Failing to Read a Contract Before Signing Does Not Eliminate Terms of Contract

April 13, 2013 | Erika Eckley

Arbitration is favored in Iowa because it enables parties to resolve their disputes while avoiding the expense and delay of traditional civil litigation while relying on experts in the subject matter to review the matter. Because of this policy, arbitration awards are presumed to be valid and enforceable. But, to be upheld, there must have been a valid agreement between the parties to arbitrate and the controversy between the parties must be subject to the agreement. In the following case, the Iowa Supreme Court reviewed whether an agreement to arbitrate existed when the agreement was included within written confirmations of grain contracts initially executed over the telephone.

The plaintiff, a grain company, entered into eight agreements with the defendant, a grain seller, over the telephone. After each telephone conversation, the plaintiff sent written confirmation of the resulting agreement to the defendant. The confirmations were similar in terms with the exception of price, quantity and delivery dates. Each document, however, contained a clause that stated that telephone conversations were binding and that the written contracts were sent to ensure that the terms of the agreement could be confirmed and recorded. The clause also stated that if anything in the contract was inaccurate that the defendant had to notify the plaintiff to correct the error. There was an additional paragraph within the agreement that notified the defendant that failure to advise the plaintiff of any discrepancies or objections to the terms of the agreement indicated an acceptance of the terms.

In addition to the price, quantity, and delivery date, the agreements also included a clause stating that any disputes regarding the agreement were to be arbitrated under the rules established by the National Grain Feed Association (NGFA). In addition, the arbitration award would be binding on the parties.

The defendant received all of the written confirmations, did not notify the plaintiff of any errors or discrepancies in the agreement, and signed and returned the contracts to the plaintiff indicating acceptance.

Later, the plaintiff had some grounds for insecurity regarding the defendant’s ability perform the contracts and requested adequate assurance of performance. The defendant did not provide such assurance which repudiated the contracts. The plaintiff sought to recover for its damages from the defendant’s repudiation. Pursuant to the agreement, the plaintiff filed a complaint with the NGFA and signed NGFA’s arbitration services contract. The defendant was sent by certified mail notice of the complaint and NGFA’s policies and rules. The defendant signed for the documents, but failed to respond. Additional notices were sent to defendant, which were also ignored. Finally, a default judgment was entered against the defendant in the amount of $406,475 for defendant’s breach.

The plaintiff filed an application with the district court to confirm the arbitration award.  At that time, the defendant resisted the application based on the claim that there was no agreement to arbitrate and if there was an agreement, it was unconscionable. Following a hearing, the district court denied confirmation of the arbitration award. The plaintiff appealed.

The Iowa Supreme Court reviewed the agreements and determined that the written contracts were binding and were a final expression of the agreement between the parties originally established orally. Because both parties signed the written confirmations that contained the arbitration agreements and the contracts imposed reciprocal obligations on both parties the basic prerequisites for enforceable written agreements were met, and the written contracts were binding. In addition, the written contracts contained an integration clause, which is one factor used by courts in determining whether the agreement is fully integrated in the document.

But, the Court’s review was even simpler because the defendant did not object to the written agreements despite the warning that he must object to any discrepancies, and perhaps even more important, the defendant signed all of the agreements further indicating his agreement to be bound by the terms. The Court pointed out that other federal courts had reached the same conclusion when telephone agreements were silent regarding arbitration, but confirmatory written agreements included arbitration clauses and parties signed the written agreements.

The Court also rejected the defendant’s argument that the arbitration clause was unconscionable. Contracts will only be deemed unconscionable if there is some procedural unfairness and the agreement contains harsh, oppressive, one-sided terms at the time the contract was made. None of these factors existed and the agreements invited the defendant to negotiate any terms about which he disagreed. The defendant, however, failed to negotiate. Moreover, the agreement to arbitrate was clearly indicated on the eight agreements the defendant received.

The Court also made clear that the arbitration process is not systemically biased in favor of its members, such as the plaintiff. The Court pointed out that multiple jurisdictions had reached the same conclusion that the arbitration process is not inherently biased or unfair.

After determining that the written agreements were binding contracts, the arbitration agreements were integrated in the contracts, and that there was no unconscionability in the contracts or process, the Court reversed the district court’s order and remanded with directions to the district court to confirm the arbitration award.

This case makes clear that courts will uphold terms agreed to in written, signed contracts. Therefore, it is imperative that parties read the proposed agreements before signing the documents and negotiate on terms about which the party does not agree to be bound. Parties cannot avoid terms of an agreement by merely failing to read the contract and objecting at a later date.  Bartlett Grain Co. v. Sheeder, No. 12-0790, 2013 Iowa Sup. LEXIS 32 (Iowa Sup. Ct. Apr. 5, 2013).