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Resources on Contracts & Agreements

Resources on Contracts & Agreements

Contracts Between Farmers and Buyers #

While farmers who sell fresh produce to food coops and other independent retailers rarely feel the need for contracts, farmers who are faced with selling to larger commercial entities may find contracts are either required or at least advisable.

Please note that written agreements can include the kind of flexibility needed by both sides. Small scale farmers may not want to be held to an exact number of pounds delivered on a date certain. Conditions are too variable. Stores may not want to be held to an inflexible agreement either because they want to choose product based on quality and the fluctuations of actual sales. Where a friendly network of farmers and coops exists, written agreements may seem like overkill, just more paper wasted—but a paper trail makes verification possible and the effort of putting the terms of a buyer-seller relationship on paper can help clarify expectations on both sides.

If your farm sells to a large retailer or distributor, you will probably be asked to sign a marketing agreement. Before you sign, you should know what you’re getting into.

Talk with officials from USDA or your local Extension #

A quick summary of the advice on contracts: read the contract carefully before you sign anything! Be sure that you get a copy of the contract and that it includes in writing the terms of payment and the length of the agreement. Be sure you understand what is required, what the criteria are and who determines whether requirements have been met. You do not have to agree to every clause: cross out, date and initial clauses you do not like and the buyer may accept your terms. Make sure there is a conflict resolution process included, preferably in the form of an ag. mediation since arbitration is much more expensive.

FLAG has a range of other resources on contracts, as well, including guides specific to organic milk contracts. For a more exhaustive guide to contracts, see FLAG’s Guide to Organic Contracts, which is over 300 pages long.

10 important rules to keep in mind — before and after you sign the contract #

Excerpted from Contracting in Agriculture, Drake University, FSA, NSAC, 2016.

  1. Remember the first rule of contracts: whoever writes the contract benefits most. Don’t assume a contract protects you. It might, but you shouldn’t assume so. The contractor who wrote the contract protected its interests. You have to protect your own. Contracts are “arms-length” transactions in which both sides try to maximize their advantages. The less bargaining power you have, the less “advantage” you have. The reality is most production contracts are one sided—the company controls the information and has much more power than any grower or producer.
  1. Read and understand a contract before signing it. Contract terms determine your rights and responsibilities. Once you sign a contract it creates binding legal obligations. That is why it is critical to understand what you are agreeing to do and to get good legal advice. Do not assume the courts will protect you if something goes wrong. Courts have resolved many cases involving production contract disputes and are likely to enforce the agreements made under the contract, rejecting growers’ claims that the terms were unfair or poorly communicated.
  1. If you do not understand the contract, ask questions and obtain legal advice. This is especially important if the investment or action involved is significant or if the contract creates a long-term relationship. Several states, including Illinois and Arkansas, have passed laws requiring production contracts to be “readable” or easier to understand for growers. These laws require contracts to disclose material risks, such as the potential need to make additional investments.
  1. You will be required to fulfill the terms of the contract before you are paid. Because you have signed a contract to obtain an economic advantage, you will have to perform whatever obligations are required before you can receive the benefits.
  1. Never assume not performing an agreement will be excused. Some contract terms may be more important than others but all have legal effect. If something happens to make you unable to fulfill the contract – like bad weather or illness – the contractor might excuse your unfinished work, but not always. In some situations, like a crop failure due to weather, state law may even provide an excuse. But if the failure to perform is your fault, even when caused by conditions beyond your control, the contractor might choose to enforce the contract. If you believe you may have to default on or breach a contract, consider alerting the other side and negotiating a resolution.
  1. Be aware of the contractor’s (or whomever the contract says will pay you) financial situation. The biggest risk with contracting is not being paid once you have performed. You can minimize the risk by investigating the contractor’s finances, by requesting financial guarantees, and by dealing only with those covered by public laws ensuring farmers get paid for crops or services.
  1. Remember, any proposed contract is subject to negotiation. Even though most contracts are printed, they can still be amended, if both parties agree. If you don’t like a certain term, ask that it be changed. Remember – you will never have more bargaining power in a contract than just before you sign. The reverse is also true – once you sign, it will be difficult, though not impossible, to alter a contract. In addition, once you enter into a production contract relation – and invest substantial sums, such as for new buildings – you may have even less bargaining ability in future negotiations. Remember to save documentation of any changes made to a printed contract.
  1. Be sure any changes to a contract are made in writing. Never rely on oral communications to amend an agreement. Just because you believe a contract was changed by a conversation with the contractor or its representative, doesn’t make it true. If you and the other party agree to amend the terms of a contract, get the new terms in writing and have the other party sign them. Be sure to determine whether the other person has legal authority to make the change. Most contracts include what are known as ‘entirety’ clauses, which state that only written terms are binding and “oral modifications” are not allowed – unless reduced to writing. It is important to keep letters or other documents showing what was agreed to. Courts may allow oral testimony to alter contracts, but the burden of proof will be on you to prove the changes were made.
  1. Keep good records of your performance under the contract. It is very helpful to keep records and documents concerning your performance –such as amounts you delivered and when payments were made. Also, keep notes about any communications with the contractor. If a dispute arises, your records may provide the answers a court will need in order to resolve it.
  1. Stay in touch with the other party. Good communication between parties to a contract is important for resolving uncertainties and preventing problems. Do not hesitate to ask questions if you don’t understand what is happening, such as why a payment is late. The other party may be unaware of the problem. Good communication is especially important when conditions – such as price changes or weather – make upholding the contract difficult.