Enforceable Arbitration Provisions in Short Standard Form Contracts - Lessons From Timmerman v. The Grain Exchange, Part 1
In using most standard-form agreements on a particular project the primary parties tend to negotiate the specific terms and reach an accord that will either include or exclude arbitration as their chosen form of primary dispute resolution. Opinions on the effectiveness and usefulness of arbitration are as varied as the fish in the sea.
The decision to utilize arbitration as the default on short standard form contracts is an individual one in the hands of the entity providing the contract for signature. In the construction industry there are many organizations offering arbitration services for one to choose from. But making sure the party who signs your contract will be bound by them is a trickier issue. Anyone wishing to add an enforceable arbitration provision to a short, standard form agreement would do well to familiarize themselves with the recent Illinois case of Timmerman v. The Grain Exchange, et al. (5th Dist. Doc. No. 5-08-0404).
In Timmerman, farmers caught up in The Grain Exchange fiasco brought an action against the grain dealer they had contracts with for the supply of grain. The dealer had its license revoked and assigned the contracts it had with the farmers to another grain dealer after the revocation; also a defendant sued by the farmers.
The farmers sought a determination that they were not bound by the contracts because the grain dealer’s license had been revoked. In arguing against such a finding, the grain dealers asked the court to determine that the arbitration provisions contained in the one-page-single-sided contracts that the farmers entered into with the grain dealer. The contracts were created by the dealer and contained a term stating that “the Rules of the National Grain and Feed Association” would apply to the contract. Nowhere did the contract mention arbitration, which is contained in the Rules referenced in the contract. And, the rules were not made available to the farmers prior to signing, nor were the farmers told that the Rules referenced in the contract contained an arbitration provision.
The district court found that the attempt to apply the Rules’ arbitration provision to the farmers would be procedurally unconscionable – “a situation where a term is so difficult to find, read, or understand that the plaintiff cannot fairly be said to have been aware he was agreeing to it.”
The appellate court agreed. In agreeing with the district court, the appellate court cited a long string of cases and examples of contractual provisions found to be unconscionable due to their placement in the contract, the lack of their conspicuous nature, the failure to point them out to signatories and the failure to allow signatories time to understand or peruse the contract before signing.
While many of the cases cited by the court are examples of what not to do, for those seeking to have an enforceable arbitration provision in a short contract there were several decisions referenced.
Of note was the appellate court’s recitation of the decision in Bunge Corp v. Williams (45 Ill. App. 3d 359) from 1977 which upheld an arbitration provision printed on the back of a contract where the words:
“THE TERMS PRINTED ON THE BACK HEREOF ARE A PART OF THIS CONTRACT.”
Appeared in bold letters just above the signature line on the front page.
The decision in Turner Construction v. Midwest Curtainwalls (187 Ill. App. 3d 417) from 1989 where a construction subcontract was valid where it incorporated an arbitration provision in the general contract by reference and stated that the general contract was “available for examination by the Subcontractor at all reasonable times at the office of the general contractor” and that the subcontractor “represents and agrees that it has carefully examined and understands the general contract.”
While any party to your agreement may attempt to challenge its arbitration provision, carefully crafting one that will be upheld with an eye to decisions regarding upheld provisions can help you overcome any such challenge.
