Review your pork production contract
DES MOINES – If you’ve ever wondered how good your pork contract is, go through a rough period like the pork industry recently experienced. Even if you’ve come through these trying times with flying colors, now’s the time to review your contract, said Eldon McAfee, an attorney with Beving, Swanson & Forrest P.C. in Des Moines.
“So many people want to hand the contract to an attorney and have him or her review it, but you need to read and understand the contract, too, because you’ll have to live with it.”
During his presentation at the Pork Checkoff’s Pork Academy at the 2010 World Pork Expo in Des Moines, McAfee encouraged producers to review the following considerations with contracts:
Remember the basics. Read and understand any contract before signing, and know what is required of the parties involved.
Also, know the other party’s financial and other business history. Make sure any amendments to the contract are put in writing and are attached to the contract.
Know what’s covered, and what’s not. If something isn’t in the contract, it isn’t part of the agreement. “Also realize that if something is in the contract, you must do it,” McAfee said. “Don’t let someone tell you, ‘Don’t worry about that, because we don’t enforce it.’ If push comes to shove, you’ll have a problem.”
Review contract default. It’s important to understand legal issues like force majeure (defined as the impossibility of performance). In most swine contracts, market forces and disease are excluded. “If you have a PRRS outbreak, for example, that’s not considered a force majeure,” said McAfee, who adding that a similar situation exists if corn goes to $6 a bushel. “The basic legal standard is that ‘economically burdensome’ is usually not enough to get out of a contract.”
Understand arbitration. Determine if arbitration is required by the contract, should a contract default situation arise. In addition, make sure to review which state’s laws apply, and where the court action or arbitration will be held. “Arbitration can be work very well, and the process moves faster than the court system, but be aware that an arbiter will require an hourly fee,” McAfee said.
Understand termination issues. If a producer is required to sell pigs every nine weeks and the buyer misses a payment, is this a reason to break the contract? Not necessarily. “If you walk away, you could be the one in default,” McAfee said. In general, under a pig purchase agreement, a buyer’s failure to pay for one group of pigs in a multi-group contract is not a sufficient legal basis for a seller to terminate the contract. “Likewise, under a production contract, missing one payment is not generally a sufficient legal basis for the contract producer to terminate the contract,” McAfee said.
With any contract, it’s important to communicate with the other party, McAfee concluded. “If the contract requirements cannot be fulfilled, let the other party know in advance, and try to negotiate a resolution.
If negotiations don’t work, be ready to use legal options. Still, don’t give up on negotiation, even after the legal process has started, because it can still be an important part of the process.”
Observe new federal contract requirements
Specific disclosure provisions also need to be considered when addressing pork contracts today. While mandatory federal requirements for clauses that must be in grower contracts between contract growers and pork producers have been in effect since June 18, 2008, the U.S. Department of Agriculture’s Grain Inspection, Packers and Stockyards Administration is levying fines on producers who are not following this law.
“While the law wasn’t enforced at first, all that has changed now,” McAfee said. “In some cases, penalties of up to $1,500 have been enforced.”
Requirements that apply to swine production contracts include:
- Contract grower’s right to cancel. A swine contract grower has the right to cancel a production contract by mailing a cancellation notice to the contractor not later than three business days after the contract was executed or any cancellation date stated in the contract, whichever is later.
The contract must clearly disclose this right to cancel, the method by which the grower may cancel the contract, and the deadline for canceling the contract. McAfee said it’s a good idea for the contract to require that the notice to be sent by certified mail.
- Disclosure of additional large capital investments. Federal law states that all swine production contracts must have a disclosure statement on the first page of the contract conspicuously stating that additional large capital investments may be required of the contract producer.
The disclosure must have the heading, “Additional Capital Investments Disclosure Statement.” GIPSA originally took the position that all contracts subject to this requirement had to have this disclosure, even if the contract did not large capital investments, said McAfee, who noted that the term “large capital investments” is not defined in the law.
However, on March 19, 2010, GIPSA issued a statement that the disclosure may alternatively state that “no additional large capital investments shall be required during the term of the contract.”
Contact Darcy Dougherty Maulsby by e-mail at email@example.com.
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