By: Melanie L. Vanderau, Esquire
The use of formal contracts in agricultural production, including crop growing and livestock production arrangements, has been on the rise in recent years. If you find yourself wondering whether it’s worth it to have a formal agreement in place in a production relationship, remember that the purpose of a formal contract is to minimize risk. The more certainty you have in place by clearly agreeing to terms in writing, the easier it becomes for you to manage and plan for risks to your business when entering into the production arrangement.
The best way to minimize risk is considering what you’re expecting out of the production arrangement and evaluating the proposed contract terms accordingly. Ask yourself some questions about how you want the relationship to play out and then consider how, if at all, those terms are treated in a written agreement. For example:
Pricing: How is the price of the product determined? Is the price based on a market price? If so, what market is used? When does the determination of market price occur? Who bears the risk of a fluctuation in market price? Do you want to have a minimum price built into the agreement to limit your risk of market fluctuation?
Payment: How are you expecting to get paid? Upon delivery? Will that be invoiced? How soon to you expect to receive payment after delivery? What happens if the payment is late? If they stop paying you, how do you get out of the agreement?
Quality: What quality standards are in place for the product? Are these standards objective third-party standards, like the USDA or the FDA? What happens if the product delivered does not meet the quality standard?
Delivery: Who is responsible for delivery? Who bears the risk of loss if the property is damaged in transit? If you bear this risk, is this loss covered by an insurance policy?
Cancelation/Termination: Is the term of the Agreement clearly stated? What procedures are in place to terminate the agreement early for each party? What is the impact of such termination? What happens if there is a default by either party?
Catastrophic Events: What party bears the risk for a catastrophic event outside of either party’s control? Avian flu, insect outbreaks, and catastrophic weather are all events that can drastically impact your ability to produce, depending upon the nature of your agreement. Does the agreement contain provisions that relieve you of your obligation to produce upon the occurrence of a catastrophic event?
Agreeing to clear terms like these allow you to manage your risks in connection with the production arrangement. While a written agreement may seem unnecessary at the outset, remember that it’s only when something goes wrong that the existence and terms of a contract become critical. That’s why it’s best to think about and plan for these issues at the beginning, when you can still take the time to manage and minimize your risks.