In Hanlon v. Monsanto Ag Products, LLC, 48,010 (La. App. 2 Cir. 10/9/13), — So.3d —, the Second Circuit Court of Appeal held that the arbitration clause contained in an agreement between cotton farmers, manufacturers, and sellers was enforceable.
Trial Court Held Arbitration Clause Unenforceable
The plaintiffs were cotton farmers who filed a redhibition action against the manufacturers and sellers of certain seeds that were allegedly defective. The manufacturers and sellers filed an exception of prematurity or motion to stay asserting that farmers had signed an agreement that included an arbitration provision. The plaintiffs argued that the arbitration provision was unenforceable because it was a contract of adhesion to which they did not consent. The Louisiana Supreme Court has previously set out the standard for identifying contracts of adhesion.
[A] contract is one of adhesion when either its form, print, or unequal terms call into question the consent of the non-drafting party and it is demonstrated that the contract is unenforceable, due to lack of consent or error, which vitiates consent. Accordingly, even if a contract is standard in form and printed in small font, if it does not call into question the non-drafting party’s consent and if it is not demonstrated that the non-drafting party did not consent or his consent is vitiated by error, the contract is not a contract of adhesion.
Aguillard v. Auction Mgmt. Corp., 04-2804, p. 12 (La. 6/29/05), 908 So. 2d 1, 10-11. Applying this to the Hanlon case, the trial court held that arbitration provision was unenforceable. The trial court reasoned that there was a lack of mutuality based on the limited remedy provided to the growers in the agreement and the superior bargaining strength of the manufacturers and sellers to the cotton growers.
Second Circuit Reverses and Upholds Arbitration Clause
The Second Circuit Court of Appeal specifically addressed whether there was a valid agreement to arbitrate in light of the plaintiffs’ claim that the arbitration clause was adhesionary and unenforceable. The Court evaluated the physical features of the agreement, the mutuality of the parties, and the bargaining position of the parties.
The court first explained that Louisiana law, like federal law, favors arbitration. A contract is one of adhesion when its form, print, or unequal terms call into question the consent of the non-drafting party. In the current contract, the arbitration provision was neither distinguished nor concealed in any way; therefore, the Court concluded the arbitration clause was not adhesionary based on the valid consent of the manufacturers based on the face of the agreement.
The Second Circuit concluded that the arbitration clause lacked mutuality, but this alone did not mandate a finding that the arbitration provision was adhesionary and unenforceable. The arbitration clause lacked mutuality because it did not in any way limit the defendants who may have claims against the growers arising out of or in connection with the agreement, sale or performance of the cotton seed.
Finally, the Court evaluated the bargaining position of the parties. The bargaining position is considered only when a contract involves such a necessary transaction that the party was compelled to enter it. The plaintiffs offered affidavits that they grew only the seeds of the defendants. The affidavit was limited in that it did not foreclose the possibility that other seeds could be ordered locally or purchased elsewhere. The Court concluded that the plaintiff favored the seeds with the defendant’s technology, but the purchase of the seeds was not so necessary that the plaintiffs were compelled to enter the agreement. Therefore, the disparity of the parties’ bargaining positions was not considered the court. Based on this analysis, the Second Circuit declared the arbitration provision was enforceable.
The decision by the Second Circuit Court of Appeal further supports the favorability of arbitration provisions. This case is significant because it offers further clarification regarding the evidence required to successfully challenge an arbitration provision in subsequent case law. Therefore, it is important to consider the standards set forth in the Hanlon case to ensure that an arbitration provision is upheld if challenged.
Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.