NPSAS Newsletter--What are your terms?

What are your terms?

The Northern Plains Sustainable Agriculture Society, along with Farm Aid and the Farmers Legal Action Group (FLAG), sponsored a legal clinic March 27, 1999 dealing with issues surrounding sales contracts for specialty crops, such as certified organic production, and debtor/creditor law.

A contract is a legally binding agreement that obligates two parties who agree to buy and sell goods. It is in effect a personal law written by you and your buyer that will govern your transactions. A contract can be spoken or written. Spoken agreements are legally binding, however, there is much more room for misunderstandings. A properly written contract spells out the details so that both parties clearly understand what the other intends and expects.

Some pointers in dealing with contracts include:
1) Read the whole contract and understand it. That may seem obvious. However, if anything is unclear, get clarification. Many times, if there is a dispute, it is over the details. Most contracts are carried out very smoothly but once a dispute arises it is too late to say you didn't understand that part. Sale contracts for agricultural products are governed by Article 2 of the Uniform Commercial code, which is recognized in all fifty states. A lawyer does not have to be an expert in ag issues to address these contracts, as the laws that govern them are the same regardless what you are buying or selling. However, there will be quality issues and specifications that are unique to the sales of agricultural goods.

2) It is important to remember that promotional materials, other documents, or even promises made that did not become part of the written contract may not be binding. Your contract is your agreement. If you think promises made in other documents or spoken promises should be part of the contract say so! Remember, the best defense against having to go to court to iron out "misunderstandings" is to prevent them as much as possible with a clearly written agreement. The more details you spell out the fewer problems you will encounter.

Things a good contract should have:
a) Who are the parties?
b) What will be produced and where it will be produced? Specify the legal description of the acreage that the crop is to be produced on. Should your crop suffer hail damage, or drown out, you can easily provide the documentation. It is conceivable that, if you do not specify where the crop is to be grown, a court could make you buy and deliver that product to honor the contract. Or if you are growing separate acreages of the same crop under contract to different buyers and one of those fields suffers a complete loss, who is to say what is whose?
c) Specify the style of production (such as certified organic) or anything else the two parties expect of each other by way of production practices.
d) How long will the contract will last?
e) Specify quantity. Consider whether you want to commit to a certain number of bushels or to the production off of a certain number of specified acres or to a combination of the two. If you should commit to bushels, what happens if production was reduced or yields were extra good? If it were reduced you may be held to the contract and be forced to purchase extra bushels of product to fill the contract. If you commit to a certain number of acres, is the buyer obligated to purchase all of the production or up to a certain number of bushels? Does the buyer have exclusive rights to all of the production or up to a certain number of bushels/acre? Spell out variables such as these in your contract.
f) Specify quality. Make sure you both understand the minimum expectations that are important to fill the market needs. What are the conditions under which the product might be rejected? Phrases such as "acceptable standards" or "foreign material" are too vague and leaves room for a subjective opinion. Those standards need to be as clearly defined as possible. You probably will not be able to spell it out so precisely that you are guaranteed that there will be no confusion. However, the more specific the better for both parties involved.
g) Specify the testing and grading procedures that will be used to determine whether or not the product meets the quality standards that you have agreed upon. What proof needs to be established to assert that the product does or does not meet the agreed quality standards and how and by whom will that proof be established?
What about dockage-- clearly define the terms here. Find out what the companies policies are. What is it that tells them that they should dock you $.10 a bushel or $.06/ bushel dockage? If the policies of their buyer, who will in turn purchase the grain from them, affects those decisions, you have a right to know what their policies are also. Know that you do not have to accept their policies. You may need to negotiate with your buyer on some of these points.
h) Specify price. Do not enter into a "fill in the blank" contract. Price should be stated either directly as a per bushel or per pound price; or it can be spelled out by defining the criteria or the formula upon which the final price depends. Make sure that there is a clear understanding and a clear description of that understanding in the contract. Otherwise, you leave it up to the courts to try and figure out what the intention of the two parties was.
i) Sale and payment terms are extremely important. Specify the timing and method of payment. If there is to be a range of time that payment is to be made; if there is to be some flexibility, spell that out too. Say whatever you've agreed to.
j) Specify delivery terms. Who is responsible for delivery? where will the delivery or exchange be made? who pays delivery costs? who is responsible for the risk of the loss of the crop once it is harvested? while it is in storage on your farm? once it leaves your farm? while it is in transportation? while it is in storage? When does the shift in responsibility and ownership actually take place? If on one hand, lightning strikes your buyer's elevator, you might wish that he owned it at that point. However, if the buyer goes bankrupt while the grain is in his possession, you might wish you had clear title to the grain. As lawyer, Kurt Anderson, told the group many times during the day, you have to choose your own poison based on your knowledge of the risks involved and the circumstances of each transaction.
k) Dispute Clause. If there is a dispute, what state will the dispute be handled in? The laws of that state will also govern the dispute.
j) Act of God Clause. This clause releases either party from the contract should an unforeseen or irresistible force cause them to be unable to meet the terms of the contract. An economic downturn, a soft market, or financial difficulties with another buyer does not constitute an Act of God.

This is a process of communication designed so that a buyer and seller can come to an agreement that is clearly understood by both. Talk to other producers about their experiences with different types of contracts and terms. What has worked to protect their interests and those of the traders; and what has failed one party or the other?

So far we have been dealing with the writing of a contract. There is another aspect that you must consider once this law has been written. There is the law and then there are the facts. What happened? You need to ask yourself how you will keep track of what happened. What documentation can you gather to prove the facts? Examples of such documentation would be: Taking proper samples of your grain. Send one sample to the buyer and keep one for your own records so that you can prove what was sent. If yields may be an issue of contention, document your yields as you are harvesting. Keep a notepad beside your phone and document all phone calls with date, time, who you spoke to, what was said by both parties, etc. If the content of the call warrants further documentation, write a letter to the party you spoke to stating, Dear Sir: During our phone conversation of Friday, February 2, 1999 we discussed ______. I said________. You said__________. If I have misunderstood anything that was said, please respond by March 1, 1999. Sincerely, Farmer Joe In other words, document anything that may be an issue of fact in the honoring of the contract.

Your buyer breached the contract... You discover that your buyer is insolvent... What are your choices of action? You have legal standing.

To learn more about your options and what resources are available to you, order your video copy of the presentations and discussions that took place at the Legal Clinic by sending $10 to: NPSAS Legal Clinic, 9824 79th St SE, Fullerton, ND 58441.

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