Contract and Structural Inequality

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Written by:  Deborah Post

Last week we learned that Jim Perdue,  Chairman of Perdue Foods Inc., spoke to Maryland legislators on behalf of the small farmers he claimed would be forced out of business if the environmental law clinic at University of Maryland Law School is allowed to sue Perdue and one of its growers.  I was familiar with Perdue’s relationship with small farmers.  Some years ago — in 1998, to be precise — I wrote a contracts exam using the pleadings filed in Monk v. Perdue Farms, Inc., 12 F. Supp.2d 508 (D.Md. 1998),  by plaintiff’s attorney, Roger L. Gregory, then partner in the firm of Wilder and Gregory, now judge on the Fourth Circuit Court of Appeals.

Monk was a case about racial discrimination. Several black farmers alleged that they were not accorded the same treatment under the terms of Perdue’s standard form contract as white farmers.  In that respect, the Monk case bore some resemblance to Reid v. Key Bank of Southern Maine, Inc., 821 F.2d 9 (1st Cir. 1987), a case I cover in contracts when I teach students about the implied duty of good faith. Mr. Reid was the only borrower at the bank to have his line of credit cut off, his note accelerated, his collateral seized without the bank officers first calling him in to the bank for a meeting.  Reid is still mentioned in other casebooks in notes about lender liability or the subjective test for good faith, but these notes appear to sidestep the issues of race and motive altogether.  The relationship between motive, malice and racial prejudice is admittedly somewhat ambiguous in Reid because the jury found there was no racial discrimination by the bank.  Nevertheless, Reid is still a case that calls attention on the disparate treatment one black businessman received and the inferences that could be drawn from that fact.

But I chose the Monk case for my final examination because it was not just a case about discrimination and bad faith.  The pleadings alleged behavior by Perdue that could be analyzed variously as misrepresentation, economic duress, bad faith unrelated to any allegation of racial prejudice, and failure to perform many of its obligations under the contract.

The genesis of all of these claims was the ironclad control Perdue had over the manner in which the farmer ran his business. The farmer was contractually obligated to take chicks supplied by Perdue, use the food or grain supplied by Perdue, build housing for the chickens or purchase equipment if Perdue decided it was necessary, administer antibiotics to the chickens as required by Perdue. The chickens were collected, weighed and delivered to the plants by Perdue employees (the status and plight of chicken collectors is a story for another day). According to the pleadings, a rider to the contract, not negotiated with the farmers but unilaterally imposed by Perdue, shifted all risk of disaster – flood or disease or excessive heat – to the farmers. If the chickens died, there would be no compensation forthcoming, although the practice in the past had been to pay a minimum amount per chicken received and raised.

The current conflict with Perdue reminded me of that old exam  because back then chicken manure was part of the problem. Perdue has known for some time that farmers were storing chicken manure on their property. In  Chapter 3 of  a 2001 report , Professor Neil D. Hamilton of the Drake University Agricultural Law Center  reviewed the terms in several contracts used by producers, noting that whether the contracts were silent on the issue of chicken manure or expressly placed responsibility for disposal on the farmer, the cost of the removing chicken manure fell on the farmer. By most reports, chicken growers don’t make much money, somewhere between  $16,000 -$18,000 a year. Perdue, in contrast, reports on its website that it has annual sales of $4.6 billion a year. Perdue had to have  known that the cost of removing manure would be significant  for  famers whose profit margin is so slim.

Apparently, Perdue did see and plan for a future when environmental regulation would prohibit the use of chicken manure as fertilizer and  require its removal from poultry farms.   Perdue Farms is now trumpeting its environmental stewardship and its farsightedness in constructing the Perdue AgriRecyle plant. The plant has been in operation for nine years and was built, says Perdue, to offer the growers the option of taking poultry litter ( chicken manure) somewhere at “no cost to them.”  In fact, Jim Perdue proudly claims that Perdue was willing to bear that cost “in order to help the growers satisfy the new rules around nutrient management in the Chesapeake Bay region.”   The ‘cost’ to Perdue of taking the growers’ manure without charging those growers a fee  is questionable. This manure is the raw material Perdue uses to manufacture MicroStart 90, a fertilizer that that it  sells to the Scotts Co., golf course management companies and organic farmers as “processed manure.”  Chicken manure may well become a new profit center for Perdue.

Perdue offered the plaintiffs in Monk a standard form contract on a take-it-or-leave-it basis that gave Perdue  control over production and placed much of the risk of loss associated with growing poultry on the farmer. The power differential, the structural inequality between farmer and producer, is explicit in the contractual terms that governed their relationship, in the asymmetry of duties and obligations, and in the disparity in wealth perpetuated by the method and terms of compensation.

Farmers fought for fairer terms in their contracts, but were thwarted by contractual terms that made the provisions of the Packers and Stockyards Act inapplicable to to producers like Perdue.  In the 1980s,  a grower in North Carolina filed suit against Perdue claiming that the company was violating a provision of the Act which prohibited “live poultry dealers from engaging in or using “ any unfair, unjustly discriminatory, or deceptive practice or device.”  Wiley B. Bunting Jr. v. Perdue Inc., 611 F. Supp. 682 (EDNC 1985). The plaintiff lost the case  because Perdue does not sell poultry to the growers. It retains title to the chickens and the growers are paid for the service they provide in raising the chickens.  The court found no legislative history to support an expansive interpretation of the term “live poultry dealer.”

More recently, arbitration provisions in the standard form contracts drafted by producers thwarted the efforts of farmers, like the plaintiffs in Monk, to challenge the terms or the manner in which the contract was performed by Perdue.

Fortunately, agrarian sentiment worked to the benefit of poultry growers when Congress passed the last farm bill.  Under the amended version of the Packers and Stockyards Act, a poultry farmer cannot be coerced into assenting to an arbitration provision.  “Any livestock or poultry contract that contains a provision requiring the use of arbitration to resolve any controversy that may arise under the contract shall contain a provision that allows a producer or grower, prior to entering the contract, to decline to be bound by the arbitration provision.” 7 U.S.C.S. Section 197(c).

The revised statute and new regulations effect a redistribution of power between grower and producer; they address structural inequality by regulating the process of contract formation in a situation where the terms otherwise would not have been negotiable. The statute restored to farmers the freedom of contract that contemporary contract jurisprudence has theorized out of existence. Maybe this is a development that judges need to think about. Why was legislation needed to remedy the abuses that stem, inexorably and inevitably, from structural inequality?

Which brings me back to contracts and to the final examination I gave in the Spring of 1998. A final examination matters to students. They probably read it more carefully than any case they read all year. If questions of social justice have been explored in class, students may reflect, as they construct their answer, on the meaning of power, the reason why a drafter would include terms that are extremely favorable, perhaps even ‘disproportionately favorable,’ to a client, the strength or weakness of doctrines which arguably restrain the use or abuse of power. A final examination is an instrument that assesses what students learn. If we truly want our students to learn something about social justice, a final examination should raise issues about the inequities and the inequality that law perpetuates and the potential the law might have to address or even remedy them.