SASKATOON – Power dynamics occur between farmers and companies who sign contracts together. Saskatoon lawyer Craig Zawada says farmers who don’t understand those dynamics will go into the relationship with one hand tied behind their backs.
Speaking at Pulse Days during Crop Production Week in Saskatoon earlier this year, Zawada said contracts have always existed in the world of buying grain and seed, but they’ve become more important as the industry moves to more off-board crops and with the rise of specialty crops such as pulses.
“We see a lot more private relationships,” he said.
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“No longer can you rely on a statute or government protection to get your product sold. Farmers are having to enter into contracts a heck of a lot more.”
Zawada said different contract terms are used in different regions of the Prairies.
“When I use the term ‘production contracts’ I’m using it to refer to a whole set of different kinds of contracts. It’s something where there’s production, a farmer has grown something and it is being sold,” he said.
“In a more narrow sense, a production contract is one where a farmer is specifically contracted to produce something. Often, the buyer will provide the inputs – the seed, fertilizer and such. Then you use that and produce it and whatever results from that goes to the buyer.”
Zawada said depending on how the contract is set up, risk is allocated to the partners in different ways.
“It’s common the risk rests with the buyer in a situation like that. It’s much like you’ll see in a poultry operation in the States. If it’s a great year, the buyer does well. If it’s a poor year or you get hailed out, the buyer takes the risk,” he said.
“But that’s not always the case. Sometimes the risk is passed onto the producer. In that case, it becomes like a deferred delivery contract. That’s where a producer has more obligations to deliver something. If you don’t have (your own) product to deliver, then you’ve got to find it or else pay the penalty that’s set out in the agreement.
“If there’s one thing about DDCs (deferred delivery contracts), it’s that they’re pretty much all different. But when you talk about deferred delivery contracts, in more instances than not, it’s the producer that’s bearing the risk rather than the buyer.”
Zawada said buyers tend to be more sophisticated in terms of contracting.
“When we talk about bargaining power we usually think about size and resources. If you’re dealing with Agricore or Dreyfus, you’ve got way fewer resources available to you for legal advice, money and so on. But it’s just as much the expertise involved,” he said.
“These guys are doing contracts every day and they draft (the contracts). You can’t expect to have the same level of expertise and experience when you’re dealing with those contracts.
“To some extent, that means you have to rely on your advisers – your lawyers, accountants and so on. But you have to recognize you’re not starting from the same point. You’ll have to work a little harder at the outset to make sure you are being treated fairly.”
Zawada said it’s vital that farmers follow the money when signing contracts: how much are they getting paid and for what?
“There are some sub points to pay attention to when you’re looking at pricing, such as making sure the amount is sum certain. I see all kinds of contracts and it still surprises me how many contracts don’t have a certain price or formula you can calculate the price from. It leaves a lot of leeway and if a dispute arises, the other side is never going to take your point of view,” he said.
“Another thing that surprises me that’s often not put in is that the contract will say you will be paid X dollars per bushel, but it doesn’t say when. I’ve had buyers come back and say we can pay them next year or in two years, as long as we pay them.
“There is a reasonableness that’s built into that, but you don’t want to get into that kind of definition later on. You want to know when you’re going to get paid.”
Contracts should provide a mechanism for resolving disputes rather than depending on the opinion of the buyer.
Zawada said most contracts have two delivery requirements: the duty to deliver and the duty to accept. Farmers will want to make sure that the duty to accept is properly spelled out and that the cost of storage is not offloaded onto them.
If a clause in the contract stipulates that the buyer can delay acceptance, farmers need to know for how long, if there is a penalty and if storage costs will be paid to producers.
“If for some reason you can’t deliver, what are the penalties for that?” he said.
“Often contracts will have formulas built in. Make sure you can trace through and figure out how that gets calculated. It could lead to uncertainty that isn’t resolved in your favour.”
Most contracts are short, often one page or less. Zawada said that isn’t necessarily bad, but it does leave much unstated. Termination provisions that spell out when a contract can be terminated are often left out.
“Because it’s the buyer that’s usually drafting these things, they’ll have all kinds of provisions where they can terminate the contract and few where you as a producer can do so,” he said.
“One thing you really don’t want to have in there as a producer is something that’s within the opinion of the buyer saying they can terminate the contract. You’ll sometimes see this in security agreements, where it says they can enforce their security if on reasonable grounds they feel their security is threatened.
“That’s a pretty wide range of events, and that’s their opinion, so you’re into a fight whether their opinion is reasonable or not. You don’t want to get into that. You want to have something as certain as possible.”
Zawada wondered about the obligations of buyers and sellers if a breach or termination occurs.
“It’s rare to have those remedies spelled out. Consider having those remedies built in, so you know what your exposure is going to be.”
When a contract is not honoured and the two parties can’t settle the dispute, the next step may be a trip to the courtroom. However, Zawada said litigation is expensive.
“You cannot start a lawsuit in Queen’s Bench in Saskatchewan right now for anything less than five figures, and much higher potentially. It’s expensive to go to court and you have the uncertainty of going to court, spending $10 or $50 or $100,000 in legal fees and not knowing if you’re going to win,” he said.
“You have to be pretty sure you’ve got a solid case, but you also have to be aware of judgment proof parties. They’re parties that can’t or won’t satisfy a judgment.”
Like contracts, Zawada said a judgment is just a piece of paper. Farmers can go through the trial and get a judgment but that doesn’t mean buyers will automatically pay.
“Sometimes they’ll pay, but more often you’re going to have to go out and enforce it: either send a sheriff out to seize some goods and hope there’s some non-exempt assets sufficient to pay for that judgment or else garnishee amounts payable, again without exemptions. But whenever you’re dealing with the agricultural sector, there are a large number of exemptions,” he said.
“At the end of the day, the party you have the judgment against may end up not having any assets to pay the judgment or they may go bankrupt. That’s what we mean by a judgment-proof party.
“So when you’re negotiating your contract, you should make sure it’s a solid company, organization, business or individual on the other side. Would you be able to collect a judgment from this party?”
Zawada said he’s seen examples in recent years of seed cleaners and seed buyers going belly up, and bonding isn’t always available. In situations like these, there are many reasons why farmers won’t be able to collect any money.
To protect themselves, he said farmers should make sure they’re negotiating with trusted companies.
“I’m not saying you never contract with someone you’re a little iffy on the trust issue, but you’d better make sure you’re encompassing that risk somewhere else, by saying ‘I can afford to walk away from $50,000 of payments’ or ‘the up side is so high I want to take that risk,’ ” he said.
“You can have the best lawyer, the best accountant and the best professional advisers in the world, but if you run into someone who can’t pay or won’t pay, you may end up out of luck.”
