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Reversing a federal district court’s denial of a motion to compel arbitration of a textile industry dispute, the Fourth Circuit Court of Appeals held that arbitration was a “usage of trade” in the textile industry and therefore a part of the parties’ oral sales agreement.
In In re Cotton Yarn Antitrust Litigation, Nos. 05-2392, 05-2393, 2007 WL 2965586 (4th Cir. Oct. 12, 2007), various yarn purchasers commenced a class action against several North Carolina yarn manufacturers for alleged price fixing violations. The manufacturers moved to dismiss the suit for those individuals whose contracts included an arbitration provision.
The district court concluded that the contracts between the yarn purchasers and manufacturers were oral. Consequently, the arbitration terms contained in the sales contract and invoices materially altered the oral contract, which did not specifically mention arbitration, and were therefore unenforceable. The manufacturers appealed, arguing that arbitration is a well-established custom in the textile industry and thus as a “usage of trade” it was automatically a part of the parties’ agreement.
The Court held that the disputes were subject to arbitration as arbitration was a “usage of trade” in the textile industry. N.C. Gen. Stat. Ann. Sec. 25-1-201 defines an agreement as “the bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade as provided in G.S. 25-1-303.” Under N.C. Gen. Stat. Ann. Sec.25-1-303(c), “[u]sage of trade” is “any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question.”
The yarn manufacturers’ sales contract and invoices incorporated the “Yarn Rules,” a collection of industry rules regarding contract terms, conditions, and industry norms. Regarding arbitration, the Yarn Rules state, “parties to the sale and purchase of yarns are members of the textile industry, which has, for over fifty years, settled disputes by arbitration in accordance with the forms and conditions of contracts which have tended to become standard and in accordance with equity and good conscience and the customs and practices of the trade.” Although the parties did not specifically mention arbitration during their telephone conversation, arbitration was a “usage of trade” and therefore became a part of the contract.
Additionally, the Court found the arbitration terms contained in the sales contracts and invoices did not materially alter the contract, as the oral agreement included an agreement to arbitrate. Therefore, those additional terms became part of the contract under N.C. Gen. Stat. Ann. Sec. 25-2-207(2)(b).
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