Dear Katy:

My company grows sweet potatoes in North Carolina. Two years ago, we entered into a deal with a distributor of prepared foods. My company agreed to dice the sweet potatoes as required by the distributor, who agreed to pay us by the pound at a certain price. For product that was not diced, we were to be paid at a different rate per pound.

My company has not been paid for the product that we delivered under the contract for the past two years, I filed a complaint with the USDA’s PACA branch, however they dismissed my complaint. The USDA said that they did and there is language in the contract referencing arbitration in the event of a dispute. As far as I’m concerned, there’s no dispute, the distributor is just trying to take advantage of me.

What do I do next?

-Cranky in Concord

Dear Cranky:

I can appreciate your frustration. My understanding is that the USDA requires the parties to adhere to the terms of the contract that they entered into. Here, your contract includes a provision requiring the parties to participate in arbitration in order to resolve any dispute arising under the contract. The USDA does not offer arbitration services, and is likely telling you that you need to stick to the terms of the deal that you entered into — and arbitrate this case.

To begin with, let’s make sure that our readers know what arbitration is. Instead of filing a lawsuit and resolving the dispute through the court system, arbitration is a private dispute resolution proceeding one or both parties will initiate an arbitration proceeding, where a neutral third-party evaluates the evidence and renders a decision that is binding on both parties. The decision can be enforced through the court system and there are limited grounds for a party to challenge the validity of an arbitration decision. The person(s) serving in the role of arbitrator may be retired judges or attorneys with experience in the area of law related to the case. In most states, arbitrators are only required to have some level of expertise in the field of the dispute, and are not required to have a law degree.

While our reader hasn’t elaborated on the terms of his arbitration clause, it may include language about the number of arbitrators. Traditionally, there is either one arbitrator (and the contract will set forth the procedure for selecting him or her), or there may be a three person panel. Ordinarily in these circumstances, each party selects one person to serve as arbitrator, and the two selected then will decide who the third arbitrator will be.

In addition to local arbitration providers, there are private arbitration service providers that offer services nationwide. These are the American Arbitration Association (AAA) and JAMS Mediation, Arbitration and ADR Services (JAMS). In instances involving produce suppliers and distributors, I believe that it is critically important that the arbitrator have an understanding of the produce business. Arbitration services tailored to meet the needs of the produce industry are offered by the Fruit and Vegetable Dispute Resolution Corporation, oftentimes referred to as the DRC. In order to take advantage of the DRC’s arbitration services, one party must be a member of the DRC. AAA, JAMS, and the DRC each have their own procedural rules that govern the arbitration process.

In a lawsuit, there are expenses such as the filing fee ($400 in the federal courts) attorney’s fees and fees for discovery, such as court reporter costs and document production expenses. While arbitration is a private alternative to hashing out a dispute publicly in the court system, it has the potential to be as expensive, or even more expensive, than a lawsuit. First, the arbitrator is paid at the hourly rate that he or she sets for his or her services. In addition, most require payment of additional fees, characterized as “filing,” “administrative” or “case management” fees. For example, if your claim is $100,000, AAA requires payment of an initial filing fee of $1,925, plus a final fee of $1,375. For cases involving two parties, the filing fee with JAMS is $1,500, plus a case management fee equal to 12 percent of the arbitrator’s total hourly fees. Similarly, the DRC charges an administrative fee based upon the amount of the claim, and if the hearing is conducted, requires payment of a nonrefundable hearing fee.

Either state or federal law will govern the next steps in initiating an arbitration proceeding. If your contract involves a transaction in interstate commerce (for example, if part of your agreement with the distributor is to deliver the sweet potatoes to the distributor in another state) then it may be governed by the Federal Arbitration Act (FAA). This legislation was enacted in 1925 to evidence a national policy favoring arbitration. In addition, each of the 50 states maintains statutes that operate alongside the FAA and govern the validity of arbitration agreements and awards.

Since our reader has provided very little information about the details of the arbitration provision in his contract, it is important to consult with a legal professional who can evaluate the terms set forth in contract, and guide Cranky in Concord through the process of initiating an arbitration proceeding against the distributor.

Katy Koestner Esquivel is the managing member of Esquivel Law, which helps produce growers and sellers with contracts and collection matters. Her column answering produce industry-related legal questions is a regular feature in The Produce News. To ask her a question, contact Esquivel at , (239)206-3731.