Texas Supreme Court Considers Arbitration Clause in Cotton Case

Last week, the Texas Supreme Court issued a decision relating to the well-publicized disputes between cotton farmers, cotton gins, and marketing cooperatives that arose in 2010 after cotton prices soared.  In this case, Venture Cotton Cooperative v. Freeman, the Supreme Court analyzed the validity of an arbitration clause contained in the marketing agreement between the farmers and the marketing cooperative.  [Read full opinion here.]

Photo via Jennifer Blackburn Photography

Background

In 2010, Venture Cotton Cooperative, a cotton marketing cooperative, operated a marketing pool for the sale of its members’ cotton.  Venture obtained members by working with various gins to set up meetings with farmers.  Venture held one such meeting in Seminole, Texas, at the Ocho gin.  Several farmers decided to join the pool and executed the necessary documents, which required each farmer to designate the number of acres committed to the pool and to estimate the production that Venture might expect from these acres.

In 2010, cotton prices quickly increased and Venture became concerned that pool-members might be tempted to sell their committed production on the open market for a higher price. [For additional information on the cotton contracting disputes in 2010, click here.]  Ultimately, a dispute arose between Venture and some of its members, culminating in two groups of farmers filing suit against Venture asserting numerous claims including fraud, negligent misrepresentation, breach of fiduciary duty, mutual mistake, and violation of the Texas Deceptive Trade Practices Act.

Venture sought to stay the lawsuits and enforce the arbitration provision contained in the parties’ agreements.  The farmers contracts with Venture provided for binding arbitration of all disputes under the Federal Arbitration Act and the arbitration rules of the American Cotton Shippers Association (ACSA).  Further, the provision stated that the location of arbitration would be in either Houston, TX or Memphis TN as chosen by Venture and included a provision that the farmers agreed to pay all arbitration and court costs and Venture’s reasonable attorney fees in the event of a breach by the farmers.

The farmers opposed application of the arbitration provision, claiming it was unconscionable.

Lower Court Decisions

The trial court held a hearing on the enforceability of the arbitration clause.  The trial court found the arbitration agreement was unconscionable and ordered the farmers’ lawsuit to continue forward in court.  Venture filed an interlocutory (meaning immediate) appeal.  The Eastland Court of Appeals affirmed the trial court’s decision that the arbitration clause was unconscionable.  The court explained that the arbitration clause forced farmers to forego substantive rights and remedies afforded by statute (specifically the American Cotton Shippers Rules prohibited the right to recover attorney fees if successful, despite this being a statutory right available to the farmers pursuant to the Deceptive Trade Practices Act) and was one-sided as it allowed Venture to recover attorney fees if successful, but did not provide the same rights for the farmers.

Basic Law of Arbitration Clauses

Arbitration clauses are generally enforceable if the party seeking arbitration proves that the dispute falls within the scope of the clause.  If so, then the party opposing arbitration must prove that a valid defense exists to allow the invalidation of the clause.  One such defense is a claim that a clause is unconscionable.  An unconscionable contract term is one that is grossly unfair or one sided, although there is no precise factual definition to determine whether a clause is unconscionable.  Instead, courts must consider the factual basis underlying each case.  If an arbitration clause is unconscionable, it is unenforceable.

Supreme Court Decision

The Texas Supreme Court considered three main issues.  First, the Court considered whether the ACSA Rule 8(k), which prohibits the recovery of attorney’s fees in arbitration is unconscionable as it limits statutory rights available to the farmers.  The Court sided with the farmers on this issue, holding that to the extent the arbitration rules would limit the farmers’ recovery pursuant to statutory rights, that provision would be invalid.

Second, the Court addressed the issue of severance.   The court sided with Venture on this issue, holding that the unconscionable rule 8(k) could simply be severed from the remainder of the arbitration clause.  Thus, the arbitration would go forward, but rule 8(k) would not apply and, therefore, farmers would be entitled to recover attorney fees under the DTPA if successful.

Third, the Court considered whether the provision in the arbitration agreement allowing only Venture to recover attorney fees if successful, while offering no such right to the farmers, was unconscionable.  The farmers relied upon Texas Civil Practice and Remedies Code Section 38.001, which allows for the recovery of attorney’s fees for a successful party in a breach of contract case.  The Supreme Court reasoned that parties are free to contract as they wish and the mere fact that an agreement allows one party to recover fees while not providing this right to the other party was not unconscionable per se, but the unconscionability would depend on a review of all of the facts surrounding the agreement.  Thus, the lower courts were incorrect to use the one-sided provision, alone, as grounds for finding unconscionability.

Thus, the case was remanded back to the trial court to determine whether, in light of all the factual circumstances, the one-sided attorney fee provision was unconscionable.

Why Does This Matter?

As many of the disputes arising between farmers and cotton gins and marketing coops in 2010 illustrate, it is critical that farmers carefully review contracts before agreeing to allow a cooperative to market their product.  Even the “legalese” provisions like arbitration clauses or attorney fee provisions can be critical for parties to review, understand, and seek to ensure fair treatment.

Further, this case also illustrates the importance of parties recognizing and understanding dispute resolution clauses.  When parties agree to dispute resolution (typically either mediation or arbitration), it is critical to understand the type of dispute resolution required by the contract and the parameters and rules for that type of resolution.  Dispute resolution clauses can be very useful in avoiding long, expensive court battles, but can also result in giving up substantial rights, so parties should carefully review and analyze these provisions.  Click here for some additional information on the different types of dispute resolution.

I recommend that any producer have his or her own attorney review any contract before signing.  Although this may be an added upfront expense, it will save the party significant amounts of money if it prevents a dispute later on.

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