A farmer who finds himself in court trying to resolve a dispute with a grain buyer can be sure of one thing, says an expert in agricultural production contracts.
He’ll wish he wasn’t there.
“The legal solution is almost always the worst solution,” Saskatoon lawyer Craig Zawada told about 100 farmers attending the annual meeting of the Saskatchewan Mustard Growers Association.
Going to court can be an expensive proposition that will invariably put a farmer at a disadvantage.
A grain company may be willing to eat a big legal bill to avoid losing a case and setting an unfavourable precedent, he said.
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It’s almost always a better idea to try negotiating a mutually acceptable resolution to a contractual dispute, even if it means not getting everything you want.
Once a case gets into the legal system and is turned over to a judge, the farmer loses any control he might have over the outcome.
Production contracts were much on the minds of producers attending the mustard growers meeting, in light of the recent failures of several small grain companies, which cost farmers thousands of dollars.
Zawada said there are a number of reasons why agricultural production contracts are becoming among the most contentious issues in farming:
- Inequality of bargaining power: Contractual law assumes that both parties are freely entering into an agreement and each is able to negotiate acceptable terms. But with fewer and larger buyers dominating the agricultural marketing scene, it’s clear that in most agricultural production contracts the farmer is not on an equal footing with the buyer.
- Realities of contracts: Farmers must recognize that a contract is a trade off of rights and obligations and neither side will get everything it wants. They must prioritize what they want to get out of their contract. For example, are they willing to accept the additional risks of dealing with an unlicensed dealer to get an extra two cents a bushel?
- Transparency: More and more contracts include confidentiality clauses, which forbid either side from talking about details of the agreement. This is creating a more closed, secretive agricultural marketing system with much less public information about prices.
n Standardized contracts: Farmers are usually presented with a standard form contract full of legal jargon, with the implication being that the terms and conditions are not negotiable. However, farmers should know there is no reason such contracts can’t be altered and amended through mutual consent.
Zawada said agricultural production contracts usually don’t contain dispute resolution procedures, which means problems must be resolved under general contract law.
He told the farmers it’s a good idea to include in their contracts clauses providing for mediation or arbitration to resolve disputes, but cautioned that the rules must be set out clearly.
Another problem is that penalty clauses included in production contracts tend to favour the buyer rather than the farmer-seller, another outcome of the inequality of bargaining power in most production contracts.
Lawmakers in the United States have responded to concerns about agricultural contracts by implementing what are called “producer protection acts.” About 20 states have introduced or are considering such acts.
They generally require that contracts be written in plain and understandable language, and they prohibit confidentiality clauses. They provide farmers with a three-day cancellation period and allow them to discuss contracts with advisers. They also give farmers first claim on the assets of a company that goes out of business.
However, Zawada said farmers on this side of the border shouldn’t expect to see special legal protection like that any time soon.
“We’re still a long way from that in Canada.”
He also said it’s not clear yet from the U.S. experience whether it’s even the right way to go.
“In the meantime, the onus is on producers to protect themselves.”
Industry groups such as the mustard growers association can work with grain companies to develop standard contracts that are fair to farmers. Farmers should get legal advice before they sign a contract and government agencies such as Saskatchewan Agriculture can provide advice to producers.
But probably the best way farmers can protect themselves is to deal with reputable companies with proven track records, he said, even if that means paying a few cents a bushel for the reduced risk.
