Once again, a Texas court has issued an opinion regarding whether an arbitration provision in a cotton sales contract is enforceable.  The Amarillo Court of Appeals issued its opinion last week in Ecom USA, Inc v. Clark, which offers some lessons and reminders to parties entering contractual agreements and attorneys litigating these cases.  [Read opinion here.]

Background

This case was filed by a number of cotton farmers who contracted to deliver cotton they grew in 2010 and 2011 to the U.S. Cotton Growers Association, a marketing pool owned by Ecom.  Each of the form contracts signed by the farmers contained a clause reading that “any and all disputes” between the parties “shall be resolved exclusively by binding arbitration pursuant to the arbitration rules of the American Cotton Shippers Association.”

After disputes arose between the parties as to whether the parties complied with their contractual obligations, the farmers filed suit against USCGA and Ecom alleging breach of contract, fraud, deceptive trade practices, conversion, misrepresentation, breach of fiduciary duty, conspiracy, and theft.  The defendants moved that the trial court compel the parties to arbitration, relying on the contractual arbitration clause.

The trial court refused to compel arbitration, finding instead that the arbitration clauses were unconscionable, unenforceable and void.  The defendants appealed to the Amarillo Court of Appeals.

Basic Law

Just last year, the Texas Supreme Court considered a very similar case, also involving an arbitration provision in a cotton contract.  [To read a prior blog post on this case, click here.]  In Venture Cotton Coop. v. Freeman, the Court held that the arbitration provision was not unconscionable.  In reaching that decision, the Court looked at a number of factors, including the language of the agreement, impact that the clause would have on the parties’ legal rights, the parties’ general commercial background, and the relative bargaining power of the parties.  Because US courts respect the ability of private parties to enter into contractual agreements, only where the bargain is grossly unfair and harms the ability to negotiate will a clause be held unconscionable.

Appellate Court Ruling

The Amarillo Court of Appeals reversed the trial court, and found that more evidence was necessary before the trial court could rule the provision was (or was not) unconscionable.

The farmers claimed that the arbitration clause should be held unconscionable because their causes of action could not be effectively arbitrated, the damages claimed may  not be available in arbitration,  and full discovery was not allowed.  What the farmers failed to develop, however, was evidence of the commercial climate when the contracts were signed, alternatives to the farmers who signed the contract, the ability of the farmers to bargain, and the commercial knowledge of the farmers.  Importantly, the farmers and their attorneys did not have the benefit of the Venture opinion when developing their evidence as that opinion came out after this case was filed and decided by the trial court.

Because the factual record was not adequately developed, and because the Texas Supreme Court decision in Venture offers new clarification on the law regarding arbitration clauses, the Court of Appeals reversed and remanded to the trial court for further proceedings in light of Venture.  The parties will likely develop additional evidence and again bring this issue to the trial court with a more complete record.

Why Do We Care?

This case is another important reminder that parties must carefully read contractual language–including that fine print legal language on the last page–and ensure they understand their rights under the contract.  It is unlikely that the farmers read and understood what they were agreeing to by signing a contract containing an arbitration clause.

Additionally, this case illustrates the impact of dispute resolution clauses contained in most contracts.  By agreeing to arbitration, the parties agreed to forego numerous rights, including their right to a trial, their day in court, and certain discovery procedures.  For a great blog explaining the rights given up when agreeing to arbitration, click here.  Conversely, arbitration provisions can be quite useful in settling disputes more quickly and less expensively than using the traditional court system.

As always, it is highly recommended that before signing any contract, farmers and ranchers hire an attorney to look over the document.  That extra time and money for a thorough legal review could save producers time, money, and headache i the long run.

Finally, this case offers a good lesson for attorneys litigating the applicability of an arbitration clause.  In order for a court to rule on the validity of an arbitration clause, the parties must develop evidence in conjunction with the factors set forth in the Venture case.