Designing Forage Production and Purchase Contracts

This article is built around an analysis of typical issues that livestock and forage producers face.
Designing Forage Production and Purchase Contracts - Articles
Designing Forage Production and Purchase Contracts

Introduction

Similar summaries have been prepared to address typical issues involved in raising heifers, leasing land, hiring contract labor and landscape contracting. These issues will not be addressed in this program in the interest of time. If these issues are of concern to you, please request a copy of the summary that is of most interest.

At the outset it is important to recognize that the information provided in this program is educational in nature. It is not intended to be legal advice to any member of the audience and is not intended to replace the need for such advice on particular contract problems. The services of a competent professional who is aware of all facts and circumstances involved in a given situation should be obtained to obtain such advice:

The basic elements of any contract:

All contracts have the following five elements in order for the contract to be enforceable:

  • Competent parties
  • subject matter
  • offer
  • acceptance (the meeting of the minds) and
  • consideration

A person is competent if he or she is of legal age (age 18 in most states) and is able to exercise their own free will. If mental disease or a temporary condition, such as that brought on by drugs or alcohol, prevents a person from making these decisions, the person may be temporarily unable to enter into a contract while the disability continues. A contract has a proper subject matter if it is a legal agreement that courts will enforce. For example, agreements to commit criminal acts are not enforced as contracts. A person makes a contract offer when he or she expresses to someone else their willingness to enter into a binding contract to do a particular thing. The offer must be specific as to its terms. An offer is accepted when a person to whom the offer is made agrees with all of the terms specified in the offer without any conditions, reservations or qualifications. The acceptance must accept all of the terms required by the person making the offer and it must be done during the period that the offer is open and available to be accepted. If a person is unwilling to accept all of the contract terms, a period of negotiation takes place until the parties reach agreement or all outstanding offers expire. Consideration in a contract is the payment or transfer of something between the person who accepts the offer and the person who makes the offer. Goods can be exchanged for money, or other goods. A promise to do something that is not otherwise required can also be consideration for a promise to do something made in return.

Government Contracts

The differences between general commercial contracts and government contracts can be important if the buyer or seller of forages is a government agency. In general government agencies often require a different type of process to form the contract and may impose additional requirements on sellers to the government. While this is an important issue, it will not be a significant part of the presentation.

Conflicts of Interest

It is also important to recognize that the interests of a buyer of forages are not necessarily the same as those of the forage producer. Simply because two parties are interested in exchanging cash for crops does not mean that they will see any of the other issue in the same way. Often there will be questions that one party would answer in a way that protects only his or her interest without considering the interests of anyone else. This is not a negative statement about the business or those who engage in it. It is simply state a matter of fact that any party to a contract should recognize. Protecting your interests is your responsibility. No one else will do it for you!

When is a written contract required for an agreement to be enforced?

The Common Law Statute of Frauds and the Uniform Commercial Code (UCC, a body of state contract law dealing with the sale of goods) version for the sale of goods over $500 are two situations in which written contracts are required to be enforceable.

The Common Law Statute of Frauds requires that contracts for the sale of land, promises that will be performed more than one year later, promises to pay the debts of another person, and promises obligating an estate to pay the debts of another person are required to be in writing to be enforceable. Any type of writing satisfies the requirement if the writing is signed by the person against who enforcement is being pressed.

Under the UCC, contracts for the sale of goods for a purchase price of $500 or more are required to be in writing to be enforceable. Goods include typical items of tangible personal property, including growing crops, livestock and the unborn young of livestock. If the parties to a contract are both considered to be "merchants" for Uniform Commercial Code purposes, an exception allows certain contracts to b enforced if there is no written document signed by the person against whom enforcement of the contract is sought. Under this exception, one merchant is required to send the other merchant a memorandum of an oral conversation that forms the agreement between the parties. If the other person to the contract does not object to the written memorandum within 10 days of receiving it, the written memorandum becomes the written evidence of the parties agreement. For example, if a buyer of goods calls a seller and places an order, the seller's memorandum sent to the buyer confirming the order can satisfy this exception if the buyer does not object to the memorandum within 10 days of receiving it.

To be a merchant for UCC purposes, the person or business must be one that normally deals with these particular types of goods. For example, an equipment dealer could be a merchant in regard to the equipment he sells, but not be a merchant to other types of goods, such as crops or livestock, he does not sell. Farmers have been held to be merchants under some state laws, but not be merchants under other state laws.

Treatment of Oral Contracts

If a written contract is required in only certain cases, are oral contracts effective? The answer may surprise you that oral contracts can be just as enforceable as written contracts! The problem, however, often deals with proof of the parties agreement. Each party may remember those provisions that benefit their interests or their positions, but forget other provisions that do not have the same benefit. That being the case, what is the best way to do business? What can you do to avoid being in the situation of having to confront someone suffering from "selective amnesia?" The best way to avoid this problem is to use a written agreement in all cases.

What information should every contract include and how should the contract describe it?

Who is going to:

  1. do what in specific terms?
  2. when are they going to do it and what are the consequences of not being able to do it within the time period specified?
  3. where will the activity take place, whether it be growing, storing, transporting or delivering the forage? and
  4. what does the buyer of the forage owe the producer in return for delivering the required amount of high quality forage that the buyer ordered when the contract was entered in return?

In describing this information, be as clear, concise and direct as you can be. This is not a place where fancy words are an advantage. Simple, easy to understand words may actually be an advantage if a dispute should arise.

Case Study: Campbell v. Hostetter

The following example of a crop production contract is not a forage production situation, but it is a good example to show that things can go wrong between the time the contract to produce is formed and the time for performance arrives. This fact situation will be used to discuss a variety of issues throughout the rest of the presentation.

Charles Campbell entered into an agreement for the sale by Campbell and the purchase by Hostetter Farms, of 3,000 bushels of No. 2 wheat at $2.15 a bushel, delivery to be made in June and July of that year and that they signed a written memorandum to that effect. The parties likewise agreed that Campbell delivered 1,534.88 bushels of wheat for which he was fully paid but that he failed to deliver the remaining 1,465.12 bushels. The parties are in disagreement as to whether the failure to deliver was excusable because of unanticipated, abnormal farming conditions. Hostetter claims damages of $1,814.36 but Campbell denies liability.

The parties agree that on May 8, Campbell agreed to sell and Hostetter to buy 20,000 bushels of No. 2 yellow corn at $1.70 per bushel, delivery to be made in October and November of that year and that this agreement was also evidenced by a written memorandum. They agree that Campbell delivered and was paid for 10,417.77 bushels of yellow corn but that he failed to delivery the balance of 9,582.23 bushels for which Hostetter claims damages of $11,977.79. Again, the parties do not agree on whether the non-delivery was excusable or on the Campbell's liability for damages.

On July 21, Charles C. Campbell entered into an agreement evidenced by a written memorandum of purchase whereby Campbell agreed to sell and Hostetter agreed to buy 1,000 bushels of soybeans at $7 a bushel, delivery to be made in October, November and December. Campbell raised on his farms and delivered 1,136-2/3 bushels of soybeans within the agreed time period. Hostetter refused to pay for the soybeans because Campbell had a shortage of deliveries under separate wheat and corn contracts with Hostetter. Campbell also has an unpaid bill of $520 for 65 bushels of Arthur seed wheat seed purchased in the spring of 1973. Campbell was billed $520 for the seed but that bill has not been paid.

Campbell's position: Campbell argues that he should be able to excuse his non-delivery of wheat and corn because of an unduly wet season resulted in a partial failure of his wheat crop and an inability to plant his normal acreage of corn because of wet ground. Hostetter does not dispute the testimony of Campbell that the crop yields on Campbell's acreage were significantly below normal during this crop year because of an unusually wet season.

Hostetter's position: Hostetter contends, however, that Campbell's contractual obligation was to deliver 3,000 bushels of No. 2 wheat and 20,000 bushels of No. 2 corn without regard to the source from which these products were obtained.

Issues commonly faced in performance of a contract:

a. The contract obligations are unclear. How should the words used and the obligations created by them be interpreted? Searching for the intent of the parties and their "meeting of the minds" is a necessary step.

Did Campbell promise to deliver the specific amount of corn, wheat and soybeans to Hostetter regardless of where it was produced, or did Campbell agree to plant a specified number of acres to these crops and then sell Hostetter 4 the yield from thee acres? Are these obligations identical to each other, or are they different?

Would your answer matter if Campbell had additional land that he used to produce corn and wheat and which did not suffer a decline in yield? In other words he had yields from other acres that could fulfill Hostetter's contract.

Would your answer matter if the price of the crops rose, after the contract was signed, to a level that Campbell could have made a significant profit at, if he could be relieved of the obligation to sell the crops to Hostetter? What do you think?

In a forage contract situation, the buyer may require that the forage meet certain requirements. Are these requirements fair, reasonable, can the producer meet them; can the requirement be measured correctly? What if the producer can not meet these requirements? What should the consequence be to the producer?

b. When do obligations to perform the contract begin? How much time can be taken to complete the work?

Production contracts that have time deadlines must specify when performance of the contract must be begin and full contract performance completed.

c. What is a "contract default" when does "default" occur?

d. Can failure to fulfill a contract be excused? If so, how can it be excused?

Who should bear the risk that a wet planting season will decrease the yield? Should Campbell as the producer or Hostetter as the buyer bear the risk? As a farmer, Campbell is well aware of the risk that bad weather presents. As a buyer of crops, Hostetter should recognize the uncertainty and the inability to control weather that the farmer confronts everyday of every growing season.

e. The owner's obligations and the owner=s failure to perform.

Do the parties recognize their obligations under the agreement as well as any situations that can excuse their failure to perform the contract?

f. What is "customary" in regard to any issue that arises during the period of contract performance?

If Campbell is going to do custom work for Hostetter, what "standards" should Hostetter hold Campbell to in terms of the quality, timeliness, for products such as forage, heifers, etc? What standards should Hostetter use to adjust or penalize Campbell for failing to meet the standards Hostetter set?

Parties to a contract are generally free to establish their own standards of what is acceptable work if there is no overriding standard that would apply, such as a government quality control regulation or a health and safety consideration. Once the standard is identified the parties are free to develop a system that varies the obligations to pay according to the level of performance received.

What both parties need to think about in each of the situations is:

  1. What attributes of performance can be accurately and reliably measured?
  2. How does a lower level of performance affect the value you receive from the goods you purchase?
  3. What will the buyer of the goods accept regarding these variable terms? You may want to rely on what is customary, but someone has to be in the position of the one who sets the custom. If no standard is set, you can be guided by what is fair and reasonable under the circumstances. That is where items 1) and 2) come in.

Over time the parties may change their approach to these questions, or see other ways to approach the same issue. That is to be expected.

g. Responsibility for injury or damage that occurs during contract performance.

A custom feed producer has been sued by a dairy where the dairy alleges the producer delivered feed containing dangerous levels of mycotoxins and an inadequate level of salt. The producer denies the claim and suspects the samples of the feed which were analyzed as containing the mycotoxin and inadequate salt were not properly preserved to be representative of what was delivered.

General Contract Considerations

h. Obligations to insure - Insure who? Insure for what? Insure for how long?

i. Changes to the contract and their impact on the obligations.

j. Enforcing the contract if it becomes necessary to do so.

k. Damages for non performance of contract obligations.

Provisions that may be confusing or unclear

  1. Performance bonds and bonding in general
  2. Indemnification, save harmless, and obligation to defend provisions
  3. Dispute resolution in traditional and non-traditional ways.

Case Study

The following case involves a commonly faced question of contract law namely, "What did the parties mean when they chose particular language to become part of their agreement?"

Glenn is a purchaser and reseller of merchandise. Carlisle manufactures goods and sells them to wholesale and retail customers, including Glenn. Glenn and Carlisle have had a business relationship since at least 1995. On June 5, 1997, Carlisle faxed Glenn a list of merchandise that Carlisle had available for sale. That list specified several types and quantities of goods.

The phrase, "all quantities subject to change," or "quantities subject to change" appeared at the bottom of each of the five pages comprising the June 5 list. The president of Glenn responded to the fax on June 12, 1997 by sending Purchase Order No. 10354 to Carlisle. The Purchase Order was for all of the goods on the June 5 list. The Purchase Order specifically referenced that list stating: "QUANTITIES ARE PER FAXED LIST FROM CARLISLE ON JUNE 5, 1997[.]" The Purchase Order contained columns labeled: "Quantity," "Prod. #," "Description," "Pack," "Price," and "Amount." Several quantities were listed in the "quantity" column, and descriptions and prices were entered under the corresponding columns in rows reflecting the quantities that were listed for given items and prices. The Purchase Order also contained a handwritten entry asking Carlisle to "PLEASE SIGN AND FAX BACK AND CALL FOR DELIVERY APPTS." Id. (capitals in original).

On June 13, 1997, Carlisle responded to the Purchase Order by sending Glenn a letter thanking him for the order he had placed for "the goods" The letter also informed Glenn that Carlisle "had to enter the orders with a per case price so that if the quantities change Carlisle had a way to bill you for only what you have received." The June 13 letter also offered additional merchandise for sale. Sometime thereafter, Glenn faxed the letter back to Carlisle accepting the additional merchandise. Glenn offered to pay Carlisle a total amount of approximately $ 990,000.

Between June and September 1997, Glenn sent Carlisle a total of $ 750,000 in eight separate payments, beginning with a $100,000 payment on June 12, 1997. Carlisle began shipping goods shortly after June 12, and continued shipping through August 1997. During that period, Carlisle shipped approximately $ 736,000 worth of goods to Glenn. However, some of the goods that Glenn ordered from the June 5 list were never delivered because Carlisle sold them to other customers.

On May 1, 1998, Glenn sued Carlisle alleging, that Carlisle's failure to deliver all of the goods listed in the June 5 fax constituted a breach of contract. Glenn claimed damages in the amount of $14,000 for payments it had made to Carlisle for goods that Carlisle never shipped, and lost profits in the amount of approximately $230,000. The latter sum represented the profit Glenn claimed it would have realized from the resale of the goods that Carlisle never shipped.

Carlisle's position: Carlisle claimed that the undisputed facts established as a matter of law that it was not under any binding obligation to sell any given quantity of goods.

Glenn's position: Glenn claimed it was entitled to judgment in its favor as there was no dispute that Carlisle did not ship all of the items ordered by Glenn that were listed in the original fax.

Question: Did Glenn have a binding contractual obligation with Carlisle to sell a given quantity of merchandise to Glenn? If it did, did Glenn present sufficient evidence to prove consequential damages in the form of lost profits that resulted from Carlisle's breach?

How is an ambiguous contract interpreted? Under Pennsylvania contract law the meaning of a clear and unambiguous written contract and the intent of the contracting parties must be determined from the four corners of the contract. However, if the written contract is ambiguous, a court may look to extrinsic evidence to resolve the ambiguity and determine the intent of the parties.

A contract is ambiguous under Pennsylvania law if, and only if, it is reasonably or fairly susceptible of different constructions and is capable of being understood in more senses than one and is obscure in meaning through indefiniteness of expression or has a double meaning. A contract is not ambiguous if the court can determine its meaning without any guide other than a knowledge of the simple facts on which, from the nature of the language in general, its meaning depends. A contract is not rendered ambiguous by the mere fact that the parties do not agree on the proper construction.

The June 5 fax from Carlisle to Glenn clearly and unambiguously set forth specified quantities for each description of merchandise offered for sale to Glenn. However, as noted, the fax also stated: "quantities subject to change" and "quantities per faxed list." Carlisle's specification of precise quantities while at the same time informing the buyer that the quantities were "subject to change" creates an ambiguity as to the intent of the parties regarding the quantity Carlisle intended to sell, and the quantity Glenn intended to buy from the faxed list. What did the parties intend when the June 5 fax was sent?

The Purchase Order specifically stated that Glenn wanted to buy the "quantities... per faxed list... on June 5, 1997." Moreover, as noted above, the Purchase Order stated the specific quantities of each item Glenn was agreeing to buy, and those quantities were taken directly from Carlisle's June 5 fax. Given this scenario, Carlisle may have intended the notification that "quantities were subject to change" to inform Glenn that Carlisle was not promising any specific quantity and that the quantities on the list were only illustrative of the quantities Carlisle might have available for sale. However, Glenn did not interpret the fax in this manner as Glenn took some care to specify the quantities it wanted to purchase, and the specific price for each of the types of merchandise it wanted. Moreover, Glenn thereafter began paying Carlisle based upon the quantities specified in the Purchase Order.

Carlisle may also have intended the reservation of quantities listed in the June 5 fax to inform Glenn that, although Carlisle may have been offering the specific quantities set forth therein, Carlisle's obligation to sell them was contingent upon availability. This would have allowed Carlisle room to adjust for problems in manufacturing the items listed, and offered flexibility in the event of inventory error.

One of Carlisle's employees who was involved with this transaction testified that the reservation on the June 5 fax was intended to allow for any discrepancies in inventory. However, she also admitted that the merchandise that had been offered to Glenn on June 5 had been sold to other customers. She testified that the "'quantities subject to change' on there allowed [Carlisle] to be able to ship all, none or some of a particular item." When questioned more closely, "All, none or some?" she confirmed, "Yes.". In this earlier testimony this witness stated the reservation was intended to guard against "some inaccurate number in the computer inventory report[,]" She specifically denied that the qualification as to quantities was intended to allow Carlisle to ignore an offer from a buyer in the event that a better deal came along. The credibility of this witness was affected by her inconsistent statements.

A buyer of goods under contract who does not receive the goods may recover lost profits, if the seller knows that the buyer intended to resell the goods and the loss was not reasonably avoidable. Accordingly, Pennsylvania imposes a duty of mitigation or "cover." That duty is defined as making "in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller." Carlisle argues that Glenn did not establish that it tried to obtain the merchandise elsewhere. Therefore, it is not entitled to recover the lost profits, because it failed to take the necessary steps to avoid the losses.

However, Carlisle, not Glenn, has the burden of proof as to Glenn's efforts to "cover" his potential losses. The cover rules are an expression of the general duty to lessen damages. The burden of proving that losses could have been avoided by reasonable effort and expense must be borne by the party who has broken the contract. It was up to Carlisle to establish that reasonably similar items were available and that it would have been reasonable for Glenn to acquire them. Inasmuch as Carlisle did not introduce sufficient evidence to prevail on what should have been an affirmative defense, the record supports the jury's award of lost profits of $230,003 on the resale of the undelivered goods. In addition, Glenn is entitled to $14,000 in payments made over the value of what was delivered to Glenn.

Authors

John Becker, Ph.D.