Summary of a Recent
Judicial Development in
Cooperatives

The Validity of Substantive Provisions of a Contract Does Not
Go to the Arbitrability of the Contract

John Stacks
National AgLaw Center Research Associate

Summary of Decision

In Sleeper Farms v. Agway, Inc., 506 F.3d 98 (1st Cir. 2007), the First Circuit Court of Appeals denied Sleeper Farms' motion to vacate the district judge's order referring its dispute with Agway to an arbitrator and to vacate the district judge's order confirming the arbitrator's award.

Background

Sleeper Farms (Sleeper), a seller of seed potatoes, alleged that Agway, an agricultural cooperative, improperly withheld a $51,000 payment. Id. at 101. Agway claimed that the relevant shipment contained genetically altered potatoes. Id. The parties were unable to reach an agreement about the withheld sum. Id. Sleeper threatened to sue, and Agway filed a request for arbitration with the American Arbitration Association (AAA), which the AAA accepted. Id. Sleeper filed suit in federal district court in Maine, asserting various common law causes of action and challenging other alleged unfair practices by Agway. Id. Sleeper moved to enjoin arbitration, and Agway moved to stay the proceedings pending arbitration. Id. The court denied Sleeper's motion and granted Agway's motion to stay the proceedings pending arbitration. Id.

Agway filed for bankruptcy, and the bankruptcy court allowed arbitration to continue. Id. The parties stipulated that "all issues of liability and damages contained within Sleeper Farm's Complaint . . . shall be determined through arbitration in this forum." Id. On the merits, the arbitrator found that Agway improperly withheld the $51,000 payment but rejected most of Sleeper's other claims; he awarded Sleeper $82,000 plus costs. Id. Sleeper moved to vacate the award, and Agway moved to confirm it. Id. The court upheld the award. Id. at 102.

Arguments

On appeal, Agway argued that the stipulation made by the parties agreeing to arbitration provided an independent basis for arbitration and indicated that Sleeper abandoned its original objection to arbitration. Id.

Sleeper argued that its contracts with Agway were illegal (void ab initio) and that Agway waived its right to arbitrate by resorting to the self-help remedy of withholding payment. Id. Sleeper further argued that the arbitration award should be vacated because the arbitrator acted "in manifest disregard of the law." Id. at 104. Also, Sleeper argued that any oral contracts should be enforced against Agway and that as a matter of public policy, the arbitrator improperly invoked the statute of frauds to bar its claims. Id. at 105.

Analysis and Holdings

The court found that the stipulation in which the parties agreed to arbitration did not prevent Sleeper from asserting non-scope objections to arbitration. Id. at 102. The court also found that Sleeper's void ab initio argument addressed the validity of the substantive provision of the contract, not its arbitrability; federal law dictates that the arbitration clause of a contract is valid even if the substance of the contract is otherwise void or voidable. Id. at 103. The court agreed with Sleeper that a claim of waiver may be a genuine challenge to arbitrability; however, the court found that Sleeper did not sufficiently assert a claim of waiver. Id.

The court held that when Agway withheld payment (a self-help remedy), it did not waive its right to arbitration; nothing in the language of the arbitration clause suggested that if a party resorted to self-help remedies, that it would waive its right to arbitration. Id. at 104. The court declined to consider Sleeper's assertion that the arbitrator acted "in manifest disregard of the law" because Sleeper did not argue the issue before the court; rather, it simply incorporated by reference the related motion before the district court. Id. Finally, the court did not disturb the arbitrator's finding that there were no oral contracts between Sleeper and Agway, and it also held that not all legal mistakes by an arbitrator are automatically subject to correction on judicial review. Id. at 105.

The case was decided on November 2, 2007.