Avoid Being ‘Hog’-tied with a Bad Contract
Let’s face it — if you’re in agriculture and, more specifically, the pork industry, you know the size and scope of the industry has drastically changed over the past couple of decades. While that’s great, it also brings with it a heightened amount of risk with a lot more money at stake. And when there’s money at stake, everyone becomes a “stake”holder!
So what can you do to ensure you properly transfer any risk you may encounter? The answer: Clarify roles and responsibilities through a written contract. Obviously, it’s not as simple as it sounds, though I’d love that to be the case.
There are various contracts that can be pertinent depending on your involvement. Essentially, there are contracts between growers, investors, independent contractors, and packers. Sometimes these need to be separate contracts, and sometimes everything can be combined into one contract. But before you sign any dotted line, you need to know some critical steps to take and items to watch for.
- Read, read, and read again! It’s important to read and understand your contract and know what the responsibilities are for all parties involved before agreeing to sign it.
- Know what’s covered, and what’s not. If something isn’t in the contract, it isn’t part of the agreement….it’s as simple as that. Additionally, it’s worth noting that if something is in the contract, you’re required to comply. Seems obvious, right? Well, many times, the other party will tell you not to worry about it because they never enforce it. However, if push comes to shove, you’ll end up with a legal issue.
- Review contract default. It’s important to understand legal issues like force majeure (the impossibility of performance). In most hog contracts, market forces and disease are excluded. If you have a Porcine Reproductive & Respiratory Syndrome (PRRS) outbreak, for example, that’s not considered a force majeure. The basic legal standard is that economically burdensome is usually not enough to get out of a contract. Which basically means you’re hog-tied. Pardon the pun.
- Understand arbitration and mediation. This is critical. It’s also important to determine if arbitration is required by the contract, should a contract default situation arise. In addition, make sure to review which states’ laws apply, and where the court action or arbitration will be held. Arbitration can work very well, and the process moves faster than the court system.
- Understand termination issues. If a producer is required to sell hogs every 10 weeks and the buyer misses a payment, is this a reason to break the contract? Not necessarily. If you terminate, you could be the one in default. In general, under a hog purchase agreement, a buyer’s failure to pay for one group of pigs in a multi-group contract isn’t a sufficient legal basis for a seller to terminate the contract. Similarly, under a production contract, missing one payment isn’t a sufficient legal basis for the contract producer to terminate the contract. The contract must clearly disclose the right to cancel, the method in which the grower may cancel, and the deadline for canceling the contract.
- Communicate. With any contract, it’s important to communicate with the other party. If the contract requirements cannot be fulfilled, be proactive and let the other party know right away and try to negotiate a resolution.
- Consider specific disclosures. While mandatory federal requirements for clauses that must be in grower contracts between contract growers and pork producers have been in effect since 2008, the U.S. Department of Agriculture’s Grain Inspection, Packers, and Stockyards Administration is levying fines on producers who aren’t following this law.
What it boils down to is this. There are key elements of a contract you need to be aware of. Your attorney as well as your insurance agent should be well versed on the various provisions in a contract. Many times, our Holmes Murphy staff can help reduce your risk by re-clarifying provisions that shouldn’t be your responsibility. So reach out to us. And, before you secure any handshake, be sure you know what you’re agreeing to.
Published on: 05.15.17