Summary of a Recent
Judicial Development in
Production Contracts

Arbitration Agreement Lacks
Mutuality of Obligation

Harrison M. Pittman
Staff Attorney

Summary of Decision

In Tyson Foods, Inc. v. Archer, No. 03-649, 2004 WL 308127 (Ark. Feb. 19, 2004), the Arkansas Supreme Court held that an arbitration agreement contained in contracts entered into by Tyson Foods, Inc. (Tyson) and several hog farmers was unenforceable because it lacked mutuality of obligation.

Background

Tyson contracted with several farmers to raise live hogs for Tyson. See Tyson Foods, 2004 WL 308127. Paragraph eleven of the contracts provided that "[a]ny dispute or controversy between the parties hereto arising out of or relating to this Contract, . . . shall be submitted to arbitration . . . ." Id. Paragraph sixteen of the contracts provided the following:

Upon default of breach of any of the Producer's obligations under this Contract the Company may immediately cancel this Contract by giving notice in writing, and the Company may, without further notice, delay or legal process, take possession of swine, feed or other property owned by the Company. The Company shall have the right to utilize, the Producer's swine facilities until the swine reaches marketable weight. The Company may also pursue any other remedies at law or equity.

Id.

In August of 2002 Tyson informed the farmers that it intended to cancel their contracts. See id. Shortly thereafter the farmers brought an action in circuit court alleging fraud, deceit, and promissory estoppel, and seeking compensatory and punitive damages. See id. Tyson filed a motion to stay the proceedings and a motion to compel arbitration. See id. The circuit court rejected Tyson's motions, ruling that the arbitration agreement was not enforceable because it lacked mutuality of obligation. See id. Tyson appealed the circuit court's decision to the Arkansas Supreme Court. See id.

Arguments

Tyson's principle argument was that the arbitration agreement is mutual because it requires both parties to submit disputes to arbitration. See id. The farmers argued that there was a lack of mutuality since their only option under the contract was to submit a dispute to arbitration, while Tyson retained the right to "'pursue any other remedies at law or equity'" in the event a farmer defaulted on his contract obligations. See id.

Analysis and Holdings

The court explained that arbitration "is simply a matter of contract between the parties" and that a valid contract under Arkansas law requires competent parties, subject matter, legal consideration, mutual agreement, and mutual obligations. Id. (citations omitted). Recognizing that the only element at issue was whether the parties had mutual obligations under the contract, the court explained that "mutuality of contract means that an obligation must rest on each party to do or permit to be done something in consideration of the act or promise of the other; thus, neither party is bound unless both are bound." Id. (citation omitted). It further explained that a contract "that leaves it entirely optional with one of the parties as to whether or not he will perform his promise would not be binding on the other." Id. (citations omitted).

The court held that there was a lack of mutuality because under the contracts the farmers agreed "to forgo their rights to pursue judicial actions, while . . . [Tyson] retained their ability to pursue an action through the judicial process." Id. It added that

it is clear from our cases discussing mutuality that one party cannot limit another party to the exclusive remedy of arbitration, while retaining the ability to pursue other judicial remedies for themselves. We have repeatedly stated that there is no mutuality where one party uses an arbitration agreement to shield itself from litigation, while at the same time reserving its own ability to pursue relief through the court system. In sum, Arkansas precedent on mutuality requires that the terms of the agreement must fix a real liability upon both parties.

Id. (citations omitted).

Concurring Opinion

The concurrence explained that ambiguities in the provisions of a contract are to be "construed strictly against the drafter of the contract" and that an ambiguity exists when a contract provision has more than one reasonable interpretation. Id. It concluded that

Because the language is susceptible to more than one interpretation, it is necessarily ambiguous; because it is ambiguous, it must be construed strictly against Tyson, the drafter of the contract. . . . [I]t is . . . apparent that the agreement lacks mutuality, because the . . . [farmers] are bound to arbitration, while Tyson may seek redress through a court of law. Such a lack of mutuality renders the arbitration agreement unenforceable.

Id. (citation omitted).

Dissenting Opinion

The dissent concluded that the language contained in paragraph eleven does not violate the requirement of mutuality of obligation. See id. Noting that the majority misunderstood the nature of the contract at issue, the dissent explained that "Tyson is not only worried about whether the producer will carry out his or her duties as agreed under the contract, which might well give rise to a disagreement submitted to arbitration, but Tyson is also rightly concerned about its investment in the hogs while claims subject to arbitration are resolved." Id. The dissent stated that the language of paragraph eleven is designed to permit Tyson "to protect its property by injunction or such other court action as may be necessary, and which would be outside the realm of an arbitrator's power." Id.

The case was decided on February 19, 2004; this summary was posted Feb. 24, 2004.