module 3: understanding the content of an agricultural contract

http://www.fao.org/contract-farming

Course on

OPERATIONAL AND LEGAL ASPECTS OF CONTRACT

FARMING SCHEMES

MODULE 3: UNDERSTANDING THE CONTENT OF AN AGRICULTURAL CONTRACT


CONTENTS

You will better understand:

• How are contracts developed?

• What does a contract usually look like?

▫ Form

▫ Content

• Understanding the responsibilities of the parties

• How long does a contract last?


1. HOW ARE CONTRACTS DEVELOPED?


Contract formation

• Several stages including:

Negotiations and exchange of information

Offer presentation

(buyer)

Acceptance (farmer)

Contract preparation

Signature


Contract formation

• Common best practices:

▫ Negotiation carried out in a fair and transparent manner & in good faith to build trust between farmers and buyers

▫ Farmers need to be involved in discussions with the buyer from the beginning of the negotiation to make sure that: they understand all the contract conditions and

their interests and rights are considered.


The negotiation stage

• Offer:

▫ The buyer provides the offer to farmers which outlines the conditions of the contract:

In writing

Give time for reviewing the document to understand well all the conditions & consult with advisors for support


The negotiation stage

• Upon receiving the offer:

▫ The producer can request clarifications &changes to certain clauses (e.g. pricing, quality, payment, product delivery) if they seem unfair or impossible to achieve


Who can help in contract formation?

PROBLEM

If farmers find it difficult to:

understand contract clauses written in confusing

legal jargon

feel capable to ask questions and negotiate with a

buyer on their own

SOLUTION

They should ask a trustworthy person to explain them the

detail included in the contract:

leader of the farmers’ organization

a government extension officer

NGO, etc.

Booking time limit: 19/07 by 3pm

Booking time limit: 19/07 by 3pm


The last stage

• Ready for signing the contract: Signature, should come only after a full agreement

on all the conditions has been reached and the negotiation phase is completed.


An example…

https://www.youtube.com/watch?v=_PtGCAI0sJA

https://www.youtube.com/watch?v=_PtGCAI0sJA


2. WHAT DOES A CONTRACT LOOK

LIKE?


The contract• Fundamental principle

• Freedom of contract• Signataries are free to enter into a contract and to determine its

specific content


Contract form

• Contracts should:• Be in writing!

• Use language that is well understood by the signing parties• In cases of illiteracy, a neutral third party should read clauses and

explain them as needed

• Ensure equal treatment when conditions are equal Standard contracts can be designed by companies, but :

• Preferably each farmer should sign them individually

• Preferably negotiate terms collectively


Contract content

• Important recommendation

Always consult a lawyer!

• General principle▫ Apart from typical legal requirements such as the

identification of partners, a clear object and a signature, usually there is no detailed requisites on specific clauses. Good practices do exist though!


Contract content

1. The parties • Typically the producer (individually or in group) and

the buyer

2. The purpose • Reason for the contract, inc. specific commodity

Ex: "The farmer commits to grow and sell all produced tomatoes to the

company in exchange for payment based on the prevailing market price”

3. The production site• Specify size and location of the farming area


Contract content4. Obligations of the parties: Clear description of

contractual obligations

Ex: Poultry production contract

Farmers’ obligations Company’s obligations

Raise chickens according to pre-established methods

Pay the agreed price in accordancewith a pre-determined formula

Provide part of the inputs: power, water and material for the bed

Provide inputs: one day chicks, feed, medicines

Comply with technical rules imposed by the company

Provide technical assistance

Grant the company free access to the production area

Provide transportation from thefarm to the slaughterhouse


Contract content

5. Price and payment: • Clear method for price determination

Not necessarily expressed in monetary terms – it may be set as a price reference, a formula, a percentage over production costs, etc.

E.g.: “All of the crops grown by the farmer will be sold to the company at

predetermined prices fixed by the company for each variety and specific grade quality level”

• Clear definition of when and how will farmers be paid


Contract content

6. Input provision:• Description of inputs provided by the buyer

• When and where will be delivered

• How repayment will be calculated and made

7. Third parties may also sign:• Banks, NGOs, input suppliers, etc.


Contract content

8. Excuses:

▫ Acceptable justification for failing to comply with the contract

Force majeur

Changes of circumstances

9. Remedies:

▫ refer to any legal measure provided by law or by contract to protect the interest of one party against the failure of another party to performproperly


Contract content

10. Duration, renewal and termination

Ex: “The parties agree that either party may terminate the Agreement

by giving one month written notice to the other party of its intention to terminate” (Zambia, cotton contract)

11. Remedies ▫ refer to any legal measure provided by law or by

contract to protect the interest of one party against the failure of another party to perform properly

12. The signature

Ex: “Both parties signed this agreement on the day……..month

…….and year……. in the presence of two witnesses”


3. UNDERSTANDING

THE RESPONSIBILITIES

OF THE PARTIES


Responsibilities of the parties

• Re. the product

• Re. the process

• Re. the delivery

• Re. price and payment


Product-related obligations

• Quantity

▫ Clear indication of the quantity to be produced

a) the whole production

Ex: “The farmer must supply the entire crop produced to the buyer”

b) a percentage of production

Ex: “The farmer shall supply to the buyer 70% of the total fruit

produced in the orchard”

c) a specified quantity

Ex: “The grower is contracted by the buyer to produce 150 kg of

paprika in the 2016/2017 season”


Product-related obligations

• Quality: Clear indication of quality requirements

▫ Quality characteristics mayinclude: physical characteristics (e.g. colour, size,

shape)

contents (e.g. low fat milk, seedless grapes)

fitness for a purpose (e.g. seeds that are resistant to a certain virus or green beansthat are free of chemicals prohibited by the target market


Contract content - quality

Contract for paprika - Zambia

Grades Specifications Price ($/kg)

A Dark maroon/purple without damages 7.0

B Dark maroon/purple with maximum 25% 6.5

C Red 5.0

D Orange/red 4.0

Contract for potato - India

Grades Specifications Price

I Size of minimum 40 mm, free from external and internal defects, minimum weight of 1 tonne

Established at deliveryII As above, but slightly bruised or damaged

III Second growth, greening or cut


Process-related obligations

• InputsEx:“The farmer shall use only planting material supplied by the buyer,

and shall use only chemicals approved by the buyer in cultivation of the crop” (Trinidad and Tobago, pepper contract)

• Land, facilities and equipment

Ex: “The grower shall be responsible for all farming activities

including land preparation, irrigation, planting, plant protection measures and harvesting” (India, potato contract)


Process-related obligations

• Standards and certification

Ex:“The grower shall adhere to the EurepGAP standard. Sanctions

may be applied to the grower in case of the EurepGAP requirements not being met” (Tanzania, vegetable contract)

• Intellectual property rights

Ex:“The company will supply the seedlings to the farmers. The

number of seedlings supplied shall not exceed the one agreed by the parties. Prohibitions and fines will be enforced for any farmer found to be multiplying this planting material” (Thailand, Eucalyptus contract)


Price and payment-related obligations

• Clear method for price determination

▫ Not necessarily expressed in monetary terms – it may be set as a price reference, a formula, a percentage over production costs, etc.

Ex: “All of the crops grown by the farmer will be sold to the company

at predetermined prices fixed by the company for each variety and specific grade quality level”

• Clear definition of when and how will farmers be paid


Price-related obligations

• Negotiated before the growing cycle

• Easily understood

• Yet, susceptible to conflict if markets change much

Fixed pricing

• Usually based in formulas associated with market or performance parameters

• More difficult to be understood

• Less susceptible to conflict but risk of firm manipulations exist

Flexible pricing


Price-related obligations

• Base price paid out either at the beginning or end of season

• Final price calculated once buyer sells commodity

• A second payment is made after companies sort out costs and revenues

• Often used in commodity export markets (coffee, cotton, tobacco, etc.)

Split pricing


4. HOW LONG DOES

A CONTRACT LAST?


Contract duration, renewal & termination

▫ Duration: Short term or long term Ideally the production cycle of the products involved has to be

taken into account, as well as the parties’ financial obligations

▫ Renewal: Provisions for renewal may be included In some cases renewal is automatic

▫ Termination By mutual decision

Unilaterally: Usually requires advance notice

By failure of one of the parties: Usually in cases of contentious situations


www.fao.org/contract-farming


module 3: understanding the content of an agricultural contract

Education