Arbitration Award Vacated In Part by District Court

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W & J Harlan Farms, Inc. v. Cargill, Inc. (S.D. Ind. April 21, 2011)

The parties entered into a grain storage contract whereby plaintiff sold defendant a specific amount of corn at set prices for three years and defendant delivered a storage system at no charge.  When floods destroyed 2,400 acres of plaintiff’s corn and plaintiff sought to postpone delivery under the contract, defendant informed plaintiff that it charged $1 per bushel carrying charge to carry the contract over one year.  Plaintiff sought to cancel the contract because the carrying charge policy was contrary to its expectations under the contract.  When defendant demanded damages, plaintiff filed suit.  Defendant initiated arbitration with the National Grain and Feed Association (“NGFA”) and this action was stayed.

The NFGA found in favor of defendant, awarding defendant $238,050 in damages, plus interest.  Defendant moved to dismiss the lawsuit and confirm the arbitration award.  Plaintiff cross-moved to vacate the arbitration award.

Plaintiff argued that the arbitrators failed to find on plaintiff’s claims for fraud and fraudulent inducement and as such, the award is neither final nor definite.  Plaintiff claimed that defendant orally represented that an “Act of God” would excuse non-delivery of one year’s production in case of natural disaster if delivery of an equivalent quantity was made in a subsequent crop year, and that based on this representation, plaintiff entered the contract.  The court held that it was not clear whether the arbitrators considered this claim and the decision must be vacated and remanded to the arbitrators for either clarification of their decision regarding the fraud claim or resolution of that claim.

Plaintiff also argued that the arbitration panel exceeded its authority by determining the case in accordance with instructions in the Guidelines for NGFA Arbitration Committee Members to the extent those guidelines were not incorporated into the arbitration agreement or provided to plaintiff prior to the arbitration.  Plaintiff argued that the guidelines prevented the arbitrators from considering its fraud claim to the extent that the guidelines require the arbitrators to interpret the parties’ contract, and the fraud claim was not found in the parties’ contract.  The court rejected this challenge, holding that the guidelines square with the common law rules of contract interpretation, and plaintiff overstated the import and effect of the guidelines.

Plaintiff also argued that the arbitrators’ decision should be vacated for evident partiality for several reasons, including that employees of defendants sit on the NGFA Arbitration Committee and served as NGFA Arbitration Secretary, NGFA Arbitration Committee members and arbitrators are employees of companies that engage in buying grain from farmers and the MGFA precludes individual farmers from serving as arbitrators.  The court rejected these arguments, stating that precedent expressly rejected concerns about structural bias when there was a prior business association between an arbitrator and a party.

Plaintiff also argued that the arbitrators’ failure to determine its claim for fraud and fraudulent inducement and their disregard of the legal principles incorporated into the contracts are sufficient to vacate the arbitration decision for manifest disregard of the law.  The court rejected this argument, because there was no allegation that the arbitrators’ decision instructed the parties to violate the law.

Accordingly, the court denied defendant’s motion to confirm the arbitration award, and granted plaintiff’s motion to vacate the arbitration award in part.

For a copy of the decision click here

Toni Frain and Jeffrey Kingsley