Summary of a Recent
Judicial Development in
Production Contracts

Buyer of Potatoes Required to
Arbitrate Contract Dispute

Harrison M. Pittman
Staff Attorney

In an action brought by a seller of potatoes against an agricultural corporation and several of its employees for breach of contract, the United States District Court for the District of Maine has ruled that the seller was required to submit the dispute to arbitration because the seller agreed to arbitration and because the arbitration clause was not unconscionable, fraudulent, or otherwise invalid. Sleeper Farms v. Agway, Inc., 211 F.Supp.2d 197, 200-03 (D. Me. 2002).

Vaughn and Mary Sleeper, plaintiffs, owned and operated a potato farming operation known as Sleeper Farms, also a plaintiff. See id. at 198. Agway, Inc. ("Agway"), defendant, was a corporation that specialized in agricultural goods and services. See id. Richard Sirois, Todd Bradley, and Carl Smith, defendants, were Agway employees. See id.

Sleeper Farms was a "contract grower" of seed potatoes for Agway from 1998 through 2000. See id. At the beginning of each growing season, Vaughn Sleeper communicated with either Sirois or Bradley "and agreed to plant certain quantities and varieties of seed potato in return for Agway's promise to buy the crop at harvest time." Id. at 198-99. The parties usually did not discuss price during these communications and typically left the price terms open. See id. at 199.

Once the potato crop was harvested, Agway would send purchase orders to the plaintiffs that designated the quantity and price of potatoes desired by Agway. See id. Vaughn Sleeper would sign and return the orders and would ship the potatoes to the growers indicated by Agway on the purchase orders. See id. These growers would inspect the potatoes and report the potatoes' quality to Agway. See id. Agway would then pay Sleeper Farms for the shipped potatoes. See id.

Vaughn Sleeper "received, signed and returned eight purchase orders from Agway between 1998 and 2000." Id. Each of these purchase orders contained an arbitration clause that read:

[t]he parties to the Contract agree that the sole remedy for resolution of any and all disagreements or disputes arising under this Contract shall be through arbitration in accordance with the rules of the American Arbitration Association, Syracuse, New York. The decision and award determined through such arbitration shall be final and enforced in any Court having jurisdiction thereof.

Id. Vaughn Sleeper claimed that although he signed and returned the purchase orders he was unaware of the arbitration clause included in them. See id.

The plaintiffs contended "that the orders did not fulfill the underlying agreement between the parties for each season." Id. The plaintiffs complained that they "did not receive agreed-upon prices for some of the potatoes [they sold] to Agway, and that [they] only signed the orders designating the prices because [they] did not have a choice." Id. According to Vaughn Sleeper, he usually received the purchase orders after negotiations between the parties had already commenced for the subsequent growing season, "effectively forcing [the plaintiffs] to accept unfavorable prices in exchange for continued patronage from Agway." Id. In addition, Vaughn Sleeper claimed that Agway failed on several occasions to pay for potatoes that were shipped out to the growers designated by Agway on its purchase orders. See id.

In June, 2000, Agway refused to pay the plaintiffs for potatoes they shipped based on Agway's belief that the quality of the potatoes was not satisfactory. See id. The plaintiffs objected, and Agway demanded that the matter be submitted to arbitration. See id. The plaintiffs responded by bringing an action in federal district court against Agway and several of its employees "alleging a variety of contractual, statutory and common law tort claims against Defendants." Id. The plaintiffs also filed a motion to stay or enjoin the arbitration proceedings. See id. The defendants filed a motion to dismiss or stay the district court proceedings pending arbitration. See id. The district court granted their motion, staying court action so that the matter could be submitted to arbitration. See id.

The plaintiffs argued that they did not assent to the purchase orders, "and even if they did, the purchase orders did not incorporate an arbitration clause." Id. at 201. The plaintiffs also argued that if the court determined that the arbitration clause was properly incorporated into the purchase orders, then the clause should be invalidated because it was either "unconscionable or fraudulently induced." Id. Finally, the plaintiffs asserted that the purchase orders themselves were "illegal, unconscionable or fraudulently induced." Id.

The district court explained that the issue of whether the parties' dispute should be arbitrated centered upon whether there was valid agreement to arbitrate disputes and, if so, whether the parties agreed to arbitrate this particular type of dispute. See id. at 199-200. The Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1 - 14, governs the process for submitting disputes to arbitration. See id. at 200. The FAA provides that "arbitration is fundamentally a contractual matter, and requires courts to honor all agreements to arbitrate except those that are invalid 'upon such grounds as exist at law or in equity for the revocation of any contract.'" Id. (quoting 9 U.S.C. § 9). "'It is a cardinal principle of federal arbitration law that 'arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.''" Id. (citations omitted). Courts are required to apply state law to determine whether such an agreement exists. See id. at 200-01 (citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)).

Once a court has determined that an agreement to arbitrate exists, the court must determine the scope of the parties' agreement, "unless the parties have 'clearly and unmistakeably' [sic] delegated the issue of 'scope' to an arbitrator." Id. (citations omitted) (emphasis supplied). The arbitration clause in the present case provided that arbitration proceedings would be conducted under the rules of the American Arbitration Association ("AAA"). See id. One of the AAA's rules states that "'[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the . . . scope . . . of the arbitration agreement.'" Id. (citations omitted). The court explained that "[t]his is a 'clear and unmistakable' delegation of scope-determining authority to an arbitrator. Thus, if the Court finds that an agreement to arbitrate exists between the parties, it will leave the second arbitrability question to an arbitrator." Id. (citations omitted). Therefore, the district court was faced only with the question of whether a valid agreement to arbitrate existed between the parties. See id.

The court explained that an arbitration clause can be severed from the contract in which it is included. See id. (citing Large v. Conseco Finance Servicing Corp., 292 F.3d 49, 53 (1st Cir. 2002) (pagination not yet available)). Because an arbitration clause is severable, "only challenges to the substance of the clause itself, or to the existence of the contract within which it appears, are pertinent to the issue of the existence of an agreement to arbitrate." Id. (citations omitted). The court declined to address the plaintiffs' arguments that the purchase orders "were illegal, unconscionable, or fraudulently induced" because those arguments challenged the validity of the contract as a whole and not whether there was an agreement to arbitrate. See id.

The court first examined the plaintiffs' argument that they were not bound by the terms contained in the purchase orders because they never assented to them. See id. The court noted that the purchase orders on their face were contracts for the purchase of seed potatoes and that both parties signed the orders and acted in accordance with the terms of the orders. See id. The court also noted that some of the plaintiffs' breach of contract claims derived from certain obligations included in the purchase orders. See id. Thus, the court rejected the plaintiffs' argument because there was "little doubt that the orders [were] contracts for the sale of seed potatoes, to which both parties assented." Id. (citation omitted).

The court next considered the plaintiffs' argument that "even if they assented to the purchase orders . . . the arbitration provision was never validly incorporated into the purchase orders, and therefore an agreement to arbitrate never came into being." Id. at 202. The plaintiffs based this argument on the facts that the document that contained the arbitration clause was not attached the purchase orders and that they never signed that document. See id.

The court explained that whether the document containing the arbitration clause was physically attached to the purchase orders was irrelevant. See id. The court also explained that "[e]ven if a document referred to in the contract as 'attached' is not physically appended to it, the document is nevertheless treated as incorporated provided it is readily available to the contracting parties." Id. (citations omitted). The court noted that the plaintiffs understood that the sales contract consisted of the terms and conditions referred to in the purchase orders and that they had at least five copies of the document. See id. Thus, the court concluded that "[t]here could be no mistake that the purchase orders incorporated [the arbitration clause] . . . ." Id.

Next, the court examined the plaintiffs' argument that the arbitration clause itself was invalid because it was either unconscionable or fraudulently induced. See id. A clause is unconscionable when

in light of the general commercial background and the commercial needs of the particular trade or case, the [clause] involved [is] so one-sided as to be unconscionable under the circumstances existing at the time of the contract . . . . The principle is one of the prevention of oppression and unfair surprise, and not of disturbance of allocation of risks because of superior bargaining power.

Id. at 203 (citation omitted).

The court stated that although the plaintiffs have attempted to establish "that the clause is unconscionable, the evidence [shows] nothing more than their dissatisfaction with Defendants' bargaining position in negotiating the purchase orders as a whole." Id. The court concluded that "[t]his issue goes to the validity of the contract rather than the existence of an agreement to arbitrate, and is for the arbitrator, not the Court, to decide." Id.

Finally, the court rejected the plaintiffs' argument that Agway and its employees "fraudulently induced them to agree to the purchase orders by promising to purchase and pay for future installments of seed potatoes." Id. The court stated that this argument does not "address the arbitration issue specifically, and [is] appropriate for an arbitrator." Id. The court noted that the plaintiffs did not assert that the defendants "made specific representations regarding the arbitration provision, itself, that induced them to agree to the purchase orders." Id. (citations omitted).

The court concluded that the parties agreed to arbitrate this dispute and referred the matter to an arbitrator to determine "what issues contained in Plaintiffs' Complaint, or raised by Plaintiffs as defenses to the purchase orders, are covered by the arbitration clause . . ., what issues . . . are not covered by the clause and should remain for the Court to decide . . . and the merits of the issues that are covered by the clause." Id.

The case was decided on July 1, 2002; this summary was posted February, 2003