June 25, 2020

Honorable Martin J. Oberman

Vice Chairman

Surface Transportation Board

395 E Street SW

Washington, DC 20423

Dear Vice Chairman Oberman:

Per the communication requirements in 49 C.F.R. § 1102.2(g)(4), the Department of 

Agriculture (USDA) is writing to detail and summarize its recent ex parte (EP) meeting in 

EP 755, Final Offer Rate Review (FORR). USDA staff (attendees are included below) 

appreciate meeting with you and Surface Transportation Board (Board) staff by phone on 

June 25, 2020.

At this meeting, the Board’s personnel included:

Marty Oberman, Vice Chairman

Ellen Erichsen, Attorney-Advisor

USDA’s personnel included:

Bruce Summers, Administrator, Agricultural Marketing Service (AMS), USDA

Bruce Blanton, Director, Transportation Services Division (TSD), AMS, USDA

Adam Sparger, Deputy Director, TSD, AMS, USDA

Jesse Gastelle, Economist, TSD, AMS, USDA

Peter Caffarelli, Economist, TSD, AMS, USDA

Our objective with the conversation was two-fold—to express our appreciation for the 

Board’s efforts to make rate review more accessible and effective for agricultural shippers

and to emphasize several points for the Board’s consideration. Given the close connection 

to EP 756, our points also touched on aspects of the Board’s proposal to streamline market 

dominance. USDA emphasized the following:

(1) The need for balance. Existing processes are lengthy and expensive. It is clear through 

the Nation’s rail transportation policy that the Board has a mandate to regulate 

unreasonable rates, and it is evident more practical methods are needed. The absence 

of rate cases brought by shippers, coupled with the extreme distribution of rates, does 

not indicate balance. We believe the Board has an effective and workable solution in 

FORR that is at least as good as any current process.

(2) Further, effective rate review is needed because, under the current procedures, 100 

percent of the unreasonable cases are missed.

(3) Price mark-ups represent an economically valid way to detect market dominance.

They are a better measure of market dominance than the proposed screens, and if 

markups cannot be used directly as screens, they should be used to determine 

appropriate thresholds in the proposed screens.

Agricultural Marketing 

Service

Transportation and 

Marketing Program

Transportation Services 

Division

1400 Independence 

Avenue SW

Room 4523

Stop 0266

Washington,

DC 20250

 300818 

 ENTERED 

Office of Proceedings 

 July 1, 2020 

 Part of 

 Public Record 
(4) There is substantial merit in a competitive benchmarking approach, given its economic 

underpinnings. If the Board is unwilling to use the competitive benchmark approach, it 

could implement a revenue to variable cost (R/VC) screen at a higher threshold, where 

a complainant would have a presumption of market dominance. According to our 

reading of U.S. Code § 10707, an R/VC ratio greater than 180 is not itself enough to 

determine market dominance but an R/VC ratio greater than 200 (or some other higher 

level) could be enough. We see no evidence suggesting Congress did not intend to 

wholly eliminate R/VC as a market dominance determining factor, otherwise it could 

have plainly said R/VC is not enough to determine market dominance. Instead they 

mentioned a specific threshold as not being enough.

(5) USDA strongly believes the design of FORR incentivizes reasonable presentations of 

evidence and offers. Each side must weigh the risk of the other party suggesting 

something slightly more reasonable and thus being selected by the Board. In the rare 

event the Board is faced with two unreasonable proposals, a third option could be for 

the Board to elect the status quo. This could address a railroad concern over the binary 

choice.

(6) If substantial concerns remain over implementing a new procedure in full force, the 

Board could consider establishing FORR through an initial pilot phase to be evaluated 

after a set period or set number of cases. The idea is to craft something that can be 

used as a real-world experiment to try out new processes to see if they are used by 

shippers, work well, and are seen by the community as a positive step toward making 

rate review accessible. If the experiment works, the FORR process can be adopted

permanently. If not, another approach can be tried.

The Board and USDA discussed the argument presented by several railroads that FORR is unfair 

because it does not prescribe an “economic measuring stick.” USDA agreed FORR does not 

prescribe a single measuring stick and contended the Board’s proposal creates a process that 

better captures the broader principles behind the Board’s statutory requirement to provide

effective rate review. USDA asserted that:

No single methodology of rate review captures all these broader principles. For instance, 

the notion that a shipper should not bear costs from inefficiencies or facilities from which 

it derives no benefit is measured thoroughly by a Stand-Alone Cost analysis, which is an 

important aspect of rate considerations but far from the only consideration. Any one 

methodology that did capture the whole picture would be extremely complex and costly.

The principles of effective rate review, while multifaceted, are very clear. The open 

question is how to determine whether one of those principles has been violated.

The Board could be more explicit in their final rulemaking about the types of actions that 

represent a violation of those principles. For instance, another violation might be an

“extreme markup of price above cost,” which would be targeted toward 49 U.S.C. § 

10101, avoiding “undue concentrations of market power” and could justify use of a 

competitive benchmarking approach. In addition, the Board could also be more explicit 

about how revenue adequacy might translate into a determination of unreasonableness. 

Being more explicit in these ways would mitigate the railroads’ concern, while still 
leaving it up to the participants to determine the best methodology and evidence to make 

their case.

The Board and USDA also discussed the voluntary arbitration process suggested in CN’s 

pleadings. USDA stated that it supports private-sector solutions, such as arbitration, as a means of 

resolving disputes, including those over rates. USDA noted railroads can voluntarily elect to 

arbitrate now over rates, yet do not. USDA posited this is because railroads lack the incentive to 

arbitrate so long as shippers lack an effective means to challenge a rate. Thus, effective rate 

review is a necessary and critical precursor to effective arbitration. USDA stated:

Successful arbitration depends on the process itself. One system the Board could consider 

is offered by the National Grain and Feed Association, which has long been used in the 

grain community. NGFA’s system could work because the process is transparent, binding, 

and involves arbitrators knowledgeable in both the shipping (agricultural, in this case) and 

carrier industries. Rates are not currently subject to NGFA’s rail arbitration. Of note, 

another process—modeled after NGFA’s arbitration rules—is used by BNSF Railway

(BNSF) and Montana grain producers over the arbitration of grain rates. USDA offered to 

provide the Board with more information on arbitration, which is enclosed.

Enclosed, please find (1) a supplemental handout USDA offers for the record, containing further 

detail and supporting evidence to the issues discussed in the meeting as well as other points the 

Board might consider; (2) a 2007 paper describing NFGA’s arbitration process, The NGFA 

Arbitration System at Work; and (3) a 2014 paper describing the mediation/arbitration system

used by BNSF and Montana producers, Rail Rate Mediation and Arbitration for Grain Shippers.

If more information would be helpful, please let me know.

Sincerely,

Adam Sparger, Deputy Director

Transportation Services Division

Enclosures (3)
Ex Parte 755: Final Offer Rate Review

USDA Supplement for Informal Discussion

with the Surface Transportation Board

June 25, 2020

Authority and Interest

The Agricultural Adjustment Act of 1938 and the Agricultural Marketing Act of 1946 entrust the 

Secretary of Agriculture with representing the interests of agricultural producers and shippers in 

improving transportation services and facilities. As one of many ways to accomplish this mission, the 

U.S. Department of Agriculture (USDA) initiates and participates in Surface Transportation Board (STB 

or Board) proceedings involving rates, charges, tariffs, practices, and services.

Introduction

USDA appreciates the Board waiving the general prohibition on ex parte communication in Ex Parte (EP)

755 (Final Offer Rate Review) and the opportunity to visit with the Board on these important issues. 

USDA offers this supplemental handout for the record, which reiterates and supports the points raised in 

its June 25 conversations with individual Board members and includes other points for the Board to 

consider. Given the close tie between this proceeding and EP 756 (Market Dominance Streamlined 

Approach), this handout also contains commentary on the Board’s proposal to streamline the market 

dominance determination.1

Summary

The key takeaways discussed in detail in this supplemental handout include:

• USDA strongly supports the steps the Board has made with its Final Offer Rate Review (FORR) 

and Streamlined Market Dominance proposals.

• The Board should improve rate review. A number of agricultural shippers experience rates above 

the statutory 180 percent-threshold—some well-above—and yet no cases have been brought. This 

fact underlies the need for rate review reform.

• There are two types of errors—determining a rate is unreasonable when it is not (a false positive) 

and determining a rate is reasonable when it is not (false negative). Both are costly, yet current 

methods only guard against false positive errors. It is important to balance the costs of both 

errors.

• The Canadian experience with Final Offer Arbitration (FOA)—an approach that parallels the 

Board’s FORR proposal in several respects—offers valuable insight for making FORR even more

effective. Contrary to some claims, FOA’s tight procedural schedule is a critical element in

reducing costs to participants and encouraging the best evidence to be brought forward.

1 For example, in its decision, STB wrote, “The Board proposes that the FORR procedure may only be used if the complainant 

also elects to use the streamlined market dominance approach proposed in Docket No. EP 756, Market Dominance Streamlined 

Approach, served concurrently with this decision.” Surface Transportation Board. Decision. Docket No. EP 755: Final Offer Rate 

Review. Decided September 11, 2019.
2

• Price markups are a straightforward and economically valid way to measure market dominance 

and ought to be considered as a main element in the Board’s rate review and market dominance

proposals.

• The nature of rail and truck competition is complex. The fact that a shipper uses truck 

transportation does not mean trucking is an effective check against a railroad’s market 

dominance. Moreover, data suggest railroads may have market power even over short distances, 

despite assumptions that trucks would be highly competitive with railroads along shorter routes.

Discussion

The Board Should Act

The Nation’s rail transportation policy (49 U.S. Code § 10101) is designed to ensure a safe, healthy, and 

efficient rail transportation system, much of which is accomplished through competitive forces. Under 

this policy, railroads are permitted to differentially price to recover their high fixed costs and earn 

adequate revenues, but the policy is also designed to provide balance and have regulatory mechanisms in 

place where competition is lacking. While railroads may use differential pricing, these prices must be 

“reasonable” if the market is not competitive.2

Regulatory reform for reviewing and challenging unreasonable rates is needed. Shippers are facing rates

where the revenue to variable cost (R/VC) ratio exceeds the statutory 180 percent-threshold,

3 and some 

are well-above this level. For example, according to the Board’s confidential Carload Waybill Sample

(CWS) data, 31 percent of grain shipments between 2015 and 2018 faced rates with the R/VC ratio higher 

than 180 percent. Fourteen percent of grain shipments had R/VC ratios higher than 240 percent, while 2 

percent had R/VC ratios higher than 360 percent. In terms of tonnage, 47, 18, and 3 percent of grain 

tonnage are moved at R/VC ratios above 180, 240, and 360, respectively. Yet grain shippers are not 

bringing rate cases, lending credence to the long-time claim from shippers that existing procedures are too 

costly, complex, and uncertain.

Where markets lack effective competition, it is the regulatory mechanisms that check severe applications 

of market power. These mechanisms are the safeguards against unfair rates that disproportionately favor 

railroads at the expense of shippers (and by extension the larger economy), and these safeguards must be 

valid and accessible to work properly.

More Emphasis on Identifying True Positives and Less on Avoiding False Positives

In its reply comments, the Association of American Railroads (AAR) contended USDA “gets the Board’s 

statutory paradigm exactly backwards” when USDA argues that false positives are better than false 

negatives, but AAR is ignoring the context of the argument.

4 AAR’s error is in missing the marginal or 

incremental nature of USDA’s argument and the broader need for balance. Elsewhere, Dr. Jerry Ellig 

expressed concern over USDA’s suggestion to use a competitive benchmark as the market dominance 

screen because “all econometric models have prediction errors.”5 USDA agrees with this point and further 

emphasizes that all attempts to measure market dominance and rate reasonableness, econometric or 

otherwise, will have errors. The Board’s goal should be to account for the costs of both kinds of errors 

2 49 U.S. Code § 10101. Rail transportation policy. 3 A shipper can contest the reasonableness of a rate only if the railroad is “market dominant” over the traffic at issue. In 49 U.S. 

Code § 10707(d)(1)(A), a railroad does not have market dominance if “the rate charged results in a revenue-variable cost 

percentage for such transportation that is less than 180 percent.” 4 Association of American Railroads. January 10, 2020. Reply Comments in EP 755, Final Offer Rate Review.

5 Jerry Ellig. January 10, 2020. Reply Comments in EP 755, Final Offer Rate Review, and EP 756, Market Dominance 

Streamlined Approach.
3

(truly unreasonable rates deemed reasonable and truly reasonable rates deemed unreasonable) and attempt 

to minimize the total cost of those errors.

Without agricultural shippers bringing cases, existing rate review procedures are missing 100 percent of 

their unreasonable rates. That is, the errors have been unbalanced. Despite railroads’ satistification with 

the status quo, the Nation’s rail transportation policy requires the enforcement of rate reasonableness.

USDA believes the Board’s proposals are steps towards doing exactly that, and also believes that minor 

modifications to the proposals can both reduce the number of errors overall and move closer to balance.

The railroads often characterize the shipper position as a demand for “re-regulation.” However, this is an 

exaggeration. USDA and others recognize that it is problematic for all users and society at large if many 

reasonable rates are incorrectly deemed unreasonable (false positives). Moreover, the R/VC data above 

suggest the majority of rail rates are reasonable. Therefore, it is important for the Board to have a test

with a low rate of false positives. USDA’s contention is only that unreasonable rates that remain 

unregulated (false negatives) are also costly. A balanced approach recognizing those costs means moving 

away from the 100 percent false negative rate.

Additionally, USDA believes there are many built-in safeguards to avoid false positives. Often, when 

medical professionals are concerned about how often a test’s positive predictions are actually correct

(precision), the simple solution is to test twice. The Board effectively does this by having a market 

dominance test followed up by a rate reasonableness test. Whatever level of precision the Board deems 

acceptable (and recognizing the tests are not independent), having the two tests means false positive rates 

can be higher and false negative rates can be lower on each test than if there were only one test.

AAR’s reply comments contend “Congress did not instruct the Board to take a broad view of market 

dominance because a ‘market dominance is always followed up by a rate reasonableness test.’ Instead, 

Congress limited the agency's authority to instances where there was a lack of effective competition ‘in 

hopes of removing most rates from rate regulation.’”6 AAR’s comments seem to apply to a world where 

these things could be measured perfectly and without cost. In reality, it is unclear how else the Board 

could effectively implement the various statutory goals in the Nation’s rail transportation policy without

“taking a broad view” and weighing the costs of the different kinds of errors as USDA has suggested.

In addition, it is helpful to consider comments from Dr. Ellig and the other authors of the Transportation 

Research Board’s (TRB) 2015 landmark study from this perspective. Dr. Ellig states, “The USDA 

proposal would use benchmarking to create a presumption that a railroad is market dominant. The TRB 

committee’s proposal would use benchmarking to identify rates that should be subject to more extensive 

scrutiny, but it did not propose to create a legal presumption that a rate above the STB-selected threshold 

indicates market dominance.”7

While it is true the TRB committee did not propose benchmarking would solely lead to a presumption of 

market dominance, it is clear they see value in its implementation. In the report, they recommend 

“repeal[ing] the 180 percent revenue-to-variable-cost formula by directing [the U.S. Department of 

Transportation] to develop, test, and refine competitive rate benchmarking methods that can replace [the 

Uniform Rail Costing System (URCS)] in screening rates for eligibility to be challenged.”8 In their 2019

comments, they add, “the rate benchmarking procedure outlined in [the 2015 TRB report] provides a 

6 Association of American Railroads. January 10, 2020. Reply Comments in EP 756, Market Dominance Streamlined Approach. 7 Jerry Ellig. January 10, 2020. Reply Comments in EP 755, Final Offer Rate Review, and EP 756, Market Dominance 

Streamlined Approach.

8 Transportation Research Board, Modernizing Freight Rail Regulation, Special Report 318, 2015.
4

superior indicator of whether a railroad may have market dominance and a useful check on inaccuracies 

introduced by URCS.”9

USDA agrees with the thrust of the TRB committee’s comments. The difference between USDA’s 

suggestion and the TRB authors’ comments appears to be only in whether the competitive benchmark 

screen would replace the other proposed market dominance screens or add to them. USDA believes the 

competitive benchmark screen in addition to the proposed screens is too much focus on avoiding false 

positives.

The R/VC screen alone is intended to avoid the false positive error of determining rate unreasonableness 

when a railroad is not in fact market dominant. USDA agrees with Dr. Ellig and the TRB authors that 

URCS is problematic, and agrees with the TRB comments when they cite Wilson and Wolak (2016) in 

stating, “‘[T]he benchmark price could supplement the R/VC < 180 test to ensure that failure of this test is 

in fact due to a non-competitive price, rather than the methodological issues with the URCS ‘variable 

cost’ measure.’”10 In other words, the competitive benchmark screen could be yet another safeguard to 

avoid false positives.

Adding the proposed market dominance prongs on top of the R/VC and competitive benchmark screens 

would further reduce false positives, but only marginally. However, doing so raises the expected number 

of false negatives. This is because some shippers with legitimate cases will be incorrectly barred from rate 

review through this abundance of screens. Given the need for balance, and the false positive safeguards 

already in place, USDA believes the Board should replace the proposed market dominance prongs with a 

competitive benchmark because the benchmark would likely have fewer errors overall—thereby reducing

both false positives and false negatives. If the Board keeps its existing screens, it should not add the 

competitive benchmark screen on top. Doing so would not be consistent with the need for balance.

Final Offer Arbitration in Canada is a Useful Model

It is worth emphasizing that there are key takeaways from final offer arbitration (FOA) in Canada, a

method that is related to the Board’s FORR proposal. The Class I railroads with operations in Canada—

Canadian National Railway (CN) and Canadian Pacific Railway (CP)—have considerable experience 

with FOA and their perspective could be an important part of improving the proposals. However, USDA 

encourages the Board to “not let perfect be the enemy of good.” While the Canadian railroads present 

some valid concerns, the conclusion should not be to dismiss the proposal altogether, but to incorporate 

the concerns to improve it.

For example, the railroads express concern over the restricted schedule of FOA. CP argues the 

abbreviated schedule does not control costs and instead involves “much uncertainty” and “a substantial 

amount of preparation.”11 For CP, a typical “FOA team will include 4 to 6 lawyers, 2 to 5 

experts/consultants, 7-10 in-house subject matter experts/witnesses, and numerous supporting 

personnel.”12 CP contends these costs make FOA inaccessible and, by extension, the Board’s FORR 

proposal will be similarly flawed. However, the fact that a lot of resources are used is not a valid reason to 

do away with the restricted procedural schedule proposed in FORR—it is precisely the opposite. The 

reason why procedural limitations are needed is to act as a constraint and force parties to focus their 

limited time and resources on only the clearest and most important evidence. FORR coupled with the 

9 Boyer et al. October 17, 2019. Comments in EP 755, Final Offer Rate Review, and EP 756, Market Dominance Streamlined 

Approach.

10 Ibid. 11 Canadian Pacific. November 12, 2019. Comments in EP 755, Final Offer Rate Review. 12 Ibid.
5

Streamlined Market Dominant test is still likely to be significantly lower cost than any other available rate 

review process.

CN raised another concern with differences in information between shippers and railroads coming into 

FOA. CN writes, “A railroad is given mere days to respond to an economic analysis that a shipper could 

spend months developing.” While it is true, as the initiator of a case, the shipper can plan in advance, it is 

also true that a railroad has control over the issue at the center of an FOA case—the level of the rate. A 

shipper, weighing the costs and benefits of bringing a case—even if months in advance—would not do so 

if the rate is reasonable.

CN’s argument also misses the advantages FOA affords the railroads, which is why the case results in 

FORR ought to be made public. Any particular railroad will likely be involved in more cases than any 

particular shipper, and as cases are brought railroads get more and more information on what works and 

what the results are in the FOA process. This is explained in a forthcoming paper by Dr. James Nolan. 

He writes, “As repeat players possessing more and asymmetric information, railways in Canada are much 

better positioned to build an effective FOA case than any individual shipper.”13 In sum, the Board is right 

to have a short procedural schedule and to make the results public.

USDA supports CN’s suggestion to design an arbitration process for small shippers, as long as it is a 

complement to effective rate review processes, such as FORR and Streamlined Market Dominance.

Price Markup is a Straightforward and Accessible Measure of Market Dominance

In competitive markets, firms are unable to charge a price above cost because they will lose business to 

competitors charging less. This is not true in less competitive markets where firms exert market power

and are able to charge a price markup above cost. In fact, the size of the price markup is directly related to 

the level of competition in a market and is used by economists to measure the degree of market power.

Therefore, the Board has a straightforward means of estimating rail market dominance through R/VC 

ratios or through a competitive benchmark measure, like that suggested by the 2015 TRB report and 

follow-on work by two of that report’s authors.

14

USDA contends price mark-ups are a better measure of market dominance than the proposed prongs for 

the streamlined market dominance test, and if markups cannot be used directly as screens, they could be 

used to determine appropriate thresholds in the proposed screens.

The Presence of Alternative Shipping Options Does Not Imply Effective Competition

In their reply comments, AAR states, “[S]hipper organizations would have the Board rule that where the 

shippers elect to use truck, this is evidence of market dominance,” but AAR has the claim backwards. 15

The correct statement is the presence of truck alternatives does not imply a competitive market. To claim 

the opposite—that truck presence does imply a competitive market—is called the “cellophane fallacy” in 

antitrust economics.

The cellophane fallacy refers to the mistake of concluding a market is competitive based solely on 

observed market shares at prevailing prices without accounting for the market power behind those prices. 

For instance, at some (high enough) price, a shipper will be deterred and find some alternative. The fact 

13 James Nolan, “Parallel or Converging? A Comparative Analysis of the Grain Handling and Rail Transportation Systems in 

Canada and the United States,” forthcoming.

14 See, for example, Wilson and Wolak, “Benchmark Regulation of Multiproduct Firms: An Application to the Rail Industry,”

NBER Working Paper No. 25268, November 2018. 15 Association of American Railroads. January 10, 2020. Reply Comments in EP 755, Final Offer Rate Review.
6

that the shipper uses this alternative does not mean the alternative is necessarily competitive or a check 

against market power.

A hypothetical example helps illustrate this. Imagine a railroad that would—in the absence of all 

competition (e.g., from truck, barge, or other railroads)—charge, $7,500 for a 2,000-mile, single-car grain 

shipment, which costs the railroad $5,000. Now assume a truck alternative exists for $7,400. The railroad 

must now account for the truck option, so it might offer a price of $7,350, just under the competitor. In 

this world, trucking is a constraint on rail rates. Nonetheless, the railroad is clearly using its market power 

over this distant shipment to significantly markup prices above cost ($7,500 rate versus $5,000 cost). It is 

essentially pricing at the monopoly price. So, the mere existence of a truck alternative does not imply 

effective competition.

This example illustrates why markup is a better measure of market dominance than explicit modal market 

shares. Declaring markets—for example, where more than 10 percent of movements are by trucks—as 

“competitive” does not necessarily capture reality. While USDA recognizes a markup threshold will still 

be a somewhat arbitrary threshold, it is less arbitrary than other measures and benefits from its straightforward approach that relies on readily available data. The STB cannot avoid the task of choosing where

competition stops and market power begins,

16 and USDA believes a markup threshold is superior to using 

market shares for this task, as it is directly related to the level of competition and less arbitrary.

Railroads May have Market Power Even Over Relatively Short Distance Shipments

The cellophane fallacy has important implications for the shipment distance, intermodal, and intramodal

thresholds, as proposed in EP 756. If “effective” competition is unclear (as it is without a defined

allowable level of markup), it is even more unclear where to draw the line on what shipment distance (or 

distance to intra- or intermodal options) is associated with effective competition. The railroads argue 

effective competition occurs at the 500- or 750-mile shipment distance threshold. Shippers, on the other 

hand, contend that distance is around 250 miles. In both cases, it is unclear how one reaches these 

conclusions without a clearer definition of what “effective” competition is. In the shipment distance band 

favored by railroads, the 500- to 750-mile range may represent the longest distance shipment for which

railroads have to consider the truck rate at all. USDA believes some railroads may have market power at 

distances even as short as 200 miles.

For example, based on USDA quarterly reports in 2018, surveyed truck rates averaged $2.97 per truck 

mile for a 200-mile shipment in the North-Central region.

17 This translates into a truck-carload equivalent 

at around $2,610.18 Using the Board’s 2018 CWS data, a 1-2 car, 200-mile grain shipment originating in 

similar states had an average variable cost per car around $1,000, while the average rate per car was 

$1,500. For shipments of 101 cars or greater, the average variable cost per car was $550, while the 

average rate per car was still $1,500.

While this is far from a complete analysis, it raises questions over how much market power railroads have 

even over 200-mile shipments. Of course, truck is quicker and more reliable than rail, which explains part 

of the difference. A more precise analysis would be needed to ensure an “apples-to-apples” comparison.

However, the rail rates include a significant markup above rail costs, which is possibly unsurprising, 

16 Unless the Board defines effective competition as any price below the pure monopoly price or defines ineffective competition 

as any price above the perfectly competitive price, then the Board must define an arbitrary level of competition as “effective.” 17 USDA Agricultural Marketing Service, Grain Truck and Ocean Rate Advisory, 2018 reports. Values were averaged for the 

North Central region for the 200-mile distance band. The North-Central region includes Kansas, Kentucky, Illinois, Indiana, 

Iowa, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Tennessee, and Wisconsin.

18 The truck-rail-equivalent is developed using standard measures of a railcar (110 tons) and a large semi (25 tons). Source: Iowa 

Department of Transportation’s modal comparison chart.
7

given the higher, unconstraining, truck rate. The existence of the price markup implies railroads have 

market power even over shipments involving relatively short distances, such as 200 miles, and perhaps 

even fewer. Whether this distance and its associated level of competition and markup are “effective” is 

what the Board needs to define. Regardless of the distance chosen, STB should set the distance threshold 

(and other prongs) with an eye toward the average level of competition or markup associated with that 

distance.
The NGFA Arbitration System at Work 

By 

Lisa Bernstein 

Wilson Dickenson Professor of Law 

The University of Chicago 

March 15, 2007
Introduction

This report explores the advantages and disadvantages of the National Grain and Feed 

Association’s (“NGFA”) arbitration system as compared to the two most prominent forums

available for resolving commercial disputes—courts and general commercial arbitration

tribunals. It also compares particular features of the NGFA system to the same features in 

other trade association-run private legal systems, concluding that the core elements of the 

NGFA system are common to most such systems and well suited to the grain and feed 

industry. 

The report concludes that the NGFA system is the most highly developed and sophisticated 

of the association-run systems, and that it is superior to both general commercial arbitration 

and litigation in State and Federal court for resolving commercial disputes among industry 

members. It also notes that there is no indication that the system—in terms of its rules, 

procedures, and outcomes—is biased against non-members who submit claims (or have

claims submitted against them) pursuant to either pre- or post-dispute arbitration provisions. 

The report also highlights the safeguards in the NGFA arbitration system that are designed to

ensure that it is both fair and open to scrutiny by would-be users of its rules and procedures. 

More generally, the report suggests that the NGFA system is valuable not only for its 

provision of an unbiased forum for the speedy, fair, and relatively low-cost resolution of

disputes, but also, and perhaps most importantly, for its adoption of detailed and procedurally 

fair arbitration rules; its provision of several clear and detailed sets of contract default rules—

the Grain Rules,1

 the Feed Rules,2 the Barge Rules,3 and the Barge Freight Trading Rules;4

and its adoption of an adjudicatory philosophy that can support trade and the negotiated 

resolution of disputes in its shadow far better than contracts that are subject to the Uniform 

Commercial Code and that are interpreted and enforced in court. 

In sum, the NGFA system offers all of those who use it significant advantages over dispute 

resolution through the courts or general commercial arbitration tribunals, and suffers from

almost none of the disadvantages that make some other types of private and statutorily-based 

dispute resolution systems and tribunals controversial. As discussed further below, unlike 

many merchant-to-consumer types of arbitral provisions, agreements to arbitrate disputes 

through the NGFA system offer advantages to both large firms and small firms as well as to 

both stronger and weaker contracting parties. Moreover, the way the system is structured 

helps to ensure not only that it is well-run today, but also that it will be able (as it has been

for over one hundred years) to adapt to changes in market conditions and other challenges in 

a flexible and rapid way that will benefit contracting parties. 

 1 The Grain Trade Rules were adopted in 1902. 2 The Feed Trade Rules were adopted in 1921. 3 The Barge Trade Rules were adopted in 1964. 

4 The Barge Freight Trading Rules were adopted in 1981. The NGFA also adapted special Rail

Arbitration Rules in 1998 to supplement the regular arbitration rules in “disputes between railroads

and their customers [when they are] using the NGFA Arbitration System.” General Explanation of 

the NGFA Arbitration System, at www.NGFA.org. 

1
Part I of this report gives a brief overview of the origins and operation of the NGFA arbitral 

system and the rules creation and amendment processes. It concludes that given the 

longevity of the system and the voting rules contained in the By-Laws that govern Trade 

Rules and Arbitration Rules adoption and amendment processes, the rules are quite likely to 

be value-creating for contracting parties, and that to the extent that they do not suit a 

particular transaction or transaction type, they do not impose costs on the contracting parties 

since they may, by their terms, be varied by contract.5

Part II of this report looks at how particular features of the NGFA system compare to (1) 

other trade association-run tribunals; (2) general commercial arbitration at the AAA;6

 (3) 

AAA-administered but trade association-specific commercial arbitration, and (4) litigation in 

State or Federal Courts. It also considers how the NGFA system as a whole compares to

these other fora in terms of overall cost, ease of use, compliance with judgments

(enforceability) and fundamental fairness. 

Part III explores the ways that the existence of the system adds value to transactions even 

when disputes do not occur. 

Part IV explores why most of the objections to arbitration commonly raised by consumer

groups, farmers, academics, and politicians, are unpersuasive in the context of the NGFA 

system and the systems adopted by many other US and international trade associations. 

In sum, the report concludes that the NGFA’s private legal system is well tailored to the 

needs of the industry, adds a great deal of value to the transactions it governs, and is fair to 

those whose contracts it governs. 

 5 See NGFA Grain Trade Rules Preamble (“All Active members and other parties using these rules 

are free to agree upon any contractual provisions, which they deem appropriate, and these rules 

apply only to the extent that the parties to a contract have not altered the terms of the rules, or the

contract is silent as to a matter dealt with by the pertinent rule.”) 

6 In addition to their widespread use, a reason that the AAA rules were selected for the purposes of

comparison is that some commentators have explicitly critiqued the NGFA arbitration system as 

being unfair because it operates differently from AAA-administered arbitration in terms of both its 

substantive rules and procedures. Matthew L. Benda and Edward E. Beckmann, for example, in To

Arbitrate or not to Arbitrate: A Parishioners Guide to Alternative Dispute Resolution in the 

Agricultural Context, 2 Drake J. Agric. L 315 (1997) take the position that the AAA’s rules are 

procedurally and substantively superior to NGFA’s, especially in disputes between members and

non-members. However, in reaching this conclusion the authors overlook many of the aspects of the 

AAA’s rules that make them undesirable even according to the criteria for judging arbitration 

systems put forth by the author. For example, they suggest that the costs of a hearing in the NGFA

system are higher than the cost of a hearing in the AAA system, id. at 326, something that as the

tables in Part I of this report illustrate is unlikely to be the case. Second, they suggest that the legal

reasoning in AAA opinions is superior to the Trade Rules based reasoning in NGFA opinions,

something that ignores the fact that the outcomes under the general principles of law they suggest are

employed by the AAA are far less predictable thereby making settlement less likely, and the fact that

the AAA arbitrators only very rarely produce opinions at all. 

2
I. History and Operation of the NGFA System 

From the beginning of its private legal system, the NGFA took pains to ensure that its trade

rules and arbitration rules were widely known and understood. The early trade press, most 

notably the journal, Who is Who in the Grain Trade, provided detailed coverage of the rules 

creation and amendment processes as well as information about the way the arbitration 

system worked. At least once each year the trade rules were reprinted in their entirety. In

addition, decisions were reprinted, and readers were invited to submit questions about both

trade rules and industry custom to the NGFA chairman, with some replies being published in 

an “Ask the Chairman” column. 

In 1920, in an effort to facilitate understanding of the rules and the arbitration system, the 

association published a well-indexed, bound compilation of the arbitration decisions issued 

before that date. After that time opinions were circulated to members and reprinted from time 

to time. 

Today, all arbitration decisions, as well as the NGFA Trade Rules and Arbitration Rules, are

posted on a publicly accessible part of the NGFA website. Arbitration decisions are also

circulated to members in the NGFA newsletter. In addition, NGFA continues to go to 

extraordinary lengths to acquaint its members and others in the industry with its rules. It 

continues to sponsor trade rules seminars that are designed to acquaint any interested persons 

with the trade rules, the arbitration system, and the relevant law.7

 These seminars serve to

reduce the frequency of contractual misunderstandings and are viewed, and rightly so, as 

ways to avoid disputes requiring third party intervention. The printed materials from these

seminars as well as additional written materials on the rules and association-drafted standard 

form contracts for different types of transactions are also available from the Association for a 

fee. Because these materials are so accessible, they enable transactors to learn a great deal 

about their legal rights and obligations without consulting a lawyer, thereby decreasing the 

legal costs of doing business. 

Although the focus of this report is on the working of the arbitration system, it is important to 

note that the NGFA trade rules, which provide the substantive rules used to resolve disputes, 

are an integral part of the ability of the system to resolve disputes in a fair and expeditious 

manner. 

The NGFA rules creation and amendment process is designed to be widely inclusive, with 

the interests of member firms of different sizes and regions being amply represented.8

 Today, 

the Trade Rules Committee, which is appointed by the NGFA Chairman to recommend

 7 For example, a seminar held in May 2004 covered topics such as “Applying the NGFA Trade Rules 

... Trading and Producer Contract Law ... Case Study Presentations ... Legality of Cash Contracts ... 

Cross Border Trading in North America ... The New Contracts: What Are They? When and Why to

Use Them? ... Managing Fiduciary Risks and Liabilities in Contracting ... NGFA Arbitration - 

Alternative Dispute Resolution for the Industry.”

8 In all of the associations studied, trade rules were drafted solely by association members. 

3
changes in the Trade Rules, to the membership, or to the Board of Directors,9

 is selected with

an eye toward ensuring the representation of different-sized firms and maintaining a roughly 

even division between firms who are “net buyers” of commodities and those who are “net 

sellers” of commodities. Because firm representatives who serve on NGFA committees are 

not recompensed for their travel expenses and are not paid for their services, small firms 

sometimes choose to limit their participation in association committees, but as Table 1 below 

illustrates, firms of all sizes are active in the rules amendment process. 

Table 1- Composition of Grain and Feed Trade Rules Subcommittees by Firm Size 

 

Size of Company Number of Representatives on Feed and 

Grain Rules Subcommittees 

Small (Less than $25 million in sales) 5 

Medium ($25 - $250 million in sales) 7 

Large (More than $250 million in sales) 9 

Moreover, because final approval of any rule changes must be ratified by the membership-atlarge, with each firm, regardless of its size getting one vote, small firms could, simply by 

voting against the proposal, effectively block the adoption of any rules that would adversely 

affect their interests. As the table below demonstrates, they would out-vote large and 

medium firms 600 to 120. 

Table 2- Firm Size and Representation in the NGFA Active Membership 

Company Size in Terms of Annual Sales 

(or Grain Purchases for Processors) 

Number of 

Members 

Small (Less than $25 million in sales) 600 

Medium ($25 - $250 million in sales) 100 

Large (More than $250 million in sales) 20 

Over the years the NGFA has struck a successful balance between amending the trade rules

in response to new circumstances and the arbitrators’ experience applying them,10 and 

providing rules that are relatively stable. As of 1996 the Grain Rules were amended 58

times, the Feed Rules 32 times, the Barge Rules 22 times, and the Barge Freight Rules 8 

times. Many of these amendments were wording changes to enhance clarity rather than

 9 The Board of Directors itself is composed of members from firms of all sizes. As of February 2004,

eighteen directors worked at small firms (defined as those with less than $25 million in sales), twentyone directors worked at medium sized firms (defined as those with sales between $25 million and 

$250 million), and twenty worked at large firms (those with more than $250 million in sales). 10 Sometimes the arbitrators note the need for a rule amendment in their opinions. See, e.g., Pioneer

Hi-Bred Int’l v. Overby Grain Farms, Inc., NGFA Case No. 1700 n. 1 (1993) (“[T]he arbitrators have 

communicated to the NGFA’s Trade Rules Committee the dichotomy posed by NGFA Barge Trade

Rule 2(g)(1) as it is now written.); Guthrie Corp. v. Continental Grain Co., NGFA Case No. 1673 n. 1 

(1992) (“The arbitrators believed that the NGFA’s Trade Rules Committee should examine whether a 

more specific definition of ‘due diligence’ in the Trade Rules would minimize future disputes of this

nature, and have communicated this view to the committee.”). 

4
substantive changes. When rules changes do occur, they are widely discussed in the trade

press as well as in NGFA publications and, more recently, on the NGFA web site, thereby 

ensuring that traders are aware of the changes. The fact that transactors can vary these rules

by contract is a further guarantee that if the rules become obsolete, are unclear, or are 

unsuited to a particular transaction or transaction type, they will not pose any barrier to 

efficient commerce. 

In sum, the democratic and inclusive nature of the rules-creation process is one of the

primary reasons that the system has successfully adapted itself over time to changing market

conditions and new technologies. It also helps to explain why the system has consistently 

been fair to transactors of all sizes. 

II. Operational Features of the NGFA, the AAA, and the Courts as Fora for the 

Resolution of Commercial Disputes

This section explores the ways that various features of the NGFA arbitration system compare 

to those that are used in a sample of other trade association-run arbitration systems, the AAA 

general commercial arbitration system, AAA-administered industry-specific arbitration 

tribunals, and public courts. The AAA was selected for comparison because its rules and 

procedures are widely regarded as acceptable substitutes for those provided in civil courts. 

Costs of Dispute Resolution: Forum and Legal Costs. Filing fees in most commercial 

arbitration tribunals—whether industry-specific or AAA-run or administered-- are higher 

than they are in court.11 This is not because arbitration is a money-making venture,12 but 

largely because courts receive a huge public subsidy. 

Some trade associations charge a fixed filing fee while others vary the fee based on the 

amount in controversy (often subject to set minimums and maximums). In associations that 

are willing to arbitrate member-to-nonmember disputes, members and non-members are 

often charged different amounts. The differential fees for members and nonmembers are due 

to the fact that most association-run arbitration systems are subsidized from general 

membership dues. At the NGFA, however, while the arbitration system does receive a 

subsidy from dues, members and non-members are nonetheless subject to the same fee

schedule.13

 11 For example, it costs only $296.50 to file a civil claim in Los Angeles County. See

http://www.lasuperiorcourt.org/fees. The cost of filing is $247 in Hennepin County, Minnesota

which includes Minneapolis). See http://www.courts.state.mn.us/districts/fourth/General/ 

Fees.htm; and $150 (without service) in Harrison County, Texas which includes Houston. See

http://www.hcdistrictclerk.com/Civil_Info/Civil_info.asp. The New York City Civil Court Filing

Fee for Commercial Claims is only $25. See http://www.courts.state.ny.us/courts/ 

nyc/civil/fees.shtml. 12 The AAA is a not-for-profit organization and most trade association executives maintain that

arbitration programs either are operated at a loss or generate only insignificant income for the

association. 

13 See NGFA Arbitration Rule 5.

5
The filing fees for a sample of trade association-run systems are set out in Table 3 below. As

the table demonstrates, among industry-run arbitration tribunals, the NGFA’s filing fees, 

which depend on the amount of the claim and are capped at $10,000, are quite reasonable. 

Table 3- Filing Fees in Trade Association-Run Arbitration Systems 

Association Filing Fees for Members Filing Fees for Nonmembers 

ACSA-ATMI Board of Appeals (BoA) $400 $800

American Film Marketing Association 

(AFMA) 1 

1% of amount claimed; $200

minimum; $3,500 maximum

1% of amount claimed; $200 minimum;

$4,500 maximum; plus a $500 surcharge.

American Spice Trade Association 

(ASTA-spice) 

$250 for sole arbitrator; 

$500 for three arbitrators 

$500 for sole arbitrator; 

$1,000 for three arbitrators 

Association of Food Industries, Inc. (AFI) 

2 

$400; $800 if multiple contracts 

between the same parties 

$900; $1,300 if there are multiple contracts 

between the same parties 

Cocoa Merchants’ Association of

America, Inc. (CMAA) 3 

The greater of 1% of the amount

claimed or $500 

1% of the claim plus $2,500

Green Coffee Association (GCA) For contract arbitration –$605 

for up to 250 bags; plus, for each

additional bag up to 500, 35

cents per bag; and for each 

additional bag over 500 bags, 56

cents per bag. 

For contract arbitration –$605 up to 250

bags; plus, 35 cents for each additional bag 

up to 500; and 56 cents for each additional 

bag over 500 bags. Furthermore, for nonmembers there is a surcharge that depends

upon the status of the other party to the 

dispute. If the other party is a member, the 

charge is an additional $300; it is an

additional $2,000 if the other party is a nonmember.

National Cottonseed Products Association 

(NCPA) 4

$4,000 A non-member must either apply for 

membership, or pay the $4,000 plus 25% of

the cash amount in dispute, up to a 

maximum of $250. 

National Hay Association (NHA) 5 $200 Same as members. 

Printing Industries of Wisconsin (PIW) $175 Same as members. 

Rice Millers’ Association (RMA) 6 “$2,500” in the lowest claim

bracket to “$10,000 plus 1⁄4% of

the excess (of the claim) over $1 

million,” in the highest claim

bracket. No maximum fee. 

Same as members.

Rubber Trade Association of North 

America, Inc. (RTA-NA) 7 

$250 Same as members

National Grain and Feed Association 

(NGFA)14

“$400, plus 1% of the claim,” in

the lowest claim bracket to 

“$2,150, plus 1⁄4% of the claim” 

in the highest bracket. There is a 

maximum filing fee of $10,000. 

Same as members.

*This table represents the amount that member and non-member claimants (plaintiffs) must 

submit to initiate proceedings. Note that in NCPA arbitrations, a non-member may not bring 

the complaint (but he will be charged a filing fee if he consents to arbitrate). At the AFMA, 

AFOA, ASTA-seed, ASTA-spice, AFI, and CMAA, only the claimant pays this fee; whereas

 14 In April 2005, the NGFA membership approved the first fee increase in over five years. 

6
at the BoA, GCA, NCPA, NHA, PIW, RMA, RTA, and NGFA, both parties pay the fee. 

Some of the associations with the lowest fees have not amended their rules recently. 

**A “deposit” is defined as an amount charged as a rough estimate of actual cost (the excess 

is refunded and the deficiencies as compared to actual costs are payable), or an amount that

will be refunded to one party or the other depending on the outcome. 

1 - For a fee of $50 for members and $150 for non-members, AFMA will send a letter to the 

other party providing for a 10-day settlement period before arbitration is formally initiated. 

2 - The AFI considers these amounts “deposits,” but they are actually similar to filing fees. 

If the claimant loses, the fee will be used to “defray the cost of the arbitration,” but there is

no provision for refund or increase based upon actual costs. Furthermore, “[i]f the party 

bringing the arbitration is successful in the arbitration, an amount equal to the arbitration fee 

will be added to the award.” AFI, Arbitration Rules, Section X(3). 

3 - The CMAA considers these amounts filing fees, but they actually represent a deposit 

against costs. If there is any remainder at the end of the arbitration, it will be refunded to the 

claimant, and the Board may require either party to pay additional expenses incurred.

4 - These amounts are not actually filing fees but deposits; the deposit of the party against 

whom costs are assessed will be credited toward payment of the cost of the proceedings. In 

addition, if the deposit is insufficient to pay all costs of the arbitration, the party against 

whom costs are assessed must immediately pay the difference. The other party will have his 

deposit returned. 

5 - NHA rules refer to these amounts as deposits; the winner has 1⁄2 of the fee returned. 

6 - These amounts may be considered deposits against expenses, although they are called 

“administrative fees.” These costs are fixed, but the fee schedule notes that “Any of the 

above fees may be increased at the sole discretion of the Arbitration Committee if deemed 

necessary by the Committee to cover RMA expenses.” 

7 - The fee is fixed in the sense that there is no refund if actual costs are lower than $250,

although parties may be charged more if actual costs are greater. According to an association 

executive, the fee can range as high as $1,000, but $250 is adequate for 99% of the 

arbitrations conducted. The fee structure is not contained in the arbitration rules; it is 

established annually by the Board of Directors. In addition, unlike those of the other 

associations, this fee is not payable until after the award is rendered. One quarter of it is 

given to the arbitrators. 

7
The NGFA’s fees are also on the low side as compared to the more reputable of the general 

commercial arbitration providers. As the Table 4 below demonstrates, it would cost a 

plaintiff $1,600 to file a $160,000 claim at the NGFA but $4,000 to file the same claim at the

AAA. In addition, as Tables 5 and 6 illustrate, the additional costs imposed on the parties by

the AAA are much higher than the corresponding costs imposed by the NGFA. 

Table 4- Filing Fees in AAA and AAA-Administered Systems 

Association Filing Fees for Members Filing Fees for 

Non-Members 

American Fats and Oils 

Association (AFOA) 

“$500” in the lowest claim bracket to “$7,000,” in the highest

claim bracket* 

Same as 

members.

American Seed Trade 

Association (ASTAseed)** 

“$500” in the lowest claim bracket to “12,500 plus .01% of

the amount of the claim above ten million.” There is a 

maximum filing fee of $65,000.

Same as 

members.

American Arbitration 

Association (AAA)***

“$500” in the lowest claim bracket to “12,500 plus .01% of

the amount of the claim above ten million.” There is a 

maximum filing fee of $65,000.

Not applicable 

*For claims above the highest claim bracket, that is, claims in excess of $5,000,000, the 

filing fee will be negotiated at the time of the request for arbitration. There is a minimum

filing fee of $2,000 for any case having three or more arbitrators. Note also that in addition 

to paying the filing fee, the claimant must submit a deposit of $5,000 to be applied against 

the fees and expenses payable to the arbitrators. The difference, if any, is refundable within 

thirty days after the award. 

** The ASTA-seed rules apply to disputes with non-members only if the non-member is 

from the US or Canada. ASTA-seed members arbitrate disputes with parties from other 

countries under the auspices of the Federation International du Commerce des Semences. 

*** AAA includes Expedited Procedures and Procedures for Large, Complex Commercial 

Disputes with its Commercial Arbitration Rules, but the same basic fee schedule is applicable 

to any of the Procedures.

****ASTA-seed has adopted the AAA’s Commercial Arbitration Rules. AFOA is 

recognized as an affiliate because it uses AAA administrative services. Although the 

Association publishes arbitration rules under its own name, they are similar in many respects 

to those of the AAA. 

In most association-run tribunals and in AAA general commercial arbitration, filing fees are 

only one component of the actual forum-related costs. As set out in Table 5 below, many

associations impose additional fees in varying amounts as part of the arbitration process. In

those associations that give the parties the option of requesting an oral hearing, additional 

hearing-related fees—some fixed and some based on actual costs (as at the NGFA) – are 

typically imposed. 

8
Table 5- Additional Costs imposed by Association-Run Tribunals 

Assn. Other Fees and Costs 

BoA Non-members must pay actual costs if they exceed the filing fee. 

AFMA • A counterclaim or cross claim must be accompanied by a filing fee. • Arbitrator fees. The 

arbitrator usually collects a $1,000 advance on his fee from each party. Members pay an hourly 

rate of $250 for the first 16 hours and $275 per hour beyond that. Non-members pay $300 per

hour for the first 16 hours and $325 per hour beyond that. • Travel and other expenses incurred

by the arbitrator, when hearing is needed • $50 for members and $150 for non-members for the

optional Pre-arbitration Settlement Procedure. 

ASTA

-spice 

• A stenographic hearing, if desired.

AFI • Additional hearings may be charged at the rates listed above under filing fees. • A party 

requesting postponement of a hearing may be required to pay the costs. If the postponement

extends beyond 45 days at the request of the defendant, he shall pay $500. The association will 

not grant postponements beyond 90 days without the consent of the claimant. 

CMAA • Additional costs may be charged to either party if incurred. • A counterclaim or a third party 

claim requires an additional filing fee. • The parties may request and pay for a stenographic 

transcript if desired.

GCA • The arbitrators may require an oral hearing. If there is an oral hearing, a stenographic record 

must be taken for the Association’s record, and the expense will be charged to the parties. • An

arbitrator’s fee of $35. 

NCPA • If the issues and evidence relating to two or more contracts between the same parties are the 

same, they may be submitted under a single arbitration agreement. If the issues and evidence are 

different, or relate to quality, requiring different sets of samples, a separate arbitration agreement 

shall be signed for each contract; or, if the disputants request that different issues be covered by a

single arbitration agreement, a separate fee shall be assessed for each contract involved. • Actual

expenses for the arbitrator for attending meetings of the committee. (Loser pays.) 

NHA • The cost of an oral hearing if held. • $50 per diem for the arbitrators for their services in 

considering and deciding cases. • The amount of the arbitrators’ traveling expenses and hotel

bills. 

PIW • The hearing fee per session ranges from $450 for the initial 3-hour session, and $100 per hour

for each additional session, to $1,750 for the initial 3-hour session, and $500 per hour for each 

additional session, depending upon the size of the claim. • Parties will be responsible for any 

stenographic services, transcript services, and expert witness fees (including travel) that they 

request. 

RMA • A counterclaim must be accompanied by an administrative fee. • Expenses, if any, of the 

arbitrators and the Arbitration Committee. • Fees and expenses of any experts. • Fees and 

expenses of consultants to the arbitrators and the Arbitration Committee. 

RTANA • One quarter of the administrative fee is given to the arbitrators, but they shall be awarded

additional fees in the award if “unusual or extraordinary services” have been required of them. • 

Stenographic charges and other expenses. A member using any facility or service of the Trade 

shall be fully responsible for payment of proper fees for such facility or service upon

presentation of invoice. 

NGFA • Cost of the stenographic record for an oral hearing; this will become part of the official 

transcript of the case. • When applicable, travel and hotel expenses for the arbitration committee, 

the National Secretary, and the Association’s legal counsel. 

9
In contrast, while the cost of simply filing a civil claim in public courts is far lower, the

overall cost of resolving a dispute in industry-run tribunals is far less than it is in the public 

legal system, given lawyers’ fees, the costs of initiating and responding to discovery requests, 

and the length of time it takes to obtain and collect a final judgment. Although data are not 

readily available, the use of lawyers in trade association-run arbitration systems appears to be

increasing, at least in larger claims. However, the streamlined procedures employed by these 

tribunals should nonetheless result in a significant savings in legal costs relative to a court

proceeding. In general, the cost of resolving disputes in association-run systems, and through 

the NGFA system in particular, is also likely to be less than the cost of resolving a similar 

claim through the AAA system. This is primarily because in the AAA a hearing is almost

always held,15 whereas at the NGFA, a hearing is held only if it is requested by one or both 

of the parties. In addition, unlike the NGFA where the arbitrators serve for free and parties 

pay only for the arbitrators’ actual out-of-pocket travel expenses, parties in AAA arbitrations

are obliged to pay the arbitrators their usual and customary fee which, given their legal 

training, can be high. 

Moreover, whether it is cheaper to arbitrate in AAA tribunals than to litigate in court is less 

clear. The AAA procedures are more cumbersome and delay-prone than the industryspecific procedures, and lawyers are typically used. One study of AAA arbitration concluded 

that “[o]ne does not save money by going to the AAA,” rather than state or federal court for 

claims above $5,000.16 

Table 6 – Other Fees and Costs in Systems Run by the AAA & Affiliates 

Assn. Other Fees and Costs 

AFOA • If a monetary claim is made in the answer, another administrative fee is due. • Arbitrator’s fee [not above 

$500 per arbitrator per hearing day or $300 per arbitrator for each executive session, or day of study time 

(when the Panel consists of a single arbitrator)] • A stenographic record, if desired or ordered by the arbitrators.

• Required traveling and other expenses of the arbitrators. • For each day of hearing, there will be an

administrative fee of $100 payable by each party for a single arbitrator panel, and $150 each for a 

multiarbitrator panel. • If a hearing is postponed after it is scheduled, the postponing party will pay the fee as 

if the hearing had taken place at the scheduled time. • A processing fee is payable 180 days after the case is 

initiated, and every 90 days thereafter, until the case is withdrawn or settled or hearings are closed by the 

arbitrator. The fee is $150 per party for a single arbitrator panel and $200 per party for a multiarbitrator panel.

ASTA

-seed 

• A Case Service fee is incurred for all cases that proceed to the first hearing. Fees range $200 to $6,000. • 

Another filing fee is due if there is a counterclaim or additional claim. • Arbitrator’s compensation (consistent 

with the arbitrator’s stated rates). • Stenographic record, if desired. • Required travel and other expenses of the

arbitrator(s). 

AAA • A Case Service fee is incurred for all cases that proceed to the first hearing. Fees range $200 to $6,000. • 

Another filing fee is due if there is a counterclaim or additional claim. • Arbitrator’s compensation (consistent 

with the arbitrator’s stated rates). • Stenographic record, if desired. • Required travel and other expenses of the

arbitrator(s). 

 15 The AAA refuses to release data on how often hearings are held. However, according to a customer 

service representative (interviewed June, 2004) the AAA recommends a hearing in cases where more

than $10,000 is at issue and maintains that although litigants typically follow their recommendations, 

the rules do not require them to do so. 

16 See Herbert M. Kritzer & Jill K. Anderson, The Arbitration Alternative: A Comparative Analysis of

Case Processing Time, Disposition Mode, and Cost in the American Arbitration Association and in

the Courts, 8 Justice System Journal, 1, 18 (1983). 

10
Timelines of Dispute Resolution The NGFA rules provide a clear time table for the filing 

of complaints and arguments (together with certain types of evidence specified in the rules), 

the approval of arbitrators, the filing of appeals, and payment of judgments, 17 a time table 

that should be sufficient for most types of disputes, except perhaps when a weather or pest 

related event –such as a freeze on the Mississippi river that halts barge traffic—puts a heavy 

strain on the system’s administrators and its unpaid arbitrators, who not only decide cases, 

but also reduce their judgments to clear and detailed written opinions that take time to write 

and edit. Extensions of some of these deadlines are available under limited circumstances,18

and are frequently granted, a practice that the Arbitration Rules Committee might consider 

constraining in their next round of Rules revisions.19 However, the clear intent of the rules is 

to facilitate the timely resolution of disputes and reduce parties’ ability to make strategic use 

of delay.20 In contrast, while some states offer reasonably expeditious handling of civil 

claims, in many states it takes far longer for a commercial case that goes to trial to reach a 

final verdict. In addition, in the court system, during the period from filing to hearing, the 

civil discovery system gives the parties a way to inflict high and escalating costs on one 

another, a type of behavior that is severely constrained in the NGFA system. Nonetheless, 

NGFA should pursue methods by which it could further expedite its arbitration system, 

something that it began to do in its latest round of arbitration rules revisions. 

 17Under the NGFA Arbitration Rules, the arbitration complaint must be filed within 12 months after a claim

arises or after expiration of the contract performance date; except for cases between members and nonmembers 

arbitrated pursuant to a court order, in which the complaint may be filed within 30 days of issuance of the court 

order. After the complaint is filed, the rules establish specific sequential deadlines for the parties and the NGFA 

National Secretary: Plaintiff has 15 days to sign the arbitration contract; Defendant has 15 days to sign the 

arbitration contract; Plaintiff has 20 days to file a First Argument; National Secretary has 10 days to forward the 

First Argument to Defendant; Defendant has 20 days to file an Answer; National Secretary has 5 days to 

forward the Answer to Plaintiff; Plaintiff has 10 days to file a Rebuttal; National Secretary has 5 days to

forward the Rebuttal to Defendant; Defendant has 10 days to file a Surrebuttal; National Secretary has 5 days to

forward the Surrebuttal to Plaintiff. The National Secretary then appoints a three-person panel of arbitrators to

the case. The parties have 5 days to challenge an appointment. Upon receipt of the arbitrators’ final decision, 

the National Secretary has 5 days to forward it to the parties. The parties then must comply with the award or

file an appeal within 15 days. 

18 See e.g., NGFA Arbitration Case No. 1900 (where a case was held in abeyance at the request of the parties). 

See also, NGFA Arbitration Rule 7(i), which provides that the National Secretary may extend the deadlines for 

parties’ arguments for good cause shown for a period no longer than 20 days from the original deadline. Other 

factors that may lead to delay include: (1) oral hearing requests; (2) appeals; (3) administrative issues requiring 

resolution that interrupt the process; and (4) stays and abeyances requested by the parties to pursue settlement, 

court resolution or other reasons. 19 For example, while the current rules provide that the “National Arbitration Committee shall act 

promptly on all cases submitted, “ Arb. R. 8(k), it might be desirable to include a 30-day limitation

subject to waiver for a fixed period in the discretion of the National Secretary. Moreover the NGFA 

membership very recently approved a number of Arbitration Rule Amendments in April 2005 that 

encourage the timely conclusion of cases. 

20 From 1995-2000, the average time for disposition in all cases was 424 days. However, due to a

freeze on the Mississippi, whose severity was widely underestimated, this period includes a number 

of cases involving string trades (that is, deals between multiple parties) relating to this occurrence. 

The multiparty nature of these cases and the volume of them that occurred in a short time frame,

added greatly to the average length of the dispute resolution process over this time period. Leaving 

these cases aside, the average time from filing to disposition during this period was 405 days.

Further leaving aside cases that were subject to appeals or stays requested by the parties, the average

time for disposition was 359 days. 

11
Most industry-run tribunals attempt to constrain the use of delay as a strategic weapon. Many 

have adopted rules similar to the NGFA’s. Others have no such rules; yet make it known that 

the expeditious resolution of disputes is one of their primary goals. 

The AAA general arbitration rules also contain deadlines for the taking of particular actions, 

but these are so laxly followed that studies of the process found that it could take as long as 

or longer than resolving a dispute in court. 

The ability to obtain a more timely resolution of a dispute is often most valuable to smaller 

transacting entities that enter into deals that are large in relation to the overall size of their 

businesses.21 When such entities are the victims of breach, they may not have either

sufficient internal operating capital or access to outside capital on reasonable terms, to enable 

them to continue in operation, or continue in operation at previous levels of trade during the 

pendancy of a dispute. In contrast, a large entity that enters into trades that are a fraction of 

its net wealth may suffer no ill effects from waiting for a judgment. As a consequence, the

reduction in delay provided by the NGFA system is a feature that is highly advantageous to 

the less wealthy side of a dispute. Moreover, by giving smaller parties who might not 

otherwise have been able to sue a credible threat to arbitrate, the availability of arbitration

should make it less likely that those who deal with smaller parties will take actions that they 

would have felt free to take if the smaller party only had recourse to the legal system to 

address contractual wrongs. 

 21 Moreover, because the NGFA, like most trade associations with these systems, requires most claims 

to be submitted to arbitration within a year of the date the controversy arose, while a five-year statute

of limitations applies in at least certain public courts, the system enables firms to have smaller

disputing financial reserves than they would need if all of their contracts were subject to litigation in

the courts. This is a benefit that should be particularly important to smaller or less well capitalized 

concerns. 

12
Who are the decision makers? In most association run programs, an effort is made to

choose arbitrators with knowledge about the type of transaction and good at issue. Table 7 

below sets out the qualification of arbitrators in the sample of trade association-run systems. 

Table 7 – Qualifications of Decision-Makers in Trade Association-Run Arbitration 

Systems 

Assn. Qualifications of Decision-Makers 

BoA • Knowledge of the Southern Mill Rules • Experience in their respective industry • Reputation for 

integrity and fairness • No interest in the matter involved

AFMA • Arbitrators must be lawyers • At least seven years experience in the entertainment field representing 

sellers and buyers, particularly in the international licensing of film. • Experience in arbitration

• Familiarity with litigation • In addition, to become a member of the AFMA panel, candidates must 

submit two letters of recommendation: one from an arbitrator who currently serves on the panel, and

another from a party actively involved in the international motion picture business. 

ASTAspice* None specified. 

AFI • No financial or other interest in the result of the arbitration. • Expertise in the product or commodity 

in dispute. • Arbitrators from overseas may be appointed if they are members of the Association. 

• Nonmembers may serve if there is an insufficient number of members available or if the Association 

is undertaking to arbitrate on products which are not dealt in by any extensive group of the 

Association’s own members. Such non-members must be recognized in the trade as being competent 

to serve as arbitrators in the specific controversy. • Except where it is necessary or where the parties 

have otherwise agreed, panels shall not be selected exclusively of merchants or exclusively of brokers. 

CMAA • Members of arbitration panels must be members of the 25-person Arbitration Committee elected by 

the membership of the Association from among the membership. • No interest or conflict of interest in

any arbitration.

GCA • No personal or financial interest in the matter in dispute. • Prior to commencement of any arbitration

each selected arbitrator is directed to state in writing or orally to the President that there is no 

circumstance known to him which does or might create any bias or appearance of bias or interest on 

his part and that there is no fact known to him which might disqualify him. • He must also state that he 

is knowledgeable about the subject matter at issue. 

NCPA** • Members of the arbitration committee must be members of the association. • Arbitrators are to be 

representative of the membership and the regions covered by the membership. 

NHA • Member of the 3 arbitration committees must be members of the association. • Members of the 

committees must hold no other office in the association. • Not more than two of the three arbitrators 

on any committee may be receivers of hay, nor can more than two be shippers. • The committees are 

geographically allocated. 

PIW • No interest financial or otherwise in the outcome of the case. • Completely impartial in fact and

appearance. • High personal and professional integrity. • Particular knowledge and expertise in the 

printing industry. 

RMA • Arbitrators shall normally be drawn from the membership of the Arbitration Committee, but the 

Committee may in particular cases appoint one or more arbitrators who are not Committee members. 

• No financial or personal interest in the result of the arbitration.

RTANA • Arbitrators must be members of the Association or employees of members, unless otherwise agreed

by the parties. 

NGFA • Prominent people experienced in the type of trade or transaction involved • Employee or active 

partner, principal, officer or director of a member firm eligible to arbitrate disputes under these rules 

• Commercially disinterested with respect to the particular dispute 

*No member may refuse an appointment to serve as arbitrator, unless for a good cause 

shown. 

**Appointment as an arbitrator is subject to the member’s consent to serve. 

13
Note that the “no business connection or financial interest” requirement can sometimes be 

waived under the rules of some associations. See, e.g., the rules of the RMA and the AFOA. 

The AAA general commercial arbitration rules do not require industry-specific expertise, and 

lawyers commonly sit on panels. In contrast, the AAA-run association-specific tribunals do 

value and encourage industry expertise, but unlike the NGFA, they do not strictly require it. 

Table 8 – Qualifications of Decision-Makers in Systems Run by the AAA & Affiliates 

Association Qualifications of Decision-Makers

AFOA • Arbitrators must be members of the association or employees of companies 

that are members of the association.

• No person who has a financial or personal interest in the result of the 

arbitration shall serve. 

ASTA-seed Rules are silent. 

AAA Rules are silent. 

Associations vary in the number of arbitrators who hear each case. Most provide for three 

arbitrators, but some provide for as few as one, particularly when the parties consent to this.

Most associations reimburse arbitrators for their out of pocket costs, while a few also pay 

them a nominal sum for their efforts. Table 9 below sets out the number of arbitrators, the 

selection process, and the extent to which they are compensated for their services or 

reimbursed for the cost of their participation in the system. 

14
Table 9 - Decision-Makers in Trade Association-Run Arbitration Systems 

Assn. Number of DecisionMakers Method of Selection Compensation 

BoA 2, one representing each 

association (but if those two

are unable to reach a 

unanimous decision, they

shall select a third to act 

with them). Fn 1

Association Executive Unpaid (no expenses are mentioned) 

AFMA 1* Association provides list; parties strike 

and rate preferences; if agreement is 

not reached, an Association Executive

appoints the arbitrator. 

Paid by the parties, plus actual

expenses 

ASTAspice 1 or 3 at discretion of

Arbitration Board Chair. 

Association Executive, with input from

parties 

Rules are silent 

AFI 3 Arbitration Board selects panel; parties 

may challenge; an Association 

Executive makes the final choice. 

Unpaid (rules are silent on whether 

they receive expenses) 

CMAA 3 Chairman of Arbitration Board selects 

a panel and parties may challenge.

Unpaid (unless services require 

extraordinary amount of arbitrator’s

time; no expenses are mentioned). 

GCA 3 Association provides list from which

names connected with parties are 

removed; Association Executive 

chooses from remaining names by lot.

Paid by the parties through a fee 

based on the amount of coffee in

controversy (no expenses are

mentioned)

NCPA 5 Each party selects two members from

the 15-member Arbitration Committee, 

and those four select a 5th, who serves

as Chairman of the committee. Fn 2

Unpaid* (but they receive their 

actual expenses) 

NHA 3 Association Executive appoints Fn 3 Paid, plus actual expenses Fn 4 

PIW 1 or 3, depending on the 

size of the claim 

Party Driven Paid by parties (fixed administrative 

fee separate from filing fee covers 

the arbitrators’ fees plus expenses) 

RMA 3 or 5 or 7 Arbitration Committee appoints Unpaid,* (but they receive their 

actual expenses) 

RTANA 3 Arbitration Committee appoints, parties 

may challenge 

Fn 5 

Paid by parties through a percentage

of the filing fee (but Arbitration 

Committee may permit arbitrators to

provide for additional fees if unusual 

or extraordinary services required). 

NGFA 3 Association Executive appoints Unpaid. * (they only receive 

expenses related to oral hearings).

Fn 1. This has not been necessary in ten years. 

Fn 2. If the arbitration involves only dealer members, the parties may, upon unanimous written 

consent of all, petition the Board of Directors to appoint a special arbitration committee. In such 

event, the President shall select a committee from the Roster of Dealer Members, such committee to 

consist of not less than three (3) or more than five (5) Dealer Members. 

Fn 3. When member to non-member disputes arise, selection process with greater party input is used. 

Fn 4. Except when the Committee holds a session at the time and place of the annual Convention. 

Fn 5. The Arbitration Committee may in its discretion appoint a person objected to by the parties, 

provided the person objected to is not disqualified to serve. 

* This is not explicitly stated in the rule.

15
In contrast, in AAA General Commercial Arbitration, arbitrator fees can be very high, 

particularly for experienced or well-regarded arbitrators. This is also true, though to a 

somewhat lesser extent, in AAA-administered systems. 

Table 10 - Decision-Makers in Systems Run by the AAA & Affiliates 

Association Number of DecisionMakersMethod of Selection Compensation 

AFOA 1 or 3 Association provides a list, 

and parties may strike and rate 

preferences; if agreement is 

not reached, an Association 

Executive makes the 

appointment from the list. 

Paid by the 

parties, plus 

actual expenses 

ASTA-seed If the agreement does not 

specify a number, one, 

unless the AAA, in its 

discretion, directs that 

three arbitrators be 

appointed. 

Direct Appointment by 

parties, or Association 

provides a list and parties may 

strike and rate preferences; if 

agreement isn’t reached, the 

AAA may choose the 

arbitrator. 

Paid by the 

parties, plus 

actual expenses 

AAA If the agreement does not 

specify a number, one, 

unless the AAA, in its 

discretion, directs that 

three arbitrators be 

appointed. 

Direct Appointment by 

parties, or Association 

provides a list and parties may 

strike and rate preferences; if 

agreement isn’t reached, the 

AAA may choose the 

arbitrator. 

Paid by the 

parties, plus 

actual expenses 

Appeals In the public court system, appeals are sometimes filed as a way to lengthen the 

disputing process or to avoid paying a judgment for a period of time or as a threat to induce 

the prevailing party to settle for an amount less than the judgment. As the tables below 

illustrate, the AAA stands in sharp contrast to the legal system in its non-provision of appeals 

within its system. The attitude of trade association-run systems to the provision of an appeals 

process is mixed. 

16
Table 11: The Availability of Intra-Association Appeal 

Association Is Intra-Association Appeal Available?

BoA No

AFMA No

ASTA-spice Yes

AFI No

CMAA Yes

GCA Yes

NCPA No 1

NHA Yes

PIW No

RMA No

RTA-NA Yes

NGFA Yes

1

 However, there is provision for a “rehearing” if and only if new evidence is discovered after 

the hearing has been completed. 

Table 12 – Availability of Appeal in Systems Run by the AAA & Affiliates 

Association Is Intra-Association Appeal Permitted?

AFOA No

ASTA-seed No

AAA No

The NGFA arbitration system does provide for intra-association appeal. This feature of the 

system, as discussed further below, adds an extra layer of protection against biased or 

erroneous results. In addition, unlike the rules governing appeals in most public courts, its 

Arbitration Appeals rules contain several safeguards against the strategic use of appeals or

threats to appeal. 

First, the NGFA Arbitration Rules set out strict time limits for requesting an appeal, fifteen 

days from issuance of the primary arbitration committee’s decision,22 and appeals tend to be 

rendered in a timely manner. Second, the NGFA rules require the losing party to post a bond 

in the amount of the judgment,23 thereby removing a defendant’s incentive to request an 

appeal merely to delay paying a judgment. Finally, the NGFA imposes a separate filing fee 

on the appellant of twice the arbitration fee paid for the primary arbitration,24 thereby greatly 

lessening the incentive to appeal in situations where the hope of reversal is slim. The number 

of appeals at the NGFA compared to the number of arbitrations is small. 

 22 NGFA Arbitration Rule 9 (c) 

23 NGFA Arbitration Rule 9 (d) 

24 NGFA Arbitration Rule 9 (c) 

17
The Discovery Process The NGFA system does provide for the exchange of information

between the parties and specifies in its rules the type of evidence that should be submitted to 

establish particular types of facts.25 The rules and jurisprudence of the tribunal also provide 

that when a party fails to provide information the arbitrators may take that into account. This 

provides parties with a significant incentive to provide the relevant information. It is not 

uncommon for arbitrators to note in their opinions that one or the other party failed to 

introduce a type of evidence that they considered probative such as a copy of a contract. The 

system does not provide for the type of widespread “fishing” expeditions through a person’s 

business records that are permitted by the federal (and most state) rules of civil procedure.

This is one of its greatest advantages. Sometimes a plaintiff who is considering filing a case 

in court may be deterred from doing so because the rules of civil procedure will then give the 

defendant access to business records that the plaintiff prefers to keep secret, such as customer

lists or sources of supply, especially if the plaintiff and defendant are in any sense 

competitors (as in a dispute between two merchants who each buy and sell in a particular 

geographic area). Fear of being required to disclose this information may deter breachedagainst transactors from filing meritorious claims. As a consequence, the NGFA system may 

lead plaintiffs to vindicate their rights in cases where they would find it undesirable to do so

in the public system—thereby increasing their access to justice.26

Although opponents of ADR in general, often claim that the differences between arbitral

procedure and court procedure with respect to information exchange amount to a lack of due 

process in the private proceeding, this claim, at least in arbitration between business entities,

reflects a fundamental misunderstanding of the needs of commercial contracting parties. 

There is not a single industry-run arbitration system that provides parties with the type of 

wide-ranging discovery rights that they are entitled to in court. Most, simply leave it to the

parties to submit relevant information and many, such as the Board of Appeals, the National 

Cottonseed Products Association, the Printing Industries of Wisconsin, the Rice Millers 

Association, and the Association of Food Industries (with the parties’ prior consent), also 

explicitly permit,27 although do not require, the arbitrators to request additional information

from the parties. The rules of these tribunals are developed and voted on by the very people 

whose transactions will be governed by them. As a result, if transactors really felt that these 

wide ranging discovery rights (due process protections) added value to contracting 

relationships, it would be logical for them to be included in their private systems. 

 25 See e.g., NGFA Arbitration Rules, Rule 6(a)(4) (explaining how to demonstrate proof of market 

difference); id. Rule 6(f) (providing that “if the grade or quality of commodities is in dispute,

inspection certificates or other documentary evidence must be submitted.”)

26 For a general discussion of the ways transactors’ desire to keep business information private might 

effect their litigation decisions, see Omri BenShahar and Lisa Bernstein, The Secrecy Interest in

Contract Law, 109 Yale L.J. 1805 (2000)

27 The rules of other associations examined are silent on this issue. Although the AAA gives wider

ranging discovery rights under most of its rules, the general arbitration rules, the American Fats and

Oils Association Rules, the American Seed Trade Association rules, all explicitly give the arbitrators

the right to request information as well. 

18
In thinking about how more limited discovery rights might impact the accuracy of

adjudication,

28 it is important to note that arbitrators in trade association-run arbitration 

systems tend to have a great deal of background information about the industry, and a clearer 

understanding of the typical evidentiary trail in a given type of transaction. This knowledge 

likely makes it easier for them to make inferences from what they do not see than it would be 

for a judge or jury. Given their greater understanding of the market and transaction at issue, 

and the relatively clear nature of the trade rules, there is no reason to think that their decision

would in fact be any less accurate than the decisions of judges and juries in similar cases

governed by the Uniform Commercial Code. 

Finally, it is important to note that state legislatures are beginning to recognize that even 

large corporations, generally considered to be among the most sophisticated litigants, who 

have contract disputes with other large corporations, might not find the wide ranging rights 

of discovery made available under the federal and most state rules of civil procedure 

desirable. Delaware, for example, has passed the Delaware Summary Proceedings Act29

which is designed to give the parties in large contract disputes

30 a streamlined way to resolve 

them. The Act makes jury trials and punitive damages unavailable,31 restricts the types and

amount of discovery that may be undertaken, and limits the time for discovery to 180 days.32

Since the Delaware legislature is considered uniquely sensitive to business concerns, the 

adoption of this statute is a strong indication that the availability of a less discovery intensive

method of resolving disputes is considered desirable by very sophisticated (perhaps the most

sophisticated) contracting parties. 

 28 Nevertheless, even if the lack of court-style discovery did reduce accuracy, it would not necessarily 

be an undesirable feature of the system. There is no reason to suppose that businesses want to bear

the cost of the type of wide-ranging fact-finding and discovery permitted in civil litigation and AAAsponsored general commercial arbitration. For an overview of the arguments against the desirability 

of maximum accuracy in adjudication, see Louis Kaplow, The Value of Accuracy in Adjudication: An 

Economic Analysis, 23 Journal of Legal Studies, 307 (1994). While the public court rules of procedure

need to be the same for contracts and torts (which may require a fishing expedition to uncover), 

business and non-business disputes, the NGFA system has the flexibility for an intelligent approach 

toward the type of information that it would be most cost effective to permit or to require disputing 

parties to introduce. 

29 Del. S. Res. 28, 137th Gen. Assembly (1994). In addition, many states explicitly require arbitration

and/or mediation provisions to be included in certain types of agricultural and non-agricultural 

contracts, suggesting that states themselves perceive arbitration and/or mediation to be better than 

state courts for resolving such disputes See e.g., NY CLS Racing & Wagering § 1013 (2004). (Requiring

binding arbitration to resolve disputes over the simulcast of horse races.); Cal Ins Code § 10089.70 

(2004). (“Program for insurance mediation for earthquake disputes and automobile collision coverage

and automobile physical damage coverage.”); K.S.A. § 16-1505 (2003). (“Any swine purchasing 

contract, swine marketing contract or swine production contract between a contractor and a swine

production facility owner or swine marketing pool or swine producer shall contain language

providing for resolution of contract disputes by either mediation or arbitration. If there is a contract 

dispute the parties may submit the disputed issue to an arbitrator or mediator selected by the parties 

pursuant to the contract provisions.”) 

30 Originally, the Act made its procedure available to disputes with over a million dollars at stake, but 

since 1998 it has been available in cases with more than one hundred thousand dollars in controversy. 31 Del. Super. Ct. Rule 124(b) (2004). 32 See Del. Super. Ct. Rule 124-33 (2004)

19
Openness and Public Access Trade association-run arbitration tribunals vary widely in terms 

of public and even member access to information about arbitral outcomes and decisions. 

Like the AAA, many association tribunals simply render awards and do not produce any kind 

of arbitral opinions. The AAA defends this practice in its arbitrators’ manuals on the grounds 

that it minimizes the likelihood that its awards can be challenged in court.33 

Other associations, such as the Memphis Cotton Exchange, require arbitrators to write 

opinions but only make these available to the disputing parties. 

Table 13 below lists the way that each tribunal reports its decisions. A reporting method is 

classified under the heading “opinion” if it includes a statement of facts, allusion to the rule 

to be applied, and some conclusions applying the rule to the facts. A reporting method is 

classified as an award, if it is simply a written statement that Mr. A must pay $X to Mr. B. 

Table 13 - Form of Decision in Trade Association-Run Arbitration Systems 

Association Award or Opinion?

BoA Opinion

AFMA Opinion

ASTA-spice Opinion

AFI Opinion

CMAA Unclear

GCA Opinion

NCPA Opinion

NHA Opinion

PIW Practice varies

RMA The award may, but need not, contain a statement of arbitrators’ reasons 

and conclusions. 

RTA-NA Opinion

NGFA Opinion

*In many cases, the rules were not explicit about the form of decision; so these 

determinations were made with the aid of inference from the language used in describing the 

award. 

 33 See “No Written Opinion is Required,” a Guide for Commercial Arbitrators, available at: 

http://www.adr.org/index2.1.jsp?JSPssid=15727&JSPsrc=upload\LIVESITE\Rules_Procedures\AD

R_Guides\comguide.html. (“[W]ritten opinions might open avenues for attack on the award by the 

losing party. Courts will not review arbitrators’ decisions on the merits of the case, even where the 

conclusions are different from those that a court might reach. But a carelessly expressed thought in a

written opinion could afford an opportunity to delay enforcement of the award.”) 

20
Table 14 - Form of Decision in Systems Run by the AAA & Affiliates 

Association Award or Opinion?

AFOA Unclear

ASTA-seed Award

AAA Award

Among trade association systems surveyed, the NGFA arbitrators write the most complete 

and cogent opinions. The NGFA also makes its opinions more easily and widely available to 

both members and the general public than any other association. NGFA opinions are made 

available in both the hard copy and electronic versions of its monthly newsletter and can be 

accessed by both members and the public on an unrestricted part of the NGFA website. The 

opinions are well-written and structured, with a clear statement of the facts, a discussion of 

the governing source of authority, and a clearly set out method for calculating damages when

they are awarded. Indeed, it is far easier for a lay person to read NGFA opinions to learn 

what is expected of him34 than it is for a person to figure out what it is he is actually

supposed to do in a real world transaction from reading the Uniform Commercial Code and 

thinking about the unwritten customs of his trade, precisely what he would be required to do 

to figure out the proper course of action in a particular situation under the law. In addition,

as discussed above, the NGFA sponsors seminars and training sessions to better acquaint 

interested persons with its arbitration system and other aspects of the trade. These 

educational programs are extraordinarily well-run, providing an understanding of the trade 

rules that is the equivalent of a law school’s course in commercial law. It is far more likely 

that a grain merchant will know the NGFA’s rules than it is that a typical merchant transactor

will understand the contours of the Uniform Commercial Code. The effect of the NGFA 

system on influencing behavior is likely to be far stronger than the effect of a legal precedent 

on the activities of merchants more generally. 

The NGFA’s jurisprudential approach does not give the arbitrators the authority to change 

the Trade Rules through their decisions. Nonetheless, their opinions serve the function of

identifying areas where the rules may need to be reviewed and possibly revised, and thereby 

promote the evolution of the governing principles perhaps better than the incremental 

common law approach of the courts. 

 

More generally, the NGFA opinions serve to educate industry participants not only about 

how the rules work (which they do extraordinarily well), but also about what is and is not 

regarded as proper commercial practice in the industry. They are therefore more likely to 

 34 Indeed, NGFA opinions sometimes contain very clear and distinct messages about what types of

behavior are and are not considered acceptable. They also contain discussion about what constitutes 

good practice and how disputes can be avoided. See e.g., Cargill v. Zen Noh, NGFA Arb. Case. No. 

1708 (noting that “the arbitrators take this opportunity, however, to suggest to all grain merchants 

that disputes of this type can be avoided by using clear, unequivocal and simple terms or language to

make offers and to indicate acceptance to constitute a trade or enforceable contract.”); Commodity

Specialists v. Bartlett and Company, Case No. 1715 (“The arbitrators also concluded that the broker 

could have worked with both principals more explicitly at the time of the trade as the implicit

meaning to both the buyer and seller.”) 

21
serve the key function of providing guidance for future behavior, than court decisions many 

of which are rendered without any meaningful opinion being written. 

Qualifications of Neutrals and Safeguards Against Bias Trade association arbitrations are 

typically conducted by either active or retired members of the trade. There are no 

professional cadres of arbitrators and most arbitrators do not have legal training. Table 7,

above, sets out the formal descriptions of arbitrators and their necessary qualifications in a 

number of trade association run systems and Table 8 above, sets out the same information for 

the AAA and the AAA-affiliated programs. 

All trade association-run systems are careful to try to disqualify arbitrators who might have 

an interest in and/or be affected by the outcomes of the cases that they hear. Many have 

features that may operate as checks against biased decision-making. The NGFA has several

such checks. First, NGFA arbitrators are required to sign their opinions, making the quality 

of their judgments at least partially observable to the membership-at-large. If an arbitrator

were viewed to have rendered a biased opinion, he would likely suffer harm to his reputation 

and a decline in his own business’ profitability, making it quite unlikely that he would 

engage in this type of practice. Second, the clarity of the NGFA trade rules, and the 

formalistic adjudicatory philosophy adopted by its arbitrators, are an additional layer of 

protection against bias. Unlike courts applying the Uniform Commercial Code, who have 

tremendous leeway to vary outcomes based on their conclusions about what is reasonable,

seasonable, customary, and in good faith, NGFA arbitrators have significantly less discretion. 

Although custom (that is, unwritten custom) does play some role in NGFA arbitration when 

both the contract and the trade rules are silent on a point,

35 it is not the basis of many arbitral 

decisions, and unlike in the public legal system custom and conduct are rarely permitted to

vary or trump the meaning of trade rules or contractual provisions as they so often do in 

litigated cases.36 Although no dispute resolution system absolutely prevents biased decisions,

the clarity of the NGFA rules makes it much harder for arbitrators to disguise bias, thereby

reducing the likelihood that biased decisions will knowingly be rendered in the first place. 

Unlike many private legal systems, the NGFA system gives the parties the right to appeal to

a five-member arbitration appeals committee which undertakes a de novo review of the

record, making it highly unlikely that attempts to improperly influence members of the 

primary arbitration committee would be successful. Since the make-up of any appeal 

committee is not determined until an appeal is filed, it would be quite risky to engage in such 

activity without being certain one could succeed in influencing the appeals panel as well. 

 35 For a discussion of the NGFA’s adjudicative approach see Lisa Bernstein, Merchant Law in a 

Merchant Court: Rethinking the Code’s Search for Immanent Business Norms, 144 U. Pa. L. Rev. 1765 

(1996) (noting that the NGFA Trade Rules are taken to codify those industry practices that are viewed

to be customs, so that while arbitrators occasionally look to unwritten custom, it is only when there is 

no other basis for a decision that these unwritten customs are considered. Moreover, because unlike

courts the arbitrators in the NGFA system have wide-ranging industry experience, it is unlikely that 

litigants will be able to fabricate unwritten practices, something that it is fairly easy for them to do in 

the public legal system.) 

36 See e.g., Nanakuli Paving v. Shell Oil, 664 F.2d. 772 (9th Cir. 1981) and Columbia Nitrogen v. 

Royster, 451 F.2d 3 (4th Cir. 1971), cases where courses of performance, courses of dealing and usages

of trade are invoked to override quite clear contractual provisions. 

22
The small likelihood of success of this type of corruption—which is further reduced by the 

NGFA rules giving either party the right to challenge both primary and appellate arbitrators

for cause-- and the high risk of such an endeavor, make it very unlikely to occur. Moreover,

since primary arbitration tribunals are composed of three arbitrators and appeals committees 

of five different arbitrators, obtaining a tainted judgment would require the influencing of a 

large number of people simultaneously, something that is unlikely to succeed. 

Finally, the fact that NGFA opinions do not have binding precedential effect, greatly reduces,

if not eliminates, arbitrators’ incentives to render improper decisions in situations where the 

interests of an industry segment to which they personally belong are at issue. 37

One-way requirements In most trade association run systems, members are, as a condition of

membership, required to submit disputes with other members to the association’s arbitration

system. Many systems are also willing to hear disputes between member and non-members,

provided that either of the parties includes an arbitration provision in their contract or enter

into a post dispute agreement to arbitrate. The types of clauses often found in standard form

consumer contracts which require the consumer to arbitrate any claims, but reserve to the 

company drafting the contract the right to resolve a dispute either through arbitration or 

litigation at its discretion do not appear to be used in the grain and feed industry. 

Some of the trade association run tribunals, however, do have fee and/or cost-shifting

provisions that some critics might characterize as one way requirements, though they 

generally apply to winning or losing parties regardless of status and thus are not properly 

characterized as such. The NGFA does not have any such provisions. In terms of fairness to

smaller would-be plaintiffs this is quite important. In systems where plaintiffs might be 

forced to bear a portion of the defendant’s costs (in an amount that might be either high or 

difficult to estimate) they might be deterred from bringing suit, if these extra fees and costs 

would leave them in financial distress were they to lose. 

 37 This also reduces the pressure an industry segment might find it worthwhile to bring to bear in a 

particular case. 

23
Table 15 - Fee and Cost-Shifting Provisions in Trade Association Systems 

Fee Shifting Provisions Cost Shifting Provisions 

BoA For ATMI and ACSA members: Winner of arbitration has 

filing fees returned. Fees for requests for ex parte decisions

returned if (identical) charge to losing party is collected. 

For non-members: No provisions

No provisions

AFMA At the discretion of the arbitrator. At the discretion of the arbitrator; however, 

certain costs are presumptively allocated 

equally. 

ASTAspice Fee shifted to losing party unless losing party made prior

written settlement offer deemed sufficient, in which case 

fee paid by party refusing settlement offer. 

No provisions

AFI Fee added to award of winning party who initiated

arbitration. 

At the discretion of the arbitrators, but parties 

bear expense of presenting their own 

witnesses, and there are limitations on the 

award of winning party’s travel expenses. 

CMAA At the discretion of the panel. At the discretion of the panel.

GCA To be provided in award, apparently at discretion of

arbitrators. 

To be provided in award, apparently at

discretion of arbitrators. 

NCPA Fee, in form of deposit for costs, shifted to losing party

unless losing party made settlement offer greater than

award renewed before arbitration committee, in which case

fee paid by party in whose favor award is made. 

Cost shifted to losing party unless losing

party made settlement offer greater than

award renewed before arbitration committee, 

in which case fee paid by party in whose 

favor award is made. 

NHA Winning party has 1⁄2 of fee returned; losing party forfeits 

entire fee. 

No provisions

PIW No provisions No provisions

RMA Arbitrators must allocate fees against one or both parties, 

allocation apparently discretionary. 

Mandatory allocation includes expenses of 

arbitrators and Arbitration Committee and

fees and expenses of experts and consultants 

of arbitrators and Arbitration Committee. 

RTANA To be stipulated in award and ultimately borne by losing

party unless the arbitrators otherwise determine. 

To be stipulated in award and ultimately 

borne by losing party unless the arbitrators 

otherwise determine. 

NGFA No provisions. No provisions. 

1 Note that the Southern Mill Rules provide that "[e]xpense of the arbitration shall be borne 

by buyer and seller in the same proportion as the respective parties may win or lose in the 

award made by the arbitration." 

24
Table 16 – Fee and Cost Shifting in Systems Run by the AAA & Affiliates 

 Fee Shifting Provisions Cost Shifting Provisions 

Association Shifting (or Return of filing fees) Shifting of Arbitration Costs 

AFOA In the discretion of the arbitrators, 

including fees due to AAA. 

In the discretion of the arbitrators, 

including expenses due to AAA. 

ASTA-seed In discretion of arbitrators. In discretion of arbitrators. 

AAA In discretion of arbitrators. In discretion of arbitrators. 

 

Consent of the parties The NGFA By-laws require members to submit disputes with other 

members to arbitration. As a consequence in transactions between NGFA members there are 

no colorable issues regarding the meaningfulness of members’ consent to arbitrate. In

transactions between members and nonmembers, however, where some contracts provide for 

NGFA arbitration and some do not, arguments based on lack of consent to the NGFA’s 

jurisdiction have been raised from time to time. Typically the nonmember will claim either 

that he was unaware of the arbitration provision,38 or that the system is systematically biased

against nonmembers so he should not be held to the terms of the agreement. 

In arguing against the NGFA’s jurisdiction on the grounds that he did not know about the 

arbitration provision, a non-member is drawing on arguments from merchant-to-consumer

arbitration regarding arbitration clauses that are buried in the fine print of contracts that

unsophisticated consumers have no rational incentive to read. In contrast, the non-members 

challenging the NGFA arbitration provisions are, even if they engage in farming activities,

more closely analogous to merchants than they are to consumers. Today, even small farmers

are relatively sophisticated, selling their products for future delivery and managing their 

financial exposure with futures contracts settled on boards of trade. The contracts they 

challenge are not insignificant in size and they have as great an incentive as two merchants

transacting with one another to include the provisions that they think will maximize

contractual value. The ability to bring an arbitration action if they are not paid is, especially if 

they are a smaller entity than the member they are dealing with, of tremendous benefit to 

them, since the NGFA process is, as discussed in this report, cheaper and quicker than

instituting an action in court. Moreover, since the NGFA widely publicizes the results of 

arbitration cases and makes its decisions easily accessible to both members and nonmembers

alike, and also publicizes any failure of a member firm to pay an arbitral award, the chances

that a judgment rendered by the NGFA will be promptly paid is far higher than the chances 

that prompt compliance with a court judgment will take place. More generally, the use of 

arbitration in connection to cash contracts for agricultural commodities is widespread and

known to all in the industry. Indeed a contract for the sale of an agricultural commodity on 

 38 There are some steps that NGFA members could take when entering into contracts with nonmembers that would make it less likely (though by no means certain) that a court would uphold the 

clause. For example, the arbitration clause should not be buried in small type and might be set forth

early in the contract, in the specially negotiated remarks section, and in large type. In addition, the 

member could require the nonmember to separately initial the arbitration clause to show clearly that

he was aware of it. 

25
the cash market that did not include an arbitral provision of some kind would be far more

unusual than one that did. 

Extension beyond the contract context Many of the features of industry-run arbitration 

systems that make them well suited for the resolution of contract disputes, and many of the 

arguments in favor of their use, do not extend to their resolution of other types of disputes.

For example, a panel of grain merchants adjudicating a dispute about timely delivery or 

damages for off-grade goods can bring to bear their years of experience in the trade and their 

knowledge of industry trade rules. In contrast, such a panel would have no particular 

expertise in resolving a dispute over termination of an employee, the existence of 

employment practices that violated the Age Discrimination in Employment Act,39 or fault for 

a slip and fall tort that occurred in the employees’ parking lot after an ice storm. The NGFA 

trade rules, by their terms, govern only “transactions of a financial, mercantile or commercial 

character connected with grain,” “feed” and “barge transportation,”40 and there does not 

appear to be a single NGFA arbitration case that involved any other type of transaction or 

claim. Many trade association-run programs have limits similar to those in NGFA 

compulsory jurisdiction. 

The NGFA arbitration system offers disputants a way to resolve a dispute far more quickly 

than they could if they had recourse only to the public court system where the use of lawyers

is, as a practical matter required. This cost saving is important not only in cases that actually 

result in an arbitration decision, but also in terms of its effect on limiting the ways that the 

mere threat of taking a dispute to a third party neutral impacts contractual relations. In 

transactions where one transactor can more easily bear the high cost of litigation (perhaps the

first transactor works for a large firm with in-house counsel and no cash flow difficulties),

the stronger transactor can threaten the weaker one with litigation if he does not agree to 

revised terms or some other demand. Because the mere initiation of a legal case, which is

quite cheap in terms of filing fees, has the practical effect of requiring the defendant to hire a

lawyer to file an answer (which can be quite costly) and may enable the plaintiff to make 

discovery requests before dismissal that are costly to respond to, the plaintiff can (especially 

if he has inside counsel), in effect, impose significant costs on the defendant before being 

forced to bear significant costs himself, thus gaining leverage he would be unable to obtain in 

the NGFA system. 

Enforceability Under the FAA and the law of most states, an arbitration judgment is

enforceable to the same extent as an award entered by a court.41 Trade association-run

systems, however, have additional means of persuading parties to comply with their

 39 Age Discrimination in Employment Act of 1967, Pub. L. No. 90-202, 81 Stat. 602

(codified as amended at 29 U.S.C. §§ 621-34). 

40 NGFA Grain Trade Rules, Preamble; NGFA Feed Trade Rules, Preamble; NGFA Barge Freight 

Trading Rules, Preamble. 

41 Although arbitration awards can be challenged in court, on the grounds that fraud was involved;

the arbitrators were provably biased; the arbitrators were guilty of misconduct, and especially of 

refusing to hear relevant evidence; that the arbitrators exceeded their powers or that they failed to

execute a “mutual, final, and definite award,” see 9 U.S.C. § 10(a) (1)-(4), reversal is uncommon. 

26
judgments, such as publicizing noncompliance in association periodicals, a practice that in 

many industries can lead to reputation loss. 42

 

III. Benefits of the System 

As discussed above, many of the benefits of the NGFA’s private legal system come from its 

ability to resolve disputes more quickly and cheaply than courts or general commercial 

arbitration providers. Yet many of its most important benefits do not come from its provision 

of first rate arbitration services, but rather from its provision of comprehensive sets of

contract default rules and its adoption of a largely formalistic adjudicative approach that 

provides an alternative to inquiry into course of dealing, course of performance and unwritten 

usages, except in cases of true gaps in both the Trade Rules and the governing contract.

Together the Trade Rules and the association’s adjudicative approach, reduce the cost of 

transacting, reduce the number of genuine misunderstandings about rights and obligations 

that arise, and increase both the likelihood of settlement when disputes do arise as well as the 

likelihood that those settlements that are reached reflect the merits of the dispute rather than 

the parties’ relative ability to bear litigation costs and delay. 

 

First, one of the most straightforward benefits of the trade rules and the NGFA’s reluctance

to look to unwritten customs, is that transactors do not need to learn the many and varied 

local customs that have grown up around the country, making it less expensive for

transactors to deal with those living in other locations, thereby promoting the growth of a 

national market with its associated benefits. Similarly, because the Trade Rules are 

increasingly being used in the types of cross-border transactions encouraged by NAFTA, 

they make it unnecessary for transactors to become familiar with the commercial law related

rules of Mexico and Canada, thereby reducing transaction costs. 

Second, the comprehensiveness of the NGFA rules reduces the cost of entering into any

contract, by decreasing the number of terms that must be specified and the number of terms

that must be specifically defined. While this particular benefit was likely more significant 

before the advent of computers made the generation of standard-form and amended standardform contracts so inexpensive, even today it facilitates telephone trade that are confirmed by

email or postal mail. Moreover, by providing so many clear definitions of terms commonly 

used in trade, the rules make it unnecessary for contracting parties to set out definitions of 

key terms in their confirmations and contracts, leading to simpler agreements that the

transactors are more likely to understand.43

 42 For discussions of the ways that associations use reputation bonds as a way of inducing compliance

with their judgments, see Merchant Law in a Merchant Court: Rethinking the Code's Search for 

Immanent Business Norms," 144 University of Pennsylvania Law Review 1765 (1996); Private 

Commercial Law in the Cotton Industry: Creating Cooperation Through Rules, Norms, and 

Institutions, 99 Mich. L. Rev. 1724 (2001); The Questionable Empirical Basis of Article 2's Incorporation

Strategy: A Preliminary Study," 66 U. Chi. L. Rev. 76 (1999); Opting Out of the Legal System:

Extralegal Contractual Relations in the Diamond Industry," 21 Journal of Legal Studies 115 (1992). 43 Moreover, although it is currently inexpensive for each party to define terms in its computergenerated confirmations, it remains expensive for parties to trades done through the exchange of 

confirmations to check to see that the terms of their form confirmations agree. The reliance on the 

trade rules to supply such terms unless otherwise noted, therefore reduces the cost of checking

27
Third, the rules reduce the likelihood that disputes based on genuine misunderstandings of 

transactors’ respective rights and duties will occur. Before the adoption of the rules and 

before knowledge of them became widespread, misunderstandings about the meaning of 

particular provisions were a surprisingly common source of disputes. 

Fourth, the clear and predictable trade rules adopted by the NGFA create value for 

transactors by promoting flexibility and cooperation in the transactions they govern. Unlike 

courts who look to the parties’ actions under a contract as the best indication of what they 

intended their writing to mean, and who often interpret actions like acceptance of late

deliveries on a few occasions as modifications of the underlying contractual obligations, the 

NGFA arbitrators look to the obligations set out in the contract and Trade Rules to resolve 

disputes. As a consequence, if at the time a particular shipment arrives late, it has actually 

caused no harm to the buyer, there is no reason for him to bring an action against the seller or

do anything other than accept the delivery and, if he feels like it, suggest that he hopes the 

goods will arrive on time in the future. If, however, the buyer knows that in accepting late 

delivery he will be eroding his right to demand timely delivery in the future, he might object 

to the late delivery and cause a ruckus that he would have no incentive to cause under the 

NGFA system. Put another way, there are many types of adjustments that contracting parties 

are willing to make at the time particular circumstances arise, that they might nonetheless be 

very reluctant to promise to make should the same circumstances arise. The reason is simple. 

Consider a buyer who keeps some inventory on hand and who is known to always give small 

extensions of delivery dates if he thinks the person he is dealing with has taken proper steps 

to ensure timely delivery. This may be good business practice for him, because knowing that 

he will be reasonable, sellers will not feel it necessary to take added precaution against late 

delivery and may therefore quote him a better price than the price he would be quoted were 

he to haul every seller into court or arbitration for each technical breach of a contract. Such a 

buyer, however, would want to preserve the right to demand strict compliance if he thought 

that the seller was not taking the proper steps to ensure timely delivery, or was putting him

last as a priority since he was so accommodating.44 As a consequence, relative to state 

imposed law, the NGFA system is quite likely to encourage contractual flexibility. 

 

confirmations as well as the likelihood that a so-called battle-of-the forms problem will arise in the

case of a contractual dispute. 

44 While a contract could be drafted that permitted the seller to be late when he had taken optimal

precautions to ensure timely delivery, this would be undesirable from the point of view of the buyer.

What exactly would these optimal precautions be? First, the buyer and seller might not have a clear

idea of it and it would be expensive to prove to a third party both what these precautions were and

whether they had been taken in a particular case. As a consequence, even if it could be proven, 

looking at the matter from a time of contracting perspective and anticipating the cost if a dispute 

arose, it is unlikely that either party would bind itself to such an obligation. In economic terminology, 

such a contract would condition on information – whether or not the seller took optimal precautions 

– that would not be verifiable, that is, could not be proved to a court with sufficient accuracy at a cost

that the parties would regard as desirable from an ex ante perspective. 

28
IV. Common Objections to the Use of Commercial Arbitration and their Applicability

to the NGFA system. 

Many of the objections to arbitration put forth by those who seek to limit its use, were 

developed in connection with consumer-to-corporation ADR of the sort that is required by 

credit card user agreements, product warranties, bank-account agreements, and software

vendors.45 Although some of these arguments are powerful in the consumer context, most 

have little or no force in the context of contracts to buy and sell agricultural commodities,

even in situations where one party is a merchant (and a member of a trade association 

providing arbitral services) and the other a producer (who is not a member of such an 

association.)

46

First, and most generally, these arguments are based on the idea that agricultural producers

are similar in knowledge, power, and resources, to ordinary consumers. While this 

comparison might have been valid at some point in the past where most producers were tiny

unsophisticated family-run farms, it is much less apt today, when many producers (even 

family-owned firms) are larger and most producers must comply with a host of complex 

governmental regulations, have most likely encountered arbitration provisions similar to the 

NGFA’s when they purchased seeds, and have long engaged in rather sophisticated financial 

means of managing their risk, including hedging on the Chicago Board of Trade . 

Second, a core element of the critiques of consumer-to-corporate arbitration are that the 

consumer is somehow either unaware of the arbitration provision, unable to understand it, or 

forced to accept it. Given the longstanding use of arbitration in the seed industry, cashmarkets for agricultural products, and commodities futures markets, it is unlikely that many 

farmers are surprised by the presence of these provisions. Moreover, the wording of the 

arbitration provision that NGFA recommends for use with non-members is clear, easy to 

understand,47 and is widely used. 

Finally, critics of arbitration point to several differences between judicial and arbitral 

procedures and conclude that “[a]rbitration includes many unfair advantages for powerful

parties because it eliminated many complicated procedures inherent in the judicial system 

which were created to ensure a fair trial for less powerful parties.”48 There are a number of

 45 A nice summary of these objections is provided in Shelly Smith, “Mandatory Arbitration Clauses in

consumer Contracts Consumer Protection and the Circumvention of the Judicial System.” 50 DePaul

Law Rev 1191 (2001). 46 Indeed encouraging the use of business-to-business arbitration was one of the main goals of the 

Federal Arbitration Act. 

47 The NGFA sample contract for use between grain companies and producers reads as follows: 

“Arbitration: The parties to this contract agree that the sole remedy for resolution of any and all 

disagreements arising under this contract shall be through arbitration proceedings before the

National Grain and Feed Association (NGFA) under NGFA Arbitration Rules. The decision and 

award determined through such arbitration shall be final and binding upon the buyer and the seller.

Judgment upon the arbitration award may be entered and enforced in any court having jurisdiction

thereof.” 

48 Shelly Smith, “Mandatory Arbitration Clauses in consumer Contracts Consumer Protection and the

Circumvention of the Judicial System.” 50 DePaul Law Rev 119, 1228 (2001). 

29
reasons, however, that the less complicated and less expensive procedures involved in NGFA 

arbitration may benefit rather than harm, smaller, less powerful, parties.49

To begin with, many less powerful parties do not have the resources to avail themselves of

these protective intricacies of the legal system. 50 Even if they might do better (and it is by no 

means clear that they would) in court than in arbitration, the likelihood that they could afford

to pursue a case to trial is quite low, making the chance that as a practical matter, they would 

have no recourse at all if wronged, even higher than it would have been had their contract 

included a provision mandating arbitration. 

Another procedurally based argument commonly put forth against arbitration is that

“arbitration lacks safeguards inherent to the judicial system, such as discovery which is 

designed to maximize the fairness of trial,”51 by forcing a corporation to turn over the 

relevant documents and statistics to consumers. While this objection is powerful in 

consumer-to-corporate litigation, where wrongdoing might not be uncovered absent the types 

of fishing expeditions encouraged by the discovery rules, it does not have much relevance in 

a contract dispute between a farmer and a merchant. In a typical transaction of this type,

both the farmer and the merchant should each have a copy of the relevant documentation.

Furthermore, especially where the claim is non-delivery of the goods or a dispute over their 

quality, the farmer may well have equal or better access than the merchant to relevant

information. In addition, because the parties in NGFA Arbitration cases may request 

additional information from each other in their arguments, and the NGFA arbitrators have the 

authority to make inferences from any failure to provide information, it is unlikely that even

large merchant concerns will be able to hide information to the detriment of farmers. 

Opponents of arbitration also maintain that “mandatory arbitration denies consumers the 

traditional elements of the judicial system, including written opinions ... the option of having 

a jury as a decision maker, and a fair appellate process to guarantee justice.”

52 These 

objections do not carry much weight in the NGFA context. First, the NGFA arbitrators do

write opinions, indeed they are produced in every decided case. In contrast, many state court 

proceedings do not result in a written opinion, but rather in an order directing a result.

Second, if the purpose of a jury is to have a case decided by a group of peers, the three 

member NGFA arbitration panels come a lot closer to this ideal than do six or twelve citizens

chosen at random who are likely to know nothing about agricultural commodity 

merchandizing. Third, the NGFA system does provide appellate review as a check on 

erroneous decisions made by primary arbitration panels. 

 49 The inclusion of arbitration provisions may however have a very negative effect on the ability of 

public interest groups or class action lawyers to use the consumer class action as a tool for policing

corporate behavior. First, the inclusion of such a provision has been held to defeat class action status. 

Second, the absence of fee and cost shifting provisions, while quite beneficial to individual plaintiffs,

makes it less likely that such organizations will choose to undertake these cases on what amounts to a

contingent fee basis. 

50 Highly detailed procedural rules tend to favor the party with the better lawyer while simpler 

procedures are more accessible to ordinary business people and less skilled lawyers. 

51Shelly Smith, Mandatory Arbitration Clauses in consumer Contracts Consumer Protection and the 

Circumvention of the Judicial System.” 50 DePaul Law Rev 1191, 1228 (2001). 52 Id. at 1228. 

30
In sum, the leading arguments against arbitration that have been developed in the corporateto-consumer context, do not, for the most part, apply to agricultural commodities arbitration,

even in contexts where the contracts giving rise to the dispute are between merchant 

members of trade associations and producers who are not members of these associations. In 

addition, arguments based on the procedural superiority of trial to arbitration overlook the 

fact that many commercial cases resolved in the court system (excluding those that settle) are

resolved not by trial but rather on motions to dismiss, motions for summary judgment, or

through the entry of default judgments when the defendant fails to respond to a complaint. As 

a consequence, those attacking such systems on the grounds that they offer fewer procedural 

protections than are available at trial, need to show that the due process and fairness-based

procedural protections afforded litigants whose cases are disposed of in civil litigation other 

than by trial are superior to those provided by the NGFA and other trade organizations.

53 

Finally, opponents of general commercial arbitration overlook the fact that industry-specific 

arbitration systems provide benefits to weaker parties that they cannot obtain in court or 

general commercial arbitration. These benefits are grounded in the style of NGFA opinions 

and in the association’s arbitral enforcement mechanism. A NGFA member who refuses to

arbitrate or who refuses to comply with an arbitral award entered against him can be 

suspended or expelled from the association. Such actions are published in the NGFA 

newsletter at the association’s expense. In addition, NGFA opinions often label the actions

of one or the other party as being improper even in cases where the party being so labeled 

prevails. These opinions are, as noted above widely circulated. As a consequence, by

becoming a member and invoking NGFA arbitration in its contracts with nonmembers, a firm 

is, in effect, subjecting its contracting behavior to an additional level of scrutiny and

transparency to its current and potential future trading partners. When a non-member 

producer enters into a contract with a NGFA member that includes an agreement to arbitrate,

he gets a huge benefit (relative to litigation) if the member breaches the contract or violates

trade rules. He has the option of bringing an action and getting damages without the expense 

of trial. He can also widely expose the bad behavior of the larger entity, thereby inflicting 

reputational harm. Knowing that any attempt to take advantage of the “little guy,” even if 

technically okay will lead to negative reputation sanctions, and that nonpayment will be

severely sanctioned, the member is likely to behave better toward the non-member during the 

course of their relationship than he would be if the arbitration provision were not included.

As a consequence, wholly apart from what happens in decided cases, the fact that the 

member is subject to additional discipline means that from an ex ante perspective he is less 

likely to misbehave. 

In contrast, in the public legal system, a producer’s threat to sue a larger merchant might be

unbelievable for many smaller-sized claims because litigation costs would easily swamp any 

 53 In California, for example, the percentage of civil complaints (excluding family, small claims, and

probate) disposed of by trial in 2003 was 8.8% (.8% by jury, and 8.0% by a court). See

http://www.courtinfo.ca.gov/reference/documents/csr2003.pdf. In New York, only 4% of the civil 

cases were disposed of by trial. See http://www.courts.state.ny.us/reports/annual/pdfs/

2002annualreport.pdf. In Texas, 5.56% of civil cases (excluding personal injury and tax) were

disposed of by trial. This figure was calculated using statistics found at: http://www.courts.state. tx. 

us/publicinfo/AR2003/county/stsum_cv.pdf. 

31
expected recovery. Moreover, any threat he might have to damage the large merchant’s 

reputation would also be in vain for several reasons, among them, that he would have to bear 

the cost, he would not be believable until he had a judgment in hand which might be so many

years later that no one will care, and it is unlikely that an opinion will be written in such a 

case and a mere award will likely not convey any reputation damaging information. 

Moreover, even if a judicially rendered opinion or award did contain reputation-damaging

information, the fact that it was rendered by someone who knew nothing about agricultural 

commodity merchandizing would mean it would have limited impact. In sum, while many of

the industry-wide benefits of the NGFA arbitration system are evident from looking at the 

way disputes are actually resolved, many of its most important benefits, particularly for nonmembers, are more subtle and may not be evident solely from looking at decided cases. 

V. Concluding Remarks 

 

This report has sought to provide an overview of the operation of the NGFA arbitration 

system as compared to the operation of other trade association run private legal systems, 

AAA-run or administered dispute resolution programs, and the legal system. It has 

demonstrated that while the NGFA system does not precisely mimic either the public system 

or the AAA’s procedures, this should not be viewed as a weakness of its system, but rather as

one of its important strengths. The substantive trade rules, procedural rules, and adjudicative 

approaches, developed in this system are well tailored to the types of transactions they 

govern. They add substantial value to contracting relationships without introducing any

unfairness or power imbalances into contractual relations. Indeed, to the extent that the

system affects the distribution of power between contracting parties at all, it tends to provide 

greater benefits to smaller parties (both NGFA members and nonmembers) by giving them a

way to pursue valid claims without taking the type of financial risk entailed in state court 

litigation or bearing the costs of the significant delays involved in both litigation and AAA 

and AAA-administered arbitration. 

32
1

Rail Rate Mediation and Arbitration for Grain Shippers

Agricultural 

Marketing 

Service

March 2014

Marvin Prater • Adam Sparger 

Summary

Transportation costs have a direct impact on agricultural producers’ profits. Agricultural producers in remote areas 

have few transportation alternatives, and the price they receive for their products is net of transportation and other 

marketing and handling costs. When producers and marketers of agricultural products believe the rates they are 

paying for transportation are too high or uncompetitive, they need access to a dispute-settlement mechanism that is 

fair, easily understood, accessible, and affordable. 

Agricultural shippers believe the formal procedures for challenging unreasonable rail freight rates available through 

the Surface Transportation Board (STB) are too lengthy and expensive, with the risk not being worth the reward, 

effectively preventing them from accessing meaningful rate relief. Also, although affected by rail rates, agricultural 

producers do not have access to STB rate-challenge procedures because they typically do not ship their products to 

the ultimate consumer, but rather sell them to agribusinesses that arrange for transportation to the final customer. 

Mediation and arbitration of agricultural rail rates offer alternatives to formal STB procedures. A less formal rail rate 

mediation/arbitration system could potentially provide a fairer and lower cost approach to challenging rail rates. 

The Montana Grain Growers Association, Montana Farm Bureau Federation, and BNSF Railway Company (BNSF) have 

developed rail rate mediation/arbitration procedures that can be accessed by producers. Although this system is 

a step forward, it is limited to only one State and one railroad; no other major railroad thus far has been willing to 

arbitrate rail rates. 

A national-level rail rate mediation/arbitration system that is simple and cost-effective is needed to provide a fair and 

impartial forum for all grain producers and shippers.

Introduction

The United States has invested in a transportation infrastructure—truck, barge, and rail—that gives its agricultural 

producers a competitive advantage in transportation costs. Even so, higher transportation costs in any given situation 

can damage the competitive position of U.S. agricultural products in the highly competitive export markets, as can 

the cost of production at the farm level. The ability to export surplus grain production is extremely important because 

U.S. farmers produce much more than can be consumed domestically. The ability to export excess supply supports 
2

domestic grain and agricultural product prices, provides jobs, and enhances the vitality of rural economies. The rates 

agricultural shippers pay for transportation can facilitate or inhibit American competitiveness in world agricultural 

markets, which can directly degrade the strength of local rural economies. 

Railroad volumes and business also hinge on competitiveness in world and domestic markets. Depending on the 

particular market and geographic location, agricultural shippers may have a choice among transportation carriers or 

modes. On the other hand, other commodities compete with agricultural traffic for rail capacity, which can influence 

railroads’ offered rates. 

Because markets do not respond competitively from every origin at all times, however, producers and shippers may 

sometimes view the rates they are paying for transportation as excessive or uncompetitive. With transportation costs 

integral to profit, producers and shippers need access to fair, cost-effective processes to challenge rail rates they 

believe to be unreasonable. 

Under the Staggers Rail Act of 1980,1 agricultural and other shippers may challenge rail rates that are 180 percent or 

greater of the revenue-to-variable cost ratios of carriers providing the service. Currently, agricultural shippers may 

challenge rail rates through a formal rail-rate appeals process governed by the Surface Transportation Board. They 

also may submit a rail-rate dispute to the National Grain and Feed Association (NGFA) rail arbitration system. But 

under the NGFA Rail Arbitration Rules,2 either the shipper or the carrier must be an NGFA member company, and 

both of the involved parties must agree to arbitrate the rail rate case. A third option for producers shipping through 

facilities in Montana that are served by BNSF Railway is the rail-rate mediation/arbitration mechanism established by 

the BNSF and some farm organizations.

Rate Appeals Procedures

There are currently three rate appeals procedures available to shippers through the STB. The first procedure is known 

as the Stand-Alone Cost (SAC) test. Under the SAC test, a shipper has to design an optimally efficient, hypothetical 

railroad to serve the traffic that includes the route used by the shipper. The shipper then develops a hypothetical rate 

used to judge the reasonableness of the actual rate being charged. This hypothetical rate simulates the rate which 

would prevail in a competitive market. However, the costs and complexity of a SAC test make it inaccessible to all but 

the biggest shippers who must pay, on average, $5 million or more to litigate such a case.

The second procedure was designed for medium-size rate disputes. It is known as the Simplified-SAC test and is 

a scaled-down version of the original SAC test, using simplifying assumptions to judge the reasonableness of the 

challenged rate. Though it is less expensive than the Stand-Alone Cost procedure, the Simplified-SAC procedure still 

requires more than $2 million in legal and consulting costs to pursue. 

The third procedure, known as the Three-Benchmark test, was designed as a less costly alternative to the SAC test 

to be used in small rate cases. With this test, the reasonableness of the challenged rate is determined by comparing 

the markup (difference between revenue and variable cost) for the challenged rate to three different comparable 

markups. This shows whether the challenged rate markup is reasonable compared to other markups. The cost of 

appealing rail rates using the Three-Benchmark procedure ranges from $250,000 to $500,000, and the limitation on 

rate relief is $4 million over a 5-year period.3 

1 Staggers Rail Act of 1980, Public Law 96-448, Title II–Railroad Rates and Inter-Carrier Practices, §10701a.

2 National Grain and Feed Association. “Trade Rules and Arbitration, Arbitration System.” http://www.ngfa.org/trade-rules-arbitration/arbitration/, (February 5, 

 2014)

3 STB Decision 42980, July 18, 2013, Docket No. Ex Parte 715, Rate Regulation Reforms.
3

Agricultural shippers are in need of a rate-challenge procedure that is timelier and less expensive than these rate 

appeals procedures. Many agricultural shippers have found these rate-challenge procedures too lengthy and 

expensive, effectively preventing them from accessing rate relief. Although chemical companies have successfully 

used the Three-Benchmark Procedures, no agricultural shipper has appealed rates using them. U.S. Magnesium, a 

producer of chlorine, is the only firm to file a rate complaint using the Simplified-SAC procedures, but settled the case 

before an STB decision was rendered.4

Mediation and Arbitration

Mediation and arbitration offer alternatives to the rate-challenge procedures at the STB. Mediation is an informal 

process in which the parties discuss issues in dispute with a mediator who assists them in resolving the dispute. The 

outcomes of mediation are not binding. Arbitration is more formal than mediation, but is still a relatively informal 

process compared to formal STB procedures. Arbitration is generally binding on the parties, in which the parties in a 

dispute present written and/or oral arguments before an arbitration panel of neutral qualified third-party arbitrators 

with expertise in the subject matter of the dispute. The quality of the decisions in arbitration is strongly dependent on 

the objectivity and qualifications of the selected arbitrators. 

Arbitration involving grain-shipper rail-rate appeals would operate most effectively with a panel of three arbitrators 

who collectively have strong backgrounds in arbitration procedures, grain merchandising, and rail transportation. 

A panel of three arbitrators is generally preferred because it improves the likelihood of well-reasoned opinions, 

enhances the balance and fairness with which the system is viewed, and reduces the potential for inadvertent errors. 

All of these reasons are especially important given that there are limited rights for court appeals under arbitration.

Unlike a court case, an arbitration decision does not set precedent. However, by agreeing to participate in arbitration, 

the parties agree to be bound by the arbitral decision with limited appeals rights. Thus, a desirable arbitration 

agreement would provide for an appeals process that broadly allows either party to appeal an arbitrated decision in 

addition to necessary instances involving a clear abuse of an arbitrator’s authority or discretion. Without an effective 

avenue for appeal within the arbitration agreement, parties may not be as willing to enter arbitration proceedings 

because the court system generally will not vacate arbitration decisions. When an arbitration appeal to the court 

system occurs, the appellate court will typically look at the process of arbitration and the way in which the rules of law 

were applied to determine whether the proceeding was fair, but will generally not alter the arbitrator’s finding of facts 

or decision unless impropriety, such as clear arbitral bias, is present. 

If parties are to make use of an arbitration system, there must be assurances of fairness, neutrality, and openness 

to foster an atmosphere of trust. Publishing the decisions—excluding proprietary and confidential business 

information—is essential for providing transparency, building trust in individual arbitrators, and demonstrating a 

commitment to neutrality. In addition, publicly published decisions can discourage extreme positions, encourage 

voluntary settlement, and create incentives for arbitrators to render thoughtful, well-reasoned decisions. Arbitration 

processes that are perceived as accessible and fair by both parties are also likely to encourage the parties to try to 

resolve the dispute through direct discussions, thereby preserving business relationships.

A major benefit of arbitration is that it has the potential to offer less time-consuming and lower cost rail-rate challenge 

procedures than the formal STB process. One of the most important aspects of arbitration is the direct business 

discussions it encourages, facilitating informal mediation of many issues before they require more formal arbitration. 

The Montana-BNSF Railway arbitration system only charges each party an initial $400 case management fee to initiate 

a case. Additional fees are determined by the fee schedule of the administering body, the Judicial Arbitration and 

Mediation Services (JAMS). 

4 U.S. Magnesium v. Union Pacific Railroad, Surface Transportation Board, NOR 42115 and NOR 42116. The cases were initiated on June 25, 2009, and terminated 

 on March 24, 2010.
4

Similarly, the STB and NGFA have arbitration systems for resolving commercial disputes between shippers and 

participating railroads. The NGFA arbitration system, established in the late 1890s, has a long history of successful 

resolution of disputes. The fee structure for NGFA rail disputes arbitration is:

Up to $100,000 claim $400, plus 1% of the claim

$100,001 to $500,000 claim $900, plus 1⁄2% of the claim

More than $500,001 claim $2,150, plus 1⁄4% of the claim

Any claim Maximum fee of $10,000

 

However, the fees cited in these examples do not include the possible costs of a consultant and/or lawyer that the 

parties may decide to use to help prepare the case. 

Montana-BNSF Mediation/Arbitration System

The mediation/arbitration system between producers in Montana and the BNSF Railway is the only one that can be 

used to mediate or arbitrate rail rates. BNSF does not have any current plans to enter into other bilateral arbitration 

agreements, but it is open to reviewing and discussing other voluntary arbitration proposals. 

The Montana-BNSF mediation/arbitration system was started January 30, 2009, and is conducted through the 

Montana Grain Growers Association (MGGA) and the Montana Farm Bureau Federation (MFBF). It is administered by 

JAMS and modeled after the NGFA’s arbitration rules. No other major railroad thus far has been willing to arbitrate 

rail rates. 

The Montana-BNSF arbitration system uses three mutually agreed-upon arbitrators drawn from a pool of eligible 

arbitrators. If the parties cannot agree on three arbitrators, the claimant chooses one, BNSF chooses one, and the 

remaining arbitrator is chosen by both parties.

The system is unique in that it allows grain producers, rather than the grain elevator shipping the grain, to make 

claims. The advantage of this provision is that the grain producer is generally the party that can incur the most harm 

from rail rates believed to be excessive, since transportation costs are reflected in the price paid to the farmer. By 

contrast, the elevator’s main concern may be that its rail rates are comparable to other elevators in the region so that it 

does not become uncompetitive.

Eligibility is limited to those producers shipping wheat or barley more than 250 miles on BNSF and is restricted to 

shipments having a revenue-to-variable cost ratio (R/VC) higher than 180 for non-shuttle shippers and a R/VC higher 

than 195 for shuttle shippers. The R/VC is determined using the STB Uniform Rail Costing System. Arbitrators are also 

limited to ruling on the tariff rate, not on the fuel surcharges or other accessorial charges that can add significantly to 

the cost of rail service. The fuel surcharge, however, is included in mediation discussions. Finally, relief would not be 

granted in the event a truck rate is lower than the BNSF rate, even though the truck rate would be uneconomic over 

longer distances or the lower price may be given only when the trucking firm needs a backhaul. Any relief obtained 

by the producer is effective for no more than 1 year from the award and 14 months prior to the commencement of the 

arbitration process.
5

In December 2009, a case filed by a Shelby, MT, producer was successfully mediated. The rate at issue was for wheat 

shipments from Shelby to export facilities near Portland, Oregon. A majority of Montana’s wheat crop each year 

is loaded on vessels at the mouth of the Columbia River, and nearly all of the wheat is transported from origin to 

destination by BNSF. As a result of this mediation, BNSF lowered the rail rate by $165 per railcar (about 4.5 cents per 

bushel). In addition, BNSF reduced rates, to a smaller extent, for shuttle loaders east of Shelby and on its Northern line 

in order to preserve current market relationships among elevators.

Even though the Montana-BNSF system has received some praise from agricultural and shipper interests, it is not 

without its opponents. Montana Attorney General Steve Bullock criticized the Montana-BNSF arbitration system as 

being unlikely to provide meaningful relief to shippers.5 

Conclusions

There is a need for agricultural producers and shippers to have access to a fair, timely and affordable method for 

challenging rates believed to be unreasonable. The current STB rules governing SAC, Simplified-SAC, and ThreeBenchmark rate appeals have not been feasible for agricultural shippers. Additionally, the STB rate-challenge 

procedures do not give agricultural producers an opportunity to bring a rail rate case; only the grain elevator shipping 

the grain may make a claim. 

Arbitration of agricultural rail rates potentially promises a more expeditious, fairer, and lower cost way of challenging 

high rail rates. All the country’s grain producers and shippers deserve a forum and process that is fair, impartial, costeffective, and works for the betterment of both shippers and major railroads. Major railroads in addition to BNSF 

should be encouraged to participate in a similar program that is national in scope.

5 Letter to BNSF from Montana Attorney General Steve Bullock, August 17, 2009.
6

Page 1 photo credit:

•	 Jerry Huddleston

Preferred citation: 

Prater, Marvin, and Adam Sparger, Rail Rate Mediation and Arbitration for Grain Shippers. U.S. Department of 

Agriculture, March 2014. Web. <http://dx.doi.org/10.9752/TS151.03-2014>

For more information, contact Marvin.Prater@ams.usda.gov or Adam.Sparger@ams.usda.gov.

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