Consolidated Table of contents

UNIDROIT Working Groupfor the preparation of a Legal Guideon Contract Farming

Fourth MeetingRome, 17 – 20 November 2014

UNIDROIT 2014Study 80 A – WG4 – W.P. 1Original: English12 Novembre 2014

Annotated Consolidated Zero Draft of the Guidewith observations and proposals for changes

from Working Group members and the consultation round

To facilitate discussions at the Working Group meeting, the present document reproduces the fulltext of the Zero Draft of the Guide together with observations and proposals for changes inserted ascomments in the margin. Such observations and proposals have been presented in full in Doc. 23(Consultation summary: consolidated issues, with addendum) and in Doc. 24 (comments receivedfrom members of the Working Group, with addendum).

Comments of a general nature or not referring to a particular issue in the text appear at the verybeginning of the relevant chapter. Whenever comments are too long to be reproduced in full in thedocument, a cross reference is made to the corresponding document, i.e. either Doc. 23 or Doc. 24.

Wherever possible, the Secretariat has inserted proposals for possible draft text, and on someoccasions minimal explanations or reflections, clearly identified in the comment.

Consolidated Table of contents

INTRODUCTION

Prepared by the UNIDROIT Secretariat and FAO

(Total 14 pages)

Preface

I. General introduction to contract farming

A. Concept of contract farming: general remarksB. Variety of contract farming operations in practiceC. Outline of principal benefits and risks of contract farming

1. Benefits arising from the use of agricultural production contracts2. Potential problems associated with agricultural production contracts

2. UNIDROIT 2014 – WG4 – W.P. 1 – Annotated Zero Draft

II. Scope of the Guide

A. Characteristic elements of agricultural production contracts covered by the Guide1. Agricultural production contract v. partnership2. Agricultural production contract v. employment

B. The agricultural production contract

CHAPTER 1 – THE LEGAL FRAMEWORK


(Total 26 pages)

I. The applicable private law regime

A. Legal treatment of agricultural production contracts1. Agricultural production contracts as a special contract type2. Agricultural production contracts and traditional contract forms

B. Domestic legal sources applicable to the contract1. Rules and principles of law2. Customary rules and usages3. Trade usages and practices4. Standard terms and guidance documents

C. Contracts with an international element1. Contractual obligations2. Non-contractual obligations

II. The role of the regulatory environment

A. Agri-food trade

B. Production inputs1. Seeds2. Biosafety3. Plant Variety Protection4. Producers’ right to genetic resources5. Other agricultural inputs

C. Agricultural finance and support

D. Competition and antitrust

E. Human rights1. Right to food2. Right to work and labour law

F. Access to natural resources

UNIDROIT 2014 – WG4 – W.P. 1 – Annotated Zero Draft 3.

CHAPTER 2 – PARTIES TO THE CONTRACT, CONTRACT FORMATION

AND CONTRACT FORM

Prepared by Professor A. Bryan Endres and the UNIDROIT Secretariat

(Total 30 pages)

A. The agricultural producer1. Distinctive features

(a) Agricultural production(b) Producing as a professional activity(c) Legal status of agricultural producers

2. Forms for conducting an agricultural production activity(a) Individual producers(b) Producer organisations

B. The contractor1. Private corporate structures2. Public entities

C. Other parties interested in an agricultural production contract1. Value chain participants

(a) Various linkages between participants(b) Types of participants

2. Interested third parties

II. Contract Formation

A. Offer and acceptanceB. Capacity and consentC. Role of those who intervene or assist in the contract negotiation

1. Producer organisations2. Facilitators3. Public authorities4. Intermediaries

III. Contract Form and Content

A. Contract formB. Contract contentC. Consequences of breach of required form or content

CHAPTER 3 – OBLIGATIONS OF THE PARTIES

Prepared by Professor Marcel Fontaine and Professor Henry Gabriel

(Total 45 pages)

I. Risk allocationA. Production risk allocationB. Commercial risk allocationC. Exclusivity


II. Core obligations of the parties

A. The product1. Quantity

(a) The whole production is purchased(b) Only part of the production is purchased

2. Quality(a) Determining quality(b) Quality standards(c) Product safety(d) Link with certification requirements

B. Production process1. Provision and use of inputs

(a) General obligations(b) Specific obligations related to certain types of inputs

(i) Land, installations and fixed assets(ii) Physical Inputs(iii) Finance(iv) Services

(c) Obligations related to intellectual property rights2. Production methods, compliance and control

(a) Specified production methods(b) Monitoring and control

C. Delivery1. Time and place2. Acceptance

D. Price and Payment1. Price Determination2. Price Mechanisms

(a) Fixed prices(b) Price scales

3. Time and method of payment

III. Additional obligations

A. Insurance obligationsB. Record keeping and information managementC. Community interests

IV. Transfer of obligations

CHAPTER 4 – EXCUSES FOR NON-PERFORMANCE

Prepared by the UNIDROIT Secretariat

(Total 17 pages)

I. Supervening events affecting the performance of agricultural productioncontracts

A. Force majeure v. change of circumstances

B. Contractual allocation of risks through force majeure clauses


C. Risk allocation and title transfer

D. Insurance and other risk mitigation and allocation schemes

II. Events qualifying as force majeure and change of circumstances in contractfarming practice

A. General notion of force majeure in contractual practice1. Natural events (“Acts of God”)2. Governmental acts3. Other disturbances: strikes, wars, social unrest, market disruptions

B. Relevant change of circumstances in contractual practice

C. Burden of proof

III. Consequences of the recognition of force majeure and change of circumstances .

A. Effects on the parties’ obligations1. Excuse from non-performance2. Suspension of performance3. Compensation and indemnities4. Additional obligations: notice and mitigation requirements

B. Effects on the contract as a whole1. Termination of the contract2. Right or duty to renegotiate3. Judicial adaptation

CHAPTER 5 – REMEDIES FOR BREACH

Prepared by Professor Fabrizio Cafaggi,in collaboration with Professor Paola Iamiceli

(Total 59 pages)

I. Remedies in production contracts

A. General aspects and principles related to remedies

B. Different types of contractual remedies

C. Remedies for collective harms

D. The role of the aggrieved party and its impact on remedies against breach: comparativenegligence and duty to mitigate (general aspects)

E. The obligor’s right to a last attempt to perform and the right to curedefective performance

F. Renegotiation

G. The effects of termination1. The effects of termination: total v. partial termination2. The effects of termination and the impact on linked contracts


II. Contractor’s remedies for producer’s breach

A. Introduction1. Sphere of control and producer’s liability2. Contractor’s remedies

B. Remedies in kind1. Remedies in kind for producer’s breach of process-related obligations

(a) Right to performance(b) Corrective actions

2. Remedies in kind for product non-conformity(a) Corrective measures(b) Repair(c) Replacement

3. Remedies in kind for producer’s failure to deliver the product(a) Remedies in kind and partial delivery

C. Product withthrawal and product recall

D. Withholding performance

E. Price reduction

F. Termination1. Termination for breach of process-related obligations2. Termination for product non-conformity3. Termination for producer failure to deliver

G. Damages1. Damages for producer’s breach of process-related obligations2. Damages for product non conformity3. Damages for producer’s failure to deliver

H. Penalties, fines and black lists

I. Contractor’s conduct and claim for remedies1. Contractor’s conduct and impact on remedies2. Contractor’s duty to mitigate and contractor’s remedies

III. Producer’s remedies for contractor’s breach

A. Introduction: cooperative and non-cooperative remedies against contractor’s breach

B. Right to performance1. Right to performance in case of delay in price payment

(a) Right to payment and guarantee mechanisms2. Right to performance in case of contractor’s failure to provide (conforming) inputs.

Repair on inputs. Inputs replacement(a) Remedies in kind when inputs are provided by a third party in privitywith the contractor

C. Withholding performance1. Withholding performance in case of contractor’s delay in providing finance

D. Termination and the failure of cooperation1. The grounds for termination for contractor’s breach

(a) Termination for contractor’s failure to pay(i) Termination in case of obligee’s delay in providing finance

(b) Termination for contractor’s failure to provide (conforming) inputs(c) Termination for contractor’s failure to take delivery


(d) Termination for contractor’s failure to purchase the whole production(or a percentage of it)

E. Damages1. Damages for delay in payment. Interests and other consequential damages.2. Damages for contractor’s failure to provide (conforming) inputs and impact

on producer’s liability3. Damages for contractor’s failure to take delivery4. Liquidated damages and penalty clauses

IV. Restitution

CHAPTER 6 – DURATION, RENEWAL AND TERMINATION

Prepared by Professor M. Joachim Bonell

(Total 10 pages)

I. Duration

A. “Short-term” contracts vs. “long-term” contracts

B. Maximum and minimum duration imposed by law

II. Renewal of contracts

A. Renewal by express agreement

B. Tacit or automatic renewal

C. Renewal at the option of one party

III. Termination

A. Scope

B. Termination clauses

C. Notice requirement for termination

D. Grounds for termination1. Automatic termination2. Consensual termination3. Termination by one of the parties in accordance with special termination clauses

E. Effects and consequences of termination

CHAPTER 7 – DISPUTE RESOLUTION

Prepared by Prof. Paripurna P. Sugarda and the UNIDROIT Secretariat

(Total 15 pages)

I. Disputes and dispute resolution in agricultural production contracts

II. Considerations regarding the various dispute resolution methods available for theparties


III. Non-judicial dispute resolution methods

A. Amicable dispute resolution

B. Arbitration

IV. Judicial dispute resolution

V. Enforcement of settlements or decisions resolving a dispute

INTRODUCTION


Table of contents

Preface ............................................................................................................................................................ 2

I. General introduction to contract farming ................................................................................................ 3

A. Concept of contract farming: general remarks ..................................................................................... 3B. Variety of contract farming operations in practice ............................................................................... 4C. Outline of principal benefits and risks of contract farming .................................................................. 6

1. Benefits arising from the use of agricultural production contracts .................................................. 72. Potential problems associated with agricultural production contracts ........................................... 8

II. Scope of the Guide................................................................................................................................. 10

A. Characteristic elements of agricultural production contracts covered by the Guide ............................ 101. Agricultural production contract v. partnership.................................................................................. 112. Agricultural production contract v. employment ................................................................................ 11

B. The agricultural production contract .......................................................................................................... 12

Commented [A1]: Online comments.Fondation pour le droit continental (ad hocexpert group) suggested that the document isstill too long and that some form of morepractical document should accompany thisGuide.

Commented [A2]: Online comments.Fondation pour le droit continental (ad hocexpert group) notes that the approach chosen inthe Guide concentrates on “contractualequilibrium” between parties. Traditionalapproach, at least under French law, is not tolook for the right equilibrium but to findappropriate legal tools so as to prevent andpunish an “abuse” of its position by the strongestparty.Online comments. French Ministry of Justice -Direction des affaires civiles et du Sceau makesthe same note on the approach of the Guide.

Commented [A5]: Online comments. Min.Justice Canada notes that examples andapproaches are heavily weighted to cropproduction, and greater attention should be paidto other forms, e.g. livestock.

Commented [A4]: Online comments. Min.Justice Canada notes that it is critical to identifywhat the contractor and producer would expectto obtain from the relationship. For details, seeDoc 23.

Commented [A3]: Online comments. Min.Justice Canada notes that the content is mixed,containing both assessment of legal implicationsand the integration of authorìs and/or FAO’sbiases or other policy goals. For details, see Doc23.

Commented [A6]: Online comments. Min.Justice Canada suggests including a part IIIdealing with the context in which the Legal Guideis being developed. For details, see Doc 23.

2. UNIDROIT 2014 – WG4 – W.P. 1 – Introduction

Preface

(a) Purpose of the Guide

1. The Legal Guide on Contract Farming is primarily addressed to the parties to a contractfarming relationship, i.e. producers and contractors the producers being the farmers and thecontractor being the buyer/sponsor/investor. Contractors may on-sell, package or process afterpurchasing the product/crop.. It provides advice and guidance on the entire relationship, fromnegotiation to finalization, from performance through breach or termination of the contract. TheGuide provides a description of common contract terms and a discussion of legal issues and criticalproblems that may arise under a variety of practical situations. It illustrates how these may betreated or are regulated under different legal systems, including when relevant, specific types oflegislation. In so doing, the Guide aims to promote a better understanding of the legal implications ofcontract terms and practices. Contractual advice or recommendations may be provided as a result ofanalysis and discussion when considered meaningful. Under that perspective, the Guide intends topromote more stable and balanced relationships, to assist parties in designing and implementingsound contracts and to develop good practices, thereby generally contributing to building a sound andconducive environment for contract farming.

2. This Guide does not interfere with domestic mandatory rules and nor does it intend to providea model for, or encourage the adoption of, special legislation. It is acknowledged however that, to theextent that the Guide identifies problems and highlight possible workable and fair solutions, it couldalso provide useful information for policymakers considering the adoption of regulatory or legislativeprovisions dealing directly or indirectly with agricultural production contracts. As a soft lawinstrument, its application will rely upon its intrinsic quality and usefulness in addressing problemsand suggesting solutions. The Guide could be recognised as a reference for good practice byreflecting a minimum internationally-accepted standard of practice in contract dealing. It is suggestedthat it could also be used by international organisations and development agencies when asked bycountries to assist them by providing capacity building on the formulation of public governanceinstruments to sustain agricultural development. The Guide could also be useful for progessionalorganisations, judges, arbitrators, legislators, and, perhaps even most importantly for mediators,since the Guide promotes mediation. Also, the Guide might be useful as a basis to develop educationtools in the context of training programmes addressed to producers in specific countries or sectors.

(b) Approach of the Guide

3. The Guide recognises that contract farming, from an economic viewpoint, may be seen as avalue chain management system over various of stages, from production, processing, marketing tofinal consumption. Contract farming involves an exchange of goods, services and finance, and aims athigher efficiency through better coordination, lower costs and chain alignment. Systems rely on avariety of legal patterns linking the various participants who are often subject to common standardsapplicable to and influencing each segment of the chain.

4. The Guide focuses on the particular bilateral relation between the agricultural producer andthe party which seeks to obtain a designated product, based on an “agricultural production contract.”However, other parties may participate in the production contract itself, and insofar as the internalobligations and remedies of the producer and the contractor may be affected, multilateral contractsor bilateral contracts built around the main relationship will be considered. While recognising theinterconnection between the different segments of the chain, a global value chain legal analysis isbeyond the scope of this Guide.

Commented [A7]: Online comments. Min.Justice Canada suggested adding a section (c)« How to Use the Guide » For details, see Doc.23.

Commented [A8]: Online comments. Mr.Eaton suggested clarifying the meaning ofproducers and contractors on this early stage.

Commented [A9]: Online comments.Fondation pour le droit continental (ad hocexpert group) suggested highlighting the Guide’srole as a model for international organizations,legislators, judges and mediators. Also suggestedto draft a paragraph similar to the Preamble ofthe Unidroit Principles to clearly explain thepurposes of the Guide.

UNIDROIT 2014 – WG4 – W.P. 1 – Introduction 3.

I. General introduction to contract farming

A. Concept of contract farming: general remarks1

5. Agricultural production under a contract between farmers and their buyers has long beenpracticed for many agricultural commodities in most countries around the world. Under contractsentered into with agricultural producers, food processors, traders, distributors and other purchasersof agricultural products organise their procurement systems in accordance with their specific needswith regard to quantity, quality, timing of delivery and other supply chain management requirements.Contracts may also specify the desired agricultural production or livestock rearing processes, oftenfollowing domestic and international quality and safety standards for food and agricultural productionand trade.

6. Although contract farming is a well-known mechanism to coordinate agricultural productionand trade, interest in its use has been noticeably increasing. The reasons for this growing interesthave been associated with the recent transformations in food and agricultural systems that aremaking it increasingly more difficult to meet consumer demands under more traditional, open-market-based procurement strategies. On the one hand, more quantities of food are required to meetdemographic changes – notably in rapidly urbanizing areas – and the progressive rise in livingstandards. On the other hand, scientific and technological developments have accompanied and inturn very significantly contributed to changes in market demand, in the operation of supply chainsand in the production of raw commodities. Contract farming may also provide solutions for each partyrespectively: a driving factor for contractors, for example, the risk-mitigation characteristic thatcreates a mechanism for the protection of the investment and the intellectual property rights. On theside of the farmer, cContract farming may work as an efficient tool to strengthen farmers’ its’capacities, and is expanding in developing countries where it opens significant opportunities foreconomic and social development by providing local producers with access to markets and support inthe form of technology transfer and credit facilities. It is further seen as a potential tool for reducingpoverty, contributing to rural development and decent rural employment, and increasing foodsecurity.

7. Under a broad economic approach, “contract farming” generally refers to “a form of supplychain governance adopted by firms to secure access to agricultural products, raw materials andsupplies meeting desired quality, quantity, location and timing specifications, whereby the conditionsof exchange are specifically set among transaction partners by some form of legally enforceable,binding agreement. The specifications can be more or less detailed, covering provisions regardingproduction technology, price discovery, risk sharing and other product and transaction attributes.”2

8. Under the concept described above, contract farming focuses on the coordination betweenthe different parts of a supply chain, involving a variety of participants and contract modalities. Asopposed to direct sales from producers to their buyers through open market spot transactions wherethe product is delivered immediately against a price, contract farming relies on agreements that aremade either during production or, more often, before the production is initiated, thus providingcertainty for the future delivery and supply of the product. A large variety of contract patterns servethis function in practice. Some of them rely upon traditional forms of relationships either based on thefuture sale of the produce or on the entitlement to the produce based on the granted use of the landor of animals, while new forms have developed to meet the changing needs of the economicenvironment.

9. As it is understood in this Guide, contract farming refers to a particular modality ofagricultural production based on an agreement between a farmer and another party – typically an

Commented [A10]: Mr Kirke, onlinecomments, “another key driver is risk mitigationfor the contractors

-Against their investment-Against their IPR”

[this short addition has been inserted here, butperhaps it would fit more in a context where thedriving factors are enumerated.An example of how this could be done is hereproposed]

Commented [A11]: Online comment madeby FAO.


agribusiness company. Under the parties’ agreement, which is designated as an “agriculturalproduction contract,” the farmer would undertake to produce and deliver agricultural commodities inaccordance with contractor’s specifications, while the contractor would undertake to acquire theproduct for a price and would generally have some degree of engagement in production activitiesthrough, for example, the supply of inputs and the provision of technical advice.3

10. The Guide offers a legal analysis of the agricultural production contract and of the mutualrelationships between the producer and the contractor deriving from the contract. The interplay ofthe contract and the supply chain structure will also be dealt with incidentally, under a private lawperspective. In fact in many instances, the content of the contract, prices and the criteria todetermine performance standards may be defined according to principles that are determined bydownstream participants in the chain. Very often, the requirements that producers have to meet intheir agricultural practices reflect regulatory constraints related to the market of the final product’sdestination. Often, these constraints come from public sector-mandated standards and regulationsregarding food safety and quality, although they may also be from private sector-driven standards.

B. Variety of contract farming operations in practice4

11. Contract farming operations may take a large variety of forms depending on many factors,under the perspective both of the global environment and the particular conditions of the transactioninvolved. There are significant differences between regions and countries of the world regarding thelevel of economic development which in turn impacts on the structure of the agricultural sector andmarkets. In advanced economies, production under a contract has intensified following theindustrialisation of agriculture in the second half of the XXth century, accompanied by importanttechnological innovations in transport, logistics and telecommunications and by the development ofcredit opportunities to enhance investment in the production sector. Participants in the processingand marketing sectors are increasingly concentrated both at national and international levels. Marketsare increasingly interconnected and subject to common standards applicable to quality andtraceability. In emerging and developing countries, contrasting realities may be found. Certain marketfeatures would reflect some of the most advanced models of development present in industrialisedcountries. Yet, these coexist with traditional forms of production involving small producers.

12. As regards the particular conditions of the transaction involved, a series of factors will or mayinfluence the particular conditions surrounding an agricultural production relationship. A number ofelements regard the parties themselves, which will be further developed in Chapter __* of the Guide.

13. Different models have been proposed to characterise and describe the structure of contractfarming operations, in particular in the context of developing countries. These models include thecentralised, nucleus-estate, multipartite (such as for example, public-private partnership),intermediary, and informal models.5 The centralised model involves a centralised contractor buyingfrom a large number of small producers, typically with strict quota allocation and tight quality control.Similar to the centralised model, under the nucleus estate model the contractor also manages acentral estate or plantation which is used to guarantee downstream customer commitments in thecase of shortfalls from producers and/or to ensure a certain level of minimum throughput forprocessing plants. Nucleus estates can also be used for research, extension and/or breedingpurposes. Next, the multipartite model can involve several government bodies and/or privatecompanies jointly participating with farmers, such as organizations responsible for credit provision,production, management, processing and marketing. At the other end of the spectrum, the informalmodel describes the case where individual entrepreneurs or small companies make verbal or simplewritten production contracts with farmers on a seasonal basis, perhaps benefiting from government-


sponsored extension services to support farmers. Lastly, the intermediary model represents avariation on the aforementioned models where a collector (or other intermediary) is utilized to dealbetween the producer and contractor.

14. Virtually every commodity may be produced under agricultural production contracts; thisincludes crops, livestock, aquaculture and forestry, for human and animal consumption as well as forindustrial use. The particular nature of the commodity will invariably have essential implications onthe content and overall design of an individual contract, in particular regarding the obligations of eachparty and the price. It is not intended in this short presentation to deal with all the specificities ofeach type of commodity. However, certain general considerations can be made on broad categories ofcommodities which are likely to determine certain features of the agricultural production contract.

15. Production of commodities intended for human or animal consumption (including for thecosmetic and pharmaceutical industries) involves compliance with safety requirements. In particular,perishable goods are often produced under contract farming, as they require fast and efficientcoordination with the marketing stage. However, they involve increased risks during the productionphase and in the handling process. For many commodities, compliance with standardised protocolswill be required to prevent risks and hazards. It is necessary to apply control and interventionprocedures under the hygiene and food safety regulations of the destination domestic and exportmarkets; such aspects may be regulated under the contract by reference to voluntary standards suchas good agricultural practices. Engaging in the production of such commodities generally requires acertain level of skills on the part of the producer to enable strict compliance with quality conformityand traceability obligations. It may also entail a rather intense level of support by the contractor inproviding specialised inputs, technical assistance and supervision, and/or the provision of finance.

16. Many commodities require large capital investment in facilities, fixed assets and equipment(tractors and other machinery, irrigation systems, barns etc.) for production and post-harvestoperations. For that purpose, especially where specialised credit institutions for agriculture aremissing and access to credit for producers is limited, contractors may provide finance to the producer.While the repayment obligation is likely to work as an incentive for the producer toward contractcompliance, it may entail dependency vis-à-vis the contractor: for this reason it is advisable that theduration of financial obligation is clearly drafted. . Dependency on the contractor is more likely tobecome problematic when the investment amount is more significant and the facilities, equipment orother fixed assets are adapted only to a particular type of production and will not be appropriate for adifferent purpose. In light of the exposure of the producer to what may substantial investment risks,it is important that these requirements are envisaged prior to entering in the contract. Generallyspeaking, in such situations watertight legal regulations to safeguard capital investments must beapplied at the commencement of the venture to protect both contractors and producers.

17. Of course, commodities vary regarding the length of the production cycle and this variationhas implications for agricultural production contracts. Some commodities entail a cycle of a fewweeks while others would last over several years, typically for tree crops and forestry production.This will generally determine the duration of the contract and, coupled with the other terms of thecontract, may strongly influence the perspective of the parties to rely on stable relations.

18. Labour-intensive commodities are generally seen as particularly appropriate to grow underagricultural production contracts, especially when a certain level of care is required in manualhandling during the production phase or in post-harvest operations (such as sorting, grading, drying,and packaging). In fact, it is established that a fair level of attention toward high quality productioncan generally be found in small structures such as family farms or medium scale production units.Based on this feature, countries where the cost of labour is low are particularly attractive for

Commented [A12]: Mr Kirke, internetconsultations, asks whether the guide couldrecommend terms of agreement to cover theperiod of producer financial obligation.[An attempt has been made here to fit thiscomment in this sentence but furtherconsideration made be needed in view of theconsiderable variety and differences incontracts.]

Commented [A13]: Ms Pultrone, onlinecomments, describes the importance of havingthese risks envisaged prior to entering a contract.“It is also important to consider that manycontracts require farmers to make investments inorder to comply with the entrepreneurial needsof the company and this may expose farmers torisks, which are important to envisage beforeentering into contracts.”

Commented [A14]: Online comments. Mr.Eaton suggested adding this line.


investors to develop high value-added, differentiated products for specialized domestic or exportmarkets. Horticulture provides an example of such commodities.

19. Under a similar, but more sophisticated perspective, identity-preserved commodities whichhave become very common in modern agriculture are often produced under production contracts.Identity-preserved is the designation given to bulk commodities marketed in a manner that isolatesand preserves the identity of a shipment.6 This may apply to value-added commodities such asorganic products, or to specialised varieties often requiring the use of special technology orproduction methods, or else to new commodities for new markets, which may be tested on a rathersmall and closely monitored basis. Engaging in the production of these types of commodity generallyentails more stringent and cumbersome obligations upon the producer regarding performancestandards – regarding both the final product and the process or methods, with strict traceabilityrequirements and subject in many occasions to third party verification. It may also entail obtainingparticular technology transfer licences, confidentiality obligations toward third parties, andcompliance with obligations deriving from contractor’s proprietary rights (based on ownership, patentand other intellectual property rights over the product). Generally, such commodities will becontracted on an exclusive basis, meaning that the whole production is to be delivered by theproducer, very often including any non-conforming share of the produce, as well as wastes andresidues. This will result in producers being generally entitled to higher prices. On the other hand,there might be examples of laxity in monitoring exclusivity clauses, where producers might be able tosign into exclusive contracts with different contractors.On the other hand, producers will generally beentitled to higher prices.

20. A broad category of commodities is intended not for human consumption but for industrialuse, typically the textile (for fibres) or chemical industries. Also, with the growing demand forrenewable energy sources, the planting of crops for bioenergy production has also increasedconsiderably. While such crops are often grown through intensive agriculture in large plantations,investors increasing rely on contract farming. Also the wood-based industry is turning to contractfarming for securing the supply of raw material, which is also seen as potentially contributing tosustainable forest management. While not being restricted to these particular crops, it may be notedthat governments often participate in investment plans and sometimes participate in regulating theindividual contracts in consideration of the economic, social and environmental implications involved.

21. In dealing with any particular commodity, attention should be paid to which party will beresponsible for rejected products, by-products, or wastes, which depending on the circumstancesmay have a commercial value and also potential environmental implications.

C. Outline of principal benefits and risks of contract farming 7

22. Contract farming is generally recognised for its potential to sustain and develop theproduction sector by contributing to capital formation, technology transfer, increased agriculturalproduction and yields, economic and social development and environmental sustainability. Finalconsumers as well as all participants in the supply chain may also draw substantial benefits fromvaried and stable sources of supply and efficient processing and marketing systems. Governmentsare increasingly mindful of the role that contract farming can play in agricultural development, andsome governments have instituted enabling policies to attract private sector investors and tocoordinate ventures with local producers, sometimes under public private partnerships. On the otherhand, contract farming may involve a number of risks which, excluding risks facing all other forms ofagricultural production, for a large part derive from the typical imbalance in the bargaining power of

Commented [A15]: Online comments. Min.Justice Canada suggested adding a definition ofidentity-preserved.

Commented [A16]: Mr Kirke, onlinecomments, says ”multiple examples exist withinthe tobacco crop of famers making multiplesupposedly exclusive agreements with differentcontractors”[It is not clear how workable it would be toinclude this example in the Draft.]


the parties. This section offers a general overview of the advantages and potential risks that mayarise in the context of contract farming.

1. Benefits arising from the use of agricultural production contracts

23. Through the contract – or the collective sum of individual contracts – the contractor secureson a regular basis the supply of products required for optimising the capacity of processing facilities,the management of stocks and the consistency of delivery to their customers. By organising theproduction upstream, the contractor can plan the delivery of the needed quantity of product underthe required time schedule, which helps it to protect against market fluctuations. In addition, thecontractor ensures that the product meets designated quality requirements, both as regards theparticular variety and its conformity to designated attributes. It also ensures compliance withregulatory and voluntary standards in relation to food safety and increasingly also to sustainabilityconcerns with regard to social and environmental issues. Traceability and certification are increasinglyused or required to provide evidence of compliance and determine possible responsibilities in supplychains.

24. Also, in consideration of the increasing use of sophisticated technology in agriculture,contractors will be able to organise the production process itself and ensure that the producer appliesdesignated methods, although in certain occasions, the contractor will instead rely on particular skillsor know-how of the producer. Particular contractual structures or terms will also enable the firm toprotect the title it may wish to protect over goods or processes, such as the ownership or intellectualproperty rights over seeds or animals. Largely as a consequence of these two features, contractfarming appears to typically open opportunities for developing new commodities for new markets, orintroducing innovative production methods. By drafting the terms of the contract to accommodatetheir particular market and processing needs, contractors optimise their coordination with theproduction phase.

25. When defining their business strategy, food manufacturers and investors may have recourseto contract farming rather than directly engaging in equity investment involving land acquisitions orlong term leases. In certain contexts, land deals are subject to restrictions, in particular for foreigninvestors, while where possible, owning or directly managing the land involves large immobilisationsof capital and entails related liabilities that the investor may not be willing to face. Further factorsthat may influence a choice between contract or direct farming might include the length of the cropgrowth and the benefits of generating wealth through a mutual or individual arrangement. In a largenumber of situations however, investors develop contract farming operations in addition to directfarming in the plantations they control.

26. Under the production contract, the farmer may acquire greater certainty regarding theavailability of a market, based upon the contractor’s commitment to acquire the produce. In addition,the farmer can rely upon a more predictable income for its livelihood and can better organise itsproduction activity. From the producers’ perspective, market fluctuations can be avoided and newopportunities may be opened for developing new commodities and new markets. On the other hand,as a result of the transfer of certain responsibilities under the contract to the contractor, either whenthe contractor acquires decisional power or as a result of the allocation of shared responsibilities andcontrol under the contract, the farmer will be able to reduce risks and uncertainties in relation toproduction. Thus, the contractor very often would procure the inputs on behalf of the farmer(typically seeds and fertilisers, animals, feed and veterinary products) and may also provide technicaland management services aiming at sustaining the productive capacity of the farmer and obtaininghigher yields and better product quality, at a lower cost. Very importantly, contracting may offer the

Commented [A17]: Mr Kirke, onlineconsultations, says that other factors relating tocontract farming or direct farming. might belength of time the crop is in the ground or thebenefits of shared wealth generation versussingle corporation wealth generation.


farmer access to the contractor’s agronomic technology and know-how needed for specialisedproduction and markets which may otherwise be beyond producer’s reach.

27. Contract farming promotes value chain financing by facilitating the provision of credit andfinance to producers and to buyers, with derived benefits for all participants in the chain. Theproduction contract itself plays a major role as credit vehicle. A typical feature is the provision ofworking capital by the contractor in the form of inputs (such as seeds and seedlings, fertilizers andother chemicals, animals and veterinary products, among others) and services (such as preparationof the land, planting, harvesting or transportation of the produce) on advance terms over futuredelivery. As a consequence, a farmer can engage in the production activity without facing up-frontpayments that it would otherwise generally be unable to afford. This is particularly likely to be thecase for small farmers who cannot offer a security over the land and would therefore not be able toobtain credit from commercial banks. Likewise, based on the contract and future revenues, thefarmer will have enhanced access to credit and loans from the contractor itself, or from bankinginstitutions.

28. For an industrial or commercial firm in the food manufacturing and marketing sector,engaging in production contracts with agricultural producers serves to organise a streamlined andefficient coordination with its own activity. This applies to the use of the infrastructure andinstallations involved in the processing of the raw material, as well as to complying with itsobligations towards the downstream market participants, for example retailers as well as finalconsumers.

2. Potential problems associated with agricultural production contracts 8

29. Problems likely to arise under an agricultural production relationship very much depend onthe particular situation involved, notably the relative economic power of the parties, the specific risksthey face and their competitive position with regard to the contract partner and the market ingeneral. Therefore the contract farming agreement should always be framed to take into account theparticular situation.

30. While production contract operations may involve parties dealing on an equal footing, it oftenhappens that the relationship will bring together parties dealing on an uneven basis. Typically,medium or large processing or marketing companies with advanced management capabilities dealwith large numbers of small or medium-scale producers, thereby spreading risks of loss. Producers,on the other hand, although this is not always the case, may have little or no opportunity to contractwith another party if the contract fails or is not renewed. and they may have little flexibility to sell toother buyers even if better prices offered. This highlights the need of positive management attitudesof the contractors coupled with the support of farmers’ representatives. Contractors may also belarge cooperatives acquiring the produce from their members: in this context however, unique issuesare involved, linked to the special nature of the cooperative relationship.

31. Power imbalance may have important consequences at the time when parties agree on theirobligations. The contractor may draft contract terms to its advantage while the producer may not bein a position to obtain symmetric benefits, and sometimes even to understand or fully assess theextent of its future obligations. Imbalanced or burdensome conditions may apply to different terms,in particular prices, while producers are often bound by privacy clauses and confidentiality clauses.During contract performance, changes in market conditions may induce the contractor to apply unfairor fraudulent practices to justify the rejection of the product delivered by the producer. Unfairsituations are all the more likely to occur when producers are economically dependent, generally as aresult of an exclusive relationship, and would not claim their rights in fear of not having the contract

Commented [A18]: Online comments. Min.Justice Canada suggests rewording thisparagraph.

Commented [A19]: Online comments. Mr.Eaton suggested adding this line. « Agreementsshould be framed to appropriate to « theparticular situation ». Each CF project differ inboth the physical and social environments andthe degree of government supports/utilities.

Commented [A20]: Ms Pultrone, onlinecomments, specifies that if a contract fails or isnot renewed, this does not necessarily preventproducers to sell their production for a differentway (e.g. in the market).

Commented [A22]: Ms Watanabe, internetcomment. « Moreover, producers may have noflexibility to sell to other buyers even if havebetter price offered. »

Commented [A21]: Online comments. Mr.Eaton suggested adding this line. « CF rarely is anequal partnership. Whoever supplies the fundingmust control the project but at the same time itmust be a fair and just partnership. This can beachieved by Contractor’s positive managementattitude coupled with the support of farmerrepresentative through regular P/C forums.


renewed or being subject to other forms of retaliation. Though it needs to be kept in mind, that notall contract farming relationships are exclusive. Other possible problems derive from high levels ofindebtedness and the incapacity to repay advances provided by the contractor or capital investmentloans made to meet the contractor’s requirement under the production relationship. Counter-balancing these risks, it has been observed that governmental rural agents are in a position toidentify charlatan operators even before they make contacts with farmers. Therefore, and because ofthe inherent imbalance created by unfair contracts, such contracting companies might not last long inbusiness.

32. On the producer’s side, selling the produce to a third party in breach of its obligation towardthe contractor is often a problem. This would typically be the case when, at the time of delivery, theproducer can obtain on the open market a higher price than the contracted price. In the open market,the producer would also be paid in cash, which might be preferable over possible complex paymentsschedules included in the contract. Finally,T the producer may have little flexibility on selling to otherbuyers even if he has capacity to repay all advances provided by the contractor, or capital investmentloans made to meet the contractor’s requirement under the production relationship. A related majorissue in some projects is the problem of a “legally binding” contract. Following side selling, or anotherbreach of an obligation, the contractor can take a small farmer to court for debts or produce to thevalue of a few hundred dollars. Positive interaction and interdependency between the contractor andthe producer can go a long way to solve side selling.

33. Under both parties’ perspective, compliance is related to the expected benefits and theincurred risks in case of breach. When side-selling occurs, the arrangement affects the attraction ofthe contractor’s investment and advances to the farmer. On the other hand, when relationships arebuilt on the long term and offer stability to the parties as a principal benefit rather than short termbenefits, contract breach is less likely to occur, as parties have incentives to comply with theirobligations rather than putting the relation at risk.Under both parties’ perspective, compliance isrelated to the expected benefits and the incurred risks in case of breach. When relationships are builton the long term and offer stability to the parties as a principal benefit rather than short termbenefits, contract breach is less likely to occur, as parties have incentives to comply with theirobligations rather than putting the relation at risk.

34. Contract enforcement through dispute resolution procedures is generally challenging. Asdisputes often relate to factual issues in the context of lasting relationships, involving relatively lowamounts, obtaining redress from a judge is generally very lengthy. Access to fair and impartial justiceis not guaranteed everywhere. Alternative dispute resolution mechanisms such as arbitration aregenerally seen as more appropriate but they are not always available and can be costly. In certaininstances, private enforcement mechanisms provided by professional or trade entities, raise issues ofindependence and impartiality.

35. Other problems refer to the potential risks which may derive in certain countries from theintroduction of new varieties of plants and technology and intensive production methods undercontract farming operations, entailing the disruption of traditional cultivation methods and livelihoods,in particular when this affects the ability of farmers to use the crop for future planting. Workingconditions applied on the farm by the contracted farmer, affecting the farmer’s family or workers,raise concern in a number of countries. Labour issues are likely to have sensitive implicationsespecially when the local regulatory framework is weak and does not provide adequate protection tothe farmer or the community.

36. Against this background, it should be recognised that contract farming offers many potentialadvantages but also potential risks. Successful transactions will depend on how the relationship is

Commented [A23]: Online comments. Min.Justice Canada notes that there exists anerroneous assumption that all contracts areexclusive.

Commented [A24]: Online comments. Mr.Eaton : « Such practices do happen but suchcontracting companies will not last long inbusiness. Government rural agents are in aposition to identify charlatan operators beforethey make contacts with farmers.”

Commented [A25]: Mr Shepherd onlineconsultation. « Another reason is that casualbuyers may pay cash while the contractingcompany may delay payment »

Commented [A26]: Ms Watanabe, internetcomment, « the producer may have no flexibilityon selling to other buyers even if he has capacityto repay all advances provided by the contractoror capital investment loans made to meet thecontractor’s requirement under the productionrelationship. »

Commented [A27]: Online comments. Mr.Eaton suggested adding these two points on thediscussion.

Commented [A28]: Mr Kirke, internetconsultations, explains that for the sake ofclarity, the issue is rooted in the marginal pricepayable from the contractor to the farmer will belower than the price paid by the ‘informal’purchaser. This situation reduces the attractionto contractors of providing advances to farmers.

Commented [A29]: Mr Kirke, internetconsultations, says that he is unsure whetherthis is relevant, as a situation is being describedthat is the environment in which contracts mayexist.


organised and performed and how ensuing problems are solved. The cornerstone of the relationshipis the agreement. Ensuring clear and fair allocation of risks, liabilities and economic returns at thetime of the conclusion of the contract, as well as predictable conditions regarding both performanceof the contract and possible non-performance events, is essential to ensure sustainable relationshipsand financial benefits in the long term. The contract can be drafted to deliver mutual benefits to bothparties, and build stable relations, foster increased collaboration, promote good agriculturalproduction practices and ensure compliance with best social and environmental practices, including incertain occasions by applying higher standards that those required under the applicable locallegislation. The legal framework is essential as it recognises legal effect to parties’ stipulations andsupplements them as the case may be by mandatory or default provisions applicable to therelationships between the parties. In addition, it provides a public law background which will berelevant either as applicable regulatory provisions, or will be made applicable through contractprovisions. It is important to note however, that if a situation arises where public law is excessivelyprotective towards the farmer, this may also result in no contract performance.

II. Scope of the Guide

37. It is recognised that agreements may vary widely but certain characteristic features wouldserve to distinguish the typical contract form addressed under the Guide from other contractstructures or types which may be already known and well defined under national settings.

A. Characteristic elements of agricultural production contracts covered by theGuide

38. The contracts covered by the Guide typically involve two parties: a “producer” directlyinvolved in the production of agricultural products as an independent person or undertaking; and a“contractor,” committed to purchase or otherwise to take delivery of those products – typically anagribusiness company engaged in processing or marketing activities. The independence of theproducers does not exclude a group of producers who joined together in a cooperative or some otherform of group. However, the agreement may be part of a complex transaction involving otherparties – for example several producers, a public entity, an input supplier, a banking institution – andthat separate contract relationships may either have an influence on, or be themselves affected bythe production contract. The participation of other parties will be discussed in the Guide, only insofaras they may affect the mutual obligations and remedies of the producer and the contractor.

39. The agreement is entered into by the parties before the production begins, and is often setfor a fixed term, either for one harvest or season or for several or many production cycles. Seasonalagreements are normally valid for the duration of the crop from planting to harvest. In successfulcontract farming projects, conditions and prices are usually reviewed annually. However each contractperiod is generally part of a lasting relationship rather than intended as a one-off transaction, as theparties generally organise their activities (and in particular the infrastructure needed with theresulting financial commitments) with a long-term perspective. Exceptions of course exists, researchshows that for example in India, farmers move in and out of contract farming quite regularly. Issuesrelated to the duration of the contract, its termination and renewal will be discussed in Chapter [VI]of the Guide.

Commented [A30]: Mr Yap (World Bank), inhis online comment says that while this sentenceis consistent with the Guide's legal focus, moreconsideration might also be given to therelationship itself, and the importance of theinteraction and trust between the contractingparties. Additional acknowledgement could begiven to the importance of forging a means ofcollaboration, where the driver is mutual benefit,rather than a contract where legal obligation isthe driver.

Commented [A31]: Ms Pultrone, onlinecomments, says that this section could then listother issues of contract breach and unfairpractices undertaken by the farmer, e.g. inputdiversion, the ways to cheat the buyer addingstones or other materials in the production orthe failure to deliver the product to avoid therepayment of the advances.Some of the practices are however already dealtwith in the chapter relating to Obligations, albeitto a lesser degree. ... [1]Commented [A32]: Online comments. Min.Justice Canada suggests deleting this sentence,as it is not clear why the contractual legalframework becomes a public law background.

Commented [A33]: Ms Watanabe, onlinecomments, « a public law that excessivelyprotect the farmer can result in no contractperformance. »

Commented [A34]: Buenos Aires. Similarpoint was raised by Ms. Rankin (FAO).

Commented [A35]: Online comments. Min.Justice Canada questions whether thedescription of the elements is accurate andcomplete.

Commented [A36]: Online comments.Fondation pour le droit continental (ad hocexpert group): suggested clarifying thatindependence of producers does not exclude... [2]Commented [A37]: Online comments. Mr.Eaton suggested adding these lines.

Commented [A38]: Mr Shepherd, onlinecomment, “the use of the word "generally"covers the exceptions but research in India doessuggest that some farmers move in and out ofcontract farming quite regularly “


40. The price to which the producer is entitled may be determined either at the time of formationof the contract or at a later stage on the basis of a formula set in the contract. The price will reflectthe risks borne by the parties and has a central function in determining the overall equilibrium of therelationship. The price can be determined under a variety of formulas, entailing different implications(see Chapter 3 at ___ for further discussion *).

41. The agricultural production contract covered by the guide typically assumes legallyindependent parties. If, however, the level and form of the control exerted by the contractor is suchthat the producer is practically deprived of independent action, domestic law may characterise therelationship between the parties differently. This can happen either when the producer is formed as alegal entity, while the other may arise when physical persons are involved.

1. Agricultural production contract v. partnership

42. While economically linked to and dependent upon the contractor as an independent legalparty, the agricultural producer must keep autonomy in terms of assets and management over theundertaking. When the nature and level of control by the contractor is such as to raise doubt aboutthe producers’ real legal autonomy, the applicable law may assume that one common venture has infact been created between the producer and the contractor. This could occur for example when thecontractor is seen to have direct ownership of the whole activity, as a result of holding ownershipand/or proprietary rights over both the tangible and intangible assets needed for the operation of thebusiness: i.e. the inputs, the technology, the process and, through exclusive rights, over the futureproduct.

42bis Nevertheless. agreements that specify production criteria e.g. cultivation practices, variety,fertilizer and chemical application, grading and crop maturity levels at harvest, the supervision iscarried out by the contractors extension staff. Contract extension officers should visit producers on aregular basis to ensure the crop husbandry practices meet market demands. Once the product ispurchased normally it is the property of the contractor. This should not in general create anassumption of a partnership.

43. When, under the applicable law,9 the contractor and the producer are seen to form one singleentity (under a partnership, de facto company or other similar concept), the contractor couldpotentially be exposed to liabilities normally vesting on the producer and may be exposed to claimsby third parties upon the producer’s default. Even if rare, thisThis could apply to the general debts ofthe producer, in particular towards the producer’s employees which would come under a directemployment relationship with the contractor. Under such situations, the contractor would beresponsible for compliance with responsibilities based on labour and social regulations.

2. Agricultural production contract v. employment

44. When the producer is a natural person and the contract imposes a very tight control by thecontractor, the applicable law may characterise the particular relationship as an employmentrelationship, entailing the application labour and social laws with possibly significant financialobligations for the contractor. . This can occur when the contractor has to intervene when theproducer falls behind in the cultivation programme. It can also happen when a producer is allocated acrop quantity target the the producer cannot reach. Therefore careful planning by the contractorshould ensure that the producer is allocated a quota that the producer can successfully cultivate.

Commented [A39]: Mr Kirke, onlineconsultations, asks whether this description isoverly simplistic, and if it adds any value.

Commented [A40]: Mr. Shepherd: para 41last sentence is not clear.

Commented [A41]: Online comments. Min.Justice Canada suggests covering also agencyrelationships.

Commented [A42]: Online comments. Mr.Eaton suggested adding this paragraph.

Commented [A43]: Online comments. Mr.Eaton points out that he has never experiencedthis scenario, and suggests it is rare.

Commented [A44]: Online comments. Mr.Eaton suggested adding these clarifyingexamples.


45. The characterisation of “employment,” the rights and protection deriving from the employeestatus and the effective implementation given to the applicable rules differ widely across countries. Atthe same time, in many industries, companies increasingly externalise activities and functions toindependent parties based on contracts, while ensuring that contractors comply very strictly to theagreed objective with a view to higher technical and cost efficiency.

46. To determine the existence of an employment relationship, national labour and sociallegislations set forth broad criteria applicable as a matter of public policy. Very often, nationallegislations have special rules applicable to employment in agricultural undertakings, as well as tolabour inspection.10 Most often, characterisation will rely upon the appreciation and interpretationmade by the courts, primarily by the actual facts and economic reality irrespective of the particulararrangements or actual designation used in the contract. It is in fact common that contractors includean express clause in the production contract referring to the producer as an “independent contractor”or contain a specific clause to the effect that the producer is not an employee or an agent of thecontractor, but such clauses may not be valid under the applicable law or may not be binding on acourt or public authority for the purpose of determining the nature of the relationship.11

47. Criteria12 that are commonly found under national legislations to characterise an employmentcontract would generally relate to the concepts of subordination, economic dependency and absenceof financial risk. Subordination would flow from the employer’s authority and control to determinehow and where the work is carried out, with extended direction and supervision powers, evaluation ofresults and application of disciplinary sanctions, and often the provision of working tools andmaterials. These elements are often present under a production contract, where the contractor wouldsupply a large number of inputs, and would have a close technical control of the process. It wouldgenerally be considered particularly relevant and indeed leading to characterising the producer as anemployee when the contracted tasks are performed on the premises of the contractor. However,depending on the particular circumstances, even when the production is not performed on theproducer’s production site, it could still be found that the nature of the contract is that of employmenttaking place at the home of the employee.

48. Also, economic dependency appears as a frequent criterion under employment contracts,which could be established in particular when services are provided on a personal and exclusive basiswith the remuneration being the sole source of income. These elements may indeed also be foundunder a production contract. On the contrary, financial risks borne by the producer would rathergenerally point to an independent undertaking. Financial risk could be inferred from responsibilityincurred for management and capital investment (which could be evidenced for example wheninsurance cover has been taken out) with the related opportunities for financial gains (as opposed tofixed remuneration).

B. The agricultural production contract

49. While acknowledging that agricultural production may be structured under many differentcontractual arrangements and forms, the Guide will focus on one particular form of contract farmingbased on an agreement between a contractor and an agricultural producer. Under the parties’agreement, which is hereinafter referred to as an agricultural production contract, the producerundertakes to produce and deliver agricultural commodities in accordance with the contractor’sspecifications, while the latter undertakes to acquire the product for a price and provides guidanceduring production through the supply of inputs, the provision of technical advice, and/or the advanceof credit. This Guide thus focuses on a typical situation involving two parties: a producer directlyinvolved in the production of agricultural products as an independent person or undertaking, who

Commented [A45]: Online comments.Justice Canada suggests expanding the scope. Fordetails, see Doc. 23.


owns or has rights to the site of production; and a contractor, committed to purchase or otherwisetake delivery of those products, typically an agribusiness company engaged in processing ormarketing activities. Consistent with assumption of the parties’ legal and factual entrepreneurialindependence, as set out in the previous section, the Guide does not cover transactions where thecontractor is itself also the owner of the land on which the agricultural production takes place, anarrangement which would resemble some traditional contracts in most legal systems (e.g. lease,crop-sharing). Conversely, the notion of contractors’ guidance or control over the production alsoexcludes from the subject matter covered by the guide those contracts in which the contractor’s owninput to the production, a part from providing more or less detailed further specifications, is limited toadvanced payment to finance the production cycle (e.g. forward contracts), as these agreements arewidely seen as a sub-set of ordinary sales contracts.

50. However, the agricultural production contract may be part of a complex transaction involvinga larger number of parties. In that case, these separate contractual relationships may either have aninfluence on, or be themselves affected by the production contract. The participation of other partieswill be discussed in this Guide, but only insofar as they may affect the producer’s and contractor’sinternal obligations and remedies. In many instances, downstream supply chain participants maydetermine or influence the contract’s content, including prices and performance standards. Forexample, the requirements that producers have to meet in their agricultural practices very oftenreflect regulatory constraints related to the final product’s destination market. Often, theseconstraints come from public sector-mandated standards and regulations on food safety and quality,although they may also be private sector driven.

51. Therefore, this Guide offers a legal analysis of this agricultural production contract and therelationship between the producer and the contractor, and deals incidentally with the interplaybetween the contract and the supply chain structure. The following chapter will begin by introducingthe legal framework for agricultural production contracts, as it influences all issues that may arise incontract farming operations. Next, Chapter __* will introduce the key characteristics of the partiesinvolved in agricultural production contracts. Chapter __* will discuss how agricultural productioncontracts are negotiated and formed, and what these contracts contain. More specifically, the varietyof obligations bearing upon the producer and the contractor in the context of integrated relationshipswill be discussed in detail in Chapter __*. The next question that naturally arises is to determine theconsequences of a failure of the producer or the contractor to abide by the terms of the contract.Accordingly, Chapter __* will explore excuses for non-performance and remedies for breach ofcontract. Issues related to the duration, termination and renewal of the contract will be discussed inChapter __* of the Guide. Last, Chapter __* will explore mechanisms for dispute resolution andcontract enforcement in the context of agricultural production contracts.

* Sample contracts cited in this document have been collected from the FAO Contract Farming ResourceCentre at: http://www.fao.org/ag/ags/contract-farming/toolkit/en/1 To be considered as possible additional information in the Introduction or in an Annex: an historicaloverview.2 Da Silva, C. in: The growing role of contract farming in agri-food Systems development: drivers,theory and practice, Agricultural Management, Marketing and Finance Service FAO, Rome, 2005.3 Although contract farming can also refer to agreements that cover only marketing aspects of crops andlivestock without any concern to production related issues, for the purposes of this guide such types ofcontractual agreements are of less interest and therefore will not be covered. Comment: this concern shouldhave been met with the introduction of para. 104 The content of this section is to be further elaborated. In fact the intention is that FAO/AGS reviewsthe whole introduction.


5 Eaton, C. and Shepherd, A. (in: Contract Farming: Partnerships for Growth. FAO Agricultural Services,Bulletin 145, Rome, 2001), pp. 44 et seq.6 Womach, Jasper : Agriculture : A Glossary of Terms, Programs and Laws, 2005 edition. Updated June16, 2005. Congressional Research Service. The Library of Congress(http://www.cnie.org/nle/crsreports/05jun/97-905.pdf).7 It may be seen at a further stage whether this section may be articulated differently, focusing on thefollowing aspects of contract farming: – increased certainty/stability and risk mitigation; – credit and financevehicle; – technology and know-how transfer – economic, social, environmental development; and for eachaspect, benefits / problems for both parties may be illustrated.8 The approach here is an economic/social perspective (see e.g. “Investing in smallholder agriculture forfood security” report by the HLPE on Food security and nutrition June 2013 – while legal aspects are addressedunder Part III hereafter.9 The incidence of a contractual characterisation of the relationship in this context is to be furtherexplained (based in particular on contractual clauses).10 See at international level, the ILO Labour Inspection (Agriculture) Convention, 1969 (No. 129).11 (“INDEPENDENT CONTRACTOR – GROWER or ELEVATOR is, for purposes of this Agreement, anindependent contractor and nothing contained in this Agreement shall make GROWER or ELEVATOR anemployee or agent of COMPANY or authorize him/her to act on their behalf.” FAO contract USA 26).12 See Recommendation No. 198 adopted by the International Labour Conference in 2006; Thepresentation of the criteria reproduces excerpts from Employment Relationship: An annotated guide to ILORecommendation No. 198 – ILO Publication 2007, p. 33 et seq. which provides examples in nationallegislations. ILO Labour Inspection (Agriculture) Convention, 1969 (No. 129).

Page 10: [1] Commented AuthorMs Pultrone, online comments, says that this section could then list other issues of contract breach andunfair practices undertaken by the farmer, e.g. input diversion, the ways to cheat the buyer addingstones or other materials in the production or the failure to deliver the product to avoid the repaymentof the advances.Some of the practices are however already dealt with in the chapter relating to Obligations, albeit to alesser degree.

Page 10: [2] Commented AuthorOnline comments. Fondation pour le droit continental (ad hoc expert group): suggested clarifying thatindependence of producers does not exclude working as a group. See also “Obligations” comment 1.

THE LEGAL FRAMEWORK


Table of contents

I. The applicable private law regime ................................................................................2

A. Legal treatment of agricultural production contracts........................................................31. Agricultural production contracts as a special contract type ........................................32. Agricultural production contracts and traditional contract forms ..................................4

B. Domestic legal sources applicable to the contract ..........................................................61. Rules and principles of law .....................................................................................62. Customary rules and usages ...................................................................................83. Trade usages and practices ..................................................................................84. Standard terms and guidance documents..................................................................9

C. Contracts with an international element ................................................................... 111. Contractual obligations ......................................................................................... 112. Non-contractual obligations ................................................................................... 12

II. The role of the regulatory environment ....................................................................... 13

A. Agri-food trade ....................................................................................................... 13

B. Production inputs .................................................................................................... 141. Seeds ................................................................................................................ 142. Biosafety ............................................................................................................ 153. Plant Variety Protection......................................................................................... 154. Producers’ right to genetic resources ....................................................................... 165. Other agricultural inputs ....................................................................................... 16

C. Agricultural finance and support ................................................................................ 16

D. Competition and antitrust......................................................................................... 17

E. Human rights ......................................................................................................... 171. Right to food....................................................................................................... 182. Right to work and labour law ................................................................................. 19

F. Access to natural resources....................................................................................... 21

Commented [A1]: Online comments.French Ministry of Justice - Direction desaffaires civiles et du Sceau notes that thenotion of good faith in the text appears tohave a significantly different meaningcompared to the French. It seems to stand for“equity”, implying a greater power of a judgewho can be external to the contract to fulfill it(whereas good faith implies legal review ofwhat has been established by the parties)

Commented [A2]: Online comments.Min. Justice Canada suggests restructuringthis chapter. For details, see Doc. 23.

Commented [A3]: Online comments.Min. Justice Canada suggests not using theterm “soft law”. For details, see Doc. 23.

2. UNIDROIT 2014 – WG4 INF. 1

THE LEGAL FRAMEWORK

1. Generally, parties are free to structure their contracts however they see fit, based on the widely-recognised principle of freedom of contract. However, this freedom may be limited both by rules ofprivate law and the broader regulatory environment. Contracts are regulated by particular sets of rulesthat are in certain cases mandatory, or otherwise provide solutions for matters not addressed by theparties, by so-called “default rules”. Default rules could determine, for example, the moment when titleto the goods passes, the scope of the parties’ obligations, the price, or the limitation period for theexercise of actions and remedies. Understanding how a particular agricultural production contract isregulated will help parties give due consideration to potentially applicable mandatory provisions anddefault rules, and thus draft better terms for their contract. Legal understanding will also be useful forparties trying to resolve disputes, especially with respect to interpretation issues and the identificationof available default rules. It is also important to emphasise that the contract establishes mechanismsfor transparency in the relationship to reduce the information asymmetry.

I. The applicable private law regime

2. Most often, the legal relationships deriving from agricultural production contracts are strictlydomestic in character, meaning that all of the contractual elements are located in or produce effects inone single country. By their very nature, agricultural production contracts are indeed characterised bystrong ties to the producer’s country. The producer will be a national of said State, be domiciled orreside there, and the essential obligation under the contract, namely producing the designatedcommodity, will take place on the land or installations owned or controlled by the producer. A varietyof other elements forming part or related to the contract are likely to take place in or be related to thisState. This applies, for example, to the place of incorporation or registration of the contractor, whicheven when part of a multinational group will generally conduct its operations through a local subsidiaryas a separate legal entity. It would likewise generally include the place where the contract is negotiatedand entered into, where the agricultural products are delivered, and where the payment is to be made.

3. Based on the strictly domestic character of the contract, the rules of the producer’s State legalsystem will usually apply, including both the mandatory and default provisions. This will be true notonly when the parties have expressly referred to the domestic law, but also – as it will most often bethe case – when the contract is silent in this regard. It can be noted that the parties would normallyhave no advantage in choosing or claiming the application of a foreign law to regulate their contract,and indeed it is unlikely in many jurisdictions that they would be authorised to do so. The choice of thedomestic legal system, by express provision or by default, may generally foster the litigants’ –particularly the weaker party’s – better access to justice and procedural protection, both during theprocedures and at the enforcement stage.

4. The domestic legal system is also likely to apply to most legal situations involving parties otherthan the producer and the contractor. This includes parties participating in the performance of theproduction contract on the basis of the same agreement, or under separate contracts. Falling underthis category is the labour force hired by the producer. The domestic legal system is also likely to applyto agreements for the provision of credit, inputs or services. Based on another capacity, other partiesmay have a liability claim toward one of the parties as a result of the performance of the productioncontract. This may occur, for example, when environmental damage is caused to the production site orits surroundings, and hence within the jurisdiction. Another possible ground of liability may derive fromdefects in the agricultural product having an impact on other participants in the value chain such asconsumers. However, when the products are marketed in a foreign country, this international dimension

Commented [A4]: Ms Watanabe, onlinecomments, adds that it is important that thecontract establishes mechanisms fortransparency in the relationship to reduce theinformation asymmetry.

UNIDROIT 2014 – WG4 INF. 1 3.

may lead to the application of a foreign law, a situation discussed in more detail at the end of thissection*.

Assuming that domestic law applies, the legal regime applicable to a particular contract will have to bedetermined, usually by characterising the relationship as one of the contract types defined by theapplicable law, since different rules may apply to different contract types. For contracts involvingcomplex relationships with many interlinked obligations, different approaches may be used tocharacterise the relationship. In some instances, the law itself may create a regime applicable to thatparticular kind of transaction, which thus becomes “typified” as a nominate contract type. When nosuch special regime exists, the mixed nature of the relationship may lead to identifying differentunderlying contractual structures, each characterised by a different performance, with the result thatthe overall relationship will be subject to a combination of contractual regimes, as if the identifiedcontractual obligations were unrelated. Under a simpler approach, one particular performance may beconsidered as prevailing in the transaction, resulting in the application of the corresponding legal regimeto the entire relationship. Finally, under yet another approach, on account of its totally unique or original(“sui generis”) character, rules governing similar contracts may be applied by analogy, in addition togeneral contract law provisions. Clearly, this discussion is more relevant for codified legal systems thanfor judge made or primarily judge made legal systems.

A. Legal treatment of agricultural production contracts

5. Determining what legal regime applies to a particular contractual relation involvescharacterising the relation as possibly falling under one legally defined contract type under theapplicable law. Special contracts are regulated by particular sets of rules which in certain cases aremandatory, or would provide solutions for matters which have not been otherwise regulated by theparties (by so-called “default rules”). This will apply for example to the time when title transferoperates, to the scope of the obligations of the parties, to price determination, or to time limits. It mayalso involve consequences regarding aspects outside the contractual agreement, for example on theapplicable tax regime.

6. For contracts involving complex relationships with more than one characteristic performance,different approaches may apply for the purpose of characterising the transaction. In certain instances,the law itself may create a regime applicable to that particular transaction, which thus becomes“typified”. When no such special regime exists, the mixed nature of the relationship may lead toidentifying different underlying contractual structures – each identified by a different characteristicperformance – with the result that the overall relationship will be subject to a combination of contractualregimes, as if the identified contractual obligations were unrelated. Under a simpler, morestraightforward approach, one particular performance may be considered as prevailing in thetransaction resulting in the application of the corresponding legal regime to the entire relationship.Finally, under yet another approach, on account of its totally original (“sui generis”) character – ratherthan being directly applicable, rules concerning similar contracts will be applied by analogy. Clearly, thisdiscussion is more relevant for codified legal systems than for judge made or primarily judge madelegal systems.

1. Agricultural production contracts as a special contract type

7. More and more national economic and social policies recognise the special nature ofagreements between agricultural producers and market operators. A number of countries not onlyidentify such relationships but also regulate them through substantive rules, generally a combinationof mandatory and default rules, thereby creating one or several specific types of contract. These

Commented [A5]: Online comments.Prof Fontaine. Paragraphs 5 and 7 arebasically identical. I suggest removingparagraph 5 since 7 seems to be a morenatural place for the conversation.


regulations vary in nature and scope. While a number of them focus in particular on marketing of theproduce, others deal specifically with the prototypical agricultural production contract discussed in thisGuide. Accordingly, special legislation might use different designations, such as an “agriculturalcontract”, “production contract”, “integration contract”, “aggregation contract”, “contract farming”, or“agro-industrial contract”. Leaving aside the diversity in terminology and focus, such special legislationgenerally pursues the common objectives of increasing certainty and transparency in contracts,protecting producers against unfair practices and encouraging parties to establish stable relationshipsin their mutual interests.

8. Specific treatment of agricultural production contracts may be implemented in many ways.Certain domestic regulations consist of dedicated provisions under the contract law part of a statute,while others are enacted through stand-alone legislation. Within statutes concerning agriculture, landlaw, corporate law, tax law, commercial law, competition law or others, special provisions often addressthe relationships between the operators involved in primary agricultural production and the market,either to expressly include such contracts or on the contrary to exclude them from their general scope.Frequently, provisions regulating the private law relations between the parties are included in a generalstatute on the development of the agricultural sector that also covers a number of different aspectssuch as investment, finance, land tenure and producers’ organisations. Such provisions can also bepart of a statute designed to apply to a certain commodity, particularly when a public agency or boardhas regulatory powers over it. In addition, private relationships are sometimes regulated throughstandard conditions approved by organisations representing professional interests, that are then givenmandatory effect, either directly or through some form of approval by the competent governmentalagency.

9. Specific regulations on agricultural production contracts may contain requirements as tocontract form, as well as the parties' substantive obligations. Compulsory requirements regardingwritten form and minimum content attempt to strengthen the producer’s position at the time of theagreement’s conclusion by enabling him to be aware of the expected benefits and potential risks beforeentering into it. Before entering into a contract, a document providing pre-contractual information mayavoid information asymmetry. This document should provide information about production description,health and environmental requirements and economic risks of the activity, the estimated investmentsin facilities or growing areas for producing to contractor, the alternatives for loans, and so on, for safedecision of producer to perform the contract. Transparency promotes fair conduct because it improvescertainty regarding performance and non-performance conditions. Another common feature of speciallegislation is to provide for dispute resolution mechanisms, thereby seeking to ensure workableenforcement solutions and promote contract compliance. Substantive legal requirements attempt torestrict unfair practices and protect producers by affording them particular remedies or by restatinggeneral or specific principles included elsewhere in the law. While most legal systems leave parties withan ample freedom to regulate their relationship, others do impose a balance of rights and liabilitiesupon them. Finally, some laws regulate collective contracts, which then become mandatory for allindividual contracts entered into in the corresponding sector. There may also be model contract formsannexed to the special legislation, intended either for individual or collective contracting.

2. Agricultural production contracts and traditional contract forms

10. Not all legal systems treat agricultural production contracts as a special category of contracts,and even those that do so may not regulate all the mutual obligations under an agricultural productioncontract in a great level of detail. Therefore, for matters not expressly addressed by the parties, defaultrules may be drawn from rules that govern traditional contract forms, depending on which elementsare found to be preponderant under a given contractual arrangement.

Commented [A6]: Ms Watanabe, onlinecomments. This comment also echoes thatmade by the Mr Ogrand, president offarmer’s association in Uganda, PrivateSector Workshop.


11. As seen above, under the applicable law, the nature of the parties’ obligations may have animportant role in characterising the single obligations or the entire transaction. It may also be relevantwhen the contract is considered of a sui generis type. Legal types may be described under two broadcategories. One involves a transfer of ownership of the goods from the producer to the contractor, whileunder the second category, the contractor keeps the ownership through the whole production process.

12. – Transactions involving a transfer of ownership: Many agricultural production contracts,especially those relating to crop and vegetable production, rely on the mechanisms that typicallycharacterise a sale transaction. Under a sale, the seller undertakes to deliver specified goods to thebuyer, against the payment of a set price. The sale transfers the ownership over the goods to the buyer,together with related warranties. Depending on the particular transaction, the producer could be eitherthe seller delivering the production to the contractor, or the buyer of inputs – animals, seeds or plants– from the contractor. Parties would enjoy a certain flexibility to adapt their obligations (for example toagree when title passes together with the risks). However, certain aspects often present in the contextof an agricultural production relationship may be critical in defining the legal regime of the wholetransaction as a sale. It could be so where, ast it is often the case, the inputs supplied by the contractoraccount for a substantial amount of the materials necessary for the production, and/or wherespecifications under the contract would not only concern the product at delivery but would deal withprocesses and techniques to be implemented during the production, with the result that thepreponderant part of the producer’s obligations would consist in the supply of labour or other services.1

In addition, contrary to a typical sale transaction where it is the seller that defines the specificity of theproduct, under a production contract, this role vests in the buyer to meet its particular needs. Anotherpeculiarity of the production contract is that most often, the product is individualised and cannot besupplied from a third party. How these various elements will be assessed to the effect of characterisingthe contract will depend on each particular legal system.

13. – Transactions not involving a transfer of ownership: this category will be found typicallyfor poultry and livestock production, and under certain legal systems may also be found for high valuecrops (often protected under intellectual property rights). Depending on the objectives sought by theparties as well as the legal types available under the applicable law, certain forms will commonly befound to underpin agricultural production relationships. For example, under certain legal systems, theproducer may be considered to provide “services,” i.e. to apply labour and skills using best effortsrather than being committing to a specific result, and the price would be set according to performancestandards. In certain countries, especially for livestock production, particular types would be appliedfalling under the general categories of lease or loan, and under such agreements, the farmer would begranted the use of the animals owned or managed by the contractor for a period of time, and over thisperiod, the farmer would be responsible for the condition of the property. In some common lawjurisdictions, “bailment” – whereby farmer is entrusted with the possession of the contractor’s propertyand must take care of the goods – provide the contractor with extended protections against the possibleuse, sale or other kinds of transfer by the producer, typically of seeds or crops of special brands orgenetically modified produce when the contractor holds intellectual proprietary rights. Theaforementioned types are mere examples as a variety of other forms may apply under any particularlegal system, each involving a corresponding legal regime.

14. Based on the generally recognised principle of freedom of contract, parties would generally beallowed to designate a particular type to structure their whole relation or a certain part of it.2 However,it must be recalled that certain forms are subject to mandatory characterisation, generally to the effectof applying mandatory provisions to meet public policy, economic or social objectives, for exampleprotective rules in the interest of a weaker party. As already discussed, this would typically be the casewith employment contracts, and it is also the case in certain legal systems for production contracts


(see Section 4 below). Also, depending on the methodology used under national law, a judge mayconsider that the true economic objective pursued by the parties or the essence of the relationship,requires the application of a different legal regime than the one designated by the parties.

B. Domestic legal sources applicable to the contract

15. Whether or not an agricultural production contract is treated as a particular type of contract,or is assimilated, in whole or in part, to traditional contract forms, any particular agreement will besubject to a variety of legal rules that will apply under different perspectives. First and foremost, theparties will encounter a number of public policy limitations designed to protect overriding social andeconomic interests. In addition, parties frequently include ambiguous terms in their agreement or elseomit key provisions. For such situations, the dDomestic law may apply implied terms or default ruleswhich are applicable to agricultural production contracts in virtue of different legal sources. Amongthem, domestic sources, standard terms and guidance documents, and international sources will beexplored further in the following sections. Note that this presentation does not intend to becomprehensive exhaustive but serves to raise awareness as to the type of issues involved under eachlegal system in determining the applicable legal categories and concepts and their respective normativescope. Under domestic law, different categories of rules could apply or be relevant, including statutoryprovisions, general principles, traditional and customary rules, usages and practices, and soft law. Itshould also be kept in mind that other sources may be relevant under domestic law. In particular, theinterpretation given by courts is important in all legal systems, albeit to a variable extent. Courtdecisions rendered under codified legal traditions, especially when they come from a country’s highestcourt, will provide important reference in interpreting the law. The role of prior court decisions is evenmore important in common law countries where they constitute judicial precedents that indicate waysof reasoning and applying solutions based on particular facts and situations. Legal doctrine can also bean important source of interpretation.

16. It is worth noting that certain States countries recognise a plurality of legal orders within theirboundaries. This is the case when several different entities have regulatory powers which may berelevant to the contract in some aspects or as a whole. In federal systems, contract regulation oftenlies with the political subdivisions or may be shared with the central government. Also, many Statescountries recognise legal pluralism, where the right of certain communities to be regulated by specificrules applicable on the ground of personal, ethnic, territorial or religious criteria. The scope andapplicability of the rules under each particular legal order, and the manner in which possible conflictsbetween the various autonomous legal systems are to be solved depends on the constitutional systemof the country.circumstances of each case.3

1. Rules and principles of law

17. The general law of obligations or of contracts – whether codified as in most civil law systems,or not as in most common law systems – will typically regulate fundamental aspects of the agreement,such as its interpretation, formation and validity, content or object, non-performance and remedies,limitation periods, assignment of rights and third party rights, as well as agency and restitution –although these two latter concepts may be found under separate categories of rules. It must be notedthat provisions found under other legal categories may also be relevant in the context of agriculturalproduction contracts, such as real rights – dealing inter alia with ownership, possession and securityinterests – the legal capacity of natural and legal persons, tort liability, company law and, in particular

Commented [A7]: Online comment, byFAO, suggests a change of the word “publicpolicy “to “regulatory.” The reason for this isthat public policy cannot, by itself, restrict acontract: only public law, or legislationapproved for implementing public policyobjectives, can do this.

Commented [A8]: Online comment fromFAO, recommends a more specific wordingof this sentence to:“In addition, atypical contract may leave toomuch space to parties to include ambiguousclauses or leave areas of the contract open tointerpretation”.

Commented [A9]: Change suggested byFAO, online consultations.

Commented [A10]: Change suggested byFAO, internet consultations.

Commented [A11]: Additionrecommended by FAO, online comment.

Commented [A12]: Change suggested byFAO, online comment.

Commented [A13]: Addition suggestedby FAO, online comment

Commented [A14]: FAO, internetconsultations, in addition to change alsothinks that "the footnote is correct, the valueof custom in the system of legal sources isdifferent from legal pluralism."


contexts, family law or the law of succession. Laws related to litigation before courts and alternativedispute resolution mechanisms will likewise be highly relevant.

18. A number of mandatory rules will be relevant to deal with unfair terms or unfair practices inthe context of agricultural production contracts. For example, within the ambit of contract law,provisions relating to the validity of contracts may find application, in particular with regard to consentdefects. When dealing with formation of contracts, special provisions may apply for standard formcontracts to protect the interest of the party that did not draft the contract. Also, in a number of legalsystems, rules applicable to special contract types aim to protect the weaker party when unevenbargaining positions might lead to imbalanced contract terms or would enable the stronger party touse unfair practices. It is however important to note that a public law that is excessively protective ofthe weaker party could result in no contract performance.

19. Moreover, so-called general principles of law may provide further guidance to parties. Incountries where relations are generally based on individual initiative and the freedom of the market,fundamental principles such as freedom of consent and the binding effect of contractual obligations(pacta sunt servanda), go along with and are sometimes limited by the widely-recognised principle ofgood faith.4 In those legal systems that recognize it, a broad notion of good faith can have far-reachingimplications as it can form the basis of a number of obligations, from the pre-contractual phase duringnegotiations to performance of the surviving obligations after the contract is terminated. Anotherimportant principle, the principle of reasonableness, may offer flexibility in interpretation because itimplies looking at the particular circumstances when evaluating terms or actions. An additional broadprinciple is the preference for preserving the contract and its efficacy whenever possible, in accordancewith the original will of the parties and purpose of the contract. Several other principles and conceptsmay be relevant, such as loyalty and fair dealings – often considered as corollaries to the principle ofgood faith as well as behaving in a consistent manner – the duty of information, transparency, andcooperation between the parties.

20. The particular principles as well as their formulation, authority and scope vary depending onthe features of each country’s legal system, and may furthermore be subject to debate even within onesingle jurisdiction. Concepts such as fairness or equity in contract, for example, are not universal anddo not always entail positive obligations, or else may be subject to other interpretations or standardsleading to different results between one country and another. However, it is widely recognised thatcertain common concepts can be applied to come to a similar result of establishing or re-establishinga certain level of fairness between the parties, when this balance has been severely disrupted byprofoundly unfair contract terms or acts.

21. It is generally accepted that certain requirements are reasonable or indeed necessary to protecta legitimate interest, and that certain types of conduct should not be accepted or should be sanctioned,such as acting in bad faith; abusing rights; using undue influence, pressure and unfair tactics; exploitinga much stronger bargaining position; not disclosing critical information; applying unilateral changes ofpractices; and many others. Generally accepted principles are also reflected in guidance instrumentspromoting good practices in business transactions or in food supply chains. It is worth noting that theparties themselves may wish to refer to general principles in their contract, or to apply these principlesto their relationship in general5 or for certain of its aspects.6

Commented [A15]: Online commentmade by Ms Watanabe.

Commented [A16]: FAO, internetconsultations. The comment is made thatfreedom of consent and the binding effects ofcontractual obligations are not only generalprinciples of law. In many systems these arealso recognized in civil codes. The distinctionbetween this paragraph and para. 18 suggeststhese are two separate things, which wouldnot be accurate. A different thing is the goodfaith

Commented [A17]: FAO, internetconsultation, the point is raised that“reasonableness” might not be a standardapplicable to/accepted in all jurisdictions.

Commented [A18]: FAO, internetconsultations. The issue is raised on whetherthis last point is also a corollary of good faith,thereby being moved next to loyalty and fairdealings.


2. Customary rules and usages

24. Customary rules may play a role in many legal systems, including in some cases whereagricultural production contracts are entered into with local or indigenous communities or theirmembers. Most often, customary rules derive from practices and traditions, are not codified norwritten,7 and deal with matters such as personal status, family relationships, inheritance, governanceof land and other natural resources, and rights over livestock. Collective rights pertaining to a wholegroup or community are frequent.8 With respect to contractual relations, customary rules may dealwith the capacity of persons to enter into an agreement – restricting for example the rights of womenin certain contexts – the validity of agreements, issues of form and evidence, performance andsanctions for non-performance. Internal enforcement and dispute resolution mechanisms are often inplace.9 It is important therefore to acknowledge that the local culture and private institutions might,in some situations, prevail.

25. Customary law is recognised in a number of countries, often by the national constitution or otherstatutory provisions.10 The applicability and scope of these rules, how they are recognized, and howpossible conflicts between the various autonomous legal orders are to be solved, depends on theparticular features of each country’s legal system. Very often however, no definite rules regulate theapplication of such law, which will therefore only govern relationships between members of theparticular community of people.11 In other settings, customary rules may find an application in courtsas local customs or usages, two concepts that are often conflated.12 Even when a particular practice ortradition does not legally amount to a custom, parties should take them carefully into account in theirdealings, especially when they have a strong social, cultural and personal dimension. Private agentscan establish rules to conduct the agricultural production contract. The conflicts can be solved internallybecause the parties already have all the knowledge of trading. Whereas the judge would have to takeknowledge about the contractual terms, the object traded, the market, and a lot of information thatcan be quite complex, which only parties involved in the relationship have the domain.

26. Generally speaking, usages can be described as practices, behaviours or terms that aregenerally or regularly observed in a similar context or operation or in a particular industry or trade.They may derive from local habits, which may have a particular significance with respect to agriculturalproduction because producers are often expected to apply their traditional knowledge and practicesrather than methods brought in from elsewhere. Usages may also be important in the context ofdealings involving producers or communities subject to traditional rules and customs. While oftencodified, good agricultural practices could also be seen as usages applying implicitly to the cultivationof a number of commodities. Under most domestic legal systems, usages and practices are includedby statute among the possible sources which courts can apply to a particular contract or contractualterms. Legal systems differ widely on the level of recognition and authority conferred to unwrittenusages and practices, which generally rely upon judicial practice.

3. Trade usages and practices

27. Usages may also refer to common practices and terms in transactions taking place in aparticular trade or industry, such as for particular commodities.13 Depending on the circumstances,relevant usages may be local or international. Under most domestic legal systems, usages and practicesare included by statute among the possible sources which courts can or must apply to a particularcontract or contractual terms.14 Legal systems differ widely on the level of recognition and authorityconferred to unwritten usages, which generally rely upon judicial practice.15 They are however seen asadapting some contracting aspects to each culture and this may determine the success and respect tothe contract by both parties. As a general principle, the application of usages should not beunreasonable or contrary to positive rules of law or to the express terms or general content of the

Commented [A19]: Mrs Watanabe,online comment, says that it is important totake into account the local culture and privateinstitutions might prevail.

Commented [A20]: Ms Watanabe, onlinecomments, adds this point to the paragraph.[I am not sure if it would be the correct partof the guide to discuss about it.]

Commented [A21]: Comment made byT. Benoit from FAO in Bangkok


contract.16 However, usages have been invoked by courts in some instances to interpret the plainlanguage of an express term, for example to the effect of allowing for a certain degree of flexibility inthe specified quantity delivered, or the time of delivery.17

27 (bis). Whether a specific usage can in fact be relied upon to fill missing terms in a contract orconstrue its terms, is a question that raises complex issues regarding the actual existence of the allegedusage, usually determined by examining its effective and constant application by similar parties, andevidence that the parties were aware of it and could be expected to observe it.18 Here, the rules ofevidence are crucial and depend on the particular situation as well as the procedural rules applied bythe court.19 In certain instances, documents such as standard contract forms, general conditions orprofessional standards will be considered as reflecting usages, if they fit within the criteria establishedby the applicable legal system.

4. Standard terms and guidance documents

28. Standards to be applied directly by contracting parties, or rules providing more generalguidance to them and sometimes to other stakeholders, may be found in model contract forms orconditions, codes of ethics and of conduct, good practices20 and so-called “soft law” instruments . Theymay be drafted by private entities such as trade associations – especially those focused on a particularcommodity21 – professional organisations, non-governmental organisations,22 or individual commercialfirms.23 Preferably, the standard drafting would involve a wide set of actors, representing bothproducers and contractors. Standards may also originate from public entities such as internationalorganisations24 or government agencies,25 or bodies formed by stakeholders from various sectors.Generally, the application of such standards is monitored by an internal or external body, which mayalso serve as an enforcement authority.26

29. . Allowing the industry to self-regulate itself to a certain extent by using standard terms andguidance documents, instead of the top-down regulation from the governments, has many strengthsespecially in seasonal crops.. First of all, private firms often have hands on experience with the field,especially if they actually participate in commercial operations. Hence, they would have the bestavailable knowledge to use as a basis for the soft law instruments. To ensure that the drafted termsand guidance documents are unbiased and balanced, the participation and the process must be bothvoluntary and transparent. Finally, the market participants have a mutual interest to organize themarket. If done properly, market self-regulation can be a valid corrective supplement to traditionalregulation, increasinges market transparency and through that efficiency, stability, fairness of pricesand distribution of margins throughout the value chain. When third parties are introduced to regulateand monitor contracts ,the risk is that the contractor may withdraw from direct farmer contracts anddeal only with transient middlemen. Through this, the idea of sustainability is seen not only as a toolof corporate responsibility but also as a way of securing the supply chain.

30. One important group of standards encompasses technical requirements for product quality,defining for example safety targets or attributes in response to particular dietary or religiousrequirements,27 and quality and safety management systems, that establish criteria and imposeprocedures to prevent and control risks and ensure traceability throughout the production andtransformation processes.28 A number of standards address recommended conduct in contractualrelations, in particular with respect to human rights, environmental issues, labour conditions and othersocial concerns, resulting in specific obligations that go beyond the level required by applicable publicregulations.29 Very often, standards concern categories of commodities, and may combine objectivesrelating to different areas. Standards are typically not country specific, although they may addressparticular problems which are more likely to arise in certain contexts than in others.

Commented [A22]: FAO, onlineconsultations. The point is made that theparagraph (and the whole section) includetwo different concepts of “standard”. Thestandard clauses used in certain contracts, andthe technical standards used as reference forthe technical specifications of the product.These two meanings of “standard” aredifferent and should be dealt with in differentparagraphs.The same person advises using two terms”“standard contract forms” and “technicalstandards”

... [1]Commented [A23]: The importance ofcodes of conduct in the private sector was... [2]Commented [A24]: FAO, internetconsultations. The comment is made that... [3]Commented [A25]: FAO, internetconsultations. The suggestion is made to... [4]Commented [A26]: Online comments.Mr. Eaton: “CSE has indicated previously the... [5]Commented [A27]: Mr Medina, PrivateSector Workshop, session 2, illustrated the... [6]Commented [A28]: Online Comments.Mr. Eaton suggested adding this comment.

Commented [A29]: Buenos Aires.Session 1. Mr. Piet Vantemsche highlighted... [7]Commented [A30]: Buenos Aires.Session 1. Mr. Piet Vantemsche highlighted... [8]Commented [A31]: This comment wasmade by Mr Ywema, Private Sector ... [9]Commented [A32]: View comment byFAO, internet consultation, above. The... [10]Commented [A33]: View comment byFAO, internet consultations above. This... [11]Commented [A34]: FAO, internetconsultations. This reference is considered... [12]Commented [A35]: FAO, internetconsultations, makes a comment about this... [13]Commented [A36]: The comment ismade to remove this sentence by FAO,... [14]


31. Certain global schemes and standards have gained wide recognition and are increasinglyapplied on a voluntary basis, acquiring greater harmonisation across parts of the world.30 In somecases, they have even been made compulsory by government regulations.31 In that situation, or whenthe parties include them as express terms or by reference in their contract, what is originally intendedas soft law and voluntary regulations becomes binding upon the parties. Even when there is no suchexpress application, recommended practices could be seen as applicable usages.32 Likewise, standardsmay enjoy wide recognition because of the authority of the entity that developed them or their intrinsicquality.

32. In a number of countries, governments have increasingly sought recourse to soft law as analternative or an addition to mandatory regulations, in order to promote fair contractual practices incommercial or business relationships in general, or more specifically between suppliers and buyers inthe food supply industry.33 Examples also include principles by Intergovernmental Organisations thatseek to create a link between the public sector, the private sector and civil society groups, wherebygovernments are informed of certain basic criteria that need to be fulfilled in order to build theproducer’s capacity and skills. Depending on the jurisdiction, soft law instruments consist ofrecommendations by a government entity, or voluntary codes of practices or good conduct that rely oncollaboration with stakeholders for their preparation and implementation. Monitoring and enforcementmechanisms are sometimes put in place to encourage and report on adherence to the voluntary rules,which generally brings reputational benefits.34 On the contrary, failure to comply may be sanctionedthrough disciplinary measures, typically by reduced membership rights in the association supportingthe voluntary scheme. Furthermore, in some cases, dispute resolution procedures are available underthese voluntary schemes. The effectiveness of these enforcing mechanisms can be questioned,especially in the context of transnational production contracts.

33. In addition to general public international law instruments which may be applicable asmandatory provisions, international sources may be relevant in the area of private commercial law,most often as default provisions. This may be the case regarding legislation enacted by regionalorganisations which is given direct legal effectiveness within member States, or international treatieswhich are subject to a specific adoption procedure. When contract farming transactions take placeacross borders involving parties situated in different countries, the United Nations Convention oncontracts for the international sale of goods may be applicable by analogy. Soft law instruments mayalso be taken into consideration: in particular, the UNIDROIT Principles of International CommercialContracts which represent a private codification or “restatement” of the general part of internationalcontract law, have gained a large recognition in providing balanced rules for contract relations with aspecial attention for the weaker party while preserving the economic purpose of the contract, andneutral solutions compatible with most domestic legal systems. Although designed for internationaltransactions, the UNIDROIT Principles often serve as a model in contract law reform. When foundappropriate to a particular relationship and subject to the applicable mandatory rules, they can be usedby the parties in drafting their contract, for example through the incorporation of selected rules ascontract terms.

Commented [A37]: FAO, internetconsultations.

Commented [A38]: FAO, internetconsultations. This should be changed to"technical production standards"

Commented [A39]: Mr Ywema, PrivateSector Workshop, session 1, emphasised theincreased harmonisation that is taking placein the area of schemes and standards.“The industry is increasingly harmonised andthe number of initiatives is growing aroundthe world”

Commented [A40]: [This is an attempt tofit some of the comprehensive points madeby Mr Selvanathan, Private Sector Workshop,session 1.They deal with an issue that might be difficultto address properly in parts of the Guide, buttheir inclusion could also be movedelsewhere if necessary. For example note thediscussion that is made in the “legalframework” chapter on human rights wheresimilar but slightly different initiatives arediscussed

Commented [A41]: Buenos Aires.Session 3. Prof. Cafaggi questioned theeffectiveness of transnational enforcement ofprivate standards.


C. Contracts with an international element

34. Sometimes, agricultural production contracts may involve an international element, forexample when the contractor’s place of business is situated in a different country than the producer’sone. This situation may be found under multiparty contracts, involving for example an importer, aproducer organisation and its members. Under another type of situation, the international character ofthe contract would derive from the fact that the goods are to be delivered by the producer directly in aforeign country.

1. Contractual obligations

35. Under international contracts, parties enjoy in most countries a large autonomy to choose theapplicable law and the competent jurisdiction or dispute settlement mechanism. By agreeing to bebound by the law of a particular State, the parties subject themselves to all relevant laws or regulationsthat would govern their contract in that jurisdiction.

36. When a production contract is international in character, the parties commonly designate thelaw of the State where production takes place as applicable to the contract.35 One justification behindthis choice is to make clear for producers that their domestic legal regime applies to the contract, whichis normally one of their expectations since it is best known to them. This choice thus facilitates contractcompliance and enforcement. It is also possible that choosing a foreign law to govern the contract maybe restricted by mandatory rules, which may be the case when special legislation on productioncontracts has been enacted in the producer’s State or when the applicable rules of private internationallaw place limitations on the choice of the governing law. It may also occur that a particular State hasspecial legislation governing contracts for the sale of agricultural products, subjecting such contractsto formal and substantive requirements. These requirements may be mandatorily applicable when suchgoods are delivered in the State, whatever the law otherwise applicable to the contract.36 However,while mandatory provisions will bind the judge in the State having enacted them, their application bya judge in a foreign jurisdiction may not always be certain.

37. When the dispute is brought before a court, in the absence of a choice of law provision in thecontract, a judge would have to determine which law applies. Under a straightforward determination,a judge seized in the jurisdiction of the producer and competent in accordance with its own proceduralrules is likely to find that its domestic legal system has a natural vocation to apply to a situation which,based on a variety of factors, is indeed closely connected with the State of the forum.37 On the otherhand, if a judge determines the applicable law based on conflict of law rules, the judge will typicallyapply a test that looks at factors connecting the contract to a particular place. Under this scenario, thelaw of the State where the producer is situated is still likely to be applicable. This will be the case whenthe connecting factors point to the law of the State where the contract’s characteristic obligation is tobe performed, or of the State which has the closest connection with the contract or the particularobligation considered.38

38. In certain cases, a uniform legal regime may be applicable to the substance of the contractualobligations. This may occur when the States involved have adopted a common statute regardingcontractual obligations39 or as a result of the application of the United Nations Convention on Contractsfor the International Sale of Goods (CISG). 40The CISG has become the generally applicable regime forthe international sale of goods in a very large number of countries and is applicable either when thecriteria regarding contracting States are met, or as a result of a private international lawdetermination.41 It must be noted that when a uniform regime applies, certain matters still remain

Commented [A42]: Online comments.UNCITRAL. The draft Legal Guide onContract Farming (the "draft Legal Guide")contains numerous references to the UnitedNations Convention on Contract for theInternational Sale of Gods, 1980 ("CISG").We are glad to note that the CISG has beenused as a reference text for suggestingmodern contract law provisions. Indeed theCISG provides a modern and balancedrestatement of contract law that is often usedas a model for national and regional contractlaw reform as well as a source of inspirationfor contractual provisions in specific businesssectors.

The draft Legal Guide also makes referenceto cross-border transactions where the CISGis likely to be relevant, as pointed out in itsChapter 9, paragraph 32. In light of the factthat the draft Legal Guide is intended to assistless experienced users, it may be useful toclarify that references to the provisions of theCISG in the draft Legal Guide, unlessotherwise indicated, are meant as reference toa model text, and do not necessarily imply theapplicability of the convention


outside of its scope. For example, the CISG does not govern the validity of the contract or its effect onthe property of the goods. Such issues must be settled under the applicable domestic law.

39. When a dispute relating to an international contract is settled under arbitration, there isgenerally a greater flexibility than in State court litigation for the determination of the law governingthe substance of the dispute, depending on the applicable legislation and specific rules of theproceedings. Generally, parties are entitled to choose rules of law as opposed to a particular State law.In this context one widely-recognised instrument is the UNIDROIT Principles of international commercialcontracts (2010), which constitutes a soft-law, general restatement of principles applicable to mostaspects of any type of contract, offering modern and balanced rules that are generally acceptable acrosslegal traditions. The parties may also authorise an arbitrator or a mediator to settle the case on thebasis of justice and fairness. This may indeed offer an appropriate basis for solutions in cross-borderproduction operations, with companies dealing with producers situated close to the border of aneighbouring country.42

2. Non-contractual obligations

40. When the goods produced under an agricultural production contract are unfit for human oranimal consumption and cause personal harm or damage of a different nature, a plaintiff may ask forcompensation. It will then be necessary to determine who should be held liable and bear responsibilityto compensate for the damage done. While many countries would apply their general rules on torts –or non-contractual liability – others have enacted special laws on general product liability43 and/or onfood safety matters.44 Depending on the particular legislation – and the ground(s) of liability, based onfault or strict liability – and the circumstances of the case, such legislation may attribute liability to theproducer and/or another participant in the supply chain, in particular to the operator that has processedor put the product on the market. This legislation may also provide for the allocation of liability betweenvarious operators.45

41. When an international element is involved, for example when the damage is suffered in adifferent country than the one where the product was made, a judge having jurisdiction will determinethe law applicable to the substance of the case, generally based on a conflict of law analysis.46 It canbe observed that special conflict of law rules applicable to product liability consider the fact that theperson alleged to be liable – typically the producer – could have reasonably foreseen that his productwould be marketed in the country where the damage was suffered as one condition for the applicationof a foreign law. Consequently, under such rules, the person alleged to be liable would not be subjectto an unforeseeable law. Since obtaining effective compensation from a producer abroad may bedifficult, public policy considerations may prevail, thereby leading to the imputation of liability on theoperator that has put the product on the market.


II. The role of the regulatory environment

42. In addition to legislation governing their obligations and responsibilities and the elements oftheir agricultural production contract, parties will be subject to a number of laws and regulations thatwill influence the formation and implementation of their contract, particularly regarding technicalspecifications. These may act as an enabling environment and be conducive towards long-termsustainability or act as a disincentive against contract farming due to excessive regulation. In mostcases, these public regulatory instruments will be aimed at the protection of public goods, thedevelopment of the agricultural sector and the safeguard of rural populations. These might involve alegal framework and involve the regulatory protection of human rights in agriculture, encompassingcivil and political rights, as well as economic, social and cultural rights such as the right to food, theright to health, the right to social security and the right to work; the protection of human, animal andplant health and the environment; labour law and decent rural employment in agriculture; lawsgoverning the access to natural resources necessary for agricultural production; and access toagricultural inputs and the trade in agricultural products. This section presents a non-exhaustive list ofthese regulatory areas that may particularly influence the formation and implementation of agriculturalproduction contracts. It refers to regulatory instruments adopted by countries both at theinternational and at the national level.

A. Agri-food trade

43. Contract farming directly intersects with matters governed by laws on the production and tradeof agricultural products, and with the sanitary measures and technical requirements that countries areentitled to set up, internally and internationally, in the context of trade liberalization.

44. International trade law, mostly constituted by the international agreements underpinning theWorld Trade Organization (WTO), shapes national policies and legislation concerning the support andgovernance of their agricultural sector. Legal commitments made by countries at the multilateral leveltypically have to be implemented through reforms to domestic law and national institutional oradministrative structures. Good examples of specific multilateral commitments of this nature in theagricultural sector would be article 27(3)(b) of the WTO Agreement on Trade-Related Aspects ofIntellectual Property Rights (TRIPS Agreement), which makes it mandatory for WTO members to:provide for a system of plant variety protection; carry out export subsidy reduction commitmentsexpressed by article 9 of the Agreement on Agriculture; and fulfil the requirement that agriculturalmarketing boards, generally falling under the definition of "state trading enterprises" stated in articleXVII of the General Agreement on Tariffs and Trade 1994, carry out their purchases – for example ofagricultural inputs – in a non-discriminatory manner.47

45. In particular, the Agreement on Agriculture that arose out of the Uruguay round of internationaltrade negotiations contains measures that parties to the agreement must implement, concerningagricultural market access, domestic support, and export subsidies. Moreover, TRIPS calls on all WTOmembers to provide "effective and adequate" intellectual property rights (IPRs) that do not amountthemselves to trade restrictions. The Agreements on Sanitary and Phytosanitary Measures (SPS) andTechnical Barriers to Trade (TBT) also influence national food safety and quality, animal and plant healthregulations., They also impact on otheras well as all technical requirements such as certification,labelling and standardization, that apply to agricultural products both domestically and in internationaltrade.

46. Food safety and quality are gaining more and more importance to protect consumer health andare enforced under national legislation. The term food safety legislation refers to all legislation thataddresses or is aimed at ensuring “that food will not cause harm to the consumer when it is prepared

Commented [A43]: Bangkok. Prasnar Yi,speaking of the Cambodian example, saidthat it is important to look not only at theregulatory environment of the agriculturalproduction contract, but also that of all thecontracts surrounding it.

Commented [A44]: Bangkok. Carlos DaSilva from FAO talks about the relationshipbetween enabling environment which can beseen as part of the regulatory environment.The importance of the role of theGovernment is also discussed by Khoi Dang,Vietnam and De Los Reyes, Philippines.



and/or eaten according to its intended use.”48 Countries are called by the SPS Agreement to align theirfood safety measures to the standards approved by the Codex Alimentarius Commission.49 Thosestandards apply to different levels of production and elaboration of agricultural products and may alsorefer to different aspects which may become highly relevant in the context of agricultural productioncontracts, including packaging and labelling requirements. Identification, monitoring anddocumentation of the different stages provide traceability of the product, which is increasingly requiredall along the chain, from the producer to the final consumer.

47. Along the same lines, livestock production and the veterinary domain are governed by animalhealth and production legislation. WTO countries are encouraged to base their national veterinarylegislation on the international reference standards adopted by the World Organization for AnimalHealth (OIE).50 In the absence of national legislation, contractors could request that producersincorporate farming practices recommended by the OIE, such as animal welfare standards, to facilitatethe access to international markets. Plant protection standards and the international certification ofplant health are governed by the standards approved under the auspices of the International PlantProtection Convention (IPPC),51 a legally-binding international agreement that guides countries in theestablishment of international and national phytosanitary measures and certification procedures, andserves as a reference for all operations involving the international trade of plants and plant products.

48. Finally, countries may have enacted national legislation governing conformity assessmentprocedures, including certification services. In the context of the TBT Agreement, these procedures aredefined as technical procedures confirming that products fulfil the requirements laid down in regulationsand standards. The procedures requested by national legislation can become effective tools of domesticprotectionism and create "unnecessary obstacles to international trade", when applied in a non-transparent and discriminatory manner. To prevent these risks, the TBT Agreement establishes in itsarticle 5 a set of substantive and procedural requirements governing this type of procedures, andencourages countries to foster conformity assessment procedures based on internationally-recognizedstandards.

B. Production inputs

49. Beyond trade-related measures, agricultural production is commonly governed at the domesticlevel by a broad range of legal instruments aimed at regulating various agricultural inputs and ensuringthat agricultural products meet the quality and safety levels expected by national consumers and tradepartners. Legislation governing the inputs to agricultural production affects the manner in whichcontract farming is carried out, especially because it frequently entails adherence to prescribedproduction methods as well as the direct provision of agricultural inputs such as seeds, fertilizers, andpesticides. Those inputs might be regulated by input-based legislation such as seed laws and pesticidelaws, legislation governing the protection of intellectual property rights over specific inputs orcommunity rights to access protected inputs, or in commodity-specific acts that aim to closely regulateproduction and the supply chain for those commodities which are deemed particularly important forthe national interest.

1. Seeds

50. Contractual arrangements for access to and use of seeds may be restricted by seed legislation,which ensures that seeds, as a critical asset for increasing agricultural production and productivity, areof a high quality and remain available and accessible to farmers. In some countries, seed legislationrecognizes certified seeds as the only quality-guaranteed ones that can be legally marketed. In thosecountries, seed producers must enrol in formal certification schemes that are recognized through


certified seed labels issued by the competent authority. Other countries rely only on the informationincluded on seed labels. Contract farming operations might restrict seed purchases to legally marketedseeds or to specified ones, but it is important to note that both producers and contractors are boundby national seed legislation, where it exists.

2. Biosafety

51. Access to seeds and seedlings might also depend on national legislation governing biosafety,GMOs and access to improved varieties. For example, certain countries have banned the import of GMOseeds,52 based on a concern that they may have adverse effects on the conservation and sustainableuse of biodiversity, and may pose risks to human health. To regulate the international trade of suchseeds, within the more general category of living modified organisms (LMOs), 130 governmentsreached an agreement in January 2000, referred to as the Cartagena Protocol on Biosafety.53 Theobjective of this Protocol is to ensure that the transfer, handling and use of LMOs resulting from modernbiotechnology do not have adverse effects on the environment and human health, specifically focusingon cross-border movements of LMOs intended for release into the environment.The key point is thatthe Protocol allows countries to prevent imports of genetically modified seeds even in the absence ofconclusive scientific evidence of their harmfulness, thus embodying the precautionary principle.54

52. It also establishes the Advance Informed Agreement (AIA) procedure, that allows each countryto control first imports of genetically modified seeds, by subjecting them to risk assessment proceduresprior to issuing the permit or authorization necessary for import.55 The whole procedure, fromnotification by the export country to acceptance or refusal by the importing country, is detailed in theProtocol. If the importing country authorises the import of such a seed, the exporter must providedocumentation and labels containing information on the identity and traits of the seed.56

3. Plant Variety Protection

53. Access to specific plant varieties, including seeds and seedlings, may be subject not only toseed legislation, but also to legislation governing intellectual property rights over plant varieties.57

Countries regulate the registration and legal protection of new plant varieties to encourage commercialplant breeders to invest the resources, labour and time needed to improve existing plant varieties, byensuring that breeders receive adequate remuneration when they market the propagating material ofthose improved varieties. In the absence of a grant of exclusive rights to breeders, the dangers of “freeriding” by third parties would be considerable. Article 27.3(b) of the TRIPS Agreement requires WTOmembers to protect plant varieties using either: (i) patent law, (ii) an effective sui generis system or(iii) a combination of elements from both systems.

54. Following this provision, some countries have adopted agreements established under theauspices of the International Union for the Protection of New Varieties of Plants (UPOV).58 The UPOVtreaties establish a sui generis – unique or of its own kind – protection system especially tailored tothe needs of plant breeders. Article 15(2) of the UPOV Act of 1991 incorporates the exception of“farmers’ privilege,”59 which allows the use by the farmer of the product of the harvest on his or herown holding. However, the scope of this so-called farmers’ privilege varies widely in national plantvariety protection laws. While some countries only permit farmers to plant seeds saved from priorpurchases on their own land holdings, others also allow them to sell limited quantities of seeds forreproductive purposes. Countries that are not signatory members of the UPOV Convention may chooseto approve a different sui generis system or to apply general patent law.

Commented [A46]: FAO, internetconsultation. The commentator says thatGMOs are embedded in the concept ofbiosafety and that the reference to improvedseeds is not fully accurate here


4. Producers’ right to genetic resources

55. Producers’ rights are also protected by the International Treaty on Plant Genetic Resources forFood and Agriculture (ITPGRFA), adopted under the auspices of the FAO on November 3rd, 2001, by aconference of 120 government delegates. This treaty aims to facilitate the exchange of seeds and othergermplasm to be used for research, breeding and crop development. The treaty promotes this exchangeby establishing a “multilateral system” to which member States and their nationals will be given“facilitated access.” The ITPGRFA recognizes the enormous contribution of producers to the diversity ofcrops that feed the world. It establishes a global system to provide producers, plant breeders andscientists with access to plant genetic materials and to ensure that recipients share benefits derivedfrom the use of these genetic materials with the countries where they have originated.60

56. It is important to underline that some of the provisions of the ITPGRFA may conflict with TRIPS– in particular TRIPS Plus61 – and national IPR laws62 and in that respect countries will need to evaluatein their own national laws the need to balance the protection of IPRs against other objectives such asencouraging biodiversity, facilitating access to plant genetic resources, recognizing producers’ rights,promoting an equitable sharing of benefits and protecting the traditional knowledge of indigenouscommunities.

5. Other agricultural inputs

57. In addition, laws governing access to and use of pesticides and fertilizers may also influencecontract farming. Legislation on pesticides and fertilizers normally includes a general prohibition againstproducing, purchasing and using products that are not authorized or registered by the competentauthorities. Producers are bound to use authorized products and to respect rules related to their useand disposal. In the realm of livestock production, parties will also need to pay attention to legislationgoverning feed, veterinary pharmaceuticals, and livestock rearing and welfare.

C. Agricultural finance and support

58. To varying degrees, governments around the world have implemented policies and enactedlegislation designed to support their domestic agricultural sectors, adding more or less stabilitydepending on the uncertainty of policy-changing. These efforts may be very broad or may focus on oneor several commodities deemed to be particularly important. For example regions which have relativeadvantages in certain agri-products, may be designated and zoned as stable large-field productionzones with intensive supports of government, in technology and investments for such products.Alternatively, policies would also be promoted to support contract farming activities for farmers andentrepreneurs who are not eligible for or do not participate in large-field production zones. Amongmany issues, agricultural finance – which is dedicated to financing agriculture-related activities such asinput supply, production, distribution, wholesale, processing and marketing – is a major concern indeveloped and developing countries alike. The inability of producers and contractors to access capitalon competitive terms to undertake profitable investments, or take advantage of market opportunities,often hinders incomes and growth. Even if micro-financing is becoming more widely used, it is still notalways readily available, nor necessarily as suitable a vehicle as contract farming for agriculturalproduction, as in many situations the risk is still basically shared between micro financing institutionsand the producer. Similarly, without financial products and services to insure against risk, ruralhouseholds and enterprises may even retreat from profitable projects for which they have adequateliquidity.63

Commented [A47]: Carlos Da SilvaFAO, Bangkok, talks about negativeoutcomes resulting from overreliance ongovernment policy as this may unexpectedlychange

Commented [A48]: Mr Dang, Bangkoksession 2, talks about different governmentpolicies for different production land sizes.

Commented [A49]: Mr Andrada,Bangkok session 3, discusses the micro-finance institutions. He still believes thatmicro-financing can help to better distributethe risk (also through the interplay withAgricultural Guarantee funds, CropInsurance) and can improve value chainfinancing.

Commented [A50]: Online comments.Prof. Fontaine. Suggested adding a mentionto micro-financing.


59. Contract farming can facilitate the provision of credit and finance to producers and contractors,and as such, may fit directly or indirectly within government policies for improving access to agriculturalcredit. For example, governments sponsor in some cases an overall contract farming arrangementbetween private parties, with financial support provided either by a public entity or by a private bankinginstitution under a government guarantee, as part of a public development programme.

D. Competition and antitrust

60. Contract farming may be strongly influenced by competition law since, in a number of legalsystems, unfair contractual terms and practices are addressed and sanctioned under mandatory rulesin unfair competition and antitrust legislation. This type of legislation aims to correct distortions orrestrictions in markets resulting from the abuse of a dominant position by one or several participants.Market distortions occur when a small number of operators control a particular market and enter intoagreements or concerted practices aimed at determining or influencing prices, production quotas orproducts, or sharing sources of supply and thereby restraining commerce. Due to the size and marketimportance of some of the parties, the producers might have to accept unilateral unfair terms asthey would not be in the position to reject the contract or to negotiate the terms previously. Unfairpractices may also involve undue preferential or discriminatory treatment of particular producers orcategories of producers through contractual conditions, by imposing a different treatment to similarparties and more generally by using deceptive practices . In some cases, exclusivity clauses (SeeChapter __*) might also raise antitrust issues when they unduly restrict competition.

61. Antitrust legislation may apply as a matter of general economic public policy, and can beintended in certain circumstances for particular sectors, such as the food and feed processingindustry, and even a specific commodity within such sectors. Through antitrust regulation,anticompetitive behaviours, unfair and fraudulent practices, and particular contract terms or practicesdefined as unfair or unreasonable would be prevented or sanctioned.

E. Human rights

62. Human rights influence how governments regulate contract farming, and may also affect theway in which the parties structure and carry out their agreement. Businesses have a responsibility torespect human rights that exists independently of the States’ ability and/or willingness to fulfil theirown human rights obligations whereas. governments could view the opportunity of contract farmingarrangements as a practical tool through which to ensure social objectives. From a human rights-basedperspective, there are several principles that should be incorporated into the negotiation andimplementation of contract farming agreements. Participation, accountability, empowerment, non-discrimination, transparency, human dignity and the rule of law are some of the principles that businessmodels such as contract farming should encompass. Non-discrimination, participation andempowerment are particularly important to foster the role of vulnerable parties, particularly women inthe negotiation and signature of such contracts. Although women are the predominant producers ofsome commodities, they are often excluded from decision making and in most cases yield to men forcontract signature. The role of women in agriculture should be fully recognised and supported bygovernments by promoting and facilitating their access to negotiation and decision making platforms,agricultural inputs and income-generating opportunities such as contract farming agreements.Particular attention should be paid to the important role that they have in child care and nutrition andtherefore, differentiated measures should be considered to guarantee the rights of women and childrenwithin the context of contract farming activities. Social protection and safety nets are key elements ofany national strategy on contract farming, for they allow the producers to take the risk involved in

Commented [A51]: Prof. Paripurna,session 2 Bangkok, argues a generalcompetition law point. « Smallholders havelittle bargaining power to negotiate contentsof the agreement with economicallypowerful companies, and In this condition,smallholders are in no chance to negotiate orreject the contract proposed by companies.[The point on unilateral terms of contract isand their negative effect on the economicenvironment is also made by Mr Salvador (session 4 Bangkok)

Commented [A52]: Online comments.Prof. Fontaine. Suggested mentioning thepossible role of exclusivity clauses on issueswith antitrust and competition law.

Commented [A53]: This point is madeby Mr De Los Reyes, session 2 Bangkok.



moving from subsistence farming to commercial farming. Safety nets can guarantee that even if theventure fails, the producer still has means of survival, facilitating the transition to contract farming..

63. Contract farming has the potential to improve the livelihoods of small rural farmers byfacilitating their access to markets and by creating opportunities for decent work and incomegeneration. Increased stability and the farmers’ ability to forecast their own livelihood may create, inturn, the potential of improving overall human and environmental rights protection. When contributingto reduce deprivation and poverty and to empower the poor (“the right-holders”), contract farmingdirectly or indirectly contributes to the enjoyment of human rights. In particular, contract farming isclosely linked to the right to food and the right to work.

1. Right to food

64. Among the human rights that are closely linked to contract farming, a very central is the rightto food. Because contract farming has the potential of creating a large scale change in agriculture, forexample by incentivizing a transfer from subsistence to commercial farming, the link to right to foodand food security is evident. After its first international expression in the Universal Declaration ofHuman Rights in 1948, this the right to food has been recognized in several international legalinstruments64 as well as in national constitutions and laws.65 The International Covenant on Economic,Social and Cultural Rights (ICESCR), a binding legal instrument to which 16266 countries are parties asof September 2014, deals with this right more comprehensively than any other instrument. Pursuantto its article 11.1, member States recognize “the right of everyone to an adequate standard of livingfor himself and his family, including adequate food, clothing and housing, and to the continuousimprovement of living conditions,” while pursuant to article 11.2 they recognize that more immediateand urgent steps may be needed to ensure “the fundamental right to freedom from hunger andmalnutrition.” The UN Committee on Economic, Social and Cultural Rights, in its General Comment 1267, has further explained that the core normative content of the right to adequate food includes: i) theavailability of food in a quantity and quality sufficient to satisfy the dietary needs of individuals, freefrom adverse substances, and acceptable within a given culture; and ii) the accessibility of such foodin ways that are sustainable and that do not interfere with the enjoyment of other human rights.

65. In order to be able to enjoy an adequate standard of living, and particularly to realize theirright to food, poor farmers depend either on subsistence production or on food available in the localmarkets. As net food buyers, high food prices immediately affect rural farmers who, according to FAOestimates, constitute the most vulnerable sector in developing countries, constantly exposed to hungerand malnutrition.

66. The impacts of contract farming on the realization of the right to food, as well as the impactsof the right to food on contract farming, will indirectly depend on how governments incorporate theirinternational human rights obligations in national policies and regulatory frameworks and directlydepend on the contractors and producers including clauses conforming with the right to food in theircontracts.. According to international law, governments have a threefold obligation to respect, protectand fulfil the right to food. While the duty to respect the right to food requires States not to take anymeasure that would prevent access to food, the duty to protect that right demands that they takemeasures to ensure that enterprises or individuals do not deprive people of their access to food. Finally,the duty to fulfil the right to food obliges States to proactively engage in activities intended tostrengthen their people’s access to and utilization of resources and means to ensure their livelihood,including food security. As mentioned earler, the businesses have their own independent responsibilityto respect human rights, and this should be reflected in the best contractual practices implemented onthe field.

Commented [A55]: Online comments.Mr. Shepherd. Questioned the relevance ofthe discussion of women’s role in child careand nutrition for contract farming. Alsoquestioned, why social protection and safetynets are relevant.[I took away the discussion, and brieflyelaborated on the merits of social nets.]

Commented [A56]: Mr Kirke, PrivateSector Workshop session 3, made the pointthat from the farmer/producer perspective, anincreased respect of human rights and theenvironment is closely connected to theirstability and ability to predict their ownlivelihood.

Commented [A57]: Online comments.Mr Shepherd. Questioned the relevance of thediscussion on right to food.[I feel it is relevant, and tried to brieflyelaborate in the re-draft.]

Commented [A58]: Online comments.Mr. Shepherd. Questioned the links with«national contract farming legislation » as theGuide does not intend to encourage adoptionof special legislation ».[I toned down the legislation, and highlightedthe contractual practice.]


67. In accordance with the obligations mentioned above, it is important to ensure that contractfarming activities do not undermine key substantial aspects of food security and nutrition, such as thelocal biodiversity that guarantees the existence of diverse and sustainable diets as part of the qualitydimension of food which ensures adequate nutrition. In contract farming activities involvingmonocropping, best contractual practices would protect the availability of local food supply, by leving aportion of the producerìs land for subsistence production. regulatory frameworks should establish somelimits to protect the availability of local food, for instance by creating incentives for farmers to keep aparcel of their land for subsistence production. This could limit the negative impacts of monocultureand guarantee direct access to food when high prices affect local markets.

68. Fundamentally, human rights obligations imply that governments must prevent the risk ofabuse within contract farming relations and, whenever abuses occur, ensure that effective remediesare available.68 It also implies that States shall create an enabling environment where producers andcontractors can develop contracts that are fair, equitable and transparent, in compliance with the ruleof law. Along this line at the multilateral level, on 16 June 2001, the United Nations Human RightsCouncil endorsed by consensus the UN Guiding Principles on Business and Human Rights.69 Theprinciples refer to the countries’ duty to protect human rights through the approval and enforcementof laws aimed at or having the effect of requiring businesses to respect human rights, and to periodicallyassess the adequacy of such laws. The principles also aim to ensure that other laws governing ongoingbusiness operations do not constrain but rather enable businesses to respect human rights by providingthem guidance in that respect.

69. The human right to adequate food is indivisibly linked to the inherent dignity of the humanperson and is indispensable for the fulfilment of other human rights enshrined in the International Billof Human Rights. It is also inseparable from social justice, requiring the adoption of appropriateeconomic, environmental and social policies, both at the national and international levels, orientedtoward the eradication of poverty and the fulfilment of human rights for all.70

2. Right to work and labour law

70. Another human right which is closely linked to contract farming is the right to work. TheUniversal Declaration of Human Rights guarantees everyone “the right to work, to free choice ofemployment, to just and favourable conditions of work and to protection against unemployment”(Article 23). The ICESCR71 further details “the right of everyone to the opportunity to gain his living bywork” (Article 6) and the right to fair wages and equal remuneration for work of equal value withoutdistinction of any kind” (Article 7). Governments who are signatories to the ICESCR must protect theright to free choice of work as well as just and favourable working conditions for all of its citizens.Through an extensive series of widely-accepted international conventions, the International LabourOrganization (ILO)72 has elaborated through tripartite consultations international standards forpromoting principles and protecting rights at work which are widely implemented in domesticlegislation. In particular, the ILO Declaration on Fundamental Principles and Rights at Work adopted bythe International Labour Conference in 1998 lists the four core labour standards, namely: (i) freedomof association and the effective recognition of the right to collective bargaining; (ii) the elimination ofall forms of forced or compulsory labour; (iii) the effective abolition of child labour; and, (iv) theelimination of discrimination in respect of employment and occupation. Irrespective of a country’sratification status of ILO Conventions or its level of economic development, the ILO Declaration on theFundamental Principles and Rights at Work commits member states to respect and promote theseprinciples and rights. At the national level, domestic labour and employment law regulates the legalrelationship between workers, employers and trade unions. It establishes employers’ and workers’

Commented [A59]: Online comments.Mr. Shepherd. Questioned the need forlegislation to regulate on subsistence farming.[I emphasized contractual practice.]


rights and obligations, while defining and regulating labour and employment contracts. Moreover, itsets up a number of individual and collective rights aimed at protecting workers.

71. The impacts of contract farming on the realization of the right to work and decent rural workingconditions can be manifold. By promoting the access of smallholder farmers to markets, contractfarming contributes to increase the productivity of smallholder agriculture. In so doing, contract farmingcontributes to better incomes for smallholders, to the creation of new jobs as well as to the overallstability of rural jobs. Furthermore, contract farming can be an important channel for expanding theapplication of international labour standards (ILS) to rural workers. Agricultural workers are often notcovered by labour legislation at the national level. Furthermore, the majority of poor and disadvantagedworkers in the agricultural, forestry and fisheries sectors are employed in the informal economy andare therefore automatically excluded from the protection of labour legislation. Extending labourlegislation international labour standards through agricultural production contracts to agriculture andrelated rural occupations remains a priorityoffers a possibility to promote decent work in rural areas aswell as facilitating and providing incentives for formalization. This would extend internationally requiredlabour rules to both agricultural workers covered by national labour laws and those who are not,However, much needs also to be done to foster the application of labour standards in practice for thosecategories of workers which are not covered by legislation and which will likely continue to operateinformally such as people participating in family-based small scale agriculture. In particular,governments can promote sustainable agriculture, good and safer agricultural practices to reducehazardous work, as well as labour saving practices and technologies that reduce dependence on childlabour and women work burden. Responsible contract farming arrangements and national contractfarming legislation can represent an important instrument in this sense. Conversely, if adequateguarantees and monitoring are not foreseen, workers may experience poor terms and conditions,especially women workers, and there could be an increasing incidence of child labour.73

72. Labour law can have an important twofold impact on contract farming. First, it may play animportant role if farmers recruit workers to assist them in producing the quantities and qualitiesspecified in the contract farming agreement. In such cases, farmers will need to apply nationallegislation touching upon agricultural production, including the implementation of labour law provisionsgoverning the relationship with their employees. National contract farming legislation may then becomea powerful tool to support good labour practices in agriculture and to contribute to decent ruralemployment74 and better livelihoods by introducing specific labour conditions, such as the avoidanceof children labour, appropriate health and safety and working conditions, specially for the mostdisfavoured workers (such as pregnant women), etc. It is important to remember that even though theproducers recruit workers to assist them in production, as per the contract farming agreement, theworkers are under producers responsibility.

73. Second, labour law may have an impact on contract farming operations in cases where theycorrespond to a labour relationship, as determined under national legislation. The essence of contractfarming is that the producer acts under the contractor’s guidance as an independent party, not anemployee. Thus, if producers and contractors are involved in an employment relationship, they cannotbe considered to have concluded an agricultural production contract. Nonetheless, the boundaries witha labour relationship may be difficult to draw in particular situations. The UN Special Rapporteur on theRight to Food has noted that, in some situations, farmers bound by contract farming arrangementshave “become essentially wage-earning agricultural labourers on their own land, but without thebenefits” or protections of international or domestic labour law.75 This may particularly be the casewhen the parties’ respective rights and obligations remain unclear, when there has been an attempt todisguise the employment relationship, or when inadequacies or gaps exist in the legal framework or inits interpretation or application. In order to avoid the unclear situations, a pre-contract with clear

Commented [A60]: Additionrecommended by FAO, online consultations.

Commented [A61]: Online comments.Mr Shepherd. Questioned the strong link tospecialized legislation.[I tried to emphasise contractual practice.]

Commented [A62]: Ms Watanabe, onlinecomments, makes the point about theproducer’s responsibility towards the workers“even though the producers recruit workers toassist them in production satisfied in thecontract farming agreement, the workers areunder producers responsibility.”


information about the production system would be reasonable tool for producers to aid them in theirdecision to enter into the contract farming. Should the producer act as the weaker party in the contractfarming arrangement, then producer’s representatives, such as syndicates, associations etc., shouldmonitor the agreements and assist them in giving or withholding consent. Many producers may be insituations where they are operating in the informal sector, or else existing labour frameworks do notadequately cover self-employed workers.

F. Access to natural resources

74. Depending on the region and type of commodity, contract farming may touch upon issues ofaccess to land, water, forest resources, and/or wild products. For many contract farming agreements,the land’s accessibility is the most necessary component for production. Many different questions mayarise depending on the nature of rights held over the land – ownership or otherwise – and the identityof their holder – more particularly whether it is one of the parties to the agricultural production contractor a third party, including the government. Especially for contractors that engage in contract farmingwith indigenous producers, the concept of Free, Prior and Informed Consent (FPIC) is very important.FPIC is the “collective right of indigenous peoples to make decisions through their own freely chosenrepresentatives and customary or other institutions and to give or withhold their consent prior to theapproval by government, industry or other outside party of any project that may affect the lands,territories and resources that they customarily own, occupy or otherwise use.”76

75. Ownership and other forms of control may entail a number of obligations under publicregulations. Public land management may impose restrictions regarding the kind of commodity to begrown or raised, in addition to environmental requirements. On the other hand, a number of issuesmay arise in connection with the characterisation of land rights under the applicable law. For example,tenancy agreements may be a regulated type of contract under different legal systems. Land accessand land tenure are frequently regulated by specific national land access legislation, be it included inCivil Codes, Agrarian Codes or stand-alone statutes. While land legislation may regulate the access toall real estate rights affecting agricultural land, countries also regulate the access to other naturalresources which are fundamental for agricultural development, including water resources, forests, andfisheries.

1 See CISG, Article 3.2 Sample contract 1 (Uganda ) “Agreement [Under the Sale of Goods Act, Chapter 82, Laws of Uganda]”.3 Future versions may further discuss the importance of customary law as a source of law applicable to contracts.There is a paragraph that deals with legal pluralism, (recognizing different legal orders/regimes). Customary lawwould be a separate paragraph since it is a separate concept. It seems important to recognize customary practices(costumbre/derecho consuetudinario) as a source of law that might be recognized explicitly in Commercial Codes,and confirmed in case-law. In some countries, for instance, customary law would be applied for a commercialrelationship (costumbre mercantile) even before applying civil law. This consideration would rather implyapproaching written legislation vs. customary law within one single legal regime.4 UPICC, Art. 1.7.5 Sample contract for pepper in Trinidad & Tobago “18 BEST EFFORTS – Both parties shall during theperiod of this agreement act in good faith diligently and honestly with each other in the performance of theirresponsibilities under this agreement and nothing will be done to jeopardize the interest of the other.”6 Sample contract for cotton in Kenya (2) “9.1 Any dispute whatsoever and howsoever arising out of thisContract shall be, at first instance, settled amicably by the parties through good faith negotiations” – Samplecontract for fruits in Brazil (2) “4 FOURTH CLAUSE: THE PRICE’S FINAL BALANCE AND ITS CALCULATION FORM– 4.1 Having considered that the “final price” of the box of oranges, object of this agreement, will be determinedbased on [exchange rate] quotes of industrialized juice in currency], the parties will rigorously observe, in thisdetermination, and with loyalty and good faith, the basic principles detailed below, discussed and expressly agreedamong them.

Commented [A63]: Ms Watanabe, onlinecomment.


7 There is no uniformly accepted definition of customary law. One broad definition is as follows:“Customary ‘laws’ include customary worldviews, principles or values, rules and codes of conduct, and establishedpractices. They are enforced by community institutions, and can have sanctions attached. They are derived fromnatural resource use – some practices and beliefs acquire the force of law. They are locally recognised, orallyheld, adaptable and evolving.” Swiderska, K. et al., Protecting Community Rights over Traditional Knowledge:Implications of customary laws and practices. Key findings and recommendations 2005-2009. London, IIED,2009.8 The notion of collective rights is often seen as particularly important to safeguard the identity and cultureof ethnic minority groups: Richard H Thompson, “Ethnic Minorities and the Case for Collective Rights”, (1997) 99American Anthropologist 786; Miodrag A Jovanovic, “Recognizing Minority Identities Through Collective Rights”,(2005) 27 Hum Rts Quarterly 625; Darlene M Johnston, “Native Rights as Collective Rights: A Question of GroupSelf-Preservation”, (1989) 2 Can J L & Jurisprudence 19 at pp 24-26. However, collective rights have also beensubject to a number of critiques because of their apparent inconsistency with the focus of modern liberal systemson individual rights: Leslie Green, “Two Views of Collective Rights”, (1991) 4 Can J L & Jurisprudence 315 at pp315-18.9 Special courts may be established to adjudicate matters related to customary law, for example the Maori LandCourt in New Zealand (continued under the Te Ture Whenua Māori Act 1993). In the United States, tribal courtsexist on many native reservations and apply the customs of the particular tribe in which they are located: MichaelD Lieder, “Navajo Dispute Resolution and Promissory Obligations: Continuity and Change in the Largest NativeAmerican Nation”, (1993) 18 Am Indian L Rev 1; Gloria Valencia-Weber, “Tribal Courts: Custom and InnovativeLaw”, (1994) 24 New Mexico L Rev 225 at pp 232 and ff. In Africa, many communities apply customaryenforcement and dispute resolution mechanisms: Elin Henrysson and Sandra F Joireman, “On the Edge of theLaw: Women’s Property Rights and Dispute Resolution in Kisii, Kenya”, (2009) 43 Law & Soc’y Rev 39.10 In Canada, for example, aboriginal customs benefit from some constitutional recognition: Constitution Act,1982, being Schedule B to the Canada Act 1982 (UK), 1982, c 11, s 35; Darlene M Johnston, “Native Rights asCollective Rights: A Question of Group Self-Preservation”, (1989) 2 Can J L & Jurisprudence 19 at pp 26-28. Thisis also the case in South Africa: Constitution of the Republic of South Africa Act, No. 108 of 1996, s 211. In NewZealand, the constitution also refers to customs and provides for special adjudication procedures: Treaty ofWaitangi Act 1975, s 6A. See also the Constitution of the Republic of Ghana, chapter 4, s 11(2) and (3). InSwitzerland, customary law is explicitly recognized as a subsidiary source in civil law (Swiss Civil Code, art 1). InGermany, the Civil Code also recognizes custom, and can potentially invalidate contracts that violate the “goodcustoms” of the community, although this appears to be interpreted restrictively: Bürgerliches Gesetzbuch, s138(1); Helge Dedek, « Not Merely Facts : Trade Usages in German Contract Law » in Fabien Gélinas, ed, TradeUsages and Implied Terms in the Age of Arbitration, Oxford, Oxford University Press, 2013 (forthcoming).11 See Nicole Roughan, Authorities: Conflicts, Cooperation and Transnational Legal Theory, Oxford, OxfordUniversity Press, 2013. In the context of a Case Study of one example of state-indigenous relationships i.e.Crown-Maori Relationships in New Zealand, she states that “a balance of reasons likely supports having […]common systems of private law and criminal justice. These are necessary to provide for dispute-resolution andprotect social interaction beyond the tribal membership, but they do not preclude the operation of parallel tribaljustice mechanisms and do not mean that the common justice system should consist only of state-made law. Onthe contrary, when rules of Maori law would produce results that are more in accordance with the reasons thatapply to all parties, then those rules should apply.”12 In common law jurisdictions, custom is often not referred to in statutes but has been recognized by courtsfor many centuries as a rule of law: FA Greer, “Custom in the Common Law”, (1893) 9 Law Quarterly Review153; Julius Lewin, “The Recognition of Native Law and Custom in British Africa”, (1938) 20 J of Comp Legislationand Int’l L 16; David J Bederman, “The Curious Resurrection of Custom: Beach Access and Judicial Takings”,(1996) 96 Columbia L Rev 1375 at pp 1382 and ff. See also Elin Henrysson and Sandra F Joireman, “On the Edgeof the Law: Women’s Property Rights and Dispute Resolution in Kisii, Kenya”, (2009) 43 Law & Soc’y Rev 39 atp 40; JH Dalhuisen, “Custom and Its Revival in Transnational Private Law”, (2007-08) 18 Duke J of Comp & Int’lL 339 at pp 339-44. Customary rules have also been recognized in a similar way by jurisdictions governed byIslamic law: Gideon Libson, “On the Development of Custom as a Source of Law in Islamic Law: Al-rujūʿu ilā al-ʿurfi aḥadu al-qawāʿidi al-khamsi allatī yatabannā ʿalayhā al-fiqhu”, (1997) 4 Islamic Law and Soc’y 131.13 In that regard, some associations have codified usages prevailing in their particular industry, e.g. theInternational Cotton Association Rules that express rules presumably drawn from usages on insurance, payment,sampling, quality and other important aspects of the production or sales contract: International CottonAssociation, Bylaws and Rules, online: <http://www.ica-ltd.org/media/layout/documents/rulebooks/rulebook_english_jun2014.PDF>. Commodity-specific usages arealso often unwritten.14 In Québec, appropriate usages constitute implicit terms of the contract, which judges must apply (art1434 CcQ). They may also serve as interpretative devices (art 1426 CcQ). In France, they may also serve thesetwo purposes (arts 1135 and 1159 Cc). In Germany, trade usages and customary practice “are seen neither asan independent source of objective law nor as merely content of the contract”, but are nevertheless applied byjudges in one of those two ways: Ernst Rabel, Das Recht des Warenkaufs, vol 1, De Gruyter, 1935 at p 59;Handelsgesetzbuch, s 346; Bürgerliches Gesetzbuch, ss 157 and 242.15 In common law jurisdictions, usages have been recognized mostly through judicial decisions. One of thefounding cases on that topic is Hutton v Warren, (1836) 1 M&W 460. See also the articles mentioned in supranote 6. There is a debate in some jurisdictions and in international private law as to the exact nature of usages;while some consider them only as interpretative devices or implied terms (e.g. Québec and France, see ibid),others may in addition characterize them as freestanding rules of law that can even trump the parties’ contractualstipulations (e.g. Germany, see ibid).


16 David V Snyder, “Language and Formalities in Commercial Contracts: A Defense of Custom andConduct”, (2001) 54 SMU L Rev 617 at p 621. In the US, see Barnard v Kellogg, 77 US 10 Wall 383 (1869)(Usage “may be admissible to explain what is doubtful; it is never admissible to contradict what is plain. […] Andit is well settled that usage cannot be allowed to subvert the settled rules of law”); see also, more recently,Uniform Commercial Code, section 1-205(4). In South Africa, see Cook v Pedison Limited 1927 WLD 62 at p 71(a trade usage “does not conflict with positive law (in the sense of endeavouring to alter a rule of law which theparties could not alter by their agreement) or with the clear provisions of the contract”).17 This interpretative role is provided for by statute in some jurisdictions such as France and Québec: supranote 12; see also Snyder, ibid at pp 621-22. This flexibility has however been criticized by many: Charles J. Goetzand Robert E. Scott, “The Limits of Expanded Choice: An Analysis of the Interactions between Express and ImpliedContract Terms”, (1985) 73 California L Rev 261.18 For the criteria, see Canadian Jewish Congress v Polger, supra note 10 at para 53; Cook v PedisonLimited, supra note 10 at p 71. Many courts have stated that the goal in finding usages is to ascertain thecircumstances that parties are deemed to have considered when entering into their contract: Canadian JewishCongress, ibid at paras 53-55; Emadyl Industries CC t/a Raydon Industries v Formex Industries (Pty) Ltd t/aFormex Engineering, [2011] ZAECPEHC 58 at paras 43-44. Some authors have expressed the view that for ausage to be binding, there has to be a material element – the existence of a practice – and an intentional element– the conviction of parties that they are bound to the particular unwritten usage: Jean-Claude Royer and SophieLavallée, La preuve civile, 4e éd., Cowansville, Éditions Yvon Blais, 2008, n° 108-111 at pp 64-67.19 See Lisa Bernstein, “Trade Usages in the Courts: The Flawed Conceptual and Evidentiary Basis of Article 2’sIncorporation Strategy”, (2014) Northwestern University L Rev, forthcoming, online:<http://ssrn.com/abstract=2366533>.20 T he FAO has compiled Good Agricultural Practices from around the world in a useful database, availableonline: <http://www.fao.org/prods/gap/database>.21 See for example International Cotton Association, Bylaws and Rules, online: <http://www.ica-ltd.org/media/layout/documents/rulebooks/rulebook_english_jun2014.PDF>.22 Fairtrade International, “About Fairtrade”, online: <http://www.fairtrade.net/about-fairtrade.html>;Food and Drink Federation, “Sustainable Sourcing: Five Steps Towards Managing Supply Chain Risk”, online:<http://www.fdf.org.uk/sustainable-sourcing.aspx>; see also infra, note 26.23 SAI Platform, “About Us”, online: <http://www.saiplatform.org/about-us/who-we-are-2>; Unilever,“Sustainable Living”, online: <http://www.unilever.com/sustainable-living-2014/>; Nestlé, “Our commitments”,online: <http://www.nestle.com/csv/what-is-csv/commitments>.24 Committee on Food Security, Voluntary Guidelines on the Responsible Governance of Tenure of Land,Fisheries and Forests in the Context of National Food Security, Rome, FAO, 2012, online:<http://www.fao.org/docrep/016/i2801e/i2801e.pdf>; FAO, IFAD, UNCTAD and the World Bank Group,Principles for Responsible Agricultural Investment that Respects Rights, Livelihoods and Resources, 25 January2010, online: <http://siteresources.worldbank.org/INTARD/214574-1111138388661/22453321/Principles_Extended.pdf>; European Commission, Vertical relationships in the FoodSupply Chain: Principles of Good Practice, 29 November 2011, online:<http://ec.europa.eu/enterprise/sectors/food/files/competitiveness/good_practices_en.pdf>; OECD, Guidelinesfor Multinational Enterprises, Paris, OECD, 2011, online: <http://www.oecd.org/daf/inv/mne/48004323.pdf>;UN Global Compact, The Ten Principles, online:<http://www.unglobalcompact.org/AboutTheGC/TheTenPrinciples/index.html>; ILO, Tripartite Declaration ofPrinciples concerning Multinational Enterprises and Social Policy, Geneva, ILO, 2006, online:<http://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/---multi/documents/publication/wcms_094386.pdf>. International commodity-based organizations established bytreaties also adopt such standards, notably the good practices drafted by the International Cocoa Organization<http://www.icco.org/sites/sps/good-agricultural-and-warehousing-practices.html>; the International CoffeeOrganization Coffee Quality-Improvement Programme, resolution number 420,<http://dev.ico.org/documents/iccres420e.pdf>; see also FAO, International Commodity Bodies, online:<http://www.fao.org/fileadmin/templates/est/CCP/oewg/International_Commodity_Organisations_.pdf>.25 The Food and Drug Administration (FDA) of the United States has for example issued a number of generaland commodity-specific Guidance Documents designed to help producers without binding them to new standards:FDA, Food Guidance Documents, online:<http://www.fda.gov/Food/GuidanceRegulation/GuidanceDocumentsRegulatoryInformation/default.htm>.26 These enforcement mechanisms may be more or less stringent depending on the nature of theinstrument. For example, the OECD MNE Guidelines and the ILO Tripartite Declaration, supra note 22, establishdispute resolution mechanisms that are mostly based on consensus and amicable settlement. Perhaps moreefficiently, organizations providing certification schemes, for example Fairtrade International, may withdraw theirapproval if standards are not respected. See also: European Commission, Framework for the implementation andenforcement of the principles of good practice in vertical relations in the food supply chain, 25 January 2013,online: <http://www.supplychaininitiative.eu/sites/default/files/b2b_voluntary_initiative_-framework.pdf>;FLOCERT, “Assuring Fairness”, online: <http://www.flo-cert.net/>.27 One of the most important international initiatives in this regard is the Codex Alimentarius, created bythe World Health Organization and the Food and Agriculture Organization of the United Nations, which establishesvoluntary food standards and guidelines aimed at ensuring the quality, safety and fairness of the internationalfood trade, e.g. General Guidelines for use of the term “Halal”, document CAC/GL 24-1997.28 General norms exist, such as the ISO 9001:2008 norm on Quality Management Systems. Other normsapply more specifically to the food industry: International Food Standards, online: <www.ifs-certification.com>;FSSC 22000, online: <http://www.fssc22000.com/>; Safe Quality Food Certification, online:


<http://www.sqfi.com/>; Non GMO Standard, online: <http://www.nongmoproject.org/product-verification/non-gmo-project-standard/>; BRC Global Standards, online:<http://www.brcglobalstandards.com/>; Marine Stewardship Council Certification, online:<http://www.msc.org/get-certified>; GlobalGAP, online: <http://www.globalgap.org/>.29 Fair trade, IFOAM Organic Standards; (addition suggested by FAO, internet consultation) OECD,Guidelines for Multinational Enterprises, Paris, OECD, 2011, online:<http://www.oecd.org/daf/inv/mne/48004323.pdf>; UN Global Compact, The Ten Principles, online:<http://www.unglobalcompact.org/AboutTheGC/TheTenPrinciples/index.html>; ILO, Tripartite Declaration ofPrinciples concerning Multinational Enterprises and Social Policy, Geneva, ILO, 2006, online:<http://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/---multi/documents/publication/wcms_094386.pdf>. (FAO, internet consultation these are not technical standardsper se but global guidance documents)30 The Global Compact, for example, has gathered adhesions from more than 12 000 enterprises: UN GlobalCompact, Participant Search, online: <http://www.unglobalcompact.org/participants/search>. This includesmore than 268 Food Producers:<http://www.unglobalcompact.org/participants/search?business_type=2&commit=Search&cop_status=active&joined_after=&joined_before=&keyword=&listing_status_id=all&organization_type_id=&page=1&per_page=250&sector_id=36&utf8=%E2%9C%93&sort_by=joined_on&direction=ASC>.31 A very widely applied system is HACCP – Hazard analysis and critical control points – system, which ismade mandatory under the public regulations of certain countries either for particular commodities or as agenerally applicable principle (e.g. EU Regulation EC/178/), and is very largely used under voluntary qualitystandards and schemes such as the ISO 22000 standard dealing with food safety. The Codex Alimentarius, supranote 25, is also widely applied through the WTO Agreement on Sanitary and Phytosanitary Measures, whichdirects member states to conform their measures to international standards, among which the Codex Alimentariusfigures prominently.32 To be applicable as usages, such schemes, standards and good practices have to fit within the criteriaestablished by the applicable legal system. In most cases, they have to be generally accepted and followed, suchas to make them implicitly binding upon relevant parties. See for example Canadian Jewish Congress v Polger,supra note 10 at para 53; Cook v Pedison Limited, supra note 10 at p 71.33 See for example the Guidance Documents developed by the Food and Drug Administration of the UnitedStates: FDA, Food Guidance Documents, online:<http://www.fda.gov/Food/GuidanceRegulation/GuidanceDocumentsRegulatoryInformation/default.htm>;Poland, Code of Good Agricultural Practice, Warsaw, 2004, online:<http://iung.pl/dpr/publikacje/kodeks_dobrej_praktyki_rolniczej.pdf>34 On the other hand, such instruments have often been criticized because of their non-binding nature and lackof enforcement: Hellen Keller, “Codes of Conduct and their Implementation: The question of Legitimacy”, (2008)194 Beiträge zum ausländischen öffentlichen Recht und Völkerrecht 219.35 Sample contract for tea in the United Republic of Tanzania “Law Applicable – 13.1 This agreement shallbe governed by the Laws of the United Republic of Tanzania”36 France, Code rural et de la pêche maritime, Article L631-24 on “contracts for the sale of agriculturalproducts”, para. III: “Le présent article est applicable aux ventes de produits agricoles livrés sur le territoirefrançais, quelle que soit la loi applicable au contrat”. See in the context of the United States federal system, theIowa Producer Protection Act, Section 11, which makes the application of the law compulsory to ensure thatproducers located in that state will enjoy the protections of the act.37 With the consequence that a contract clause designating as competent forum the court of the countrywhere the production takes place is likely to result in the application of the domestic law of the forum, even whenno express clause so provides.38 See: Regulation (EC) No 593/2008 on the law applicable to contractual obligations (Rome I): Article 4 –“1. To the extent that the law applicable to the contract has not been chosen in accordance with Article 3 andwithout prejudice to Articles 5 to 8, the law governing the contract shall be determined as follows: (a) a contractfor the sale of goods shall be governed by the law of the country where the seller has his habitual residence; (b)a contract for the provision of services shall be governed by the law of the country where the service providerhas his habitual residence; […] – 2. Where the contract is not covered by paragraph 1 or where the elements ofthe contract would be covered by more than one of points (a) to (h) of paragraph 1, the contract shall be governedby the law of the country where the party required to effect the characteristic performance of the contract hashis habitual residence.”

Inter-American Convention on the Law Applicable to International Contracts (1994), Article 9: “if theparties have not selected the applicable law, or if their selection proves ineffective, the contract shall be governedby the law of the State with which it has the closest ties.

The Court will take into account all objective and subjective elements of the contract to determine thelaw of the State with which it has the closest ties. It shall also take into account the general principles ofinternational commercial law recognized by international organizations.

Nevertheless, if a part of the contract were separable from the rest and if it had a closer tie with anotherState, the law of that State could, exceptionally, apply to that part of the contract.”39 An example is provided by the Uniform Act on general commercial law adopted by the States parties tothe Organisation for the harmonization of business law in Africa.40 References to the provision of the CISG in this Guide, unless otherwise indicated, are meant as reference to amodel text, and do not necessarily imply the applicability of the Convention.


41 In defining whether a production contract may indeed be characterised as a sale under the Convention,special consideration should be paid to Article 3 of the CISG, Article 3: “(1) Contracts for the supply of goods tobe manufactured or produced are to be considered sales unless the party who orders the goods undertakes tosupply a substantial part of the materials necessary for such manufacture or production. (2) This Conventiondoes not apply to contracts in which the preponderant part of the obligations of the party who furnishes thegoods consists in the supply of labour or other services.”42 Cross border contract farming is reported to be commonly practiced in Laos for the Thai and People’sRepublic of China markets. See: http://mssrc.la.ubu.ac.th/2006/admin/Projects/18/cross-border-contract-farming.pdf43 See within the European Union, Directive 2011/95/EC on General Product Liability; Directive 85/374/ECon liability for defective products.44 See, e.g. within the European Union, the Regulation (EC) No 178/2002 of 28 January 2002 laying downthe general principles and requirements of food law, establishing the European Food Safety Authority and layingdown procedures in matters of food safety, with Articles 17-20 dealing with the responsibilities of food and feedbusiness operators in matters of food safety; under Article 21, the 2002 Regulation applies without prejudice toCouncil Directive 85/374/EC on liability for defective products (supra note).45 See, the 2004 Guidance Document on the implementation of Articles 11, 12, 16, 18, 19 and 20 ofRegulation 178/2002 on general food law – Conclusions of the Standing committee on the Food Chain and AnimalHealth; see also ECJ Case C-315/05 Opinion of Advocate General Stix-Hackl delivered on 12 September 2006; inA. Alemanno, Trade in Food: Regulatory and Judicial Approaches in the EC and the WTO, 2007.46 Examples of relevant international instruments are: within the European Union, the Regulation (EC) No864/2007 of 11 July 2007 on the law applicable to non-contractual obligations (Rome II), Article 5 of which dealswith product liability: “1. […] the law applicable to a non-contractual obligation arising out of damage caused bya product shall be: (a) the law of the country in which the person sustaining the damage had his or her habitualresidence when the damage occurred, if the product was marketed in that country; […]However, the law applicable shall be the law of the country in which the person claimed to be liable is habituallyresident if he or she could not reasonably foresee the marketing of the product, or a product of the same type,in the country the law of which is applicable under (a), (b) or (c).” Also: the Convention of 2 October 1973 onthe Law Applicable to Products Liability.47 See FAO, Mosoti, Victor and Gobena, Ambra: Legislative Study 98 “International trade rules and theagriculture sector”. Page 13.48 Codex Recommended International Code of Practice General Principles of Food Hygiene – CAC/RCP 1-1969, Rev. 4-2003, Art. 2.3.49 www.codexalimentarius.net50 www.oie.int51 www.ippc.int52 For example, see Zulu B., As drought takes hold, Zambia's door stays shut to genetically modifiedorganisms, Science and Development, www.scidev.net/content/features/eng/as-drought-takes-hold-zambias-door-stays-shut-to-gm.cfm, 12 April 2005.53 See also Traynor P. L. and Komen J., "Regulating Genetically-Modified Seeds in Emerging Economies",in Seed Policy, Legislation and Law: Widening a narrow Focus, Niels P. Louwaars, Food Products Press, New York,2002, p. 215.54 Cartagena Protocol on Biosafety, art. 10(6).55 Ibid., art. 10.1.56 Ibid., art. 18(2).57 As it is mentioned above, Article 27(3)(b) of the TRIPS Agreement makes it mandatory for WTO membersto provide for the protection of plant varieties through patents, an effectives sui generis system, or a combinationthereof.58 For more information please consult: http://www.upov.int/portal/index.html.en59 “Notwithstanding Article 14, each Contracting Party may, within reasonable limits and subject to thesafeguarding of the legitimate interests of the breeder, restrict the breeder's right in relation to any variety inorder to permit farmers to use for propagating purposes, on their own holdings, the product of the harvest whichthey have obtained by planting, on their own holdings, the protected variety or a variety covered by Article14(5)(a)(i) or Article 14(5)(a)(ii)”.60 For more information please consult: http://www.planttreaty.org/61 TRIPS Plus which provide for intellectual property protection above the minimum standard that the TRIPSagreement.62 Article 12 (d) of the ITPGRFA mentions that: “…Recipients shall not claim any intellectual property orother rights that limit the facilitated access to the plant genetic resources for food and agriculture, or their geneticparts or components, in the form received from the Multilateral System”.63 FAO AGS, Agricultural Finance and Investment, http://www.fao.org/ag/ags/agricultural-finance-and-investment/en/.64 Committee on Economic, Social and Cultural Rights, General Comment No. 12: The right to adequatefood (Art. 11), para. 1, (E/C.12/1999/5).65 See e.g., L. Knuth & M. Vidar, Constitutional and legal protection of the right to food around the world.(2011), FAO, Rome.66 As of 17th of September of 2014.See https://treaties.un.org/pages/ViewDetails.aspx?src=TREATY&mtdsg_no=IV-3&chapter=4&lang=en


67 See CESCR General Comment 12.68 Special Rapporteur on the Right to Food, Olivier De Schutter, Interim Report A/66/262, p. 6.69 http://www.business-humanrights.org/UNGuidingPrinciplesPortal/BackgroundHistory70 Art. 11, International Covenant on Economic, Social and Cultural Rights (ICESCR), G.A. res. 2200A (XXI),21 U.N.GAOR Supp. (No. 16) at 49, U.N. Doc. A/6316 (1966), 993 U.N.T.S. 3, entered into force Jan. 3, 1976.71 See Art. 6, International Covenant on Economic, Social and Cultural Rights (ICESCR), G.A. res. 2200A(XXI), 21 U.N.GAOR Supp. (No. 16) at 49, U.N. Doc. A/6316 (1966), 993 U.N.T.S. 3, entered into force Jan. 3,1976.72 See e.g., Para. 11, Interim report of the Special Rapporteur on the right to food, Olivier De Schutter,submitted by the Secretary General of the United Nations to the Sixty-sixth session of the United Nations GeneralAssembly, A/66/262, 4 August 2011.73 A not uncommon outcome of contracts is that women and younger family members provide much of the labourwhile cheques are paid to the (male) household head who holds title to the contracts (Glover & Kusterer, 1990;Torres, 1997). ftp://ftp.fao.org/docrep/fao/007/ae023e/ae023e00.pdf See also case studies from Indiahttp://dlc.dlib.indiana.edu/dlc/bitstream/handle/10535/6078/9281IIED.pdf?...174 Decent rural employment is decent work in rural areas. Decent work has been defined by the ILO and endorsedby the international community as being productive work for women and men in conditions of freedom, equity,security and human dignity. Decent work involves opportunities for work that is productive and delivers a fairincome; provides security in the workplace and social protection for workers and their families; offers betterprospects for personal development and encourages social integration; gives people the freedom to express theirconcerns, to organize and to participate in decisions that affect their lives; and guarantees equal opportunitiesand equal treatment for all. The Decent Work Agenda is a balanced and integrated programmatic approach topursuing the objectives of full and productive employment and decent work for all at the global, regional, national,sectoral and local levels. It comprises four pillars, namely: employment creation and enterprise development;social protection; standards and rights at work; governance and social dialogue.75 See e.g., Para. 19, Interim report of the Special Rapporteur on the right to food, Olivier De Schutter,submitted by the Secretary General of the United Nations to the Sixty-sixth session of the United Nations GeneralAssembly, A/66/262, 4 August 2011.76 FAO, Governance of Tenure Technical Guide no 3 : Respecting free, prior and informed consent, Rome, FAO,2014, p. 4.

Page 9: [1] Commented Author 11/12/2014 12:30:00 PMFAO, online consultations. The point is made that the paragraph (and the whole section) include two different concepts of

“standard”. The standard clauses used in certain contracts, and the technical standards used as reference for the technical

specifications of the product. These two meanings of “standard” are different and should be dealt with in different paragraphs.

The same person advises using two terms” “standard contract forms” and “technical standards”

[Although a useful point, the commentator might have misunderstood the first paragraph confusing what are 3rd party standards

with standard contractual forms. To avoid confusion (arising potentially in the paragraph below), rather than using "standard

terms", the guide could say either standards or technical standards.]

Page 9: [2] Commented Author 11/12/2014 12:31:00 PMThe importance of codes of conduct in the private sector was emphasised by various speakers at session 1, Private Sector Workshop.

Although they include ethical standards they are also broader, covering also other important aspects

Page 9: [3] Commented AuthorFAO, internet consultations. The comment is made that even here international guidance documents and guidelines are confused

with the two meanings of standard.

Page 9: [4] Commented AuthorFAO, internet consultations. The suggestion is made to remove this last sentence.

Page 9: [5] Commented AuthorOnline comments. Mr. Eaton: “CSE has indicated previously the importance of industry to regulate itself without third partyintervention. Particularly important in seasonal crops.”

Page 9: [6] Commented AuthorMr Medina, Private Sector Workshop, session 2, illustrated the Spanish example saying that while “increased regulation mightgenerate additional costs, auto-regulation of unfair practices had a very important capacity to correct unfair behaviours: increased

retailer and supplier collaboration could help to correct such behaviours, stabilize the food supply, and drive innovation.”

Page 9: [7] Commented AuthorBuenos Aires. Session 1. Mr. Piet Vantemsche highlighted the potential of inter-professional chain consultations in more detail than

presently in the Guide. Similar ideas were expressed by Ms. Victoria in Session 3.

Page 9: [8] Commented AuthorBuenos Aires. Session 1. Mr. Piet Vantemsche highlighted the potential of inter-professional chain consultations in more detail than

presently in the Guide. Similar ideas were expressed by Ms. Victoria in Session 3.

Page 9: [9] Commented AuthorThis comment was made by Mr Ywema, Private Sector Workshop, session 1.

Page 9: [10] Commented AuthorView comment by FAO, internet consultation, above. The suggestion is made to change this to "technical standards"

Page 9: [11] Commented AuthorView comment by FAO, internet consultations above. This might be changed to "technical standards"

Page 9: [12] Commented Author 11/12/2014 12:45:00 PM

PARTIES TO THE CONTRACT, CONTRACT FORMATION

AND CONTRACT FORM

Prepared by Professor A. Bryan Endres and the UNIDROIT Secretariat

Table of contentsA. The agricultural producer.......................................................................................................................... 2

1. Distinctive features................................................................................................................................ 2(a) Agricultural production......................................................................................................................... 3(b) Producing as a professional activity ..................................................................................................... 3(c) Legal status of agricultural producers................................................................................................... 3

2. Forms for conducting an agricultural production activity ..................................................................... 4(a) Individual producers ............................................................................................................................. 4(b) Producer organisations......................................................................................................................... 5

B. The contractor........................................................................................................................................... 81. Private corporate structures ................................................................................................................. 92. Public entities ........................................................................................................................................ 9

C. Other parties interested in an agricultural production contract ............................................................. 101. Value chain participants ...................................................................................................................... 10

(a) Various linkages between participants............................................................................................... 11(b) Types of participants .......................................................................................................................... 11

2. Interested third parties ....................................................................................................................... 13

II. Contract Formation................................................................................................................................ 14

A. Offer and acceptance .............................................................................................................................. 14B. Capacity and consent .............................................................................................................................. 16C. Role of those who intervene or assist in the contract negotiation.......................................................... 18

1. Producer organisations................................................................................................................... 182. Facilitators ...................................................................................................................................... 193. Public authorities ............................................................................................................................ 194. Intermediaries................................................................................................................................. 19

III. Contract Form and Content ................................................................................................................... 20

A. Contract form.......................................................................................................................................... 20B. Contract content ................................................................................................................................... 22C. Consequences of breach of required form or content ............................................................................. 24

Commented [A1]: Online comments.Fondation pour le droit continental (ad hocexpert group) suggests that the nature of therelationship between the Unidroit Principlesand the Guide should be better highlighted,because the expected audience might not befamiliar with the Principles. This concernsespecially this chapter where there aremultiple references to the Principles, butsimilarly others as well. The Groupencourages giving clear guidance as to thedevelopments which directly concern thedrafting of contractual clauses and thosewhich are more general views on the legalregime of contract farming and are moreuseful for international organizations,legislators, judges or mediators.

2. UNIDROIT 2014 – WG4 – W.P. 1 – Parties, Formation and Form

PARTIES TO THE CONTRACT, CONTRACT FORMATION AND CONTRACT FORM

1. This Chapter explores the form and formation of an agricultural production contract, as wellas the parties to the contract. Below, Part I* introduces the range of parties that may be involved inan agricultural production contract. Part II* provides an overview of contract formation, including thekey elements of offer, acceptance and confirmation. Part III* discusses the form and content of anagricultural production contract.

I. Parties to the Contract

2. Often, one single producer will be engaged toward one contractor under a bilateralrelationship reflected by their contract. However, other entities may also participate in thearrangement, creating a multiparty contract. In other situations, third-party entities could deal withone of the parties on the basis of a separate but linked contract that is instrumental for theperformance of the central agricultural production contract. Below, Parts A and B* identify the twokey parties that undertake the characteristic obligations under this type of contract, i.e. anagricultural producer and a contractor. Part C* provides an overview of other parties who mayparticipate in the contract, have an interest in it or otherwise influence its conclusion andperformance.

3. Several issues should be kept in mind throughout this section, particularly regarding theintersection between agricultural production contracts and national legislation. Thus, the way in whicha contracting party is qualified under domestic law – as an individual or a collective entity – hasimportant consequences regarding the legal regime that will apply to it and to its dealings with thirdparties. In countries that have enacted special legislation for agricultural production contracts, thenature of the parties serves indeed as one element defining the scope of this contract type. Theconcepts of agricultural producer and contractor presented below refer to the economic and legalposition under a production contract, but not to the status that may be recognised under domesticlaws or regulations for special purposes, such as subsidies or licences.

4. In addition, it should be reminded that domestic law governs issues regarding the capacity ofnatural and legal persons to conduct economic activities and to enter into an agreement. The formand legal structure of each party will determine its obligations under tax law or corporate law, whichare not addressed here. It may be noted however that production contracts sometimes containclauses spelling out that the producer, the contractor or both, have duly complied with such duties,together with a warranty for noncompliance.1

A. The agricultural producer

1. Distinctive features

5. An agricultural producer2 may be defined in various ways, and even within a particularcountry particular laws and regulations may apply different criteria depending on their context orpurpose. This is notably the case in areas of particular importance such as land tenure andmanagement, eligibility for financial subsidies, applicable tax regimes, social security schemes,possible special status under competition law, as well as environmental, health and hygieneregulations. However, two criteria in particular are generally relevant to characterise an agriculturalproducer, namely the nature of the produced goods and of the activity itself.

UNIDROIT 2014 – WG4 – WP.1 – Parties, Formation and Form 3.

(a) Agricultural production

6. Depending on the country, the concept of “agriculture” may relate to the utilization of land,forest, marine and freshwater resources. Very often it refers to obtaining primary products fromidentified sectors, typically crop cultivation – with possible further specification such as horticulture,floriculture, viticulture –, animal husbandry, forestry and aquaculture, as well as products directlyderived from these activities such as milk, honey, and silk. In many countries, an analytical approachfocuses rather on the control of a “biological cycle,” a concept referring to one or several operationscarried out with a view to the biological development of vegetal and animal products.

7. Domestic rules governing agricultural production contracts may either be general or apply tospecific products such as poultry, vegetables, or milk. In this latter situation, specific provisionsaddressing contractual relations may be found in an act regulating a particular commodity,3 or mayconstitute a whole act or instrument by themselves – such as a standard mandatory form contract.4

(b) Producing as a professional activity

8. Another criterion which is generally used to qualify an agricultural producer under domesticlaw assumes that the producer, whatever its size and structure, carries out the production on anindependent and professional basis. This independence does not exclude a group of producers whojoined together in a cooperative or some oter form of group. As mentioned in the Introduction*,employees fall outside of this scope and are therefore not within the purview of this Guide. Theprofessional purpose of the activity may be defined in various manners. First, it may refer to theproducer as an “entrepreneur,” or to its undertaking as an “enterprise,” which implies an organisedactivity involving a level of financial risk. Second, there may be reference to the economic purpose ofthe activity as including the sale of the products or an exchange of goods and services. Lastly,definitions may exclude production intended exclusively for family or household consumption.

9. An agricultural activity typically takes place over a certain portion of land or in installationsthat are under the producer’s control and management. This control may involve actual ownership orrights of use, together with related rights under the domestic law. The producer may also lease theland from a private or a public entity. In many jurisdictions and in developing countries in particular,individuals or communities often live on land without holding any formal title, under traditional orcustomary forms of tenure. Whatever their nature, the possibility for a producer to rely on securetenure rights will enable it to safely engage in a production activity and to contract on a sound basis.

(c) Legal status of agricultural producers

10. Domestic laws may apply different rules to agricultural producers depending on the nature oftheir activity or their legal status, generally affording greater legal protection when producers are notengaged in commercial activities. The basis for protection depends on the legal system and theparticular country.

11. Many countries distinguish a “civil” and a “commercial” body of law, and regulate mostaspects of the status and activity of producers under the general rules of the “civil” law. However,when producers act under certain corporate structures, “commercial” rules would apply. Agriculturalproducers subject to civil rules would be entitled to process or market their products only as ancillaryto production activities. Besides fiscal benefits, a “civil” status would involve the application of specialrules in matters such as agricultural land leases, insolvency or jurisdiction of courts. Regardingcontract law, irrespective of whether the other party also has a “civil law” status or is a businessentity, the general part of the law of obligations will apply rather than the special commercial lawrules governing transactions among merchants.

Commented [A2]: Online comments.Fondation pour le droit continental (ad hocexpert group) suggested clarifying thatindependence of producers does not excludepossibility of participating as a group. Seealso introduction, comment X.

Commented [A3]: Online comments.Justice Canada suggest moving this toChapter 1. For details, see Doc. 23.


12. In many other jurisdictions, the status of agricultural producer would not be subject to aparticular body of law compared to other activities. Rather, a distinction would be drawn between aperson occasionally involved in dealing with agricultural products and having no or scarce experienceor knowledge regarding the particular commodity sold or market concerned, and a producer acting ona commercial basis, having knowledge or skills with regard to certain practices or goods, or anexperienced professional involved in transactions in the ordinary course of its business. If theproducer is characterised as a “merchant,” or an agricultural firm, rules applicable to commercialactivities will govern contract formation, performance and remedies. For example, a merchant willgenerally be subject to implied warranties regarding the quality of the goods delivered under a sale.Also, subject to special regulation, it may not be required to comply with the written formrequirement. Furthermore, merchants may not benefit from the extended protection granted to non-commercial parties by special legislation on unfair terms and practices or statutes of fraud.

2. Forms for conducting an agricultural production activity

13. Producers may carry out their activity on an individual or collective basis. As agriculturedevelops as an income-earning and profit-making activity, the ways in which producers organizethemselves are increasingly captured by legal formality. Institutional forms and legal structures maybe the same that are available for other sectors or activities, but in most countries, there are legalforms specifically designed for agricultural producers. Each particular form entails a range of differentrights and obligations, and may have a decisive influence on the management and the potentialdevelopment of the activity from a business perspective. For the purpose of this Chapter, thecommon legal forms that producers may take will be classified into two broad categories, dependingon whether they represent a legal structure for exploiting a single undertaking or whether they areused as a pool of several undertakings.

(a) Individual producers

14. Around the world, the agricultural sector is typically made up of small to medium-sizedentities, most being family-managed undertakings. Accordingly, while encouraging the developmentof large entities to respond to increased productivity needs, many countries also implement publicpolicies to sustain small and medium scale enterprises. Particular attention is paid to small and microenterprises and to empowering specific categories of persons, such as women or youngentrepreneurs. Available policy options in this realm include simplifying and reducing the costs of theformalities required to open and operate an activity, thus encouraging producers to acquire a formalstatus either as individual entrepreneurs or under a corporate form.

(i) Natural persons and partnerships

15. Individual producers generally operate through small production structures in terms of capitalsize, number of workers employed and volumes of production. In most parts of the world, farmingbusinesses are not required to incorporate under a specific legal form. However, registration is mostoften required to obtain permits, licenses or public certifications needed for certain types ofproduction. Registration comes with certain obligations such as tax and accounting liabilities, but alsoaffords a certain level of protection, typically by giving access to social security benefits and publicprogrammes geared toward the formal sector. Some countries where the informal sector prevailshave thus implemented simple registration procedures providing a certain level of legal recognitionthat may facilitate access to credit by formal banking institutions and to other forms of State support.

16. In an agricultural undertaking owned and operated by one individual, the personal andprofessional capacity and assets form one single entity, to which the creditors may have access to

Commented [A4]: Ms Watanabe, onlinecomment.


secure payment of the debts contracted for the agricultural production. The producer as well as theproducer’s family may be exposed to substantial risks. Depending on the applicable law however,certain items of the household property, or the land itself, may be protected from attachment in debtrecovery proceedings. Furthermore, in addition to the risks inherent in agricultural activity such asweather constraints, an undertaking operated by an individual is exposed to risks related to theowner’s physical condition and wellbeing.

17. Often, two or more individual producers join their capital and skills to carry out a revenuegenerating activity, appearing as a single entity but having no separate legal personality. Many suchsituations may arise in practice, for example within a family or a group of neighbours. This type ofundertaking, recognised as a partnership under most legal systems, would be considered as jointlyheld by the partners. Absent a specific agreement, partners would share profits and losses equally,each incurring joint and several liability for the other’s decisions, debts and defaults. This feature mayentail risks, but would also have a peer monitoring effect within the producers. Certain forms mayallow members to participate with a limited liability.

18. While not legally required, a written agreement is generally useful to govern the relationsbetween the partners regarding matters such as capital contributions, allocation of profits and losses,duties and management responsibilities. A written agreement brings the added benefit of clarity fromthe contractor’s perspective, in particular regarding the status of the person authorised to contractand deal on behalf of the group.

(ii) Corporate structures

19. Corporate structures are particularly suitable for collective holding of capital and representwidespread forms of farming. Simple corporate structures such as the limited liability company maybe preferred for smaller groups of investors. In many countries, individual producers also have theoption to incorporate as a single-owner company. Under a corporate form, the continuity of theactivity can be facilitated by the transfer of company shares, including for example upon the death ofa shareholder Setting up a company creates an independent legal entity, thus separating the owners’personal assets – typically the land – from the company’s assets, and limiting the owners’ liability forthe company’s debts. It must be noted however that incorporating a limited liability company wouldnot shield the producer against all liability. Creditors often seek to obtain a personal guarantee for thedebts or other obligations under the contract, for example by obtaining a bill of exchange signed bythe producer, or a mortgage over non-farm assets, when this is allowed under domestic law.

20. Many countries have special corporate structures for small undertakings with a limitednumber of producers – for example up to ten members, typically relatives, family members orneighbours – either personally and directly involved in the production by providing labour in additionto capital, or admitting also other non-producer physical persons. These special types of producerorganisations may be limited in their ability to carry out activities considered to be of a “commercial”nature, such as trading or processing the product, except within certain limits. Limitations of thisnature may be one of the reasons why contract farming arrangements are a suitable vehicle for thedistribution of agricultural products and the better integration of producers in value chains.

(b) Producer organisations

21. Agricultural producers may also join the resources of their respective production units,without however losing their individual autonomy, by creating producer organisations such asassociations or cooperatives.5 In the context of this Guide, the concept of producer organisations isintended broadly to include any form where the production of individual producers is managed and/ormarketed collectively. Among the available forms, associations and cooperatives may be seen as the

Commented [A5]: Online Comments,Min. Justice Canada suggests removing thisas specious or irrelevant.


most widespread categories of organisations that could participate as a party in a productionrelationship, although a large number of different designations and forms may also be found inpractice and under national law.

22. When producers join efforts under an adequate legal form provided by the law they are able,as a group, to seek commercial financing, conclude insurance contracts, hire labour, apply for publicsubsidies or other public policy programmes, develop certification schemes, own shares in other legalentities, and take various other steps to build, strengthen and increase production capacity. Anorganisation with legal personality can buy, hold and sell immovable or movable property, be a partyto a contract and act in legal proceedings.

23. The legal formalisation of a producer organisation generally requires a certain level ofmaturity of the group in terms of internal cohesion, minimum technical and financial capacities andmanagement, and awareness regarding the objectives and the means to be implemented. This inturn may result in strong interdependence and an added social pressure encouraging all members toimplement best practices. Also, the formation and operation of a legal entity have implications interms of costs and liabilities. In response, certain countries have adopted simple legal forms intendedfor groups with small-scale producer membership that would allow them to engage in formal dealingswith buyers. Special programmes and policies are implemented both by public actors and by non-governmental organisations to foster and sustain small producer organisations. It is also worth notingthat several private sector participants dealing with such organisations, especially under the fair tradeor equitable trade schemes, have focused on the empowerment of small producers by undertakingspecific obligations in their contractual relationships, for example by providing extension services andsupport to the community.

23 bis - Associations are often the result of the implicit or explicit acknowledgement of the existenceof synergies among the various participants. Regrouping would, for example, reduce acquisitioncosts, pool expertise (some participants have a specific expertise while others have another, a poolingof which could be beneficial to all), or share the acquisition costs of expensive equipment on a costsharing basis. Often the membership is made of members active in the same production field.

24. Members of traditional communities or indigenous groups may produce collectively anddeliver products to contractors under agricultural production contracts. Certain countries recognise bystatute a legal personality to designated customary bodies or traditional communities. A communitycould function as a producer organisation, with members having their own assets and the head of thecommunity being authorised to enter into contracts for the community, or members could also havecommon ownership over the community property. Most often there would be no written documentsevidencing title or relations within the community, but there would be a general knowledge inside itabout title or identification of the community or its members. Often, people dealing with thecommunity such as contractors may also possess this knowledge. Nevertheless, a written associationagreement would be preferable also in this context.

25. Different types of organisations may also have an important advocacy role. Under thegenerally recognised principle of freedom of association, contractors should not restrict a producer’srights to join or contract with a producer association. Similarly, contractors should not engage inretaliatory or discriminatory practices towards producers exerting such rights. This type of conductwould be sanctioned under domestic law and is expressly condemned as an unfair practice underspecific legislation on production contracts.6 Under such legislation, the protection afforded toproducers to join an association is further strengthened by the prohibition on inserting confidentialityclauses in contracts and their consequent invalidity.

Commented [A6]: At Bangkok ProfParipurna equates this capacity building to astrong interdependence and a socialpressure that encourages all members toimplement best practices

Commented [A7]: Online comments.Min. Justice Canada suggests adding thisparagraph to complement to preceding one.

Commented [A8]: Online comments.Min. Justice Canada suggests mentioningthat a written association comment wouldbe relevant also in this context.


(i) Non-profit entities

26. Agricultural non-profit entities may play a role in enhancing their members’ capacities ininformation, management, training and extension services, research, advocacy and others. They mayalso provide services for the organisation of production by receiving and distributing inputs,performing land preparation services, and monitoring contract performance through quality control.They may act as facilitators in dealings between producers and the contractor and sometimes alsotoward other parties, such as a bank providing credit to producers, or a government entityadministrating a public development scheme. Depending on their particular form, entities in thiscategory may come close to a cooperative. However, because of their non-profit identity and purpose,voluntary associations, self-help groups and similar entities are not authorised to distribute profits tomembers. Note that in a number of countries, non-profit entities are entitled to conduct revenue-generating activities under certain conditions, while in others this capacity is very restricted.

27. The relations between the entity and its members and the operating rules are set by itsinternal statutes, while the legal capacity of the association and scope of liability towards third partiesare determined by national law. The authority of a legal representative to deal with third parties andundertake obligations on behalf of members is based on the authority conferred by the members,under the statutes. Sometimes, it is also reflected in the production contract itself. 7 The associationmay be a party to a production contract, undertaking specific obligations in its own name as afacilitator, in addition to acting as an agent regarding members’ obligations toward the contractor.

28. Producers may also join informally, without registering or complying with formal requirementsprovided for by the law or without formally defining the relationships between members and howthey will be represented. This may result in a high level of uncertainty when one person deals with acontractor on behalf of a group of producers. This may be the case when one leading produceraggregates the production of its neighbours, delivers the inputs supplied by the contractor, and thenmakes payment to the other producers. Whether the leading producer acts on behalf of the group asa single entity or on behalf of each of the individual producers needs to be clarified in advance, sincea default by one member will have different implications. In certain situations, the person acting onbehalf of the group could be personally responsible for defaults by group members. Usages within thegroup and implied authority will be relevant in this context.

(ii) Cooperatives

29. Cooperatives are economic entities that combine commercial and not-for-profit features, andplay a major role in the economic and rural development of most countries around the world. Incertain geographical areas and for particular commodities, agricultural cooperatives gather very largenumbers of producers and manage most of the production. They may, however, take several formsdepending on their membership, object and activities.8 Cooperatives are economic entities that maycombine commercial and non-for-profit features depending on the legal system. They also varyconsiderably in size as well as in technical and economic capacities.

30. An agricultural cooperative may perform different tasks. It may market the production of itsmembers or even organise the production process itself. Moreover, cooperatives sometimes provideservices such as planning, technical assistance, access to equipment, supply of inputs, and qualitycontrol. As the cooperative acquires more business and financial strength, activities and services tomembers could expand to include for example group certification or obtaining third party certification,developing specialised products and labels, and engaging in downstream activities such as pre-processing, transformation and packaging. These activities may often be undertaken throughcommercial subsidiaries or based on contract alliances and networks, thus achieving vertical and/or

Commented [A9]: Online comments.Min. Justice Canada suggests elaborating onthe legal implications.

Commented [A10]: Online comments.Min. Justice Canada notes that theapplication of this paragraph goes beyond“non-profit entities” and might be bettersituated elsewhere.


horizontal integration. Cooperatives may also gather associations of producers rather than justindividual ones.

31. In many countries, cooperatives are regulated by a special legal regime, and particular rulesmay apply to those engaged in agriculture or in the production of specific commodities. In othercountries, cooperatives come under the general rules governing corporate bodies, sometimes adaptedin light of the cooperative principles. Internal statutes regulate the relationship between thecooperative and its members based on their participation as financial shareholders and primary – andsometimes exclusive – beneficiaries or users. Based on this duality, in certain countries therelationship between members and the cooperative is viewed as sui generis in nature, andcooperative rules would apply to issues such as transfer of ownership, the price, the duration of thecontract, and remedies for non-performance.

32. The parties involved may have different roles, obligations and risk allocations, depending onthe purpose and membership reflected in the statute of the cooperative and its business strategy fordealing with buyers of the produce. When the cooperative gathers members producing together – forexample on jointly owned or controlled agricultural plots –, the cooperative will enter into aproduction contract in its own name. In this situation, it would be directly responsible for theobligations toward the contractor and non-compliance by individual members would be dealt withinternally under the cooperative’s rules.

33. Members producing individually or grouped under associations may join in a cooperative forthe marketing or exporting of their produce. The role and liabilities of the cooperative would varydepending on its statutes and the applicable law, and depending on whether it acquires title to theproduce from the members or acts as their agent. In the latter case, the acts validly entered into bythe cooperative as an agent bind directly the members under a production contract, while thecooperative will respond directly of the acts performed in its own name. On the other hand, when thecooperative acquires title over the produce delivered by its members in order to resell it or process it,the services provided by the cooperative to members often correspond to those typically delivered bya contractor under a production contract. However, it is important to note that a commercial firmbuying the produce may also provide direct services to producers, conceptually bypassing thecooperative. In such a case, the various participants – producer(s), association(s) and/or cooperativeand/or commercial buyer – would share obligations and responsibilities in the manner spelled out inthe relevant contracts.

B. The contractor

34. For the purposes of this Guide, the contractor is the party commissioning the production fromthe producer and providing a certain degree of guidance, such as the supply of inputs, services,finance and control over the production process. Typically, the contractor will be an entity thatmanufactures or processes the produce, and then sells it either to the final consumer, as it occursincreasingly with supermarket brands, or to other chain participants for further processing andonward sale along the supply chain.9 The contractor could also be a wholesaler or an exporter,dealing with matters besides manufacturing or processing. Besides commercial entities, other typesof contractors may be involved such as cooperatives and, in particular occasions, public entities. Incountries where certain commodities are publicly regulated and cannot be traded directly betweenprivate parties, special exemptions may allow producers to enter into contracts with commercialcontractors.

35. The contractor’s legal form will be relevant in several different ways. It may determine therules applicable to its relationship with the producer, as part of the definition of the type of contractregulated by certain national laws. Its capacity will generally have an influence on the characteristics

Commented [A11]: Online Comments.Min. Justice Canada suggested clarifying thatnot all products are intended formanufacture or processing.


and balance of its contracts with agricultural producers. Its legal location may also be relevant todetermine the law applicable to the production contract.

1. Private corporate structures

36. The contractor will often be a business entity, carrying out its activities on a commercialbasis. Certain laws dealing with agricultural production contracts define this type of contract in partby referring to this commercial status, designating the contractor as a “processor,” “industrial” party,or “agribusiness.” Such laws may require its incorporation under a particular form characterised as a“commercial” entity.10 Under certain laws, a contractor entering into a contract farming agreementmay be designated as an integrator, a buyer, a financier or some other term.11

37. Contractors may vary widely in size, business formats, and ownership. For example, theymay be small businesses dealing with limited numbers of producers and supplying buyers in the localmarket. However, they could also be entities conducting large-scale operations for domestic or exportmarkets. As food supply chains are highly concentrated and operate globally, the contractor wouldfrequently be part of a corporation or a group having an international reach. The relationships,strategies and bases for coordination between the single entities of the group may rely on variousinstitutional forms and contractual structures. Very often, a transnational corporation would operatelocally through a jointly owned company based on foreign and local capital shares, incorporated orregistered in the country where the production takes place. The contractor may also be a foreigncompany operating directly from its main office situated abroad or operating through a local branch.In the latter case, the rules applicable to that entity may require a close attention as they may varyfrom country to country.

38. Under a traditional format, the company would be totally owned and controlled bycommercial investors. For certain entities however, social concerns underpin business objectives,forming the basis of so-called social companies. Such a company would often be formed by aproducer organisation developing activities down the supply chain in coordination with theproduction. In other cases, producer organisations would take a share in the capital of a companyentering into a joint venture with other equity investors, possibly including public entities. The capitalformation will influence the company’s strategy, operating methods and dealings with producers. Itmay therefroe be useful to know who owns the company in order to maximise the negotiationstrategy.

39. A cooperative may also act as a contractor under an agricultural production contract. As seenabove, in many instances members would supply their produce and transfer title thereto to thecooperative on an exclusive basis, while receiving a variety of services. Depending on domestic law,relations between members and the cooperative would either be regulated by special cooperative lawor by general contract law subject to certain adaptations reflecting the cooperative principles. When acooperative deals with non-members, it would do so as a contractor on the basis of general contractlaw or the applicable specific legislation.

2. Public entities

40. Most often, public government entities are not directly involved as a party to an agriculturalproduction contract, and instead are involved as interested third parties, as explored further inSection ___ below*. But, in some cases, a public entity could participate as a contractor in anagricultural production contract. Public entities are institutional buyers of agricultural productsintended for schools, hospitals, the military or other needs in the context of public services.International humanitarian agencies delivering food under emergency assistance programmes are

Commented [A12]: Online Comments.Min. Justice Canada suggests revising, as thelegal statement might be inaccurate.

Commented [A13]: Online Comments.Min. Justice Canada suggested adding thissentence.


also major purchasers of agricultural commodities. While most of this supply is obtained on spotmarkets, an increasing attention is given in many countries to coordination with the production stage.On the one hand, this derives from the general concern to keep a closer control over the products’quality, with the frequent requirement that producers be certified or supply certified products, and incertain contexts also that they be covered by product liability insurance. On the other hand, it servesas a basis for targeted policies in support of certain categories of producers, for example to providestable markets under sustainable terms for local small producers or family farming.

41. In many cases, however, a public agency would contract with a private partner selectedthrough the appropriate procedures to deliver the service, including organising the procurement andsupply in accordance with designated requirements. Under this formula, while the public entity wouldset the standards, it would not be directly involved in contracts with individual producers. They wouldbe concluded by a private contractor, either a commercial company or a not-for-profit entitydelivering benefits for the community rather than solely pursuing a private interest.

42. Under other situations, the relationship could be established directly between a public agencyand the producer, thus potentially reducing transaction costs, as no intermediary is involved. Manycountries apply special rules to public procurementprocurement process, including competitivebidding processes to select the contracting party. However, informal direct contracting may also bepossible for certain categories of products or purchases below certain amounts. In either caseparticular requirements may apply, with implications notably on contract formation and price. Thelegal status and regime for such dealings would vary depending on the country. Usually, undercommon law systems, general contract law would remain applicable, except for special provisionsprovided for by the relevant public regulations. Under civil law systems, the public entity may bedeemed to act in a private capacity, its contracts being private in nature and therefore governed bygeneral contract law, or contracts may be seen as special acts governed entirely by public regulationsor administrative law.

C. Other parties interested in an agricultural production contract

43. Beside the situation where certain entities act in representation of one of the parties, forexample a producer organisation concluding a contract on behalf of individual producers, manyparties other than the producer and the contractor may participate in the agricultural productioncontract, have an influence on it or be affected by the production relationship. These parties may beclassified under three broad categories, namely supply chain participants, interested third parties andpublic entities.

1. Value chain participants

44. Value chain participants include various entities adding value to the final product along thesupply chain, from its conception through production, transformation and handling, up until finalconsumption, for instance by providing goods, finance, services, information, and know-how, therebycontributing to the production process. Participants may be linked through institutional or contractualrelations. The agricultural production contract participates in the operation of the supply chain withdirect linkages to its other structures and participants, and is in turn subject to the influence andtensions exerted by those participants.

Commented [A14]: Online Comments.Min. Justice Canada notes that the term ofart is either procurement or prcurementprocess.

Commented [A15]: Online Comments.Min. Justice Canada suggests using either theterm “supply chain participants” or “valuechain participants” as a standard term.


(a) Various linkages between participants

45. The parties to an agricultural production contract may be linked to other participants of thevalue chain in many patterns. Under a multiparty contract, the other party or parties intervenedirectly in the production and the role and level of responsibility of each participant will most often bespecified in the contract, together with the possible effects of one party’s breach on the other parties’contractual relationships.

46. Other parties may be bound to the producer or contractor under separate arrangements,aimed at helping them perform their obligations under the production contract. This will be the casefor example for workers hired by the producer or for providers of goods – for example seeds – orservices – transport or harvesting – retained by the contractor to perform its obligations toward theproducer. As employees, subcontractors or agents, each of these parties would in principle beresponsible only toward its own contracting party.

47. In certain situations however, the intervention of a specific third party may be required orprovided for by the production contract, making the contractual relationships interdependent. Thiscould be the case when the contract requires the producer to purchase the inputs from a designatedsupplier, or when the producer is required to provide a personal guarantee to a third party to secureits obligations under the contract. In these situations, contractual relationships are linked, meaningthat non-performance or defective performance under one contract will determine and may create acause of non-performance of the related contract.

48. Finally, the supply chains form their own special form of linkage between parties. In a supplychain, the participants share common interests and implement compliance mechanisms to protectthem. These mechanisms are often introducer through standard contract terms, used similarly acrossthe chain. If either party then fails to perform, the remedies would either flow from the contractitself, being subject to the parties’ will and bargaining power, or from the mandatory provisions of theapplicable legal system. A likely source of tensions in the context of supply chains lies in matchingthe coherent structure of the supply chain with the legal concepts and practical consequences of thedifferent parties’ autonomy and privity of the contract. Giving more importance to either wouldindubitably effect the other, as greater coherence leaves less room for parties’ autonomy and viceversa. However, certain legal systems may recognise the effects that certain obligations between theparties to the production contract would have on third parties, based on extra-contractual liability, onthe contract, or on legal doctrine, for example in third party beneficiary contracts.

Finally, in the context of supply chains, while participants share common interests andimplement compliance mechanisms through standards applied by contract across thechain, remedies for non-performance generally flow either from the mandatory provisionsof the applicable legal system, or from the contract itself and hence subject to the parties’will and bargaining power. The legal concepts and practical consequences of the parties’autonomy and privity of contract on the one hand, and the coherent structure of the supplychain on the other are likely to create tensions. However, certain legal systems mayrecognise the effects that certain obligations between the parties to the production contractwould have on third parties, based on extra-contractual liability,12 on the contract,13 or onlegal doctrine, for example in third party beneficiary contracts .

(b) Types of participants

49. Various parties are or may be relevant to an agricultural production contract, depending ontheir particular situation and the features of the local market. In highly integrated relationships, the

Commented [A16]: Online comments.Prof Fontaine noted the overly dense andtechnical nature of paragraph 48.[proposed text to achieve greater clarity.]


contractor provides most of the goods and services required to carry out the production, while inother circumstances other participants will play a more active role.

50. As global supply chains become increasingly consumer-driven, the requirements applied atthe final consumer level have a strong effect on the content of the obligations of the variousparticipants along the chain. At the international level, safety and quality standards or corporatesocial responsibility requirements in developed markets are often higher than those applied incountries where the production takes place, affecting in certain situations the availability of analternative market for the product. Variations occurring on the final consumer market are also likelyto play a major role – together with other factors – in the supply chain dynamics, and may haveimportant implications on the equilibrium of existing production contracts based on terms referring toother economic conditions, especially regarding the price.

51. Except when the contractor produces and delivers the inputs to the producer, physical inputssuch as seeds and planting material, young animals and animal feed, chemical and veterinaryproducts are purchased from third-party suppliers, generally on credit terms. The contractor maypurchase the inputs for delivery to the producer, or may require the producer to purchase the inputsfrom a specific supplier or with no limitation. In certain cases, inputs may be subject to third-partyintellectual property rights.14

52. Service providers will often act as subcontractors for one of the parties. For example, theproducer may subcontract with a third party which harvests the crop, or the contractor maysubcontract with a third party to conduct site monitoring during the production process. This situationmay also arise where the technology to be applied under a particular production process is protectedby third-party intellectual property rights.

53. The production contract will very often serve as a vehicle for producers and contractors toobtain credit and/or financing from microfinance institutions, commercial banks, social lendinginstitutions, or government entities under public schemes. Guarantee of payment may be built on thecontract, for example if the producer receives advances from the credit institution against a lien overfuture revenues generated under the contract. The contractor would stand as a guarantor toward thebank for the producer, or based on the producer’s rights assignment to the benefit of the bank, thecontractor could make direct payments to it in discharge of the producer’s debt. In other similarsituations, the contractor could finance the production to producer if the latter is unable to obtaincredit and/or financing from institutions due to lack of formalities and/or documents.

54. Certain production contracts would organise a close monitoring of the parties’ performance,linking the release of credit or loans to the producer, for example for the purchase of inputs, to noticeby the contractor or other party intervening as facilitator.15 This type of situations is frequent whenthe production contract is part of a government-sponsored development programme through whichfinancial support provided either by a public or by a private banking institution is guaranteed by thegovernment. In order to maximise the success of the programme and avoid the diversion of moneyreceived to purposes other than production, the producer might in some cases receive inputs insteadof money.

55 Insurance plays an important role to mitigate risks. It may cover a large number of hazards,such as fire, theft, disease or natural calamities, damage to property or injury of third parties on thefacilities, as well as the life or health of the main actors performing the contract. Because of the risksinvolved, insurance that covers damage to or loss of the crop or the animals may seldom beavailable. Even when available, premiums may be unaffordable for many producers, especiallysmallholders.

56 In certain countries, it may be mandatory for the parties to take out particular insurancecoverage, and production contracts may also provide for specific obligations in this regard. Insurance

Commented [A17]: Ms Watanabe,internet comment.

Commented [A18]: Ms Watanabe,online comment.


products are typically provided by private entities and may also be offered by large cooperative ormutual entities or microfinance providers. Public policy schemes exist in a number of countries,providing guarantee mechanisms to private insurance services or subsidizing minimum insurancecoverage, generally linking it to credit granted under public schemes. Beyond insurance schemes,large-scale natural calamities may be covered by special State interventions offering some level ofcompensation for agricultural losses.

57. Third party verification provides the parties with an independent and expert assessment ofthe product’s conformity at delivery – which may also apply to the inputs delivered by the contractor– and, as the case may be, at critical stages of the production process. This verification may beprovided for in the contract itself and may be carried out by a technical body offering the requiredguarantees of impartiality and skills. It may also be provided by public entities such as commodityboards, non-governmental entities or private entities. The parties may also decide to resort to thirdparty verification after a disagreement arises on the conformity of the produce.

58. Third party verification may be based on certification schemes and particular sets ofstandards. While compliance with mandatory standards is monitored through public enforcementmechanisms, compliance with private voluntary standards relies on a certification contract with anaccredited body. Sometimes, the contractor covers the costs of certification for the producer, toensure that its production can bear the label corresponding to the standard against which it wassuccessfully certified; but, many times the costs of certification actually fall on the producer. Thecertification procedure is determined by each standard scheme and involves several controls takingplace over periods of time, such as on-site inspections, taking samples for chemical or biologicaltests, auditing, and reviewing documents. When irregularities are found and standards are infringed,the certification scheme generally provides for a series of measures that the certifying body is entitledto apply, from corrective instructions to sanctions leading potentially to a denial or withdrawal of thecertification. When dealing with contractor’s remedies under the production contract, an appropriatealignment or coordination with the enforcement mechanisms provided by the certification scheme willbe necessary.

59. Extension services generally aim to strengthen producers’ capacities by supporting thecreation and operation of producer organisations, the development of agronomic and managementskills, or access to information on market conditions. Those services may also include facilitatingrelations with contractors by helping identify potential parties, and negotiate and draft the contract.During the production, extension services may support better compliance and provide assistancewhen disagreements arise between the parties.

60. Extension services are generally provided by producer organisations, non-governmentalorganisations or public entities as a part of social and economic development programmes forparticular rural areas. Special development programmes may often focus on certain categories ofproducers, such as women, indigenous communities, and poor and landless producers. Under certaincircumstances, contractors may also provide extension services, especially when they are committedto fair trade standards.

2. Interested third parties

61. Other parties may hold interests that could affect the ability of the parties to perform under aproduction contract. The producer’s tenure rights and its entitlement to use the land may beuncertain or precarious. If those rights are challenged, the producer may not be able to performunder the contract. Similarly, when the producer leases the land, the landowner will generally need tobe informed of certain elements, or may have to authorise them, such as the particular crop grownon the land and cultivation practices, or facilities built to carry out the production. Under particular

Commented [A19]: Online comments.Prof. Fontaine suggested merging allinsurance related issues on the chapter on“Excuses”, to avoid repetition. These twoparagraphs are now merged there.[In chapter “Obligations”- “Insuranceobligations” there is still a stand-alone sub-chapter on insurances, but it deals with theissue from a different angle and seems todeserve a few stand-alone paragraphs of itsown, so no change is needed there.]


circumstances based on the contract or the law, the landowner may have a claim on the crop itself,such as a lien for unpaid rent16. Production contracts often include a clause concerning the producer’stitle to the land, and sometimes the landowner may sign it itself. Other creditors, typically bankinginstitutions, may claim rights over the land when the producer has granted a pledge over it forfinance and has not complied with its repayment obligations.

62. Also, the rights held by the contractor’s creditors may affect the producer’s rights derivingfrom a production contract. This may occur for example in the case of a contractor’s insolvency, whenthe producer’s rights to payment for the production rank second to the third party creditors’ rightover the proceeds of the sale of the produce. Certain domestic laws would however provide specialprotection to the producer by affording it a priority right.

63. The parties to the production contract usually cannot modify, dispose of or otherwise affectthe rights of third parties. However, it is in the interest of both producer and contractor to ensureclarity in their respective rights and, when appropriate, settle the priority issues that may arise.Special clauses may be included in the production contract or under separate agreements providing awaiver of rights over the crop or a transfer of the right to payment. It must be noted that terms inthe contract involving designated third parties would not affect rights that may possibly be claimed byother third parties.

II. Contract Formation

64. A contract consists of the parties’ legal obligations resulting from their agreement. Theconcepts of offer and acceptance have traditionally been used to determine whether and when theparties have reached an agreement, a contract being concluded either when an offer is accepted.Alternatively the parties conduct can be sufficient to demonstrate the conclusion of the contract.orwhen the parties’ conduct is sufficient to demonstrate their agreement.17 The process of formation ofthe contract has a crucial importance in building the contractual relationship since it shapes theobligations which will bind the parties over the duration of the agreement. The characteristics of theparties and their respective economic position and bargaining power play a major role in the balanceof the contract.

65. The formation of the contract includes a series of stages and aspects, which includenegotiations and preliminary exchange of information, delivery of an offer and the acceptance of theoffer, and the making of the contract proper. As a common best practice, the whole contractformation process should be carried out in a fair and transparent manner and in good faith.18 Goodfaith, while not universally accepted as a principle of contract formation, may involve applying – orrefraining from adopting - certain conduct rules, and may also have certain implications as regardsthe level of information that should be communicated to the producer. In order to reach transparencyin the contractual relationship, a pre-contractual document would be important informing data, suchas list of producers involved in the same production, list of ex- producers, information aboutcontractor, rights and obligations of producer and contractor, investments for production, costs ofproduction, revenue expected the mode of inspection and monitoring, environmental liability and soforth.

A. Offer and acceptance

66. In the context of an agricultural production contract, the offer containing the prospectiveterms of the agreement typically comes from the contractor. With a view to leaving the opportunity tothe producer to fully appraise the content of the future agreement, it is a recommended practice inmany contexts that an offer be presented in writing with sufficient time before signing the

Commented [A20]: Online comments.Mr. Shepherd gave an example of landlordsforcing their tenants into agriculturalproduction contracts.

Commented [A21]: Online comments.Prof. Fontaine pointed out that taking theparties’ conduct into consideration to decidethat the contract has been concluded is analternative to, not an application of thetraditional offer and acceptance.[proposed text to clarify this division.]

Commented [A22]: Online comments.Prof. Fontaine recalled that the requirementof good faith in contract formation is notuniversally accepted.

Commented [A23]: Ms Watanabe,online comment. [Although this comment isuseful, it is repeated in similar fashion also inthe previous chapter.]

Commented [A24]: Online Comments.Min. Justice Canada suggests expanding toinclude information technologies.


agreement, so that the producer may review the proposed conditions thoroughly and, as the casemay be, consult with informed persons or entities.19 A written offer may even be required undercertain legislations and, in such cases, to be valid the content of the offer should reflect the contentof the final agreement.20

67. Because its mere acceptance is sufficient to form the contract, the offer must be sufficientlydescriptive and definite to encompass the terms of the agreement.21 Courts will not enforce contractsin which the parties’ intentions are not expressed and are incapable of being determined throughoffer and acceptance. Vagueness, indefiniteness and uncertainty with respect to any of the essentialterms of the agreement may render the contract unenforceable.22 As a general rule, the materialterms of subject matter, price, payment terms, quantity, quality, and duration must be sufficientlydefinite such that the respective promises and performance of each party is reasonably certain.23 Injurisdictions with special rules on agricultural production contracts, these descriptive terms must befully included in the written document given to the producer for signature.24

68. However, all agreements will have some degree of vagueness and indefiniteness due touncertainties in language and communication, especially in international transactions involvingmultiple languages. Although certainly not in accordance with the good production contract practicesdiscussed above, seemingly essential terms, such as the precise description of the goods,25 price,26

and time27 or place of performance,28 may in some circumstances be omitted from the offer withoutrendering it insufficiently definite.29 A court may enforce the agreement as long as the partiesintended to be bound by it and the missing terms are determinable through interpretation of othercontract language, reference to the parties’ established practices,30 or application of the principles ofgood faith, fair dealing and reasonableness.31

69. In the event that a written agreement is totally silent as to quantity, oral evidence cannot beused to fill this gap.32 Open-quantity contracts present particular difficulties. For example, a contractfor the sale of goods may define the quantity by reference to a contractor’s requirements or aproducer’s production. In such circumstances, exclusivity may be considered a prerequisite for theenforcement of the agreement.33 However, where the quantity term is merely imprecise, as opposedto wholly absent, courts may rely on parol evidence to supply the required precision.34 Since someagricultural production contracts may qualify as output or requirement contracts, care should betaken to specify the quantity and potential exclusivity.

70. Preliminary negotiations refer to the bargaining communications and other events involvingthe parties prior to the acceptance of an offer. Accordingly, every offer is part of the preliminarynegotiations until it is accepted. In protracted negotiations, courts will examine every offer,counteroffer and action of the parties to determine if they have reached an agreement on completeand definite terms capable of being understood by the court.35

71. Whether a preliminary communication is an operative offer capable of acceptance or merely astep in preliminary negotiations is an issue to be carefully considered in the agricultural productioncontext, especially in situations of disparate bargaining power. Mere statements of intentions,estimates, advertisements or circular letters, price quotations and preliminary agreements such as“agreements to agree” or “agreements to negotiate” may appear to the lay person as definitive offersor binding contracts. In attempting to decipher the legal effect of these communications, courts havelooked to a variety of factors: the ordinary meaning of the language used; the parties’ history ofdealing;36 the degree of targeting of the communication;37 local and trade usages; the parties’ socialrelationship; the objective completeness of the bargain’s terms; the subject matter of the agreement;and the foreseeability that the recipient of the information will act in reliance on the communication.38

72. Agreements to agree, which are unenforceable agreements which imply to bind two parties inorder to negotiate and enter into a contract, may suffer from indefiniteness with respect to the

Commented [A25]: Mr Kirke raises thepoint that in this and the followingparagraphs, the key point would be toensure that the contract is understood bythe producer.[This could be reiterated in theseparagraphs; an argument could be madehowever that similar points have been raisedalready with regards to the literacy level ofthe producer and the capacity to giveconsent.]

Commented [A26]: Online comments.Prof Fontaine held that this and severalpassages below are too exclusively based onAmerican sources, and therefore may nothave universal value.[This might call for a more extensiveresearch, and has not been addressed in thecurrent draft. ]

Commented [A27]: Online Comments.Min. Justice Canada suggested giving a lay-man definition for an agreement to agree.


finality of terms and the intention of the parties to be legally bound. In some circumstances, theparties may have finalized the terms, but lack the intent to be bound until a final writing is draftedand signed at some later date.39 In other scenarios, the parties will conclude separate agreements ona series of terms over the course of negotiations, but no contract will be formed as long as anessential term is still subject to negotiation. The preliminary agreements are rather considered aspart of the negotiations leading to what may or may not be a final offer.40

73. On the other hand, negotiations may take place in an informal context that incorporates non-verbal communication, a history of dealings, custom and other circumstances. The parties may leavesome terms for future discussions, not viewing them as essential to the bargain. Accordingly, if it isclear that the parties intended to be bound, the court may uphold the agreement.41 Partialperformance by one or both parties may be strong evidence of such an intent.42

74. Additional negotiations may also occur after the formation of an initial contract. On a relatedaspect, it may be noted that parties sometimes insert “entire agreement clauses”43 according towhich the single contract document reflects the entire agreement of the parties to the exclusion ofany separate document or agreement. This kind of clause aims at enhancing parties’ certaintyregarding their rights and obligations.

75. Under general contract law, mere acceptance of an offer by the offeree is sufficient to formthe contract . A statement – or under certain legal systems a conduct – by the offeree indicatingagreement to an offer constitutes its acceptance.44 In circumstances where the start of performancewould be a reasonable mode of acceptance, the offeree should provide actual notice of acceptance tothe offeror within a reasonable time thereafter.45 Although this performance may render the offerirrevocable, the failure to provide notice of acceptance may entitle the offeror to treat the offer aslapsed.46 In general, the offer can be revoked it the revocation reaches the offeree before it hasdispatched an acceptance, even if different solutions exists in various legal systems. Generallyhowever, an offer cannot be revoked if the offer itself implicitly or explicitly states that it is irrevocableor if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has alsoacted in reliance of the offer, even before its acceptance. 47

76. The applicable law may require for a contract to be perfected that additional requirements becomplied with. This is typically the case when the contract is subject to approval by a governmentauthority.48 In certain contexts, third parties’ consent may be required, for example the owner of theland where the production is to take place. Also, the consent of the spouse may be required.Customary law may impose specific formalities for the contract to be valid. For example, the consentof the representative of the community may be required for acts of disposition.Replies to offers thatcontain additions, limitations or other modifications are generally viewed as rejections of the initialoffer and constitute a counter-offer.49 Considerable debate exists as to the effect of a reply acceptingthe offer while proposing conditions that do not materially50 alter its terms. As a general rule, unlessthe offeror objects to the discrepancy without undue delay, a contract is concluded, including themodifications contained in the acceptance.51 However, if the offeror objects to the modifications, andparties still proceed with performance, it is unclear which terms apply – those included in the initialoffer or those of the purported acceptance or counteroffer.52

B. Capacity and consent

78. For an agricultural production contract to be valid and enforceable, the parties, whethernatural persons or legal entities,53 must have legal capacity when entering into it. Mandatoryprovisions of domestic law govern issues regarding legal capacity.54

Commented [A28]: T Benoit at Bangkok,held that customs and cultural differencesmight influence differently in negotiationand this in turn can determine the successand respect to the contract (T. BenoitBangkok)

Commented [A29]: Online comments.Prof. Fontaine suggested adding a quick noteon the revocability or irrevocability of theoffer.

Commented [A30]: Online Comments.Min. Justice Canada suggests splitting thisparagraph, as it contains differentthoughts.(Aadditional requirements such asapproval by third parties and thecounteroffer containing conditions)

Commented [A31]: Online Comments.Min. Justice Canada noticed an error in thesequence. Should be B not D.[addressed]


79. As an additional validity requirement, parties must have given valid consent at the time ofcontract formation. Defects of consent and relative remedies are governed by mandatory provisionsof domestic law.

80. One potentially sensitive issue in the context of agricultural production contracts is whetherthe producer had a sufficient understanding of the terms of the contract and of its implications whenentering into the agreement. Lack of informed consent may amount to a defect in consent, forexample it may be interpreted as a mistake, either of fact or of law,55 or fraud 56 making the contractavoidable, or allowing for other remedies. The circumstances of the dealings of the parties, and theindividual situation of the producer will play a determining role in assessing whether in the particularcase, the producer’s informed consent was indeed absent, what particular ground can be invokedunder the applicable law, and the consequences regarding the contract and the available remedies.

80bis One particularly relevant aspect in this context is, for the producer, the capacity tounderstand the terms of the contract based on literacy or language. In fact, illiteracy and languagebarriers are common obstacles to informed consent by producers.57 Third-party facilitators have animportant role in the negotiation process to ensure that contract terms are explained and drafted in alanguage accessible to producersThird-party facilitators have an important role in the negotiationprocess to ensure that contract terms are explained and drafted in a language accessible toproducers.58 Contractors should make sure that in the particular circumstances producers understandthe terms of their future engagement.

81. Under this perspective, a contract should not impose upon the producer a general prohibitionto disclose the terms and conditions agreed to in the contract, to the effect of preventing theproducer from consulting third parties such as an attorney who could advise as an attorney who couldadvise the producer on the fairness of the agreement and the material and legal risks it involves.Consequently, certain legal systems have expressly outlawed general confidentiality clauses. Whenthey are not expressly outlawed, they may be declared unfair on the basis of general contract law.

82. Other relevant aspects regard the producer’s effective access to information elementssurrounding the contract, and its ability to assess their implications on the overall relationship and itsparticular position. Whether and to what extent the contractor may have an obligation to providesuch information may vary. Under certain legal systems, based on the general principle of goodfaith,59 the contractor would indeed be under a duty to provide certain elements of information beforeformalizing the agreement.60 This objective can also be obtained by sector-specific legislation whichsets out mandatory form and content requirements. The information that a party should disclose willalso be commensurate to its relative importance for the other party, of which the first party was orought to have been aware. This consideration is of particular relevance for contractors dealing withsmallholders who are inexperienced and unsophisticated in negotiating contracts, and may not haveeasy access to the relevant information surrounding the contract.

83. As regards the risks involved, these may vary from direct effects to complex consequences,and it would generally be for the producer to evaluate them. There, the individual capacity andexperience of the producer will be essential as a variety of issues may be involved in e.g. theagronomical, financial and legal fields. In this context again, facilitators may play a very importantrole, also in strengthening the capacities of the producers. Again, certain specific legislation doesrequire the contract to disclose the risks for the producer deriving from the contract. Whether a lackof awareness, misunderstanding or mistake regarding particular implications or risks – in particularregarding profitability – do in fact amount to a lack of informed consent shall therefore be assessedon a case-by-case basis, based on the applicable law and the factual circumstances.61

84. It may be noted that certain regulations provide for specific mechanisms aiming at affordingan enhanced protection to producers in the process of contract formation. For example, certain

Commented [A32]: Mr Kirke, internetconsultation, questions whether theparagraphs regarding lack of informedconsent and information by the producer arerealistic.It is not clear however how the Guide couldmove more towards practice in this areamaintaining its objectives and withoutbecoming too case-specific.

Commented [A33]: Mr De Los Reyes,session 2 Bangkok, says that a governmentpresence is fundamental in curingInformation asymmetry and ensuringavailability of keyinformation to smallholder farmers incontract farming.This point is also made by Mr Salvador,Bangkok session 4, when he says that“crucial then that governments and evenNGOs provide the proper training to farmersand their organizations so that they are ableto bargain for better terms in their contractfarming agreements.”

Commented [A34]: Mr De Los Reyesfrom session 2 at Bangkok held that it isimportant that the producers are givenproper legal and business advise atnegotiation stage.Mr Dang, Bangkok session 2, says thatproducers should also be trained themselvesabout legal issues regarding contract farming


regulations afford producers the right to cancel the contract within a given period (typically threedays) after the conclusion of the contract. The producer may exercise this right after having fullyconsidered the implications of the contract, and possibly after being advised by a third party. Theregulations require for the contract to disclose the producer’s right to cancel, the method a producermust follow to cancel, and the deadline for canceling the contract.

85. With a view to building successful relations in the long term, good practices wouldrecommend for the contractor to act in a transparent manner and provide to the producer prior to theconclusion of the contract any information with is relevant not only for the performance of thecontract but also as regards the essential implications and potential risks that may derive for theproducer.Contracts induced by fraud, mistake or duress may also be voidable by the aggrievedparty.62 With respect to mistake, the erroneous belief must relate to the facts prevailing at the time ofcontract formation, not to a party’s prediction or judgment about the future.63 Thus, an incorrectjudgment regarding future crop prices, production yields or weather conditions does not give rise to amistake rendering the agricultural production contract voidable. Moreover, the effect of the mistakemust be such that enforcement would give rise to unconscionability or the other party must be atfault for the mistake.64 Similarly, a misrepresentation by one party may rise to a fraudulent level if itis intended to induce assent from the other party.65

86. Improper pressure during the bargaining process in the form or duress or undue influencemay make the contract voidable.66 A threat that presents to the aggrieved party no reasonablealternative but to manifest assent to the bargain could emanate from the other party or from anentity external to the negotiations. In some instances, economic duress or business compulsion mayqualify as an improper threat.67 However, if the other contracting party is unaware of the improperpressure and has acted in material reliance to the contract, avoidance by the victim is precluded.68

Undue influence may arise in situations where one party is under the domination of another or, byvirtue of the relationship, may reasonably assume that the person will not engage in negotiationsinconsistent with the aggrieved party’s welfare.69 In the agricultural context, changing marketconditions could, in certain circumstances, lead to claims of economic duress, for example in cases ofthreat to put the supplier out of business.70 The party claiming duress must demonstrate that itsacceptance of contract terms was involuntary, and that circumstances provided no alternative andwere the result of the other party’s wrongful acts.71 Wrongful acts may include threats to put one outof business or deprive of livelihood, or threats to institute criminal or regulatory actions, in order tosecure a private benefit.72

C. Role of third parties in contract fomationthose who intervene or assist in the contractnegotiation

87. As seen in the section dealing with the different stakeholders relevant for agriculturalproduction contracts (see __*), different entities may take part in the contract itself or have aninterest in the contract farming operation and be otherwise involved. When entities other than thecontractor and the producer are part of the agreement, such as a public entity or a finance provider,the terms of the contract are generally dependent upon the conditions imposed by this entity orsubmitted for its approval.

1. Producer organisations

88. In many contract farming schemes, contractors deal with individual producers. Mosttransactions are based on predetermined terms and conditions which are set by the contractor incontracts of adhesion, and leave little or no opportunity for negotiation by the producers. On the

Commented [A35]: Online Comments.Min. Justice Canada suggested changing thename of the heading, as there are alreadythird parties elsewhere who were interestedin the contract.

Commented [A36]: Online Comments.Min. Justice Canada suggest making thissection shorter. For details, see Doc. 23.


contrary, dealings with producer organisations which imply larger volumes of delivery of produce andlower transaction costs for the contractor are likely to allow for higher negotiation capabilities on theproducers’ side. Producer associations or unions, when sufficiently representative, may have animportant advocacy role and strengthen the position of members in dealing with contractors. Incertain contexts, contract terms are agreed at the inter-professional level between producerorganisations and buyers on a commodity basis and for a specific area and duration, which wouldform a model or standard agreement that individual contracts may or should comply with.

2. Facilitators

89. Depending on the particular environment, different entities may act as a facilitator, such asgovernment entities, producer associations and non-governmental organisations, developmentagencies and individuals. Facilitators may have an especially important role in assisting the parties insetting mutually-advantageous conditions, in particular by providing support and advice to producersbefore and at the time the contract is concluded, and by building trust between investors andproducers so that they fully understand the terms of the agreement. Facilitators should not decide forthe parties but may have a mandate to represent either the contractor or the producer in negotiatingwith the other party and signing the contract.73 They may act as witnesses when informalagreements are concluded.

3. Public authorities

90. Where sector-specific legislation is in place, a public entity may have extended authority inbringing the parties to the production contract together and in monitoring the conclusion process ofthe contract, often subject to specific form and detailed content requirements, including review andapproval of the contract, with procedures varying in each system. Certain systems provide for aformal registration of contracts (with the payment of related fees),74 with different public policypurposes. One possible application is publicity towards potential third-party buyers that a particularproducer is under an exclusivity contract with another contractor.75 Depending on the legal system,the submission for public review may be voluntary76 with a view to providing certainty regarding thecontract’s conformity with form requirements.

90 bis Public authorities have also a wider enabling role, as has been alluded elsewhere in thisGuide. To facilitate the use of contract farming, the public authorities could use multiple methodswithout endangering the financial sustainability of the relationship. For example, the governmentcould offer tax exemptions or subsidies to contractors contracting with small-holders. Similarly,facilitating access to information and implementing training workshops to enable decision making andmarketable skills for farmers could effectively increase the desirability of contract farming.Forexample, the government could offer tax exemptions or subsidies to contractors contracting withsmall-holders. Similarly, facilitating access to information and implementing training workshops toenable decision making and marketable skills for farmers could effectively increase the desirability ofcontract farming.

4. Intermediaries

91. Most contract farming arrangements are negotiated and/or concluded by a person whorepresents and acts on behalf of either the producer or the contractor. A contract concluded by arepresentative or an agent is binding upon the party represented. Matters regarding the form of theauthority, and the consequences of an intermediary acting beyond the scope of its authority are dealt

Commented [A37]: The importance offacilitators at the early stages is emphasisedby Mr Namvong, session 4 Bangkok. He alsomentions their usefulness through thecontractual relationship, including forexample contract enforcement.

Commented [A38]: Mr De Los Reyes inBangkok, session 2, raised the point that thegovernment could act as provide a centralrepository of relevant and updated data forsmallholders s when they enter into BusinessContracts.

The same speaker also proposed other waysthe government could intervene, bydeveloping its capacity to monitor contractimplementation, facilitation and requiringregular submissions from the parties ofaudited financial statements anddevelopment progress of agribusinesscontracts.

Note that to varying degrees these twocomments could also be added in thechapter relating to obligations, in the section... [1]Commented [A39]: Buenos Aires.Session 1. Ms. Malanos highlighted sometools that governments can use to facilitatecontract farming. In session 2, Ms. Salazarraised similar points, highlighting theinstrumental role of government action.

Commented [A40]: Buenos Aires.Session 1. Ms. Malanos highlighted sometools that governments can use to facilitatecontract farming. In session 2, Ms. Salazarraised similar points, highlighting theinstrumental role of government action.

Commented [A41]: UNIDROIT 2013 –Study 80 A – W.P. 3 – Comments from A.Shepherd and C. Eaton. Both commentershighlighted the sometimes instrumental roleof “middlemen” in Informal/Intermediarymodels.

Similar conversation was had also in Romeconsultations, by e.g. Prof. Cafaggi on ... [2]


with under representation and agency rules under domestic law. Such rules differ greatly among legalsystems and within each legal system the rules may also vary.

92. For a producer, in certain circumstances, distinguishing between a representative of acompany (employee or agent) and an autonomous entrepreneur acting as a subcontractor for acompany may not be easy. However this has important legal consequences as it implies differentliabilities and remedies. When an entrepreneur is autonomously engaged as a main party to thecontract farming arrangement, it would take over the risks deriving from the producers’ or its ownfailure and would be linked under a separate supply contract to the company. On the contrary, a mereintermediary would undertake no personal responsibility for the obligations under the contractfarming agreement.77 This points to the importance of establishing with certainty the status of theperson negotiating and concluding the contract: unless it can be clearly inferred from thecircumstances, the particular context and history of relationships, it is recommended to obtain formaldocumentation regarding the identity of the person and its actual authority to represent the otherparty.

93. As seen above, producers may also be represented for example by a producer organisation ora facilitator who acts on its behalf. Again, the authority to this effect should be clearly set.

94. Under this perspective, it would be advisable that, when undersigning the contract farmingagreement, the employee or agent specifies its status and does not only sign in its own name butadds language such as “for and on behalf of” followed by the principal’s name, so as to avoid any riskof being held personally liable under the contract. Some more detailed wording may be inserted inthe contract farming agreement itself.78

III. Contract Form and Content

As a starting principle, contracts are not subject to any requirement as to form or content.79

A. Contract form

95. In most cases, the contract will take the form of a written agreement – either a single,comprehensive document or a series of emails, invoices and other correspondence. When one partyhas limited literacy, an oral explanation may accompany such an agreement.80 On occasion, due toindustry usages, local practices, the desires of the parties or other circumstances, the productioncontract will be an oral or “handshake” agreement, concluded without any documentation.81

96. As a matter of good contracting practice, written, straightforward and simple contracts areencouraged as a means to improve the clarity, completeness, enforceability and effectiveness of theparties’ agreement.82 Care should be taken to try to reduce complexity where possible and toensure that contracting parties with limited literacy skills fully understand the terms,83 for example byhaving a neutral third party read the written contract aloud before its signature. The idea behind this,is the promoton of transparency, open communication and close collaboration between thecontractor and the producer, as key tenets not only at the stage of contract formation, but alsothroughtout the contractual relationship.

96bis Similarly,Similarly it may be very uncommon, in these situations, to have comprehensivewritten contracts so it is important to cater also for oral agreements through trust. For example,when the parties conclude an oral agreement, they should do so in the presence of a third partyhaving no economic interest in their relationship.84 This may help overcome the difficulties inenforcing oral contracts by making it easier to prove the terms agreed to by the parties.85

Commented [A42]: Online Comments.Justice Canada suggests explaining the idea abit more. For details, see Doc. 23.

Commented [A43]: Online Comments.Justice Canada suggests covering electroniccontracting. For details, see Doc. 23.

Commented [A44]: Mr Straathof, PrivateSector Workshop, made the point onstraightforward, simple contracts and itsbeneficial effects on contractualrelationships

Commented [A45]: This point is madeby Mr Ywema, Private Sector Workshop,session 1, when he says that there is a “needfor reducing complexity, drawing a line afterwhich contract farming may not add valuebut act as a detriment."

Commented [A46]: Mr Joshi, session 3Private Sector Workshop, emphasised thesethree elements with regards to all the stagesof contract farming relationships.

Commented [A47]: This point was madeby Mr Joshi, Private Sector Workshop,session 3.


97. The fundamental principle of freedom of contract provides that parties are free to enter into acontract and to determine its specific content.86 In an effort to reduce transaction costs,87 contractorsvery often make an offer to enter into an agricultural production contract to multiple producers onstandard forms, using standard terms, and incorporating by reference standards contained in otherdocuments. Since producers often bear the administrative costs of contracting, they may alsoappreciate standardized contracts, especially if they know that their peers have entered into thesame arrangement that fits within a cultural pattern.88 Even if the standard contract terms do notmanifest the classical form of freedom of contract on an individual level, they adhere to the principleon a broader collective level, achieving a greater balance of power and obligatons, especially whennegotiated between producers’ organisations and the contractor, as mentioned above.

98. However, the legal freedom to enter into any contract may be overshadowed by the lack ofeconomic freedom to negotiate specific terms or reject a lawful, yet economically unbalancedcontract.89 There is a concern that non-negotiable “contracts of adhesion” are often drafted to protectthe stronger party, or to provide it with excessive benefits accruing from the other party, therebyimpairing the realization of the reasonable economic expectations of the non-drafting adheringparty.90 Accordingly, courts generally apply a rule to interpret any ambiguity against the contractdrafter.91 Conversely, where a literal-minded reading of a contractual term would give a party morethan is reasonable with respect to the contract as a whole, the court may adopt a more liberalinterpretation.92 In instances of gross disparity, the affected party may avoid the contract or ask acourt to modify it in accordance with reasonable commercial standards of fair dealing.93 (See ChapterXX (Remedies) for further discussion*). Of course, this litigation-based concept of producerprotection raises underlying issues regarding practical accessibility to the courts and, especially forsmallholders, the discounted value of relief available after the fact.94

99. In light of the potential disparity of economic power between the parties, unequalinformation, and anti-competitive practices,95 some jurisdictions have enacted specific regulationsregarding the required form of agricultural production contracts in an effort to improve thefunctioning of agricultural supply chains.96 Due to the variety of domestic legal traditions, legal rulesand norms governing agricultural production contracts, jurisdiction-specific rules may be found in civilcodes, agrarian codes, general contract legislation, specific agricultural contract legislation, as well assector- or product-specific legislation.97 The specific requirements thus implemented range fromreadability standards to the substantive terms of the agreement.98

100. To mitigate possible misunderstandings, contracts should be written in a language familiar toboth parties99 and should avoid complex and unclear terms, so that a producer of average educationand experience in the given region can understand them. Some jurisdictions specify typeface sizesand require the use of sections, captions and indices to facilitate the understanding of longerdocuments.100 The use of technical terms may be outlawed unless they are customarily used byproducers in the ordinary course of business.101

101. Agricultural production contracts may specify production or handling standards, or includeother technical terms. In such situations, some jurisdictions require that the contract provide a fullexplanation of these special provisions within the written document signed by the parties,102 and thatany documents incorporated by reference be attached to it.103 Other disclosure requirements maycompel the contractor to specifically disclose the material risks to the producer.104 Again, theseobligations regarding contract form go beyond general contract law to minimize misunderstandingsand anti-competitive practices arising due to disparity of economic power or unequal informationbetween the parties.

Commented [A48]: Online Comments.Min. Justice Canada suggests clarifying. Fordetails, see Doc. 23.

Commented [A49]: Buenos Aires.Session 1. Prof Zeledon raised the point onhow standard contract terms are reflectingthe principle of freedom of contract on acollective level, even if limiting it onindividual level.

Commented [A50]: This point is raisedby Mr Yi, Bangkok session 2, who cites theCambodian Civil Code.[This point could alternatively be added tothe subsequent paragraph.]


B. Contract content

102. Under general contract law, minimum content requirements apply for a contract to be valid.These generally refer to a sufficient identification of the parties and the object of the agreement.

103. Rules specifically applicable to agricultural production contracts generally impose additionalcontent requirements in the interest of transparency and providing information to the partiesregarding a number of essential aspects. These relate to the content and extent of the coreobligations of the parties, and may cover other aspects which are determinant in the overall balanceof benefits and risks deriving from the agreement. In this regard, it may also be advisable to adopt aproportional approach to reviewing and informing about the contents of the contract based on theliteracy level of the producer.

104. Certain regulations go into great detail regarding the matters for the parties to include in thecontract. This is in particular the case when model forms of contracts are imposed upon the parties.In such cases, procedural protection (i.e. the parties’ obligation to include a provision dealing with acertain matter) may be combined with substantive protection (i.e. the parties’ obligation to include aprovision with a certain content).105 A number of systems also require that the parties should specifyavailable mechanisms for dispute resolution, sometimes requiring the parties to have recourse tomediation prior to turning to any binding mechanism106

105. Subject to any specific applicable legislation, it is in the interest of the parties to address in acomplete and detailed manner the relevant elements of their contractual relationship. Hence, mostagricultural production contracts contain provisions to this effect.

106. Although agricultural production contracts may take many forms in order to account for thediversity of products, stage of the supply chain, legal jurisdictions and social norms, severalimportant components are present in most written arrangements to enhance transparency andconvey complete information. It may be observed however a convergence of clauses and conditionson the spectrum of contract farming across different commodities and countries.

107. Parties. Most contracts start with an identification of the parties. In the agricultural context,this usually includes the name and contact information of the producer and contractor. In addition, itmay include a description of the land or livestock under production with respect to the particularcontract, specifying for example the number of acres, geographic location or specific livestock. For amore thorough discussion of the parties to a production contract, including third parties, producers’associations and government regulators, see Chapter __*.

108. Purpose. This clause outlines, often very succinctly, the reason underlying the contract, forexample “Agreement to Grow Tomatoes.” It may identify the commodity to be produced by theproducer and purchased by the contractor. An Agreement and Consideration Clause may beembedded within this section of the contract to summarize or at least acknowledge the respectivepromises of the parties, thus establishing the required contract consideration or cause. Instead of theoperational part, the purpose of the contract is also commonly expressed in the initial recitals or apreamble. Using a preamble allows the parties to succinctly give a general overview of the wholecontract, but might cause confusion, if the preamble can be interpreted differently than the operativepart of the contract.107

109. Identification of the Production Site. Contracts typically identify the production site. Regardingland, the particular size and location of the contracted tract (generally determined on the basis ofland registries) may determine the content and scope of the parties’ obligations, for tneexamplewhen the delivery and purchase obligations refer to the whole production from the designated plot.

Commented [A51]: Online Comments.Min. Justice Canada suggests providing atable/checklist of these elements. Fordetails, see Doc. 23.

Commented [A52]: Mr Kirke in theinternet consultation suggested aproportional approach in reviewing thecontract’s contents, based on the literacy ofthe farmers

Commented [A53]: Mr Kirke, in theinternet consultation, talked about how thecontract will have a different significanceaccording to its stage in the supply chain. [acomment has been added here but it mighthave a more nuanced meaning.]

Commented [A54]: observation madeby C. Da Silva (IFAD), Bangkok.

Commented [A55]: Online comments.Prof. Fontaine suggested commenting on themethod of including the purpose on thepreamble, instead of the operative part.


110. Obligations of the parties. The agreement should specify the obligations of both the producerand contractor, and in fact, most of an agricultural production contract typically consists of obligationsof the parties. In a written document, these may be in separate sections. Common producerobligations may include production and handling requirements, use and payment of specific inputs tomeet market requirements, location and timing of delivery, quality standards, and whether it is avolume (i.e., quantity) and/or acre contract. Production obligations may also include compliance withthe contractor’s intellectual property rights such as trade secrets and patented or protected seeds.Contractor obligations often include specifications or provision of production inputs such as seeds,chemicals and land, technical assistance services, production oversight, communication of productquality testing standards, and delivery acceptance. For a complete discussion of the partiesobligations, see Chapter __*.

111. An important part of the parties’ obligations, the price and terms of payment go to the heartof the parties’ bargain and are worth a separate mention here. Accordingly, a contract will usuallystipulate the price to be paid or contain a provision for its subsequent determination. In the absenceof a specific agreement by the parties, the court may infer a reasonable price.108 As a matter of goodpractice, the contract should have a clear and transparent method for determining the price. Otherprovisions include specifications on when and in what form the contractor will transfer payment to theproducer.109 For further discussion of price and payment terms, see Chapter __*.

112. Similarly, the provision of inputs is an aspect of obligations that is worth a separate mention.The agreement should reasonably identify the physical inputs. There is no set rule on how this isdone, but it is common to refer to the inputs by technical specifications or commercial brands.Regardless of how the inputs are described in the agreement, as with all terms of the agreement,they must be described with enough specificity to allow enforceability.

113. Inputs are an essential term of the agreement if the inputs are to be provided by thecontractor. Unless the inputs prices are set or regulated (for example, to prevent excessive prices) bygovernment regulation, this is a term to be agreed upon by the parties. As an essential term to theagreement, the failure to set or have a basis to determine the price of the inputs) could result in afailure of assent.

114. Determination of the price of the contractor’s inputs is an important matter, which should beclearly explained in the contract. It should be done with due consideration to the correspondingmarket prices, as well as to the pricing mechanism which will govern payments to be owed by thecontractor to the purchaser. Because the cost of the inputs is often related to the payment to theproducer for produce, a well-drafted agreement will logically connect the description and pricing ofthe inputs with the overall payment terms of the agreement so that all aspects of costs and paymentscan be compared easily. Failure to do so may subject the contractor to a different payment schemebased on default terms that were not contemplated by the parties.

115. Excuses. Agricultural production contracts are particularly vulnerable to occurrences thatmake performance impossible or significantly more challenging than what was envisaged at the timeof entering into the contract. The contract may specify the risk of loss for force majeure events orchange of circumstances and, if available, insurance obligations. For further discussion of excuses fornon-performance, see Chapter __*.

116. Remedies. The contract may include designated remedies in the event that one party fails tomeet its obligations under the contract. Here it is worth briefly repeating that in the event ofoverreaching by one party, yielding a gross disparity in the obligations, the aggrieved party may seekto avoid or reform the contract.110 See Chapter __* on Remedies for further discussion.

117. Other related elements found in agricultural production contracts include disclaimers ofwarranties, often accompanying the supply of inputs by the contractor,111 as well as limitations on

Commented [A56]: Mr Kirke, internetconsultation, says that often both volumeand area are specified in a contract, as this“assists in the supply of farmer support andto address potential cross trading betweencontractors.


damages and liability between parties arising from the contract, allocation of responsibility for wastedisposal, potential environmental liabilities, responsibility for obtaining and complying with publicpermits, provisions for successors and the assignment of rights, contract renewal provisions, andentirety clauses prohibiting oral modifications of the underlying agreement.112

118. Duration. The duration of the contract may vary depending on the production cycle and theapplicable law.113 For contracts stating no specific duration, the contract term may be implied basedon the type of crop. For example, a contract to grow maize – an annual crop – is implicitly limited toa single year.114 On the other hand, contracts imposing a substantial financial obligation on one party,generally the producer, may imply a more durable relationship and an expectation of renewal andcontinued purchasing by the contractor.115

119. Renewal. Renewal may result from a separate express agreement to extend the duration ofthe existing contract, from an automatic provision incorporated in the initial contract, or tacitly fromthe continued behaviour of the parties after the expiration of the fixed term.116 Oral contractsextending beyond one year may, in some jurisdictions, trigger a requirement that contractsperformed over more than one year be in writing.117

120. Termination. Contract termination discharges the parties from their respective obligationsflowing from the agreement. It may happen automatically, by agreement of the parties, or under aright arising from the non-performance of the other party. To increase clarity and certainty,production contracts should specify the situations and procedural requirements, such as a noticeperiod, for contract termination.118 They can also provide for different remedies in case one partybreaches its contractual obligations. For a complete discussion of contract duration, renewal andtermination, see Chapter __*.

121. Dispute Resolution. Although parties do not enter into a production contract with the intentionof engaging in a dispute, external factors such as weather, disease or market conditions may exposethe parties to risk, hardship and the resulting potential for disputes.119 Accordingly, productioncontracts should incorporate at the outset methods for dispute resolution and choice of lawprovisions. Common forms include judicial proceedings, arbitration and mediation. These provisionsadd important procedural certainty to contract interpretation, execution and resolution.120 For furtherdiscussion on dispute resolution mechanisms, see Chapter __*.

122. Signature. In written contracts, there should be a distinct section that, in addition to thesignature of the parties, includes the date and place of contract formation. As a good practice, theparties should sign in the presence of a witness and include its signature on the document.121

C. Consequences of breach of required form or content

123. Whenever the applicable law requires an agricultural production contract to be made inwriting or imposes other requirements as to form (e.g. sufficient readability) or as to substantivecontent (such as the inclusion of clauses addressing specific obligations of the parties), it wouldgenerally also specify the consequences of noncompliance with such requirements.

124. Regarding written form, it may be set as a condition for the contract to be valid,122 in whichcase the contract will be declared void if the requirement is breached. Alternatively, when the writingrequirement serves evidential purposes only, the existence and content of the contract can beestablished by any means available under the law.123

125. If the applicable law is silent regarding the consequences of the breach of a formrequirement, depending on the legal system, methods of interpretation differ. One widespread trendis to consider the freedom of contracting an overarching principle and to interpret strictly any

Commented [A57]: Online Comments.Min. Justice Canada noted a missing letter Cin the heading. [addressed]

Commented [A58]: Several argumentshave been raised about the formality of acontract.In Bangkok Mr Andrada said that in thePhilippines excessive formality goes againstthe fact that farmers are uncomfortable withformal agreements.Alternatively, arguments have also beenraised on how to keep the language to asimple standard, reflecting the differentregional dialects.A similar problem of literacy and writtencontract form was also raised in contractfarming in Thailand.


exception to the principle, such as formal requirements, with the consequence that the written formmay be considered as serving purposes of evidence or publicity only.124

126. Breach of other formal requirements may result in a variety of sanctions depending on theapplicable law: from avoidance of the contract as a whole,125 to civil126 and administrative penalties(fines127 or cancellation of the contractor’s license or the contractor’s entitlement to benefits underthe publicly-supported contract farming scheme). Certain systems would allow revision of thecontract by the court.128

* Sample contracts cited in this document have been collected from the FAO Contract Farming ResourceCentre at: http://www.fao.org/ag/ags/contract-farming/toolkit/en/1 Sample contract of cabbage seed growing in Australia, clauses 1-5.2 This concept is to be included in the Glossary3 Cf. Tanzania, The crops laws (miscellaneous amendments) Act, 2009, with a dedicated article dealingwith contract farming, for every commodity governed under the Act, i.e. tea, coffee, sisal, cotton , tobacco,pyrethrum and sugar cane4 Cf. for example: in the USA, Iowa law covers commodities defined to include livestock, raw milk, andcrops; Kansas law covers poultry production contracts; Wisconsin law addresses “vegetable procurementcontracts”; in France, Arrêté du 15 mars 1988 relatif à l’homologation d’un contrat type d’intégration pourl’élevage à façon de veaux de boucherie; Arrêté du 15 mars 1988 relatif à l’homologation d’un contrat typed’intégration pour la production de volailles de chair à façon.5 A “producer organisation” is sometimes found as a defined concept under domestic law to designate entitiesrepresenting categories of agricultural producers generally on a territorial and/or commodity basis. The producerorganisation is entitled to participate in policy decisions and negotiate with market participants such as buyersand other agri-businesses. In certain countries, organisations such as cooperatives have a preponderant role inorganising production for particular or large categories of commodities, often sharing regulatory powers withgovernment boards to decide on production quota, quality, prices and other factors.6 See US Model Producer Protection Act Section 9; Iowa Act, Section 9.7 See Sample contract for sugar beets in South Africa:“1.1.18 “Growers’ Association” means the association formed to collectively represent the Growers;3. GROWERS’ ASSOCIATION – 3.1 The Grower shall be entitled to monitor and take part in the business of theProcessor together with other Growers as a collective through the Growers’ Association to the extent and in themanner set out in this Contract. Accordingly, the Grower hereby irrevocably authorises the Growers’ Association torepresent him in relation to his dealings with the Processor, the intention being that the Processor will havedealings not with a multitude of Growers participating in the sugar beet project but with only the Growers’Association representing all Growers. 3.2 The Grower shall procure that the Growers’ Association shall representhis interests under this Contract in accordance with its terms and subject to its conditions. 3.3 It is anticipated thatthe Growers’ Association will appoint 1 (one) individual who shall be responsible for communicating with theGrower and generally dealing with the Grower in relation to any concerns which the Grower may have, suchindividual hereinafter being known as the “Growers’ Representative.”8 According to the fundamental principles on which is based the universally recognised co-operativeidentity, co-operatives are independent entities, formed by members on a voluntary and open membership, tomeet their common economic, social and cultural needs and aspirations, through a jointly owned anddemocratically controlled enterprise. Education, training and information, cooperation among cooperatives andconcern for the community are other fundamental values upon pertaining to the cooperative identity. See the1995 International Cooperative Alliance Statement on the Cooperative Identity; the 2001 United NationsGuidelines aimed at creating a supportive environment for the development of cooperatives and the InternationalLabour Organisation (ILO) Promotion of Cooperatives Recommendation, 2002.9 Particular types of transactions where the final consumer (either individually or collectively through acooperative for example) deals directly with agricultural producers are not in the scope of this Guide.10 See e.g. USA Minnesota Act: ““Contractor" means a person who in the ordinary course of business buysagricultural commodities […] or who contracts with a producer to grow or raise agricultural commodities […].”Under French law, under an “integration contract” the contractor must be incorporated as “an industrial orcommercial company” (Art. 326-1(1)); Panama law (art. 134) refers to an agreement involving “an agribusinessparty”; when contractor does not meet this requirement, the contract would not fall under the characterisation ofthe type of contract regulated under the specific act.11 Tanzania – The crops laws (miscellaneous amendments) Act, 2009 (applicable for regulated commodities,i.e. tea, coffee, sisal, cotton, tobacco, pyrethrum, sugar cane: "contract fanning" means farming under


agreements between cotton growers, farmers or producers on the one part and financiers including [xxx] buyers,[…] investors or bankers on the other part”.Under certain transactions, agricultural credit institutions would provide loans together with support for theproduction such as inputs and equipment. See: High Court of South Africa (Bophuthatswana Provincial Division)Case No. 75/04 - Lichtenburg Graa Trustees (EDMS) BEPERK v. PJ & ilm Boerdery y(EMS) BEPERK, 30 Sep. 2004where the characterization of the contract as a sale or as a loan was discussed.12 EU Directive 85/374/EEC of 25 July 1985.13 For example - France Cass. 1re civ., 22 févr. 2000, n° 378D, Coopérative agricole de la vallée moyennede la Loire [CAVML] c/ Groupement agricole d'exploitation en commun [GAEC] Touzeau frères et autres : Juris-Data n° 000700.14 In view of the potential impact of third party supplier relationships over the agricultural productioncontract, this paragraph would probably need to be further developed.15 Contract sample for the production of cotton in Kenya - Obligations of CODA – 5.716 It has even been reported, that some landlords have forced their tenants to take on biofuel contracts,because they believed these contracts would be more profitable, allowing them to charge more rent or obtaina larger payment if there was a profit-sharing agreement.17 UNIDROIT Principles of International Commercial Contracts, Article 2.1.1 (2010).18 Even when no positive obligation of good faith bears upon the parties during the negotiations, they should not actin bad faith. See: UNIDROIT Principles 2010: Art. 2.1.15 (negotiations in bad faith) “(2) [However,] a party who negotiatesor breaks off negotiations in bad faith is liable for the losses caused to the other party”. Cf. also “Vertical relationships in theFood Supply Chain: Principles of Good Practice”, proposed by core members of B2B platform, General Principle C – “Fairdealing: contracting parties should deal with each other responsibly, in good faith and with professional diligence”.19 In the context of Lao PR, see the recommendation in NAFES, Guidelines for Facilitating Fair Contract Farming, June2012, p.26, § 3.3.6.2: “Once a contract agreement is drafted, it should be circulated to the producers before signing for theirfeedback and suggestions. In soliciting comments and suggestion one of the most important things is the participation ofthe stakeholders for feedbacks. Participation includes receiving sufficient information, attending in discussion andparticipating in decision making. All stakeholders should receive a copy of draft contract in advance before discussion so thatthey have enough time to review the contract. All the comments and suggestion should be discussed, negotiate to come toan agreement, and revised in the final contract agreement document”.20 505 Illinois Compiled Statutes § 17/20 ; Minnesota Statutes Annotated § 17.943(1).

For another example of the requirement of a written offer, see Art.. R. 631-9 Rural and Fishery Code (FrenchDecree n° 2010-1753, December 30th, 2010, in the dairy sector): “the offer of a sales contract of cow’s milk delivered on theFrench territory must be in writing and must comply with the requirements of article R. 631-10”.

When legislations of Member States of the European Union require the drafting of a written offer, such adocument must contain mandatory provisions. Indeed, according to Art. 148 EU Regulation 1308/2013: “Where a MemberState decides that […] first purchasers must make a written offer for a contract for the delivery of raw milk by the farmers[…] such offer for a contract shall fulfill the conditions laid down in [the next paragraph]”21 UNIDROIT Principles of International Commercial Contracts, Article 2.1.2, comment 1 (2010).22 Corbin on Contracts § 4.1 (1993).23 J.D. Calamari & J.M. Perillo, The Law of Contracts, § 2-13, at 43-44 (2d ed. 1977).24 505 Illinois Compiled Statutes § 17/20; Minnesota Statutes Annotated § 17.943(1).25 Corbin on Contracts § 4.6 (1993).26 UNIDROIT Principles of International Commercial Contracts, Article 5.1.7 (2010); Restatement (2d) ofContracts § 33 cmt. e.27 UNIDROIT Principles of International Commercial Contracts, Article 6.1.1 (2010).28 UNIDROIT Principles of International Commercial Contracts, Article 6.1.6 (2010).29 Uniform Commercial Code § 2-20130 United Nations Convention on Contracts for the International Sale of Goods, Article 9 (2010).Restatement (2d) of Contracts § 33 cmt. a.31 UNIDROIT Principles of International Commercial Contracts, Article 2.1.2, comment 1 (2010). But see,31 United Nations Convention on Contracts for the International Sale of Goods, Article 14(1) (2010) (statingthat an offer is sufficiently definite if it indicates the good and at least implicitly makes provisions fordetermining the quantity and price).32 Alaska Independent Fishermen’s Marketing Ass’n v. New England Fish Co., 548 P.2d 348 (Wash. App.1976).33 Allen Blair, “You Don’t Have to be Ludwig Wittgenstein”: How Llewellyn’s Concept of Agreement ShouldChange the Law of Open-Quantity Contracts, 37 Seton Hall Law Review 67, 97-98 (2006).34 PMC Corp. v. Houston Wire & Cable Co., 797 A.2d 125, 128-29 (N.H. 2002) (finding an expectation topurchase “a major share” or “major portion” of its requirements sufficient to satisfy the statute of frauds).35 Corbin on Contracts §§ 4.1, 2.1 (1993).36 United Nations Convention on Contracts for the International Sale of Goods, Article 9(1) (2010).

Formatted: English (United States)

Formatted: French (France)


37 United Nations Convention on Contracts for the International Sale of Goods, Article 14(1) (2010).38 Corbin on Contracts § 2.2 (1993).39 Corbin on Contracts § 2.9 (1993).40 Corbin on Contracts § 2.8 (1993).41 Corbin on Contracts § 2.8 (1993).42 Corbin on Contracts § 2.9 (1993).43 See for example: sample contract of paddy in India, “This Agreement contains the agreement of the parties withrespect to the subject matter hereof and supersedes all prior agreements whether written or oral between the Parties withrespect thereto”. – Sample contract of roots and tubers in Jamaica: “This contract contains the terms of the entireagreement between the parties thereunto and cannot be modified nor added to by any agreement not expressly statedherein”.44 United Nations Convention on Contracts for the International Sale of Goods, Article 18(1) (2010).45 Uniform Commercial Code § 2-206(2).46 Corbin on Contracts § 3.8 (1993).47 UNIDROIT Principles of International Commercial Contracts, Article 2.1.4 (2010).48 Art. 4.9 Philippine DAR Administrative Order n° 09-06: “the AVA contract shall take effect only upon receipt by thecontracting parties of the PARC or PARC ExCom [public authority] resolution approving such contract, or upon the affixing ofthe PARO’s signature as a witness or nominal party to the contract. The absence of PARC or PARC ExCom approval orsignature of the PARO shall render the said AVA contract null and void”.49 United Nations Convention on Contracts for the International Sale of Goods, Article 19(1) (2010).50 Material terms include price, payment, quality and quantity of goods, place and time of delivery,potential liability of one party to the other, and the settlement of disputes. United Nations Convention onContracts for the International Sale of Goods, Article 19(3) (2010).51 United Nations Convention on Contracts for the International Sale of Goods, Article 19(2) (2010).However, if the party to an existing contract proposes a modification, the silence of the receiver is notconsidered acceptance to the modification. Rather the contract continues without change. Corbin on Contract §3.18 (1993).52 Corbin on Contracts § 3.37 (1993).53 It may be noted, that concerning legal persons, it is important to distinguish capacity and authority of the legalrepresentative. cf. supra the section on Intermediaries.54 Depending on the legal system, the concept of capacity varies. For example, French law distinguishes capacitywhich refers to the ability to own and to exercise rights, from insanity (when a person suffers from a mental disability or isintoxicated) which relates to a lack of a lucid consent required for the contract to be valid.

55 See UNIDROIT Principles 2010: Art. 3.2.1 (Definition of mistake): “Mistake is an erroneous assumption relating tofacts or to law existing when the contract was concluded”.

The concept of mistake is approached very diversely depending on the legal system. For example, In English law,mistake is not a ground to avoid the contract when the mistake relates to the essential characteristics of the object of thecontract or to surrounding facts: it is legally relevant only if it is shared by both parties and renders the contract impossible.In German law, a party may avoid a contract because of a mistake as to the facts that was not caused by the other party,nor known to him, provided that the error was as to a quality considered essential in business (§ 119(2) BGB), though if theother party either knew nor had any reason to know of the mistake, the avoiding party may have to compensate the other’sreliance losses (§ 122 BGB). In French and Belgian law, a contract may be avoided on the ground of mistake even if the errorwas not provoked by the other party or even known to it, provided that the error was to the substance of the object of thecontract (e.g. to its essential qualities normally expected by the parties) or some matter that had entered the contractualsphere. In French law, mistake as to the value or to the economic profitability of the foreseen operation are not grounds foravoidance.56 In English law, there is no duty to disclose facts, and there will be a remedy only if the information provided isincorrect or positively misleading (“misrepresentation”). Conversely in French and German law, there may be fraud bykeeping silent when there was a duty to disclose.57 In many countries where contract farming takes place, there is a high level of illiteracy. UNIDROIT Secretariat,Report on First Meeting of the UNIDROIT Working Group for the preparation of a Legal Guide on Contract Farming, Study 80A, Doc. 2, January 2013, § 44, p. 8.58 For an example of a legislation dealing with this issue, see Art. 4.7 Philippine DAR Administrative Order n° 09-06:“The terms and conditions of the AVA contract shall be fully known to all parties. If warranted, the parties may translate thecontract into the local dialect known to the ARBs. It shall be the responsibility of the concerned DAR field officials to ensurethat the ARBs are made fully aware of and understand the options available to them, including their rights and obligationsunder the AVA contract”.59 It may be noted that, depending on the legal system, unintentional breach of an obligation to act in good faithmay result in damages and not in the avoidance of the contract. See also UNIDROIT Principles 2010: Art. 3.2.4. allowing fora remedy for non-performance when the circumstances permit so.


60 The Brazilian bill n° 330 goes a step further by providing an example of a positive obligation for the contractor todisclose information prior to the making of the contract: Art. 8 provides that the integrating agricultural firm is under a dutyto prepare every three months a pre-contractual information document for prospective producers; this document mustreport detailed technical and financial information, as well as the parties’ obligations and allocation of liabilities reflected inthe standard agreement.61 See in this regard the approach taken by certain courts in France regarding mistake and the expected profitability– referred to in footnote 47.62 Restatement (Second) of Contracts §7.63 Restatement (Second) of Contracts § 151.64 Restatement (Second) of Contracts § 153.65 Restatement (Second) of Contracts § 162.66 Restatement (Second) of Contracts § 175.67 Restatement (Second) of Contracts § 176.68 Restatement (Second) of Contracts § 175(2).69 Restatement (Second) of Contracts § 177.70 Jamestown Farmers Elevator, Inc. v. General Mills, 552 F.2d 1285 (8th Cir. 1977) (alleging threats bydefendant to put the plaintiff out of business).71 Id.72 Id.73 For a description of the role facilitators in Lao PR, see NAFES, Guidelines for Facilitating Fair Contract Farming,June 2012, p. 28, § 3.3.774 The requirement of registration exists in countries where contract farming is highly regulated such as India,Tanzania (in the framework of Boards that are qualified for certain products), Philippines (in the framework of agrarianreforms) and Morocco (in the framework of development projects).75 Such publicity is intended to reduce side selling opportunities for producers, and to shift the responsibility ontoother buyers contracting with the producer obliged under the registered contract.76 Minnesota Statutes Annotated § 17.944.77 See NAFES, Guidelines for Facilitating Fair Contract Farming, June 2012, p. 7 et seq. In Lao PR, the followingexamples are provided of investor’s representatives: head of village, head of farmer group, relatives, acquaintance or arespected well-known senior person in the village; also Government agencies. Conversely, another type of “intermediary” isdescribed as “traders” who “have written and/or verbal agreement with investors and producers for buying and selling.Traders and investors may share investment in contract and trader buys products from producers to deliver to the investor”.78 Cf. sample contract United States of America - Weaner Pig Supply and Purchase Agreement “14. AUTHORITY TOENTER INTO THIS AGREEMENT. Each person executing this agreement represents and warrants that this agreement has beenduly and validly authorized by such person's principal, if any, and that all necessary action has been taken, and that thisagreement constitutes the valid and binding obligation of the parties hereto enforceable in accordance with its terms.”79 UNIDROIT Principles of International Commercial Contracts, Article 1.2 (2010).80 UNIDROIT Principles of International Commercial Contracts, Article 1.2 (2010); United States ex rel Fed.Corp. v. Commercial Mechanical Contractors, 707 F.2d ``24 (10th Cir. 1982).81 United Nations Convention on Contracts for the International Sale of Goods, Article 11 (2010).82 Robert A. Feldman & Raymond T. Nimmer, Drafting Effective Contracts: A Practitioner’s Guide § 1.01;Caterina Pultrone, An Overview of Contract Farming: Legal Issues and Challenges, XVII Uniform Law Review263, 283 (2012).83 Food and Agriculture Organization of the United Nations (FAO), Guiding principles for responsiblecontract farming operations 2 (2012); UNIDROIT Principles of International Commercial Contracts, Article3.2.7(1)(a) (2010).84 Food and Agriculture Organization of the United Nations (FAO), Guiding principles for responsiblecontract farming operations 2 (2012).85 Neil Hamilton, Farmers Legal Guide to Production Contracts, at 12 (1995).86 UNIDROIT Principles of International Commercial Contracts, Article 1.1 (2010).87 Transaction costs may include the time and effort of individualized bargaining, simplifying internaladministration, facilitating planning and reducing risk to a calculable quantity. Nicholas S. Wilson, Freedom ofContract and Adhesion Contracts, 14 International and Comparative Law Quarterly 172, 176 (1965).88 Philip Shuchman, Consumer Credit by Adhesion Contracts, 35 Temple Law Quarterly 125, 131 (1962).89 Respectively gestaltungsfreiheit and abschlussfreiheit. Arthur Lenhoff, Contracts of Adhesion and theFreedom on Contract: A Comparative Study in the Light of American and Foreign Law, 36 Tulane Law Review481, 482 (1962).90 Corbin on Contracts § 1.4 (1993).91 Restatement (2d) of Contracts § 206; Shuchman, supra note 9, at 133.92 Corbin on Contracts § 1.1 (citing Tantleff v. Truscelli, 110 A.D.2d 240 (NY 2nd Dept. 1985) and notingthe phrase fiat justitia ruat coelum (“when the skies begin to fall, Justice removes the blindfold from her eyes


and tilts the scales”) for the principle that courts may reject enforcement of even clear language in a contracton the basis of a shifting premise of reasonableness.93 UNIDROIT Principles of International Commercial Contracts, Article 3.2.7 (2010). Provisions of mass-produced standardized agreements are not automatically given effect if they are at variance with thereasonable expectations of the party who did not prepare the document. Corbin on Contracts § 1.1 (citingDarner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 682 P.2d 388 (Ariz. 1984)) (1993).94 Larry Bates, Administrative Regulation of the Terms in Form Contracts: A Comparative Analysis ofConsumer Protection, 16 Emory Law Review 1, 45 (2002).95 Carlos A. da Silva, The Growing Role of Contract Farming in Agri-food Systems Development: Drivers,Theory and Practice, at 3 (2005) (citing Chen et al, Changes in Food Retailing in Asia: Implications ofSupermarket Procurement Practices for Farmers and Traditional Marketing Systems, FAO AGSF OccasionalPaper No. 8 (2005)).96 Spain: Law 2/2000 on standard contracts of agrifood products (Ley 2/2000 sobre contratos tipo deproductos agroalimentarios) and implementing Real Decreto 686/2000. Italy: Law NO. 102/2005 for theRegulation of agrifood markets (Regolazione dei mercati agroalimentari). France: The Law for themodernization of agriculture of 27 July 2010 (Loi de modernization de l’agriculture LMA). Iowa: CommodityProduction Contracts, IA Code § 202.97 Caterina Pultrone, An Overview of Contract Farming: Legal Issues and Challenges, 17 Uniform LawReview 263, 267 (2012).98 Although outside of the terms of the contract form, the state of Iowa established a rather unique andpowerful statutory provision that provides for an agricultural lien placing the farmer with super priority overother debtors of the contractor in the event the contractor is insolvent. Iowa Code (§579B).99 Food and Agriculture Organization of the United Nations (FAO), Guiding principles for responsiblecontract farming operations 2 (2012).100 505 Illinois Compiled Statutes § 17/20 & § 17/25 (Readability of Production Contracts); MinnesotaStatutes Annotated § 17.943(1).101 Minnesota Statutes Annotated § 17.943(3).102 505 Illinois Compiled Statutes § 17/35; Spain Law 2/2000 (Article 3) on standard contracts of agrifoodproducts (Ley 2/2000 sobre contratos tipo de productos agroalimentarios)103 505 Illinois Compiled Statues § 17/35.104 France Rural and Fishery Code, Article 326-6.105 This is notably the case regarding the regulations relating to livestock production contracts, where parties engagein complex obligations and need an increased level of certainty regarding technical and legal aspects. E.g. Belgian law ofApril 1st, 1976 on vertical integration in the sector of animal production (“Belgian law”); Art. 4(3) Catalonian law 2/2005;French Decrees of March 15th, 1988 approving a standard integration contract for veal calf production, and a standardintegration contract for poultry production.106 Art. 9 Moroccan law n° 04-12;107 Generally in this case, the operative part would prevail. UNIDROIT Principles of International CommercialContracts, Article 4.4.2108 UNIDROIT Principles of International Commercial Contracts, Article 5.1.7 (2010).109 Caterina Pultrone, An Overview of Contract Farming: Legal Issues and Challenges, 17 Uniform LawReview 263, 280 (2012).110 James J. White, Robert S. Summers & Robert A. Hillman, Uniform Commercial Code § 5:1 (6th ed.,2013); UNIDROIT Principles of International Commercial Contracts, Article 3.2.7 (2010).111 Neil Hamilton, Farmers Legal Guide to Production Contracts, at 43 (1995).112 United Nations Convention on Contracts for the International Sale of Goods, Article 29 (2010).113 For example, Belgian national legislation limits contracts to no more than three years. Belgian law Art.5(2).114 Neil Hamilton, Farmers Legal Guide to Production Contracts, at 35 (1995); Cr. Cataluña law 2/2005Art. 4(2).115 EU Regulation 261/2012, Art. 185f; Minnesota Statutes Annotated § 17.92 (Recapture of CapitalInvestment Required by and Agricultural Contract).116 See Generally, Subha Narasimhan, Relationship or Boundary? Handling Successive Contracts, 77California Law Review 1077 (1989); France Rural and Fishery Code, Article 631-24.117 Restatement (2d) of Contracts § 130 (Illustration 4).118 UNIDROIT Principles of International Commercial Contracts, Articles 5.1.8, 7.3.2 (2010).119 Neil Hamilton, Farmers Legal Guide to Production Contracts, at 1 (1995); UNIDROIT Principles ofInternational Commercial Contracts, Article 6.2.2 (2010).120 Caterina Pultrone, An Overview of Contract Farming: Legal Issues and Challenges, 17 Uniform LawReview 263, 281 (2012).121 Caterina Pultrone, An Overview of Contract Farming: Legal Issues and Challenges, 17 Uniform LawReview 263, 281 (2012).





122 Art. L. 326-6 Rural and Fishery Code (French law n° 64-678): If the contract does not specify the price to be paid,the duration of the contract and the object of the obligations of supply of products or services, then it is voidable. It impliesthe nullity of a verbal contract or nullity of the contract when the prescribed clauses are not sufficiently detailed.123 Art. 2 Belgian law: The contract and its modification must be written. In case of breach of this requirement, theproducer can provide evidence of the existence of the contract, of its terms and of its modifications by any means offeredby the law, including witnesses and presumption.

Art. 8, 2° of Spanish law BOCG 10A37-1 art. 8, 2°, provides: “En ningún caso, el requisito de forma exigido lo es deexistencia y validez del contrato”.124 M. Fontaine, Le processus de formation du contrat: Contributions comparatives et interdisciplinaires àl’harmonisation du droit européen, LGDJ, éd. 2002, p. 629, n° 26.125 Art. 4(3) Catalonian law 2/2005: Oral contracts shall be void. – Art. L. 326-6 French Rural and Fishery Code: Thecontract is voidable, also when the prescribed clauses are not sufficiently detailed; most recent French case law hasconsidered that this remedy being in the producer’s interest, only the producer can claim it (nullité relative, as opposed tonullité absolue when public policy is involved: this distinction involves different time limits to bring the action under therules of civil procedure); as a consequence, an integration contract has been considered legally binding although it hadbeen concluded orally, since the producer was not challenging its validity.126 Iowa Producer Protection Act, Section 13: Civil penalties may be due for unfair practices.127 Art. 24, 1° Spanish law BOCG 10A37-1: “Las infracciones en materia de contratación alimentaria previstas en estanorma serán sancionadas con multas de acuerdo con la siguiente graduación: a) Infracciones leves, hasta 3.000 euros b)Infracciones graves, entre 3.001 euros y 100.000 euros c) Infracciones muy graves, entre 100.001 y 1.000.000 euros”.

French Decree n° 2010-1753, December 30th, 2010, in the dairy sector: the absence of a written offer includingmandatory clauses, or an offer written in breach of the model contract, will be subject to the administrative fine of article L.631-25 of the French Rural and Fishery Code.128 Under Minnesota Act, section 17.944, Subd. 8, Reformation: “(a) In addition to the remedies provided in secion8.31, a court […] may change the terms of the contract or limit a provision to avoid an unfair result […]”.

Formatted: Spanish (Spain, TraditionalSort)


Page 19: [1] Commented Author 11/12/2014 1:12:00 PMMr De Los Reyes in Bangkok, session 2, raised the point that the government could act as provide a centralrepository of relevant and updated data for smallholders s when they enter into Business Contracts.

The same speaker also proposed other ways the government could intervene, by developing its capacity tomonitor contract implementation, facilitation and requiring regular submissions from the parties of auditedfinancial statements and development progress of agribusiness contracts.

Note that to varying degrees these two comments could also be added in the chapter relating to obligations, in thesection about Record keeping and information management.

Page 19: [2] Commented Author 11/12/2014 1:13:00 PMUNIDROIT 2013 – Study 80 A – W.P. 3 – Comments from A. Shepherd and C. Eaton. Both commenters highlightedthe sometimes instrumental role of “middlemen” in Informal/Intermediary models.

Similar conversation was had also in Rome consultations, by e.g. Prof. Cafaggi on “Coyotes”. Discussion of theirroles could therefore be extended.

OBLIGATIONS OF THE PARTIES

Prepared by Professor Marcel Fontaine and Professor Henry Gabriel

Table of contentsI. Risk allocation..........................................................................................................................................3

A. Production risk allocation .......................................................................................................................... 3B. Commercial risk allocation......................................................................................................................... 4C. Exclusivity .................................................................................................................................................. 5

II. Core obligations of the parties.................................................................................................................6

A. The product................................................................................................................................................ 61. Quantity................................................................................................................................................. 7

(a) The whole production is purchased .............................................................................................. 7(b) Only part of the production is purchased...................................................................................... 8

2. Quality ............................................................................................................................................... 10(a) Determining quality ..................................................................................................................... 10(b) Quality standards......................................................................................................................... 11(c) Product safety.............................................................................................................................. 13(d) Link with certification requirements ........................................................................................... 13

B. Production process................................................................................................................................... 141. Provision and use of inputs ................................................................................................................. 14

(a) General obligations...................................................................................................................... 14(b) Specific obligations related to certain types of inputs ................................................................ 16

(i) Land, installations and fixed assets........................................................................................ 16(ii) Physical Inputs........................................................................................................................ 17(iii) Finance ................................................................................................................................... 18(iv) Services................................................................................................................................... 20

(c) Obligations related to intellectual property rights ...................................................................... 202. Production methods, compliance and control ......................................................................................... 22

(a) Specified production methods .................................................................................................... 23(b) Monitoring and control ............................................................................................................... 25

C. Delivery .................................................................................................................................................... 271. Time and place..................................................................................................................................... 272. Acceptance .......................................................................................................................................... 29

D. Price and Payment ................................................................................................................................... 311. Price Determination ............................................................................................................................ 312. Price Mechanisms................................................................................................................................ 32

(a) Fixed prices ................................................................................................................................. 32(b) Price scales................................................................................................................................... 33

3. Time and method of payment ............................................................................................................. 34

III. Additional obligations............................................................................................................................ 35

A. Insurance obligations ............................................................................................................................... 35B. Record keeping and information management ....................................................................................... 36C. Community interests ................................................................................................................................ 37

IV. Transfer of obligations .............................................................................................................................. 37

Commented [A1]: Online comments.Fondation pour le droit continental (ad hocexpert group) suggested that especially inthis chapter, but throughout the guide,greater attention should be paid todistinguish according to the specific areaconcerned, as different issues and solutionsare relevant for example for production ofmilk than for production of soy. Thesedistinctions have importance for e.g. delays,quantity, and quality.

Commented [A2]: Online comments.French Ministry of Justice - Direction desaffaires civiles et du Sceau notes that thereexists an absence of recommended pre-contractual obligations in the Guide.

Commented [A3]: Online comments.Prof Fontaine: “As far as I am concerned I donot think it would be appropriate to give myname as one of the two co-authors of thisChapter. I did write myself the first draft ofthe part concerning the producer'sobligations, but the whole chapter has sincebeen completely reorganized and redrafted,mainly by Bill Garthwaite and the Secretariat.Perhaps the chapters could be publishedwithout any reference to specific authors,but credit would be given in some form tothe different contributors at the beginning ofthe Guide.”

2. UNIDROIT 2014 – WG4 – W.P. 1 – Obligations of the Parties

OBLIGATIONS OF THE PARTIES

1. This chapter introduces and explores the obligations on parties that derive from anagricultural production contract. In agricultural production contracts, it is important to understandthat the obligations of producers and contractors are typically interlinked, with the result that oneparty’s performance will often be dependent upon the other party’s compliance. Thus, the producermainly undertakes to produce the goods in accordance with the contract specifications andrequirements, and to deliver the goods to the contractor in accordance with the contractspecifications and requirements. A number of other obligations are related to these main duties,such as the duty to pay for the inputs and to reimburse the financing it may have received fromthe contractor.

2. The main obligation of the contractor under an agricultural production contract is topurchase the product or, depending on the nature of the arrangement, to remunerate theproducer for the services rendered in the production of the commodity. It is also a commonfeature of many agricultural production contracts that contractors agree to, or may even insistupon, supplying various inputs for production. Agricultural production contracts often give thecontractor the right to exercise oversight of the production process, which may includeinstructions and technical guidance. Each of the parties’ obligations may have a corresponding orrelated obligation on the other party. For example, the obligation of the contractor to supplytechnical instructions has the corresponding obligation of the producer to follow the instructions.

3. A number of obligations may exist throughout the production cycle. Under some legalsystems, a principal example is the general obligation on both parties of good faith and fair dealing.1

Where applicable, this obligation exists throughout the life of the contract, and is relevant for anumber of potential problems in the contract farming relationship that often result in disputes.toregulate the contractual dealings between the two parties, especially in those situations wheredispute may arise. These problems may include early contract termination before the investments infacilities are paid off, the contractor requiring additional improvements at the producer's expense, themanipulation of the quality, quantity or cost of inputs such as birds and feed, the contractor’sknowledge in advance that contracts will be unprofitable, under weighing of livestock and feed, thefailure to make payments or failure to make timely payments, and retaliatory termination ofcontracts for collective organizing.

4. This chapter examines these issues and obligations and proceeds by first introducing keyaspects of the allocation of risks between the parties. Next, the core obligations of the parties toan agricultural production agreement are explored. Many obligations may occur over a period oftime, or at multiple points during the duration of the agricultural production contract, and specialcare is taken to highlight this fact, where relevant, during the presentation of each obligation.

5. The final section of this chapter analyses several broad obligations and issues which maybe relevant at any stage of performance of an agricultural production contract. It is importantthat both parties are aware of these obligations during the entire course of their performance.The presentation of this chapter is made in the context where the agricultural productioncontract is concluded between an individual producer and an individual contractor. As discussedin the chapter on parties to the contract, the contractual arrangements may be more complexthan this two-party arrangement.

5 bis. The focus of this chapter is on obligations that flow from the provisions of the contractitself. However, parties should always be mindful of their obligations that derive from othersources (see the Chapter on the Legal Framework at __*). Thus, for example, when the producer

Commented [A4]: In response to MrShepherd’s advice, internet consultations, toavoid the negative connotations of thisparagraph, an attempt has been made tomodify it focusing on the contract dealingsbetween the parties rather than thedisputes.

Commented [A5]: Online Comments.Min. Justice Canada suggests deleting thesewords.

UNIDROIT 2014 – WG4 – W.P. 1 – Obligations of the Parties 3.

hires employees, the producer is subject to the requirements imposed under labour and social law,such as working hours, social contributions, safety conditions at the work place, and bans on childemployment. It is not uncommon that, although applicable as a matter of public regulation, someagricultural production contracts expressly contain these obligations.2

I. Risk allocation

6. The obligations of the parties under the contract are intrinsically related to the how theparties intend to allocate and compensate for risks. Conceptually, when parties draft a contract andinclude obligations which bear upon one party and/or the other, the parties are also allocating riskswhich will fall upon one party and/or the other.

7. The main risks that the parties are exposed to during the life of the contract can be dividedinto two broad categories: “production risk,” the risk of loss or shortfall of production by expected orunforeseen events that arise during production; and “commercial risk,” the risk that the actualmarket value of the produce at the time of delivery or marketing may be lower or higher than theprice anticipated by the parties at the time they set the price or the price formula.

A. Production risk allocation

8. Events during the production phase, such as weather, may cause a shortfall or even theentire loss of the produce (see also the discussion of supervening events on the Chapter on Excusesat __*). These events are collectively referred to as production risks. Typically, the contract willcontain provisions specifying which of the parties bears the risk of the loss and which party isresponsible for securing the quantities needed to meet the contract requirements. These provisions,and the resulting obligations, must be understood in the light of the default risk allocation that maybe provided by the applicable law.

9. To understand fully the obligations in an agricultural production contract, it is important toappreciate legal implications of holding and transferring “title” to the goods. Title to goods may begenerally thought of as ownership of the goods. Transferring title is therefore transferring ownership.Whether a party has title has a number of implications which are relevant. One implication is theright of the owner to dispose of the goods by sale or other disposition. Another importantconsequence of ownership is the potential bearing of risks of deterioration, loss or damage to thegoods. Whether a party holding title bears production risks depends on the contract provisions andthe applicable law, but under the typical default rule, these risks are placed on the party that ownstitle to the goods. If the transfer of risk is not linked to the transfer of ownership, a specific attentionshould be paid to perishable products .The general idea is that as soon as one enters into possessionof perishable products, he should take over the risks.

10. Title in agricultural production contracts can be classified under two broad categories. Similarto an ordinary sales transaction, the first category focuses on the particular goods that the producerowns and will deliver to the contractor. Under the second category, the contractor is the owner of theraw material and the transformed product during the whole production process. In this latter case,the producer’s status is similar to that of a services provider. For both categories, the obligations ofboth parties will depend on which party has title to the goods and the inputs at the relevant time.

11. In some legal systems, the transfer of title occurs when the buyer takes possession ordelivery of the goods. In these legal systems, the transfer of the risks of loss would normally occur

Commented [A6]: Mr Shepherd suggeststhe removal of « the »

Commented [A7]: Online Comments.Min. Justice Canada suggested deleting.

Commented [A8]: Online comments.Fondation pour le droit continental (ad hocexpert group) Suggested clarifying thesituation in case of perishable goods.


at the time of possession or delivery. Under certain legal regimes, the default rule for risk of lossfollows the physical control over the goods. This is justified by the fact that the person in possessionis usually in the best position to care for the goods. This is common in contracts such as a lease,loan, bailment or deposit, where the person having the use or custody of the goods bears the risks,and not the owner of the goods. Subject to the obligation of good faith, the default rules that governrisk of loss can usually be changed by a provision in the contract.

12. There are two issues that are of particular concern to the contractor. First, it is important tothe contractor that the producer has valid and sufficient rights over the produce and land. Second,the contractor must know when title passes. This question of title can be factually complex becauseof the fungible nature of goods that may come into existence in the future. As for the producer’srights in the land and the goods, mandatory provisions generally apply to protect the rights of thirdparties. However, as between the parties, it is not uncommon for the contractor to require theproducer to assure that the producer is a legitimate holder of the land, that the producer has full titleover the produce, and that no other party can assert rights over the production, land tenure rights,security rights or other claims.

13. One issue that is of particular concern to producers is that some contracts attempt toestablish the contractor’s title to the crop while also placing all the risk of loss on the producer untilthe crop is delivered. Thus, in many agricultural production contracts, the producer does not haveany legal right or title to the crop while it is being raised. This is designed to protect the contractor’sfinancial interest in the crop from claims by the producer's obligees, and to protect the intellectual-property rights in the genetic material (see below at ___ for further discussion of intellectual propertyrights*). But, many contracts also provide that the risk of crop loss, such as by weather or disease,rests with the producer. In other words, if the crop is successful, the contractor owns it; if the crop islost, the producer is responsible and earns no compensation. This form of agreement is a classicexample of risk shifting, because it guarantees the contractor’s right to the crop without exposing thecontractor to the risks of production. Another concern for the producer arises in situations where theshift of the risk might not take place even after the contractor has taken possession and ownership ofthe produce: future rejection by other parties down the supply chain might still occur but the burdenis still on the producer. To combat these discrepancies, the parties should keep in mind, that it ispossible to insert a clause whereby the producer keeps the ownership until payment of the productsby the contractor and such a clause should not prevent the producer from passing the risks ondelivery.

B. Commercial risk allocation

14. “Commercial risks” in an agricultural production contract are those risks that the productioncannot generate the expected revenue because of changes in the market prices or the demand for thecommodities. Both of these risks may impair the parties’ capacity to recoup their investment and maycompromise the financial viability of the project.

15. The basic motivation of contract farming is for the contractor to control commercial risks byagreeing, on the one hand, on a fixed price or at least pre-established price calculation formulae, whichprotect against unfavourable price fluctuations; and by requiring compliance with predeterminedvolume, quality and production standards, which reduces the risk of rejection of the produce by theintended customers along the value chain. The particular market and commodity and the businessstructure sought by the contractor will influence the level of integration established by an agriculturalproduction contract. Tightly integrated relationships are common for production destined to be sold in

Commented [A9]: Mr Kirke, internetconsultations, asks whether the Guideshould take a stance on the practice of riskshifting.

Commented [A10]: This point is madeby Mr Salvador, Bangkok session 4, by citingthe example of clauses in the Sumifru(Philippines) banana production contracts.[this could be elaborated more or it mighthave to be moved to a more appropriatesection]

Commented [A11]: Online comments.Fondation pour le droit continental (ad hocexpert group) suggested adding this line.

Commented [A12]: Mr Kirke, internetconsultations, "risk is also volume andquality related e.g. farmer practices orweather conditions can impact bothproduction volume and quality."


oligopolistic markets, or where contractors have developed specialised lines of products requiringspecialised raw materials and production methods so as to confer on the final product a specific marketidentity. Tightly integrated relationships typically translate into various specific obligations, such as theproducer’s obligation to exclusively use contractor’s inputs and technology (see below at __*). Toguarantee production of a quality that meets the contractor’s precise market requirements, the contractnormally requires the producer to acquire specific knowledge for the contracted production and makecapital investments in installations and equipment in accordance with the contractor’s specifications(see below at ___*).

16. The producer is usually subject to close monitoring and oversight over the various processesinvolved in production. Typically, the contractor secures an exclusive right to acquire the product inaddition to having possible proprietary rights (full ownership, patent or proprietary rights) over theinputs, technology and the product during the entire production process.

17. In addition to providing for the control, mitigation and allocation of commercial risks resultingfrom marketing failure, the contract typically also provides for commercial risks that result from pricefluctuations. From the contractor’s perspective, the main risk is that the price fixed in the contract, orobtained through the application of the contractual price calculation formula (see below at __*) may behigher than the current market price for a commodity of the same quality. If the demand for the finalproduct is elastic, or competition is high, the contractor may not be able to pass price increases to theconsumers, and may have a lower profit than originally anticipated. Conversely, from the producer’sperspective, a contractual price that is lower than the market price, or is insufficient to protect theproducer’s profit against rising costs (wage, power or fuel cost increases, for instances), makes thecontract unattractive or even disadvantageous. In either case, the parties may have an incentive tobreach the contract. The risk of default is greater with simple commodities that can be more easilypurchased from substitute sources or sold to competing buyers. The more complex the production, thecloser the interdependence between the parties.

18. To a large extent, these commercial risks are controlled and mitigated through the pricemechanism established in the contract (see below at __*). The more the parties are able to devise amechanism that preserves the mutual profitability of the contract despite price fluctuations, the greaterthe chance that the parties will be able to establish a sustainable contractual relationship. In this regardit is important to improve the knowledge of the market, and the communication of informationregarding it, between both the producer and contractor: this helps counter erratic pricing and ultimatelyto manage commercial risk.

C. Exclusivity

19. To control commercial risks, the parties often reinforce the price mechanism by anobligation of exclusivity. Exclusivity is where a producer undertakes to deal only with a particularcontractor. Most often, exclusivity requires not only for the delivery of the commodity to thecontractor but also for the supply of all or most inputs from the contractor. The concept ofexclusivity is closely related to the quantity of product to be delivered to the contractor (see thediscussion on quantity below at ___*).

20. Exclusivity obligations are often an obvious consequence of the business model on which thecontract is based. For instance, if the contractor has retained title over the goods it naturally followsthat the whole production has to be returned to the contractor (subject to possible minor exceptions,e.g. allowing the producer to keep small quantities for its personal use). The result is different whenthe production legally belongs to the producer. In these cases, though, many agricultural production

Commented [A13]: Mr Ronchi, PrivateSector Workshop session 3, raised the issueof information of the market and the valueof knowledge. He said that keeping buyersand suppliers better informed actuallyhelped to manage ris and control erraticpricing ,that is negative for both parties.

Commented [A14]: Mr Kirke, internetconsultations, asks whether the this sectionshould also reflect the fact that exclusivity isoften aspirational rather than fullyimplementable. In support for this hedescribes the presence of so-call exclusivecontracts with several different contractorsin the tobacco commodity and the difficultyin obtaining legal redress for this issue.


contracts still oblige the producer to deliver its production exclusively to the contractor. This can bejustified by the contractor’s substantial inputs in the production process, such as sowing or plantingmaterial and technical assistance. This obligation may also arise from the contractor’s undertaking topurchase the whole production.

21. The producer must be aware, however, of the risks that may be involved in granting amonopoly over its whole production to a single contractual partner. Under an exclusive relationshipwith a contractor, the producer generally loses much or all of its economic autonomy, as a result ofits reliance on the contractor for access to the market, and on the contractor’s conditions for price,inputs and credit. With this economic dependency it is likely that the producer will have limitedcapacity to oppose the contractor’s possible abuses or unfair conduct, in fear of losing the contract.To guard against this, special protective provisions are generally available under national law.exclusivity

22. Exclusivity clauses alone may not be sufficient to ensure contract performance if the pricemechanism or method of payment fails to guarantee an adequate level of profits or where theincentives for breaching the contract outweigh the costs of liability for breach. A change of marketprice or the possibility of immediate payment may encourage an opportunistic producer to breach itsobligation to deliver the produce to the contractor and sell the produce to a third party. This practice,known as “side selling,” is more likely to occur when there is an obligation of exclusive delivery, but itcould also occur when the contract requires a fixed delivery amount. Side selling generally occurswhen the benefits of breaching the contract in one particular occasion would be seen by the produceras greater than the loss of the relationship under the contract. To avoid side selling, contractors mayprovide flexibility in delivery by allowing producers to retain a small quantity for sale outside thecontractual relationship. The producer would still be obligated to reimburse for the inputs andservices provided by the contractor. Conversely, the contractor should not be forced to take deliveryof an enormous quantity, should the harvest be exceptional.

II. Core obligations of the parties

23. In an agricultural production contract, the producer’s primary obligation is to produce thegoods in accordance with contract specifications and requirements. This obligation may entail a widerange of underlying sub-obligations and requirements. Concomitant with the producer’s obligation isthe contractor’s obligation to purchase the production, or if the contractor owns the produce, to takedelivery of it. Thus, the primary obligation of the contractor is to pay the price. During production,the contractor also may have several corresponding obligations such as the obligation to providespecified inputs and the obligation to oversee production.

A. The product

24. The quantity and quality of the products are central to the obligations of production anddelivery. The extent of the product-related obligations assumed by the parties can be complex. Forexample, quantity is not only commensurate to the quantity of inputs provided, but will often dependon the quality of inputs provided.3 The quantity and quality of production will also depend not only onthe standard of care used by the producer, but also on the method and means of production applied,which are often established by the contractor. The extent of each party’s obligations for the provisionof inputs and the production methods determines the risks that each party assume for loss, shortageor poor quality. This section examines first issues that relate to quantity and quality.

Commented [A15]: Mr Shepherdsuggests that something might be missinghere.

Commented [A16]: Online Comments.Min. Justice Canada suggested deleting.

Commented [A17]: Mr Shepherd,internet consultations, suggests that cashmight be another reason why side-sellingoccurs. « it is not only a change in price thatencourages side selling. Cash is a powerfulpersuader and if the contractor only paysafter 14 days while the casual buyer pays incash, farmers may side sell even if the priceis lower. »

Commented [A18]: Mr Shepherd,internet consultations, same comment asabove.

Commented [A19]: Ms Watanabe, onlinecomments, states that "there are cases thatproducers have the flexibility to sale to thirdparty whether they reimburse for the inputsand services provided by the contractor.However, the producers that sale to thirdparty might lose reputation with thecontractor."

Commented [A20]: Online comments.Fondation pour le droit continental (ad hocexpert group) suggested adding this line.


1. Quantity

25. Often, the contractor agrees to pay for the producer’s whole production. Some contracts,however, provide, for the purchase of only a portion of the future crop, a specified quantity, aminimum quantity, a quota, or a variable quantity. Some contracts state that the quantity will bedetermined later on the basis of field tests conducted during the growth of the crop. Similararrangements can be found in agricultural production contracts dealing with animal husbandry.

(a) The whole production is purchased

26. An agreement for the contractor to acquire the “whole” production may indicate severalpossible measurements, and its meaning should be clarified with specificity. If it is intended to meanthat output which is produced from a specific plot of land, the precise location, and possibly also thesurface area, of the land should be set out in the agreement.4 If the “whole production” is meant asthe crop grown from the inputs provided by the contractor, such as seeds or planting material, thisneed to be expressly stated in the agreement. Similarly, in those animal husbandry contracts thatprovide for the contractor to supply the animals, the normal expectation is that the whole productionrefers to all of the animals. This, of course, should be plainly stated in the agreement. The partiesmight also define the “whole production” by reference merely to all that the producer produces.5

27. The “crop” is usually the crop of an identified season, but it could also be the crop of severalseasons, or several crops within a single season. The contract should specify what is included in the“crop.” In some situations, the whole “ crop” might be limited in accordance to the whole usableproduction; this in turn would require a description of what would be usable. Some contracts thatprovide for the delivery of the whole crop provide an estimate of the quantity to be produced. Thistakes into consideration the uncertainty that always affects crop production. Clauses dealing withforce majeure (see the Chapter on Excuses at __*) may provide for an adaptation of the quantities ifpart of the crop is lost due to weather conditions.

28. The producer’s obligation to deliver the whole crop to the contractor implies that the latterhas exclusive rights on the production, which means that sales to third parties are not permitted (seethe above discussion on exclusivity at __*). The producer’s obligation to deliver the wholeproduction to the contractor requires that the producer deal with the contractor on an exclusivebasis for the production. There is no presumption, however, that the contractor will have anexclusive relationship with the producer. Although there is no particular legal impediment toprevent the parties from entering into an exclusive relationship, more commonly contractors dealwith large numbers of producers thereby allowing a greater overall production as well as loweringthe risks of an individual producer’s failure.

29. In exclusive contracts, i.e. when the producer has to deliver all of its output or all the outputproduced from a given land, any type of side selling (or side selling of products coming from theidentified land) amounts to a breach of an obligation (see the Chapter on Remedies at ___*).Moreover, in exclusive contracts, the producer may be liable if, even without engaging in transactionswith third parties, the producer delivers a limited quantity or poor crops due to a lack of effort.6

30. From the contractor’s perspective, the major concern of a producer’s side selling is theinability of the contractor to obtain replacement goods that comply with the contract specifications.Moreover, the goods may also contain inputs by the contractor that the contractor may want toretain control over. The contractor may protect itself from this risk by providing that, only whenthe delivery is refused for lack of conformity is the produce available for alternative sale by the

Commented [A21]: This comment wasmade by Mr Kirke, internet consultations.This point is similar to the one presented inthe following sentence, but might be seen asslightly more nuanced.

Commented [A22]: Mr Shepherd,internet consultations, suggests to mentionthat "companies need to have recoursewhen farmers fail to deliver reasonablequantities. In a similar way to thetournament compensation discussed in 158,companies need to encounter no problems ifthey wish not to renew a farmer's annual orseasonal contract because of poorperformance. The best way of judgingperformance is by comparing a farmer'soutput with that achieved by all the others."[This comment however might be betterreflected in another part of the Guide.]

Commented [A23]: Online Comments.Min. Justice Canada suggests clarifying whatare the lack of efforts.

Commented [A24]: Online comments.Prof. Fontaine would have deleted thissentence, since according to him, it does notdeal with the same substance matter as therest of the paragraph. I suggest keeping it,since the quoted legislation deals expresslywith exclusive contracts.


producer.7 When the produce incorporates inputs in which the contractor holds intellectual propertyrights, the contract may provide that produce is to be destroyed to prohibit alternative selling.8

31. The prohibition against selling to another party may be an explicitly-stated obligation in thecontract,9 but the contract may also achieve the same result implicitly by providing a link between theproducer’s obligation to reserve all its production to the contractor and the latter’s undertaking to buythe whole production. In many contracts providing for the delivery of the whole production to thecontractor, this is not made explicit, since it may appear to be self-evident. However, the issue of “side-selling” is one of the main points of concern for many contractors, and an express term is certainlyadvisable.

32. Express exceptions to an otherwise binding exclusivity clause are sometimes provided for inagricultural production contracts. For example, sales to third parties may be permitted with thecontractor’s consent. It is also not uncommon for the contract to provide for an exception if thecontractor informs the producer of the contractor’s inability to purchase the contractual quantities.10 Inaddition, limited exceptions are sometimes allowed for small quantities that the producer may keep forits personal use or for sale on the local market.

(b) Only part of the production is purchased

33. Often, to ensure a foreseeable and constant supply for the contractor, the agreementprovides for the purchase of a specific quantity that may only be a portion of the producer’sproduction. This allows both parties to know in advance what quantity is required under the contract,although it places the risk of underproduction on the producer. As such, depending on the legalsystem, the contractor may have an implied obligation to help ensure that the producer can meet itsobligation by, for example, not imposing obligations on the producer that the contractor shouldreasonably understand that the producer cannot meet.

34. If the producer’s obligation does not extend to the whole crop, it normally follows that theproducer is free to sell the additional quantities to third parties. Consequently, most contracts of thistype do not provide any restrictions on third party sales. However, there can be exceptions. Forexample, it can be stipulated that no other agricultural production contract may be entered into witha third party, depending on the contract terms, with or without the contractor’s consent. If theproducer has the right to sell the amount over the stipulated quantity, it is not uncommon for thecontractor to have a right of first refusal.11 In this case, it is advisable to provide how this right maybe exercised (time limit, notice, etc.). To avoid deterioration of the crop, the producer should knowquickly whether it is allowed to sell the excess to third parties.

35. The contract may provide for the delivery of a percentage of the whole production.12 Thepercentage is normally high enough to justify the agricultural production contract with its attendantobligations for methods of production, quality requirements and inputs by the contractor. When theproduction exceeds the contracted amount, subject to contrary agreement, the producer, in principle,is free to dispose of the excess quantity. It is not uncommon in this circumstance to provide thecontractor a right of first refusal. In this case, it is advisable to provide when the offer andacceptance occurs and how the price is determined.

36. Some contracts provide for the purchase of a minimum quantity of goods.13 Here, sometimesreference may be made to an “initial minimum” quantity that seems to indicate that the partiescontemplate additional deliveries, but the lack of further express legal obligations creates uncertaintythat can be avoided by providing guidance in the agreement. If the contract obliges the producer togrow a minimum quantity, it should clarify how the excess is to be handled.

Commented [A25]: Online comments.Prof. Fontaine wishes to know whether anearlier paragraph 31 of the version (80A, 7.Febr. 2014) has been intentionally omitted.Paragraph dealt with situation where thecontract provides for the delivery ofdetermined quantities of goods.


37. Agricultural production contracts often provide that the producer should meet a quota, basedon an allocation among the producers. This allocation is usually provided by the contractor, whomight prefer this system to avoid side-selling and will have similar arrangements with several otherproducers. The quota may also derive from public regulation.

38. Where there is a quota, the contract should be clear as to whether the quota sets a minimalrequirement, a maximum, or both. The contractor’s main concern is usually to avoid insufficientproduction, but over-production can also be a problem. The producer should know precisely what isrequired to meet the quota.

39. If the quota is a minimum quantity,14 the contract should state whether the contractor willpurchase any or all of the excess.15 The contract should also explicitly state whether the producer canfreely dispose of the production once the quota has been reached. For the producer, takingadvantage of this provision supposes that there is an alternative market, which is not necessarily thecase.16

40. The quota may work as a maximum not to be exceeded.17 This can be the case whenregulation stipulates production limits. The quota may be both a minimum and a maximumrequirement. In this case, the contract may provide that if the minimum is not met, the producer willpay a penalty; if the quota is exceeded, the price will be reduced. An explicit choice should be madeamong these different quota systems to avoid misunderstanding that may arise from a simplereference to the term “quota.”

41. It may be advantageous for the parties to provide in the contract that the quantity will not bedetermined until after the parties enter into the agreement.18 For example, the contract may providethat quantities are to be determined later by the contractor, depending on the orders it receives.19

This can serve several purposes, such as a hedge against unknown production quantities as well asthe uncertainty for future market demands and prices. This pricing mechanism provides for thegeneral uncertainty that may affect agricultural production, but is also creates higher risks for theproducer. The producer should be aware of the risk involved that quantities will be below itsexpectations, especially since decisions to sow or to plant must be taken months ahead of harvesting.

42. A contract that provides for the quantity to be determined at a later time must provide somebasis to determine both the quantity as well as when the determination will be made. Otherwise, thecontract may be deemed too indefinite to be enforceable.20 A lack of a quantity term, in and of itself,may not invalidate the agreement under many legal systems if there is some basis for determining afair price.21 Because a contract places at least some minimal obligation on each contracting party, apurported agreement that gives the contractor unbridled discretion to determine how much, if any, ofthe production to purchase is likely to be deemed unenforceable under many legal systems.22 Specificregulations or codes of conduct governing agricultural production contracts, where they exist, usuallyinclude the indication of quantities in the list of required provisions of the agreement. Sometimes,only certain types of terms to determine quantity are allowed.23 Certain regulations also provide forpossible margins of tolerance.24

43. But again, it may be advantageous to both parties to allow the contractor to have some levelof discretion in the amount of the production the contractor will acquire. To achieve this, the lawtypically provides a variety of explicit and implicit terms25 to ensure that the contractor has someobligation, which at a minimum may require good faith and fair dealing. Past practices between theparties as well as industry custom and trade usage may also apply to limit the contractor’s choice.26

It is also common for the parties to agree on an estimated minimum and maximum amount.

Commented [A26]: Mr Kirke, internetconsultations.


44. Whatever the method to determine the quantities to deliver, contracts often stipulate that theproduce must come from the producer’s own production. Purchasing from third parties to be able toreach the required quantity is normally not allowed, as the goods must have been produced on theagreed upon location, with the inputs and the methods provided for in the contract. This problem canarise in the use of quota system, which might result in the producer’s attempt to overcome themechanism through signing multiple contracts and reaching the production through combining withfamily or neighbours.

2. Quality

45. Under an agricultural production contract, producers are obligated to meet quality standardsas provided for in the contract and any applicable public regulations. In addition to the express termsin the agreement, the producer may also be responsible for the implied obligations of merchantabilityand fitness for a particular purpose.27 The obligation to meet the required quality may or may not bean obligation that must be strictly adhered to depending on the terms of the agreement and thenature of the defect.

46. The producer must meet the quality requirements pertaining both to the process and theproduct, and the failure to meet them results in non-conforming goods. Product quality increasinglydepends on process quality, so that, in contract practice, quality control at delivery is increasinglypreceded by quality monitoring during the production process. Quality management systems,including the determination of policy, objectives, planning, control, assurance and improvement ofproduct quality, are required by various technical standards28 and sometimes by the law.29

(a) Determining quality

47. Quality requirements are often defined by different characteristics that can affect pricesand even markets or distribution channels. In particular, the distinction between high premium,premium and standard, within the same commodity, can translate into different prices and oftendifferent markets. These characteristics may include all physical characteristics (e.g. colour, size,shape, etc.), contents (e.g. low fat milk, seedless grapes) and fitness for a purpose (e.g. seedswhich are resistant to a certain virus, pesticides which are apt for killing some viruses), as well asany process requirements. Quality characteristics may be based on the territory where productiontakes place and may include the denomination of geographical origin. The quality characteristicsmay be determined before the production processes or at the final inspection when both qualityand price are defined.

48. Product non-conformity can be evaluated not only on the express and implied terms of theagreement, but also on the guidance, including technical guidance, given by the contractor and itsagents (e.g. inputs provided by the contractor, process-related obligations set forth in the contract,required characteristics of the final product, technical assistance, capacity building and trainingprovided to the producer).

49. A clause that provides that the producer is solely responsible for lack of conformity of thegoods, and disclaims the contractor’s liability to third parties for non-conformity may not always beenforceable. Moreover in some legal systems it may be impermissible to shift the risk for defects tothe producer when the defects are linked with contractor’s instructions. A fair allocation of risksmight be based on the principle that the more the contractor has defined the standards for the

Commented [A27]: Mr Kirke, internetconsultations, made this point on theproblems arising from using the quotamechanism.

Commented [A28]: Mr Shepherd,internet consultations, says that this lastsentence is not clear.[the sentence has been re-drafted it butneeds confirmation as to whether theinterpretation is correct.

Commented [A29]: Online Comments.Min. Justice Canada suggests adding a word“results” to clarify the meaning.

Commented [A30]: Online Comments.Min. Justice Canada notes that thestatement is loaded. For details, see Doc. 23.


agricultural process with instructions and guidance, the more it should bear the risks linked withthese instructions, assuming that these are followed. .

(b) Quality standards

50. Quality standards may be set out either with a general formula, or with more detailedspecifications that may be contained in an attached schedule or by reference to external standards.The parties are advised to devote sufficient attention to this aspect of the producer’s obligations, butthe degree of detail, and the choice of criteria used will be related to the type of produce. Ways todefine the required quality are not the same for potatoes, sisal or goat milk. When specifications arevery technical, the parties should ensure that they are understood by the producer. If necessary,appropriate explanations should be given when the contract is negotiated. Referring to domestic asopposed to international standards more familiar to the producer might also be useful.

51. In real life, contracts are sometimes imprecise about the quality requirement. Somecontracts, for instance stipulate that the goods should be of “good quality”, of “the highest quality” orof “acceptable quality”. There seems to be differences of degree among these three formulas, buttheir vagueness is likely be a source of trouble in a dispute. Other frequent formulas refer to“merchantable” or “exportable quality”, conformity “to international quality requirements”, or “torequirements in the importing country”. These criteria are also open to different interpretations.

52. On the other hand, precise and objective quality requirements are found in many contracts.For instance, the required characteristics of the produce can be stated in more specific terms, such as“a low-linolenic identity preserved grain”, or “maximum moisture content 6,5 %”. As other examples,a contract for the delivery of bee products can contain precise descriptions of the qualityrequirements respectively for honey, royal jelly and bee pollen.30 A contract for the supply of dairyanimals can specify the accepted types of breed, the maximum number of previous lactations ofpregnant cows, the minimum milk production of some animals during their previous lactation and themorphological defects that will not be accepted. The contract can also provide a list of defaults whichwill justify refusal of the goods.31

53. A dedicated appendix to the contract is a convenient method for providing qualityrequirements when quality specifications are especially elaborate. It is a way to highlight theimportance of the quality standards provided that the contract draws sufficient attention to theexistence of the appendix and clearly states that it is part of the contract. In practice, the use of anappendix is rather frequent. When quality requirements are expressed in charts that describe thedifferent grades or categories and the corresponding figures or percentages, it may be moreconveniently done in a separate document than in the midst of a succession of various contractualclauses.

54. Another method of describing the required quality is to refer to the standards set by anexternal source. These standards are often established by a professional association or enacted innational or international regulations. Contracts may for instance refer, if relevant, to theclassifications, grades or other requirements set by different governments, or to standardsestablished by ministries or other public authorities. If the contractor is part of a supply chain wherecommon quality standards have been defined, these standards should also be the reference for theoriginal producer. The contractor should ensure that the producer is adequately informed of theexistence and contents of these standards. These private standards are known as Good AgriculturalPractices, (GAPs), defined as “practices that address environmental, economic and socialsustainability for on-farm processes, and result in safe and quality food and non-food agricultural

Commented [A31]: Mr Shepherd,internet consultations, adds the comment« assuming instructions are followed ofcourse »

Commented [A32]: Online Comments.Min. Justice Canada suggested adding thisline.


products.”32 Incorporation of private standards like GAPs allows an assessment of conformity whichtakes into account the level of care and expertise that could be expected of a producer operating in agiven field.33

55. Specific regulations or codes of conduct that govern agricultural production contracts, wherethey exist, usually include an indication of quality as a required provision of the agreement.34 Someregulations require specifications about size, weight, degree of maturity or juice content, theidentification of the agency competent for quality dispute resolution, an indication of theconsequences of non-conformity, and that contractors ensure that the producers fully understand therequired standards of quality.35 Some regulations require compliance with legal requirements, respectof animal welfare, environmental concerns, the prohibition of genetically modified organisms, orpromotion of local and biological products.36 Some jurisdictions have especially detailed provisionsthat regulate field sampling procedures.37 In addition to rules specifically designed for agriculturalproduction contracts, more general regulations, as well as private standards, are often applicable toestablish standards of quality. The requirements of quality should be expressed in sufficiently preciseterms to avoid later causes for dispute.

56. In agricultural production contracts, what constitutes the expectation embedded in thefitness for ordinary purposes is mostly based on the compliance with international agriculturalmandatory standards, especially (but not only) if the produce is destined to internationaltrademarkets. These standards should be preferably referred to in the contract through expressincorporation, bringing clarity and lowering any possible litigation costs.

57. In many legal systems, general contract law provides default rules for impliedobligationsobligations or implied terms to define performance standards that would apply to quality ofagricultural products. Normally this implied obligation requires goods that meet the “reasonableexpectation” of the contractor. At the international level, for instance, the general principle for salescontracts, in the absence of express quality standards, is that the seller must deliver goods that arefit for the purposes for which goods of the same description would ordinarily be used.38 The goodsmust also be fit for any particular purpose expressly or impliedly made known to the seller at thetime of concluding the contract, except where the circumstances show that the buyer did not or couldnot rely on the seller’s skills and judgment to pursue this purpose by using the goods.39 Apart fromthat, where the quality of performance is neither fixed by, nor determinable from the contract, aparty may be is normallymay be bound to render a performance of a quality that is reasonable andnot less than average in the circumstances (art. 5.1.6, UPICC).40

58. While default rules may fill gaps in the contract, the parties’ interest is best served by clearlydrafted clauses that provide for quality standards. This is particularly the case when theunderstanding of the default rules may vary. For instance, case law may be abundant on themeaning of “merchantable” under the contractor’s legal system (which may happen to be the lawapplicable to the contract), but the term may have no clear meaning to the producer. The term“merchantable” could cause uncertainty and be the source of an unfortunate misunderstanding (forfurther related discussion, see ___*).

59. The producer and the contractor may set the extent of liability for product non-conformity byagreeing on disclaimers and limitations.41 These may apply to limit the legal consequences derived fromexpress description of the goods or from implied obligations which are not linked with agreed criteria toassess product conformity. For example, it is rather common that input providers sometimes limit theirliability by excluding so-called consequential damages; consequential damages do not flow directly fromthe acts of the provider, but rather flow from the results of that act (see the chapter on Remedies at

Commented [A33]: Online Comments.Min. Justice Canada suggested using marketsinstead of trade.

Commented [A34]: Online comments.Prof Fontaine holds that, in a civil lawsystem, if the law provides for a default rule,the obligation is not to be qualified as"implied", but "legal". Changed accordingly.

Commented [A35]: Online Comments.Min. Justice Canada suggested adding thetwo words to clarify the meaning.


__*).42 The validity of these clauses has often been challenged before national courts, and nationallegal systems differ as to the enforceability of these clauses.

(c) Product safety

60. Both producers and contractors may have obligations related to product safety, such asensuring traceability,43 avoiding or limiting the use of certain pesticides44 ,ensuring the hygienicconditions of livestock,45 or educating the public on the safe use of the products.46. Product safetyhas also long been part of non-conformity evaluation and is related to product quality.47 Productsafety within the context of an agricultural production contract may translate into hazards that canspread when the product is delivered to the contractor or that can materialize only at the end ofthe process when the product is consumed or deployed for industrial use. Product safety involvesnot only the sphere of the contractor but those of third parties that may be exposed to hazardswithout engaging in any transaction with the producer. Liability for breach of safety requirementsmay therefore relate to hazards that concern not only the contractor’s sphere but also third parties’spheres. Safety is often considered mandatary mandatory whereas quality and quantity imply amuch higher degree of parties’ autonomy. Reflecting the importance of safety requirements it isimportant that the consequences of non-conformity both on the parties and the produce are clearlyindicated, and a balanced system of blame apportionment is devised

61. Safety requirements are associated with risk assessment and risk management. It is clearthat product safety depends on processIt is clear that production process affects products’ qualityand safety. Safety standards are primarily process based and do not recognize a sharp distinctionbetween production and delivery. Both liability and remedies may differ depending on time of riskdetection and the availability of corrective measures (see the Chapter on Remedies at __*).

62. Packaging and labelling may influence the safety of the agricultural product to aremarkable extent. The availability of food information not only ensures a high level of consumerhealth protection, but also provide a basis for consumers to make informed choices and to makesafe use of food.48 This function is even more critical when certification proves compliance withstandards. When the law establishes information rights for consumers, the duties that supportthese rights expand throughout the production chain whenever relevant information needs to beregistered and packaging adequately prepared including that information.49 Even if the beneficiaryof the information is the consumer, the contractor will be able to enforce the labelling violation andseek remedies to correct the problems, providing adequate and appropriate information, forexample by correcting the label and eliminating any deceptive information.

(d) Link with certification requirements

63. In some agricultural production contracts, the producer may have an obligation to becomecertified and implement the certification’s requirements under a specific scheme. Certification andquality assurance schemes contribute to performance monitoring by the contractor and canfacilitate early detection of conformity problems. It may be advisable for the parties to include thedetails of the certification also in the contract in order to preserve the importance of certificationbeyond the stage of acquisition. If the producer is required to be certified, there is a link betweenthe production and certification contract that results in potentially overlapping obligationscontained in the production contract and the certification contract. Assurance of compliance withcertification requirements may be provided by the producer itself by the contractor or by a third

Commented [A36]: Online comments.Prof Fontaine suggested to be more preciseabout which obligations product safetyissues could create for the respective parties.He also suggested a distinction betweensimple and more complex contracts

Commented [A37]: Mr Shepherd askswhether it would not be advisable to expandthis section, in order to include issues as tothe producer's failure to meet safetystandards, blame apportionment, thecontractor's responsibility for inputs andadvice, and the possibility of selling producenot meeting the contractor's safetystandards in the open market.[an attempt has been made to include thesecomments in a short paragraph belowalthough there might be a possibility ofoverlap between these comments raised byMr Shepherd and what is discussed in thesection relating to the provision of inputsand the Remedies chapter.]

Commented [A38]: This paragraph isbased on Mr Shepherd comments. Refer toprevious comment

Commented [A39]: Online Comments.Min. Justice Canada suggested a rewording.

Commented [A40]: Mr Shepherd,internet consultations, makes a distinctionbetween becoming certified and continuingthe certification requirements following theacquisition of certification. He suggestsincluding what could be along the lines ofwhat is written below.

Commented [A41]: Refer to previouscomment


independent party. In some cases monitoring may take a two step approach, whereby the internalassurance is provided by the producer and the external by the certification body.

64. In the case of third party assurance for certification schemes, a certificate of compliance isnormally provided to the compliant party. It may relate to the production site and methods or tothe products as specifically examined or to both the production site and the products. Thecertificate often comes with the right to use a logo or label to be shown on the product. Some ofthese labels are only aimed at being used in a commercial context, others also in “business toconsumers” relations. The availability of these certifications may represent valuable assets tomarket access. In many cases they are imposed by potential contractors as a necessary requisitefor delivery, whereas in other cases they only influence the final price without giving the contractora right of refusal.

B. Production process

65. Agricultural production contracts typically provide for obligations on how the productionprocess should be carried out, in particular on the producer but also on the contractor. This sectionexamines those obligations.

1. Provision and use of inputs

66. Inputs encompass all physical and intangible elements that are incorporated into theproduction of the final agricultural product. Below, this section will first examine general obligationswhich are common in agricultural production contracts irrespective of the type of inputs, and thenwill examine a few specific obligations related to certain kinds of inputs.

(a) General obligations

67. The allocation of responsibilities between the parties for inputs varies. The obligations arebased on the contract provisions, expressed and implied, default rules from the applicable law andindustry practices.

68. The supply of inputs to the producer often allows the producer to engage in the productionactivity without having to finance the cost of the inputs up-front, which the producer might otherwisebe unable to afford. Moreover, the contractor is also often in a better position to guarantee inputavailability, quality and costs. Particularly with large agribusiness contractors, economy of scales cankeep the costs low by the larger purchases of inputs and the granting of credit to the producers, andthese savings can be passed on the producers and thereby reduce production costs. The contractormay also have ready access to mechanization and transportation facilities that would not otherwisebe available to the producer. Ideally, all of these factors combined should result in higher productivityand higher returns and thereby justify the contractor undertaking these obligations. Conversely,though, the producer may be locked into the costs and quality of inputs from the contractor that donot reflect either the best price nor the best quality available. It is the possibility of this one-sidedbargain that may effectively reduce the choices of the producer and call the enforceability of theagreement into question.

69. Crucially, when the producer is to use contractor’s inputs, the producer may have to complywith a number of obligations. The first obligation is to receive the inputs. This obligation goes alongwith the corresponding rights to check conformity of inputs (keeping samples, keeping records), and

Commented [A42]: This two-stepapproach is emphasised by Dr Petrov, PrivateSector Workshop, session 1.

Commented [A43]: Online Comments.Min Justice Canada suggests revising theheadings and adding a new section vi) onInsurance. For details, see Doc. 23.

Commented [A44]: Mr Shepherd,internet consultations : economies of scaleor economy of scales ?

Commented [A45]: Mr Shepherd askswhether it would be advisable for thecontract to indicate the input not only ingeneric terms but also as a brand.[it would seem that that this is alreadyaddressed elsewhere in the section relatingto the provision of inputs.]


to notify apparent defects (entailing possible remedies). Second, the producer may have anobligation to take care of the inputs. Depending on the type of obligation and on parties’specifications, this could involve a far-reaching obligation upon the producer, especially for the risksof loss. When the risks of the loss are on the producer, the producer may be required to procure takeout an insurance. Third, the producer may have an obligation to use the inputs according to theindications given by the contractor.50 This comes with certain correlated obligations: to observenecessary precaution in use; to keep records and comply with administrative obligations; to use theinputs exclusively for the purposes of the contract (giving back unused inputs – and not diverting theinputs by selling them or using them for personal purposes). Conversely, the use of inputs from othersources is normally forbidden.

70. Producers have an obligation to pay for inputs. Unless otherwise agreed (for instance bymeans of a deduction of the price for the final produce), all inputs which the producer has topurchase from the contractor, whether physical inputs (such as seeds, planting material or fertilizer)or services (such as technical assistance or training) have to be paid. Because the cost of the inputsis often related to the payment to the producer for produce, a well-drafted agreement will logicallyconnect the description and pricing of the inputs with the overall payment terms of the agreement sothat all aspects of costs and payments can be compared easily. Failure to do so may subject thecontractor to a different payment scheme based on default terms that were not contemplated by theparties.

71. An express price term can have as much flexibility as necessary, and not only be set as adefinite price, but also be based on later determined market prices. Moreover, the price term forinputs can be individualised for each delivery or can be based on an overall master agreement.Absent an express term, there are a variety of measures that can used to determine the price ofinputs, such as custom and trade usage, past practices between the parties, and the determination ofa reasonable price based on appropriate market prices. Thus, for example, the payment of inputsmay be organised according to an agreed upon schedule, but very often, the price of the inputs isdeducted from the price due to the producer for the final delivery of the product. The relationshipbetween the cost of the inputs and the payment for the production should be clearly articulated in theagreement. The cost of delivery of the inputs can be borne by either party, but this needs to beprovided for in the agreement. Some jurisdictions regulate input prices to prevent unfair pricing orviolation of competition laws. These regulations are mandatory rules that are not subject to varianceby the parties in the agreement.

72. Inputs supplied by the contractor may have to be paid rapidly.51 Very often, however,contracts do not provide for their immediate payment. The producer usually benefits from creditterms: the price of these inputs will be deducted from the amount due by the contractor forpayment of the produce after delivery. This amounts to an advance in kind received by theproducer, reimbursable by reduction of the final price of the produce. Note that inputs provided bythird parties are normally paid directly to the suppliers.

73. Inputs provided by the contractor may cause difficulties for the producer. These inputs mayturn out to be defective (e.g. poor quality plants, infected seeds, etc.), thus preventing the producerfrom meeting the contractual quality or quantity requirements. Certification of input quality by anindependent entity would sometimes be advisable if it can be obtained. Contractor inputs may also bemore expensive than similar inputs which the producer could purchase from another source.Problems also arise when the contractor is late in delivering the promised inputs, thus possiblyendangering the production process and the producer’s ability to meet its obligations.

Commented [A46]: Mr Shepherd,internet consultations.

Commented [A47]: Mr Kirke, internetconsultations, wonders whether thisparagraph, or others below, highlight theadditional risk due to the producer’s use ofinputs for crop outside the contract. Thispoint also echoes a similar comment, duringa discussion at the Bangkok Consultation, ofproducers selling the inputs and breachingthe contract.[If this idea is viewed as important it could beadvisable to add the obligation to "use inputsexclusively for the contract" on its own,rather than adding it as part of a list ofcorollary obligations.]

Commented [A48]: Online Comments.Min. Justice Canada asks for a clarification ofthis sentence. For details, see Doc. 23.


74. The contract may also oblige the producer to provide certain inputs.52 These physical inputsto be supplied by the producer may have to be bought among those recommended or approved bythe contractor.53

75. In addition, often the land is provided by the producer. When the goods are to be producedon the producer’s land, contracts governed by some legal systems include a provision under whichthe producer warrants that it is a legitimate holder of the land and that it has full title over theproduce, or that no other party can assert rights over the production, based for example on landtenure rights, security rights over the crop or otherwise, thus affecting its entitlement to the crop.54 Ifthe producer is not the owner of the land, but leases it from a landowner, it may be advisable torequire the landlord’s signature on the agreement, to avoid a later dispute by the landlord that theproducer was not entitled to raise crops or animals on the leased ground.

76. Inputs may be provided by third parties, and their failure to provide inputs or the provisionof defective ones may render the one party liable to the other for output non-conformity or forbreach of process-related obligations when input non-conformity affects the production process.55

In the absence of a contrary contract provision, the extent to which one party is liable to the otherparty for production failure or product nonconformity that is the consequence of insufficient orinadequate inputs supplied by a third party depends on whether the law will regard theconsequences of the third party’s failure as a risk falling within either party’s sphere of influence orcontrol.

(b) Specific obligations related to certain types of inputs

(i) Land, installations and fixed assets

77. In most agricultural production contracts, the contractor does not have rights in the landused for agricultural production. In some limited circumstances, however, the contractor may provideor have an interest in the land and its fixed assets. This may occur when the producer leases to thecontractor the land used for the production. Therefore, most often, the producer will provide the land,either as the owner, or as the holder of rights when the land – or the aquaculture site – is owned bya third party. Sometimes, the state is the owner, and particular in the context of public developmentprograms, contract farming will take place under public-private partnerships. Normally, in this case, aportion of the land would be directly managed by the contractor and would contain the processingfacilities. The remainder of the land would be allocated to the producers, who might be eitherindividuals or communities working collectively.

78. If the producer leases the land, an important issue is the duration of the production contractin relation to the lease. If the lease is terminated or comes to an end and is not renewed during theproduction contract, the producer may not be able to perform its obligations. Secure land tenurerights are important for producers to build stable relationships with contractors, Customary andtraditional law may also have to be taken into consideration.

79. Many contracts require that production (or post-harvest operations) take place in certainfacilities. The contract may specify detailed requirements or plans for facilities, particularly inlivestock contracts (see further discussion in production methods, below at ___*). The particularlocation where the production takes place may be part of the determining elements of the produceattributes (for example when denomination of origin is relevant). Goods produced on a different trackof land than specified in the contract would generally not be accepted by contractor.


80. If the contract requires the producer to construct a new facility or expand and improve anexisting facility, the contractor may have significant obligations that should be clearly delineated inthe agreement. Of specific concern is whether the costs of the construction or expansion is onlyeconomically feasible with a multi-season agreement between the contractor and producer. Whetherarticulated in the agreement or not, the normal expectations of a producer is that the relationshipbetween the producer and the contractor will be of a duration to make the construction of new orexpansion of existing facilities economically viable. These expectations, if not expressly provided for,would normally be implied as part of the agreement.56

81. Other ancillary obligations that the contractor may have include assurances for third partyfinancing of the facilities, deadlines and penalties for later performance if the contractor is responsiblefor the construction, adequacy of design and warranties for defects if the contractor supplies thedesign or provides the labour, guaranteeing that the facilities meet industry standards andgovernment regulations, and ensuring government approval and permits, and what is the effect ofnon-compliance.

(ii) Physical Inputs

82. The contractor generally has a major role in the choice of the inputs. There are various waysfor the contractor to supply or control them. For example, the contractor may supply the inputsdirectly or the contractor may provide the producer with technical specifications or the brands of theinputs for the producer to buy and use. The agreement may require the producer to obtain certaininputs from a third party supplier. Although the contractor may supply a significant amount ofphysical inputs, the producer generally provides the land, physical facilities, water, energy, andlabour.

83. Domestic law may provide default rules for the supply of inputs. For example, unlessotherwise agreed by the parties, the contractor may have a duty to provide seeds and the necessarytechnical assistance for production.57 These default rules are normally subject to party modification.

84. If the contractor has the obligation to deliver inputs, the contractor is obligated to deliverinputs that conform to the contract specifications. This obligation not only includes conformity withthe express terms of the agreement, but generally requires that the inputs are also fit for theordinary purpose that inputs of that type are used.58 There may also be an implied obligation that theinputs are also fit for any particular purpose beyond the ordinary use if the agreement requires thisuse from the inputs.59 Whether the contractor can disclaim obligations beyond these impliedobligations varies among different domestic laws. When the contract requires the producer to getinputs from specific third parties, the contractor has an obligation to ensure the appropriateness ofthe inputs.

85. If the contract specifies how the inputs that the contractor supplies are to be used, thecontractor normally bears risks from non-performance due to faulty instructions.60 Unless theproducer, by experience or otherwise, has specific knowledge about the proper usage of the inputs,the contractor generally has the obligation to supply this information or other technical assistance.Thus, for example, because the quality and quantity of the feed is essential to the success of theproduction, if the contractor is to supply the feed, the contractor has the responsibility for the qualityand appropriateness of the feed.61 As with many of the obligations of the contractor, this requirementis multi-layered. Not only must the contractor meet the direct obligations to the producer, but thecontractor must also consider the suitability and acceptability of the feed in relation to subsidiaryobligations to upstream purchasers as well as government regulations and industry standards.


Moreover, even if the contractor is not directly responsible to supply the feed to the producer, thesesecondary obligations may require the contractor to monitor the feed that the producer supplies toensure compliance with the contractor’s other contractual, industry and regulatory obligations.

86. In addition to the obligations that the contractor has directly to the producer for inputs, theremay be ancillary obligations the contract has to meet. If the contractor designates the inputs, inaddition to the obligation to meet the express terms of the agreement, the contractor will normallybe expected to comply with applicable government product and safety regulations. For example, withlivestock, the contractor will normally have the obligation to have certified the health of the animalunder government regulations, and if required by law to have the certification made by appropriategovernment officials.62 The contractor may also be responsible for liability and casualty insurance onthe livestock. Moreover, because livestock usually belongs to the contractor, the contractor may alsohave the responsibility to provide medicine and veterinary services.63 In addition to the obligations tothe producer, the medicine is subject to, and therefore must meet, a variety of governmentregulations, industry standards and labelling requirements throughout the distribution chain.64

87. Furthermore, in addition to potential liability by the contractor to the producer for breach ofcontract, the contractor may have other legal liability to the producer and possible third parties. First,to the extent that the contractor is the owner of or supplier of the inputs, the contractor may havetortious liability for harm caused by the inputs to the producer and foreseeable third parties. This, forexample, could result from the supply of defective seeds or other inputs such as fertilizer andherbicides. It is important to note that the contractor would rarely be able to contract out of possibletort liability. Moreover, the contractor also may be subject to government sanctions if the inputs donot conform to applicable government regulation, such as may be imposed on the use of geneticallymodified crops. This liability, which is outside the contractual relationship between the contractor andproducer, is not subject to any exclusions or limitations in the contract between the contractor andproducer.

88. The time of delivery of the inputs will typically affect the ability of the producer to meet theproduction requirements. It is therefore advisable to provide express terms in the agreement for thetime and place of the delivery of the inputs, as well as the consequences of untimely delivery (e.g.price and production adjustments).

89. Some flexibility for the timing of input deliveries may be desirable to take into accountcontingencies, such as weather. It may also be common in certain industries to provide for thisflexibility as a matter of industry custom. This will typically be the case in husbandry productioncontracts which generally provide for a certain flexibility for the contractor to proceed to a newdelivery of young animals after the preceding one has been taken over for cleaning the facilities andensure adequate safe veterinary conditions. This may be stated in general terms such as, “timelydelivery” is required. If this is not expressly provided for, this may be read into the contract.

90. The agreement may provide that the inputs be subject to a verification procedure at the timeof delivery which may be carried out in the presence of both parties (for example the weighing of theyoung animals) or of a third party. This obligation may arise from the express terms of theagreement, by trade usage and custom, or in some legal systems, by the general obligation of goodfaith and fair dealing.

(iii) Finance

91. Some agricultural production contracts incorporate finance provision, either directly by thecontractor or by third parties. This finance provision may take several forms. Thus, for example, the

Commented [A49]: Online Comments.Min. Justice Canada suggests morediscussion in various financing methods. Fordetails, see Doc. 23.


contractor may agree to provide cash advances or loans to the producer that will be discounted fromfuture payments under an agreed repayment schedule. The producer undertakes to pay for thecontractor’s inputs (unless the contractor retains title). This payment, however, often benefits fromcredit terms, with an agreement that the price of inputs will be deducted from the final amounts dueby the contractor to the producer after delivery of the goods. Other types of financial assistance arealso often reimbursed by way of a deduction from the final payment. Advances are often essential forthe producer to cover costs incurred with the production, and the contractor may require thatadvances be used specifically for that purpose (rather than for personal or household use). Advancesmay account for a large part of the future amount payable upon delivery of the product. If advancesare uncontrolled, though, the indebtedness of producers can increase to unsustainable levels. Thecontractor may have an implied obligation to ensure that the producer has a reasonable likelihood ofpaying off the loans and advances.65

92. Contractors may also offer other types of financial assistance to producers. They often grantadvance payments on the price that is paid for the delivery of the contractual produce andsometimes as direct loans. It is often specified that advances are to be used exclusively for theproduction, e.g. to finance working capital or investments. More rarely, advances may be used forpersonal needs such as food or education. Advance payments may be granted at different times.They are often made after the contract has been concluded, to finance the whole production process,but they can be also more limited in amount and be paid a few days before harvesting, to finance thespecific costs of the final operations leading to delivery. These advance payments normally arededucted from the final price of the delivered produce.66

93. These different forms of financing are granted sometimes without, but usually with, interestcharges. Paying interest, if due, is another obligation undertaken by the producer. The interest isgenerally deducted from the final price due by the contractor. The contract should be sufficientlyexplicit about the interest rates and other possible costs associated with financing. A contractor mayrequest that the producer provide a personal guarantee for the full amount of the debt (as it could bethe case when the producer enjoys a limited liability under the corporate form), provide a third-partypersonal guarantee, or grant a pledge over the land.

94. Parties to an agricultural production contract should know that certain forms of credit areregulated in many legal systems, to ensure protection of the beneficiary. Regulations or codes ofconduct specifically concerning agricultural production contracts, where they exist, may includefinancing arrangements in the list of required contractual provisions, sometimes with the essentialinformation (identification of who is financing, amount, purpose, duration, interest rate, costs,reimbursement schedule, security, etc…).67

95. Advances made by the contractor may be significant and so could be the risks incurred of notreceiving proper delivery. The contractor would assess the risks on the basis of the nature andhistory of the relationship, the creditworthiness of the producer, the protections available under thelegal system and the effectiveness of enforcement mechanisms. For informal operations that involveindividual small producers, contractors normally rely principally on personal relationships and trust.Under formal operations, however, they generally seek to cover non repayment risks throughinsurance or a security interest. In some legal systems, a supplier of agricultural inputs is entitled toeither a general or a special lien over the crop, which may be subject to filing formalities.

Commented [A50]: Mr Shepherd,internet consultations, raises the possibilityof a contract falling foul of usury laws if theinterest rates are explicitly stated.


(iv) Services

96. The contractor may provide various services to the producer, on potentially every aspect ofthe production, such as the preparation of the soil or facilities, or technical assistance. Services mayalso assist the producer’s performance and improve its capacities. Very often, no clear distinction canbe made between the two categories, and the services provided may also often be considered as partof the control of the contractor in directing the production.

97. Typically one of the services provided by the contractor is technical assistance. Technicalassistance may involve specialised or expert support that may consist, for example, in agronomic orveterinary assistance. In addition to the standard of performance set out in the agreement, technicalservices may also be subject to standards of performance provided for either by governmentregulation (particularly in the area of safety) or by recognized trade or professional standards ofconduct. These standards become part of the agreement either as mandatory rules or by implication.When the technical assistance is necessary for the producer to use specific required inputs theapplicable law may assume an obligation of the contractor to provide technical assistance in the useof the inputs, such as feed and medicine.68

98. In performing a particular service for the producer, the contractor is subject to standards ofperformance which may be specified in the contract. In determining the nature and extent of theobligation and the standards of performance, particularly relevant are the contractual price and otherterms of the contract reflecting the allocation of risks and balance of obligations; the degree of risknormally involved in achieving the expected result; the ability of the other party to influence theperformance of the obligation.69 Moreover, this may shift the risk of the effectiveness of the technicaladvice wholly to the contractor. Subject to contrary mandatory law, the contractor may shift the riskback to the producer with a disclaimer clause.

(c) Obligations related to intellectual property rights

99. Both producers and contractors are well advised to consider possible obligations related tointellectual property rights (IPRs) over inputs and the final agricultural produce. These IPRs arelegal rights typically held by the contractor or by third parties. Genetic resources as encountered innature are not covered by IPR protections; they are not creations of the human mind and theycannot be directly protected as IP. However, inventions based on or developed using geneticresources may be legally protected.70 Thus, contractors may not only own the physical seeds orother inputs that they provide to producers, but contractors may also own or have licenses for IPrights to inputs which are protected by patents, plant variety rights, registered trademarks, tradesecrets or geographical indications.71, 72

100. Thus, in general, when the inputs or the technologies included in the inputs are patented,producers will have an obligation to not produce, use, offer for sale, sell or import the patentedproducts without the consent of patent holders during the protection period.73 If the inputs areprotected by plant variety rights, producers are usually excluded from production, reproduction,propagation, offering for sale, selling or other marketing, exporting, importing or stocking for anyof the purposes mentioned above of the protected variety without the consent of patent holdersduring the protection period.74, 75 Most countries have rules that regulate or limit the conditionsunder which producers may save (for replanting) any seeds protected by plant variety rights.76

101. If the inputs are protected by registered trademark, producers are excluded from attachingto those inputs the mark which usually stands for those inputs.77, 78 Trademark registration is

Commented [A51]: Online Comments.Justice Canada suggests changing theperspective of this section. For details, seeDoc. 23.


usually renewable, so the protection will last so long as the right holder pays the annual fees.79, 80

If the inputs contain information which consists of trade secret, then producers will have anobligation to keep that trade secret confidential and prevent the information from being disclosedto, or acquired by or used by others without the consent of the rights holders.81 Obligations relatedto trade secret will last so long as confidentiality is maintained.

102. The concept of intellectual property rights licensing and the content of IPR licensing clausesincluded within an agricultural production contract are very important for determining obligations.A licensing agreement is “a partnership between an intellectual property rights owner (licensor)and another who is authorized to use such rights (licensee) in exchange for an agreed payment(fee or royalty).”82 In an agricultural production contract, the contractor may be the holder(licensor) of intellectual property rights or the supplier of inputs under a license from a third partyIPR holder. Thus, with certain types of inputs, the contractor’s intellectual property rights mayimpose special obligations on producers, as well as related obligations upon the contractor.

103. First, an agricultural production contract may contain a warning clause. A warning clausetypically forbids the producer from using seeds for planting other than a single designated crop, aswell as the transfer or reuse of seed for replanting and the revelation of confidential information.83

The contract may also oblige the producer to pay a technology fee.84 In order to avoid mixingbetween crops, the contract may require the producer to keep seeds separate, to mark and clearlyidentify the borders of the fields where the seeds have been sown, and/or to abstain from allowingthird parties to grow identical products on the same land. If animals are provided, the contractmay require the producer to take appropriate measures, such as fencing (to prevent intrusion ofother animals), or to abstain from raising other animals on the same premises.

104. Some contractors present producers with a contract that grants a license to purchase theproprietary seeds and traits, or acquire them as forwarded inputs. This has consequences, forexample, for the purpose of determining whether the producer is entitled to use the crop ascollateral. Producers who do not understand these implications, or choose to ignore them, mayface unexpected obstacles or serious penalties.85

105. Often, a third party will hold IP rights over inputs used under an agricultural productioncontract. Accordingly, in an agricultural production contract, the contractor may sometimes providerepresentations on non-infringement of intellectual property rights held by third parties. Under thistype of clause, the contractor will compensate for losses incurred from the infringement of thirdparties’ IPRs even if the losses occurred on the producer’s production site. Also, within thecontract, parties may delineate which party must act in proceedings in the event of a lawsuit bythird parties for IPR infringement. This functions to minimize the risk of infringement of thirdparties’ IPRs. It may be express or implied, meaning provided by law even though it is notexpressly stated by the parties.

106. As a general matter, national laws may impose on sellers of goods a legal obligation toguarantee against the infringement of IPRs, which guarantees that the sold goods do not infringeany IPR of third parties within certain territories.86, 87 It will be exempted when: (1) at the time ofthe conclusion of the contract the buyer knew or could not have been unaware of the right orclaim; or (2) the right or claim results from the seller's compliance with technical drawings,designs, formulae or other such specifications furnished by the buyer.88 Implied guarantees againstthe infringement of third parties’ IPR can be modified or excluded by contract.89 When it ismodified, it becomes an express warranty. A breach of an express guarantee may generate liabilityfor damages.

Commented [A52]: Online Comments.Min. Justice Canada notes that this sentenceis unclear.

Commented [A53]: Online Comments.Min. Justice Canada notes that thisparagraph could be simplified or clarified.For details, see Doc. 23.


107. When contractors are licensors of IPRs to producers, several different types of clauses maybe included to attempt to protect the rights of the licensor. Contractors may sometimes insert aclause stating that the producer (licensee) cannot use the IPRs beyond the geographical limitationof the license. Some contracts include a clause whereby the contractor (licensor) can cancel thecontract if the producer (licensee) files a petition for the invalidation of the IPRs which are thesubject matter of the license.90 Contractors as licensors sometimes insert into the contract a clausewhereby the contractor need not reimburse the paid licensing fees received from the licenseeseven if the IPRs which are the subject matter of the license are declared to be void.91 IPRs presentspecial considerations for remedies in the event of breach by the contractor, for example whenproducers as licensees want to sell their products when a contractor fails to perform. But, in viewof exclusivity clauses and the contractor’s IPRs, it is possible that the producer cannot sell theproducts to third parties.

108. In addition to the obligations mentioned above, the contracting parties may be obligated toperform some duties even after the termination of the contract. Some examples include92 the dutyto keep trade secrets or other confidential matters undisclosed and the duty to confiscate theramifications of the licensing. Contracting parties are well advised to include a clause that bothparties must maintain trade secrets even during dispute resolution procedures. This issue becomesparticularly sensitive when a dispute proceeds to litigation before a State court. The parties mayhave to submit evidence which could potentially contain trade secrets or other confidentialinformation. Here, national laws may include relevant provisions about confidentiality in thelitigation procedure as a limitation to the principle of open justice.93

109. Generally, the subject of intellectual property rights is an aspect of the contractualrelationship in which the contractor will be well aware of its rights and one in which the producermay not fully understand its ramifications.94 For example, when a contractor is the IPR holder, thecontractor will sometimes require producers that receive protected seed as inputs to agree to“seed-wrap” or “bag-tag” licenses printed on or attached to a bag of seed, or else requireproducers to sign a “technology agreement” when purchasing seed, which prohibits producers fromreselling this seed or supplying saved seed to anyone for planting.95 In some cases, such asituation may impose an obligation, either expressly stated in the agreement or by implication, onthe contractor to ensure that the producer is fully apprised of its obligations.

2. Production methods, compliance and control

110. Complying with quality obligations at delivery often requires complying with specificmethods during the production process. Food products and food production are subject tomandatory regulations that reflect public policies for food safety and quality control for consumer,worker and environmental protection. Very detailed regulations may be applicable for the conditionof the production facilities and the protocols to be followed in the production and handling toguarantee the safety and integrity of the product. Participants in the distribution chain aregenerally required to keep appropriate records that establish the condition of the product or thecompliance with the required processes at different times of the production, transformation andmarketing, thus ensuring the traceability of the product along the chain and providing evidence ofthe conformity or defects of the product throughout the distribution.

111. Operators in the food industry have developed a wealth of private standards for particularattributes, qualities or geographical origin of a product or category of products, processes orproduction management systems. Compliance with standards generally involves substantially

Commented [A54]: Online Comments.Min. Justice Canada suggests clarifying thissentence.


higher production and management constraints and costs, but may be an opportunity to obtainhigher market value and competitive advantages. On the other hand, obtaining a licence or acertification regarding good agricultural practices may be a prerequisite to sell on specific markets,and would be imposed by the buyer to enter into contract relation. From the contractor’sperspective, subjecting the producer to certification is an important means of exerting control overthe production. Very often, the party seeking the certification would be the contractor based on itsparticipation a particular supply chain identified by a particular mark or label, and would apply tothe product or production process under the contract with producers. Under such a situation, thecontractor usually bears the certification costs, and would be the owner of the certificate.

112. Producers may also be the initiators of a particular certification provided they can afford theorganisation, technical and cost implications. Particular schemes aim at facilitating access tocertification services through the support of government agencies, non-profit institutions such asuniversities or non-governmental organisations, sometimes involving public subsidies paid to farmersto meet certification costs, or alternative certification systems for small farmers. Certain systemsallow for group certifications, whereby a group formed by various participants – for example severalproducer organisations – will apply internally the control procedure provided for under the standards,and will in turn be inspected by the certification authority (involving a collective responsibility in caseof individual member failures).

113. Certification plays an important role for the agricultural production contract and contractparties under a number of perspectives. Certification provides evidence and legal certainty aboutcontract performance: it serves as a tool for monitoring risks and improving performance; it alsoenables a proper allocation of liabilities in case of non-performance and thus contributes to lessen therisks incurred by the parties. When irregularities and infringements are found, under the certificationscheme, the certifying body is entitled to apply a series of measures, from corrective instructions tosanctions which may lead to deny or withdraw the certification, with implications over the availableremedies under the production contract.

(a) Specified production methods

114. Most agricultural production contracts oblige the producer to follow the methods prescribedby the contractor. This obligation is in addition to the obligations to comply with safety,environmental or social standards which are mandatory under the applicable (generally domestic)law. The contract may require that the producer comply with certain quality standards, for exampleto comply with stricter requirements of the importing country, or to comply with corporate socialresponsibility principles for example to comply with ILO principles, with respect of human rightsrelated to labour which includes working conditions, non-discrimination, freedom of association, rightto collective bargaining. In addition, the producer may be bound to undertake a number of practicaloperations involved in growing crops or raising animals, involving the provision of services and ofgoods. Certain operations may be ancillary to the production itself and may relate to the post-harvestperiod (for crops) i.e. sorting, grading, packing, transporting, before or at delivery.

115. The obligations may either be express, with contractor’s detailed requirements (including byreference) for the production process, – or they may be implied obligations96 with the possiblerelevance of good practices and codes of conduct. The producer’s obligations are for a particularresult,97 or to employ apply skills, diligence and best efforts.98 A number of considerations may beparticularly relevant:99 the way the obligation is expressed in the contract; the contract terms, in


particular the price; the degree of risk normally involved; the ability of the other party to influencethe performance of the obligation.

116. The contract may require the producer is to cooperate with the contractor to ensurecompliance with the production method and to avoid incidents (for example, it may be required toask for instructions, advise on problems occurring- such as animal disease, delays in the production,etc. -, inform on relevant matters provide regular quality control reports).100 Such an obligation mayeven be enforced required by the applicable law which therefore triggers the obligation in any givenproducer-contractor relation in to manner and extent defined in the applicable law. Cooperationincludes allowing contractor’s visits on the production site. The scope of the obligation to cooperategenerally mirrors the contractor’s obligation to cooperate.

117. The obligation to comply with the contractor’s instructions is sometimes only expressed in ageneral formula where this guidance is not detailed in the contract itself. This may not be advisable insome cases, as it may expose the producer to obligations which it did not have the possibility tounderstand and discuss before entering the contract. A more explicit formula can list the differentaspects on which the contractor’s instructions have to be followed.101 This listing draws theproducer’s attention to the wide range of instructions to which it will have to abide, but it still leavesmuch uncertainty about their specific contents.

118. The contract often specifies the time when planting or sowing can take place. Whenappropriate, provisions impose rotation in the uses of cultivated lands.102 Irrigation and drainage maybe necessary to ensure the success and quality of the crop. Contractors often specify the techniquesto be followed by the producer.

119. Directions concerning production methods usually oblige the producer to take adequatemeasures for weed and pest control. Before entering into a contract, producers are well advised tobecome aware of the risks and benefits of the use of pesticides and other chemical products,considering their possible environmental impact. Instructions on production methods given by thecontractor generally include provisions imposing the necessary precautions. The contract may forinstance forbid the use of herbicides for weed control, or the use of chemicals and pesticides bannedby applicable regulations or not admitted by the contractor. Some contracts contain a specific exhibitlisting accepted pest control products and giving directions for their use.

120. Harvesting is a key moment in the production process, and contracts usually specify that theproducer must harvest all produce in accordance with instructions given by the contractor, and oftenunder its supervision. Special training is sometimes provided shortly before the harvest. The time forharvesting is often determined by the contractor; however, some cooperation with the producer anda degree of flexibility are advisable, since the proper time is largely dependent on the state ofmaturity of the crop and the weather conditions. Presence of the contractor during harvesting issometimes required by the contract. Some contracts also contain directions about post-harvestpractices, such as cleaning the produce to wash out earth, muds and possible contaminants, ortaking appropriate care of the harvested field, e.g. by removing plant roots and stalks.

121. Livestock and poultry contract production have specific requirements for production methods.Among the typically specified obligations, the animals, usually supplied by the contractor, have to behoused in adequate facilities and contain the necessary equipment and comply with prescribedstandards as to size, sanitation, temperature or litter. Sufficient water needs to be available fordrinking and cleaning. Directions for pasture management are also frequently provided. Whether foodand medicine are supplied by the contractor or purchased by the producer in conformity with thespecifications given by the contractor, the producer undertakes to apply the required standards for

Commented [A55]: Online Comments.Min. Justice Canada suggests including thesechanges in wordings.

Commented [A56]: Online Comments.Min. Justice Canada suggests deleting thispart

Commented [A57]: Online comment.Prof. Fontaine wishes to know if theomission of paragraph 121 of the earlierversion (80A, 7 Febr. 2014) dealing with theuse of fertilizers has been omittedintentionally.


feeding and medication. Particular rules may govern the producer’s obligations at the times animalsare born or “terminated” for their consumption as well as for the disposal of animals dead otherwise.Methods of collection of animal produce, such as milk or honey, are also subject to frequent detailedprovision in corresponding contracts.

122. In the context of some particularly complex agricultural production contracts, the producermay be required to ensure the product’s traceability by law, private standards (ISO 22000),103 andsometimes contractual obligations.104 Traceability is defined as “the ability to follow the movementof foodstuff through specified stage(s) of production, processing and distribution.”105 Traceability ofproducts includes information about compliance with quality and safety requirements throughoutthe distribution chain. Lack of traceability may prevent the adoption of corrective measures wherehazards emerge at the production or consumption stage. It may also extend the effects of non-compliance along the chain and within several lines of production (e.g. cereals for human or animalconsumption).

123. Agricultural production contracts may contain provisions for labour and hygiene. A clause inthe contract may state that the producer is responsible to hire “sufficient and efficient labour.” Theban on child labour is often specifically expressed. Some contracts contain provisions on hygieneconditions that the producer must maintain during the whole production process: hygiene of thepeople handling the produce, hygiene of the animals, hygiene of the containers, hygiene of thestorage places, hygiene of the means of transportation. On a related note, regulations of a generalnature (i.e. not specifically devised for agricultural production contracts) may also apply to some ofthe aspects of the producer’s obligations for methods of production. Most agricultural products, aswell as methods of production, are subject to regulations for health and safety. Environmentalregulations may also affect such methods. Labour law regulates the use of manpower, and childlabour raises particular concern.

124. Specific regulations or codes of conduct that govern agricultural production contracts, wherethey exist, often include the requested methods of production in the list of required provisions of theagreement.106 Some regulations go further, entering into the details of many aspects, such as theuse of pesticides,107 or demanding compliance with rules concerning matters such as environment orlabour conditions,108 or again prohibiting compulsory purchase of inputs at prices above reasonablemarket values.109 Sometimes, the requirement is expressed that special production or handlingmethods, if imposed, have to be clearly explained to the producer.110

(b) Monitoring and control

125. Very often, agricultural production contracts provide that the contractor’s representatives orauthorised third parties, such as a certifying agent, will have access to the fields, partly to give directadvice, partly to supervise the way the prescribed methods are implemented.111 Sometimes this islisted among the contractor’s obligations.112The main obligation is for the producer to allow thesevisits, but the contractor may also undertake to give additional direct advice through these visits.

126. If the right to visit the production site is not stated explicitly in the agreement, thecontractor’s right would normally be implicit from the right to verify the production process.

127. Reasonable access to the planting areas is necessary for the purposes of these visits. Thisright to enter the premises is often spelled out explicitly. Many contracts have more particular termsto ensure free access, for instance specifying that the rights of inspection extend not only to thecrops, but also to harvesting equipment, transportation vehicles and storage facilities, or to the food

Commented [A58]: Online Comments.Min. Justice Canada suggests furtherresearch on the footnotes and asks foradditional examples.


and medicine to be given to animals. There may also be specific requirements for the accessibility ofpaths and plots.113 It is also common to provide for the conditions of the visits, such as thefrequency, hours, advance notice to be given, and the recording of the visits.

127 bis While the contractor may wish to reserve the right to visit the site at any time withoutprevious notice, the producer may prefer to receive at least some advance notice, in order to makeproper arrangements for the visit and conciliate it with its own working program. This requirement ofadvance notice is sometimes stipulated. The visits should take place at “reasonable” times, as manycontracts specify. Some very precise formulations are conceivable that organize the visits for specificoperations (e.g. harvest), or for different frequency depending on the stage of the growth.114

128. Commonly, the terms that provide for the contractor’s supervision of the production arestandard terms in form agreements or at least and not terms that are individually negotiated.Frequently the contractor provides a set of guidelines or a manual that relates to the production. It iscommon to refer to these by reference in the contract. These terms can often be inferred from theobligations of the producer under the contract.

129. When the contractor exercises broad control over the production, as part of the generalexpectations of the parties, best practices of contract farming may impose on the contractor a dutyto help the producer meet the contract obligations and avoid unnecessary risks. Moreover, there maybe a general duty of cooperation implied in the agreement115 that imposes the obligations of fairbehaviour, timely and diligent actions to support the producer’s performance, communication ofrelevant information and informed advice. If the extent of the control of the production by thecontractor interferes with the independence of the producer the producer might not be viewed as anindependent contractor but as an employee of the contractor. As employment contracts are oftenregulated by law, this would impose additional mandatory obligations on the contractor.

130. The contractor may reserve the right to conduct verification procedures during the productionprocess, either through its employees and agents, or through an authorised third party, such as acertifying agent. Sometimes inspections are made by external entities to ensure the compliance ofthe product with standards of quality required through the distribution chain. The verificationprocedures may include the need to visit the producer’s production site. The contract would generallyprovide for the contractor’s right to access the land or the facilities, and it is common to provide forthe conditions of the visits, such as the frequency, hours, advance notice to be given, and therecording of the visits.

131. While the contractor may wish to reserve the right to visit the site at any time withoutprevious notice, the producer may prefer to receive at least some advance notice, in order to makeproper arrangements for the visit and conciliate it with its own working program. This requirement ofadvance notice is sometimes stipulated. The visits should take place at “reasonable” times, as manycontracts specify. Some very precise formulations are conceivable that organize the visits for specificoperations (e.g. harvest), or for different frequency depending on the stage of the growth.116

132. Apart from occasional or periodic visits, the contract sometimes provides that key operationssuch as planting and harvesting will take place in the presence of a representative from thecontractor. In these cases, the contractor may have an obligation to see that its representative ispresent in due time, as the operations at stake cannot be delayed. When the contractor uses thirdparties for inspection the contractor is responsible for its agents and has an obligation to insurecompliance with objective and verifiable results.117 To the extent that the contractor has superiorknowledge to the producer, during the inspections the contractor may have a duty to inform theproducer of noncompliance with mandatory obligations under the law, such as safety, labour or

Commented [A59]: Online comments.Prof Fontaine noticed repetitions withparagraphs 125-127 and 130-131. Mergedthem all to paragraphs 125-128.


environmental law. This obligation would generally impose a duty on the contractor to assist theproducer in correcting the defect. The forms of performance monitoring and its frequency provideopportunities to implement the obligation of cooperation bearing upon the parties.118

C. Delivery

133. Delivery is a key moment in the performance of a contract. The contractor’s obligation totake delivery of the goods and the producer’s concomitant obligation to deliver the goods are basicobligations in any agricultural production contract. These obligations are mutually dependent. Theobligation of delivery may also be the source of important legal effects such as passing of title ortransfer of risks. The contractor may also lose its right to exercise remedies for apparent defects if itdoes not make appropriate reservations upon delivery. Absent a contrary agreement, the producer’sdelivery is necessary to trigger the contractor’s obligation to pay the price.119 When ownership of thegoods is to be transferred under the contract, delivery does not necessarily indicate the transfer oftitle to the delivered goods.

134. Most domestic contract laws have default rules for the time and place of delivery.120 It isextremely unusual in an agricultural production contract, however, for the parties not to agree onthese terms, either expressly, by past performance, or by custom and trade usage.121 As a goodpractice, obviously the different aspects of delivery should be organized by appropriate provisions inthe agricultural production contract. Some contracts fail to do so, or they meet delivery matters ininsufficient detail. This lack of detail is apt to cause difficulties that could be prevented by preciselyorganizing this important phase of performing the contract. It is also advisable to avoid clauses thatallow one party to unilaterally determine the conditions of delivery. The producer may be required todo that which will enable the contractor to take delivery.122 The producer is under an obligation totake care of the goods pending the actual taking over of the goods by the contractor.

135. Most legal regimes further have default rules for risk of loss. These generally apply to anagricultural production contract. For example, if delivery is at the production site or at other agreedlocation, the contractor must normally collect the goods at the contractor’s own risks and costs.Given the myriad of factors that often accompany the delivery, such as inspection before or afterdelivery, quality certification, weighing, grading and packaging, the default rules often do not matchthe expectations of the parties and therefore this is a subject that would be unwise to leave to out ofthe express terms of the agreement.

136. Taking delivery includes a number of acts that are relevant to assess not only the producer’sbut also the contractor’s liability. Taking delivery entails: (i) taking possession; (ii) inspecting thegoods; and (iii) accepting or rejecting them. These activities may be seen in light of the dutiescooperation that will enable the producer to perform its obligations. A failure to take delivery mayexempt or reduce the producer’s liability. In addition, this failure may increase the costs ofperformance borne by the producer.

1. Time and place

137. Setting the time for delivery can consist in fixing a date,123 an ultimate date,124 a time, aseries of dates125 or a period126 in the contract, depending on the time when the produce is expectedto be harvested or collected. Delivering at the wrong time or place can result in deterioration of theagricultural products and possibly also monetary losses from effects on contract obligations under a

Commented [A60]: Mr Shepherd, saysthat reference should be made specifically totime as well, as this is usual in fresh produceexport.


contract between the contractor and an entity further up the chain. Considering the uncertainties offuture weather conditions, it may be difficult to anticipate precise dates in advance. If a definitedelivery date is not set, the contract should provide a method for setting the delivery date in thefuture. The contractor usually reserves the right to set the dates. Less frequently, it is up to theproducer to provide the time of delivery. Another option is to provide that delivery dates will bemutually agreed, which will necessitate adequate consultations to be organized. It is also possible toset a date in advance, but to stipulate that this date is subject to variation, either at the one party’sinitiative, or, preferably, by mutual agreement. The contract may be more precise, and specify thehours of the day when delivery must take place.

138. Whereas some minor delays may be accepted by the contractor, delay in delivery isnormally considered a form of breach. Such a breach is not usually considered fundamental ormaterial, however, unless the parties attached specific relevance to the time schedule of delivery,due to the impact that the delay would have had on the economic activity of the contractor. Thecompliance with a delivery schedule plays major importance in case of goods subject to fastdeterioration, whereas it may be of minor importance in case of (some) livestock or forestry.Parties may have also considered delayed delivery as fundamental breach by means of an expressclause, possibly defining the extent of relevant delay in terms of days or weeks.

139. The location where delivery is to take place should be indicated in the contract. The contractmay require the producer to deliver the goods at the contractor’s premises, or at the locationindicated by the contractor, for instance an elevator, a collection centre or a warehouse. However, italso occurs that the contractor undertakes to take delivery at the producer’s premises, which in manycases such as livestock may be a preferable option for the producer, as it shifts the risk of loss duringtransport to the contractor. Special provisions may then oblige the producer to ensure access to theplace where the goods are located, or to see that the place is suitable for loading. Some contractsattempt to be very precise about the moment delivery occurs at the indicated place.127

140. The goods have to be transported from the place where they have been harvested orproduced, sometimes first to a storage place, in any case to the delivery point. The contract willspecify which party has the responsibility of transporting the goods, and who will bear the costs.Sometimes the producer has to organize transport, sometimes the contract provides that theproduction will be transported in vehicles hired by the contractor. It can also be agreed that thecontractor will hire carriers on behalf of the producer. As for costs, a contract may for instancespecify that the cost for the short-distance transportation to a temporary storage point will be borneby the producer, while the cost of transportation to the delivery point will be borne by the contractor.Other allocations of transportation costs are of course possible: it is frequent that the cost oftransportation to the place of delivery is also borne by the producer. It may be also useful to specifyin the contract who will be responsible for loading and unloading the goods.

141. Delivery may implicate numerous types of post-harvest operations, each of which may entailan obligation on one or both of the parties. Thus, for example, quality control will often requiregrading of the produce according to the contractor’s requirements or to the applicable standards orregulations.

142. Before delivery, the produce has to be packed in an appropriate way. Contractors oftenstipulate requirements in this matter.128 The contract may provide that the containers have to belabelled with a specified distinguishing mark, if only to clearly identify them apart from thosebelonging to another production. Directions about packaging may also be concerned aboutpreventing the practice of over-packing. Some contracts require that the packing takes place in thepresence of a representative of the contractor. Packaging may also be governed by certain norms.


The containers may have to be purchased by the producer; sometimes they are provided by thecontractor. The contract should clarify which party should bear the cost. If the containers have to beprovided by the contractor, the contract should provide for their timely delivery before the harvest, inthe right quantity.

143. If the produce needs to be stored before delivery, the contract should specify the conditionsof storage. Some general requirements can be set for sanitary conditions, temperature, moisture,protection against natural elements (sun, rain) or safety. Directions can be given about the locationof storage places, e.g. the presence of shelters close to growing plots. It is common that warehousesand similar entities now participate in the sorting, packaging and labelling of the goods. If, asbetween the producer and the contractor, the contractor has the obligation to package the goods, thewarehouse will effectively be the agent of the contractor and not relieve the contractor of theresponsibility for safe packaging and storage.129

144. The contractor may be responsible for post-harvest processing operations. Concomitant tothis obligation is the responsibility of delivering the goods to the processor and making sure thegoods pass into the distribution chain.130

2. Acceptance

145. The producer is obliged to enable the contractor to inspect the goods at delivery but thecontract also may oblige the contractor to inspect rapidly.131 Problems may arise with commoditiesthat rapidly deteriorate. Sugarcane, for instance, loses its saccharose in about three days afterharvesting. Moreover, when inspection of the goods is due to occur after taking delivery (rather thanbefore, e.g. at producer’s premises), delay in taking delivery may cause a delay in inspection. Thismay alter the outcome of inspection and therefore hinder the assessment of producer’s liability, andmay be grounds for exempting or limiting the producer’s liability depending on the applicable law. Ifthe truck has to wait in long lines for several hours in front of the mill before delivery can take place,the producer may suffer losses in the form of price reduction or even refusal of the goods. It is in theproducer’s interest to be informed without undue delay that the goods have been accepted (or thatproblems have appeared). It is also important that the goods are examined in the condition theyhave been delivered, without being affected by their subsequent conditions of handling and storageby the contractor (or by their possible natural deterioration with the passing of time, such as weightloss).

146. Quantity is often determined by weighing the delivered products. Losses due to spoilage maybe accepted up to a certain percentage. The producer should be allowed to monitor the weighing andthe quality assessment, where feasible. It is sometimes agreed that in a short time after delivery, thecontractor will provide the producer with a document stating its final evaluation of the quality of thegoods, based on the relevant criteria (such as the percentage of defective goods, moisture, sugar oracid content, etc. Weighing receipts are sometimes also provided. The outcome of verificationprocedures at delivery is extremely important for the producer, since it affects the price that will bepaid.

147. The establishment of quality and quantity during inspection can often create substantiallogistical problems. Large contractors may be buying from hundreds or thousands of producers atone time. Inspections may be made by multiple agents who are required to maintain consistentstandards. Fair and accurate decisions need to be made quickly. There is often minimal time fornegotiations over quality. Because it is generally the contractor’s obligation to inspect, it is normallythe contractor’s responsibility to ensure the inspection is done properly and in a timely fashion. It is

Commented [A61]: Online Comments.Min. Justice Canada notes that thisparagraph raises entirely new issues. Fordetails, see Doc. 23.

Commented [A62]: Online Comments.Min. Justice Canada suggested thisrewording

Commented [A63]: Suggestion made byMr Shepherd, internet consultation.


the contractor’s responsibility to ensure that its buyer and agents adhere to the specificationrequirements, including in situations where a buyer of the contractor is receiving the goods directlyfrom the producer. As goods can be are often perishable, the timeliness of inspection andacceptance, if not an express term, would be implicit in the agreement. Inspection costs are usuallyborne by the contractor.

148. It is usually advisable to provide for either both the producer and the contractor or a trustedthird party to monitor the inspection. Possible fraud, such as manipulating of the weight of theproduce, is a recurrent concern. The likelihood of fraud is reduced with the participation of bothparties in the inspection or with the intervention of an independent third party, or if the partiesprovide for a certification procedure or arbitration. The producer should be able to verify the processby which the determination is made. Thus, for example, it is common to include terms in the contractthat provide that where the crop or livestock is to be weighed or examined, that the producer is ableto view the weighing or examination and that the weighing is done by certified scales. Normally whenthe inspection is done by a third party, the decision by the third party is binding on both the producerand contractor.

149. The inspection may take place at producer’s premises, at the contractor’s premises, or someother place. Because of the variety of possible locations, the law that governs agricultural productioncontracts makes no presumption about the place of inspection, and therefore the parties need tospecify this in the agreement.

150. The method of inspection varies depending on the goods, but the purpose of examining thegoods is generally the same; that is, to establish whether the goods meet the quantity and qualityspecifications. There are some terms in the agreement that the parties may want to have theflexibility to determine or modify during the performance of the agreement, but normally the qualityof the goods is not one of those terms.132

151. There is a risk of contractor abuse if the contract grants the contractor wide discretion inexamining and grading the delivered goods.133 Fair contractual provisions should not expose theproducer to arbitrary decisions by the contractor. For instance, the contract may allow the producerto follow the process of fruit selection and classification, with the possibility to “expressdisagreement”. A better system consists in providing for the presence of an independent expert or forthe representative of a Government entity.134 The contractor also has to beware of possiblefraudulent behaviour by the producer. Attempts to manipulate the weight of the delivered produce dooccur, as well as bribing the persons in charge of assessing the quantity and quality of the deliveredgoods. The contract may try to discourage these practices by providing severe remedies, such asdamages and termination of the contract. There may also be from criminal consequences, flowingfrom these fraudulent practices. However fraudulent these practices are mainly fought by improvingcontrol procedures and by taking appropriate measures to ensure the integrity of the personnel incharge.

152. If rejection is based on a legitimate non-conformity claim, refusal to take delivery would notamount to a breach under most legal systems. By contrast, the rejection of asserted “non-conforming” goods is not permitted if inspection is carried on unfairly or fraudulently or throughincorrect methods. A rejection is wrongful when a contractor intentionally and/or fraudulently rejectsconforming goods ((for example, the contractor intentionally tampers with the weighing device seeabove, para. 148). A rejection is also wrongful when the contractor commits mistakes in evaluatingwhat constitutes conforming delivery according to the contractual specifications (e.g. the contractorunintentionally uses the wrongful parameters to assess the level of safety of an agricultural productor resorts to an unskilled inspector).

Commented [A64]: Online Comments.Min. Justice Canada suggests these changes.

Commented [A65]: Mr Shepherdsuggests that this sentence on « criminalconsequences » is not clear.

Commented [A66]: Online comments.Prof. Fontaine noticed some repetitions withpara 148. Included a reference to earlierpara, since the repetition concerns in myreading mostly the exception, otherwise theparagraphs approach the same matter fromdifferent angles, justifying the existence ofboth.


153. If wrongful rejection is fraudulent or intentional, the contractor bears the consequences ofthe intentional breach; depending on applicable law, these normally include liability for unforeseeabledamages and, in case of fundamental breach, termination, if it is preferred to specific performance ofthe obligation to take delivery. Third parties (e.g. certifiers) might have contributed to the fraud,being themselves liable for damages under contract law or tort law.

154. An unintentional wrongful rejection result from a mistake by a third party (e.g. certifier) if thethird party is engaged by the contractor. When the certification contract is signed directly by theproducer, as it is often the case, it is more critical to decide who should bear the consequences of acertifier’s mistake, especially if the contractor has imposed or recommended by the contractor.

D. Price and Payment

155. The contractor’s main obligation is to pay the agreed price in return for the goods orservices delivered by the producer. Provisions on the price for the products and services suppliedby the producers are therefore among the most important terms in an agricultural productioncontract. The sustainability of the contract depends largely on the ability of the parties to agree ona fixed price, a price strucutre or a price calculation mechanism that adequately protects bothparties from the commercial risks inherent to agricultural production in general and to the specificcommodity in particular (see above, …*). Ideally, the agreed price should afford both parties a rateof return that covers fixed and seasonal costs and is sufficiently profitable to make the contractattractive.

1. Price Determination

156. Price is an essential term, and the failure to set the price or set a basis for determining theprice may render the agreement unenforceable.135 Even when a price term is normally requiredunder domestic law, if there is a framework contract that provides for individual implementationagreements for each season or production cycles, or a long term agreement that provides fornegotiation of the price during the perfomance of the contract, an initial price term may not benecessary.136 The producer should understand the price term and be able to assess the expectedpayment under the contract. When the contractor supplies the terms of the agreement, thecontractor may have an obligation to provide the producer complete and understandableinformation about the price.137 This obligation may also be required under special legislation foragricultural production contracts. Regardless of the underlying legal requirements for price terms, aclear and transparent price clause, understood by both parties, may avoid future conflict andlitigation. It is good practice to allow the producer or a third party to participate in the calculationor verify the method of calcuation of the price supplied by the contractor.138

157. It is good practice to provide a clause for renegotiating the price for legitimate commercialreasons.139 This could be necessary, for example where the price of inputs over the length of thecontract between the time they are delivered for production and the time they are discounted fromthe final payment changed dramatically. This could also be necessary where unforeseeable weatherconditions change the expected output. A substantial change in the applicable market price or asubstantial currency fluctuation may also justify a price renegotiation. The inclusion and use of arenegotiation clause may help to preserve the relationship and reduce incentives for the producerto breach by selling the product to a third party and for the contractor to refuse to buy the productat the agreed price – because the contract is no longer financially advantageous.

Commented [A67]: Online comments.Prof Fontaine holds that it may go too far tostate in such general terms that it is goodpractice to provide for renegotiation of theprice. Under PICC art. 6.6.2., to which afootnote refers, hardship cases can only beexceptional and suggests that perhaps aprice adjustment clause, linked to anobjective index, could be less hazardous forthe producer than an open renegotiationclause.


158. Unfair price terms may be sanctioned under both specific agricultural production legislation aswell as general contract law.140 Special provisions may apply to designated practices. Thus, forexample, the contract may provide for the base compensation of one producer to be based on theperformance of other producers (under so-called "tournament" compensation programs).Tournaments can sometimes be prone to manipulation and favouritism, because the contractortypically has the ability to affect the performance of some participants by differentiated provision ofinputs.141 These arrangements are said to be justified because they provide incentives for theproducer, but they are often perceived as a way to discriminate unfairly against individual producers,and these terms are prohibited under some agricultural production contracts legislation.

159. Duress and gross disparity of bargaining power may be the basis to invalidate a priceterm.142 The laws that regulate competition may also apply to correct market imbalances inagricultural production contracts. A recent development in this area is the promulgation and adoptionof voluntary codes of practice to promote fair pricing (see …*).

2. Price Mechanisms

160. The prices of agricultural products in an agricultural production contract may be set bygovernment regulation that provides either minimum or maximum prices or prices set by externalmarkets. Absent government regulation, prices are agreed upon by the parties. The price term mayprovide a fixed amount, a variable amount, or a combination of both. Fixed prices are generally set toreflect production costs and producer’s performance, and they often take into account variations inthe quantity, and quality and classification of the product that are delivered according to scales.Scales may work as incentives for the producer, but they may also involve a penalty. Incentives mayalso take into account the application of certain standards of diligence in the production process forquality and safety, social and environmental objectives.

(a) Fixed prices

161. An agricultural production contract typically provides for a price to be determined at the timethe contract is entered into for a set amount of crop or livestock. This generally reflects theproduction costs and reasonable profit. It is common for contractors in their form contracts to use amarket price at the time of delivery for the price term. It is essential that the exact market isspecified in the agreement.

162. A fixed price does not need to be expressed as a figure of a specific monetary unit in thecontract. The agreement may provide that the price paid by the contractors may vary based on suchfactors as the local market prices or world market prices, the contractor’s processing costs, thecontractor’s revenues from the sale of the processed product, and the exchange rates betweenexport and import countries. Nevertheless, generally when fixed prices are set without thesequalifiers, market price variations between the time when price is agreed and price is actually duewould not affect the amount to be paid to the producer. This could provide a welcomed certainty forthe producer about the expected income when market prices fall down. However, if market pricesrise, the producer loses the opportunity to receive the higher value. A potential solution against thisproblem might be found in dividing the produce into separate parts, where one is at a fixed price andthe other at spot sale, capturing in part the benefits of market prices.

163. The main advantage of using a market price is that it provides the flexibility to have a priceset at the time of the agreement that reflects the price the parties would probably have negotiated

Commented [A68]: Comment discussedby Mr Andrada, session 3 Bangkok.

Commented [A69]: Mr Ronchi, PrivateSector Workshop, session 3, talked aboutBarilla’s practices of recommending itsproducers to hold a part of the produce forspot sale


at the time of delivery. In addition, it may be also a necessary measure in some cases due to theinherent volatility of certain commodities. A by-product of using market price is the loweredincentive to side-sell by the producer, who cannot obtain a meaningfully higher price on the openmarket. The weakness lies within the price volatility, leaving the profit of both the producer andcontractor to rely on market price fluctuations.

163bis As a way of controlling fluctuation of prices, increased regulation could be beneficial. Thiscould take place through various frameworks and degrees of formality, including for examplecentralised database recording and tracking contract arrangements, or establishing price settingsystems unifying purchasing prices during harvesting season. Although a formal solution might notalways be available for certain commodities and in some countries because of competition laws, aninformal understanding of price setting between farmers could lead to greater stability in prices.

(b) Price scales

164. For some commodities, the price varies based upon different performance measurements.For example, the prices in animal husbandry rely on a considerable number of variables such as theweight of the livestock at the time of delivery also take into account a per-day payment, the rate ofgain payments, the feed conversion-efficiency bonuses, the fuel-efficiency bonuses, and the death-loss deductions. The price may also vary over the length of the contract based on key performanceindicators.

165. For contracts with a set price plus a premium, it is common to adjust the final price by takinginto account a pricing scale based on the variations in the quantity and quality, and in some cases,efficiency. Price scales and other price adjustments may be designed as either incentives or penaltiesfor the producer. Incentives may also take into account the application of certain standards ofdiligence in the production process, the quality of the product, and safety, social and environmentalobjectives. Because the producer must rely on the contractor to evaluate these factors, thecontractor has an obligation to meet objective industry standards.143 Functionally, such adjustmentsmay be used to supplement or displace available contract remedies when the producer fails to reachthe required quality or quantity.

166. When the price term is based on payment for the producer’s services, the payment rate isusually a set base price with adjustments for a variety of performance factors. For example in alivestock contract, this may include feed conversion, death loss and fuel usage. Although thecontractor may have supplied the food and animals, the price will not be based on the cost of theinputs, but instead on the weight of the livestock at the time it is delivered to the contractor. Theprice may be linked to flexible parameters that are generally based on the revenues obtained by thecontractor from the product or after the product is delivered by the producer. These parameterstypically rely upon local market prices or world market prices, contractor’s processing costs,contractor’s revenues from the sale of the processed product, and the exchange rates among exportand import countries. The timing when these factors are measured, how these factors come into playwith respect to price volatility and incurred risks, and the share to which the producer is entitled areessential terms in the contract.

167. Prices can combine a fixed amount and a flexible share based on one or a variety of factors.When entering into an agreement, contractors and especially producers are well advised to considerthe potential advantages and risks of the chosen pricing mechanism. One advantage of price scalesis the incentive created for the producer to create high quality goods, which leads to a win-winsituation, generating higher profits for both parties involved. The associated risks stem from the

Commented [A70]: This comment wasmade by Ms Maglio, Private SectorWorkshop, session 2. She talked in particularabout the difficulties of price due to thevolatility of the green coffee bean.

Commented [A71]: This comment is theresult of a discussion in the Private SectorWorkshop. This argument was introduced byMr Pelzer, session 3. There might be apotential overlap with competition lawissues and regulation of the market, asoutlined in the discussions and additionalcomments by Mr Kushner, and Ms Maglio


complexity of scales, which may lead to both confusion and manipulation, when opportunisticparties try to abuse the system, by either the contractor downgrading products to purchase themcheaper or the producer embedding lower quality products to higher quality bundles to sell themfor a higher price.

168. As mentioned earlier in this chapter, Oover a period of time, changing market conditions canfundamentally alter the assumptions that the parties had when they concluded the contract. For thisreason, the parties may consider including a revision mechanism in the contract to allow theadjustment of the price because of changed conditions.144 When the parties do not expressly providefor changed circumstances, and one party cannot perform, particular considerations may apply whichwill be discussed further in the Chapter on Excuses*.

169. It is also good practice to provide for mechanisms for monitoring the contractor’s applicationof the price formula, which includes for example product classification and sorting, either by allowingthe producer to participate or verify the price applied by the contractor, or through the interventionof a third party.

170. Price terms should be transparent and clear. Poorly drafted price terms contribute to contractbreachesdisputes, law suits, delays and costs. They may also lead to contract breaches and may leadcause producers to inadvertently misrepresent or misunderstand how the price is calculated. Lessthan transparent price terms may allow manipulations by contractors to reduce payment. Whateverthe pricing mechanism, it should be understood by all parties at the time of the agreement.

3. Time and method of payment

171. The contract should specify the time and method of payment. Late payment or paymentthrough a different method may negatively affect the producer’s ability to meet its necessaryhousehold expenses and furthermore may have implications the producer’s obligations underseparate financing agreements for facilities, operating expenses, etc. These terms are normally setout in express terms of the agreement. Past practices of the parties and trade usage may supplementthe express agreement.145 Although time and method of payment can be supplied by default contractterms, by expressly providing who, when and how payment is made reduces uncertainty and reducesthe possibility of a dispute on this issue. Payment might be prior to delivery, upon delivery, or acertain number of days after delivery. If the price is based on a market price, it is important tospecify how and when the market price is determined. It is also important to consider, whenrelevant, the producer’s obligation to pay back any advances provided by the contractor (see ____*).

172. Payment terms vary widely depending both on the type of contract as well as the privatearrangements of the parties. Thus, for example, some agreements provide for immediate on-the-spotcash payments, while others provide for payment to be staggered out to await further delivery,inspection and processing.

173. It is not unusual to provide for payment after delivery. A delayed payment term increases theproducer’s risk of not being paid if the contractor becomes insolvent. This potential problem isexacerbated if the title to the goods has already passed to the contractor under the agreement orotherwise. This risk is mitigated in some jurisdictions by law that provides for a lien by the produceragainst the goods. In some other jurisdictions, the law provides for guarantee funds through statebanking schemes, insurance schemes or payment guarantees to protect producers against contractorinsolvency.146 These are mandatory obligations on the contractor that cannot be waived in theagreement.

Commented [A72]: The point is made byMr Andrada, Bangkok session 3, thatproducers have little control over thecontractor’s product sorting/classificationsystem which also affects price and overallsales and income.

Commented [A73]: Online Comments.Min. Justice Canada suggested thesechanges.

Commented [A74]: Online comments.Prof Fontaine wishes to include discussionabout the payment of inputs to this chapter.[the discussion seems to be relevant in itscurrent location in paragraphs 70-72, and toavoid repetition it may not need to berepeated here.]

Commented [A75]: Online Comments.Min. Justice Canada suggests mentioning theuse of letters of credit and revise discussionon currency. For details, see Doc. 23.

Commented [A76]: Various practicalissues surrounding payment are raised by MrSarang, Bangkok session 3, including: proofof payment, different methods of paymentand the person in charge to pay for payment.


174. Delayed payment may subject the producer to additional risks. For example, the delayedpayment may make it difficult for the producer to get additional financing or subject the producer toinflation costs, which may be significant. This risk is mitigated in some jurisdictions by statutorypayment deadlines that subject the contractor to an automatic claim of interest for late payment at amore favourable rate than the official rate the producer may also be entitled to recovery costs.Absent specific rates of interest for agricultural production contracts, most domestic and someinternational law provide interest rates.147

175. The payment term is often connected to the other obligations of the parties, such asinspection, packaging and shipment. Thus, payment may depend upon conditions that have to bemet before payment will be made. For instance, before getting paid the producer may be required torequest payment, provide an invoice, provide certain certifications, or wait until after inspection,cleaning, or other quality verification, including potential laboratory testing. These conditions cannotbe commercially unreasonable.

176. When the goods are bought for export, the contract may require payment to be made in adifferent currency than the currency in which the price is set. If not provided for in the agreement,the applicable default rules determine the exchange rate and the time that the exchange rate isdetermined.148

177. The choice of currency may represent an important aspect of the economic transaction,since currencies differ in terms of value on the exchange market and in terms of stability. Thechoice of currency, if set in the contract, may then contribute to the allocation of risks between theparties.149 This explains why the use of a currency which is different from the one set in thecontract (or in the law) may be considered a form of breach, unless it is excused under theapplicable law.150

III. Additional obligations

178. This section highlights some potential additional obligations beyond the core obligations ofproduction, delivery, and payment of the price that parties should be aware of when negotiatingagricultural production contracts. This analysis is not meant to be exhaustive and other obligationsmay need to be considered.

A. Insurance obligations

179. Among these, the failure to get insurance, when imposed by the contract, may beparticularly relevant since the breach may enlarge the sphere of risk of the non-performing partyinfluencing the consequences of other types of breach or supervening events. So, for example, aproducer, who does not get the requested insurance covering for costs incurred in case of plantinfestation, may be requested to cover these costs itself. Many agricultural production contracts donot contain any provision on insurance. Insurance coverage is not always available on affordableterms. If insurance is available and mandated by the contract, the contract should specify whichparty has the obligation to get insurance.

180. The contract may oblige the producer to purchase one or several of the various types ofinsurance: property and casualty on the facilities, the crops and the livestock, liability insurance forall injuries or property damage to third parties which may occur on the premises, and health and lifeinsurance of the main parties that perform the contract.


181. Insurance contracts are complex legal instruments. The contract should describe in sufficientdetail the minimal features of the coverage. Merely obliging a party to take insurance, with no furtherclarification, such as simply requiring the purchase of “adequate insurance”, may not guarantee thenecessary coverage. Insurance clauses should at least state the main minimum features of thecoverage, such as the risks to be insured (e.g. fire, theft, disease or hail) and the amounts to becovered. For liability insurance, the contract should specify the minimum limits of guarantee, and forlife insurance, the amount to be covered. Special care should be taken to verify that the insuranceclause conforms to the requirements of the law. Insurance law is often governed by mandatoryprinciples and rules.

182. Transfer of the benefit of insurance to the contractor upon delivery can also be organized byan appropriate clause, provided the insurance policy or the applicable law contains a correspondingprovision. If appropriate, a loss payee designation clause could also be stipulated in favour of a thirdparty, such as a financing institution.

183. When they are available, weather derivatives could also be purchased to cover risks such asextreme draught drought or, on the contrary, extreme rainfall. Agricultural production contracts mayoblige the producer to purchase this protection.

B. Record keeping and information management

184. Certain obligations of an administrative nature are often imposed to the producer. Forexample, the producer may be required to keep a bank account for the payments made by thecontractor under the contract. A contract for the supply of dairy animals may for instance providethat all animals must have records illustrating their individual identity. The contractor may requirecommunication of various types of information concerning the produce.151 Information from theproducer may be required through periodic reporting, possibly on the basis of the contractor’sobligations towards third parties (public agencies, inspection authorities, clients, financiers, etc.).Information from the producer may be required through periodic reporting, possibly on the basis ofthe contractor’s obligations towards third parties (public agencies, inspection authorities, clients,financiers, etc.). Such reporting may be due at the time of delivery, or on a more frequent periodicalbasis. More general management obligations are imposed by some contracts, requiring the producerto keep appropriate records (in order to justify compliance with its different obligations) and to followthe professional advice that will be provided by the contractor for managing its business. Thepreparation of a business plan may be required, especially when financing has to be obtained.

185. Many contracts provide that the producer will have to attend conferences and trainingsessions organized by the contractor: Information duties may have a major role in productioncontracts and their breach may interfere with due performance. For example, the producer may beexpected to provide information on supervening events that affect the produce. For example, aproducer may be found liable if, in an output contract, the producer does not inform the contractor ofan infestation that reduces the quality or quantity of the output and this forces a change in thecontractor’s purchase plan that causes a loss of trade opportunities or reduces its ability to takeprecaution or corrective measures.

186. Some contracts expressly provide confidentiality clauses where confidential information maybe exchanged between the parties.152 Regardless of possible contractual remedies (e.g. damages orcontract termination), disclosure of confidential information may represent a major threat to the trustbetween the parties that could possibly leading to its final break-down. Such clauses are not alwaysvalid. Under certain jurisdictions, clauses that prohibit the producer from disclosing terms, conditions

Commented [A77]: Online Comments.Justice Canada holds that this subject shouldbe covered under technical assistance oracceptance.

Commented [A78]: Note Mr De LosReyes, session 2 Bangkok. He points to a lackof central repository of relevant and updateddata for smallholders when they enter intocontracts. [This may be relevant also in thecontext of regulatory/third partyinterventions?]The same speaker also extends to bothparties the importance of submitting recordsand information to the government, with aview to developing government capacity tomonitor implementation of commercialcontracts


and prices contained in the contract are void.153 The purpose is to permit discussion of productioncontracts terms with third parties, such as family members, legal advisors, landlords, financialinstitutions or government agencies, in order to enhance informed consent and favor competition.

C. Community interests

187. When the producer leases the land from the State, the producer will have to comply withthe legal obligations for the protection of community interests and the contractor will not be able toviolate those interests. The producer’s obligation to comply with legal protections of communityinterests may be the contractor’s responsibility as well if the law requires this of if the contractorsubscribes to codes of conducts, practices, or guidelines that impose this obligation. To the extentthat these obligations concern the production process (use of pesticides, use of environmentallyfriendly production techniques, etc.) they may be actionable where the contractor does notadequately monitor the producer’s behaviour.

IV. Transfer of obligations

188. Generally, a contracting party can later assign its rights under the contract, but cannottransfer its obligations154 without the consent of the other party.155 For the contractor, normally therights under the contract are the rights to the production from the producer (the obligor). It ispossible for the contractor (the assignor) to assign this right to a third party (the assignee), merelythrough agreement with the third party because this right is not considered to be personal innature.156 The contractor will have to ensure that there is no contract provision that prevents it fromassigning its right to the production, or any other right, to a third party.157 Since the contracts areusually drafted by and for the contractor, this clause is not likely. Whether the contractor can transferany of its duties, such as the supply of inputs, technical services, or transportation, is normallyexpressly provided for in the agreement. Absent an express term, the contractor can usually onlytransfer its duties with the consent of the producer.158

1 This is a general principle of contract law that, in some form, is recognized in all legal systems. Seee.g. UNIDROIT Principle Art. 1.7. Normally, in the context of an agricultural production contract, this imposes onthe contractor an obligation of honesty and the use of reasonable commercial standards. The obligation of goodfaith is mandatory and cannot be waived by party consent.2 USA Iowa contract samples “Pork independent contractor” – C. Regulatory Requirements. A condition ofthis contract is Producer's having obtained prior approval and satisfaction of all necessary environmental and/orregulatory requirements. Such requirements shall include, but are not limited to, any county zoning requirements,state requirements or permits, manure hauling permits and/or agreements, manure management plan, and anyand all other environmental, zoning or regulatory requirements necessary to operate the Facility. In addition,Producer shall incur those expenses and do such things as CF determines to be reasonably necessary to ensurecontinuous compliance with such regulatory requirements throughout the contract term.3 E.g. quantity such as “X quantity of pigs”; quality such as the germination rate of the seeds.4 “Grower agrees to produce … acres of … soybeans for delivery under this Agreement”. This type ofagreement is called “acres agreements” in certain countries.5 “all that you produce”.

Commented [A79]: Online Comments.Min. Justice Canada holds that this subjectcould be discussed in the section dealingwith “Land, installations and fixed assets”.


6 See UCC, § 2-306. Output, Requirements and Exclusive Dealings. (1) A term which measures thequantity by the output of the seller or the requirements of the buyer means such actual output or requirementsas may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or inthe absence of a stated estimate to any normal or otherwise comparable prior output or requirements may betendered or demanded. (2) A lawful agreement by either the seller or the buyer for exclusive dealing in thekind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts tosupply the goods and by the buyer to use best efforts to promote their sale.7 See the sample contract for pineapple in India (FAO database n. 29): “2. The Buyer shall have the right toreject the pineapples if the quality of the same is not to the satisfaction of the Buyer and only the pineapplesthat are so rejected could be sold by the Seller to any other party.”8 See DUPONT OPTIUM™ QUALITY GRAINS AGREEMENT TO GROW TOPCROSS CORN, in N.D. Hamilton Farmer’sLegal Guide to Production Contracts, p. 42: “6. VOID CONTRACT. This Agreement may be voided in thefollowing circumstances: a. Location and size of plots shall be mutually agreed upon by GROWER and DUPONT,subject to meeting the rotation and isolation provisions in Exhibit 2. It is the GROWER'S obligation to carry outthe protocol, and failure to do so will allow DUPONT to void the contract at its discretion. b. If replanting isnecessary, or stand is inadequate as determined by DU PONT, the contract may be voided by DUPONT at itsdiscretion. c. If this contract is voided, all seed must be returned and all plant material must be destroyed”.

11 ”Once met the commitment in item 3.1, the surplus of the referred harvest may be acquired by theCompany …”.12 “The aim of this agreement is to define the sale and supply to the purchaser of … % of each of the fruitvarieties above produced in the contracted orchards during the harvest year …”.13 “… the seller agrees to sell to the buyer an initial minimum total of … kgs of crops …”.14 “The Grower shall at least grow the quota”.15 E.g. “The processor may at its sole discretion accept delivery of the sugar beets in excess of quota”.16 Cf. flowers grown in Kenya for sale in Europe.17 “The producer shall produce a total yield not exceeding …, in accord with National Tobacco Boardconfirmation of quota”.18 “Field tests shall have to be conducted before harvesting to determine the quality and quantity of fiberavailable to be produced and purchased by the Company …”.19 “The company agrees to buy produce from the farmer depending on the size of exports orders received”20 See e.g. UNIDROIT Principles arts. 2.1.2; art. 2.1.14.21 See e.g. UNIDROIT Principles art. 5.1.7(1).22 See e.g., Principles of European Contract Law §6.105; UNIDROIT Principles art. 5.1.7(2); LithuanianCivil Code § 6.198.3.23 India.24 Panama.25 See e.g. UNIDROIT Principles art. 5.1.7(1).26 See e.g., CISG Art 9(1).27 See also UPICC, Art. 5.1.6; CISG art. 35.28 See DIN EN ISO 9000/2005.29 Legislation recommend the adoption of quality management schemes and participation by farmers.See for example EU regulation 1151/2012 art. . EU regulation 1305/2013 art. 1630 Such as “Honey shall be pure and free from antibiotics, bad smell and foreign matters. It shall have aconcentration of over 38° Bé and meet all the requirements prescribed in the news industrial standard”.31 Gherkins: “bent and crooked, bleached, fruit fly infested, stalked, flowered, twins, broken, cut, muddy,soiled, fungus, rotten, junk materials, ringed ones, virus infected”.32 FAO, Committee on Agriculture, Rome, 31 March-4 April 2003 Development of a Framework for GoodAgricultural Practices (http://www.fao.org/docrep/meeting/006/y8704e.htm, last visited on …*).33 See for example the Thailand contract for production of asparagus (FAO database n. 47): “The Sellermust keep the asparagus growing plot clean and healthy in accordance with the guidelines and requirements ofEUREP GAP and the Buyer” and the Tanzania contract for tobacco (FAO database n. 46): “4.2 The Seller shall inparticular : (…) (t) Ensure the availability of sufficient barns, compliant with Good Agricultural Practices to meetthe agreed acreage and quantity agreed to in this Agreement in accordance with Tobacco Regulations of 2005and any subsequent amendments.”


34 France, Spain, Argentina, … .35 India.36 Emilia-Romagna.37 Wisconsin.38 See CISG, art. 35(2)(a); UCC, § 2-314(2)(c); UK Sale of Goods Act 1979, art. 14(2B)(a); BGB, §434(1).2.39 See CISG, art. 35(2)(b); UCC, § 2-315; UK Sale of Goods Act 1979, art. 14(3).40 See also UCC, § 2-314(2)(b) for a reference to “fair average quality” as implied warranty ofmerchantability for fungible goods.41 See CISG, art. 6; UCC, § 2-316; Italian Civil Code, art. 1490(2).42 See for example clause 12 of the Monsanto Technology/Stewardship Agreement 2011: “Grower'sexclusive limited remedy: the exclusive remedy of the Grower and the limit of the liability of Monsanto or anyseller for any and all losses, injury or damages resulting from the use or handling of seed (including claimsbased in contract, negligence, product liability, strict liability, tort, or otherwise) shall be the price paid by theGrower for the quantity of the seed involved or, at the election of Monsanto or the seed seller, the replacementof the seed. In no event shall Monsanto or any seller be liable for any incidental, consequential, special, orpunitive damages.” A similar provision can be found in the US DuPont export production agreement forOptimum high oil corn (Iowa database n. 77), although DuPont does not directly supply the seed corn to theproducer (DuPont however is the owner of the trade secret and patents of the TC BLEND seed corn to bepurchased by the producer from seed companies that are on a list provided by DuPont): “DuPont SpecialtyGrains makes non warranties of merchantability or fitness for a particular purpose or any other express orimplied warranty. No claim of any kind, whether or not based on negligence, shall be greater in amount thanthe value of commercial seed in a quantity comparable to that quantity of seed subject to this agreement. (…)”.43 See sample contract for horticultural crops in Kenya. FAO database of contracts.44 See sample contract of farm producer in Grenada. FAO database of contracts.45 See sample contract Broiler 3 SA. FAO database of contracts46 See sample contract for seed production, India. FAO database of contracts.47 See CISG art.3548 See art. 3.1, Regulation (EU) n. 1169/2011 of 25 October 2011 on the provision of food information toconsumers.49 See art. 1, Regulation (EU) n. 1169/2011, cit.: “This Regulation shall apply to food business operatorsat all stages of the food chain, where their activities concern the provision of food information to consumers. Itshall apply to all foods intended for the final consumer, including foods delivered by mass caterers, and foodsintended for supply to mass caterers”.50 The contract may for instance provide that "The producer shall follow strictly the usage standards of theinputs described on their packages…”.51 “All services provided by the buyer will be invoiced to the producer on a monthly basis”.52 For instance, it may be agreed that the contractor will provide seeds, but that otherwise “the producerwill be responsible for providing all the inputs including water, chemicals, fertilizers, fungicides, insecticides andlabour required for the cultivation of the produce”.53 “The Seller must use chemical fertilizer, compost and various bio-substances, e.g. bio-substances for pestcontrol in the quality and of the type already approved by the Buyer only”.54 FAO Brazil Sample contract for fruits (2) “1.1 The supplier(s) and SELLER(S) declare to be the legal owner(s),without any kind of ownership limitations, of the orchards described below, which are situated in the rural propertydenominated …” or FAO Brazil Sample contract for passion fruit saplings “– The PRODUCER, legitimate owner ofthe rural property with area of ….”55 See art. 79(2), CISG. See also Gabriel, p. 241; UNCITRAL CLOUT case n. 149 (Arbitration, 1995); n.277 (Germany, 1997); ICC Court of Arbitration, award n. 8128, 1995.56 Ibid.57 Panama, art. 138.58 See e.g., CISG Art. 35(2)(a).59 See e.g., CISG Art. 35(2)(b).60 Ibid.61 It is also important to clarify not only the contractor’s obligation to supply feed, but also obligations forstorage, drying, processing trucking and other handling costs.62 These certification standards may be imposed not only by government requirements, but also byindustry requirements.


63 Likewise, although the producer will normally have the primary obligation to insure the cleaning anddisinfecting of the facilities, the contractor may have the obligation to insure this is done. Which party isresponsible of the removal of dead animals should be specified in the agreement, but as with some of the otherobligations, it may be implicit that the contractor needs to guarantee this is done safely and within the healthguidelines as the contractor’s obligations will extend throughout the distribution chain.64 It should also be appreciated that these obligations exist irrespective of whether the contractor isresponsible for providing this input, and therefore the contract will have an obligation to monitor the medicinein order to meets its own governmental and distribution chain obligations.65 See e.g. UNIDROIT Principles Arts. 5.1.3. & 5.1.4.66 “The contractor shall pay to the producer the price mentioned in Schedule I when his crop has beenharvested, after deducting all outstanding advances given from the contractor to the producer”.67 France.68 See e.g. UNIDROIT Principles Arts. 5.1.3. & 5.1.4.69 UPICC, Article 5.1.5 : (Determination of kind of duty involved).In determining the extent to which an obligation of a party involves a duty of best efforts in the performance of anactivity or a duty to achieve a specific result, regard shall be had, among other factors, to

(a) the way in which the obligation is expressed in the contract;(b) the contractual price and other terms of the contract;(c) the degree of risk normally involved in achieving the expected result;(d) the ability of the other party to influence the performance of the obligation.

70 http://www.wipo.int/pressroom/en/briefs/tk_ip.html71 Also, ‘domain name protection’ could be important for undertaking business. Domain names can beregistered at the private (mostly, non-profit) organization in charge of each jurisdiction, which is designated byICANN, a non-profit organization, directed under the Department of Commerce of the U.S., and if there’s adispute, the WIPO has a panel to resolve it. See https://www.icann.org/ (last viewed on 21 July 2014);http://www.wipo.int/amc/en/domains/ (last viewed on 21 July 2014). But the legal protection of domain namesdiffers by country. In the U.S., domain names containing registered trademark can be protected by thattrademark registration. See e.g. Paccar, Inc., v. Telescan Technologies, L.L.C., 319 F.3d 243 (6th Cir., 2003).In Japan, domain names are protected from deceptive acquisition or use under the Unfair CompetitionPrevention Act (hereinafter ‘UCPA’). See UCPA, Art. 2(1)(xii), 3, 4.72 Possibly, a person other than contractors, like a producer or a breeder, can be a right holder. If so, the situation is simply viceversa.73 In many countries, plants are not patentable, if they are merely discovered, not invented. See Dir. 98/44/EC, art. 4(1)(a); EPOCase T 0049/83, Ciba Geigy, 26.7.1983 (EU); Patent Act, Art. 2(1); Examination Guidelines for Patent and Utility Model, Part VII, Ch. 2, 3 and4 (http://www.jpo.go.jp/tetuzuki_e/t_tokkyo_e/Guidelines/7_2.pdf, last viewed on 21 July 2014) (JP).

In the U.S., however, the inventions and discovers of plants can be patented under the system of‘Plant Patent’. See 35 U.S.C. § 161. Also, patents can be obtained with claims embracing one or more plantvarieties, provided that the invention is not technically restricted to a plant variety. See Mark.D.Janis, HerbertH.Jervis and Richard Peet, Intellectual Property Law of Plants, Oxford University Press 2014, pp.377-420.74 The International Convention for the Protection of New Varieties of Plants (1991) Art.14. Also,especially in developing countries who have not ratified yet the Convention, there are sui generis legislations toprotect plant varieties.75 The seeds protected by patents or plant variety rights cannot be sold or served for the other prohibited acts according to thelaw (it depends on jurisdictions, though). So, if producers want to save seeds for replanting or exchanging, they should read contract orseeds bag tag carefully to avoiding infringement. Also, there is the obligation of producers not to buy “brown bagging seeds” for planting.The unauthorized sale of protected varieties for reproductive purposes by unauthorized sellers, a practice commonly referred to as brown-bagging, is prohibited by federal law in US and fines for seed law violations are costly. It's commonly called "brown bagging" because theseed is packaged in plain, brown bags. Buying certified seeds with label from authorized seeds sellers is quite important for producers.76 Different countries have various rules on conditions and limitations of farmer saved seeds. Butgenerally speaking, they prohibit, in principle, the acts mentioned in the preceding footnote. See 7 U.S.C. §2541(a) (US); Reg. 2100/94/EC, art. 14(1) (EU); Plant Variety Protection and Seed Act (hereinafter ‘PVPSA’)art. 2(5), 20(1) (JP); Regulation of the People's Republic of China on Protection of New Varieties of Plants(hereinafter ‘RPNVP’), art. 6 (CN).

Nevertheless, there are some limitations on breeders’ rights regarding to farmers’ use of protectedvarieties. For example, in the US, EU, Japan and China, farmers could save seeds produced by themselves fromthe seeds legally obtained. See 7 U.S.C. § 2543 (US); Reg. 2100/94/EC, art. 14(1), CJCE, 10.4.2003, aff. C-305/00, Schulin : Rec. I-3543, ECR I-3543, point 48 (EU); PVPSA art. 20(2) (JP); RPNVP, art. 10 (ii) (CN). Butin the EU, farmers (excl. small farmers) have to pay equitable remuneration (It shall be sensibly lower thanaverage licensing fees under the same situation) to breeders for such saving. See Reg. 2100/94/EC, art. 14(3),


4th indent, Reg. 1768/95/EC. Also, the said EC Regulation requires all the farmers, who replant or will replantpropagating materials of the protected varieties of the designated species to provide information wheneverthere is a request of the breeder of those varieties. See Reg. 2100/94/EC, art. 14(3), 4th indent, CJCE,10.4.2003, aff. C-305/00, Schulin : Rec. I-3543, ECR I-3543, point 72. On the other hand, in the US, Japanand China do not require farmers to pay compensation to the rights holder for the replanting of the savedseeds. In Japan, the PVPSA provides that parties could exclude this limitation by a contract. See PVPSA art.21(2).

In most developing countries, the scope of the limitations is broader. For example, in India, farmerscan even exchange, share or sell the seeds of protected varieties under some prerequisites, without the sales of“branded seeds” (any seed put in a package or any other container and labelled in a manner indicating thatsuch seed is of a protected variety). See Protection of Plant Varieties and Farmers’ Rights Act (hereinafter‘PPVFRA’), § 39(1).77 See e.g. 15 U.S.C. § 1114(1) (US, need to fulfill the use requirements); Reg. 207/2009/EC, art. 9 (EU,community trademark); Trademark Act, Art. 25, 2(3) (JP); Trademark Law, Art. 3, 48 (CN).78 In order to an infringement of the third parties’ trademarks, the mark need to be used on the linkage between the mark itselfand the designated goods or services. See Case C-119/10, Frisdranken Industrie Winters BV v. Red Bull GmbH, 15.12.2011: ECR I-13194,points 30 et seq. (The case on the interpretation of Art. 5(1)(b), Dir. 89/104/EC but the text of the provision was not changed under Dir.2008/95/EC, so the interpretation of the case is supposed to be still in force) (EU); District Court (hereinafter ‘DC’) Tokyo, 22 July 1998,Always Coca-Cola: Intellectual Property Bull. 30-3-456(http://www.courts.go.jp/hanrei/pdf/2B372B6A5BCC21F149256A7700082E46.pdf, provided only in Japanese).But please pay attention that trademarks have not only the function guarantee to consumers the origin of thegoods or services but also the functions of guaranteeing the quality of the goods or services in question andthose of communication, investment or advertising. See Case C-487/07, L’Oréal SA, et al. v. Bellure NV et al.,18.6.2009 : ECR I-5185, point 58 (EU); Court of Appeal (hereinafter ‘CA’) Tokyo, 25.2.1981, Chanel No.5:Intangible Property Bull. 13-1-134(http://www.courts.go.jp/hanrei/pdf/18FDC412473AFC0149256A76002F8B6C.pdf, provided only in Japanese;this judgment was based on Art. 2(1)(i) but among legal professionals trademarks could have the similarfunction of advertisement); Supreme Court of Japan(hereinafter ‘SC’), 27.2.2003, Fred Perry: Civ. Bull. 57-2-125 (http://www.courts.go.jp/hanrei/pdf/js_20100319120726818352.pdf, provided only in Japanese; in thiscase, SC referred only to the functions to guarantee the origin and to guarantee the quality) (JP).79 See Madrid Agreement Concerning the International Registration of Marks (1891, as amended in 1979), Art. 6(1), 7; 15 U.S.C.§1058(a), 1059(a) (US); Reg. 207/2009/EC, art. 46, 47 (EU); Trademark Act, Art. 19 (JP); Trademark Law,Art. 39, 40 (CN).80 In Japan, the strawberry ‘Ama-Oh’ (あまおう、甘王) is protected by both trademark and breeder’s right(in force) but the strawberry ‘Tochi-Otome’ (とちおとめ、栃乙女) is protected only by breeder’s right (expired).So now, ‘Tochi-Otome’ is planted also by third parties even in Korea or China, and its price went down. In otherhand, ‘Ama-Oh’ is planted only by its licensees located in Fukuoka prefecture, so its price is maintained highly,and people recognize the ‘Ama-Oh’ as a luxury brand. It’s an example that the trademark functions as ageographical indication protection.81 See Agreement on Trade-Related Aspects of Intellectual Property Rights (1994, hereinafter ‘TRIPs’), art. 39; Uniform TradeSecret Act, § 1 (2), 2, 3 (US, adopted in 48 states); UCPA, Art. 2(1)(iv) et seq., 3, 4 (JP); Contract Law (合同法), Art. 43,60, Ch. 18 (CN).

The concept of ‘trade secret’ is relatively Anglo-American one, so the protection in Europe was not soadvanced until recently. For example, in France, undisclosed trade secrets are protected only by tort law (art.1382, 1383, Code civil), contractual responsibilities, general principle of ‘bonne foi’ (art. 1134, Code civil) orcriminal sanctions (art. L621-1, Code de la propriété intellectuelle (ci-après ‘CPI’) : secret de fabrique).Otherwise, they have to be disclosed and protected by patent (art. L611-1, al. 1er, CPI ; about the disclosure ofinvention, See art. L612-21, CPI). Much part of the protection is realised by the action of unfair competition(art. 1382, 1383, Code civil ; Cass. com. 23 mars 1965 : Bull. civ. 1965. III. n° 228.). But the protectionremains much partial.

On 26 May 2014, the Council of the EU agreed on a general approach for the draft-Directive on theprotection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition,use and disclosure (COM(2013) 813 final). See PRESSE 306. That draft-Directive will be processed in normallegislative procedure, so it will be discussed in first reading soon. The framework of the draft-Directive is almostsame as that of TRIPs.82 WIPO, http://www.wipo.int/sme/en/ip_business/licensing/licensing.htm (last accessed 15 August 2014).83 Example of such clause: Farmers shall not, during the term of this Agreement and within two years after itsexpiration, disclose any proprietary or confidential information relating to this Contract without the prior writtenconsent of the Buyer. See Tabella full contract, p 176.


84 IPRs always have the effect prohibiting others to use the subject matter of the IPRs. So it can only be a warning clause.Monsanto Technology Agreement provides “the licensed grower agrees ‘to use the seed containing Monsantogene technologies for planting a commercial crop only in a single season’ and "to not save any crop producedfrom this seed for replanting, or supply saved seed to anyone for replanting.” Monsanto’s restriction on seedgrowers include (1) requiring growers to use only seed containing Monsanto’s biotechnology for planting asingle crop (“exclusivity provision”); (2) prohibiting transfer or re-use of seed containing the biotechnology forreplanting (“no replant policy”); (3) prohibiting research or experimentation (“no research policy”); and (4)requiring payment of a “technology fee”. See Monsanto, Co. v. Scruggs, et al., 459 F.3d 1328, at 1333 (Fed.Cir. 2006). In this case, Monsanto's license agreement was upheld like many other cases.[Limited License for Patents and Trade Secrets]: The High Olete soybeans obtained by grower under thisAgreement contain valuable trade secrets pertaining High Olete quality traits that are proprietary to OPTMUM(the Olete Trade Secret). In addition, certain patents are pending with respect to High Olete soybeans (thePending Olete patents). OPTIMUM hereby grants a license to the Grower, subject to the Restriction (as definedbelow), to use the Olete Trade Secret and any pending the Olete patents that issue prior to the expiration ofthis license to the extent necessary to grow High Olete soybeans as provided in this Agreement. The licenseshall automatically terminate upon the earlier delivery of the OPTIUM GRAIN to the ELEVATOR and August 31,1999. The license grants hereunder is subject to the following restrictions: 1. GROWER may not use anyOPTIUM SOYBEAN or material directly or indirectly derived therefrom for breeding, research, seed production,reverse engineering or analysis of the genetic makeup thereof; 2. GROWER may not sell, transfer, give orsupply, directly or indirectly, and OPTIUM SOYBEAN or material directly or indirectly derived therefrom unlessGROWER gives notice to the recipient of the terms and conditions of the Agreement and agrees to bound bysuch terms and conditions; 3 GROWER may not sell, transfer, give or supply, directly or indirectly, any OPTIUMSOYBEAN, any if its seed components, or any material directly or indirectly derived therefrom (other than theOPTIUM SOYBEAN) to any party for any purpose; and/or 4. GROWER may not use the OPTIUM SOYBEAN, theOPTIUM GRAIN or any material directly or indirectly derived therefrom for any purpose other than to grow anddeliver the OPTIUM GRAIN as expressly provided in this Agreement including, but not limited to, export outsidethe US except by sale to OPTIUM or OPTIUM’s designee. See Optimum Quality Grains, L.L.C., ‘Agreement toGrow Optimum (R) Soybeans and Limited License for Patent and Trade Secret’(http://www.state.ia.us/government/ag/images/contracts/optimum5.pdf, latest viewed on 18 July 2014).85 See generally, Bowman v. Monsanto, Co., 133 S.Ct. 1761, 185 L.Ed.2d 941 (2013) (US).86 The Uniform Commercial Code (hereinafter ‘UCC’), § 2-312; Contract law, Art. 150 (CN).87 Please imagine the situation in which the goods induced the infringement of third parties’ IPRs within certain territories. If thebuyer has not resold the goods to others, the buyer may replace them into the goods that do not infringe any IPR of third parties withinthose territories. Otherwise, the buyer has to compensate the losses of the buyers generated from that infringement. On the other hand, ifthe buyer has already resold the goods to others, the seller has no way other than to compensate such losses. But the compensationcovered by the implied warranty could be limited to the losses to fill the defective nature (i.e. IPR infringing nature) of those goods. Otherpart of compensation cannot be covered by that warranty and the buyer has to sue for it based on the tort law.88 United Nations Convention on Contracts for the International Sale of Goods (hereinafter ‘CISG’), Art. 42.89 CISG, Art. 6; UCC, § 2-316.90 We can imagine the clause that the licensees cannot make such petition, but such clause could be considered void because itdegrades much the function of invalidation system to nullify the unpatentable but granted patents. Also it is said that such clause is voidbecause such clause violates the competition law.91 Actually, there could be problem on the validity of such clause in the light of the ‘ordre public’ because such clause are veryadvantageous to the licensors.

In Japan, such clause are practically provided in many licensing contracts but no one has never argued its validity before thecourt. It could be because the licensees are usually the licensors of other IPRs, typically in the case of cross licensing, and they do not wantto confirm the invalidity of such clause.92 For further details on the relationship with remedies, please see the chapter on Remedies*.93 For example, Japanese Patent Act and PVPSA have such clauses. See Patent Act, Art. 105-4 et seq.; PVPSA, Art. 40 et seq.94 The current text describes a general IPR phenomenon (i.e. enforceability of bag tag licenses) and should berephrased to fit the context of contractor/producer relationships. Currently no clear distinction is madebetween contractor as IPR holder and contractor of supplier of seeds under licenses from third-party IPR holder.95 Pioneer bag license provides that “if the tag indicates this product or the parental lines used inproducing this product are protected under one or more US patents, Purchaser agrees that it is granted alimited license thereunder only to produce forage, or grain for feeding or processing. Resale of this seed orsupply of saved seed to anyone, including Purchaser, for planting is strictly prohibited under this license. ’96 UPICC Art. 5.1.2.97 Cf. UPICC Art. 5.1.6.98 Cf. UPICC Art. 5.1.4.99 From UPICC Art. 5.1.5.


100 Cf. UPICC Art. 5.1.3.101 Such as “land preparation, plantation, fertilizing, weed and pest control, irrigation or drainage,harvesting, grading, packaging, storage, transport and/or reporting”.102 E.g. exclude sowing “on any land that was sowed with … (certain species) … in either of the two yearsimmediately preceding the production year”.103 Domestic legislation and private schemes including certification and quality assurance require product’straceability. See…104 See, for example, the contrato de compra y venta de Sesamo zafra 2011/2012 producido bajo sistema detrazabilidad within the Paraguay Rural Project in which art. 3 provides that “3.1.El Productor se obliga a acatarlas recomendaciones de los técnicos designados por la Empresa, poniendo de si su mejor empeño. La Empresaconfeccionará a través de sus técnicos la “PLANILLA TÉCNICA DEL SISTEMA DE TRAZABILIDAD” en donde seirán consignando, durante el proceso de producción y hasta la entrega del producto, las informaciones respectode la producción de sésamo antes descripto, indicándose las diversas etapas de la producción, lascaracterísticas del producto, los factores de calidad, tallas y criterios de elección, su limpieza, cuidado yentrega, entre otras cuestiones técnicas que ahí se indiquen. Dicha “PLANILLA TÉCNICA DEL SISTEMA DETRAZABILIDAD” será completada por los técnicos de la Empresa .-3.2. La falta de acatamiento por parte del productor de las instrucciones impartidas por los técnicosdesignados por la Empresa será motivo suficiente para que la Empresa disponga su salida del sistema detrazabilidad implementado, en cuyo caso el Productor deberá abonar a la Empresa el precio de las semillasrecibidas, quedando la Empresa facultada a iniciar las acciones legales por los daños y perjuicios que elincumplimiento del Productor le haya ocasionado.-“the US contract for the production of soybeans (FAO database n. 55) where art. 1 provides that “b. GROWERagrees to identity preserve (keep separate from other grain) the ____ soybeans. GROWER agrees to follow theoutline in Attachment I to this Agreement, and to certify that the outline was followed by completing andsigning Attachment I at or before the time of sale as proof of compliance”. In this contract the producer isrequired to follow and complete a detailed identity preservation outline concerning each phase of the productionprocess, such as planting, treatment, harvest, storage, transportation.105 Codex Alimentarius Commission, Principles For Traceability/Product Tracing As A Tool Within A FoodInspection And Certification System, CAC/GL 60-2006.106 France, Morocco, Argentina, … .107 Kenya.108 Emilia-Romagna.109 Wisconsin.110 Iowa.111 A contract may for instance state that the producer must “allow authorized officers of the Project to visitthe farm at all reasonable times and to view the records of the Producer related to the Contracted Produce.112 The buyer agrees to make routine visits to the production units to supervise production and verify cropsprogress and advice the growers as necessary.113 “The Seller commits to keep the internal paths in normal usage conditions and to maintain the accessplots to the harvest and transportation areas clean and cleared during the time of harvest works”.114 For instance, a contract for the production of green hot peppers provides that the visits will take place “atleast once per week on a mutually agreed day during the growth phase, at least once day during harvestingoperations, on the day after harvest, within two days of a recommendation to the farmer to ascertain a certainlevel of compliance to the recommendation and at the end of each week to ascertain projected harvest for thefollowing week”.115 See e.g. UNIDROIT Principle Art. 5.1.3.

117 See e.g., Principles of European Contract Law §3.202.118 Hungarian Civil Code (1952), Chapter XXXVI “Contract for delivery of agricultural produce” – Section420: “Where the fulfillment of an obligation undertaken in the contract is foreseen to meet with difficulties, theparties are obliged to inform each other of such circumstances, except where the other party must have knownof the impediment even without information.”119 See e.g., CISG Art. 53.120 See e.g., UNIDROIT Principles Arts. 6.1.1. & 6.1.6.121 Although it is always advisable to parties to agree expressly to all essential terms of the agreement, itis not unusual for parties with long standing working relationships to rely on their past performance as a basisfor their understanding of a current agreement. The law generally recognized past performance of the parties


as an expression of the parties understanding if the past performance accurately reflects the parties’expectations. See e.g. UNIDROIT Principles Arts. 4.2. & 4.3; CISG Art. 9(1).122 CISG Art. 60.123 (“on the 5th of September”).124 (“on or before …”).125 (“every day”, “at least every week”, “at monthly intervals”).126 (“between the 1st and the 15th of September”, “within 6 months after the signing of the contract”).127 “The Grower shall be deemed to have delivered the Crop to the Processor as soon as the Crop is lifted outof the ground by the Processor and/or its Nominee”.128 For instance, a contract for the production and delivery of honey provides that the produce has to bepacked in “unused, toxic-free and contamination-free plastic pails of standard size”. Asparagus will have “to be putvertically in baskets”.129 See e.g., Principles of European Contract Law §3.202.130 All of these obligations and cross-obligations should be reflected in the contract pricing.131 E.g. “within two hours of arrival” in a contract concerning green hot peppers.132 As noted [infra-supra], the quality term may not be a single standard, but may be based on a paymentscale that varies with the quality of the production.133 Clauses have been found in some contracts, where the producer “accepts in advance the purchaser’sverdict” concerning the quality of the goods.134 For instance, a contract for the sale of tobacco requires the intervention of a representative from theMinistry of Agriculture “in order to check that procedures are fair to the seller.135 See e.g., CISG Art. 14. Some legal systems do not require a price term, and in the absence of a priceterm, the law imposes a price that reflects the current market price at the time and place of tender. See .e.g.,CISG Art. 55. However, agricultural production contracts without a price term are virtually unheard of.136 Hungarian Civil Code (1952), Chapter XXXVI “Contract for delivery of agricultural produce” – Section422: “Contracts for delivery of agricultural produce may be made for several years. In such cases, the partiesare not bound to fix the price”.137 See e.g. UNIDROIT Principles Art. 5.1.3.138 See e.g. UNIDROIT Principles Art. 5.1.3.139 See e.g. UNIDROIT Principles Art. 6.6.2.140 See e.g. UNIDROIT Principles Art. 3.2.7(1).141 Tsoulouhas & Vukina (2000)142 See e.g. UNIDROIT Principles Art. 1.7.143 See e.g. UNIDROIT Principles Art. 5.1.4.144 UPICC, Article 6.2.2 et seq. on Hardship145 See e.g., CISG Art 9(1).146 For example under federal law in the United States, “[A] packer is obligated to hold money in trust forthe benefit of unpaid sellers unless the packer's average annual purchases do not exceed $500,000.” 7 UnitedStates Code §196 (b).147 See e.g., UNIDROIT Principles Art. 7.4.9.148 See e.g. UNIDROIT Principles Art. 6.1.9.149 See UPICC, art. 6.1.9(1)(b).150 See for example UPICC, art. 6.1.9(2) considering the case In which the use of the agreed currency isimpossible.151 e.g. total weight, sugar content and purity of the harvest, or dairy management and health records ofanimals152 See, for example, the Cameroun model contract for the production of manioc (FAO database n. 18):“Article 13: Obligation de confidentialité Les deux parties sont tenues à l’obligation de discrétion. Elless’engagent pour elles et pour toute personne travaillant pour leurs comptes à tenir confidentielle touteinformations obtenues, fournies et/ou traitées, toute communication de renseignement, document ou objetquelconque et à ne faire aucune communication sur le contenu de ce contrat aux tiers sans l’accord des partiescontractantes”.153 Minn. 17.710 - cf. also Packers & Stocky. Act, Ill. 30)154 See e.g. UNIDROIT Principle Art. 9.1.1.155 See e.g. UNIDROIT Principle Art. 9.1.1.


156 See e.g. UNIDROIT Principle Art. 9.1.7.157 See e.g. UNIDROIT Principle Art. 9.1.9.158 See e.g. UNIDROIT Principle Art. 9.2.3. Absent a term forbidding it in agreement, some legal systemsprovide for the right to delegate a duty absent the consent of the obligee if the delegation would not materiallyalter the performance rendered.

EXCUSES FOR NON-PERFORMANCE

Prepared by the UNIDROIT Secretariat

Table of contents

I. Supervening events affecting the performance of agricultural production contracts 2

A. Force majeure v. change of circumstances..................................................................3

B. Contractual allocation of risks through force majeure clauses.........................................3

C. Risk allocation and title transfer................................................................................5

D. Insurance and other risk mitigation and allocation schemes...........................................5

II. Events qualifying as force majeure and change of circumstances in contract farmingpractice ....................................................................................................................... 6

A. General notion of force majeure in contractual practice.................................................61. Natural events (“Acts of God”) ..............................................................................72. Governmental acts ..............................................................................................83. Other disturbances: strikes, wars, social unrest, market disruptions ............................8

B. Relevant change of circumstances in contractual practice ..............................................9

C. Burden of proof .....................................................................................................9

III. Consequences of the recognition of force majeure and change of circumstances ....10

A. Effects on the parties’ obligations............................................................................ 101. Excuse from non-performance ............................................................................ 102. Suspension of performance ................................................................................ 103. Compensation and indemnities............................................................................ 114. Additional obligations: notice and mitigation requirements ....................................... 11

B. Effects on the contract as a whole........................................................................... 121. Termination of the contract ................................................................................ 122. Right or duty to renegotiate................................................................................ 123. Judicial adaptation ............................................................................................ 13

2. UNIDROIT 2014 WG4 INF. 1 Excuses for Non-performance (ZERO DRAFT)

EXCUSES FOR NON-PERFORMANCE

1. After the conclusion of an agricultural production contract, some intervening cause mayeither prevent one party from performing the agreement or render its performance substantiallymore onerous. While this may happen for all types of contracts, certain occurrences can beexpected to play a greater role in agricultural production. Section I* will introduce the basicunderlying legal issues that are raised by such occurrences. This will be followed, in Section II*, byan outline of how different supervening events may be characterised by contracts and theapplicable law. Lastly, Section III* will explore the consequences of legal recognition ofsupervening events, so that parties may better envisage and address these events when enteringinto a contractual relationship.

I. Supervening events affecting the performance of agricultural production contracts

2. A supervening event is an event that is the cause affecting the performance of theobligations under a contract. Agricultural production contracts are particularly vulnerable to specificexternal factors affecting the producer’s ability to perform its obligations. Natural events such asfloods or droughts, abrupt climatic changes, exceptionally high or low temperatures and insects orother plagues affecting crops are among the most common events that could destroy, in whole orin part, a producer’s goods. Livestock can easily succumb to epidemics.1

3. Other possible supervening factors, while not as typical of agricultural production, maynevertheless influence the ability of either party to perform the contract. This is the case for non-natural occurrences such as changes in legislation or governmental policy concerning agriculture orapplying more generally, which could be determined either at the national or international level;upheavals ranging from riots to revolutions or armed conflicts; and social events such as strikesaffecting either the production process or the availability of transport and other facilities. Forinstance, a government’s decision to ban the export of specified agricultural products may impedethe full performance of obligations under an existing contract. Similarly, changes in health orenvironmental regulations may reduce the value of a specific production. Embargoes against aspecified country may constitute a major obstacle to performance. A strike in the communication ortransportation industries may also affect the ability of parties to perform. Abrupt depreciation ofcurrency or a freezing of fund transfers may also influence the fulfilment of the obligation to paythe price. Further disruptive factors that may heavily modify the original equilibrium of the contractmay happen as a result of fluctuations in market conditions affecting prices or supply.

4. Furthermore, the likelihood risk of said supervening events is enhanced by the duration ofan agricultural production contract, which usually ranges from medium to long term (and may evenbe mandatorily required by legislation)2and by the fact that parties typically undertake to makeperiodic or deferred performances. .In addition, contract farming as understood in this Guidegenerally entails a certain level of interdependency of the performances of the producer and thecontractor, with the latter providing, typically, the supply of inputs – whether goods, services orfinancing – needed by the former to fulfil its obligations. In the case of a force majeure eventpreventing delivery of the product, the contractor may have already performed its obligationsrelating to the inputs. Thus, the contractor would already have lost the value of such aperformance in addition to not receiving the expected end product. - To summarise, eventsaffecting either party’s ability to perform would most often necessarily affect the other party’s ownperformance under the agreement.

Commented [A1]: Online Comments.Min. Justice Canada suggested adding adefinition of “supervening event”.

Commented [A2]: Online Comments.Min. Justice Canada suggests using the term“risk” instead of “likelihood” as the latter isalso used to describe a function of aparameter given an existing or measurableoutcome. For details, see Doc. 23.

UNIDROIT 2014 – WG4 INF. 1 Excuses for Non-performance (ZERO DRAFT) 3.

A. Force majeure v. change of circumstances

5. While all of the supervening events described above may in one way or another have animpact on the performance of parties’ obligations, it will depend on the applicable law whether, andto what extent, they would be considered relevant from a legal standpoint and what consequencesthis would entail for the parties’ obligations and their contract as a whole.

6. Generally, national laws only provide for exceptional relief in the occurrence of events thatarise after conclusion of a contract, that are unpredictable, inevitable and beyond the reasonablecontrol of the parties, and that objectively prevent one or both parties from performing. One maythink of an exceptional flood destroying all of the growing crops being raised under a contract on aspecified plot of land. The typical effect of such an event, when recognized, is an exemption fromperformance. As will be seen below, however, variations of the preceding pattern exist underdifferent domestic laws.

7. Though each legal system obviously employs its own terminology,3 force majeure hasbecome a term of art in international contracts, especially when a specific clause is drafted to coverthese situations, but also in uniform law instruments, literature and judicial or arbitral decisions.4 Itis commonly used in agricultural production contracts as well and the term will be used in thisChapter* to refer both to express contractual provisions and to the default regime applicable in theabsence of such provisions.

8. Even if no supervening event makes performance impossible, changing circumstances overthe life of the contract may go beyond the risks contemplated at the time of its conclusion.Changes in circumstances may not necessarily impede performance, but where they fundamentallyalter the balance of the relationship they constitute a frequent ground for non-performance. Anumber of legal systems have not adopted specific provisions nor developed ad hoc judicialsolutions for such situations, at least for general contract law. Moreover, even where a rule doesexist, its effects may differ greatly, ranging from an exemption from performance resulting fromthe same legal regime as force majeure events, to giving one or both parties a right to termination,to restoring the contractual equilibrium by imposing a duty or granting a right to renegotiate theterms of the agreement and/or, more rarely, by recognizing a judicial power to adapt the contractto the changed circumstances.

9. Again, a variety of expressions and concepts are used in national law.5 Hardship is acommon term found in international contracts and literature to describe exceptional changes ofcircumstances which may give rise to a contractual or judicial remedy, or clauses regulating suchsituations.6 It does not seem, however, to be widely employed in the context of contract farming.As a result, the more neutral expression “change of circumstances” will be used in the presentGuide.

10. In this Chapter*, both scenarios will be considered. Parties should however be aware thatthe divide between force majeure and “change of circumstances” may be a matter of interpretationof the factual circumstances of the case and/or of the applicable law. Contractual provisions maybridge this divide by providing for analogous remedies, such as, for example, a periodical oroccasional revision of contractual terms.

B. Contractual allocation of risks through force majeure clauses

11. The parties to a production contract are generally free to agree on a specific provision onforce majeure, however worded, rather than rely upon general principles provided for under thegoverning law. Such clauses are common in international commercial practice and may serve

Commented [A3]: Online comments.Fondation pour le droit continental (ad hocexpert group expressed a lot of concern asregard the provisions on hardship. TheGroup notes that there should always be aclause on the matter, and that the judgeshould not be allowed to adapt or terminatethe contract. If the Guide chooses to followthe mechanism set up by Unidroit Principles,this should be clearly explained; thereference in footnote 6 appears asinsufficiently explicit.The group is concerned that judicialadaptation is not a proper solution, in actualpractice, the parties preferably resort tomediation, that should lead to finding rightbalance, not termination.

Commented [A4]: Online Comments.Min. Justice Canada suggests expanding thescope of this chapter. For details, see Doc.23.


multiple purposes, either restricting or enlarging the default rules of the applicable law that qualifysupervening events and their characteristics, modifying their effects or providing for specific issuesthey did not expressly consider. In agricultural production, as will be seen more in detail below,several contracts do contain at least a minimum reference to force majeure situations,7 and notuncommonly one or more clauses tailored to the specificities of these transactions. However, thisissue seems to draw less attention than could be expected given the possibly crucial role ofsupervening events, and there is little evidence of heavily negotiated and complex texts such asthose that may be found in other industry sectors.

12. Parties must be aware that inserting a risk allocation or force majeure clause in theiragreement does not necessarily displace the applicable law from being relevant. First, generalclauses referring to force majeure without further specifications will be interpreted in accordancewith the applicable law. This may lead to different results depending on the jurisdiction,.8 oruncertainty due to the lack of decisions in this area. Second, contractual lists of relevantsupervening events may be construed in different ways depending on the adjudicating body andthe jurisdiction. They may be qualified as non-exclusive, thereby giving a possible gap-filling role tothe applicable law. The parties can make clear that the list is not exhaustive by using expressionslike “such as”, “highlighting, among other”, “including, but not limited to”, or even simply insertingsuspension points or “etc.”, or by the addition of a cover-all final description. 9 On the other hand,detailed lists – even when followed by a general catch-allcover-all clause clause such as “any otherevent or circumstance beyond the parties’ control” – may be restrictively interpreted to only coverevents of a type similar to those specified in the clause, thus excluding other occurrences that maygive rise to an excuse under the applicable law . In other instances, the list may be exclusive, 10 forexample when it only refers to natural calamities, 11 when specific events are expressly excludedfrom an otherwise exemplary list, 12 and/or when different consequences are attached to theoccurrence of different events. Parties wishing to introduce such lists in their contract are advisedto expressly clarify those points.

13. It may also be difficult to distinguish express force majeure clauses drafted specifically infavour of one party from a contractual exclusion or limitation of liability. In theory, the difference isclear, since by definition force majeure provisions address exceptional events falling out of theparties’ control, while exclusion or limitation of liability clauses generally apply to non-performanceParties may however decide to modify the typical characteristics of the event triggering an excuseand to exonerate the non-performing party even when the impediment was avoidable and/orforeseeable. The line between an extended force majeure clause and an exclusion from liabilitymay then become blurred. Parties should thus be aware that an unexpected exclusion or limitationof liability may be hidden in loosely drafted force majeure provisions. On the other hand, manylegal systems impose restrictions on exclusions of liability, for example striking them down if theyextend to wilful or grossly negligent behaviour of the obligor, or limiting the possibility to insertthem in standard contracts.13

14. Finally, specific legislation may sometimes impose other mandatory rules that parties maynot derogate from in their contract terms. While provisions of this kind referring to force majeureevents are rather rare, they may be relevant when they apply to agricultural production. Suchlegislation may impose a certain minimum content of the contract, including a force majeureprovision14 or other risk allocation mechanisms designed for this type of situation.15

Commented [A5]: Prof Paripurna,Bangkok session 2, brings the example of apartnership agreement between producerand contractor in Indonesia (Palm Oil), thatis severely lacking in details in the event ofdefault and force majeure

Commented [A6]: This point is made byMr Yi, at Bangkok session 2, when he saysthat whereas the Cour of Cassation in Francehas determined the meaning of forcemajeure, greater unpredictability is found bythe corresponding court in Cambodia due tothe lack of decisions in this area.

Commented [A7]: Online comments.Prof. Fontaine noticed repetitions betweenparagraphs 12 and 24.I merged both in 12 and deleted 24 with asmall modification in para 19.


C. Risk allocation and title transfer

15. When the obligation to deliver is affected by a force majeure event, the risk allocation maydepend on whether the contract provides for delivery and transfer of title to goods, as it happens insales contracts. Under many domestic law systems, the risk of fortuitous loss of identified goods isborne by their owner, with the consequence that if title has already passed to the buyer, that iswhen a crop has already been sold under contract and delivery is not needed for the transfer oftitle, the seller is excused from performing but is still entitled to the price. Since this is moreproperly framed as a question of the passing of the risk for the perishing of the goods that are tobe transferred from one party to the other, it is addressed in the Chapter* on obligations of theparties.

D. Insurance and other risk mitigation and allocation schemes

16. Anticipating the risks involved in production is essential to the economic viability of anyagricultural undertaking. Parties, and in particular producers, may respond to this need bycontracting insurance against the occurrence of adverse events, insofar as sufficient coverage forsuch events is available. Insurance products are typically provided by private entities and may alsobe offered by large cooperative or mutual entities or microfinance providers. Insurance is mostcommonly used to mitigate the risk that adverse weather conditions, natural calamities or disastersmay destroy production. Contracts thus occasionally contain an express requirement that insurancebe provided, either in general terms or against specific risks.16 Crop insurance for the case of forcemajeure may even be a mandatory requirement for agricultural production agreements in nationallegislation.17

17. Since producers may find it difficult to procure insurance on an individual basis, especiallyin developing countries covering damage or loss of the crop or the animals, specific nationalinsurance schemes have been developed to shield them from the effects of natural disasters oncrops and livestock. These public policy schemes exists in a number of countries, providingguarantee mechanisms to private insurance services or subsidizing minimum insurance coverage,generally linking it to credit granted under public schemes. It is interesting to note that in oneexample, other supervening events such as political or social upheavals are not covered, andfurthermore the producer is required to follow the insurer’s guidelines and policies for “good cropand livestock husbandry”.18 Beyond insurance schemes, large-scale natural calamities may becovered by special State interventions offering some level of compensation for agricultural losses.

18. Parties may also adopt simpler risk mitigation mechanisms by inserting a periodicadaptation or revision clause in their contract. For example, a price revision clause may be used tolimit the risk of currency exchange fluctuations. These clauses often provided for an automaticprice adjustment according to a pre-established schedule which is triggered by a depreciation orappreciation or the currency in which the price is denominated above an agreed threshold – usuallyexpressed as percentage of the unit price.19 Other price adjustment mechanisms may be used tolimit the risks associated with market fluctuations. In evaluating the overall balance and fairness ofcontractual terms, with particular regard to force majeure provisions, the impact of the availabilityof such risk mitigation mechanisms should not be underestimated.

19. The effects of the worsening climate change might also affect the drafting of the forcemajeure clauses. Insurers have already started to develop defensive measures, such as excluding

Commented [A8]: Online comments.Prof. Fontaine suggested coordinatingdifferent instances of insurance mentions inthe same paragraph.I have merged here the paragraphs 55 and56 from “The parties to the contract,contract form and formation”, but decidedto leave the “Insurance related obligations”in the chapter “Obligations”, as it seemed tofit better there.


some extreme events, to protect their business models against the more unpredictable weatherpatterns.1 On the other hand, insurers have also launched new products, such as weatherderivatives, allowing for more innovative risk management. In any case, the increasedunpredictability of the weather might give rise to supervening events more often than before.

II. Events qualifying as force majeure and change of circumstances in contract farmingpractice

A. General notion of force majeure in contractual practice

18.20. Agricultural production contracts may contain a general reference to “force majeure” as theouter limit of the parties’ liability, sometimes coupled with another term such as “fortuitouscase.”20 When no further specification is provided the clause will be interpreted in light of theapplicable domestic law. In those jurisdictions where the notion of force majeure is part of thegeneral law of obligations and contract, parties can be expected to rely on its usual interpretationby national courts and will feel less compelled to specify its exact scope and implications, unlessthey intend to deviate from this general understanding. When, on the other hand, the governinglaw does not recognize the notion of force majeure, its contours will be shaped by the contract as awhole and by domestic and international contractual practice in applying analogous clauses.21 Inthis situation, a more detailed contractual provision is thus more common and may be moreadvisable, as the domestic legal system might have little experience with the definition of thisconcept.. As seen above, an inclusion of a list of examples, exhaustive or not, is a widely usedmethod for clarifying the parties intensions.

19.21. Some contracts may also use the terms “adverse factors” or “adverse events” – with orwithout additional language, such as “alien to the will of the parties” or “beyond the control of theparties.”22 Interestingly, this language is often used without specifying whether it includes onlyimpediments or also mere difficulties. Furthermore, contracts usually do not stipulate the effect onthe parties’ performance or if they do, they envisage, as a consequence of the occurrence of theevent, that a renegotiation should ensue. It is therefore more akin to a clause on change ofcircumstances.

20.22. As a rule, a force majeure event is an unforeseeable and unavoidable event outside theparties’ sphere of control. All three requirements are sometimes expressly mentioned in thecontract, but in other instances only one or two of them will be highlighted. Note that long andcomplex force majeure clauses may raise the issue of whether the parties purposely intended toexclude any omitted requirement(s) or not. The contract will then have to be interpreted in light ofthe applicable law.23 When a force majeure clause contains a list of events that serve as anexemplification of the kind of circumstances covered by the clause, these too will be instrumentalin interpreting the meaning of the more general requirements.24

21.23. General force majeure clauses are usually applicable to the performance of both parties,unless they are expressly designed to apply to one party only.25 Another important element to beconsidered is the extent to which the force majeure event should affect the parties’ performancebefore the clause comes into play. Sometimes contracts expressly require that the obligationbecome impossible to perform.26 Other expressions with the same meaning are also reported, such

1 http://www.actuaries.org/CTTEES_ENVIRO/Documents/Tim_Hardy.pdf

Commented [A9]: Online comments.Prof. Fontaine suggested noting the climatechange and how it affects force majeurethrough changes in insurance policies.

Commented [A10]: Prof Paripurna, inBangkok session 2, brings the Indonesianexample through the Partnership AgreementTemplate.Problems with predicting the Courts’decisions, due to their lack of jurisprudencein this area, has also been raised inCambodia by Mr Yi, session 2 Bangkok.

Commented [A11]: Online Comments.Min. Justice Canada suggests commenting onthis conclusion. Should the parties avoid thisimprecise language because it could lead tolitigation.

Commented [A12]: Online Comments.Min. Justice Canada asks for additionaldescription and examples. For details, seeDoc. 23.


as “preventing any of the parties from the exact execution of their duties,”27 or “events that disablethe fulfilment of this agreement.”28 Contracts may further consider whether the impediment ispermanent or temporary in nature, a distinction that also shapes the consequences of theoccurrence of the impediment, which are addressed below in section 3*.

22.24. The uncontrollable or inevitable nature of the event is sometimes mitigated when theparties refer to a reasonability test.29 The contract may also include specifications regarding thecausal link between the event and the failure to perform, indicating for example that both thedirect and indirect effects of a force majeure event on the performance of the parties’ obligationswill be relevant,30 or that only direct effects are to be considered.31

23. A common contractual mechanism used to guide the interpretation of a general forcemajeure clause is the inclusion of a list of events which would qualify under the clause, providedthey conform to any further specification as to the kind of circumstance covered by the term.Typically the list is not exhaustive, as is often made clear by the parties with expressions like “suchas”, “highlighting, among other”, “including, but not limited to”, or even simply by insertingsuspension points or “etc.”, or by the addition of a cover-all final description.32 The choice ofwording will be important however to understand what type of event is envisaged. In otherinstances, the list may be exclusive,33 for example when it only refers to natural calamities,34 whenspecific events are expressly excluded from an otherwise exemplary list,35 and/or when differentconsequences are attached to the occurrence of different events. Parties wishing to introduce suchlists in their contract are advised to expressly clarify those points.

24.25. When the contract does not contain a provision regulating the extent of the parties’liability, the question will be left to the applicable law. In this respect, a comparative analysis ofexisting legal systems shows that though different models have been adopted,36 they all share afew common denominators. First, in practice, a determining factor is often whether thesupervening event is considered to be within the party’s “typical sphere of risk” connected to itsperformance in the context of the contractual agreement. Second, recognition by courts of anevent exempting from performance in the absence of a specific contractual clause is a rareoccurrence in commercial contracts.

1. Natural events (“Acts of God”)

25.26. The paramount example of event that may affect the producer’s performance is a naturalcatastrophe destroying the crops to be produced and delivered or killing the animals to be raised,in whole or in part. Contracts containing a force majeure clause with a list of examples almostinvariably include natural events such as floods, frosts, droughts, storms, fires and earthquakes. Inthis case, the listed events should satisfy the conditions set forth in the general clause. Conversely,other contracts may expressly state that natural factors fall in the range of the risks borne by theproducer.37 This clause should be read together with any risk mitigation mechanism put in placeeither by the contract itself – for example compensation for selected types of natural disasters38 –or by the producer through insurance coverage for example.

26.27. When the contract is silent or when it only contains a general reference to force majeure,the relevance of certain natural events destroying the producer’s production will have to beassessed under the applicable national law. It may be difficult for the producer to prove that theevent was outside the normal sphere of risk of an agricultural activity, notwithstanding itsexceptional character, at least when due to bad weather conditions.39 Some courts have required,for example,40 that the contract be unequivocally interpreted as operating in advance the sale ofcrops produced on specific land, and that the whole production be destroyed by an event beyond

Commented [A13]: Online Comments.Min. Justice Canada suggests addingexamples. For details, see Doc. 23.

Commented [A14]: Online Comments.Min. Justice Canada questions whether thisstatement is accurate. In addition, thisstatement seems overly all-inclusive and maybe understood as going beyond contractualclauses on force majeure.


the producer’s control.41 As a result, producers’ claims that destruction of crop should beconsidered force majeure usually have little chance of success,42 at least in some jurisdictions.

27.28. Epidemics and pests are particularly important since most contracts require the producer totake precautions to guard crops against them and more specifically to comply with the contractor’sinstructions in this respect. It would be difficult for a producer to prove that such occurrences areoutside its sphere of risk. Moreover, they are not generally mentioned in the lists of eventscontained in force majeure clauses.43 Some contracts even provide that the contractor has theright to refuse to harvest crops attacked by flies or mites or discard the harvested crop without anycompensation to the producer. Accordingly, it is crucial for producers to be aware of theircontractual obligations and exposure to the risk associated with pests .

2. Governmental acts

28.29. The actions of a legislator or other government body exercising its sovereign powers can beanother typical source of disruption of the parties’ performance. A public authority exercisingsovereign powers, including when implementing international resolutions or decisions, is to bedistinguished from a governmental body participating as a private actor in the market.44 Whilenatural catastrophes most commonly – although not exclusively – affect the producer’s ability toperform, governmental acts can also impede either or both parties from fulfilling their obligations.Contractual clauses may refer generally to “acts of governmental authorities” or more specificallyto “any act or omission of any national or local authority”.

3. Other disturbances: strikes, wars, social unrest, market disruptions

29.30. Among the non-natural events affecting the parties’ performance, strikes or other labourunion actions or resolutions are often expressly mentioned, sometimes including illegal or non-authorised actions.45 Mob, riots, and other social disturbances are additional events that oftenappear in force majeure clauses, as well as wars, insurrections and revolutions. Generallyspeaking, a strike of employees of either party would rarely qualify as an event justifying failure ordelay in performing, since it would not be considered outside of the employer’s sphere of risk,unless the contract specifies otherwise.46 Interruption of services such as transportation orcommunication, on the other hand, would more easily fall under a general force majeure clause orbe recognised by national laws as excusing or suspending the obligation to perform. Somecontracts however expressly exclude strikes,47 or impose an obligation on the producer to ensurethat the products reach the contractor even in the case of a strike in transportation facilities (at thecontractor’s cost),48 even if the contract provides for the contractor’s obligation to take delivery atthe producer’s premises.

30.31. However, several types of events are typically not viewed as relevant. Thus, marketdisruptions are not generally considered to be force majeure or adverse events in the field ofagricultural production, nor are they specifically listed in force majeure clauses. Parties maynonetheless take into account possible future changes in the market by introducing in theircontract a price adjustment or index clause or other price calculation mechanism based on externalelements.49

31.32. Finally, there may be situations where one of the parties (and in particular, the producer)cannot perform because of some impediment concerning its person. Generally, a party’s subjectiveinability to perform due to an illness, for example, does not lead to an excuse or a suspension ofthe party’s obligations, unless the performance is considered to be personal in nature. Note that itwill be possible for the producer to adhere to an insurance scheme to cover such risks.50


B. Relevant change of circumstances in contractual practice

32.33. Generally speaking, specific “hardship-like” clauses are not typically part of an agriculturalproduction contract.51 These clauses are different from force majeure provisions as they refer to achange of circumstances that would not prevent performance but merely render it more onerousfor one of the parties. However, as mentioned earlier, contracts do often contain price adjustmentclauses that may refer to changes in the relative value of certain currencies, inflation,52 or otherparameters in order to mitigate the effect of supervening factors. In addition, the terms “adversefactors” or “adverse events” are sometimes used without specifying whether they only includeimpediments or also mere difficulties to perform.

33.34. If the contract does not contain a provision on changed circumstances, the traditionalresponse in a number of legal systems would be to deny any remedy unless the situation gave riseto an impossibility to perform.53 However, recently the trend in many jurisdictions has been todevelop legislative or judicial nuances to this rule.54 Broadly speaking, the event that triggers theapplication of the rules on change of circumstances in those systems should be exceptional,unforeseeable, unavoidable and beyond the parties’ control and sphere of risk. The difficultycreated by such events should cause an excessive burden or windfall for one of the parties. Theeffects of the recognition of a relevant change of circumstances may vary greatly amongjurisdictions and are considered below in section 3*.

C. Burden of proof

34. Issues of evidence are often overlooked by contracting parties, but they may well determinethe outcome of a dispute in a number of cases. Generally, the party whose performance isallegedly affected by the force majeure event bears the burden of proving the occurrence of theevent, the required characteristics under the contract or applicable law, and the link of causationbetween the event and the non-performance. 55 The contractual clause can however be drafted in away that shifts this burden of proof onto the other party.56

35. Contracts may include more complex procedures such as the filing of a formal report to besubmitted to and accepted by the other party, often the contractor when the event is a naturalcatastrophe affecting the production,57 or even a decision by a local authority if parties cannotagree on the evidence.58

36. Parties may wish to resort to an external and independent source to provide evidence ofthe existence of an event and of the extent of a non-conformity of the product. For example, theexceptional or uncontrollable character of a natural event could be subject to dispute. For stormsor other exceptional climatic events, the contract may require a certification by a meteorologicalstation. Certifications provided by competent market authorities or other comparable institutionsare also referred to as proof that an exceptional market disruption has occurred. Similarly, whendealing with pests, a certification on the existence and severity of the infestation could be procuredfrom a competent governmental authority.

37. The question of evidence is linked to the requirement to give notice to the other partywhen a relevant supervening circumstance occurs. The notice requirement may constitute anadditional obligation of the affected party and will be addressed below*.

Commented [A15]: Online Comments.Min. Justice Canada suggests providing someindications as to evidence gathering. Fordetails, see Doc. 23.


III. Consequences of the recognition of force majeure and change of circumstances

A. Effects on the parties’ obligations

1. Excuse from non-performance

38. The recognition of a force majeure event under most jurisdictions traditionally exoneratesthe aggrieved party from performing the obligation affected by the event. This consequence isbased on the assumption that it would be unfair to hold a party liable for a performance that hasbecome impossible or, if allowed by the governing law, more onerous. In those situations, theapplicable law may consider that the contract is deprived of its foundations, thus exonerating bothparties, or may merely preclude the non-affected party from raising a claim for damages.59 This isreflected in several of the contracts containing a force majeure clause, where it is expressly statedor implied that the affected party is excused from performing,60 or that no damages or agreedpenalties for delay in performance are due.61

39. An important question that may arise in the context of contract farming is whether theproducer would still be liable for payment of the inputs received or for restitution of any loans tothe contractor if its obligation to deliver is excused or suspended. Several contracts contain anexpress provision in this regard, specifying that the producer should still perform suchobligations.62 The provision may be worded in more general terms referring to “all pendingliquidations and other accounts” and/or “all outstanding payments” which should be settledindependently of the occurrence of a force majeure event.63 When a production contract isattached to a financing or sale agreement the two contracts may be expressly considered asseverable, thereby breaking the link between the respective obligations of the parties.

2. Suspension of performance

40. The classical theory of excuse was developed with regard to simple contracts whereperformance is instantaneous and its supervening impossibility puts an end to any futuremeaningful input by the affected party. More recent instruments, however, tend to prefer, at leastinitially, a less disruptive approach and to consider that the obligation to perform is merelysuspended for the duration of the impediment.64 Suspension is also often expressly provided for inagricultural production contracts.65

41. Suspension of performance may take different forms. In most reported contracts, noimpact on contractual duration is expressly provided. Occasionally, it automatically entails anextension of the contract’s duration for a temporary period of time equal to the duration of theimpediment. If parties choose suspension of performance as the consequence of a force majeureevent they would be well advised to clarify whether or not it gives rise to an automatic extension ofthe contract’s duration, in order to avoid uncertainties in its interpretation.

42. Suspension of performance due to a force majeure event cannot be expected to have anindefinite duration. One possible solution is that performance is considered excused after aspecified period of time has elapsed. Another solution is to give a right to the other party toterminate the contract, again after a period of time. A further possibility is that parties are obligedto renegotiate the terms of their agreement.66 It may be advisable to indicate the time from which

Commented [A16]: This title indicatesthat the consequences to be analysed willcover force majeure as well of change ofcircumstances, but the followingdevelopments are centered on force majeureand force majeure clauses. Often, thepresentation should be different for“hardship” cases. It is true agriculturalproduction contracts rarely deal with chargeof circumstances; the correspondingdevelopments could accordingly be shorter,but in my view they should be distinct fromthose on force majeure.

Commented [A17]: As the abovementioned comment by Prof. Fontaineshows, this last section probably needs moreresearch to include more completeconversation on change of circumstances.

Commented [A18]: Mr Kirke, internetconsultations, wonders whether thisquestion is particularly relevant in thedeveloping world.I believe that this comment althoughrelevant in certain contexts might be overlyspecific.

Commented [A19]: Online Comments.Min. Justice Canada notes that “it is commonfor parties to a production contract attachedto a financing or sale agreement to state thatthe two contracts are severable. A breach ofone contract does not constitute a breach for... [1]Commented [A20]: Online Comments.Min. Justice Canada suggests defining theword instrument: “Consider providing anexplanation i.e. model laws, internationalconventions, etc. These instruments have tobe put in context i.e., why is this relevant forcontract farming.”

Commented [A21]: Online Comments.Min. Justice Canada suggests addingexamples and asks if suspension and itsapplication can be illustrated, perhaps in thecontext of seasonal crops.


the period will start running: when the impediment arose, when the party became aware of it or –if an obligation to provide notice exists – when notice was served on the other party.

43. When performance of the producer’s obligation to deliver is merely suspended, one mayask whether the other party may procure the missing quantity of product from other suppliersduring the time of the suspension. The answer will depend on various factors, notably theexistence of an exclusivity clause binding the contractor.

3. Compensation and indemnities

44. In an effort to reach a fair regulation, contracts may provide mechanisms to redistributethe risk of a force majeure event affecting only one party, the producer, through partialcompensation of loss by the other party. This may be limited to a specific type of event likehailstorms, limited in time and applicable only to specific contractual agreements, for examplewhen the entire production was acquired.67 It may also consist in a redistribution of insurancecompensations received by the contractor.68 To the contrary, some clauses are reported toexpressly exclude any compensation to the producer for losses due to a force majeure event.69

4. Additional obligations: notice and mitigation requirements

45. Only a few legal systems require that the affected party give notice to the other party ofthe alleged force majeure event,70 but international instruments71 and international contractualpractice seem to favour this obligation.72 Several agricultural production contracts expresslyprovide for a notice requirement73 and parties are advised to insert it in their agreement shouldthey wish to introduce a force majeure clause.

46. Parties may wish to expressly address in their contract a number of specific issues relatingto the obligation to give notice of the supervening event. One of them is the form that the noticeshould take, some contracts requiring for example that it be written.74 In the absence of acontractual provision the general rules on contractual communications of the governing law willapply. Furthermore, even when the substantive law validates informal communications, the law ofevidence may, depending on the jurisdiction, impose additional requirements.

47. The time within which notice should be given is also relevant. Contractual practice rangesfrom the indication of a specific period75 or date, to general clauses such as: “as soon as possible,”“immediately” or the like.76 In this context, parties may wish to take into account the fact that theforce majeure event may render the notice – or its reaching the addressee – impossible or difficultand provide for such an occurrence.77 A related element that may be contractually regulated is theplace where notice is to be served, when the other party has more than one establishment, or towhom, for example certain employees or family members. Finally, parties may also provide for anobligation to give notice of the end of the impediment, when it is temporary and gives rise to amere suspension of the party’s obligations.78

48. The occurrence of a recognised force majeure event may give rise to further obligations ofthe parties or of the affected party, deriving from the relational nature of the contract and theparties’ interest in keeping the relationship alive despite the adverse circumstances. Certaincontracts, for example, expressly provide for duties to exercise all due diligence to minimize theextent of the prevention or delay in the general performance of the contract.79


49. Notice and mitigation requirements may be bundled together in a more completecontractual clause. It may require, for example, that after the occurrence of the force majeureevent the affected party shall provide further notices to the other party, more fully describing theevent and its cause, providing or updating information relating to the efforts made to avoid and/ormitigate its effects, and estimating, to the extent practicable, the time during which the affectedparty reasonably expects to be unable to carry out its affected obligations. This kind of verydetailed contractual provision, when applied to both parties, may represent reflect the general dutyto cooperate arising out of the relational nature of the contract. A force majeure event is thusconsidered as an on-going situation that may be affected by the subsequent behaviour of allparties.

50. Rarely do contracts explicitly provide sanctions for the failure to give notice of theoccurrence of a force majeure event. While this issue may be solved as any other issue ofinterpretation and gap-filling, it is reasonable to assume that the consequence will be that theparty cannot rely on the force majeure. Failure to give further notices or to exercise all duediligence to minimise its effects, on the other hand, may give rise to autonomous rights todamages.

B. Effects on the contract as a whole

1. Termination of the contract

51. Contracts, or less frequently national laws, may grant to either one or both parties a rightto terminate the contract based on the occurrence of a force majeure event. This right may beimmediately available or may arise only after a period of suspension of performance has expired.80

Termination may also automatically ensue after a specified period of time, more particularly whenthe contract contains a list of events that trigger an automatic termination and specifically includesthe impossibility to perform due to force majeure events.81 The right to terminate the contract mayalso be conditioned to giving notice to the other party.82 Moreover, the contract may expresslydetermine the effects of termination, for example limiting it to future performances.83

2. Right or duty to renegotiate

52. One of the most interesting aspects of the treatment of force majeure events ininternational contracts is that parties may wish to continue their relationship even when unforeseencircumstances impede or severely restrict performance.84 In order to achieve this purpose, a clauseof the initial agreement may provide a right or a duty to renegotiate its terms upon occurrence of aspecified event, thus deviating from the traditional understanding of the consequences of forcemajeure. While some contracts provide for renegotiation in a general force majeure clause,85

others limit it to natural calamities.86 Renegotiation is often the only consequence stipulated by theparties in response to a change of circumstances that does not necessarily correspond to thetraditional definition of a force majeure event, such as the occurrence of an “adverse factor” withno further specification.87

53. Renegotiation clauses are particularly useful in long-term contracts to emphasize theimportance of a continuous cooperation. When parties wish to include such a clause, it is advisablethat they also specify the consequences of a failure to enter into renegotiations in good faith


and/or to reach an agreement.88 The intervention of a mediation board or analogous body mayfacilitate the parties’ task in this respect, as discussed in Chapter __ on dispute resolution*.

54. Parties may also wish to ensure that their contract be periodically revised throughnegotiation, independent of the occurrence of any supervening event. This kind of provisionconstitutes a very useful risk mitigation mechanism, which is further addressed in Chapter __*.

55. In the absence of a provision on renegotiation, while parties may always decide to modifytheir original agreement or conclude another one by mutual consent, national contract laws will notusually provide a right or a duty to enter into a renegotiation process following the occurrence of aforce majeure event. Some legal systems, however, take the opposite stance, recognising thatchanges in the original circumstances existing at the time of conclusion of the contract mayexceptionally give rise to such a right or duty. This may derive from an express legislativeprovision or from the general principles of good faith, solidarity or cooperation.89

3. Judicial adaptation

56. Finally, the possibility for a court to intervene and adapt the contract to the newcircumstances should be mentioned. Generally, national contract laws do not favour this outcome.Legislative provisions on force majeure do not usually foresee any judicial intervention for thepurpose of reallocating the risks between the parties.

57. However, some legal systems give one or both parties the right to petition a court to thiseffect, when an unforeseeable and uncontrollable change of circumstances arises.90 It is importantto note that such an outcome is in practice the least likely to occur when other options areavailable to the court, for example fostering renegotiation proceedings between the parties orterminating the contract. The probability of a judicial adaptation is extremely low considering thatsuccessful claims for a remedy in the case of a change of circumstances are in themselves anegligible number wherever they are allowed.

1 It cannot be excluded that such natural events affect (also) the contractor’s obligation to provide inputs.2 E.g. Moroccan Law No. 04-12 of 17 July 2012, Art. 9: “An agricultural aggregation contract shallmandatorily contain the following clauses, and shall otherwise be void […]: the duration of the contract set inparticular on the basis of the nature of the activities under the contract with the possibility of introducingclauses of periodical renewal”. See also __ in the chapter on duration*.3

For example, the term force majeure or its translations (e.g. fuerza mayor) are commonly found inFrench based legal systems (often employed together with cas fortuit); German based jurisdictions refer to“impossibility of performance”; common law based jurisdictions restrict the use of the term force majeure tocontractual clauses, and otherwise employ different concepts such as frustration (in English law referring to theoccurrence of an event whose non-occurrence was an implied basic assumption under the contract and thatrendered performance impossible). In US law the terms impossibility and impracticability have substantiallymerged to refer to an unexpected supervening event outside of the party’s (assumed) risk that rendersperformance impossible or excessively and unreasonably difficult.4 See UPICC, Art. 7.1.7 (the term force majeure is used also in the English version); FIDIC contracts;ICC model force majeure clause; Fontaine/De Ly, Drafting International Contracts, 2009.5 Imprévision, Wegfall der Geschäftsgrundlage (fundamental change of the original contractual basis),eccessiva onerosità sopravvenuta (supervening hardship) are only some of the terms employed in differentlegal systems. Impracticability also refers to a qualified supervening difficulty in performance, whose effects arehowever the same as when performance becomes impossible.6 See UPICC Art. 6.2.1.; ICC Hardship clause.7 About two-thirds of the sample contracts considered.

Commented [A22]: Online Comments.Min. Justice Canada suggest conversation oninsurances. For details, see Doc. 23.

Commented [A23]: Online Comments.Min. Justice Canada questions whether sucha strong statement is necessary in thecontext of the Legal Guide. For details, seeDoc. 23.


8 For example, when English law is the governing law of the contract there would be no application ofthe English doctrine of “frustration” (which would exceptionally lead to a discharge of the parties’ obligations)when the contract has already allocated risk in terms of that occurrence through a force majeure or similarclause.9 See for example Sample contract for tea, Tanzania: “or any other cause of any kind whatsoeveroutside the reasonable control of the parties”.10 In this case language such as “exclusively understood as” or “to the exclusion of any other event” maybe encountered (see Sample contract for production, purchase and sale of tomatoes, Brazil, clause eleven:“fortuitous and force majeure cases, exclusively understood as fires, hailstorms, frosts, earthquakes andfloods”). Parties should be aware that existing contractual clauses may well be ambiguous. If a list is expresslydefined as exclusive but is then completed by a general cover-all clause, for example, the scope of the clausecould be difficult to ascertain (see Sample contract for production, purchase and sale of tomatoes, Brazil, clausefourteen: “fortuitous cases or force majeure, exclusively understood as fire, hailstorms, frosts, earthquakes,floods, strikes or other events that disable the fulfilment of this agreement”).11 E.g. Sample contract for production of seed cotton, Zambia; 7 Iowa Contracts, Pork independentcontractor, US.12 See Sample contract for sugar beets, South Africa: “strikes or breach of contract by any person withwhom either party has contracted”.13 See Revised General Introduction, UNIDROIT 2013 – Study 80 A – Doc. 8, para. 43; [reference also topart on formation and validity – Prof. Endres]14 See as an example Art. 168(4)(c)(iv) of the Regulation (EU) No 1308/2013, establishing a commonorganisation of the markets in agricultural products and repealing Council Regulations (EEC) No. 922/72, (EEC)No. 234/79, (EC) No. 1037/2007, that generalises a requirement formerly introduced in specific sectors such asmilk products (if a Member State decides in respect of agricultural products from a sector listed in Article 1(2),other than milk and milk products and sugar, that every delivery in its territory of those products by a producerto a processor or distributor must be covered by a written contract between the parties; and/or that the firstpurchasers must make a written offer for a contract for the delivery in it, such a contract and/or such an offerfor a contract shall contain, inter alia, rules applicable in the event of force majeure).15 As an example see LEY 2/2005, de 4 de abril, de contratos de integración, Catalunya, Art. 6:Contenido minimo del contrato de integración: 1. El contrato de integracion debe contener, como minimo, losdatos y estipulaciones siguientes: (…) El sistema de compensación mutua por los daños ocasionados por lamuerte o el sacrificio del ganado o por la interrupción del contrato por causas ajenas a las partes, en supuestosde caso fortuito o por causa de fuerza mayor, en function del valor de los animales afectados y de los gastos oinversiones efectuados por las partes sobre estos.16 As an example see 2 Iowa Contracts, US Cattle (2): “feeder will have insurance covering lightning, fireand other perils”.17 See as an example DAR Administrative Ordier No. 09-06, 5.25, Philippines. Such a legislationadditionally provides that the premium “be charged to both parties as deductible expenses”.18 See the Agricultural Insurance Scheme/Company NAIS/NAIC set up in Nigeria, whose coverage forcrop failure extends to fire, lightning, windstorm, flood, drought, pests and diseases, while for livestock, todeath and injury due to accident, disease, fire, lightning, storm and flood: O.S Aina, B.T. Omonona, NigeriaAgricultural Insurance Scheme (NAIS): Prospect, Achievement and Problems, Global Advanced ResearchJournal of Agricultural Science Vol. 1(5), 2012, 97 et seq., at 100.19 “the price (…) shall be monetarily updated for the North-American currency variation, every time that thisvariation reaches 10% above the equivalent in the national currency”.20 E.g. Sample contract for pepper, Brazil: “Except for force majeure cases…”; Sample contract ofsilkworm, China : “if the contract could not be carried out as a result of force majeure”.21 Sometimes language is added in order to guide the interpretation towards the general understandingof such clause, e.g. “normal” force majeure circumstances (Sample contract for fresh fruits and vegetables,India).22 Sample contract for pepper, Brazil; Sample contract for the production, purchase and sale oftomatoes, Brazil (clauses referring to the timetable of planting or harvesting).23 For example, reference to circumstances “beyond the party’s control” may well turn out to be asynonym for force majeure when the latter term is not mentioned at all. E.g. Sample contract for bee products,China: “Party B must deliver bee products in full amount as prescribed in this contract with the exception offailure caused by conditions beyond its control”.24 For example, “circumstances of unexpected nature” coupled with a list including strikes, revolutions,inundations, storms, government or syndicalist resolutions, or any other power that may hinder the fulfilmentof this contract may be understood as unforeseeable extraneous circumstances: Sample contract for passionfruit, Brazil.25 As an example of a general clause referring to the farmer only see Sample contract for bee products,China. See also Sample contract for soybean, US, where along with a general clause applicable to both parties(including fire, war, destruction by the elements, strikes, labor shortage, or other conditions over which theparties have no reasonable control), a specific clause in favour of the contractor is provided: “inability of


Company to properly operate its processing plan, by reason of any causes beyond Company’s reasonablecontrol.26 A good example is the following : “se considerará como caso fortuito o fuerza mayor, todo suceso queesté fuera del control de una de las partes incluyendo pero no limitándose a [list of events] y en generalcualquier suceso o hechos imprevistos que no han podido evitarse, que stando fuera del control de una de laspartes, no haga posible que cumpla con sus obligaciones contractuales” (Contrato tipo compraventa,sugarcane, Honduras).27 Sample contract for grapes in Brazil.28 Sample contract for production, purchase and sale of tomatoes, Brazil.29 Sample contract for sugar beets, South Africa: “any other cause beyond the reasonable control of aparty”. See also ICC Force Majeure Clause.30 E.g. Sample contract for sugar beet, Afghanistan; Sample contract for sugar beets, South Africa.31 E.g. FAO Sample contract for grapes, Brazil: “all occurrences of unexpected and unavoidable naturethat may directly prevent any of the parties from the exact execution of the duties…”.32 See for example Sample contract for tea, Tanzania: “or any other cause of any kind whatsoeveroutside the reasonable control of the parties”.33 In this case language such as “exclusively understood as” or “to the exclusion of any other event” maybe encountered (see Sample contract for production, purchase and sale of tomatoes, Brazil, clause eleven:“fortuitous and force majeure cases, exclusively understood as fires, hailstorms, frosts, earthquakes andfloods”). Parties should be aware that existing contractual clauses may well be ambiguous. If a list is expresslydefined as exclusive but is then completed by a general cover-all clause, for example, the scope of the clausecould be difficult to ascertain (see Sample contract for production, purchase and sale of tomatoes, Brazil, clausefourteen: “fortuitous cases or force majeure, exclusively understood as fire, hailstorms, frosts, earthquakes,floods, strikes or other events that disable the fulfilment of this agreement”).34 E.g. Sample contract for production of seed cotton, Zambia; 7 Iowa Contracts, Pork independentcontractor, US.35 See Sample contract for sugar beets, South Africa: “strikes or breach of contract by any person withwhom either party has contracted”.36 Many legal system, for example, are based on the notion of force major understood as a supervening,(unexpected and) unavoidable event beyond the parties’ control that renders performance impossible. Otherjurisdictions opt for the notion of “impossibility of performance”, whose contours may be more or less strictaccording to the specific jurisdiction. Common law-based jurisdictions traditionally refer to the notion of“frustration”: a contract is considered frustrated when a supervening event (which has not been expresslyprovided for in the contract and does not depend of any party’s default) so fundamentally or radically alters thenature of the parties’ (or one party’s) obligations, that the contract can no longer be considered the same asthat which was originally entered into by the parties. Frustration does not extend to those situations whereperformance became not objectively impossible but merely more onerous, and is extremely difficult to prove.The notion of “commercial impracticability” developed in US law, on the other hand, applies when “performanceas agreed has become impracticable by the occurrence of a contingency the nonoccurrence of which was abasic assumption on which the contract was made” (UCC § 2-615).37 Sample contract for fruits, Brazil : “the risk of fruit spoliage due to natural factors, including hailstorm,fruit fall or precocious and/or irregular ripeness are borne by the Seller. The same holds in the case of forcemajeure…”.38 See below, para. 53.39 For a telling example see Centro de Arbitraje de México (CAM), 31 November 2006,http://www.unilex.info/case.cfm?id=1149, where the occurrence of extreme rainfall and flooding was notconsidered to be an exempting event under Art. 7.1.7 UPICC because such weather conditions were notunforeseeable by grower with longstanding experience in agriculture (and because the required notice, in thecase at hand, was not given, see below, section 3).40 Additional requirements are notice and mitigation obligations on the affected party: see below, section 3.41 N.D. Hamilton, Farmer’s Legal Guide to Production Contracts, 28 et seq.42 Significantly, the cases cited by Hamilton (above, fn. 35), are examples where the commercialimpracticability defense was not recognised.43 But see Sample contract for melon marketing, Honduras: “in case of force major events such as (…),diseases and pests (…) that are not under the control of the parties in this contract”; Sample contract forasparagus, Thailand: “serious outbreak of pest”.44 For an interesting force majeure clause excluding the acts of the parties of the agreement from theacts of government which would constitute force majeure see Sample contract for tobacco, Tanzania.45 Contrato tipo de compraventa, sugarcane, Honduras: “huelgas legales o ilegales”.46 See for instance Sample contract for horticultural crops, Kenya, where “national labour strikes” arementioned. For an example of a clause concerning exclusively the contractor, who under the agreement wasresponsible for the harvesting of the products, see Sample contract for fruit, Brazil: “standstill of harvesting and/ortransport services (strikes or similar acts), as well as illicit acts that can prevent the normal functioning ofpurchaser’s establishments”.47 See Sample contract for sugar beets, South Africa.


48 See Sample contract for gherkins, India.49 See elsewhere in the guide, where unfairness of price adjustment clauses is discussed.50 For an express provision regarding insurance for accidents, death etc. see Modèle de contrat dumanioc, Cameroun: “les deux parties sont responsables chacune en ce qui lui concerne de toutes assurancesnécessaires pour couvrir leur risques divers (accidents, décès, etc.).51 This part should be further developed. Comments are particularly welcome, also concerning where thisissue should be best placed in the Guide. For an example of a fairly unbalanced clause in favour of thecontractor only see Sample contract for oranges, Brazil, where contingencies or restrictions in the volume ofexportation or importations by governmental authorities, freezing orders as to transfer of a specific currency orinability to exchange currencies, which aggravate the exportation of juice concentrate or its costs “of any kindor degree of intensity of law or fact”, allow the contractor to terminate the contract at no costs provided thatnotice is given to the other party.52 E.g. Sample contract for pepper, Brazil.53 This is the traditional position of English and French law (the latter, however, recognizing imprévisionin the case of contracts with the public administration).54 The doctrine of impracticability in US contract law was already mentioned. Other legal systems havecreated specific remedies, either through case-law (e.g. the doctrine of the Wegfall der Geschäftsgrundlage inGerman law, which allowed for termination or adaptation by the court of a supervening exceptional contractualimbalance) or legislation (e.g. the Italian, Dutch, Latvian codifications). For the most recent developments inFrench and Belgian law see below, section 3.55 A few contractual clauses point out that the force majeure should be “duly proven and accepted byBuyer” (Sample contract for passion fruit, Brazil); for more formal procedures see below, fn 52.56 See ICC Force Majeure Clause (when specified events arise, their coverage by the clause is impliedunless proved otherwise).57 See Sample contract for tobacco, Lao P.D.R. according to which in case of “environmental disastersuch as flooding, fire, drought…”the contractual clause on natural disaster would apply only if the producerwrites a report with “the (purchaser’s) staff with local authority and validated by (purchaser’s) superintendentshould be done by (58 See Sample contract for asparagus, Thailand: “If there is dispute and parties cannot agree, [the]District Operation Committee shall be a judge, and it will consider such judgment as final”.59 See CISG Art. 79 (5): “Nothing in this article prevents either party from exercising any right other thanto claim damages under this Convention”. See also UPICC Art. 7.1.7 (4): “Nothing in this article prevents aparty from exercising a right to terminate the contract or to withhold performance or request interest on moneydue”.60 E.g. Sample contract for cotton (2), Kenya: “no party shall be held in default in the performance of itsobligations”.61 E.g. Sample contract for goat milk, Indonesia (agreed increase in price not due).62 E.g. Sample contract for grapes, Brazil: “it shall not exempt the producer from their paymentobligation to the industry nor the advance delivery of inputs”; Sample contract for fresh fruits and vegetables,India: “except the liability of the farmer to repay the loan and the value of items supplied by the Company”.63 E.g. Sample contract for the marketing of melons, Honduras.64 CISG, Art. 79; UPICC, Art. 7.1.7.65 E.g. “the parties shall not be held accountable for the implementation of the contract for as long as theforce major events remain in place”: Sample contract for the marketing of melons, Honduras.66 For termination and renegotiation see below, para. (b) (i) and (ii).67 For an example featuring the three mentioned elements Sample contract for fruit, Brazil.68 For an example Sample contract for broiler chicks, Trinidad & Tobago, providing for a compensation of10% of any monies received as insurance coverage in respect to the animals housed by the farmer for anydisaster caused by “act of God, or riot or civil commotion”.69 E.g.: “Company (…) shall not be responsible for any compensation to the farmer for any loss suffereddue or arising out of any natural calamity & any force majeure event” (Sample contract for paddy, India).70 See UCC § 2-615.71 See CISG, Art. 79; UPICC, Art. 7.1.7.72 See ICC Model Force Majeure Clause.73 E.g. “the affected party will be obliged to give written notice to the other party within 48 hours of theoccurrence of a force majeure event” (Sample contract for sugar beet, Afghanistan); “both actors must informeach other if such situation occurs” (Sample contract for goat milk, Indonesia); “in case of force majeure (…)the part shall inform [the other] party immediately” (Sample contract for asparagus, Thailand). For a generalobligation of the farmer to give notice of any “event or circumstances that may adversely affect performance ofthe contract” not linked to a force majeure clause see Sample contract, farm products, Grenada.74 E.g. ”written notice”: Sample contract for sugar beet, Afghanistan.75 A common period is 48 hours (E.g. Sample contract for sugar beet, Afghanistan; Sample contract forsugar beets, South Africa).76 E.g. Sample contract for tobacco, Lao P.D.R.; Sample contract for asparagus, Thailand (1).


77 “notice should be given within […] after reinstatement of communications” See Sample contract forsugar beets, South Africa: “the obligation to give such notice shall be suspended to the extent necessitated bythe force majeure event”.78 See Sample contract for sugar beets, South Africa.79 See Sample contract for sugar beets, South Africa. See also Sample contract for asparagus, Thailand(1): “parties must continue performing the contract as soon as possible (when able to).”.Such a duty is akin to the debtor’s duty to mitigate the consequences of a breach of contract (and in particulardamages) present in many domestic contract laws (and under Art. 77 CISG, Art. 7.4.8 UPICC): see Chapters IIIand IV.80 See for example Sample contract for sugar beets, South Africa: “Should the force majeure event lastmore than 6 months, the party who has not invoked the provision (..) may terminate the contract”.81 See for example Sample contract for fresh fruits and vegetables, India, where the contract isautomatically terminated if the farmer does not offer good quality products for two crop periods, also in thecase of force majeure.82 E.g. Sample agreement (not specified), Uganda: “This agreement may be terminated by either partyon giving sufficient notice of 14 days under the following circumstances: (…) d) occurrence of any event that isbeyond the control of the parties, e.g. war, destruction of the goods by fire, natural calamities or any otherreasonable cause”.83 E.g. Sample contract for roots and tubers, Jamaica.84 See also the ICC Model Force Majeure clauses.85 E.g. Sample contract of silkworm, China : “if the contract could not be carried out as a result of forcemajeure, the two parties shall modify or terminate the contract after a consensus is reached”; see also Samplecontract for cotton (2), Kenya: “In the event of a Force Majeure the parties undertake to consult each other inorder to agree on an appropriate course of action in the given circumstances”.86 E.g. Sample contract for cotton, Kenya: “Both parties will mutually agree on how to deal with lossesattributed to natural calamities (unexpected rains during harvesting period, floods, fire, hailstone, wildlifedamage and drought)”. See also Sample contract for cotton (3), Kenya: “parties will mutually agree on how todeal with losses attributed to natural calamities [list follows].87 E.g. Sample contract for the production, purchase and sale of tomatoes, Brazil, clause one referring tothe timetable of harvesting: “in the event of adverse factors, alien to the will of the parties, a new timetableshall be drawn, in common agreement”. See also Sample contract for guava, Brazil.88 See for instance the Sample contract of silkworm, China, where modification or termination of theagreement are foreseen.89 In this respect, current developments in French case law and scholarly debate are particularlyinteresting, since they show a tendency to put pressure on the parties in order to enter renegotiations when achange in circumstances heavily disadvantages one of the parties. Furthermore, a recent (and controversial)decision of the Belgian Supreme Court recognised the right to request renegotiation of an international salescontract governed by CISG when the price of steel had suddenly risen by 70%, by making reference to theUPICC provisions on hardship: Supreme Court, Belgium, 19 June 2009, also athttp://www.unilex.info/case.cfm?pid=1&id=1457&do=case. Even more recently, the Avant-Projet for thereform of French contract law of 23 October 2013 includes a provision on “changement de circonstances”providing for the right of the affected party to request renegotiation to the other party. Upon failure or refusal,if parties agree they may petition a judge to modify the contract. In alternative, one party may request judicialtermination (Art. 104).90 E.g. a number of civil codes expressly refer to a judicial adaptation of the contract in exceptionalcircumstances: Art. 1467 Italian Civil Code (upon request by the non-affected party an equitable adaptation canbe requested to a court, as an alternative to termination); Art. 6:258 Dutch Civil Code (upon request of one ofthe parties, the judge may modify the effects of a contract, or he may terminate it in whole or in part on thebasis of unforeseen circumstances). See also the cited French Avant-projet de réforme du droit des contrats,art. 104: Upon failure or refusal of renegotiations, if parties agree they may petition a judge to modify thecontract. In alternative, one party may request judicial termination.

Page 10: [1] Commented AuthorOnline Comments. Min. Justice Canada notes that “it is common for parties to a production contract attached to afinancing or sale agreement to state that the two contracts are severable. A breach of one contract does notconstitute a breach for the other contract. Should this be reflected in the text?”

REMEDIES FOR BREACH

Prepared by Professor Fabrizio Cafaggi,in collaboration with Professor Paola Iamiceli *

COMMENTS

Table of contents **

I. Remedies in production contracts ................................................................................................... 2

A. General aspects and principles related to remedies ........................................................................ 2

B. Different types of contractual remedies ............................................................................................. 6

C. Remedies for collective harms ........................................................................................................... 13

D. The role of the aggrieved party and its impact on remedies against breach: comparativenegligence and duty to mitigate (general aspects) ....................................................................... 14

E. The obligor’s right to a last attempt to perform and the right to curedefective performance ........................................................................................................................ 15

F. Renegotiation......................................................................................................................................... 16

G. The effects of termination ................................................................................................................... 161. The effects of termination: total v. partial termination ................................................................ 162. The effects of termination and the impact on linked contracts ................................................... 17

II. Contractor’s remedies for producer’s breach............................................................................... 19

A. Introduction ........................................................................................................................................... 191. Sphere of control and producer’s liability ........................................................................................ 192. Contractor’s remedies ......................................................................................................................... 20

B. Remedies in kind ...................................................................................................................................... 201. Remedies in kind for producer’s breach of process-related obligations .................................... 20

(a) Right to performance ..................................................................................... 21(b) Corrective actions ........................................................................................... 21

2. Remedies in kind for product non-conformity ................................................................................ 22(a) Corrective measures ........................................................................................ 23(b) Repair ........................................................................................................... 24(c) Replacement .................................................................................................. 24

3. Remedies in kind for producer’s failure to deliver the product ................................................... 24(a) Remedies in kind and partial delivery.................................................................. 25

C. Product withthrawal and product recall ............................................................................................... 25

D. Withholding performance ....................................................................................................................... 26

E. Price reduction .......................................................................................................................................... 27

F. Termination ................................................................................................................................................ 271. Termination for breach of process-related obligations ................................................................. 272. Termination for product non-conformity ......................................................................................... 273. Termination for producer failure to deliver ..................................................................................... 28

G. Damages................................................................................................................................................. 281. Damages for producer’s breach of process-related obligations .................................................. 28

Commented [A1]: Online comments.Fondation pour le droit continental (ad hocexpert group). The representative of foodindustry expressed that the provisions arefavorable to the producer, and particularlycontested too large duties of cooperation.Additional comments are made to specificparagraphs below, but the list is notexhaustive.

The Group welcomes all changes onmitigation of damges and cooperation dutieswhich aboid introducing some systematicsuspicion on the contractor’s behavior. Alsosuggest to clarify that mitigation andcooperation are reciprocal duties. Referenceto good faith and fair dealing should not toowidely open the dor to the judges’discretionary power.

Commented [A2]: Online Comments.Dept. Justice Canada holds that this textdraws heavily on common law and equityprinciples and that the text should be revisedto take into account the various conceptsrelevant to the world’s two most importantlegal traditions (common/civil).

Commented [A3]: Fontaine: Somegeneral comments have also been made inour note of “Observations” of October 22,2014, often with references to individualparagraphs of the draft – they will not berepeated on this document.

2. UNIDROIT 2014 – WG4 INF. 1 Remedies for Breach (ZERO DRAFT)

2. Damages for product non conformity............................................................................................... 293. Damages for producer’s failure to deliver ....................................................................................... 30

H. Penalties, fines and black lists ........................................................................................................... 30

I. Contractor’s conduct and claim for remedies ...................................................................................... 311. Contractor’s conduct and impact on remedies .............................................................................. 312. Contractor’s duty to mitigate and contractor’s remedies ............................................................ 32

III. Producer’s remedies for contractor’s breach ............................................................................... 33

A. Introduction: cooperative and non-cooperative remedies against contractor’s breach ............. 33

B. Right to performance ........................................................................................................................... 331. Right to performance in case of delay in price payment ............................................................. 33

(a) Right to payment and guarantee mechanisms .................................................... 332. Right to performance in case of contractor’s failure to provide (conforming) inputs.

Repair on inputs. Inputs replacement ............................................................................................. 33(a) Remedies in kind when inputs are provided by a third party in privity with thecontractor ........................................................................................................... 34

C. Withholding performance .................................................................................................................... 351. Withholding performance in case of contractor’s delay in providing finance ........................... 36

D. Termination and the failure of cooperation ..................................................................................... 361. The grounds for termination for contractor’s breach .................................................................... 36

(a) Termination for contractor’s failure to pay ...................................................... 37(i) Termination in case of obligee’s delay in providing finance ................................... 37

(b) Termination for contractor’s failure to provide (conforming) inputs ..................... 38(c) Termination for contractor’s failure to take delivery ............................................. 38(d) Termination for contractor’s failure to purchase the whole production (or a

percentage of it) ........................................................................................ 38

E. Damages................................................................................................................................................. 391. Damages for delay in payment. Interests and other consequential damages. ....................... 392. Damages for contractor’s failure to provide (conforming) inputs and impact

on producer’s liability......................................................................................................................... 393. Damages for contractor’s failure to take delivery ......................................................................... 394. Liquidated damages and penalty clauses........................................................................................ 41

IV. Restitution........................................................................................................................................ 43

I. Remedies in production contracts

A. General aspects and principles related to remedies

1. Within the context of this Chapter, the term “remedy” refers to any legal measure providedby the law or by the contract itself in order to protect the interest of an aggrieved party against theother party’s non-performance. Non-performance may be excused depending on whether the act orevent causing non-performance is under the sphere of control of the obligor. As has been discussed inother chapters, unforeseeable or unavoidable impediments (e.g. natural disasters) may fall outside ofthe scope of parties’ obligations; in these cases, legal remedies may either not be provided or belimited pursuant to applicable law. When non-performance is not excused because the causing event

UNIDROIT 2014 – WG4 INF. 1 Remedies for Breach (ZERO DRAFT) 3.

falls within the obligor’s sphere of control (e.g. mere insolvency or wrongful selection of inputs), thenthe obligor is made liable for non-performance and remedies are provided to the aggrieved party.

2. The scope and structure of remedies vary upon the type of obligation breached and thecharacteristics of the contractual relationship. As regards the type of obligations, whereas some rulesare common to any type, many others vary depending on the contractual party in breach (whetherproducer or contractor) and the scope of obligation breached. Some remedies are specificallyprovided for non-performance of certain types of duties (e.g. process-related obligations or product-related obligations). Remedies for breach of process-related obligations pursue the objective ofensuring compliance with standards both instrumental to product nonconformity and independentfrom conformity as in the case of community interests or (some) environmental obligations. Furthervariations include the distinction between duties that are instrumental to the execution of otherduties (e.g. provision of inputs as instrumental to production) as distinct from other non-instrumentalperformances (e.g. product delivery). In relation to the type of commodity: the more the commodityis subject to fast deterioration (perishable goods) and the shorter the life cycle of the agriculturalproducts, the more limited the role for “in-kind” remedies. For this reason, other things being equal,remedies in kind may be more important for long-cycle goods like forestry or livestock, than forcertain types of perishable fruits or vegetables.

3. Judicial and non-judicial remedies are included in the scope of this Chapter. Non-judicialremedies are those administered by private dispute resolution bodies that the parties have referredto directly in the contract or indirectly when they incorporate by reference codes of conduct ortechnical standards associated to specific dispute resolution bodies. These remedies complementconventional contractual remedies designed by the parties and broaden their scope and functions.Not only complementarity occurs between judicial and non judicial within the legal domain but alsothe relevance of market and social sanctions in the agrifood business should be duly taken intoaccount. They interplay with legal sanctions, thereby increasing their effectiveness. Often monitoringby non-judicial bodies and early detection by certifiers are effective and prevent contractual breachesfor fear of reputational sanctions. The latter may cause much higher losses that those repaired vialegal remedies.

4. This chapter deals with remedies provided against breach, which is defined as non-performance that is not excused (see, on the divide between excused and not excused non-performance, ___*). It should be clarified that some remedies, namely damages, are exclusivelydesigned for not-excused non-performance (breach). By contrast, many other remedies can be usedboth in cases of excused and not-excused non-performance, provided that the circumstancesexcusing non-performance do not impair the use of those remedies (e.g. force majeure may or maynot exclude specific performance depending on whether impossibility is final or temporary). As ageneral rule often applied at the international and domestic level, when non-performance is excusedfor the occurrence of impediments beyond the control of the non-performing party, either party canresort to any remedy other than claiming damages.1

5. The use of a remedy does not necessarily imply litigation or resorting to court. Some legalsystems admit self-executing remedies, directly activated by the aggrieved party. In addition, partiesmay agree on the measure to be taken in case of a breach, especially if an amicable solution allowsthe parties to correct mistakes, avoid future ones, and/or limit the negative consequences of thebreach with mutual benefit. When they do not agree on a solution, they might take other types ofdecisions. Some imply judicial intervention (going to court), and some do not, such as when partiesresort to mediation and/or arbitration or merely terminate the contractual relationship on a privatebasis.

6. In sum, this chapter shall consider:


- remedies conditional upon judicial intervention;

- remedies that can be administered by private enforcers (e.g. trade associations, certifiers,standard setters, etc.);

- and self-enforcing remedies.

7. Whereas a full analysis is provided in the second and third section (*) of this chapter, thefollowing introduction to the use of remedies provides general guidelines.

8. The legal sources of provisions on remedies are to be found primarily in the contract and inthe law. Parties may also incorporate standards by reference, whose non-compliance can requirespecific remedies (codes of best agricultural practices, commodity specific codes of conduct,agricultural arbitral rules, technical standards - e.g. ISO 22000 -, certification and quality assuranceschemes). In the latter case, domestic or international law will apply. The law may provide for specificlimitations, restricting the use of remedies (e.g. the use of termination in cases in which specificinvestments have been required by contractor) or enlarging the array of available measures (e.g.penalties applicable to contractual breaches).

9. Within the limits provided by applicable law, the parties are free to select remedies, and todefine their hierarchy and sequence. Parties to a contract may decide whether criteria to choose theremedies have to be included in the contract or the choice can be attributed to the aggrieved party.Parties can define remedies and limit them in different ways. They can limit the number of availableremedies according to applicable law using disclaimers or functional equivalents. They can modify thecontent and scope of remedies stated in the law. They can allocate remedies and allow only one partyto be able to seek that remedy. This freedom is not unlimited. Even if it is a B2B , contract diclaimersmay be subject to unfairness’ or proportionality scrutiny and set aside when judges hold them unfairor disproportionate.

10. In light of the principles of effectiveness and cooperation as highlighted above, and inaccordance with applicable law, contractual remedies in production contracts should also comply withthe principles of proportionality and escalation. The principle of proportionality, for which theremedies should be tailored taking into account: the seriousness of the breach; the extent ofconsequences affecting the stability of the relation; the parties’ capacity to access the market; andthe remuneration for investments;2 the escalation principle, for which contract termination should beconsidered as a last resort remedy, whereas performance, cure and repair should be favoured.Damages complement remedies in kind and provide compensation for the aggrieved party or thegroup in case of multiparty contracts. An important element for remedies escalation may be thefundamental nature of the breach: in many legal systems only fundamental breach may give rise totermination, rejection and/or replacement of goods and, in case of anticipatory breach, withholdingperformance (see above, …*).

11. Absent explicit contractual provisions and an escalating structure by the applicable law, it isfor the aggrieved party to select the appropriate remedy on the basis of general principles, includinggood faith if relevant, pursuant to applicable law.3 Parties should be aware that, depending onapplicable law, judicial control over clauses related to remedies could include evaluation of fairnessand unconscionability (and in particular disclaimers that may limit full compensation); in someinstances control can focus on the admissibility of a particular remedy and its proportionality. Partiescan exclude some remedies or design new ones. For example, they can exclude specific performanceand include corrective actions or action plans to ensure compliance. They can define criteria tocalculate damages different from those defined by default by the applicable law.

12. Contractual relationships characterized by a high level of asymmetric power suffer limitationson parties’ freedom to deviate from the remedial structure provided by the law. Freedom to define

Commented [A4]: Fontaine: Perhapsclarify for the lay reader ?

Commented [A5]: Online comments.Fondation pour le droit continental (ad hocexpert group). The representative of thefood industry expressed serious doubtsregarding this principle.

Commented [A6]: During the PrivateSector Workshop, it was also said that thechoice of remedy would depend on thesurrounding circumstances as well(perishable/non-perishable, short/longshipment).


limits to remedies is not unlimited. Either under contract law (unfair contract terms), or under sector-specific law, and more recently under unfair commercial practices, the freedom to exclude remediesor the asymmetry between them has been subject to legislative limitations to grant strongerprotection for smallholders.

13. Many legal systems impose additional specific limitations on the types of remedies availablein production contracts and the conditions for their exercise. Typical limitations include reference toeffectiveness of remedies and cooperation among parties. When applicable, these principles providethat remedies should ensure effective compliance with performance standards, not onlydiscouraging breach (by providing negative incentives with respect to breach) but also, andpreferably, encouraging performance by facilitating pro-active error detection and correction. Thisobjective calls for cooperation also in the contractual phase following the breach, when the selectionof appropriate remedies and their concrete enactment may still enable the parties to contribute to thefulfilment of the production plan initially envisaged in the contract. The emphasis on cooperativeremedies could suggest to enhance the importance of the right to cure and mitigation.

14. Cooperative remedies emerge more in long term than in one-shot contracts where marketalternatives are privileged. Cooperative remedies may require some degree of negotiation betweenbreaching party and aggrieved party. In order to ensure that the production process will follow theappropriate Good Agricultural Practices (GAP) and any relevant standard, parties could be asked tocollaborate when there is some well-grounded evidence that standards have been violated4.Cooperation from the breaching party who runs the production process may be a precondition forspecific remedies selected by the aggrieved party.

15. Process standards often apply to the entire supply chain, forcing stronger coordination amongchain participants. They further contribute to contract standardization in the field of agriculture. Aclear illustration is provided by traceability of the product. In order to make product traceable partieshave to make identification of lots and batches possible, and keep processing and distribution recordsthrough a single portal or platform. Often traceability is also required by certification schemes inorder to show the differences between certified and non certified products. Breach for processstandards call for specific remedies.

16. The inclusion of process standards in the contract will affect both the content and the scopeof remedies. Certification and quality assurance for instance, require producers to create a completecontrol and monitoring system to ensure compliance, including subcontractors. Breach of theseobligations may call for remedies that force the producer to set the monitoring system up or toredefine its structure to implement the process standards. Remedies warranting compliance withregulatory requirements aim at ensurng product conformity. Specifically, remedies in kind havemultiplied, integrating traditional repair and replacement with corrective actions aimed at preventingproduct non-conformity. The correlation between different types of remedies becomes extremelyimportant when linking remedies for non-conforming inputs with those for non-conforming outputs.

17. A more complex interaction between contractual and certification remedies occurs when theproducer, generally a smallholder, is part of group certification (see intro*). In this instance thecertified group is responsible for ensuring compliance with the standards and has sanctioning powertowards the individual producer. The link between remedies available to the contractor and remediesavailable to the management of group certification is similar but not entirely overlapping with that ofindividual certification contracts. Remedies awarded within the group can prevent the contractualbreach or at least mitigate its consequences.

18. In production contracts, the consequences of a breach may not be limited to the singlebilateral relation. Rather, they may have an impact on the whole value chain when the breach affectsthe allocation of risks of parties other than the immediate aggrieved party. Breach of safety and

Commented [A7]: Prof. Fontaine: Alwayssay “agricultural production contracts” in full? Same remark also for other instances, e.g.Nos. 18, 26, 37, 66 and 182.


quality obligations connected to the participation of management schemes may have repercussionson the final product and impose costs and liabilities along the chain well beyond production contracts.Like in many other long-term relationships in which parties make significant investments (financialand non-financial ones), share know-how and face relevant risks, a breach may hinder suchinvestments involving several actors along the chain. For example, if one single player fails toperform obligations concerning segregation and traceability of the product, all performances up to thechain may be wasted and the product may have limited or no access to the final market or be soldthrough a very different channel. Moreover, due performance is often relevant to ensure thefulfillment of social, environmental, health and safety requirements.

B. Different types of contractual remedies

19. Not all remedies can ensure compliance with contractual commitments. In this respectremedies may be classified according to their content and function.

20. (I) Indeed, some remedies (so called in kind) aim at providing the aggrieved party with thesame (kind of) benefit expected from contract performance. These may include: specific performance(i.e., performance of the specific duty provided by law or contract, e.g. order to take immediateaction to plant a certain type of seeds within a specific time-frame); removal of defects via repair orcorrective actions; replacement of non-conforming goods. When these remedies are used, thecontractual relationship remains in place and normally any other loss occurring from the breachdespite the application of the remedy (e.g. loss for delay in performance) is covered by awardingdamages to the victim.

21. (II) In other circumstances, while the contractual relation remains in place, the remedy doesnot provide the aggrieved party with the same kind of expected benefit but a monetary valuereplacing the missed benefit. This is the logic, for example, of the price reduction in case of defectiveor partial performance. Price reduction operates both when the producer breaches its obligations todeliver the totality of conforming goods and when the contractor delivers non-conforming inputs.Depending on applicable law, the contractor’s right to seek price reduction for non-conformity ofgoods could be barred by the producer’s right to cure defects:5 if so, the remedy in kind (cure) wouldhave priority over the monetary remedy (price reduction).

22. (III) When the consequences of the breach are severe (e.g. in case of fundamental breach),there might be no room for continuing the contractual relation. In this case, depending on applicablelaw, the aggrieved party may seek contract termination and a monetary redress, mainly claimingdamages.6 The consequences of termination consist of dissolving the contractual relation,extinguishing the original obligations of the aggrieved party to perform. In case of partial or totalperformance by the aggrieved party, restitution of the conferred value may be sought.7 Depending onapplicable law, termination may leave outstanding obligations and parties may be held in breach ofthese obligations even after termination.

23. The extent to which each remedy may be used and the way legal systems prioritize remediesor build possible forms of escalation may deeply diverge from one country to another and acrossmarkets. Increasingly, differentiation introduced by domestic law concerns the size of producers(special regimes for smallholders and microenterprises have been introduced), the type ofcommodity, and market structure.8 The impact of obligee’s conduct differs depending on the type ofremedy whether compensatory damages or remedies in kind. Remedies differ also in relation to theburden of proof. Damages require the proof of breach, harm and causation. The other remedies onlyrequire proof the breach ( *see below).


24. The use of in-kind remedies may be particularly relevant when: (i) parties have realizedspecific investments hardly deployable in other relations; (ii) there is a strong interdependenceamong performances along the chain; (iii) the market is thin and the victim may not reasonably findadequate alternative solutions in substitute transactions; (iv) non-compliance does not only producemonetary losses but also non-monetary ones (e.g. reputation losses). When one or more of theseconditions do not occur, remedies other than the ones in kind may play a more important role.

25. The primary objective of remedies may not always be providing the victim’s redress.Remedies might serve the mere purpose of imposing pressure for future performance. This happenswhen one party is entitled to withhold its own performance due to the breach of the other party (e.g.the producer withholds delivery until the contractor offers the first instalment of price, if due beforeor upon delivery). Whether withholding performance may induce the other party to comply or is amere prelude to future termination (see below, under (b)*) will depend on a case-by-case basis.

(a) Remedies in kind

26. Remedies in kind have expanded their scope in production contracts to include breach forprocess-related obligations and to correct failures that can result in non-conformity. They include theright to performance, repair, replacement and corrective actions concerning the production processand the final product. They aim at achieving the results parties had envisaged or a cooperativesecond best solution when the initial terms of the exchange cannot materialize. A relevant examplemay be referred to traceability protocols due to ensure information-storing according to a commontemplate adopted along the chain. In this case, in-kind remedies may call for the creation of astorage system by the producer or its participation to a common one. Practical experience suggeststhat these remedies are informally agreed upon between the parties whereas more formalrequirements appear in certification schemes where corrective measures have to be agreed upon.

27. Repair might be of limited use for agricultural commodities and for livestock but other typesof corrective action can re-establish compliance with binding standards. When process-relatedobligations concerning quality and/or safety are breached, the contractor and to a certain extent evenparties outside of the privity down the chain, may be entitled to ask for corrective actions. Often, thisoption is found in General Terms of Conditions of major retailers and are applied to contractsthroughout the supply chain.9 Corrective actions can materialize in action plans that modify theproduction process, the use of inputs, the type of agricultural practices. This remedy prevents ratherthan corrects product non-conformity at an earlier stage. The modification of the production processbased on an action plan may contribute to deliver a conforming good even if a breach has occurred.Provided that corrective actions exist to prevent or reduce non-conformity, the effectiveness of theseactions will depend on timely intervention and the ability to detect hazards or quality problems.

28. Process-related in kind remedies are often sought by assurance quality or certificationschemes. Once in place, they play the double function of (1) ensuring compliance with certificationrequirements and (2) preventing the producer’s future breach for non-conformity. They encompasswarning, corrective measures, suspension and cancellation.

29. When remedies are related to the certification contract, there is no requirement to prove thebreach (in particular to make reference to a liability standard or to the existence of harm). The logicof certification is not based on liability and harm rather on non-compliance and restoration.Certification and quality assurance require setting up control systems based on self-inspection andreporting. The self-inspection may detect non-compliance and once communicated to the certifier,corrective action may be required. The producer can be asked to submit an action plan that ensurescontrol and monitoring of production processes. An action plan has to be agreed upon betweenparties and then implemented by the breaching party. The adequacy of the action plan and its


implementation will be monitored by certifiers when the producer has been asked for certification orby the contractor’s inspectors. The contractor will maintain a certain degree of control over the plandesign and implementation. Unlike judicial remedies in production contracts where the content isdefined by the enforcer or by one of the parties to the contract, in certification it is frequent to havecooperation between parties to determine the content of corrective measures once problems arise10.It is important to underline that certifying bodies have a self-enforcing power in case of default farmore incisive than the contractor’s.

30. It shall be examined when and how duties to provide conforming inputs or final agriculturalproducts may be enforced through these remedies in para* (see ….*). Remedies in kind may have awider application in the case of other contractual duties such as the duty to deliver or to takedelivery, the duty to use particular agricultural practices, the duty to obtain a certification, etc.

31. Applicable law may restrict the remedy of specific performance having regard to non-monetary obligations. Indeed in this case specific performance may be barred because it is notphysically possible (e.g. goods to be delivered have been destroyed); unreasonably burdensome (e.g.tons of specialty seeds, due to be segregated from ordinary seeds, have in fact been commingled);legally unenforceable for its exclusively personal character (e.g. technical assistance concerning anew agricultural methodology only known by a specific provider). in some cases legal systems maypay attention to the fact that the aggrieved party’s request has not been timely.11 In order to obtainspecific performance, the occurrence of harm is not a prerequisite, nor does the breach need to befundamental. Depending on applicable law, the possibility to claim goods’ replacement may berestricted: indeed, the applicable law may request a fundamental breach as a prerequisite for thisremedy to be applied (see, e.g., art. 46(2), CISG).

32. The request for specific performance, repair or replacement may be made on a private basis(directly between the parties without the intervention of a judge or an arbitrator), through a court orthrough an alternative dispute resolution mechanism, including arbitration. The modes of execution ofthe judicial order or the arbitration award will depend on applicable law. Depending on the latter, thecourt order may be accompanied by the imposition of a penalty for failure or delay to complying withthe order.

(b) Withholding performance

33. Depending on applicable law, this remedy may be used when (i) one party has alreadybreached the contract and the aggrieved party still needs to perform pursuant to the contractschedule or (ii), in case of anticipatory breach, when circumstances make it apparent that there willbe a fundamental breach12 (see para. …*). The impact of withholding performance on thedevelopment of the contractual relation may depend on the type of performance withheld, whethercounter-performance or instrumental performance.

34. Withholding counter-performance. When the contractor commits to pay the price or part ofthe final price in advance, failure to pay may justify producer’s withholding performance (e.g.refraining from making requested investments for which advance payments had been conceived).Symmetrically, payment of the price may be withheld when producer fails to deliver or delivers non-conforming goods.13 In these cases, withholding performance represents an instrument for theenforcement of the exchange

35. Withholding instrumental performance. Withholding performance may play a differentfunction with respect to obligations instrumental to the other party’s performance (e.g. contractor’sproviding technical assistance v. producer’s installing a new harvesting machinery). Thisinstrumentality plays an important role in cases in which producer and contractor engage in acommon interest project within a long-term relationship, making specific investments (e.g.


experimentation of a new agricultural technique calling for the purchase and use of new technology).In these cases, the primary goal is to accomplish the common project and to safeguard specificinvestments. Having regard to interdependent performances, withholding follows a cooperative logicmore than a merely self-protective one.

(c) Price reduction

36. Price reduction stands between contract adjustment and remedies. In fact quite often partiesretain the power to determine or adjust the price in accordance with effective quality of the productwhen it is more clearly observable, i.e. after production. For this purpose grading systems areadopted, sometimes provided within a single contract or supply chain, other times incorporated byreference to external sources that are generally applicable to a given market or a sector. Even whenthese adaptation mechanisms are not provided by contract, applicable law may allow price reductionas a remedy against some types of breach, namely: non-conformity and partial delivery. In bothcases the producer has performed without attaining the expected result in terms of quality orquantity (see above on the general criteria to distinguish between non-conformity and partiality*).

37. Price reduction is a typical remedy in case of breach for non-conformity or for partial delivery(see art. 50-51, CISG). Indeed, its function is preserving the contractual relationship and restoringthe balance between the values of the exchanged performances. It is used when one of the twoperformances is defective or incomplete and the aggrieved party is not interested in (or may notobtain) specific performance, nor contract termination. In production contracts, depending onapplicable law, this remedy may be applied: when the contractor fails to deliver conforming inputs;when the producer has to pay the costs of these inputs; or when the producer fails to deliverconforming agricultural products that could still be used by the contractor, e.g. being sold throughsecondary or tertiary markets.

38. In order to seek price reduction, partiality or non-conformity are usually sufficientprerequisites, whereas the occurrence of damages and the fundamental nature of the breach are notnormally requested as a prerequisite. Depending on applicable law, price reduction may also bebarred by the obligor’s right to cure defects, when recognized by law14 (see below, …*).

(d) Termination

39. Contract termination can be seen as the most severe remedy against any party’s breach,since it definitively reflects the failure of the contractual relationship. The aggrieved partyacknowledges that no restoration can be achieved through cooperation within that relationship,whereas alternative options could be sought in the market, if at all. But the threat of termination mayprovide powerful incentives to negotiate when breaches or potential breaches can occur. Often partiesdefine termination clauses that confer unilater right to terminate the contract when the breachoccurs. Termination can have additional effects beyond the specific contractual relationship like theend of the participation to a supply chain with a ban to contract with the parties participating to thechain or even broader consequences when termination is correlated to the insertion in black list thatbans from concluding a contract with all market participants. As shown below, when due conditionsfor termination occur, damages for not excused breach become an almost necessary complement tothis remedy. In fact termination does not provide any substantial satisfaction to the aggrieved partybesides restoring the aggrieved party’s freedom from contractual obligations and therefore its abilityto seek alternative transactions.

40. As examined above, in many legal systems, though not all, domestic law requires the breachto be fundamental (or material) in order to enable the aggrieved party to terminate the contract. Thisoccurs when the breach substantially deprives the aggrieved party of what the aggrieved party was


entitled to expect under the contract (within the limits of foreseeability); or the breach is intentionalor reckless; or the breach is such that the aggrieved party has reason to believe that no performancewill be forthcoming15 (see …*). In long-term relations, especially when several parties join thecontract, parties may even agree in advance that termination may not be sought before a certainlapse of time in which the parties are expected to cooperate16.

41. Depending on the type of obligation, on the amount of specific investments made by eitherparty before the time in which the contract may be terminated, and on the possibility of theaggrieved party to find adequate alternative options in the market (exit options), termination mayrepresent a threat inducing compliance and discouraging parties from breach. For example, within along-term relation in which the producer has made significant investments (e.g. to run a farm forlivestock production) and the contractor is among the few able to procure the entire production, thisproducer will make all efforts to comply with the imposed standards not to “lose the contract.” Thesame could apply to the contractor if the producer has achieved a unique production capacity owed tothe technical assistance received and investments made in new production technologies on behalf ofthe contractor.

42. Legal systems differ with respect to the procedure needed to terminate a contract. Dependingon applicable law, the producer will need to file a claim in court, or a written notice directed to theother party may suffice. Applicable law may allow the parties to follow an extra-judicial procedure iftermination clauses are included in the contract (enabling termination by notice) or if a notice isformally addressed to the party in breach assigning a term to perform.

43. Legal systems also differ about the time by which the notice of termination should be given tothe party in breach; at the international level, the requirement of providing notice within a reasonableterm after becoming aware of the breach is imposed on the aggrieved party.17

44. The use of notice out of court is important when it is coupled with a grace period, in whichthe contractor may perform, thereby preventing termination from occurring. This last resort remedymay play an important function in long-term production contracts or in contracts with importantinvestments by either party.

(e) Restitution

45. Restitution implies that a party, who is not entitled by contract or by law to retain goods ormoney in the party’s possession, is due to return them to the party with title to possess. Herebyrestitution remedies are only considered to the extent that they serve to restore a balance in theeconomic relation between the contractual parties, which has been altered because of the breach andconsequent contract termination. Indeed, when a contract is terminated, parties are normallyreleased from their obligations and, if performances have already occurred, these should be returned.In the in-depth analysis below (see ….*), a distinction will be drawn between total termination(involving the whole contract and all the occurred performances) and partial termination, in which theeffect of termination and the scope of restitution remedies extend to a part of the contract which isseparable from the other . Examples will be provided having regard to instalment contracts andcontracts mixing different types of agricultural production which are not strictly interdependent (seebelow ….*). As the analysis shows, the scope of restitution remedies depends on the nature ofcompleted performance, whether consisting of money, agricultural products, services (see ….*).

(f) Damages

46. Damages may be sought as a stand-alone remedy or in combination with other remedies.18

Their function changes accordingly. Pursuant to most legal systems, an aggrieved party to a

Commented [A8]: Prof. Fontaine: SeeComment under Nos 77-81.

Commented [A9]: The point was madeby some speakers at the Private SectorWorkshop, (Mr Pelzer and Mr Kirke) aboutthe difficulty of enforcing normal contractualperformance in some situations.[Although the point related also to taking theproducer to court, it could also be reflectedin the difficulty in obtaining damages from aproducer.]


production contract may always claim damages in so far as non-performance is not excused (see….*).

47. When damages are sought as a stand-alone remedy, the objective is normally to put theaggrieved party in the position the aggrieved party would have been had the contract beenperformed.19 For example, as a stand-alone remedy, damages including costs and lost profits aim atgiving the injured party what it should have received had the production contract been performed. Inconjunction with other remedies, damages may be awarded, for example, when a contractor requeststhe producer to deliver the agreed instalments of goods and claims damages for transportation orinsurance costs uselessly borne because of the delayed delivery.

48. Damages have to be proven by the injured parties. The injured party has to prove thebreach, the harm and the causal connection. Unlike other remedies where the existence of the breachis sufficient to entitle the party with the right to seek remedy. In some legal systems the burden ofproof has been reverted: The injured party has to prove the breach and it is for the breaching partyto prove that no harm has been caused.In order to assess whether a breach has generated damages,legal systems refer to a number of criteria, among which the most common are the following.

- Full compensation: Full compensation requires that recoverable damages include bothany loss incurred (e.g. costs reasonably incurred by producer to store the goods in case ofcontractor’s failure to take delivery), and gains the aggrieved party was deprived of (e.g.missed profits for contractor’s resale of the agricultural goods).20

- Foreseeability: the party in breach is liable only for damages as a result of non-performance that were foreseeable or could have been reasonably foreseen at the time ofcontracting.21 So, for example, the costs of preservation of goods, as borne by theproducer, represent a foreseeable consequence of the contractor’s failure to take deliveryon time, whereas the producer might not be able to recover the alleged loss of profitspotentially resulting from a pending negotiation that the producer could not attend becauseof the breach, if this pending negotiation was not known or foreseeable for the contractor.Producers should be aware about the possibility that the contract provides for contractor’srecovery of unforeseeable damages caused by producer’s breach22.

- Certainty: compensation is due only for harm established with a reasonable degree ofcertainty.23 For example, the mere chance of profits that the contractor has lost due to thedelayed delivery by the producer might fail the certainty test unless there was a concretenegotiation or even a binding contract with a third purchasing party.

49. If damages are owed, then all damages should be recovered, including both suffered losses(e.g. costs incurred by the producer to replace non-conforming inputs provided by the contractor)and lost profits (e.g. price reduction suffered in linked transactions in which the producer hasrightfully used non-conforming inputs provided by the contractor).24 As a general rule, damagesnormally include the loss in value of the expected performance (though discounted of avoided cost fornot having to counter-perform);25 this loss may not be recovered, however, if price reduction hasbeen obtained for the same loss in value.

50. When the injured party engages in a substitute transaction, damages amount to thedifference between contract price and cover price. When the contractor delivers non-conforminginputs and the producer covers and buys inputs on the market, damages will reflect the differencesbetween the price agreed in the production contract and the price paid in the cover transaction.Symmetrically, if the producer delivers non-conforming goods and the contractor buys them on themarket or from another producer, the contractor will be entitled to the difference between contractand market price. In the light of conventional sales law, if applicable, current price is the pricegenerally charged in the market for goods of the same kind under comparable circumstances26. When

Commented [A10]: Prof. Fontaine:Subject to the distinction made later (Nos 51,201-208) between expectation and relianceinterests – on this distinction, see commentbelow.


the breach consists of the delay of a monetary obligation, interests represent the main form ofrecovery for incurred damages except for any other suffered loss recoverable under ordinary rules.

51. As an alternative to damages assessed having regard to the situation that would haveoccurred if the breach had not been committed (recovery of expectation damages), some legalsystems also admit a different method of damages assessment . Under this rule the injured party hasa right to damages based on the injured party’s “reliance interest”, including expenditures made inpreparation for performance or in performance, less any loss that the party in breach can prove withreasonable certainty the injured party would have suffered had the contract been performed.27 So,for example, if the contractor fails to take delivery and wrongfully repudiates a long-term contract,the producer might be interested in recovering the costs incurred for specific investments (e.g.equipment, restructuring costs for the facility, etc.) if these are hardly re-deployable in futuretransactions. This approach does not represent the conventional rule, according to which each partybears the costs of performance of its obligations28, neither to the “efficiency argument”, for which thecosts incurred for performance should not be higher than the expected value from the contract. As itis seen below, within the limits provided by applicable law, reliance damages could be an appropriatemeasure especially to protect producer against contractor’s breach (see below ...*).

52. Parties to a contract are normally entitled by applicable laws to determine the type andamount of recoverable damages within contract clauses. Parties can limit recoverable damages andmodify the full compensation principle by, for example, excluding or limiting consequential damages.

53. One of the most common functions is to lower litigations costs linked with the need to provideevidence and liquidate damages (liquidated damages clauses). At the same time, especially whenclauses incorporate values and costs that courts would not be able to assess (e.g. immaterialdamages, costs of investments done on reliance of the correct execution of the contract, etc.), theclause tends to induce compliance and serves as a penalty. In some cases the penalty function isprevailing and parties retain the rights to claim damages in addition to penalty.29 The freedom to setmonetary penalties as consequence of a breach does not remain unconstrained according to domesticlaw. Indeed, the “legal” measure of damages is normally considered to be the benchmark to assessthe validity of penalty clauses and these may be held unenforceable if they are disproportionatelyhigh with respect to the real damages .30 Depending on applicable law, freedom of contract may alsobe limited with respect to the scope of disclaimers in relation to the nature of the breach(fundamental or not), to the conduct of the breaching party (intentional or reckless breach).

(g) Interests and late payments

54. Pecuniary obligations including damages are combined with obligation to pay interests. Bothat the national and international level, an issue arises on which interest rate should be applicable topecuniary obligations when there is a breach At the international level, whereas art. 78, CISG is silenton this point, art. 7.4.9., UPICC provides that the rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place forpayment, or where no such rate exists at that place, then the same rate in the State of the currencyof payment. In the absence of such a rate at either place the rate of interest shall be that fixed by thelaw of the State of the currency of payment. There is limited consensus, and the issue is hotlydebated, that the approach taken by the UPICC represents the general principle to be applied ininternational transactions, including those subject to the CISG.31 Indeed, the reference to the banklending rate (applicable to prime borrowers) for the currency of the payment in the country of thepayment seems the closest one to the real damage suffered by the unpaid supplier. Otherinterpreters consider that reference to the place of payment is not necessary since this obligee may

Commented [A11]: Prof. Fontaine: seeComment below on this topic.

Commented [A12]: Prof. Fontaine:There are systems where the penalty maynot be disproportionately high, which meansthat in principle penalty clauses areaccepted, but there are also systems whichcondemn any form of penalty. Also a penaltyclause contrary to the applicable legalstandards is not necessarily unenforceable;in many systems, the judge is entitled toreduce its amount.

Commented [A13]: Prof. Fontaine:Should not the Guide take into considerationthe fact that interest is illegal in manycountries ?


borrow money abroad.32 When the issue is specifically related to CISG, the majority still holds thatthe measure of interest rate should be ruled by the domestic law applicable to the contract.33

55. Interest for late payment is provided by contract law both at the domestic and internationallevel against the delay of payment of monetary obligations, including those consisting in prices.34 Theright to interest arises always and automatically whenever the producer requests for (late)performance of the price obligation. If the producer opts for termination, the accrual of interest maybe liquidated as consequential damages having regard to the delay occurred in obtaining the pricepayment, due to time needed for the substitute transaction35 (see below, …*).

56. On the one hand, the payment of interest does not require specific evidence of loss sufferedby the obligee; on the other hand, it does not reduce any concurrent right to claim additionaldamages suffered by the aggrieved party (e.g. higher penalties due by the producer in favour of afinancier pursuant to financing contract terms which were known to the contractor). In the lattercase, the producer is requested to provide specific evidence and the damages need to comply withthe usual standards of foreseeability and certainty.36

57. The duty to pay interest arises regardless of the reasons for the delay and the efforts putforth by the party to making the payment (on time). In other words, unlike for other types of non-performance, neither the obligee may rely on the occurrence of external impediments, though basedon force majeure, in order to excuse its delay in payment,37 nor is the obligee expected to give noticeof the delay for the purpose of receiving interests.38

58. As seen above (n. … in this paragraph*) the accrual of interest on an unpaid price does notexclude that additional damages may be claimed by the obligee if the obligee is able to provideevidence for such losses. Unlike for interest, ordinary rules will apply to this type of damages (seeabove, …*). For example, the breach of an obligation to pay part of the price before production inorder to finance certain investments by the producer at a certain point of the production cycle mayhave caused the need for bearing additional production costs at a later stage in order to make thoseinvestments or to take alternative precautions lacking those investments.

59. The reference to these legal rules is of paramount importance in agricultural productioncontracts because contractual clauses defining specific measures against the breach of price-relatedduties are by far less frequent than penalty clauses concerning production-related duties andcontractual obligations.39 Especially in legal systems where legislation has promoted privateregulation concerning these practices, inter-professional agreements and codes of practices maycontribute to define the applicable legal framework on interest for late payment of price.40

C. Remedies for collective harms

60. When agricultural production processes generate collective harms to human health and safetyor to the environment, different remedies are needed since the collective dimension becomes thedominant feature. In case of environmental harms correlated to natural disasters, managementschemes that address the collective dimension require the involvement of public and private actors tocoordinate effective responses to restore the staus quo or to engage in remediation, reparation andcompensate individuals for breach of process-related obligations.41 This type of remedies may includeinjunctions, corrective measures like action plans, product withdrawals and recalls, environmentalremediation plans, contract renegotiation through procedures involving producers’ and contractors’associations. Depending on contract structure and applicable law, standing for these remedies mightbe granted to third parties beneficiaries, to associations and international NGOs.

Commented [A14]: Prof. Fontaine: Insome systems, the right to interest does notrise automatically but is subject to theissuance of a special notice (dies notinterpellat pro homine).


D. The role of the aggrieved party and its impact on remedies against breach: comparativenegligence and duty to mitigate (general aspects)

61. Remedies are sought against the party in breach. Depending on applicable law, the behaviorof the aggrieved party may influence access to specific remedies, denying certain remedies in somecases or reducing the scope of remedies in others.

62. The aggrieved party may have contributed to the breach (under certain legal systems this isknown as comparative or contributory negligence42) or the aggrieved party may have failed tomitigate the negative consequences of the breach (under many legal systems this is known as a dutyto mitigate). For example, a non-conforming good may result from poor agricultural practicestogether with poor assistance by the contractor, who was obliged to provide technical services underthe contract but failed to do so (comparative negligence). Or, the contractor might have been in thebest position to resell low quality goods on a secondary market at a lower price in order to reduce theloss arising from a defective delivery by the producer but failed to do so (failure of duty to mitigate).

63. Breach of the obligee’s duty to cooperate may contribute to the obligor’s breach. The mostcommon case concerning the contractor is related to failure to inform or offer guidance on theproduction process and in particular on the use of inputs provided by the contractor or by thirdparties. When the (potentially) aggrieved party fails to comply with obligations that could contributeto achieve the expected output, consequences on available remedies might arise. When theaggrieved party seeks damages, contribution to the breach may reduce recoverable damagesaccording to the degree of fault of each party and the causal link between acts or omission anddefective performance.43 In order to promote cooperation and to avoid opportunistic behavior, theaggrieved party contributing to the breach may be limited in the selection of remedies. For example,when contributing to the breach, the aggrieved party might not be able to seek termination orspecific performance or might be asked to bear part of the additional costs the breaching party willhave to incur when performing. The latter can translate into price reduction.

64. Aggrieved parties’ in multiparty contracts. Cooperation by aggrieved parties may be evenmore important in multiparty contracts. When one party breaches, the other participants might havecollectively or individually contributed to cause the breach by committing acts or omissions. Forexample when they all participate in a safety management scheme and do not react to one party’sfailure to comply with safety standards.

65. A obligee’s duty to mitigate the consequences of the breach is more widely accepted by bothnational systems and international law,44 though divergences exist.45 Compliance with this dutynormally implies the right to recover expenses reasonably incurred to mitigate the harm caused bythe breach. When recognized by law, failure to mitigate prevents the aggrieved party from receivingfull compensation of damages or to claim those damages that are due to such failure. Specialattention is paid to timely substitute transactions as means to reduce the extent of increasing lossesdue to price fluctuations. Quite controversial is whether, in case of anticipatory breach (seeabove…*), the duty to mitigate would include a duty to rescind the contract and seek alternativetransactions.46

66. The scope of the duty to mitigate in the context of production contracts could be broader thanin general contract law. Not only does it address the objective of reducing the amount of pecuniarylosses stemming from the breach, but the duty to mitigate could help correcting mistakes and solveproblems related to quality and safety management schemes.47 The distinction between process andproduct-related obligations highlights the broader scope for mitigation in agricultural productioncontracts. Mitigation contributes to achieving higher compliance to avoid that breaches of process-related obligations translate into product non-conformity.

Commented [A15]: Online comments.Prof. Cafaggi: “Please notice that, due todeletion of specific paragraph in section III ofthis chapter during the last revision, the roleof the aggrieved party’s conduct in liability isdeveloped in subsequent sections only asregards producer’s breach (and thereforecontractor’s duty to cooperate and tomitigate) whereas it remains undevelopedfor contractor’s breach (producer’s duty tocooperate and mitigate). This may suggestthe wrong assumption that duties tocooperate and mitigate bind the contractorbut not the producer.”

Commented [A16]: Prof. Fontaine:Should the Guide enter into controversies?


67. The duty to mitigate can contribute to correct the consequences of breaching process-relatedobligations that may be outside the scope of non-conformity but within that of the productioncontract (see chapter on obligations*). When for example the producer breaches obligationsconcerning technology transfer or financing, the breach might not directly be related to non-conformity and require different remedies (see below examples on seeds and violation of IPR by theproducer…*).

68. Duty to mitigate in multiparty contracts. The duty to mitigate operates not only in bilateral,but also in multiparty contracts. Clearly, multiparty contracts may require some adjustments whendefining the scope and objectives of the duty to mitigate. In multiparty contracts, there may bemultiple parties responsible for mitigation in the typical scenario where one breaches and the othersare aggrieved. Mitigation burdens can be shared and participants to the contract might be asked tocollaborate in finding cooperative solutions to reduce hazards and prevent risk related pandemicsarising from one’s breach. Hence, multiparty contracts, when each party provides one input, mayrequire the parties to correct the consequences of the breach and find alternative solutions. Withinthis scheme it is possible that the breaching party will be asked to contribute as well.

69. Duty to mitigate in linked contracts. A duty to mitigate may arise also when contracts arelinked. The paradigmatic example is that of input provision. When inputs are provided by third partiesand turn out to be non-conforming, not only the producer but arising from non-conformity due todefective input provision.

E. The obligor’s right to a last attempt to perform and the right to cure defective performance

70. A different issue is whether the party in breach is entitled to a last attempt to perform or to aright to cure the defective performance. When the contractor rejects non-conforming goods andseeks termination, to what extent does the producer have a right to cure? Can the producer offergoods’ replacement if the contractor claims a price reduction and/or when the contractor claims forconsequential damages suffered for lost resale? If the producer seeks termination due to thecontractor’s failure to take delivery, can the contractor oppose termination or other remedies byoffering cure?

71. Reference here is to performance or cure coming after a breach has been committed and thetime for performance has expired, whereas cure or substituted performances before the time in whichperformance is due are not normally called into questions and are recognized to a larger extent bynational legal systems and international law.48 In other words, for example, the producer is generallyallowed to cure defects if goods inspection has occurred before the due date for delivery and non-conformity has been detected.

72. What happens when the time for performance expires? The right to a last attempt to performis recognized by some legal systems but not by others; in the former case it may be conceived as aprecondition for contract termination,49 and more rarely for other remedies.50 It may also beconceived as a procedural defense for the party in breach, to which a notice should be directedenabling a chance to perform before termination is declared.51 In all of these cases, the producer (orthe contractor) in breach might rely on a last attempt to deliver conforming produce (or to takedelivery). This right would be particularly relevant when agricultural performance has requiredimportant investments (e.g. in input provision, including technology or equipment) that the party inbreach could never redeploy were the contractual relationship terminated.

73. When admitted by applicable law, the right to a last attempt to perform takes the form of aright to repair or to replace previous defective performance when a former unsuccessful attempt hasbeen made.52 This right may be denied when the delay induced by cure would transform the breach

Commented [A17]: Online comments.Fondation pour le droit continental (ad hocexpert group). The representative for foodindustry doubts the right to last attempt andwishes it to be strictly limited.

Commented [A18]: Online comments.Fondation pour le droit continental (ad hocexpert group). The representative for foodindustry doubts the right to cure.


into a fundamental one, which means that termination normally prevails over the obligor’s right tocure in these circumstances.53 From a partially different perspective, the right to cure would also beprecluded by the mere fact that the breach (not the delay caused by cure) is fundamental;54

however, some interpreters would not consider a breach to be fundamental if the non-performingparty was willing to effectively cure a defective performance.55 Apart from fundamental breach, othercircumstances may limit the right to cure, e.g. if cure would not be appropriate, effective or promptlyeffected,56 or if the cure would cause unreasonable inconvenience for the aggrieved party.57 Withinother legal systems, attention is paid to the reasonable reliance by the party in breach on the factthat delivery would be accepted.58

74. When recognized, the right to cure normally suspends the aggrieved party’s right to resort toremedies different from withholding performances and claiming damages caused or not prevented bycure.59 Therefore not only termination would be precluded, but also price reduction.60 Moreover,provided that a right to cure exists within the limits described above, the choice between repair andreplacement could be controlled, through the right to cure, by the non-performing party rather thanby the aggrieved party.61

F. Renegotiation

75. The occurrence of a breach may trigger renegotiation of an agricultural production contract.Indeed, although the contract might have allocated risks and liability addressing the consequences ofthe occurred breach, real circumstances may suggest that remedies provided by the contract are notconsistent with the parties’ interests. For example, a production contract may provide that a breachof a specific obligation (e.g. failure to get certification for a given input, process or output) can causeimmediate termination of the contract. In fact, parties may agree that such failure is only temporaryand that incurred costs and investments would be lost in case of termination. At the same time, thefailure to get certification may require a specific adaptation of the contract rules; parties may agreeon the delivery of non-conforming produce to a market different from that originally indicated. Theycould also agree on the adoption of a corrective plan in order to enable certification for futureinstallments.

76. In these circumstances, renegotiation can provide an opportunity to safeguard specificinvestments and ensure continuity of contractual relations. In the light of the principle of cooperation,to take reasonable steps to review the contract rules may become a duty for all the involved parties.In a supply chain perspective, renegotiation may even involve the cooperation of actors affected bythe breach (e.g. the financier, producers’ suppliers, etc.) but outside the privity. The multi-partystructure of some production contracts may favour the achievement of such cooperation.

G. The effects of termination

1. The effects of termination: total v. partial termination

77. In general terms contract termination releases parties from the obligations arising from thecontract (duty to provide inputs, to process, to deliver, to pay inputs’ and outputs’ price, etc.) but forpost-contractual obligations, which may persist even after termination (e.g. duty to keepconfidentiality or to refrain from using certain IPRs62). When based on breach, termination does notnormally preclude any claim for damages. It does not affect any provision in the contract for disputesettlement or due to govern the rights and obligations of the parties following termination or breach(e.g. duty to pay penalties for contract repudiation or duty to mitigate damages occurred from thebreach).63

Commented [A19]: Prof. Fontaine:Should the Guide enter into controversies ?

Commented [A20]: Online comments.Fondation pour le droit continental (ad hocexpert group). The representative of foodindustry doubts the right to renegotiation.


78. In general terms the release from obligations does not change depending on whether thecontract has been terminated for breach or force majeure, or on whether the breach was committedby producer, contractor or both. However, it brings about different consequences depending on thefact that a single obligation has been executed totally, partially or in no part. If it has not beenexecuted, it is not due anymore. If it has been executed or partially executed, restitution is due to theparty who has performed, possibly in kind or in money (see below …*).

79. This considered, it can be agreed that termination is in general terms a very disruptiveremedy, marking the failure of the contract as means to govern parties’ interests and reach theirexpectations. This is totally consistent with the concept of fundamental breach as a prerequisite torepudiate the contract, when applicable in the given regime. Once this threshold is reached, thewhole contract is affected.

80. Depending on whether performances are interdependent or separable64, termination mayrefer to one obligation (partial) or to the entire contract (total termination) 65. For example, ininstalment contracts if one of the due instalments is grossly non-conforming, whereas all the othersare conforming to contract specifications, termination could address the non-conforming instalmentonly. It is important to highlight that in practice in some (few) cases specific contract clauses assignthe aggrieved party the power to opt for partial or total termination.66

81. Depending on whether termination is total or partial, all obligations or only some will beaffected by termination. Only performances affected by termination need to be returned. Indeed, incase of total termination, since parties are released from all obligations, if some have already beenperformed, these must all be returned (see below…*). In case of partial termination, obligations notaffected by termination (e.g. past instalments of bananas delivery) remain in place and performancesnot affected do not need to be returned.67

2. The effects of termination and the impact on linked contracts

82. A separate issue is whether the termination of a production contract may lead to terminateother linked contracts, for example those for input provision. Three cases should be distinguisheddepending on the relative duration of the linked contracts:

- the input provision contract has a duration which is shorter than the one of the productioncontract (because, e.g., this is a multi-year contract);

- the input provision contract has the same duration as the one of the production contract;

- the input provision contract has a longer duration than the production contract.

Duration is one dimension that can shed light on the link. In the first two cases it is very likely thatthe input provision contract has been concluded with a specific view to the execution of theproduction contract at stake. By contrast, in the third case the input provision contract, though stillinstrumental to the production activity of the purchaser, may be independent from the specificproduction contract that is then terminated. Consequently, the termination of the productioncontract might, if ever, lead to the termination of the input provision contract in the first two casesbut rarely or never in the third case. Clearly variables other than duration can define the existenceand intensity of the link as for example the supply of specific seeds that have to be used for theproduction of that commodity.

83. The issue arises with regard to termination of the production contract occurring before theseinput provision contracts are executed, e.g. when the contractor seeks termination for the producer’sfundamental failure to comply with safety standards concerning the phase of plantation beforedelivery of pesticides agreed upon in the linked input provision contract. In these circumstances the

Commented [A21]: Prof. Fontaine: Nos77-81 may call for futher discussion (alse seeNo. 210). The expressions “total” or “partialtermination” may be ambiguous. In thepresent context, “partial”, in my view, shouldrefer to the moment termination will takeeffect, meaning that the initial period of timewhen the contract was properly performedcould remain unaffected, and not to the factthat only one obligation would beterminated (comp. PICC, art. 7.3.7). Also seeComment No. 4 above.


producer may wish to be released from the obligation to pay for pesticide the producer cannot usebecause of termination of the production contract. However, such burden may not be shifted to theinput provider as a third party, unless the provider had been informed that the inputs would have hadno value for the producer if ever the production contract had been terminated. Such a condition maybe quite remote, especially with inputs that are standard products.

84. A different view could be proposed if the linked contract presented a strong interdependencewith the production contract, e.g. seeds produced upon specific instructions by the purchasingproducer or even the contractor within a special development programme partaken by all theinvolved parties. In practice in these circumstances parties may prefer to sign a multiparty contract togovern these interdependences . Furthermore, cases exist in which in linked contracts specific clausesestablish to what extent the termination of production contract affects the continuity of linkedcontract for input provision (e.g. land).68

85. A mirror-issue is whether termination of linked contracts may lead to termination ofproduction contracts. Here the question is whether the terminated contract is replaceable in areasonable time and manner without substantially affecting the expectation interest pursued throughthe production contract. If this is not the case or in any case no substitute contract is concluded andtherefore the performance of the production contract becomes impossible, then there may be groundfor its termination. Depending on circumstances it will be a termination for breach or for impedimentout of the parties’ control (see ….*). More particularly, attention should be paid to whether the linkedcontract termination may be qualified as the result of a breach by one of the parties to the productioncontract (e.g. the contractor has selected an unreliable input provider and has not substituted theprovider promptly even though the market offered viable alternatives), or liability may be excused,lacking any alternative in the market and being the linked contract termination due to the forcemajeure.


II. Contractor’s remedies for producer’s breach

A. Introduction

86. Producers include individual and collective entities like cooperatives and associations. Whencollective entities represent individual producers, the production contract is concluded between thecollective entity and the contractor whereas but for some exceptions the relationship betweenindividual producer and the collective entity is regulated by company law or the law of associations.Non-performance by individual producers as part of the collective entity may translate into a breachof contract between the cooperative and the contractor. But in general the contractor will not be ableto claim remedies against the individual producer because of privity limitations. When relevant It willbe indicated how remedies differ when the breach is committed by the collective entity rather thanindividual producers participating to a collective entity party to the production contract.69

87. The primary producer’s responsibility is product conformity. However, the producer mayundertake contractual obligations stemming from participation to quality and safety managementschemes or sustainability standards that go beyond the obligation to deliver conforming goods.Process-related obligations may concern agricultural practices, environmental protection,communities interests, social standards. Breach of these obligations gives rise to separate remediesfrom those related to product non conformity. Common principles characterize these remedies.However the sequence of remedies and the exclusion of some can differ For example whereas inproduct-related obligations termination is only subject only to the constraint of material breach, it isgenerally excluded in process-related obligations where remedies aim at restoring compliance.

1. Sphere of control and producer’s liability

88. The producer is liable for events within its control whereas it is exempted if the impedimentto performance is outside its sphere of control. Control presupposes foreseeability and/or avoidabilityof the impediments (See __ in the chapter on excuses*). If the producer can foresee the event thatwill make performance more expensive, commercially impracticable or even impossible, the producerassumes the risks unless the contract specifically provides for exemption by making references toforce majeure or excuse. Typically foreseeable but unavoidable events include some natural events(floods, frosts, droughts, earthquakes), regulatory changes at domestic or international level, andchanges in market structures and prices.70 Similarly the event making performance more difficult andexpensive will be considered under the producer’s control if it can be avoided by undertaking actionseven when they may significantly increase the costs of performance. Avoidable events include boththose that require additional precautionary measures and/or corrective actions once the impedimenthas occurred. Examples include the discovery of adverse effects of the use of fertilisers duringproduction process, the detection of hazards related to product safety, the identification of lowerquality of the product or the inadequacy of equipment for the production process.

89. Discrete allocation of risks and costs occur more frequently in one-shot contracts. Long termcontracts instead favour ex post cooperation to solve problems arising from the occurrence ofunexpected (though not necessarily unforeseeable) circumstances. Parties can allocate the risks andthe consequences of impediments to one of them; they may ex ante define adaptation mechanismsthat reallocate the costs and benefits of performance when impediments occur (this is common forchanges in markets, particularly price clauses) or design renegotiation procedures that prevent theopportunistic use of changed circumstances to extract undue benefits from the other party.71 When,as it is usually the case, the occurrence of unanticipated circumstances simultaneously affects a largenumber of contractual relationships between an individual contractor and different producersoperating in the same geographical area, collective rather than individual solutions may be sought.


This is often the case where standard contract forms rather than tailor- made contracts are deployedto regulate production activities. Those legal systems that operate via inter-professional agreementsor framework contracts often involve associations and other intermediaries in the management ofunanticipated circumstances and contractual renegotiations. Solutions are negotiated collectively andthen applied to individual production contracts.72

90. Producer’s lack of performance and remedies. In case of a producer’s non-performance, thecontractor can seek performance by claiming failure to perform, whereas in order to claim damages,(1) the existence of a breach, (2) occurrence of a foreseeable harm, (3) the causal link betweenthem, and (4) proof of certain damages is required.

91. When the producer’s liability is exempted, different contractual options are available: contracttermination, performance-based remedies, including payment of prices for inputs received by thecontractor, restitution (see chapter on excuses for non-performance*). Especially in long-termcontracts, where exemption may be limited to a single performance, the availability of other remediesconcerning process-related obligations is highly important.

2. Contractor’s remedies

92. Remedies for the contractor include a wide array ranging from right to performance totermination. Different legal sources regulate type and content of remedies. These include theapplicable law, codes of conduct parties have incorporated into the contract, Commodity Exchangeregulations when trading occurs in regulated markets, certification regimes. Private schemes oftenadd sanctioning systems based on reputation and membership ranging from warning to explulsionand using grey and black listing. Remedies are often combined. Damages claims for example can becombined with other remedies or be sought as stand-alone. The burden of proof varies depending onthe remedy.

93. Both domestic and international laws often express preferences for remedies that favour thepreservation of contractual relationships. This approach has been reinforced by sector specificlegislation especially focused on foodstuff to protect smallholders and producers73. Depending onapplicable law termination may be conditional upon fundamental breach and stricter requirements74.Most other remedies may be available both in case of fundamental or immaterial breach dependingon the conduct of the breaching party and the consequences caused by the breach to the aggrievedparty and, when relevant, to third parties along the chain. While drafting the contract, parties areencouraged to distinguish between remedies for process and product-related obligations especiallywhen the former are defined by reference to standards.

B. Remedies in kind

1. Remedies in kind for producer’s breach of process-related obligations

94. Process-related obligations may be more or less closely related to product non-conformity. Insome instances like input provision they are clearly linked to product conformity in other instanceslike community interests or social standards the link is looser or non-existing. Process-relatedobligations include input provisions and have different content depending on who the provider is. Insome instances, non-compliance can undermine the ability to deliver conforming products, whereasin other instances the breach might not have significant influence on producer’s final mainperformance. Clearly the link between process-related obligations and ‘output non conformity’ is verystrong when inputs are not conforming. When the contractor identifies violations related to inputprovision by the producer or by third parties, he does not have to wait until delivery to take action.

Commented [A22]: The value of thesereputation based mechanisms at variouslevels (family. association, community) wasstressed at the Buenos Aires Consultation.

Commented [A23]: The importance ofthis was emphasised by Ms Maglio, PrivateInternet Worshop, (even if this mechanism isnot widely used) and by Mr Grgic, internetconsultations, talking about the DisputeResolution Corporation and its de-listingexperience.

Commented [A24]: This point was veryimportant for many of the speakers at thePrivate Sector Workshop (Mr Straathof, MrJoshi, Mr Kirke). Prof Veneziano summarisedthis by delineating a move from a "conflictperspective to a cooperative perspective".


Remedies can be sought before non-conformity materializes. They can either aim at repairing orreplacing the input or modifying the production process to ensure conformity despite the defectiveinput. The increasing emphasis on process-related obligations modifies the relationship betweenmonitoring contractual performance and enforcement.

95. Process-related obligations may be breached before delivery of the final product but alsoafter delivery as for example when information for traceability purposes are not properly stored andmade accessible to the contractor or third parties like certifiers. Breach can even occur after contractexpiration. In the latter instance the obligations survive the contract.

(a) Right to performance

96. Process-related obligations require the producer to engage in activities that follow multiplestages until completion of the process. The contractor can require performance in order to ensurecompliance with the process standard. Without compliance he might not be able to get certification.Within the process, the influential role played by contractor to monitor, provide guidance and exercisecontrol, requires cooperation and communication between the parties. The right to performance mayconcern activities or conveying information about the process or product or activities related to theprocess and in particular to safety and quality.

(b) Corrective actions

97. When there is a violation of a technical standard that includes process-related obligations,often corrective measures are sought. Corrective measures may be required in order to reduce ormitigate the risks caused by the breach in addition to performance or to substitute performance if theemergence of the hazard makes the initially agreed conduct inadequate to ensure compliance. Theclaim for corrective action does not presuppose that violations ought to translate into output nonconformity.75 It applies both to process obligations instrumental to product conformity and those onlyloosely linked to non-conformity or traceability.

98. In safety related obligations corrective actions can address both failures in risk assessmentand in risk management. These remedies are aimed at addressing failures in the production processwhere hazard detection is inadequate and may not promptly contrast risk spreading. Remedies mayaddress failure to monitor risks and properly assess the emergence of hazards when, for example,some hazards become apparent only upon contractor’s inspections but had not been detected by theproducer involved in a safety management scheme. Similarly in quality related obligations correctivemeasures may be used to ensure compliance with requirements related to denomination of origin orgeographical indications and other quality related attributes. Corrective actions may have deeperimplications and go to the structure of the production process. Once the violation has been detected,the contractor can ask for modifying the production process so that the quality or safety failures canbe corrected.

99. The specific content of corrective action by the producer is often determined by agreementwith the contractor or, when certification is involved, with the certifier.76 The producer may forexample be asked to submit an action plan to modify how the critical control point operates.77 Suchan action plan can include modifications to the production process addressing the causes of potentialnon conformity. Corrective actions operate primarily within a cooperative scheme of enforcement.

100. The most radical corrective remedy is personal substitution within production process. Insome circumstances, and upon failed attempts to attain correction by the producer, some contractspermit the contractor or third parties identified by the contractor to replace the producer at itsexpense when it becomes clear that the producer will not be able to perform according to the


contract.78 Particularly in the case of livestock contracts, and to a limited degree crop contracts, theremedy allows the contractor or a third party to temporarily replace the producer and perform theactivity by directly farming in the producer’s premises.79 Parties to the contract may prefer to verifythat these practices are compliant with legal constraints concerning access to land in light ofapplicable law.

2. Remedies in kind for product non-conformity

101. The delivery of conforming products is one of the producer’s main obligations.

102. Contractor’s choice of remedies for non-conformity may depend upon many factors related to(1) time of detection of non-conformity, (2) availability of secondary or tertiary markets, (3) negativeeffects on third parties (e,g. consumers) that may require differentiation between safety and quality.Among other factors, duration of the contract and nature of the biological cycle can affect the choiceof remedy and the cooperative nature of its content.

103. Time of non-conformity detection and choice of remedies. Product non conformity andhazards related to agricultural or livestock may emerge before or at time of delivery but even longafter delivery, during the production process along the chain or at time of consumption. Detectionmay occur upon contractor’s inspections at time of delivery; it may emerge out of self-inspection, orwhen inspections are carried by third parties in charge of certification or quality assurance

104. Remedies for non-conformity may differ depending on the time of non-conformity’s detection.The possibility to correct failures may decrease over time. Early detection via inspection may permitmore significant corrections whereas detection at time of delivery may make corrective measures,especially for perishable goods, hard to implement. When non-conformity becomes apparent only ata later stage even before delivery, replacement rather than repair may become the primary remedy.

105. The differences dependent upon time of detection are significant; indeed, unless a case ofanticipatory breach occurs, early detection may not necessarily require rejection, and the parties maywish to afford the producer the right to cure defects. By contrast, when non conformity is detected attime of delivery, the contractor may wish to retain the right to reject the product and seek differentremedies depending upon the seriousness of non-conformity ranging from repair, to replacement, toprice reduction or product downgrading80 or termination.81 Rejection as such does not strictlyrepresent a remedy; it is a legal power enabling the contractor to access further remedies and towithhold price payment whenever it is subject to goods approval. After rejection the choice ofremedies should be made taking into account the nature of the contract and the one of parties’interests. Unless otherwise provided in the contract the objective of preserving the contract wouldsuggest that the contractor should first ask for repair and, only if repair is inadequate, seek productreplacement in order to preserve investments and the relationship, especially if it is long term.82

106. It may be advisable for the parties to structure remedies according to a sequence related toproducer’s conduct after the breach. For example, a specific time may be awarded to the producer totake corrective or repair measures.83 Once this time is expired and the breach persists, the contractorcould be granted the right to choose whether to (a) accept the goods (or part of them) and seek pricereduction, or (b) reject the goods and seek other remedies, namely replacement or termination.84

Price payment will be due in the former case (replacement) but not in the second (termination). As itis explained below, damages may be sought in all the mentioned cases (under a and b) depending onlegal requirements and concrete circumstances.


107. Presence of secondary and tertiary markets. In establishing remedies for product non-conformity it is advisable to consider the availability of secondary or tertiary markets wheresubstitute conforming goods could be purchased and non-conforming goods sold. Such presenceparticularly affects the availability of the remedy of replacement and the assessment of damagesthereof as shown below (*). It may also lead the contractor to downgrade the goods and apply aprice reduction with respect to lower quality products sold in a secondary market.

108. Differences between quality and safety. Both law and private standards regulate food andfeed safety mainly with mandatory rules. Safety regulation prevents producers from putting unsafeand dangerous products in the market, including intermediate markets. Production contract cannotdisplace regulatory obligations that make the producer liable if safety standards are violated. Thecontractor seeking remedies for unsafe or dangerous products against the producer has to complywith public law requirements as well. Choice of remedies is therefore conditioned by the objective tominimize risks of harm for third party in case of non-conformity related to breach of safetyrequirements. Preventive remedies can contribute to avoid breach actionable also in torts. Forexample, when upon inspection non-conforming products are found to be unsafe, contractor will wishto have the right to demand handling of the product to reduce hazards to a degree compatible withsafety requirements. The use of secondary or tertiary markets may be allowed for non-conformitywith quality standards, but may not be an option for non-conformity with safety standards. Indeed,less constraints from public legislation may come from quality requirements, although, especiallywhen they refer to products directed to consumers, consumer protection objectives related to qualitymay influence contractor’s choice of remedy. If safety is not at stake, product downgrading and clearinformation provided to final consumers do normally suffice as requested measures.

(a) Corrective measures

109. In case of goods non-conformity, the contractor may wish to seek corrective measures.85

Although correction may be more effective if requested against violation of process-relatedobligations during the production process, there might be reasons for which violation has not becomeapparent before inspection of the finalized (non-conforming) goods, or non-conformity is caused byexternal factors unrelated to the production process (e.g. goods infestation after production and justbefore inspection). In all these circumstances, if upon inspections, the contractor identifies seriousrisks of product non conformity at time of delivery, the contractor may wish to retain the right toreject the goods. A wide array of measures might be provided as a consequence of rejection. Thecontractor may be entitled under the contract to ask the producer to eliminate or reduce the hazardsin case of unsafe products. Handling unsafe product may require reducing food safety hazards toacceptable levels or destroy them according to environmentally compliant procedures. Correctivemeasures have a much broader scope than product repair. Among corrective measures for examplean important role is played by information and labelling: for example, if a gluten free product doesnot comply with the requested standards (e.g. gluten-free food standards), the producer could beasked to segregate non-conforming goods and label them so to warn about risk of gluten-content inthe food.

110. The remedy of corrective action may include (1) reviewing and determining the causes ofnon-conformities, (2) identifying courses of action that will prevent recurring non conformities, and(3) changing the production process accordingly. Even at time of delivery, when non-conformitydepends on process failures, the aggrieved party can request both corrective measures that addressproduct non conformity and, with a view to future instalments in long-term relations, measures thataddress process failures that have caused non conformity and risk to occur again.


111. The contractual definition of corrective measures should ideally take into account the time ofnon-conformity detection.86 Corrective measures can refer to safety, quality, quantity. Whenstandards include protection of third parties, in particular consumer protection, the aim of correctionis to avoid not only economic but also personal injuries that may be created when introducing unsafeproducts in the market place. Even at time of delivery correction is of remarkable importance. Clearlythe earlier detection occurs, the more effective correction will be. But of hazards may only becomeapparent during the production process or at time of delivery. When product’s correction is not aviable option, the producer may be asked to withdraw or recall the product (see below).

(b) Repair

112. Repair has a narrower scope than corrective action. It focuses on the product and coincideswith defects making the product unfit or unsafe. It does not address the causes of non conformityand is not deployed to seek management changes by the breacher. There may be cases in which,when detected at the time of delivery, non-conformity may be cured by repair.87 For example, if thelevel of dryness/humidity deviates from the parameters imposed by the technical standard, thecontractor may have reserved the right to demand that the product be subject to further dryingprocesses,88 at the producer’s expense,89 although the remedy might not be appropriate when thecontractor has contributed to the breach, e.g. by failing to provide adequate assistance along theproduction process. Parties may agree to share the costs.

(c) Replacement

113. When repair is not viable or unreasonably burdensome, the contractor may wish to reservethe right to seek a remedy in kind by requesting goods replacement.90 It may be the case, however,that in several agricultural contracts replacement by the producer is not in fact a viable option givenproducer’s (in)capacity to autonomously access the market and source substitute goods.91 Indeed,the intrinsic nature of production contracts, based on the contractor’s involvement in instructing andmonitoring over the production process, would be hard to reconcile with goods replacement viamarket. Rather, the producer could be requested to provide the contractor with other batches ofgoods produced in accordance with contractual requirements and under the contractor’s monitoring.This may happen when the produced crops exceed the quantities due under the contract and includeboth conforming and non-conforming goods, then enabling replacement of the latter with the former.A clear case could be the one in which the producer is a cooperative or a producers’ group andreplacement is sought among participants to the group. Alternatively, as it is seen below, the contractmay let the contractor engage into a “cover transaction” claiming the damages for the possibly higherprice or lower quality.92

114. A special case occurs when the contractor retains ownership of crops or livestock (the lattermore frequently than the former) but the producer has been able to grow both contractor’s and itsown livestock under the contractor’s instruction.93 Then a cross replacement could be sought byreplacing contractor’s non-conforming livestock with producer’s conforming livestock.

3. Remedies in kind for producer’s failure to deliver the product

115. Delivery of non conforming goods differs from failure to deliver. The content of remedy andpotentially the sequence of remedies can change accordingly. As seen above failure to deliver theproduct includes: (1) total lack of delivery, (2) delayed delivery, (3) delivery at the wrong place, (4)partial (incomplete) delivery. Though remedies in kind can be examined unitarily, few additionalremarks may be useful for partial delivery.


116. In all the above mentioned cases, the contractor may have interest to request performance.94

However, depending on the occurrence of the specific situations (1 through 4), circumstances mayprevent the use of specific performance, namely:

- the perishable nature of the goods, hindering the function of specific performance when delayin delivery can reduce goods’ value to zero;

- the preservation costs, changing upon the length of the delay and the nature of the goods;

- the transportation costs, that may be relevant or very relevant in case of delivery at thewrong place.

117. If these impediments do not preclude the exercise of the right to performance,95 this remedycould be particularly important when goods have been produced following specific requirementsand/or using special quality inputs that make them unique or difficult to be replaced through a covertransaction.

(a) Remedies in kind and partial delivery

118. Whether and to what extent it is appropriate for the contract to afford the contractor the rightto refuse partial delivery and full delivery will depend on whether the completeness of delivery was ofessence in the contractual relation (e.g. the contract had made clear that the contractor needed toreship the complete cargo for an important client by an exact and essential date).

C. Product withthrawal and product recall

119. Producers may be involved in the identification of the dangerous and unsafe products, in themanagement of the risks caused by unsafe products and the contract or the applicable law mayrequire them to withdraw or recall their product from the market. Withdrawals concern products thathave not yet reached the market. Recalls relate to products that have already been placed in themarket and discovered to be unsafe96. Risk assessment and management of unsafe products mayoccur at different stages of contractual performance. To simplify four stages can be distinguished: (1)before delivery, (2) at time of delivery, (3) after delivery but before the contract expires, (4) aftercontract has expired. At each stage withdrawal or recall may become necessary. The decision may betaken jointly by contractor and producer or unilaterally by the latter. When product withdrawal orrecall occurs after the production contract has expired it is generally at time of consumption whenproducers and contractors are asked to cooperate with the other chain participants to take dangerousproducts out of the market.

120. Producers involved in production contract might be involved in recall procedure not asprimary actors but as co-participants when the recall procedure involves inquiries on traceability thatgo back to the production stage. In different ways product recalls can affect production contracts,triggering the use of ad hoc remedies.

- The recall procedure may regard a component used in the agricultural chain (e.g. unsafeseeds). As a consequence the contractor may have reserved the right to request the producerto destroy seeds purchased but not yet used or products grown after the plantation of theseeds at stake.

- The recall procedure may regard products of an ongoing production chain. Not only productsavailable for consumers need to be recalled but also products already produced but not yetdelivered to the contractor (withdrawal). In this case withdrawal and recalls may beassociated.


- The use of measures as under B may require the producer to withdraw the product from asub-supplier whenever it has handed over the product for process-related reasons (e.g. theproduct is under drying process at a sub-supplier’s premise).

121. Product withdrawal and recall may be voluntary actions undertaken by the producer ormandatory actions requested by public authorities. Production contracts may regulate withdrawal andrecall in both instances. When they are voluntary they may be the consequence of an independentdecision by the producer or a remedy for breach sought by the contractor within a product recallprocedure. The contractor may seek product withdrawal and recall within the menu of remedies forproduct non conformity explicitly provided for in the contract. However generally recall andwithdrawal do not presuppose liability but simply the proof that the product is unsafe. These aretypically cooperative remedies that may require the intervention of many parties to achieve the finalresult.

122. When the hazard is detected at a later stage of production because the cause becomesknown after the product has left the producer’s sphere of control, the contract or the applicable lawmay oblige the producer to cooperate in the withdrawal or recall procedure. Product withdrawal andrecall may concern a component or an ingredient (the tomato), the goods produced by producer (thecanned tomato), the final product at the end of the production process (the tomato sauce). Contractpractice suggests that producers and their suppliers assume an obligation to cooperate withprocessors and distributors in processes concerning withdrawal and recall.97 Intended beneficiaries ofthese obligations go beyond the contractor and include relevant participants to the supply chains.

D. Withholding performance

123. In most agricultural production contracts, price payment will follow to goods’ delivery andinspection. Such structure makes withholding price payment a natural remedy against producer’sfailure to deliver or to deliver completely, at the right time, at the right place, or to deliver conforminggoods. In case of non conforming goods (or delivery at the wrong time/place) a common reaction isnot to take delivery (or to reject the goods). Not taking delivery and withholding payment are linkedand mutually reinforcing remedies. Indeed, once the contractor accepts the goods and takes delivery,payment can no longer be withheld.

124. When advance payments are foreseen, withholding them may help inducing the producer tocomply with the several obligations along the production line (including process-related obligations),whereas withholding final payment of the balance may provide adequate incentive for a timely andconforming delivery at the end of the process.

125. More critical in practice may be obligee’s withholding other types of performance, such asdelivery of physical inputs, e.g. seeds or equipment, or immaterial ones, such as technical assistance.Indeed the use of this remedy could undermine the production process and the attainment of thecommon goals pursued by the parties. However, especially when interdependence between inputprovision and production process is high and investments are costly and relation-specific, thecontractor may prefer withholding input provision (e.g. technical assistance or provision of specialtyseeds carrying on intellectual property rights) to prevent sunk costs and limit the consequences ofproducer’s breach, e.g. when the producer failed to comply with standards requesting for specific landmaintenance before seed plantation. Since the parties’ obligations are interlinked, withholdingperformance may be claimed as being the original breach by the other party so that a clear scheduleof each party’s due performance in the contract may be recommended.


E. Price reduction

126. Depending on applicable law, price reduction may be normally sought for either non-conformity or partial delivery (see, for international sales law, art. 50-51, CISG). Both in case of non-conforming and partial delivery, pursuant to international sales law, the producer has a right toperform before price may be reduced by contractor. Cure may address non-conformity or imply goodsreplacement or late delivery of undelivered products. Cure’s costs are borne by the producer (e.g.cost for second delivery).98 Sometimes contract clauses concerning partial delivery require thatcontractor offers alternative options among which stand: extension of the time, buying in the market,reducing the price.99

127. Criteria for price reduction may be contractually defined and often include a penaltydimension with an escalating adjustment of the price depending on seriousness of the breach; thismay provided both in cases of non-conforming delivery100 and partial delivery.101 In some cases thepower to determine reduction may be contractually given to the contractor.102 This procedure may beparticularly critical in case of non-conformity, when the products defects are not clearly observable orwhen the producer is not allowed to attend the product test. Some domestic legislations103 andframework contracts of trade organisations104 require or favour the occurrence of good practicesentailing participation by the producer or by institutions representing all involved parties.

128. In case of product non-conformity, price reduction can be combined with productdowngrading105 and damages. When coupled with price reduction damages may not refer to loss ingoods’ value (which is already affected by price reduction) but, depending on applicable law, theycould cover the lost profits that the contractor would have earned from a subsequent sale, e.g. whenthe contractor had a commitment to sell certified food products to a retailer and is unable to do sobecause of the producer’s breach. Depending on the circumstances these damages may be claimedalso when price is reduced for a partial delivery when the contractor is unable to meet the volumerequirements posed by its client due to the producer’s breach.

F. Termination

129. Depending on applicable law termination may be generally conditional upon fundamentalbreach or its functional equivalents. It is theoretically available for breach of process-relatedobligations, non conformity and failure to deliver.

1. Termination for breach of process-related obligations

130. Termination for breach of process-related obligations may be seen as an exceptional case.When the applicable law provides that termination is conditional upon fundamental breach, partiescould agree that only exceptionally process related violations that do not impair product conformityare so serious as to amount to a fundamental breach. In practice termination occurs rarely sinceremedies for breach of process-related obligations aim at ensuring performance rather than bringingthe relationship to an end.106

2. Termination for product non-conformity

131. Delivery of non-conforming goods may result in a fundamental breach when the product doesnot fit with the ordinary purpose and may not be used for other purposes by the contractor. Whenthat is the case the contractor may seek termination, which can be combined with damages andrestitution. Termination in case of fundamental breach, when this requisite is applicable by law, maybe sought immediately upon rejection or when corrective remedies have failed to remedy nonconformity. Contractual clauses often place termination at the end of a sequence where other

Commented [A25]: Following thecomments made at the Private SectorWorkshop, perhaps this sentence could bemoved to the introductory paragraph abouttermination.


remedies have been tried and failed.107 It is advisable that parties set forth in the contract whentermination is allowed in order to avoid opportunistic use of termination threats. Moving from thisperspective parties could design the sequence of remedies in order to preserve incentives toinvest.108

3. Termination for producer failure to deliver

132. When the applicable law links termination to instances of a fundamental breach, mere partialdelivery could fail to meet this standard be qualified as such depending on circumstances (e.g. thepossible use of delivered goods by the contractor and the specific destination of the undeliveredproducts as known by the producer). Pursuant to rules generally applied to international sales, thecontractor would be able to terminate the whole contract only if the failure to make a completedelivery amounts to a fundamental breach.109 The same principle could be applied to delayeddeliveries or deliveries at the wrong place when refusing performance would be unreasonable. Thiswould occur, for example, if the delay has no material impact on the contractor’s business and theproducer is willing to indemnify the contractor for the costs incurred (e.g. for re-shipment orinsurance extension). Depending on applicable law, damages could anyhow be claimed by thecontractor.

133. By contrast, total and definitive lack of delivery (especially if accompanied by side selling) ismore likely to be qualified by applicable law as fundamental breach. Contracts provide for specificremedies concerning side selling of inputs or final products.110 Side selling is usually (though notalways) considered fundamental breach and it is associated with termination.111 Due to the highrelevance attached by the contractor to side selling, penalty clauses are often coupled withtermination for this type of breach.112

G. Damages

134. Contractual clauses on damages for producer’s breach are not common in productioncontracts and they are often combined with the remedy of termination.113 They tend to be defined ingeneral terms114 and without specification of the criteria to calculate them.115 In a few contractsdamages are already established as a fixed amount similarly to a liquidated damage clause.116

Sometimes they are in the form of a down payment or deposit to be paid by the producer at thesigning of the contract117; in other contracts they are paid through compensation between damagesand price (or any other sum due to the producer).118

1. Damages for producer’s breach of process-related obligations

135. Overall the role of damages for breach of process-related obligations seems less relevant asstand alone than other remedies like specific performance, corrective action, price reduction. As seenabove the role for remedies in kind is particularly important for producer’s breach of process-relatedobligations. Even if this is the case, damages can still play a complementary role in some specificcircumstances. For example, in a case of non-compliance with standards concerning a safety testingprocess applied to crops, correction could be attained by requesting a later screening on the productso that safety can be ensured; then, the loss in value of the goods is already eliminated by thecorrective remedy and no damages can be claimed. By contrast, if the later screening can reduce therisk of hazards to a level that enables saleable product except for in certain markets or for certainusers (e.g. children), then damages can complement specific performance to cover the loss in marketvalue. Moreover, if the adoption of corrective measures has generated costs for the contractor, thesecosts could be claimed as incidental damages from the producer in breach.


136. Breach of process-related obligations can result in a non-conforming product having a lowermarket value than expected; in which case damages should cover such loss in value.

137. Moreover, and even when process-related breaches do not affect product conformity (e.g.breach of social standards), the contractor might be entitled under the contract or the applicable lawto claim losses for hindered reputation, maybe substantiated by lost profits in subsequenttransactions, based on the firm commitment of full compliance with the process standards. In thesecircumstances, the claim could be challenged by the producer since the link between the breach andreputation loss is often uncertain (see art. 7.4.3, UPICC).

2. Damages for product non conformity

138. Damages for product non conformity may be sought as a stand-alone remedy or incombination with other remedies.

139. Damages as a stand-alone remedy. Whenever the residual value is different from zero(because there is a market in which non-conforming goods may be sold, or because they may besubject to alternative uses by the contractor, e.g. to feed animals), damages may play a similar roleto price reduction and may not be coupled with it.119 If the residual value is very low, the contractormight be interested in being released from the obligation to pay the price and would seek termination(see below). In these circumstances the contractor may also opt for a cover purchase without seekingtermination. Depending on applicable law, the contractor might be entitled to claim the differencebetween the contract price and the cover price (if higher).120 Alternatively, under some jurisdictions,reference might be made to market price regardless any specific cover transaction. In the specificcontext of agricultural production contracts, depending on applicable law, market price could bedefined taking into account the specific features of contractual relation, including its domestic orinternational dimension.121

140. Damages in combination with other remedies. In this case recoverable damages forgood non-conformity differ depending on whether the contactor seeks remedies in kind, such ascorrective measures, repair or replacement, or seeks contract termination.

141. Damages and remedies in kind. If corrective measures or repair have been granted butthe delivered goods still fail to meet quality and safety standards required by the contract, damageswill cover the loss in value (see par. below*). The recovery of losses in resale volume and profits mayalso be claimed; laws differ over the possibility and the criteria to quantify these losses.122

142. Damages and termination. If the contractor has not asked for correction, repair orreplacement of defective goods but has sought termination and concluded a substitute transaction,then damages are assessed having regard to the “cover purchase” of conforming goods. Indeed,depending on applicable law, the contractor is normally entitled to the difference between theproduction contract price and the cover contract price (when higher).

143. The just mentioned criterion to assess damages is applicable when substitute transaction hasoccurred and is based on conventional sales law at both national and international level123. It is alsocommonly used in the food market124. It may be particularly useful when the agricultural products atstake may be purchased by the contractor in a secondary market or within pending relations betweenthe contractor and other producers. The case is relatively common when the contractor establishessimilar contractual relations with several producers for the production of identical products. In othercases the contractor signs the production contract with a group of producers or a cooperative and thesingle breach is “covered” by a substitute sale by other participants to the group.

144. Whenever the contractor has engaged in a substitute (cover) transaction, the differencebetween the cover price and contract price (if the latter is lower) represents the loss sustained and,


depending on applicable law, may be claimed as damages by the contractor. However, applicable lawmay require that the cover transaction should take place in a reasonable manner and withoutunreasonable delay.125 If the cover contract price is higher only because of an unreasonable or evenintentional delay by the contractor, this may not serve as a reference to assess damages. In thesecircumstances, courts could look at current market prices, if existing. The rule would then be thesame as that applied when no cover transaction takes place, as explained below.

145. If the contractor does not engage in a substitute transaction, pursuant to rules applicable tointernational sales if applicable, the contractor may recover the loss sustained for lack of deliverylooking at the difference between the contract and the market price (e.g. goods market value at theplace of delivery, see art. 76, CISG). It should also be noted that the contractor may prefer not todisclose the existence and value of the cover transaction. For example, the contractor may prefer notto disclose who the substitute suppliers are. In these circumstances reference to market price couldbe preferred by contractors, even if occasionally leading to undercompensation. The reference tomarket prices (sometimes combined with the option for cover transactions) is quite common withinAgricultural Commodity Exchanges regulations.126

146. By contrast, there may be cases in which the reference to market prices is of little help inagricultural production contracts, being the production rather specific and being absent secondary ortertiary markets. This aspect may represent a further incentive for the parties to contractually agreeon penalty clauses (see below, …*).

147. In addition to the just described losses, the contractor may have the right to claim incidentaldamages. e.g. those linked with the expenses incurred to preserve the non-conforming goods untildestruction or restitution to the producer. It may be disputed whether the contractor may alsorecover consequential damages consisting in lost profits expected from goods resale in the market.127

In some cases parties agree in excluding the recovery of consequential damages. 128

3. Damages for producer’s failure to deliver

148. Depending on whether the contractor asks for (and obtains) specific performance or not,damages for failure to deliver may follow a different path.

149. When delivery is late, damages will normally only cover the delay, including possible lostprofits linked with better resale opportunities at the time of due delivery. The same rule generallyapplies when timely delivery is only partial, whereas the rest of the goods are delivered at a laterstage, or when the timely delivery is done at the wrong place and goods are transported to the rightplace later on.129

150. When the contract is terminated and therefore the contractor is released from the obligationto pay the price, the contractor may normally recover the difference between the contract price andthe market price of the goods at the time of termination (if ever higher)130. The situation is thenrather similar to the one examined with respect to termination for product non-conformity (seeprevious paragraph*).

H. Penalties, fines and black lists

151. Domestic legal systems differ on the admissibility of fines and penalties in contract law. Oftenpenalties are defined as a sum to be paid by the party in default (monetary penalty)131, either a fixedamount or a percentage of the value of the total production; sometimes as a percentage to bededucted from the final price of the good. In the latter case the penalty clause provides for a specialrule of price reduction, as discussed above (see examples in footnote n. …*).


152. Monetary penalties may be provided for process-related breaches,132 for product non-conformity,133 for failure to deliver or a mix of those. Having special regard to breaches of process-related obligations, penalties are meant to induce the producer to comply with requirements whennon-compliance may increase the risk of more serious consequences stemming from the breach asfor example failure to keep the facilities in proper conditions134 or failure to use agricultural practicesthat may undermine product quality.135

153. In other cases contracts may provide for non-monetary sanctions, such as clauses prohibitingthe producer in breach to conclude new contracts with the contractor. These sanctions are normallylinked with particularly serious forms of breach: they often follow a “grace period” in which theproducer has had the opportunity to cure its breach; sometimes the contractor retains discretion asregards the length of the ban against contract renewal.136 Contractual bans against contract renewalmay be seen as devices to keep control over producers’ access to a given supply chain whencontractors aim at restricting this access to producer’s capable of complying with given productionstandards. This practice shows how contractual remedies may spread their impact well beyond thebilateral dimension of the contractual relationship.

154. A more instrument is the one enabling aggrieved contractors to black list producers in breachso making information on the breach available for the relevant market. In this case access to marketrather than to a given supply chain is at stake. Due to this significant impact on the producer’sactivity, these mechanisms often prove to be very effective in terms of deterrence.

I. Contractor’s conduct and claim for remedies

155. Contractor’s negligent conduct in case of producer’s breach may affect both availability andcontent of remedies. Depending on applicable law It may exclude some remedies or it may reducethe amount of damages that can be taking into account the time of breach and its consequences.

156. The contractor’s power to provide guidance and instructions to the producer throughout thecontract (see intro*)may entail liability and problems that might arise at time of input provision orlater when inputs are deployed to produce. Depending on the applicable law, the power to giveinstruction may impose on the contractor a duty to cooperate in order to solve common problems andavert breach by the producer.

157. Depending on applicable law (see above, general part with references to contributory andcomparative negligence*), the contractor may be requested to cooperate with producer during theproduction process in order to ensure conformity of the final product. Contractor’s duty to cooperate,when applicable, becomes even more important when producer’s defective performance materializesand parties have to find a cooperative solution to jointly solve the problem. Depending on applicablelaw, failure to cooperate may preclude contractor from seeking termination or remedies that wouldotherwise be available.137 Failure to provide instructions or provision of instructions that contributesto product non conformity may reduce the damages, to which the contractor may be entitled.138 Inthe perspective of international sales law, a more specific case of aggrieved party’s lack ofcooperation is addressed in which price reduction may not be sought if the contractor fails to accept areasonable attempt by the producer to remedy a lack of conformity (including non-conformity due toprocess related breach) before the date in which delivery is due (see art. 37 and 50, CISG).

1. Contractor’s conduct and impact on remedies

158. The contractor has to cooperate with the producer not only during the production stage butalso at time of delivery when conformity is normally assessed.


For example, if and when international sales law is applicable, the contractor’s failure to timelyinspect the goods and timely give notice for any non-conformity of the goods deprives it of thepossibility of resorting to any remedy (then including remedies in kind, price reduction, damages)(see artt. 38 and 39(1), CISG). Pursuant to the same legislation, if the contractor has a reasonableexcuse for its failure to provide the required notice, then the contractor may reduce the price andclaim damages except for loss of profits but the contractor may not resort to remedies in kind such asrepair and goods substitution (art. 44, CISG). The contractor’s duty to cooperate with the producer isparticularly important when inputs are directly provided by the contractor. Delivery of non-conforminginputs may prevent the contractor from seeking remedies like termination or substitute transactions(see Chapter …) under the applicable law.

2. Contractor’s duty to mitigate and contractor’s remedies

159. As seen in other parts of this Chapter (see ___*), several though not all legal systemsimpose on the aggrieved contractor a duty to mitigate the consequences of producer’s breach. Whena duty to mitigate is not recognized, some forms of cooperation by the non breaching party may bebased on general clauses like duty to cooperate or good faith. When recognized, mitigation can resultin the adoption of corrective measures by the contractor,139 or by a third party at the expenses of theproducer.

In process-related obligations often mitigation is aimed at solving problems related to breaches thatmight undermine product non conformity at the end of the production process. Contractor may berequired to intervene directly or with the help of third party to fix failures in the health or qualitymanagement scheme so that certification of the end product will not be endangered. Contractor mayalso intervene for defective inputs provided by the producer or by third party contractually linked toher. The general mitigation standard is that of reasonableness but third party effects and compliancewith public regulation in relation to safety may require contractor a higher level of commitment inrelation to mitigation of safety hazards generated or not prevented because of the breach. It isrecommended that parties specify in their contracts both content and scope of ex post cooperation bythe contractor also in relation to third parties’ contribution.

160. When non-conforming products are delivered, the content of mitigation duty may depend onthe nature of non-conformity. When non-conformity is related to safety the contractor may berequired to take reasonable steps to reduce or eliminate hazards related to non-conformity.Contractor may be asked to cooperate in fixing the causes of non conformity. However when nonconformity of the product can not be cured mitigation may require cooperation in replacement or toengage in substitute transactions. Acceptance of non conforming goods may be made conditionalupon reimbursement of costs incurred for mitigation that can be deducted from the final price. Butmitigation can also concern quality problems. Here mitigation can require the use of secondary ortertiary markets for products that do not meet the expected quality but can still be sold. The standardof reasonableness related to the duty to mitigate may increase when producer’s breach has beenpartially caused by contractor’s delivery of non-conforming inputs. Differences between mitigation forsafety related breach and quality related breach may also be contractually defined.

Commented [A26]: Online comments.Fondation pour le droit continental (ad hocexpert group) sees a very strong emphasis oncooperative remedies and the importance ofthe duty to mitigate or of the right to cureshould not be overestimated. This sub-chapter gives the impression that there is amitigation duty, while many legal systems(notably the civil law tradition) do notrecognize as such an obligation to mitigate)

Commented [A27]: Online comments.Prof. Cafaggi notes that sub-topics “J.Remedies in multi-party contracts” and “K.Remedies in linked contracts” have beenomitted: He says “The paragraphs onmultiparty and linked contracts have beenomitted in the latest version. We wonderwhether this creates any inconsistency withthe conclusions emerged during the Octoberworkshop and, moreover, with theIntroduction, part. where it acknowledgesthe relevance of multi-party and linkedcontracts and the importance of the supplychain dimension for the agriculturalproduction contract, concluding that,although the focus will remain on bilateralcontracts, these additional aspects will beaddressed in the Guide (see par. 50 ff.).”


III. Producer’s remedies for contractor’s breach

A. Introduction: cooperative and non-cooperative remedies against contractor’s breach

161. Like in the case of contractor’s remedies, the producer’s remedies for a contractor’s breachcan serve two main purposes: as a means for correcting or adjusting the effects resulting from thecontractor’s breach in order to enable the accomplishment of the contractual plan ( “cooperativeremedies”); or as a means to compensate the aggrieved party or to remove the effects stemmingfrom the breach (“compensatory remedies”) (see above, …*).

The role of “cooperative” remedies is particularly relevant with regard to breaches concerning non-monetary obligations and, in any case, highly interdependent obligations (including the monetaryones). Cooperative remedies are particularly important as a means to ensureregulatory complianceMoreover,long term contracts with a high level of specific investments related to participation inquality and safety management schemes require a high degree of cooperation, particularly in cases ofnon-compliance when problems have to be solved jointly.

B. Right to performance

1. Right to performance in case of delay in price payment

162. The right to price payment is not subject to the restrictions of specific performance of non-monetary obligations in terms of feasibility or costs of the enforcement of a remedy in kind (see art.7.2.1 and 7.2.2, PICC). A formal request for payment will normally suffice to enforce the producer’sright to an unpaid price. The formal request will be made on a private basis, through a court, anarbitration procedure or an alternative dispute resolution mechanism. If this claim remains withoutsatisfaction, depending on circumstances and applicable law, the producer might opt for executoryjudgements and try seizing contractor’s goods. An alternative (or complementary) option could be toresort to guarantee mechanisms, as explained below.

(a) Right to payment and guarantee mechanisms

163. The law may provide further protection for this right in contracts in which the ownership ofthe agricultural products (e.g. livestock) is retained by the contractor. It may assign the producer afirst priority lien over the goods owned by the contractor(milk, crops, livestock, etc.) or on therevenues derived from their sale to third parties, if the contractor has already sold them.140

164. A different instrument for protecting the producer’s right to payment is the issue of a letter ofcredit by a bank in favour of the producer and in the contractor’s interest. However, bank guarantescan be expensive and are not in usual in a purely commercial context.

2. Right to performance in case of contractor’s failure to provide (conforming) inputs.Repair on inputs. Inputs replacement

165. Three situations should be distinguished depending on the time of contractor’s breachconcerning input provision.

166. (a) When the non-conformity may be detected at the time of input delivery, the producermay be in the best position (and is normally requested by the contract) to inspect the inputs andpromptly notify of non-conformity. If the breach consists of incompleteness of delivery, late deliveryor lack of delivery and this has an impact on the production process, the producer may be again

Commented [A28]: Online comments.Prof. Cafaggi notes that “H. Producer’sremedies in multi-party contracts” and “I.Producer’s remedies in linked contracts” areomitted: “These paragraphs have beenomitted in the latest version. As above forcontractor’s remedies, we wonder whetherthis creates any inconsistency with theconclusions emerged during the Octoberworkshop and, moreover, with theIntroduction, part. where it acknowledgesthe relevance of multi-party and linkedcontracts and the importance of the supplychain dimension for the agriculturalproduction contract, concluding that,although the focus will remain on bilateralcontracts, these additional aspects will beaddressed in the Guide (see par. 50 ff.).”


under a duty to give prompt notice to the contractor. This notice may also come with a request forinstructions to the contractor about measures to adopt in order to mitigate the consequences of thebreach. Depending on the real possibility of obtaining equivalent inputs in the market, the producermay insist on specific performance or replacement by the contractor or opt for a cover transactionwith a third party. Sometimes contracts expressly request the producer to take steps for suchalternative transactions.141

167. (b) Some cases of input non-conformity can only be discovered after input delivery but beforeoutput delivery by the producer. Indeed, the inadequacy of a seed, the harmful nature of a fertilizer,and the unsafe character of feed can become apparent only during the production process afterdelivery. When this is the case, providing prompt notice, requesting instructions and eventually takingproper actions by the producer’s intervention could aim at the correction of the production processaffected by defective inputs. Input provision may concern livestock. In livestock production contracts,where animals are delivered to the producer, usually the contractor keeps ownership throughout theduration of the contract; if so, the producer has the possession of the livestock as custodian orcaretaker142 or is considered a “faithful depository,”143 being responsible for the care of the animalswhen in its possession. For this reason, several livestock contracts require the producer toimmediately inform the contractor “should there be any deviation from acceptable standards.”144

Moreover, in case of the mortality rate of livestock exceeding the daily rate established in thecontract, the producer shall immediately summon the contractor and present the carcass forinspection within 24 hours; prompt inspection by the contractor takes place and, in case of exceedingmortality rate limits, the value of dead animals may be deducted from the producer’s next payment.

(c) Lastly, it may be the case that the contractor’s breach concerning input provision only emergesafter completion of the production process, when the producer delivers the final product and thecontractor or its agents inspect its conformity. Then, correcting input non-conformity may be moredifficult. Since it is likely that input non-conformity will translate into output non-conformity, the mainquestion is to coordinate remedies available to the producer for the contractor’s breach with remediesavailable to the contractor for the producer’s breach. However, the choice of remedy shouldwhenever possible preserve the investments and the long term relationship.

168. Within the various remedies provided by law, the producer may have an interest in seekingremedies in kind like repair and replacement when there is a strong functional interdependencebetween input and output provision and markets are thin. The producer may instead choose asubstitute transaction combined with damages when inputs are easily replaceable and there is nostrong functional interdependence.

169.

(a) Remedies in kind when inputs are provided by a third party in privity with the contractor

170. Inputs may be provided by a third party on the basis of a contract concluded with thecontractor. The third party may be a private enterprise, an NGO, a public institution, includingGovernments.145 The contractor may then resell the inputs to the producer or it may qualify theproducer as a “third party intended beneficiary” of the contract between the contractor and the thirdparty. The input provider delivers the input to the producer (intended beneficiary) on the basis of anagreement with the contractor (promisee).146 The conditions upon which the producer may bequalified as a “third party beneficiary” and the rights and remedies the producer may have as a thirdparty beneficiary will vary depending on applicable law. In several systems these rights include rightto performance to be directly enforced vis à vis the input provider.

Commented [A29]: Prof. Fontaine: Thissection (a) is not followed by any section (b).Perhaps there is a missing passage aboutremedies in kind when inputs are providedby a third party in privity with the producer,which in my experience is very frequent ?Very often, the agricultural productioncontract obliges the producer itself topurchase inputs from the third partiesimposed by the contractor.


171. Even if the producer is not considered a “third party beneficiary,” the contractor will anywaybe able itself as party to the contract, to monitor the performance of the input provider, being directlyable to provide instructions and use contractual remedies to prevent or address a breach concerninginput provision. Remedies against the input provider include specific performance, repair andreplacement or corrective action. The use of these remedies by the contractor may contribute tofacilitate the producer’s performance, whereas the contractor’s failure to deploy them whenappropriate may, depending on applicable law, excuse the producer’s breach. An open issue iswhether the producer, besides the contractor, may seek indemnification from the third party for costsincurred because of its breach.

172. A different situation is the one in which contractor, producer and input provider have signed amulti-party contract.147 In these circumstances, depending on applicable law, both the contractor andthe producer are normally allowed to request specific performance to the input provider.

1.3. Right to performance in case of contractor’s failure to take delivery ofconforming goods

173. The role for specific performance of the duty to take delivery is particularly important in casesin which commodities are subject to fast deterioration (highly perishable crops) or to a high risk ofcontamination (particular livestock) or costs of storage (e.g. forestry).

174. Where failure to take delivery represents a breach by the contractor (and not a measureagainst the producer’s breach, e.g. in case of non-conforming goods), the producer would have theright to demand that the contractor take delivery of the goods, unless taking delivery is impossible orunreasonably burdensome.148 This may be achieved, for instance with the storage of the goods at anindependent third party’s warehouse, eventually in the presence of a public authority for the accountof and at the cost of the contractor.149

175. When costs of preservation of the goods are significant and/or the goods can deterioratequickly, applicable law may require the producer to take reasonable measures to sell the goods,retaining (part of) the proceeds to cover the expenses incurred to preserve and sell the goods.150

Some legislation also assigns the producer the right to retain an amount equal to the unpaid priceand the damages.151 The producer’s ability to resell the goods when appropriate might influence theliquidation of damages thereof (see below on duty to mitigate, …*).

C. Withholding performance

176. Filing a request for performance through the procedures mentioned above is not the onlymeans of redress available to the producer. The producer may also try to induce the contractor’sspontaneous performance by withholding the producer’s own performance whenever it is due beforeor simultaneously.

177. The effective role of withholding performance in inducing contractor’s compliance depends onthe circumstances and the type of withheld performance. Having regard to the producer’sperformances linked to the production activity (including making investments instrumental toproduction), the producer’s withholding might represent, in principle, a very effective threat. So, forexample, in case of contractor’s failure to provide conforming inputs, the impact determined byproducer’s withholding production would be much higher than the one determined by producer’swithholding payment of inputs: interdependence between input provision and processing is muchstronger than (and anyhow different from) the one between input provision and payment for inputprice. In this case, depending on applicable law and contractual provisions, there could be limitationsto the producer’s right to withhold production, e.g. having regard to the following circumstances: if


(1) non conforming inputs will result in non conforming outputs, (2) when production is stronglydependent on a specific type of inputs provided by the contractor, (3) when the producer is not in aposition to reasonably obtain substitute inputs, (4) or to take reasonable steps to reduce theconsequences of any non-conformity. In any case, cooperation will call for proper information transferto the contractor in order to stimulate corrective measures from the party who is in the best positionto adopt them.

178. In practice, the impact of withholding performance by producer may however be limited.Indeed, either because the producer has no economic power to threaten the use of such a remedy, orbecause such a use is inappropriate for the operation of the production schedule, the producer mightrefrain from withholding production and investments thereof as a reaction to contractor’s breach.

179. Once production is completed, withholding producer’s delivery could represent an effectivetool taking into account the consequences of a delayed delivery in terms of product deterioration andpreservation costs.

180. Moreover, if, as it is mostly the case, the contractor’s performance (mainly price payment) isdue to come well after the producer’s; furthermore legal principles concerning anticipatory breach (ifrecognised under applicable law) would limit the use of withholding performance only to the case of(anticipatory) fundamental breach.152

1. Withholding performance in case of contractor’s delay in providing finance

181. A special case is represented by advance payments scheduled by the contract to finance orco-finance production. If the producer has no alternative sources of funding or it is unreasonablycostly for the producer to access alternative finance, withholding production may represent a usefulremedy against contractor’s delay in financing production activity. The contract could permit theproducer witholding performance when strictly dependent upon expected finance without hindering(to the extent possible) the accomplishment of the production plan (e.g. the producer could beallowed to refrain from making the planned special investments while persisting in the ordinaryproduction activity). Providing the contractor with proper information about the impact on theproduction activity is of primary importance, since this information may trigger the contractor’scooperation to prevent changes in the agreed plan.

D. Termination and the failure of cooperation

1. The grounds for termination for contractor’s breach

182. When law restricts termination to the case of fundamental breach (see above, …*), partiesmay specify the type of breach which enables the use of this severe remedy. In production contracts,the selection of breaches allowing termination will normally depend on: (1) the role of compliancewith particular standards for the achievement of the production plan and its possible certification, ifrequested (e.g. this might refer to standards applicable to inputs provided by the contractor); (2) theanticipated consequences of the breach and the possibility to correct or reduce them (e.g. thepossibility to obtain alternative finance if the contractor fails to provide it); and (3) the extent towhich the contractor departs from the requested behavior (e.g. the extent of the delay in payment153

or the level of non-conformity of inputs provided by the contractor).154

183. In some cases, the producer’s right to terminate the contract for the contractor’s breach isaddressed by a comprehensive termination clause covering all parties’ breaches in the contract;155 inother production contracts, termination clauses for the contractor’s breach are distinguished from theclauses concerning the producer’s breach.156


184. The relevance of termination mostly depends on the type of breach enabling the remedy. Theanalysis below considers the different situations linked with the several contractor’s obligations andbreaches.

(a) Termination for contractor’s failure to pay

185. When termination is made by law conditional upon fundamental breach, the fundamentalnature of the breach for failure to pay the price mainly depends on the time in which payment is dueand the length of the delay.

186. The time factor also affects the function of termination from the perspective of the producer.Indeed, if total payment is due before or during production and the breach becomes fundamentalbefore (all of) the producer’s investments are made, then contract termination can allow the producerto avoid those investments or minimize sunk costs in cases in which those investments are hard to beredeployed in alternative transactions. If payment however, is due after production but beforedelivery and the breach becomes fundamental when the produce can be used for alternativetransactions on the market, contract termination would allow the producer to seek these alternativeoptions but will not prevent investments. Lastly, ifprice payment is due after delivery, as it is oftenthe case, the producer will normally have no interest in seeking termination, having no pendingobligations to be released from. By contrast, the producer will seek price payment, interests andother possible damages before or instead resorting to termination (see below, …*).

187. A slightly different situation to the first described above occurs when there is anticipatorybreach. Even when payment is not due during production yet, concrete circumstances may makeclear that the contractor will not pay the price (or a substantial part of it), either because thecontractor has declared so or because, e.g., the contractor has become insolvent without providingadequate assurance for the future payment.157 If assurance is not provided within a reasonable time,also considering the status of the goods (whether perishable or not), the producer will seektermination in order to be released from contract obligations and either suspend/change theproduction process or continue it and sell the goods on the market.

188. In instalment contracts and, more generally, long-term contracts covering several harvests,seasons and/or life cycles of the agricultural products, including livestock, applicable law may providethat termination be available only if the breach concerning a single instalment generates a reasonablebelief that a fundamental breach of future instalments will occur.158 This might happen, for example,if the contractor undergoes a significant financial distress, eventually heading to bankruptcy. Theexceptional nature of termination is here consistent with the nature of the contract and the intensityof cooperation envisaged by the parties,159 whereas a wider space for termination might induceopportunistic behavior also regarding its consequences in terms of costs and risk allocation (e.g. therepudiated contractor might try to put all of the costs of investments and inputs on the producer).

(i) Termination in case of obligee’s delay in providing finance

189. Where production depends on advance payments (due, e.g., to the contractor’s request forspecific investments financed by the contractor), a delay in payment may severely hinder theproducer’s capability to execute the contract, putting at risk the whole transaction. If alternativesources of financing exist for the producer, depending on applicable law, a duty to use these sourcesmay emerge and the producer could claim incidental damages for the costs incurred thereof (see onduty to mitigate, …*). When no alternative sources of financing are available, the producer may wishto renegotiate the original agreement and this may represent a preferable remedy compared totermination when parties want to preserve the relationship. For example, if lack of financing prevents

Commented [A30]: In the BangkokConsultation during discussions and Q&A, aconsiderable concern was expressed withregards to the contractor’s default and theensuing problems in terms of priority rankingin acquiring the contractor’s assets. Therecommendation was for the Guide toinclude some of the different mechanismsthatare available in certain jurisdictions toprotect the producers in such circumstances,such as security funds or possible priorityrights for the farmers. The example wasgiven in one jurisdiction of the obligationimposed upon the buyer to make aguarantee deposit prior to the production inthe amount of 10-15%.

Commented [A31]: Online comments.Prof. Cafaggi: “Please notice that the sectionon producer’s duty to mitigate has beenremoved from the latest version. Please seecomments above and below on this point.”


certain investments from occurring with a view to a new certification for sustainable agriculture, theproducer should be allowed to convert its production into a non-certified production, beingindemnified for the incurred losses (see below on damages*). When all cooperative measures fail,termination may be the remedy of last resort. For example, when financing is connected with aspecial project on sustainable agriculture in a specific rural area, which needs land-related specificinvestments before the production activity, the failure of this project due to the financier’s inability toprovide the expected resources should not affect the production contract as whole in which thespecial project was designed.160

(b) Termination for contractor’s failure to provide (conforming) inputs

190. The mutual interes of the parties in maintaining would in most cases give priority tocorrective remedies over termination, which would normally be reserved for situations where theprovision of conforming input becomes impossible.

(c) Termination for contractor’s failure to take delivery

191. In the case of a contractor’s failure to take delivery, termination may play an important rolesince it enables the producer to be released from the duty to deliver and resell the goods on themarket. When the law makes termination conditional upon fundamental breach, in order for thebreach to be fundamental, there must be either an express refusal of performance (amounting tointentional breach) or a significant delay in taking delivery having regard to the risk of fastdeterioration of the goods and the costs of their preservation (see above, par. …*). Very likely, theproducer will assess the opportunity to terminate the contract taking into account the existence ofsecondary markets and the material possibilities of accessing them in due time.

192. In case of long-term contracts, when a fundamental failure to take delivery regards a singleinstalment (one harvest or group of animals) or the delivery of a single season in a multi-seasoncontract, applicable law could restrict the remedy of termination to cases in which breach is such thatit generates a reasonable belief that there will a fundamental breach in respect of future performance(see art. 73, CISG). Alternatively, partial termination may be available so as to affect only theinstalment at stake and the relative payment (see section on effects of termination, …*).

(d) Termination for contractor’s failure to purchase the whole production (or a percentage of it)

193. The producer’s interest in terminating the contract for the contractor’s failure to purchase thegoods (this meaning the whole production or a fixed percentage of it) depends on the producer’sopportunity of alternative deals in the market and the preservation of its position within the samesupply chain. Indeed, unless the applicable law and judicial system support an effective protection inkind (with specific enforcement for both the duties to take delivery and to pay the price), theproducer will aim to reduce the consequences of the breach by selling the untaken product through acover transaction, possibly claiming for consequential damages with respect to lost profits ifadmissible (see below*). This preference may be counterbalanced by the ability of the contractor toretaliate and prevent the producer from accessing the supply chain with other contracts. Theincentives to make a better deal in the individual transaction have to be balanced with those ofpreserving a stable position within a global supply chain.

194. A particular situation may arise if the breach occurs at the end of a given harvest or seasonwithin a long-term contract. In this case contract termination is an even more severe remedy, in factdepriving the producer of the possibility of supplying goods along several years and seasons. Here,


withholding performance (see above, …*) and partial termination may represent more adequateremedies, whereas the producer will seek termination of the whole contract only if the producerreasonably believes that no reliance can exist with respect to future purchases and the producer hasalternative (or better) opportunities on the market.

E. Damages

195. Although any type of breached obligation may lead to a claim for damages when non-performance is not excused, both the requirements and the legal consequences of contractor’s breachmay differ from one type to another. The analysis below will show how, also taking into account howtermination, restitution and damages are combined.

1. Damages for delay in payment. Interests and other consequential damages.

196. Failure to pay the price gives producer a claim for damages. Late payments can represent abreach of contract and/or constitute an unfair commercial practice and be sanctioned accordingly.Lengthy payment deadlines and the lack of any penalties for payment delays may be seen as abusiveor unfair practices that exacerbate the producer’s dependences. In some domestic legislation,mandatory rules concerning maximum delay, burden of proof and sanctions, such as a more punitiveapproach to the calculation of interest rates, have been introduced specifically for agriculturalcontracts, including production contracts.161 Similar rules have been introduced by codes of conductsand codes of best practices to prevent excessive delays.162 These rules are aimed at protecting theparty with lower bargaining power.

2. Damages for contractor’s failure to provide (conforming) inputs and impact onproducer’s liability

197. When the contractor fails to provide conforming inputs, the producer can claim damages. Instable and long term cooperative relationships damages do not play a major role. Damages as asubstitute for performance for input provision will hardly be claimed unless the producer seeks inputsin the market and claims the difference between the agreed price and the price paid in the substitutetransaction. Usually, damages will be combined with other remedies including corrective measures,repair, and replacement. Here the objective is to put the producer in as good a position as theproducer would have been in had the conforming good been delivered. Depending on applicable law,when the breach is fundamental, the producer can terminate and ask for damages. The general rulefor the combination between termination and damages will apply (see below*).

3. Damages for contractor’s failure to take delivery

198. As seen above, the contractor’s failure to take delivery includes a number of situations whichdiffer both in terms of the choice between request for performance v. contract termination and interms of the damages incurred. More particularly, late delivery taking and taking delivery at thewrong place are normally compatible with the preservation of the contract. In these cases theproducer will be able to claim all the costs connected with storage, preservation and transportation ofthe goods, if needed to allow the late delivery or the delivery at the right place, together with anyother costs possibly linked with these operations (e.g. additional insurance costs).

199. Whatever the delay in price payment, adding to the delay in taking delivery, can becompensated concurrently through interest payment in accordance with what has been examinedabove (see para. …*).


200. The contractor’s failure to take delivery and wrongful rejection163 represent different cases.With different implications, the analysis can be referred to total or partial delivery that is not taken orrejected by the contractor. In these cases, as seen above, depending on circumstances and legalrequisites, damages may be claimed as a stand alone remedy or together with specific performanceof the duty of taking delivery. The present analysis focuses on the former general case, whereas abrief reference to the latter case is done at the end of this paragraph.

201. Legal systems vary with respect to the qualification and assessment of recoverable damages.Some but not all permit a choice between expectation and reliance damages, as explained here below(see definitions in para. __* and __*) .

202. When awarded, expectation damages provide the aggrieved party with “the benefit of itsbargain by being put in as good a position as he would have been in had the contract beenperformed”164; in a production contract, that is breached by the contractor failing to take delivery andpay the price, this could warrant the producer lost profits from the sale, although it should beconsidered that lost profits are not awarded by all legal systems.

203. When considered recoverable, lost profits are normally measured comparing the price statedin the breached contract and the price at which the producer (seller) has sold (or could have sold)goods in the market upon termination.165 Only marginally, attention is paid to the difference betweencontract price and production costs.166 Then, looking at some of the available options, one of thesethree criteria would be used to assess lost profits:

- the difference between contract price and substitute transaction price;

- the difference between contract price and market price; or,

- the difference between contract price and production costs.

204. In fact, if ever provided by applicable law, these criteria may sometimes fail to provideproducer with an effective remedy for lost profits. Indeed:

- Goods may be subject to fast deterioration and therefore easily perishable: in thesecircumstances the producer will not be able to resell the produce; assuming that the marketprice at the time of termination was close to 0, then the lost profit could be equal to thecontract price, but it could be questioned whether a court would be willing to award the fullprice as lost profit.

- Production could be subject to very specific standards requiring costly investments, which arehardly redeployable in alternative transactions, nor secondary markets could exist for goodscomplying with these standards: in these circumstances no cover transaction will take place;no market price exist as a reference point to assess lost profits; production costs may be high(even higher than contract price) and in any case difficult to associate to the specific deliverynot taken and paid by the contractor, being often these costs borne for long term investmentsdue to cover several harvests and crops.

205. Instead of looking at so called “expectation damages”, some legal systems allow for recoveryof so called “reliance damages”. If so, recovery tends to reimburse the aggrieved party for losscaused by reliance on the contract by being put in as good a position as he would have been in hadthe contract not been made.167 In a production contract in which the contractor has failed to takedelivery, this would mainly cover the incurred costs by producer for specific investments.

206. It should be acknowledged that in the conventional sales law approach, expectation morethan reliance is the rule.168 By contrast, in agricultural production and, more particularly in case ofcontractor’s failure to take delivery, contracts parties could consider the possibility to leave morespace for reliance damages, due to the relevance of producer’s specific investments and, in some

Commented [A32]: Prof. Fontaine: Thedistinction between expectation and reliancedamages (or “positive” and “negative”damages”) could be further discussed. Onecould indicate that for reasons linked to therespective concepts, negative interests areoften mainly taken into consideration forlosses occurring at the stage of contractformation (breach of negotiations, mistakeor fraud affecting contract formation), whileexpectation interests are characteristicremedies for breaches of performance ofvalid contracts (the subject matter of thisChapter). Legal systems acknowledging thedistinction do not always give a choicebetween the two modes of calculation, butprovide both modes with respective scopesof application. Also see comments above.


cases, the obstacles faced by the producer to substitute resales in the market. Although theadmissibility of so-called “reliance damages” is highly debated in contract theory and practice (seeabove, para. …*), legislation exists that recognizes this right in favour of producers in agriculturalproduction contracts; in this perspective, damages amount to the value of the (sunk) investmentsadjusted to reflect the remaining useful life of the equipment.169

207. In addition to the abovementioned losses, the producer’s damages could include furtherlosses incidentally or consequentially incurred from the breach and, in particular: any cost relatedwith preservation and resale of the goods; apart from the above mentioned lost profits, any otherloss, e.g. the one resulting from the delayed payment since it has been incurred only after thesubstitute sale. This delay may affect the producer’s capacity to return borrowed resources.170 Theselosses may represent a fair estimate of its consequential damages.171

208. When the producer seeks specific performance of the contractor’s duty to take delivery,recoverable damages could include all the costs incurred to preserve the goods until the late delivery.Like in the case above (see par. on remedies for unpaid price), a specific cause of action might beneeded for requesting the price and accrued interests, if payment is not affected together with therequested taking delivery.

4. Liquidated damages and penalty clauses

209. In production contracts, liquidated damages clauses could play a relevant function whenapplied to a contractor’s breach.172 In some areas, as that of late payment, the punitive componenthas grown and added a new dimension to remedies.173 On the one hand cooperative remediesbecome more important; on the other hand, for more specific and limited instances the role ofpunitive sanctions to penalize in particular contractor’s delay have developed in practice .

F. Producer’s duty to cooperate

210. Depending on applicable law, when contractor is in breach, a duty to cooperate by theproducer may preserve the relationship and the investments therof, especially when the breach is notintentional. When recognized, this duty to cooperate may after the breach affect the materializationof a breach, its magnitude and the consequences. For example, in case of contractor’s duty to selectand provide inputs, the producer could be requested (by contract or applicable law) to provide thecontractor with any relevant information about supervening circumstances affecting the choice andselection of inputs (e.g. desease of pre-existsing livestock at the same premise where new livestockshould be delivered by contractor). The producer’s failure to do so could reduce or excludecontractor’s liability depending on applicable law.

G. Producer’s duty to mitigate

211. Depending on applicable law, a mitigation duty may be assigned to the producer when thecontractor breaches. The duty to mitigate is particularly relevant when the contractor fails to provideinputs, provides non-conforming inputs, fails to accept the goods, or wrongfully rejects them. Legalsystems might not recognize a duty to mitigate but in general they recognize a duty of the aggrievedparty to act in order to mimimize the adverse consequences of a breach1.

212. When the contractor breaches an obligation to provide inputs, mitigation might require theproducer to engage in substitute transactions and find inputs in the markets. When non-conforming

1 See art. PICC 7.4.8, art. 77 CISG

Commented [A33]: Online comments.Prof. Cafaggi:” We propose to restore theoriginal scheme of the chapter as regards theaggrieved party’s duty to cooperate andmitigate, for both contractor’s andproducer’s breach (see comment above inthe general part).“

Commented [A34]: Prof. Fontaine: To becoordinated with No. 53 above, takingcomments above into consideration.

Commented [A35]: Iamiceli: Wepropose to restore the original scheme ofthe chapter as regards the aggrieved party’sduty to cooperate and mitigate, for bothcontractor’s and producer’s breach (seecomment above in the general part).


inputs are delivered, the producer may be asked to adopt corrective measures to address non-conformity as for example adapting the production process to the non-conforming inputs.

213. When the contractor fails to accept the final product, the producer should sell perishablegoods. Similarly, when the contractor wrongfully rejects the goods, the producer should resellperishable goods. Legal systems differ as to the qualification of resale. In some legal systems theproducer can but is not obliged to resell. In other legal systems resale is the subject matter ofmitigation but only when it is commercially reasonable. The substitute transaction by the producercan therefore influence the calculation of damages or can be qualified as mitigation.

214. When should producer engage in a substitute transaction without asking for the price?Certainly when waiting would imperil the ability to deliver for example in case of perishable goods2.In these circumstances, insisting on action for price may be inappropriate and the producer may bebarred from getting full compensation of costs of preservation if these could have been avoided.3

Then the producer might be under a duty to take all reasonable measures to sell the goods, keepingthe contractor informed about these steps.4 Depending on circumstances, with special regard tomarket structure (e.g. very concentrated demand), producer’s size and her commercial capability,these reasonable steps may not enable a substitute sale to occur or may enable a low profit sale. Theproducer might need assistance in order to find access to a market for a substitute sale and somemultiparty contracts provide for this collaboration by dedicated agencies.5 In order to assess the realpossibility for a substitute transaction, account should also be given to possible prohibitions includedin the contract and barring the producer’s disposal of goods, though rejected or left untaken by thecontractor; this approach is more common when production involves the use of special quality inputsor IPRs held by the contractor.6 By contrast, the mere fact that the agricultural goods (crops orlivestock) are owned by the contractor may not impede a “self-help” sale if this is due to mitigation ofirreversible losses. Conclusively, whenever, depending on the mentioned circumstances, the produceris due to take reasonable measures to sell the products, she may then be induced to withdraw herrequest for the price and terminate the contract .7 As it has been seen above, this choice affects theassessment of damages.

215. The possibility of a substitute sale, if ever accessible for the producer, may also affect thechoice of remedies and the assessment of damages in other circumstances, when costs ofpreservation are not unreasonable or goods are not subject to fast deterioration. Here, provided thatthe contractor’s breach is fundamental (e.g. because delay in taking delivery and payment isunreasonable), the producer may opt for termination and try to sell the produce on the secondarymarket.

2 See art. 88, CISG.3 See PICC art.7.4.8 art. 77, CISG.4 See art. 88, CISG.5 See for example the following clause of a multiparty agreement stipulated in Kenya for the productionof cotton: “In order to mitigate their losses, if the ginners do not buy the produce from the farmers within thebuying, CODA may advise on the way forward including sale to third parties in addition to THE FARMERCOMMITTEE seeking compensation”.6 See for example the following clause of the US DuPont export production agreement for Optimum highoil corn (Iowa database n. 77): “1.g. Grower shall not deliver any of the optimum grain to any other destinationwithout the prior approval of DuPont Specialty Grains and the Pricing Elevator except as otherwise permitted inthis Agreement. In the event of a violation of this provision, grower hereby acknowledges that, in addition toany other rights and remedies available to DuPont Specialty Grains, Grower will forfeit all premiums due on theentire contract bushels, and grower will be barred from contracting with any DuPont Specialty Grains programfor the next two successive crop year.”.7 Indeed in a long-term contract and especially in an instalment contract, the producer will aim atpreserving the continuity of the contractual relation as a whole, limiting the effects of termination to thedisputed delivery.


216. It is highly recommended to define in the contract what constitutes reasonable mitigation incase of contractor’s breaches.

IV. Restitution

210.217. When performance consists in provision of goods or services (non-monetaryperformances), in very general terms one could say that all performances affected by (total orpartial) termination (see above, par. …*), if already executed, should be returned in kind, unless suchrestitution is not physically possible. If restitution in kind is not physically possible, then restitutionshould occur in money unless: (a) the restitution in kind is impossible for reasons depending on theparty claiming for restitution, then no restitution in money is due174 (e.g. an harvest machine hasbeen lent to the producer by the contractor but then used by one of the contractor’s employee anddamaged); (b) the executed performance has brought no benefit to the recipient175 (e.g. the harvestmachine has never worked since delivery and after a short period has been destroyed by ahurricane).

211.218. In fact in a production contract the real possibility of providing restitution in kindmight be rather limited. To understand this, a distinction should be drawn between goods andservices. With regard to the former, two main objects should be considered: inputs and agriculturalproducts.

212.219. Restitution of inputs. Having regard to physical inputs, in principle they should bereturned to the contractor if they were provided by her.176 In fact, depending on the stage ofproduction, they might have been already incorporated into the product (e.g. planted seeds, usedpesticides, used feed for animals, used medicaments, etc.), which makes impossible a restitution inkind. In this case, if the agricultural product is due to rest with the producer (see below*), theproducer might be requested to pay the contractor for the value of the used inputs, unless anyreduction or exemption can be requested for their non-conformity. By contrast, provided that theproducer retains ownership of the agricultural products, the producer might be able to return in kindphysical inputs that have been received but not used yet, as well as any infrastructure, machine orequipment that might be moved out of the producer’s property without unreasonable effort andcosts.177 If the contract had provided for the use of land owned by the contractor, also land should bereturned to the contractor.

213.220. Restitution of agricultural products (outputs). Within an ordinary scheme, thecontractor is due to get possession over the agricultural products only in the final stage of thecontract execution, whereas title and possession over these outputs are retained by the producer. Inthis case, if the contract is terminated, both title and possession rest with the producer, who willretain agricultural products, including crops and livestock, without being obliged to make anyrestitution. However, it could be the case that the contractor has retained ownership over the land,the seeds or the livestock, so that, when contract is terminated before the ordinary expiration date,these goods and the outputs produced thereof have to be returned to the contractor. In practice, ifthe contractor has terminated the contract upon rejection of non-conforming goods, it may prefer toclaim no restitution.178 In other cases, for reasons linked with property rights on seeds, it mayrequest the goods to be returned or destroyed.179 An effective restitution may be also hindered by apossible lien or retention right that the contract or the law may assign on these assets to theproducer in order to secure contractual obligations (e.g. the contractor’s obligation to pay theprice).180

214.221. Four distinct issues arise with respect to the restitution of physical goods in kind:

Commented [A36]: Online comments.Prof. Cafaggi suggests that a page breakcould be useful to make clear that thissection is common to both producer’s andcontractor’s breach.


- whether the producer may claim any allowance for costs borne for goods preservation;

- whether the producer may claim any allowance for additional value brought into the goods tobe returned (e.g. agricultural products; land);

- whether the party in charge of restitution may be requested to provide any allowance forbenefits received from the goods;

- what happens when restitution becomes impossible after contract termination.

215.222. With reference to the issue under (i), depending on applicable law, these costs maynormally be claimed if these expenses are reasonably required for the goods preservation andmaintenance (see UPICC, art. 7.3.6(4)). Indeed, the party due to make restitution is under a duty toprovide best effort to preserve the goods in the interest of the other party (see also CISG, art. 85 ff.).

- As it is presented with regard to service performances, benefits anyway produced duringexecution are normally paid back by the party who has taken advantage from such benefits.In the case of benefits attached to a physical good (increase in value), it should beconsidered whether these are reasonably separable or not from the good to be returned (e.g.benefits produced by services rendered on the land are not normally separable).

- Once contract has been terminated, benefits received by the party due to return the goodsare normally considered as unjustified and should be returned as well. Among these,restitution includes the proceeds received from a resale of the goods by the party in chargeof their preservation when preservation implies prompt resale of perishable goods (see alsoCISG, art. 84(2)(b)). For example, if, in a case of termination for contractor’s breach, theproducer has to return not used seeds and, lacking a prompt taking of delivery by thecontractor, the producer sells the seeds before deterioration, then the contractor may claimsale proceeds rather than the seeds in kind.

- Like any other obligation, the one of restitution is normally subject to the exemption forimpediments that are out of the obligor’s control (see chapter. …*). Out of this case, if, forexample, the party has failed to properly preserve the goods, the party is responsible for notreturning the performance in kind, being then obliged to pay its value in money and possibledamages determined by the breach.

216.223. When the performance to be in principle returned consists in services (e.g. agronomicservices, training services, etc.), restitution in kind is obviously not possible. A restitution in moneyshould be considered reasonable to the extent that the services have brought some effective value tothe recipient despite the subsequent termination and that were not rendered as merely instrumentalfor the specific production affected by termination (e.g. training program gratuitously provided by thecontractor for its producers). Indeed this would often represent a mere cost or investment borne byone party for the best execution of the contract and not a performance rendered to the other for aconsideration. Moreover, when technical assistance represents a performance by the contractor, thismostly occurs within long-term contracts in which termination may not apply to performances whichare separable from those affected by the breach or the other event causing termination (e.g. forcemajeure). Therefore, once terminated the part of the contract affected by such event (e.g. a singleinstalment), the production contract as a whole keeps standing and technical assistance is receivedby the producer under a standing contract.

217.224. Restitution also extends to executed payments. Reference should be made to thepossibility that, pursuant to the contract rules, the producer has paid for inputs that the producer isable to return (e.g. not used seeds or pesticides, equipment, etc.) and/or that the contractor hasmade advance payments before termination for produce deliveries that have not occurred. In bothcases an issue arises on whether interests should be added to the face value of the monetary


obligation for the time between payment and termination. Indeed the rebalancing logics of restitutionremedies linked with termination would require so.181 However, parties may always waive interestsprovided that such waiver would not amount to an unfair term pursuant to possible legislationprotecting the producers’ right of restitution for advance payment done in respect of physical inputs.

218.225. Whereas restitution is available irrespective of the fact that non-performance isexcused or not, damages can only be claimed by the party who is aggrieved by a breach as not-excused non-performance. Indeed, only the innocent party may request to be put in as good positionas if the contract had been correctly executed, as damages should allow (see ….*). Being thisfunction different from the one of restitution remedies linked with termination, both types ofremedies may be concurrently applied provided that the aggrieved party does not get any unjustifiedenrichment and double compensation for the same type of suffered loss or lost profit. For example,when assessing the loss consisting in the lack of delivery of the expected produce, one shouldconsider the fact that the contractor has not paid the price or is entitled to restitution of the paidprice. For clarity this analysis is developed in the section concerning damages (see ….*).

* Research assistance provided by C. Ferrari and M. Ferrari (University of Trento). I am thankful forconversations on some of the issues addressed in the chapter with Marieclaire Colaiacomo, Frederique Mestre,Anna Veneziano and the FAO lawyers’ team. I am extremely grateful to several organizations I have had theopportunity to interview over the course of last year. They have provided with a practical perspective on manyof the issues touched in the chapter. Responsibility is mine.** Suggested note: The Reader should be aware that the clauses quoted in this Chapter (/ Guide) arepresented as mere examples, nor their validity has been assessed in the light of relevant applicable law. Thequestion of clause validity has been only occasionally but not systematically addressed in this Chapter / GuideThe author apologizes for the length and degree of detail of this document but has made the conscious choiceof providing a detailed analytical framework to be reduced and optimized at a later stage. The main aim is totrigger a discussion with practitioners on what is relevant about remedies when drafting contracts.The text is based on combined analysis of international, national legislations, transnational private standardsand contractual practices. . Practices refer to both local and global standards and no clear distinctions havebeen made between domestic and transnational production contracts.

The general part offers a common conceptual and definitional framework to be used for both producers andcontractors. The chapters on producer and contractor are meant to highlight the specificities and provideexamples. The two chapters have been conceived as symmetrical but the analysis suggests that differencesmight justify further differentiation. The main objective has been highlighting interdependencies betweencontractor and producer activities given the definition of production contract and the active role contractor playsin defining production process and outputs.

1 See art. 79(5), CISG. On the remedies for excused non-performance see ….*.2 References to the principle of proportionality in relation to sanctions is quite common in privatestandards where sanctions for breach have to be proportionate to the nature of the breach and the seriousnessof the violation. References are also common in domestic legislation even if the general label might not beproportionality.3 Contractual practices confirm. See, for example, the US Farmland Industries Swine Market HogPurchase Agreement (Iowa database n. 22): “19. Breach and remedies. If producer or farmland shall fail toobserve or perform any covenant of agreement contained herein or if any representation or warranty given byeither of them in connection herewith proves to be false or misleading, the nonbreaching party shall give thebreaching party written notice thereof and if breaching party has not cured such breach within 60 days of thedate of such notice, then the nonbreaching party shall have the right to pursue any and all the remedies it mayhave at law or in equity, including but not limited to termination of this agreement. The election of one remedyshall not foreclose the use of another remedy by the nonbreaching party and the remedies shall be consideredcumulative and not exclusive”.4 See for example the Thailand contract for the production of asparagus (FAO database n. 47): “In the post-harvest practices, if the Buyer or the Buyer’s agent discovers that the place and the procedure of washing,culling, cutting the green asparagus output is not healthy according to the EUREP GAP standard, the Buyer cansuspend the acceptance of that Seller’s green asparagus output on a case to case basis until a correction isundertaken and that correction must be approved by the Buyer in order that the purchase and sale under thecontract may continue.


5 See art. 50, CISG (“(…) if the seller remedies any failure to perform his obligations in accordance witharticle 37 or article 48 or if the buyer refuses to accept performance by the seller in accordance with thosearticles, the buyer may not reduce the price”). On this aspect see below, par. …*.6 See a Brazilian contract for the production of grapes which provides for termination plus, as alternativeremedies, the reimbursement of losses and damages or a fine equivalent to the value of the remaining harvest:“The present contract shall be null and void, regardless of any warning, judicial or extrajudicial notification, incase of default of any of its items, the offended part can demand from the other, alternatively, the losses anddamages resulting from the rescission or in the form article [...] of the Civil Code, a fine equivalent to [amount]% of the value of the remaining harvests at the time” or another Brazilian contract for the production of guavawhich only refer to a fine, regardless of the compensation for losses and damages: “The party found in breachof any clause of this agreement shall be subject to a fine of 20% (twenty percent) of the value of theproduction estimated in the First Clause, in favour of the opponent, regardless of the compensation for lossesand damages.”7 See below, part ….*.8 Here it is relevant to mention that in some US State legislation termination is limited if producers havemade substantial capital investments (see previous footnote n. 8*).9 See for example UNILEVER Sustainable GTC.10 See UTZ CERTIFIED Good Inside Certification Protocol (February 2010), par. 7.1(g): "If there are non-compliances inhibiting certification, the CB and the organization need to agree on the period within which theorganization needs to address these non-compliances. The recommended period for resolving non-compliancesis up to 6-12 weeks (30-60 working days). The CB must set a new, mutually acceptable date for re-audit ifapplicable depending on the corrective action plan set up. The certificate is only issued when all mandatory andthe necessary number of additional control points are complied with, and eventual non-compliances have beencorrected."11 See UPICC, art. 7.2.1 (Performance of monetary obligation): "Where a party who is obliged to paymoney does not do so, the other party may require payment"; art. 7.2.2 (Performance of non-monetaryobligation): "Where a party who owes an obligation other than one to pay money does not perform, the otherparty may require performance, unless (a) performance is impossible in law or in fact; (b) performance or,where relevant, enforcement is unreasonably burdensome or expensive; (c) the party entitled to performancemay reasonably obtain performance from another source; (d) performance is of an exclusively personalcharacter; or (e) the party entitled to performance does not require performance within a reasonable time afterit has, or ought to have, become aware of the non-performance".12 This is the rule commonly applied in international contract commercial law and in international saleslaw, depending on relevant legal sources. See art. 7.3.4, UPICC; art. 71, CISG.13 See the US Christensen Farm swine production contract (Iowa database n. 1), clause 9. On specificremedies of CF [Contractor]: “…in the event that the Producer is in default and whether or not this agreementis terminated on account thereof, CF at its option shall specifically retain the right to: A. Discontinue paymentsto Producer.”14 See art. 50, CISG, referring to art. 37 and 48 on seller’s right to cure.15 See art. 7.3.1, UPICC.16 See for example the USA Jennie-O Minnesota Grow/Store Agreement 1 for the production of poultry(Iowa database n. 15), where termination is allowed only after the first 10 years of the contract: “Terminationby you [the producer]. This Agreement is for a twenty–five (25) year term. You may not terminate thisAgreement during the first ten years. After the ten years, you may unilaterally terminate this Agreement onlyupon notice and payment of a termination fee or upon the default by us."17 See 7.3.2(2), UPICC; art. 64(2)(b), CISG.18 See art. 7.4.1 PIIC.19 See US Rest. Contr. 2nd, § 344, lett. a; § 347; German civil code, § 249(1).20 See UPIIC 7.4.2, US Rest. Contr. 2nd, § 347.21 See art. 7.4.4, UPICC; art. 74, CISG. Reference to ordinary course of events is normally done bycourts to assess whether a loss is a foreseeable event or not; see US Rest. Contr. 2nd (2001), § 351(Unforeseeability and Related Limitations on Damages): "§ 351 (Unforeseeability and Related Limitations onDamages): "(1) Damages are not recoverable for loss that the party in breach did not have reason to foreseeas a probable result of the breach when the contract was made. (2) Loss may be foreseeable as a probableresult of a breach because it follows from the breach (a) in the ordinary course of events, or (b) as a result ofspecial circumstances beyond the ordinary course of events, that the party in breach had reason to know (…)".See also: art. 1225, Italian Civil Code; with special regard to loss of profits that could have probably beenexpected, § 252, BGB.22 See, for example, GSK South Africa standard contract terms (http://goo.gl/EjkQ1y): “1.8. “Losses” means alllosses, claims, liabilities, costs, awards, fines, penalties, expenses (including legal fees and other professionalexpenses) and damages of any nature whatsoever and whether or not reasonably foreseeable or avoidable.7.1. In the case of Goods not conforming with the Agreement and without limiting any of its other rights orremedies, GSK may, at its discretion: 7.1.5. claim damages for any other Losses incurred by GSK which are inany way attributable to Supplier’s failure to carry out its obligations under the Agreement”.23 See art. 7.4.3, UPICC.24 At international level, see art. 7.4.2(1), UPICC (“The aggrieved party is entitled to full compensationfor harm sustained as a result of the non-performance. Such harm includes both any loss which it suffered andany gain of which it was deprived, taking into account any gain to the aggrieved party resulting from itsavoidance of cost or harm”). At domestic level, see art. 1149, French Civil Code; art. 1223, Italian Civil Code.


25 See US Rest. Contr. 2nd, § 347.26 See Uncitral Digest 2012, p. 364 (on art. 76, CISG), where it is reported that, according to a GermanCourt, a current price for purposes of Article 76 can be established using the methodology in article 55 fordetermining the price under a contract that does not expressly or implicitly fix or make provision fordetermining the price (CLOUT case No. 595 [Oberlandesgericht München, Germany, 15 September 2004). Seeart. 55, CISG, referring to the price generally charged at the time of the conclusion of the contract for suchgoods sold under comparable circumstances in the trade concerned. See also Uncitral Digest 2012, p. 269 (onart. 55, CISG) about the geographical area where the trade is carried on, whether the one of the seller or theone of delivery. A related issue is whether and when reference to international trade prices should be made toassess damages. References to world trade price are not uncommon in agricultural production contracts; seecontract for sisal in the United Republic of Tanzania: ”The fibre price to be paid to the FARMER will be based onthe quality of the produced fibre grades pegged on the world market prices.”. (http://goo.gl/F3SIs9).27 On the possibility to recover reliance damages see, in the German Civil Code, § 249, BGB; in the USA,US Rest. Contr. 2nd (2001), § 349 (Damages Based on Reliance Interest): “As an alternative to the measure ofdamages stated in § 347, the injured party has a right to damages based on his reliance interest, includingexpenditures made in preparation for performance or in performance, less any loss that the party in breach canprove with reasonable certainty the injured party would have suffered had the contract been performed”; seealso. § 351 (Unforeseeability and Related Limitations on Damages): "(…) (3) A court may limit damages forforeseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance,or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionatecompensation".

29 See for example the following clause extracted from a Brazilian contract for guava production (Faodata base n. 8): “The party found in breach of any clause of this agreement shall be subject to a fine of 20%(twenty percent) of the value of the production estimated in the First Clause, in favour of the opponent,regardless of the compensation for losses and damages”.30 See UPICC, art. 7.4.13 (“(1) Where the contract provides that a party who does not perform is to paya specified sum to the aggrieved party for such non-performance, the aggrieved party is entitled to that sumirrespective of its actual harm. (2) However, notwithstanding any agreement to the contrary the specified summay be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from thenon-performance and to the other circumstances”). See also art. 2-718, UCC: “Damages for breach by eitherparty may be liquidated in the agreement but only at an amount which is reasonable in the light of theanticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages isvoid as a penalty”.----. Case law in production contracts ….31 See Schlechtriem – Schwenzer, 2010, p. 1054 ff., part. p. 1057.32 See Schlechtriem – Schwenzer, 2010, p. 1057.33 See Gabriel, 2009, p. 237; Schlechtriem – Schwenzer, 2010, p. 1054.34 At international level, in the context of sales contract, the duty to pay interests on unpaid price orother monetary sums is provided by art. 78, CISG. Out of legally binding regulatory instruments, art. 7.4.9,UPICC, provides for a general duty to pay interests from the time when payment is due until payment, whetheror not the payment is excused. Equivalent references are included in the current version of the ProposedEuropean Regulation for a Common European Sales Law (part. see CESL, art. 166 ff, and art. 171 on themandatory nature of the rules concerning payment delay by traders).35 See Schlechtriem – Schwenzer, 2010, p. 1059.36 See PIIC, artt. 7.4.3 and 7.4.4).37 See Schlechtriem – Schwenzer, 2010, p. 1059.38 See Schlechtriem – Schwenzer, 2010, p. 1032, citing LG Krefeld, 28 April 1993, CISG-online 101..39 See for an example the following clause extracted from an Indian contract for the production of rubberlatex (FAO data base n. 31): “10.d. If however payments are not received for a particular month by the Sellerfrom the Purchaser even by the last day of the succeeding month, interest at the rate of 12.25% will be paid bythe Purchaser to the Seller for such outstanding payments”.40 See for example for France: …..(in agrifood?). See also the Belgian Code of conduct for fairrelationships between suppliers and purchasers in the agro-food chain, adopted in 2010, and the UK GroceriesSupply Code of Practice, recently enforced via legislation by the Groceries Code Adjudicator Act 2013.41 See for example art. 24 of EU Rural development Regulation 1305/2013. In an Italian frameworkcontract for seeds multiplication parties “commit to establish agreed procedures for compensation of expensesin case of plant diseases for which is excluded negligence on the part of the agricultural multiplier” (art. 8).42 The principle is recognized at the international level (see UPICC 7.4.7). Many national legal systemsbut not all recognize the role of comparative negligence in contract law (for example, it is recognized in Italy(art. 1227 c.c.), in Germany (§ 254(1) BGB), in Austria (§ 1304 ABGB), the Netherlands (art. 6.101 BW),whereas in England it is highly disputed though recognized in torts (see Beale et al. 2010, p. 1023 f.). Inparticular, what is debated is whether damages may be apportioned in respect with obligor’s negligence or hercontribution to cause the breach. By contrast, it is more widely accepted that the aggrieved party has no accessto remedies if she has exclusively or predominantly determined the lack or defect in performance (see, on art.80, CISG; and Schlechtriem and Schwenzer 2010, p. 1092 ff., presenting the different views and concluding infavour of the apportionment). When apportionment of damages is admitted, these are reduced in respect of theobligor’s negligence and/or contribution to cause the breach. No consideration is normally made of the costs the


obligor would have incurred to cooperate, neither she is entitled to recover these costs in case of cooperation.Also debated is whether comparative negligence affects the scope of remedies different from damages, i.e.specific performance, contract termination, price reduction. In particular, specific performance and contracttermination cannot be subject to apportionment, whereas in principle comparative negligence could be takeninto consideration to exclude these remedies if the obligor’s contribution to the breach has been predominant.According to some author, the aggrieved party should not be deprived of the just mentioned remedies to theextent she is willing to “pay out” the costs or losses deriving from her negligence to the other party. SeeSchlechtriem and Schwenzer 2010, p. 1094. Here their suggestions are followed with a view to a wideapplication of the principle in order to promote cooperation before and after the breach.43 See UPICC 7.4.7.44 See, for Germany, § 254 BGB; for Italy, art. 1227 c.c.; for the US, Rest. 2nd of Contracts, § 350. Atinternational level see art. 77, CISG. See also UPICC, art. 7.4.8.45 One peculiar case is the one of France where in two judgments of 19 June 2003, the French SupremeCourt explicitly rejected the introduction of a general principle of mitigation in the French law of tort, althoughsimilar results may be attained through the principle of “faute de la victim”. See Cass 2ème civ (19 June 2003)No 930 FS-PBRI, Xhauflaire c/Decrept and No 931 FS-PRBI, Dibaoui c/ Flamand, Bull Civ II No 203, D 2003 Jur2396; Petites Affiches 2003, No 208, 16.46 See Schlechtriem and Schwenzer 2010, p. 1047.47 It was mentioned that quality assurance and certification schemes do not adopt a breach basedscheme but speak of non compliance. Even outside of the ‘technical scope of mitigation’ many correctivemeasures required by these schemes to the non compliant participant can be easily incorporated in themitigation principle broadly interpreted.48 See UPIIC par. 7.1.4, and art. 37, CISG, providing that the right to cure or replace defective deliverydoes not cause the buyer unreasonable inconvenience or unreasonable expense and that the buyer retains anyright to claim damages. At domestic level see, for Germany, § 323 BGB. For English law see Beale et al. 2010,p. 973. For the US see UCC Rev., § 2-508(1).49 See, for Germany, § 323 BGB (with respect to Nachfrist).50 See, for example, art. 1146, French Civil Code requesting a “mise en demeure” before the obligee maybe held liable in damages. See in a South Africa contract for the production of sugar beet the followingprovision: “Subject to clause 26, should any Party commit a breach of this Contract (“the defaulting party”) andfail to remedy that breach within 14 (fourteen) days after receipt of a written notice calling upon it so to do(provided that if such breach is one which is not reasonably capable of being remedied within the said period of14 (fourteen) days, the Defaulting Party shall be allowed such additional period as is reasonably requiredtherefore), then the innocent Party shall be entitled, in addition to and without prejudice to any right or remedyit may have under the circumstances, either to: 1) enforce the performance of the terms hereof; or 2) cancelthis Contract and recover such damages from the defaulting party as it may have sustained.”51 See again for Germany § 323 BGB. This procedure is commonly used when court is not involved inorder to terminate a contract (see UPICC, art. 7.3.2. (termination by notice) and art. 715 (additional period forperformance). The reference is also to the German system. A similar procedure may be used on a voluntarybasis when the law enables the aggrieved party to terminate the contract without judicial cause of action as analternative mode of termination for breach. See for example, in the Italian civil code, art. 1454 on “diffida adadempiere”). However, in certain legal systems, when judicial termination is considered, the court can assign anew term for performance in certain circumstances (see, for France, art. 1184 Civil Code (see Beale et al. 2010,p. 975).52 See the following clause in a Tanzanian contract for the production of tobacco: “If either partybreaches any of the terms of this Agreement or any agreements arising out of or in connection with thisAgreement, the other parties shall have the right to terminate this Agreement unless the party committing suchbreach shall have cured such breach within thirty (30) days after written notification of such breach.”53 See UPICC, art. 7.1.4, on right to cure: this provision does not include the fundamental nature ofbreach among the limits for this right, Official Comment to this text clarifies that cure is not precluded merelybecause the failure to perform amounts to a fundamental non-performance; however, the right to cure wouldbe banned if the probable delay in affecting cure would itself amount to fundamental breach (UNIDROIT, 2010, p.227). See also art. 109, Annex to the proposal of European regulation for a Common European Sales Law,enabling the buyer to refuse an offer to cure when […] (c) delay in performance would amount to afundamental non-performance.However, in several contracts the right to cure is admitted also in case of a material breach. See for examplethe following clause of a Tanzania contract for the production of tea: “If either party hereto shall commit anymaterial breach of this agreement and in the case of a breach capable of being remedied fails to remedy thatbreach within the period of sixty days after being required to do so in writing by the other party hereto, suchother party shall be entitled by notice in writing given to the party in default to terminate the contract periodimmediately or on a date specified in the notice.”54 See art. 48, CISG, providing for a right to cure within the limits established by art. 49 (on terminationfor fundamental breach), literally meaning that termination may prevail over right to cure if the breach isfundamental.55 See Schlechtriem and Schwenzer 2010, p. 739. See also UNCITRAL CLOUT case n. 282 (Germany,1997); CLOUT case n. 339 (Germany, 1998). See also Gabriel, 2009, p. 174, presenting the ongoing debate onthe interpretation of art. 48 with respect to this issue.56 See UPICC, art. 7.1.4: “(1) The non-performing party may, at its own expense, cure any non-performance, provided that (a) without undue delay, it gives notice indicating the proposed manner and timing


of the cure; (b) cure is appropriate in the circumstances; (c) the aggrieved party has no legitimate interest inrefusing cure; and (d) cure is effected promptly. (2) The right to cure is not precluded by notice oftermination.”. See art. 48, CISG, providing for a right to cure (as already cited in the previous footnote)provided that the cure does not cause to the buyer unreasonable delay and unreasonable inconvenience. Seealso art. 109, Annex to the proposal of European regulation for a Common European Sales Law, cited, enablingthe buyer to refuse an offer to cure when (a) the cure cannot be effected promptly and without significantinconvenience to the buyer; (b) the buyer has reason to believe that the seller’s future performance cannot berelied on […].57 See CISG, art. 48(1).58 For the US see UCC Rev., § 2-508(2): “Where the buyer rejects a non-conforming tender which theseller had reasonable grounds to believe would be acceptable with or without money allowance the seller may ifhe seasonably notifies the buyer have a further reasonable time to substitute a conforming tender”.59 See UPICC, art. 7.1.4: “(3) Upon effective notice of cure, rights of the aggrieved party that areinconsistent with the non-performing party’s performance are suspended until the time for cure has expired. (4)The aggrieved party may withhold performance pending cure. (5) Notwithstanding cure, the aggrieved partyretains the right to claim damages for delay as well as for any harm caused or not prevented by the cure”; seealso CESL, art. 109 extending the right to cure as a defense against all buyer’s remedies except for withholdingperformance.60 See Schlechtriem and Schwenzer 2010, p. 741.61 See Schlechtriem and Schwenzer 2010, p. 741.62 See for example clause 9 on termination of the Monsanto Technology Stewardship Agreement:“Grower may choose to terminate this Agreement in its entirety effective immediately by delivering writtennotice to Monsanto. Monsanto may choose to terminate this Agreement in whole or in part by delivering writtennotice to Grower. Grower must deliver the notice of termination to Grower Licensing, Monsanto, 622 EmersonRoad, Suite 150, St. Louis, MO 63141. If this Agreement is terminated pursuant to such a notice, Grower'sresponsibilities and the other terms herein shall survive (such as but not limited to Grower's obligation to useSeed for a single commercial crop) as to Seed previously purchased by the Grower.”.63 See art. 7.3.5, UPICC; art. 81(2), CISG.64 Perfomances may be interdependent or separable. They may be interdependentent because oneperfomance is instrumental to the other (e.g. providing inputs is instrumental to producing crops) or becauseeither party’s performance is the consideration or remuneration for the other’s (e.g. crop delivery v. pricepayment). They may be separable if such links do not exist (e.g. producer is due to deliver pumpkins and todeliver pumpkin seeds in different instalments).65 See art. 73(3), CISG: “A buyer who declares the contract avoided in respect of any delivery may, atthe same time, declare it avoided in respect of deliveries already made or of future deliveries if, by reason oftheir interdependence, those deliveries could not be used for the purpose contemplated by the parties at thetime of the conclusion of the contract” (emphasis added).66 See for example a Jamaican Sample contract for roots and tubers (Fao database n. 35): "If Buyer (1)refuses to accept any shipment properly tendered hereunder, (2) fails to tender any payment hereunder whendue, or (3) fails to perform in any other respect according to its obligations set out in the terms herein (each ofwhich shall be a material breach of contract), the Seller may treat such default as (a) a total breach of theentire Contract, and/or (b) partial breach of Contract, e.g., a breach only as to the individual shipment orinstallment If Seller (1) refuses to deliver any shipment properly scheduled when due hereunder, (2) fails toperform in any other respect according to its obligations set out in the terms herein (each of which shall be amaterial breach of contract), the Buyer may treat such default as (a) a total breach of the entire Contract,and/or (b) partial breach of Contract, e.g., a breach only as to the individual shipment”.67 See art. 7.3.5 ff., UPICC.68 See, for example, the three linked contracts for sisal production in Tanzania (FAO database nn. 42, 43,44) one between Farmer and Buyer, one between the government Board and the Farmer, and one between thegovernment Board and the Buyer. In the contract between the government Board and the Farmer it is providedthat “4.0. OBLIGATIONS OF A FARMER. 4.1. A FARMER subleased an area for farming shall have a businessplan and develop the area as per the professional advice provided by THE COMPANY [the Buyer]. The areasubleased to the FARMER must be planted with sisal within a period of three years failure of which ownership ofthe title will be revoked. Furthermore the title ownership by the FARMER will be revoked if she fails toundertake sisal maintenance and/or will not harvest the planted sisal without any reasonable course.”69 See The Thailand contract for the production of asparagus (FAO database n. 47) between the buyerand a seller, which is an organization of multiple farmers: “In the case the Buyer discovers the green asparagusof any Seller involves use of any kind of chemical substance, the Buyer will not accept the green asparagus ofthat Seller forever. If a large number of participants deliver asparagus involving use of a chemical substance,the Buyer may terminate this purchase/sale contract by giving the Seller seven days’ advance notice in writingand may suspend acceptance immediately when discovering use of any type of chemical substance in theoutput and the growing plot. See also the Tanzania contract between a seller cooperative, a buyer and a unioncooperative for the production of tobacco (FAO database n.46), part. clause 4 (mentioned supra in footnote n.*) on the obligations of the seller and clause 5 on the obligations of the union which plays the role ofcoordinator, facilitator and performs a monitoring function on the activities of the producers. In additionpursuant to clause 13 “The Seller warrants that the quality of the Tobacco to be supplied under this Agreementcomplies in all respects with all relevant requirements of any statute, statutory rule or order or otherinstrument having the force of law which may be in force at the time when the same are sold.” And “the Buyershall have a right to refuse any tobacco that does not conform to this agreement” (clause 9.7).


70 In the Italian framework contract for the production of tomatoes, among the possible events of forcemajeure justifying total or partial non performance of the contract, are: weather events such as frost, flood,hail, strikes; socio-political events; cause death or severe disability (art. 7). See also the Italian Assocarniframework contract, art. 9.71 See the multi-party contract for seed cotton production in Kenya (FAO database n. 37): 10.2 Theparties will mutually agree on how to deal with losses attributed to natural calamities (Unexpected rains duringharvesting period, floods, fire, hailstone, wildlife damage etc). 10.4 No Party shall be held in default in theperformance of its obligations under this Agreement in the event of a Force Majeure, including war, civilcommotion, riots, enemy action, blockades, strikes, and Acts of God. In the event of a Force Majeure, theParties undertake to consult each other in order to agree on an appropriate course of action in the givencircumstances.”72 Framework contracts may also contain more general mechanisms for coordination and cooperationbetween producer and contractor such as the Italian framework contract for the production of tomatoes, whereamong the primary objectives listed in art. 2 are mentioned at letter A the “orientation of supply to demand”through the provision of "useful information for a better understanding of market trends (both in terms ofquality and quantity), possibly realizing market research and/or economic analysis and, in particular,communicating useful data for analysis and statistical processing by the District, ensuring equal distribution ofinformation between the parties and in an aggregate form in respect of confidentiality of the data of eachcompany. In order to maintain the profitability of agricultural producers, to optimize the production costs and tobetter balance the market conditions, the parties agree for it to be guaranteed - proper planning of cropinvestment to be processed and the regular supply of the product, in line with the objectives previouslyidentified (...) ; - the provision by the industries interested to plan the cultivation of late tomatoes of apremium progressively growing to interested producers, on all tomatoes delivered with effect from 18.09.2013where there is a normal start and regular performance of the processing campaign, subject to the regularcontinuity of delivery.”; at letter C “the harmonization of the supply protocols” with regard to the mode ofproduction and control of raw materials, its quality and safety, in order to contain production costs to the lowestpossible; at letter E the “adaptation of production to the evolution of the market”.73 See. for example, in the US the Model Producer Protection Act (2000), which prohibits capricious orretaliatory termination of contracts where producers have made substantial capital investments: “c. Breach ofInvestment Requirements. Except as provided in subsection (d) [voluntary abandonment by the producer orproducer’s fraud conviction], if a contract producer materially breaches a production contract, including theinvestment requirements of a production contract, a contractor may not terminate, cancel, or fail to renew theproduction contract until the following have occurred: (1) Notice. The contractor has provided a written noticeof termination, cancellation, or nonrenewal at least 45 days before the effective date of such termination,cancellation, or nonrenewal. The notice must provide a list of complaints alleging causes for the breach. (2)Failure to Remedy. The contract producer fails to remedy each cause of the breach as alleged in the list ofcomplaints provided in the notice within 30 days following receipt of the notice. An effort by a contract producerto remedy a cause of an alleged breach shall not be construed as an admission of a breach in a civil cause ofaction”.74 See, for example, the Illinois Agricultural Production Contract Code sect. 17/40 which provides no unilateraltermination of contract by the contractor except in case of force majeure or material breach or voluntaryabandonment by the producer (Sec. 40. Termination or alteration of contracts: “(a) A contractor may notprovide, offer, or execute a production contract that allows the contractor to unilaterally terminate the contractunless (i) the termination is the result of a legitimate force majeure as applied to the contractor or (ii) theproducer breaches a material term of the contract or voluntarily abandons the contractual relationship.”).75 See for example the provisions contained in the Nestlè Supplier Code “In case Nestlé becomes awareof any actions or conditions not in compliance with the Code, Nestlé reserves the right to demand correctivemeasures. Nestlé reserves the right to terminate an agreement with any supplier who does not comply with theCode.” and in the Heineken Supplier Code “In cases of non-compliance are found, Heineken and its supplierswill develop ways and means to correct the non-compliance, provided Heineken receive the commitment fromthe suppliers to correct the non-compliance within due time. If there is no commitment or lack of correctivemeasures, such may result in Heineken ceasing to do business and as a final resort terminate contracts.”76 See for example a Thailand contract for the production of asparagus according to guidelines andrequirements of EUREP GAP (FAO database n. 47), where it is provided that: “(…) In the post-harvest practices,if the Buyer or the Buyer’s agent discovers that the place and the procedure of washing, culling, cutting thegreen asparagus output is not healthy according to the EUREP GAP standard, the Buyer can suspend theacceptance of that Seller’s green asparagus output on a case to case basis until a correction is undertaken andthat correction must be approved by the Buyer in order that the purchase and sale under the contract maycontinue.With regard to certification schemes, see for example UTZ certified Certification protocol (Feb. 2010), art. 7.1on audit procedure.77 See for example UTZ certified Certification protocol (Feb. 2010), pursuant to which “g. If there are non-compliances inhibiting certification, the CB [Certification Body] and the organization need to agree on theperiod within which the organization needs to address these non-compliances. The recommended period forresolving non-compliances is up to 6-12 weeks (30-60 working days). The CB must set a new, mutuallyacceptable date for re-audit if applicable depending on the corrective action plan set up. The certificate is onlyissued when all mandatory and the necessary number of additional control points are complied with, andeventual non-compliances have been corrected. (…) h. In the case of non-compliances discovered within thevalidity of the certificate, the CB will issue a written warning to the organization with a copy to UTZ CERTIFIED.


The organization must notify the CB in writing about the corrective actions it will take. The CB will evaluate thecorrective actions which may include additional audits. The CB decides if the organization will remain certified.”(art. 7.1 on audit procedure).See also Part ii – Corrective action through producer group (group certification) of GlobalGAP general regulation(March 2013), Art. 1.7 on Non-compliances, corrective action and sanctions: “a) There shall be a procedure tohandle non-compliances and corrective actions, which may result from internal or external audits and/orinspections, customer complaints or failure of the QMS [Quality management System]. b) There shall bedocumented procedures for the identification and evaluation of non-conformances and non-compliances to theQMS by the group or by its members, respectively. c) Corrective actions following non-compliances shall beevaluated and a timescale defined for action. d) Responsibility for implementing and resolving corrective actionsshall be defined. e) A system of sanctions and non-conformances shall be operated with producers or PMUs[Production Management Units] that meet the requirements defined in the GLOBALG.A.P. General RegulationsPart I. f) Mechanisms shall be in place to notify the GLOBALG.A.P. approved certification body immediately ofsuspensions or cancellations of registered producers or PMUs. g) Records shall be maintained of all sanctionsincluding evidence of subsequent corrective actions and decision-making processes.78 A contract clause of an Australian contract for the production of cabbage seeds (FAO database n. 2) isthe following: “the Buyer shall have the right to have the necessary work done at the Grower’s expense and forthis purpose the Buyer or its representatives shall have full access to the land on which the crop is growing.Any work carried out by the Buyer under this clause shall be carried out as agent for the Grower.”79 See, for example, US Murphy Farms Inc., Contract Grower Agreement for swine production (Iowadatabase n. 2), Sect. 2.14 “…in the event Grower shall, for whatever reason, during any time in which it haspossession of any MFF [contractor]’s swine, fail or be unable to perform reasonable animal husbandry practices,or otherwise breach any material part of this agreement, MFF shall be entitled to either (i) remove its swinefrom Grower’s facilities, after having first given Grower notice in writing at least 12 hours in advance. After suchnotice, and during the interim period MFF’s swine is located upon Grower’s premises, MFF shall have the right tohave a representative supervise the care and maintenance of its swine. (ii) In the alternative, and within thesole discretion of MFF, MFF shall be entitled to leave the swine on Grower’s facilities until they are ready formarketing, as well as carry out the exclusive care and management of its swine (…)”. Similar provisions arevery common in American livestock production contracts (in additional 6 contracts found the same provision).80 In the Malawi contract for the production of paprika (FAO database n. 40), “ In the event that theOUTGROWER bringing for sale paprika or birds eye chillies which are WET, MIXED GRADES, POORLY HANDLEDOR of OTHERWISE REDUCED QUALITY, THE COMPANY reserves the right to: a) Reduce the price offered for thegrade; b) Down grade the crop; c) Reject the crop without buying”.See for example the US contract for identity preserved seed production where it is provided that “Optimumgrain delivered under this agreement shall be of merchantable quality, unadultered and unrestricted frommovement in interstate commerce within the meaning of the Federal Food, Drug and Cosmetic act, etc. (…) Anyindividual loads rejected for failure to meet any of the specifications in this agreement shall at the deliverylocation’s discretion, either be purchased as yellow corn or returned to grower for disposal as excess productionin accordance with sect. 1d. No premium will be paid for oil content on rejected loads of Optimum grain”(clause 3.d). The same contract provides that, in case of Optimum grain harvested in excess, “To the extentthat Pricing Elevator declines to purchase any quantity of the excess production, Grower shall blend such excessquantities of Optimum grain with other yellow corn by combined stream blending , or similar techniques, so asto destroy its character as Optimum grain, and shall either feed the resulting grain to livestock, or sell itwithout identification as Optimum grain. In the alternative grower may sell the excess as Optimum grain, butonly in strict compliance with the terms of Attachment B [Limited Patent and Trade Secret Agreement]”.81 See the Zambia contract for the production of paprika (FAO database n. 58): “5. Purchaser retains theright to down-grade produce which does not comply with the quality standards as laid down in paragraphs 5and 5.1, and adjust prices in accordance with the actual quality level of delivered produce. Purchaser retainsthe right to reject non-marketable produce due to unacceptable quality and/or chemical residue levels that maydamage the reputation of Purchaser. Unsatisfactory or nongraded lots of paprika shall incur a grading charge.”82 See the Grenada contract for farm produce (FAO database n. 23) where in case of non-conforminggoods as to quality, they will be rejected by the contractor but the producer has the right to cure and thecontract may be terminated only after three verbal warnings: “39) If the Producer delivers produce which doesnot meet the agreed quality standards, the COMPANY will reject the produce delivered. The Producer mayresubmit the produce after sorting, but the COMPANY is under no obligation to accept produce which do notmeet the agreed quality standards; 40) If the Producer fails to follow the procedures detailed in this agreement,a verbal warning will be given followed by three written warnings. If the Producer fails to remedy the situationafter receiving three written warnings the COMPANY has the right to terminate the agreement; (…)”.83 See the US Christensen Farm swine production contract (Iowa database n. 1) clause 8.A on generalbreach by either party: “Default is a material breach of a term or condition hereof or of any other agreementreferred to herein. Upon default, the non-defaulting party must provide 30 days’ written notice (or such othertime as may be required by law) of the default to the non-default party. If the default is not cured within 30days then in addition to the option of terminating this agreement, the non-defaulting party shall have allremedies that may exist at law and in equity. Such remedies shall include the remedy of specific performance.”In other cases, the contractor may, after notice of non-performance, request to perform, see for example theUS Murphy farms swine production contract (Iowa database n. 2), clause 5: “In the event of default or breachof contract on the part of the grower, MFF reserves the right to: a. give written notice of nonperformance to thegrower and require performance by a given date. If by the specified date the nonperformance remainsunsatisfied, MFF reserve the right to hire the necessary performance task completed by MFF or outside party


and assess all charges against the grower’s quartered compensation payment. (…)”. In the US FarmlandIndustries marketing agreement (Iowa database n. 22), at clause 19 it is provided that: “If producer orfarmland shall fail to observe or perform any covenant of agreement contained herein or if any representationor warranty given by either of them in connection herewith proves to be false or misleading, the nonbreachingparty shall give the breaching party written notice thereof and if breaching party has not cured such breachwithin 60 days of the date of such notice, then the nonbreaching party shall have the right to pursue any andall the remedies it may have at law or in equity, including but not limited to termination of this agreement.”84 See for example the Trinidad and Tobago fresh agricultural produce contract (FAO database n. 50),clause 5: “(c) The contractor shall notify the Food Producer in writing of any breach committed by the FoodProducer and request resolution of the said breach within seven days. Failure to remedy the breach will providethe Contractor with the liberty to terminate the said Agreement.” A similar clause is present also in the Trinidadand Tobago contract for the production of green hot peppers (FAO database n. 51).See also Cargill General terms and Conditions for purchase “17.3 If the goods or accompanying documentationare rejected, in whole or in part, by Cargill or any relevant competent authority, either during production orafter completion, on or after delivery, or if it is established in some other manner that they do not meet theimposed specifications, characteristics and requirements, then the counter party shall, at Cargill’s option, either(1) adjust production to Cargill’s satisfaction in order to still meet the specifications, characteristics andrequirements, or (2) refund whatever has already been paid, and/or resume delivery of goods that meet therelevant specifications, characteristics and requirements, all without prejudice to Cargill’s other rights in thematter.”85 See previous footnote n. 218** where Nestlè Supplier Code and Haineken Supplier Code are mentioned forexamples of corrective measures in case of generic non-compliance.86 See Cargill General Terms and Conditions for Purchase, art. 17.3: “If the goods or accompanyingdocumentation are rejected, in whole or in part, by Cargill or any relevant competent authority, either duringproduction or after completion, on or after delivery, or if it is established in some other manner that they do notmeet the imposed specifications, characteristics and requirements, then the counter party shall, at Cargill’soption, either (1) adjust production to Cargill’s satisfaction in order to still meet the specifications,characteristics and requirements, or (2) refund whatever has already been paid, and/or resume delivery ofgoods that meet the relevant specifications, characteristics and requirements, all without prejudice to Cargill’sother rights in the matter.87 In the Grenada sample contract for farm produce (FAO database n. 23), for example, “If the Producerdelivers produce which does not meet the agreed quality standards, the COMPANY will reject the producedelivered. The Producer may resubmit the produce after sorting, but the COMPANY is under no obligation toaccept produce which do not meet the agreed quality standards;”.88 See for example the Italian framework contract for seeds multiplication, previous footnote n. 230**.89 See for example the following clause in a sample contract for cabbage seed growing in Australia: “ (e) If theGrower shall fail for any reason to perform any of his obligations under this contact, the Buyer shall have theright to have the necessary work done at the Grower’s expense and for this purpose the Buyer or itsrepresentatives shall have full access to the land on which the crop is growing. Any work carried out by theBuyer under this clause shall be carried out as agent for the Grower.”90 See for example the terms of Unilever Purchasing Agreement “8.1 The Buyer may at its discretionreject and/or require the Supplier to replace Non-Conforming Products at the Supplier's cost and expense. Thisright to reject and/or replace shall not affect any other remedy to which Unilever and /or the Buyer may beentitled. (...) 8.3 If any Products are not delivered, in full or in part, on the due date or notice is given or dueunder clause 5.2 or Non-Conforming Products are rejected by the Buyer, then, without prejudice to any otherright or remedy, the Buyer may terminate the PO in whole or in part and source replacement products from analternative supplier, or produce them itself, and the Supplier shall promptly pay to the Buyer the increasedcosts and expenses incurred”.91 See for example a Jamaica contract for the production of roots and tubers (FAO database n. 35) wherereplacement or restitution of the purchase price are the exclusive remedies for non-conformity, see clause 3:“3. EXCLUSIVE REMEDY. If upon delivery to Buyer the produce appears not to meet the agreed qualitystandards, the Buyer shall immediately notify the respective parish Rural Agricultural Development Authority(RADA) who shall have a right to inspect the produce. The Buyer shall not return, or dispose of any goods thatfail to meet the quality standards within 72 hours of delivery without RADA’s written consent. In the event theSeller breaches the quality specification, the Buyer's sole and exclusive remedy and Seller's soleand exclusive liability shall be limited to replacement of non-conforming produce with conformingproduce or return of the purchase price”. A similar clause can be read also in the Jamaican contract for theproduction of potatoes (FAO database n. 34). See also a Brazilian contract for fruit production (FAO database n.6) where “5) In case the producer does not meet the quality specifications described in item 1, the Sales Center[an intermediary also entrusted with quality controls] is charged with replacing the product for the referredpurchases, the producer cited in this agreement having to assume the responsibility for eventual differences,the largest relative to the price settled in the agreement”.92 In the USA contract for the production of identity preserved soybeans (FAO database n. 55) thereplacement of the product is a remedy that the contractor may choose in its sole discretion in case of breach.“(…) The parties agree that this is a contract for the purchase and sale of personal property under specialcircumstances and conditions and that the COMPANY may, but shall not be obligated to, go into the openmarkets and buy soybeans of equal or greater quality to replace any of the product or otherwise, and COMPANYdetermines that its actual damages are too uncertain to prove. (…)”.


93 This could be the case in the US swine production contract where it is provided that “Producer agreesthat during the term hereof, Producer will grow pigs only for CF [contractor] and not for any other party withoutthe prior written consent of CF; the purpose of this restriction being to ensure biosecurity for CF’s pigs”.94 See art. 7.2.2, UPICC; art. 46, CISG.95 See art. 50, CISG.96 See the glossary of GFSI Guidance 6th edition.97 See for example par 11 UNILEVER GTC,98 See artt. 50-51, CISG.99 See for example art. 28 NFGA grain Trade rules,100 See the Lao PDR contract for the production of tobacco (FAO database n. 39): “The Seller commits todeliver tobacco free of pesticide. The Purchaser will perform control analysis. In case level of pesticides residuesin tobacco is found above the limit, the Purchaser will cut the commission of HOF by 25% ( in case of orangealert) or 50% (in case of red alert) depending of the level of pesticide detected by analyzes. Concerned farmerwon’t have the right to grow tobacco for LTL in the future crops. The Seller commits to deliver dry tobacco. Thestandard moisture is 17%. If moisture is above 17%, the Purchaser will deduct 2 kg from the weight of thebale. The Purchaser won’t buy tobacco which moisture w higher than 19 %. The Purchaser commits to buy allthe tobacco produced by the seller at the prices defined in annex to the limit of above quota if quality meetsstandards define in annex. The Seller commits to sell and deliver his tobacco exclusively to thePurchaser. If the quota is not completed, the Purchaser will make penalty with 2,500 kips permissing kilogram. In case the volume delivered is exceeding the quota more than 10% thePurchaser will reduce the price by 2.000 kips per extra kilogram.”101 See the Lao PDR contract for tobacco (FAO database n. 39): “The Seller commits to sell and deliver histobacco exclusively to the Purchaser. If the quota is not completed, the Purchaser will make penalty with 2,500kips per missing kilogram. In case the volume delivered is exceeding the quota more than 10% the Purchaserwill reduce the price by 2.000 kips per extra kilogram.”See also the Zambia contract for paprika (FAO database n. 58), “In the event it is established that Grower hasbeen delivering short of the contracted quantities as a result of side selling, Grower shall compensate Purchaseron undelivered quantities, set at $ _______/kg paprika”102 See the Zambia contract for the production of paprika (FAO database n. 58): “5. Purchaser retains theright to down-grade produce which does not comply with the quality standards as laid down in paragraphs 5and 5.1, and adjust prices in accordance with the actual quality level of delivered produce. Purchaser retainsthe right to reject non-marketable produce due to unacceptable quality and/or chemical residue levels thatmay damage the reputation of Purchaser. Unsatisfactory or nongraded lots of paprika shall incur a gradingcharge.”103 See for example the US Model Producer Protection Act (sect. 9, b., (4)) where it is considered anunlawful unfair practice “to refuse to allow a contract producer or the contract producer’s designatedrepresentative to observe, by actual observation at the time of the weighing, the weights and measures used todetermine the contract producer’s compensation under a production contract”.104 See for example the 2013 Italian framework contract for the production of tomatoes for the industrywhere a sort of “cooperative” control system for the quality of tomatoes is implemented: quality controls areperformed by joint quality centers composed of one representative of the producer organization and onerepresentative of the industry at the premises of each facility.105 See the Malawi contract for production of paprika (FAO database n. 40): “In the event that theOUTGROWER bringing for sale paprika or birds eye chillies which are WET, MIXED GRADES, POORLY HANDLEDOR of OTHERWISE REDUCED QUALITY, THE COMPANY reserves the right to: a) Reduce the price offeredfor the grade; b) Down grade the crop; c) Reject the crop without buying.”106 Damages or monetary penalties are indeed more frequent as a remedy in case of breach of process-related obligations. See for example the US Christensen Farm swine production contract (Iowa database n. 1),where a penalty is imposed to the producer in case of breach of instrumental/ancillary obligations “4.G (…)Manure must be removed from the facility before it reaches within 5 inches of the bottom of the beams thatsupport the slats. If this is not done, CF reserves the right to deduct $.... per day per barn from the Producer’spayment described above. (…) CF may, at its option, hire the removal of the manure from the facility. CF maythen deduct the removal costs from the Producer’s next payment.”; see also the LAO PDR contract for theproduction of tobacco (FAO database n. 39) where “In case level of pesticides residues in tobacco is foundabove the limit, the Purchaser will cut the commission of HOF by 25% in case of orange alert) or 50% (in caseof red alert) depending of the level of pesticide detected by analyzes. Concerned farmer won’t have the right togrow tobacco for LTL in the future crops.”107 See, for example, the Grenada contract for farm produce (FAO database n. 23): “39) If the Producerdelivers produce which does not meet the agreed quality standards, the COMPANY will reject the producedelivered. The Producer may resubmit the produce after sorting, but the COMPANY is under no obligation toaccept produce which do not meet the agreed quality standards; 40) If the Producer fails to follow theprocedures detailed in this agreement, a verbal warning will be given followed by three written warnings. If theProducer fails to remedy the situation after receiving three written warnings the COMPANY has the right toterminate the agreement;”. See also the Zambia contract for the production of paprika (FAO database n. 58), inwhich “Purchaser retains the right to down-grade produce which does not comply with the quality standards aslaid down in paragraphs 5 and 5.1, and adjust prices in accordance with the actual quality level of deliveredproduce. Purchaser retains the right to reject non-marketable produce due to unacceptable quality and/or


chemical residue levels that may damage the reputation of Purchaser. Unsatisfactory or nongraded lots ofpaprika shall incur a grading charge.” (art 5).108 See, for example, the Trinidad and Tobago contract for fresh agricultural produce (FAO database n.50): “5. (…) (b) The said agreement may be terminated by either party for breach of contract by the otherparty. (c) The contractor shall notify the Food Producer in writing of any breach committed by the FoodProducer and request resolution of the said breach within seven days. Failure to remedy the breach will providethe Contractor with the liberty to terminate the said Agreement.”.109 See art. 51(2), CISG.110 See the Indian contract for the production of rice (FAO database n. 28): “5.3 Farmer represents andwarrants that it shall not, during the subsistence of this agreement: i) sell or dispose of the (Company.) seedsto any person or entity other than to (Company.) or any party designated, in writing, by (Company.); or ii) usethe (Company.) seeds, for any purpose, other than multiplication under the terms of this Agreement.” In theZambia contract for paprika (FAO database n. 58) “2. […] Grower shall not sell or give any of the contractedpaprika to a third party. In the event it is established that Grower has been delivering short of the contractedquantities as a result of side selling, Grower shall compensate Purchaser on undelivered quantities, set at $_______/kg paprika.”111 In the Indian contract for the production of potatoes (FAO database n. 30) “4.11. COMPANY mayterminate this agreement at any time without giving any notice in the following circumstances : i. If theGROWER sells the XXX variety planting material to any third party without seeking COMPANY consent (…) 4.12.Upon termination of this Agreement due to the reasons stipulated in clause 4.11 above, GROWER agrees to payRs. ______as “liquidated damages” to COMPANY as within 15 days of such demand being raised in writing onGrower.” A similar provision is contained in the Indian contract for the production of rice (FAO database n. 28)with regard to side-selling of the final product (“6.2 (Company) may terminate this agreement at any timewithout giving any notice in the following circumstances: i. If the Farmer sells the contract farmed crops to anythird party. (…)”.See also the US ConAgra contract for poultry production (Iowa database n. 12) where producer use of feed,medication, supplies provided by contractor for purposes other than feeding and caring for chicks provided bycontractor or producer’s sale or delivery of said feed to third parties is a default and grounds for termination ofcontract.112 See the clause quoted in previous footnote and the China cocoon purchasing contract (FAO database n.20), as quoted below (ft …259*).113 They have been clearly identified in about 20 contracts and in half of them they arecombined with termination. Moreover, in 5 contracts damages are established as a remedy for theproducer in case of breach by the contractor (see part on producer’s remedies *).114 See Thailand contract for asparagus (FAO database n. 47) “Clause 9. The Seller breaking the contract:If the Seller breaks any of the terms of contract or refuses to deliver asparagus having a quality and a quantityaccording to the contract or according the mutually agreed day of delivery, the Seller consents to the Buyerterminating the contract forthwith and consents to compensate the Buyer for damages according to theactuality that arises within 15 days from the date of receipt of notice from the Buyer, which date shall becounted as the commencing date.” See the Kenya contract for cotton (FAO database n. 36): “3 […] 1. If theFarmer/ Cooperative/ Association does not deliver produce as mutually agreed and within the specified time, hewill bear the costs for the loss incurred by the ginner”. See also, for an example of a clause on damages in caseof general breach by either party, the Brazilian contract for the production of passion fruits (FAO database n.10): “10. The present contract shall be null and void, regardless of any warning, judicial or extrajudicialnotification, in case of default of any of its items. The offended part can demand from the other, alternatively,the losses and damages resulting from the rescission or in the form articles 918 and 920 of the Civil Code,penalties equivalent to the value of the capital, corrected”.115 See Brazil contract for tomatoes (FAO database n. 17) “At the harvest closing date considered inclause one, the PRODUCER shall have delivered to NAME OF THE COMPANY THE WHOLE PRODUCTIONharvested in the area herein contracted. Considering, among other factors: a) the expenses made by NAME OFTHE COMPANY with the production, selection and supply to the seed producer; b) the costs of technical supportto the PRODUCER by agronomists/horticulturists and agricultural technicians contracted by NAME OF THECOMPANY; c) the industrial and commercial plan of NAME OF THE COMPANY concerning this contract, theretention of the produce by the PRODUCER, beyond the period in the timetable, the inappropriate retention anddelivery or alienation for any reason, to third parties, of part of the production or all of it, shall oblige thePRODUCER, irrevocably and with no withdrawal, to the payment of losses, in favor of NAME OF THE COMPANY,dismissed profits and damages at once fixed in the value in (currency) equivalent TO THE TOTAL PRODUCTIONOF tomatoes in metric tons estimated in clause one, at the tomato price of purchase effective in the occasion,as herein stated.”See also the Trinidad and Tobago contract for the production of green hot peppers (FAO database n.51) where, in case of failure to supply, damages incorporate also the costs sustained by the contractor formonitoring and controls during the performance of the contract: “6 Failure to supply. Subject to Clause 16,where the projected crop yield as specified in Appendix “A” has been realized and the Farmer fails, neglects orrefuses to deliver the produce as agreed herein, the Farmer shall reimburse the Buyer all expenses incurred upto the time of such default in accordance with the criteria outlined in the attached Appendix “D” [where areindicated the costs of seedlings, soil test, consultant visits and field officers visits].”


116 See the Indian contract for potatoes (FAO database n. 30) “4.12.Upon termination of this Agreementdue to the reasons stipulated in clause 4.11 above, GROWER agrees to pay Rs. ______as “liquidated damages”to COMPANY as within 15 days of such demand being raised in writing on Grower.”.117 See the China cocoon purchasing contract (FAO database n. 20): “Party B [cocoon producer] shall paya lump-sum deposit of RMB ... yuan to Party A [contractor] upon signing of this contract and shall receiveinterest based on the bank interest rate for 5 year fixed deposit, payable each year. The deposit shall bereturned to Party B in lump sum upon expiration of the contract. 3. Party B is deemed to be in breach of thecontract if it fails to sell all its cocoons to the purchasing stations designated by Party A. Should this happen,the contract is automatically terminated and the deposit shall go to Party A as compensation. Party B shall alsoreturn all other financial benefits offered by Party A.”118 See US Feeding cattle contract (Iowa database n. 21): “10. First Party’s rights upon default. In theevent of Second Party’s default under this Agreement, First Party [buyer] may, in addition to any and all otherremedies provided by law, immediately take possession of the cattle and offsets any sums due Second party[feeder] from damages caused by second Party’s default”119 See CISG, Germany 22 August 2002 Appellate Court Schleswig (Live sheep case), cit. See also art. 2-717, UCC (USA): “The buyer on notifying the seller of his intention to do so may deduct all or any part of thedamages resulting from any breach of the contract from any part of the price still due under the samecontract”.120 See CISG Advisory Council Opinion No. 6, Calculation of Damages under CISG Article 74, sec. 8,available at http://www.cisg.law.pace.edu/cisg/CISG-AC-op6.html: “If there has been a breach of contract andthen the aggrieved party enters into a reasonable substitute transaction without first having avoided thecontract, the aggrieved party may recover damages under Article 74, that is, the difference between thecontract price and the substitute transaction”.121 On the general definition of market price under the international sales law on damages see above, sec.I in this chapter (*).122 For the approach followed by the CISG, see CISG Advisory Council Opinion No. 6, Calculation ofDamages under CISG Article 74, sec. 3.10 ff.123 See for international sales law art. 75, CISG.124 See, for example, GSK Canada Terms and conditions of purchase (http://goo.gl/6nNXuq): “(c) After abreach of any warranty by Supplier which results in Supplier’s inability to substantially perform its obligationsunder this PO and after Supplier’s failure to cure such breach within a reasonable time after receiving noticethereof from GSK, GSK may (among other remedies) “cover” by making in good faith and without unreasonabledelay any reasonable purchase of or contract to purchase goods or services in substitution for those fromSupplier. GSK may recover from Supplier as damages the difference between the cost of cover and the contractprice under this PO, together with any incidental or consequential damages, but less expenses saved inconsequence of Supplier’s breach. (d) Failure of GSK to effect cover as specified above does not bar GSK fromany other remedy. Furthermore, the election of cover is in addition to any other warranties provided for in lawor equity.”125 See art. 75, CISG; for the USA, see art. 2.712, UCC.126 See, for example, art. XI, STANDARD GENERAL CONDITIONS, A.G.E.R. - Borsa Merci Bologna,available at http://www.agerborsamerci.it/contracts-and-forms/standard-general-conditions.pdf: “Except forcases of force majeure, any nonperformance of this contract or any portion thereof – even if this occurs due tothe buyer’s acknowledged right to refuse the receipt of goods not corresponding to the contract conditions asstated in Article IX above – will be grounds for cancellation of the contract, solely for the portion not yetperformed. The defaulting party shall refund the amount of any differences between the contractprice and the current price at the moment of the breach, to be evaluated, generally speaking, on thebasis of the market statement of the immediately subsequent Market. The defaulting party will becharged with the interest on any price differences, calculated on the basis of the official European discount rateplus 4 (four) points, and starting from the day when the breach occurred, up to that of the payment. The partynot in default, after giving notice to the defaulting party by telegram within 5 (five) consecutive days after thedate of the breach, may proceed with the purchase or sale of the portion not performed, through a PublicMediator, with any differences, losses, and related expenses to be paid by the defaulting party”.127 See Schlechtriem – Schwenzer, 2010, p. 1031. See for an example the GSK Canada Terms andconditions of purchase cited above (http://goo.gl/6nNXuq).128 Se, for example, although not specifically referred to agricultural production contracts, EuropeanCoffee Federation, European Contract for Coffee (E.C.C.), General conditions adopted by the European CoffeeFederation (ECF), Annual General Meeting on the 7th June 2013 and effective as from 1st September 2013,Article 23 - Default: "(a) Where a party declares the other party to be in default he shall, after having givennotice when and as stipulated, have the right to claim discharge of the contract with or without damages. (b)The defaulting party shall pay on demand any damages. Consequential damages are excluded. (...)".129 See for example the USA contract for the production of soybeans (FAO database n. 55), clause 6: “6.INDEMNIFICATION, SPECIFIC PERFORMANCE AND LIQUIDATED DAMAGES. (…)COMPANY in its sole discretionmay elect, in lieu of other remedies, and GROWER or ELEVATOR agrees to pay to COMPANY as liquidateddamages for all products sold, delivered, or withheld by or for GROWER or ELEVATOR, other than in accordancewith the terms of this agreement, 10% of total market value of such products. Market value is to be determinedas of the time that demand for shipment of the products is requested by COMPANY. If the products have beensold by GROWER or ELEVATOR, then the price for which such products have been sold shall be their market


value. Both parties agree to undertake all reasonable efforts to mitigate damages in the event of a breach bythe other party.”130 This is the rule which is common in several legal systems and also under international sales law (see art. 76,CISG). See also Uncitral Digest 2012, p. 365 on art. 76, adding that, if the aggrieved party has taken over thegoods before avoidance, however, the relevant time is this earlier date (China International Economic andTrade Arbitration Commission, People’s Republic of China, 18 April 1991, English translation available on theInternet at http://cisgw3.law.pace.edu/cases/910418c1.html).131 For example in the Italian framework contract for the production of tomatoes monetary penalties areestablished as remedy for producer’s breach of the duty to deliver the production, as well as, in case ofcontractor’s breach of the duty to take delivery and in the form of monetary interests for late payment (art.12). The contract also provides a detailed system of price differentiation according to the defects of theproduct.132 See, for example, the Brazilian contract for the production of guava (FAO database n. 8): “Fifth clause.At any time, while the present contract is in force, the INDUSTRY may inspect cultivated areas and through itsrepresentatives, determine the techniques that shall be observed by the PRODUCER in the management of theculture linked to this contract, including the ideal crop point, in order to comply with the quality desired by theINDUSTRY. Eight clause. The party found in breach of any clause of this agreement shall be subject to a fine of20% (twenty percent) of the value of the production estimated in the First Clause, in favour of the opponent,regardless of the compensation for losses and damages”.The reader should be aware that question of validity of penalty clauses in the legal systems involved in thementioned examples is not addressed in this footnote.THIS COULD BECOME A GENERAL DISCLAIMER APPLICABLE TO ALL CLAUSES MENTIONED IN THE GUIDE.133 See for example the Brazilian contract for the production of tomatoes (FAO database n. 16): “In casethe PRODUCER does not meet the requirements above mentioned, the product will be considered not inconformity with the specifications; in this case, the INDUSTRY will impose penalties for variable losses, at itsdiscretion. (…) 8. It is stipulated a penalty of R$ ....... per hectare to the party that violates any of the clausesof this agreement.”. See also the Zambia contract for sugar bean seed (FAO database n. 61): “8. The selleragrees to pay K………………… in event that all of the produce specified in clause 1 is not available with regards topackaging, quantity and quality for collection by the buyer by the date in clause 1.”134 See, for example, in case of livestock production contracts the penalties for producer’s breach of process-related obligations concerning cleaning the facility, properly handling and removing manure, promptly orderingall feed delivery from the contractor, as it is provided in the US Christensen Farm swine production contract(Iowa database n. 1): “4.F (…) In addition to being a condition of default, CF shall deduct $... per day from theProducer’s next monthly payment for each day exceeding of four days from the end of any grow-out periodduring which the facility has not been properly cleaned. 4.G (…) Manure must be removed from the facilitybefore it reaches within 5 inches of the bottom of the beams that support the slats. If this is not done, CFreserves the right to deduct $.... per day per barn from the Producer’s payment described above. (…) CF may,at its option, hire the removal of the manure from the facility. CF may then deduct the removal costs from theProducer’s next payment. 4.H Failure to order delivery of feed, or an inaccurate feed order which requires CF todeliver feed on less than 48 hours advance notice, shall entitle CF to deduct $... per loaded mile for eachtruckload of feed delivered to the facility from the Producer’s next payment”.135 See the Lao PDR contract for production of tobacco (FAO database n. 39): “The Seller commits to delivertobacco free of pesticide. The Purchaser will perform control analysis. In case level of pesticides residues intobacco is found above the limit, the Purchaser will cut the commission of HOF by 25% (in case of orange alert)or 50% (in case of red alert) depending of the level of pesticide detected by analyzes. Concerned farmer won’thave the right to grow tobacco for LTL in the future crops.”See also the Zambia contract for the production of paprika (FAO database n. 58): “Purchaser retains the rightto reject non-marketable produce due to unacceptable quality and/or chemical residue levels that may damagethe reputation of Purchaser. Unsatisfactory or nongraded lots of paprika shall incur a grading charge.”136 See Farm produce Grenada (FAO database n. 40) “If the Producer fails to follow the procedures detailed inthis agreement, a verbal warning will be given followed by three written warnings. If the Producer fails toremedy the situation after receiving three written warnings the COMPANY has the right to terminate theagreement; 41) Producers whose agreement has been terminated by the COMPANY will be debarredfrom future contracts for a minimum period of one year. The COMPANY will be under no obligation toenter into future contracts with the Producer. (…)”.In the Lao PDR contract for the production of tobacco (FAO database n. 39), “The Seller commits to delivertobacco free of pesticide. The Purchaser will perform control analysis. In case level of pesticides residues intobacco is found above the limit, the Purchaser will cut the commission of HOF by 25% in case of orange alert)or 50% (in case of red alert) depending of the level of pesticide detected by analyzes. Concerned farmerwon’t have the right to grow tobacco for LTL in the future crops” (art. 3).137 See the Brazilian contract for the production of guava (FAO database n. 8): “The INDUSTRY reservesthe right to apply discounts and, or, to refuse lots not found compliant to the quality specifications, according tothe chart appended. Sorting and weighting shall be done no more than 24 hours after the arrival of the produceat the factory. Past this period, the INDUSTRY will lose the right to apply discounts for quality.138 Only some legal systems recognize the applicability of comparative negligence in contract. Howeverinternational contract law recognizes the general principle whereby the party that has contributed to the harmcannot recover the equivalent damages see PICC 7.4.7139 See for example the Italian framework contract for seeds multiplication, pursuant to which (art. 3) thecontractor commits “to take, in agreement with the OP on behalf of multiplier farms, the practical measures for


the preservation of the product that may become necessary. If the seed delivered does not comply with theagreed parameters for moisture, to immediately desiccate the seed and to charge any costs to the multiplier”.140 See for example Model Producer Protection Act, sec. 7; art. 7, Iowa Producer Protection Act -----.141 See Unilever General Terms and Conditions of Purchase of Goods, part. Condition 2A.2: in case theSupplier is required to use ingredients and components supplied by Unilever, Unilever “shall use its reasonableendeavours to arrange for the delivery of Unilever Products to the Supplier but shall have no liability to theSupplier if it fails to deliver or is late in delivering any Unilever Products. If any Unilever Products are notdelivered, the Supplier shall not be liable for any failure to supply the Products except to the extent, at therequest of Unilever, it is able to obtain alternative materials satisfactory to Unilever.142 See the US ConAgra broiler contract (Iowa database n. 12)143 See Brazil poultry breeding and producing contract (FAO database n. 13)144 See Trinidad and Tobago, Poultry production contract (FAO database n. 49).145 See, for example, the Tanzania sisal contract farming (FAO database n. 43) between the Tanzania sisal board(a government entity) and farmer, pursuant to which the board will give to the farmer the land and provide asublease title for growing sisal.146 An interesting case is the system of linked contracts implemented by Cargill for the production ofweaner pigs, the so called Cargill Pig.Net Alliance of independent swine producers who are willing to buy andsell weaner pig. Cargill, in fact, entered into a Pig. Net agreement with the Farrower, of which Finisher is thirdparty beneficiary; the Farrower owns a farrowing facility and is intended to sell pigs to Finishers, who own anursery/finishing facility where to raise and finish weaner pigs. In addition Cargill enters also a second contract,a Pig. Net agreement with the Finisher, of which Farrower is third party beneficiary. Both Farrower and Finisherare bound by the other party agreement with Cargill and both these agreements have a term of three yearsand nine weeks.147 See for example the complex contract for cotton production in Kenya (FAO database n. 37) between multipleactors, a farmer committee (as organization of producers), four companies as buyers and ginners, a bank, thenational irrigation board (NIB) and the cotton development authority (CODA), with a role of coordination amongall other inputs and services providers.148 See UPICC, art. 7.2.1. See also art. 62, CISG (“The seller may require the buyer to pay the price, takedelivery or perform his other obligations, unless the seller has resorted to a remedy which is inconsistent withthis requirement”).149 See, for example, art. 1514, Italian Civil Code, …. Others?150 See part. CISG, art. 88(2). Compare this provision with art. 2-603, UCC, on the buyer’s resale ofperishable rejected goods.151 See UCC, § 2-706(1); art. 1515, Italian Civil Code, …. Others? See also art. 132(2), ProposedRegulation on a Common European Sales Law (“Where the buyer has not yet taken over the goods or thedigital content and it is clear that the buyer will be unwilling to receive performance, the seller may nonethelessrequire the buyer to take delivery, and may recover the price, unless the seller could have made a reasonablesubstitute transaction without significant effort or expense”).152 See UPICC, art. 7.3.4; CISG, art. 71 (where the prerequisite is that it becomes apparent the otherparty will not perform a substantial part of his obligation).153 In the USA Jennie-O Minnesota Grow/Store Agreement 1 for the production of poultry (Iowa database n.15), for example, termination is allowed only after the first 10 years of the contract also in case of default bythe contractor such as failure to make a payment for more than 60 days after written notice or a materialbreach not cured after written notice within the due time: “Termination by you [the producer]. This Agreementis for a twenty –five (25) year term. You may not terminate this Agreement during the first ten years. After theten years, you may unilaterally terminate this Agreement only upon notice and payment of a termination fee orupon the default by us. (…) (2) Default by us: (a) failure to make a payment to you which remains unpaid inwhole or in part for more than sixty (60) days after written notice from you to us that same is due and payable,or (b) we violate, or materially breach any of the other covenants, agreements, stipulations or conditions of thisAgreement, and the violation or default continues for a period of ninety (90) days after written notice from youof such violation or default. If the default is of a nature that requires more than ninety (90) days to cure thatlonger period can be used to cure the default if you agree. (3) If we default and do not cure after theappropriate notice and period to cure the default, then you shall have the right to terminate the Agreement.You may receive damages attributable to our default and the cost of enforcement. However, this will be limitedto a maximum of two year of building payments.” In this contract payments by the contractor include “cashpayments” for each head of turkey delivered to the contractor plus “building payment” consisting of an amountto be paid to the producer for the first 7 years of the contract each month after the subleased building iscertified as ready for occupancy by turkeys and, in case the producer acquires the building after the 7-yearterm exercising its option to purchase, a monthly amount to amortize the option purchase price.”154 See for example the contract mentioned in the following footnote n. 328**.155 See, for example, the Brazilian contract for the production of pepper (FAO database n. 12): “NINTHCLAUSE: Except for force majeure cases, the breach of any clause of this agreement shall determine itsautomatic rescinding. Likewise, regardless of the obligation for compensation of losses and damages, the partythat motivate the rescission shall pay the other one a fine of 20% (twenty percent) of the estimatedproduction value, as established in the First Clause”; see also the Tanzania contract for the production of tea(FAO database n. 45): “10.3 If either party hereto shall commit any material breach of this agreement and inthe case of a breach capable of being remedied fails to remedy that breach within the period of sixty days afterbeing required to do so in writing by the other party hereto, such other party shall be entitled by notice in


writing given to the party in default to terminate the contract period immediately or on a date specified in thenotice.”156 See for example the Thailand contract for asparagus (FAO database n. 47): “Clause 8. The Buyerbreaking the contract: If the Buyer breaks any of the terms of contract or refuses to buy the asparagus for anyreason other than those prescribed in the contract and the exhibits (Nos.1; 2 and 3) or according to themutually agreed schedule of the delivery day, the Buyer consents to the Seller terminating the contractforthwith and consents to compensate the Seller for damages according to the actuality that arises within 15days from the date of receipt of a notice from the Seller, which date shall be counted as the commencing date.”157 See art. 7.3.4, UPICC; art. 71, CISG.158 See art. 73(2), CISG. With regard instalment supply contracts (somministrazione), see art. 1564,Italian Civil Code, restricting the remedy of termination within the scope of fundamental breach hindering trustand reliance (fiducia) in respect of the adequacy of future performance.159 See the USA Jennie-O Minnesota Grow/Store Agreement 1 for the production of poultry (Iowa database n.15) in previous footnote n. 320. In this contract for 25 years payments by the contractor include “cashpayments” for each head of turkey delivered to the contractor plus “building payment” consisting of an amountto be paid to the producer for the first 7 years of the contract each month after the subleased building iscertified as ready for occupancy by turkeys and, in case the producer acquires the building after the 7-yearterm exercising its option to purchase, a monthly amount to amortize the option purchase price.”160 See for example the IFAD prototype tri-partite agreement between financial institutions (FI), offtaker (TO) &outgrowers where in case of default specific performance and/or corrective measures are preferred instead oftermination: “If any event of default by (TO) or (FI) shall occur and continue for a period of 30 days after noticethereof has been given to (TO) or (FI) by the Outgrower or his/her designated representative or the Republic ofThe Gambia, then the Outgrower or his/her designated representative or the Republic of The Gambia shall takeany measure needed to rectify the default. In such a case, the Contract for Management Services signed by theRepublic of The Gambia with (TO) and the Loan Agreement signed by the Republic of The Gambia with (FI)shall apply.”161 See in Italy the Ministry decree n. 199/2012 implementing art. 62, Law decree n. 1/2012…162 In some instances private regulatory regimes may also define ‘private’ remedies for late payments.Late payments may constitute a breach of contract, administrative rules and private regulation triggering threedifferent sanctioning regimes. See footnotes below.163 In the US Perishable Agricultural Commodities Act, § 499e regulates liability to persons injured in case ofunfair conduct by dealers (included wrongful rejection) and provides that: “(a) Amount of damages. If anycommission merchant, dealer, or broker violates any provision of section 499b of this title he shall be liable tothe person or persons injured thereby for the full amount of damages (including any handling fee paid by theinjured person or persons under section 499f (a)(2) of this title) sustained in consequence of such violation”.164 See US Rest., Second, § 344(a).165 See art. 75-76, CISG. In the European perspective: art. 164, Proposed Regulation on CommonEuropean Sales Law (CESL). In national sales law, see for the US art. 2-708, UCC; art. 215, Swiss Code ofObligations; art. 1515, It. Civil code. In order to control for the fairness of the reference values, it is normallyimposed that the substitute sale must be commercially reasonable and done in a reasonable manner (see art.75, CISG; art. 2-706, UCC).166 See art. 2-708(2), UCC, conditioning the alternative criterion of lost profit to the fact that the referenceto the market price does not provide an adequate satisfaction of the expectation interest. With regard to theCISG, see Schlechtriem – Schwenzer, 2010, p. 1033, about the aggrieved party’s possibility to provide adifferent measure of lost profits without recurring to a (though possible) substitute transaction.167 See US Rest., Second, § 344(b).168 See art. 75-76, CISG.169 See the USA Model Production Act, sec. 8: “This section only applies to a production contract executedby a contract producer and a contractor, if the contract producer must make capital investments of $100,000 ormore according to investment requirements provided in all production contracts in which the contract producerand the contractor are parties. (...) a contractor shall not terminate, cancel, or fail to renew a productioncontract until the contractor has done the following: (…) (2) Damages. The contract producer has beenreimbursed for damages incurred due to the termination, cancellation, or failure to renew. Damages shall bebased on the value of the remaining useful life of the structures, machinery or equipment involved”.170 See, for example, the following clause of a multiparty agreement stipulated in Kenya for the productionof cotton, involving the financier: “If the Ginners fail to collect the cotton at the designated areas within buyingwindow provided by CODA the ginners will compensate the FARMER COMMITTEE for the loss incurred. Suchcompensation shall first be used to pay off the loans owed to the Bank by farmers”.171 See UCC, art. 2-708(2) and art. 2-710. See also proposed amendment to art. 2-710, UCC, with aseparate provision on seller’s consequential damages as distinct from the loss of profits already covered by art.2-708. The amendments proposed in 2008 have been withdrawn in 2011; however, already in the officialcomments accompanying the amendments the drafters acknowledged that “[s]ellers rarely suffer compensableconsequential damages. A buyer’s usual default is failure to pay. In normal circumstances, the disappointedseller will be able to sell to another buyer, borrow to replace the breaching buyer’s promised payment, orotherwise adjust the seller’s affairs to avoid consequential loss”.172 See for example the USA Model Production Act, sec. 8 on production contracts involving investmentrequirements: “e. Penalty. If a contractor terminates, cancels, or fails to renew a production contract other thanprovided in this section, the contractor shall pay the contract producer the value of the remaining useful life ofthe structures, machinery, or equipment involved”; see also sect. 13 on penalties and enforcement: “a. Civil


Penalties. A contractor or processor committing an unfair practice under section 9 shall be subject to a civilpenalty of up to [???]”.173 See the provisions concerning interests for late payments such as: in Italy the Ministry decree n. 199/2012implementing art. 62, Law decree n. 1/2012; in Argentina, the Codigo De Buenas Practicas Comerciales signedin Buenos Aires in 2000 between Large Supermarkets and Suppliers’ organsations, especially par. 1.2; art. 2,European Directive n. 7/2011.174 See art. 7.3.6(3), UPICC.175 See art. 7.3.6(2), UPICC, which provides for an alternative restitution in money only if reasonable: Seealso the Official Comment, p. 259 f., interpreting the reasonableness in terms of benefit for the recipient.176 See for example the India contract for the production of fresh fruits and vegetables (FAO database n. 26):“18. Notwithstanding anything contained herein in above, if the farmer is not in a position to offer good qualitycrops/produce satisfying the requirements of the company of the company continually for two crop periods thisagreement will stand automatically terminated and all the advances in terms of inputs as financial assistanceshall be returned back.”177 See, for example, the US ConAgra broiler contract (Iowa database n. 12) : “Art. V Default. 1. In the eventthis agreement is breached by either party (…) and such default continues for a period of 3 days after writtennotice given to the party so in default by the other, then this agreement shall immediately thereuponterminate, and on the part of ConAgra, if the Grower is so in default, ConAgra its assignee or agent, or either,to take possession forthwith of said broiler chicks , unused feeds and supplies previously furnished (…).”178 See for example the Australia cabbage seeds contract (FAO database n. 2): “C.Other conditions (c)The Buyer remains the owner of the furnished seed and shall own the crop produced therefrom and the Growerwill not have the right or authority to sell, dispose of, use or encumber, or permit to be sold, disposed of usedor encumbered any part of the crop; either while the seed is growing or is being harvested or at any timethereafter, nor shall the furnished seed, nor the crop be or become lienable or liable for any claim now orhereafter existing against the grower.” (…)(i) In the case that the crops are rejected by the Buyer the Groweragrees to refund any or all monies advanced, and the said crops then become the property of the Grower.”179 See the following contract clause in the US DuPont export production agreement for Optimum high oilcorn (Iowa database n. 77): “3.d Optimum grain delivered under this agreement shall be of merchantablequality, unadulterated and unrestricted from movement in interstate commerce (…). Any individual loadsrejected for failure to meet any of the specifications in this Agreement shall, at the Delivery location’sdiscretion, either be purchased as yellow corn, or returned to Grower for disposal as excess production inaccordance with sect. 1.e.”.180 For reference to legislation see above … par. *, footnote…* (to be completed).181 See also art. 84(1), CISG.

DURATION, RENEWAL AND TERMINATION

Prepared by Professor M. Joachim Bonell

Table of contents

I. Duration.................................................................................................................2

A. “Short-term” contracts vs. “long-term” contracts .........................................................2

B. Maximum and minimum duration imposed by law ........................................................2

II. Renewal of contracts ..............................................................................................3

A. Renewal by express agreement ................................................................................3

B. Tacit or automatic renewal.......................................................................................3

C. Renewal at the option of one party............................................................................4

III. Termination ........................................................................................................4

A. Scope ..................................................................................................................4

B. Termination clauses................................................................................................5

C. Notice requirement for termination............................................................................5

D. Grounds for termination ..........................................................................................51. Automatic termination .........................................................................................52. Consensual termination .......................................................................................63. Termination by one of the parties in accordance with special termination clauses ...........6

E. Effects and consequences of termination ....................................................................7

DURATION, RENEWAL AND TERMINATION

1. The issues of contract duration, termination and renewal are of great importance in thecontext of agricultural production contracts, since these contracts imply by their very nature thecarrying out of a continuous or periodic activity for at least one of the parties. It is therefore essentialfor the parties to know from the outset when their contractual relationship begins and ends. Equallyimportant are whether and, if so, how the contractual relationship may be terminated before itsterms and/or renewed when it comes to an end.

2. Parties are well advised to specifically address these issues in their agreement. Indeed,domestic legislation, to the extent that it deal withs duration, termination and renewal at all, isnormally confined to a few basic rules, such as those imposing minimum or maximum durationperiods or requiring notice in writing in case of termination. Further details are left to be agreed uponby the parties in each given case.

3. In fixing the duration of their contract and regulating its termination and possible renewal,parties should be aware that these issues are to a large extent interrelated. For instance, the shorterthe duration of the contract, the greater the need to provide in the contract for its possible renewal at

2. UNIDROIT 2014 – WG4 INF. 1 Duration, Renewal and Termination (ZERO DRAFT)

the expiration date. Conversely, the longer the duration, the greater the need of providing for theright of either party to terminate the contract prematurely.

I. Duration

4. Express provisions on contract duration are common practice in agricultural productioncontracts, and may even be imposed by law.1 In determining the duration of their contract, theparties have to take into account the production cycle of the goods involved, as well as their financialobligations. The latter are particularly relevant where the producer, in order to meet its obligations,has to make long-term investments such as the acquisition of specific equipment or the constructionof new facilities. In order to be economically viable, such investments require that the contractualrelationship between the producer and the contractor be long enough. (See infra, paras. __*).

5. Duration clauses can be drafted in various ways, such as by fixing a number of calendar days,months or years starting from a set date,2 or a precise period between a set date and an event orbetween two specified events.3 The parties may also make the contract duration dependent on theperformance of the obligations of the parties.4

A. “Short-term” contracts vs. “long-term” contracts

6. Generally agricultural production contracts may be of short duration, usually expressed as anumber of months5 or with reference to a crop season, or be structured as a a long-term contract,either by specifying a longer period of several years,6 or simply by not specifying an ending term.7

7. The reasons for choosing one option or the other mainly depend on the nature of theagricultural products involved and the parties' willingness to be bound over a short or longer periodof time. Contracts for short-term crops such as vegetables and field crops are usually concluded onan annual or seasonal basis, whereas crops such as tea, coffee, sugar cane and cocoa may requirecontracts of a longer duration. Also, livestock production and marketing contracts are normallystipulated to last for a longer period. More generally, parties will prefer a longer contract durationwhen they are interested in a solid and lasting relationship, particularly in view of the necessity forthe producer to make long-term investments.

8. Long-term agricultural production contracts give rise by their very nature to a relationshipbased on trust and confidence between the parties and an ongoing duty to cooperate to allow eachparty to properly perform its obligations.8 This has significant implications with respect to, forexample, the producer´s right to unilaterally terminate the contract (see infra paras. __*), thepossible right of either party to terminate the contract for just cause (see infra, paras. __*), andspecial remedies in case of hardship (see Chapter __ on excuses for non-performance*).

B. Maximum and minimum duration imposed by law

9. In some legal systems, agricultural production contracts are subject to minimum durationperiods, which are very often connected to the production cycle.9 There may also be limitations as tothe maximum contract duration. Thus, domestic laws may provide that fixed-term contracts can beconcluded for no more than a set number of years and that a longer period will automatically bereduced to the term prescribed by the law.10 When negotiating an agricultural production contract,parties will therefore have to ascertain if the applicable law provides restrictions on its duration.

10. In cases where production is to be carried out on leased land, another aspect that must beconsidered is the relation between the agricultural production contract itself and the land lease


contract. National laws sometimes expressly address this matter, by stating for instance that theproduction contract cannot be stipulated for a longer period than the land lease contract,11 or that, ifthe parties do not stipulate the exact duration of the land lease contract, it is presumed that itsduration is a set number of years.12

II. Renewal of contracts

11. Upon expiration of a fixed-term agreement, the parties might be interested in itscontinuation. They are therefore well advised – and may sometimes be even required by law13 – tomake express provision in their contract as to whether and, if so, how it may be renewed. Renewalclauses may provide for three different forms of renewal: (1) renewal by express agreement; (2)tacit or automatic renewal; and (3) renewal imposed by one of the parties.

A. Renewal by express agreement

12. Parties may stipulate that their contract can only be renewed by an express agreement inwriting.14 This clause may be structured so that the parties prescribe that the agreement will last fora set period unless the parties come to an agreement to renew before the contract the end of theperiod.15 However, if the parties renew the contract only orally or by mere conduct notwithstandingsuch a clause, they may be prevented from invoking it subsequently on the basis of the generalprinciple prohibiting inconsistent behaviour, if this principle is recognized by the applicable law.16

13. While the contract will normally be renewed under the same terms as the “old” contract, theparties may occasionally provide that they will enter into negotiations within a certain period of timebefore the expiration date, with a view to renewing the contract and possibly revising some of itsterms to take into account relevant changes, for example concerning prices, that might haveoccurred after the conclusion of the “old” contract. The contract may explicitly mention that theparties will act in good faith during such negotiations to enter into a new written agreement, but thatif the parties fail to reach a new agreement, the agreement will expire.17 The contract may state thatthere is no obligation on either party to renew the agreement, but if both parties are satisfied withthe performance of the current contract, they may provide notice to the other party a set amount oftime before the expiration of the contract.18

B. Tacit or automatic renewal

14. An agricultural production contract may also be renewed tacitly or automatically. This mayoccasionally occur even in the absence of any contractual provision to this effect, for instance whenthe parties continue to behave as if the contract was still in existence after the expiration date.However, in most cases the contract expressly provides that it will be tacitly or automaticallyrenewed if neither of the parties expressly objects within a specified period of time.19

15. In short-term contracts, it is quite frequent that parties stipulate that the contract isautomatically renewed for additional periods of the same or a different duration, unless one of theparties does terminate it by notice in writing within a certain period of time before the expirationdate.20 Automatic renewal can be limited to a specified or unspecified number of times.

16. A contract that has initally been concluded for a short period, even if renewed periodically forother equally short periods, may de facto create a long-term relationship lasting for many years. Thiscourse of action is particularly common for agricultural production contracts influenced by seasonal orperiodical factors such as the growing cycle, harvest and production process. In this context, it may

Commented [A1]: Online comments.Prof. Fontaine noted that the principle is notuniversal.


occur that even after a series of annual or periodical renewals, the contractor unilaterally terminatesthe contract by giving prior notice only within a short period of time. The contractor behaves on theground that the renewed contracts, like the original contract, are also fixed-term contracts of a shortduration that may be terminated on short notice. However, the continued renewal of the “old”contract over many years may have caused the producer to reasonably believe that its contractualrelationship with the contractor has de facto become a long-term relationship. Thus, according to thegeneral principles of good faith and the prohibition of inconsistent behavior,21 the contractor may beprecluded from terminating the contract on short notice and be obliged to give notice of termination areasonable time before the renewal date.

17. In determining the reasonableness of the notice period, courts may look to the actualduration of the relationship, the particular nature of the agricultural production involved – especiallythe biological and production cycle of the crop – and the substantial investments that have beenundertaken by the producer.

18. To avoid any uncertainty in this regard, domestic laws sometimes limit the possibility of tacitrenewal of agricultural production contracts, for example by permitting renewal only for a maximumperiod of one year except if otherwise provided by the parties by written agreement,22 or byprohibiting tacit renewal altogether and providing that whenever the parties continue the execution ofthe contract, it will tacitly be regarded as a permanent contract with no specified term.23

C. Renewal at the option of one party

19. Exceptionally the contract may provide that only one of the parties, in most cases thecontractor as being normally the stronger party, is entitled to extend the duration of the relationship,and that in case it decides to do so the producer must accept the renewal unless it makescompensatory payments. Such clauses are sometimes included when the contractor providesadvances or inputs to the producer; here, the parties might include a contract provision that givesthe contractor the right to renew the agreement until the contractor has recouped its losses.24

However, such unilateral renewal clauses may be considered unenforceable in some legal systems onthe ground that they give the contractor an excessive advantage over the other party without anyjustification.25

III. Termination

A. Scope

20. The term “termination” – or the equivalent term “cancellation” used in some but not allcommon law systems – covers a great variety of situations ranging from the automatic termination ofthe contract at the expiration date or the fulfilment by the parties of all their obligations to thetermination by either of the parties in the exercise of a right provided by agreement or by the law.For the purpose of this Chapter, the term “termination” is to be understood in a broad sense so as tocover virtually all cases where the contract is brought to an end, either automatically or on theinitiative of either of the parties, with the only exception being termination for breach,26 which isspecifically addressed in Chapter __ on Remedies*.

Commented [A2]: Online comments.Prof. Fontaine noted that these principlesare not universal.

Commented [A3]: Online comments.Prof Fontaine suggested adding “may”.

Commented [A4]: Online comments.Prof. Fontaine suggested to add a word oncivil law systems, where quite a variety ofterms are also used to cover a wide range ofsituations.


B. Termination clauses

21. Several countries recommend in their national legislation that parties include so-calledtermination clauses in their contract, that is provisions specifying when and how the contract isterminated automatically or on the initiative of the parties.27 Indeed, the more precisely the partiesregulate the possible cases of termination of their contract, the more stable and predictable theirrelationship will be.

C. Notice requirement for termination

22. When the contract is of an indefinite duration, or when termination is permitted under thecontract before its expiration, a party intending to terminate the contract is normally often requiredto give notice of its intention to the other party. In order to be effective, the notice has to meetcertain requirements as to form.

23. The notice normally in general has to be given in writing,28 and sometimes even in the formof a registered letter or judicial writ.29 As far as time is concerned, an advance notice is generallyrequired, but how long in advance it must be given very much depends on the circumstances of thecase. Possible solutions range from rather flexible time limits that take into account the productionand marketing cycle or the amount of investments,30 to very precise time limits with a set number ofdays.31 Generally speaking, it is fair to say that the longer the contract duration, the longer theperiod of required advance notice, and vice versa. In any case, it is preferable to stipulate precisetime limits.

24. It should be noted that the consequences of not observing the prescribed form and/or timealso depend on the circumstances of the case. Thus, if the addressee of the notice does not objecton the grounds that it was not given in the form and/or within the time provided in the contract, itssilence may be construed as tacit consent to derogate from the respective contract provisions.Even if the receiver rejects an improper notice, the terminating party may still serve a new one inthe prescribed form and/or accept that termination is postponed until the end of the prescribednotice period.

D. Grounds for termination

25. Termination of agricultural production contracts may occur for various grounds and in variousforms. Apart from termination for breach (explained in further detail in Chapter __ on Remedies*),the most important grounds include: (a) automatic termination upon expiration of the establishedduration or the performance of contractual obligations; (b) termination by mutual consent; and (c)termination by one of the parties in accordance with special termination clauses.

1. Automatic termination

26. Fixed-term contracts normally end automatically and without any advance notice on theirstipulated expiration date,32 or after the legally prescribed maximum duration period.33 Yet, partiesmay also provide for the automatic termination of the agreement upon fulfilment of their contractualobligations.34

Commented [A5]: Online comments.Prof. Fontaine questioned the use of“normally” in this and the next paragraph.


2. Consensual termination

27. Another way to end the contractual relationship is by an agreement between the partiesreleasing each other from their mutual obligations. Although national legislation may expresslyindicate this possibility for the sake of completeness,35 it is rather rare to see it in contractual practicesince parties take for granted that they may terminate their relationship by agreement even in theabsence of a specific provision to this effect in their contract.

3. Termination by one of the parties in accordance with special termination clauses

28. Most agricultural production contracts contain provisions that allow parties to unilaterallyterminate the contract. When they entitle both of the parties to do so, one speaks of bilateraltermination clauses, and when they provide termination by one party only, of unilateral terminationclauses.

(a) Clauses providing termination by either party

29. It is a generally recognised principle that a contract may not bind the parties eternally, andthat where they have failed to specify its duration, they are allowed to opt out of it provided they givenotice a reasonable time in advance.36 Express provisions to this effect are quite normal inagricultural production contracts of indefinite duration, but may also be found in fixed-term contractsof long duration. In both cases, it is common practice that the parties indicate a precise period oftime within which the advance notice must be given37

30. While parties are normally free to end the contract at any time, a clause sometimes providesthat termination may occur only following a certain period of time after the conclusion of the contract.This time period may take account of investments made by one or both of the parties.38

31. Note that in most cases the parties are entitled to terminate the contract without anyexplanation, but that the terminating party might occasionally be required to state the reasons fordoing so. When giving reasons for termination, the terminating party might have to comply withstated notice requirements as to form and timing.39

(b) Clauses providing termination by one party

32. Agricultural production contracts may provide that only one of the parties, often thecontractor, is entitled to unilaterally terminate the contract. Such one-sided unilateral terminationclauses are typically found in contracts of an indefinite duration, but may exceptionally be containedin fixed-term contracts of a relatively short duration thereby enabling unilateral termination beforethe expiration of the term.40

33. The unilateral right to terminate the contract may be subject to some limitations. Thecontractor may thus be required to give prior notice to the producer within a stipulated time. As afurther protection to the producer, termination may be permitted only following a certain period oftime after the conclusion of the contract. In contract practice however, the contractor is often entitledto unilaterally terminate the contract at any time, for any reason and without giving prior notice,taking advantage of a so-called “termination at will.”41

34. Termination clauses granting only one of the parties the right to terminate the contract at willmay be unenforceable under the applicable law, on the ground that they give that party an unfairadvantage over the other party without valid ground.42 Indeed, by allowing termination at any time


the contractor may end the contract with immediate effect even shortly after its conclusion, therebycausing substantial loss to the producer who may no longer be in a position to absorb the costs ofcapital investments made in reliance on a longer contractual relationship. Moreover, by permittingthe contractor to end the contract for any reason whatsoever or no reason at all, the right oftermination may be abused as a mere retaliation against the producer.

35. In order to avoid or at least reduce such risks and possible abuses, domestic laws mayprovide special protection for the producer. Especially when the producer had to make capitalinvestments of a considerable amount pursuant to the contract, the contractor may be required togive the producer notice of its intention to terminate the contract with a sufficient time before theeffective date of termination. Moreover, the contractor may be obliged to reimburse the producerfor any damages incurred due to early termination.43 However, since such protective legislation isstill the exception, parties are well advised to expressly provide in their contract for somerestrictions on early termination by the contractor, such as the duty to give notice of its intentionto terminate the contract a reasonable time in advance, and the duty to reimburse the producer atleast in part for the losses suffered due to the early termination.

(c) Termination for just cause

36. Agricultural production contracts, particularly if concluded for a longer period of time, may besubject not only to the usual risks of a breach by one of the parties or of supervening events makingperformance impossible or excessively more onerous, but also to the risk of a radical breakdown ofthe parties’ mutual trust and confidence making the continuation of their relationship, at least for oneof the parties, no longer sustainable. Termination of the contract for this reason is usually referred toas “termination for just cause” as distinguished from termination for breach, for force majeure or forrhardship. Parties would do well to remember that termination for just cause might not be availablein all jurisdictions.

37. Parties may wish to provide in their contract for the possibility to terminate their relationshipfor just cause. To this effect, they may choose between different approaches. They may draft ageneral termination clause in such a broad language as to cover also the right to terminate thecontract for just cause (see supra, para. __*). Alternatively, they may deal with termination for justcause in a separate provision, drafted either in general terms44 or specifying the event(s) to beconsidered a “just cause” warranting termination; such listed events might include when either partybecomes subject to a judicial order or bankruptcy proceedings.45 The latter approach would not onlyallow the parties to better define the contingencies in which the contract may be terminated for justcause but also to specify how such a right may be exercised (e.g. by mere notice to the other partyor only by notice in advance), when termination takes effect (e.g. immediately or only after a certainperiod of time), and whether the terminating party or the other party is entitled to damages.46

E. Effects and consequences of termination

38. As a rule, the parties are released from their obligations to perform and to accept futureperformance upon termination, but the accrued rights or liabilities, such as the right to claimdamages for non-performance, survive.47 Parties to an agricultural production contract may include intheir contract an express provision to this effect.48 Moreover, termination does not affect anyprovision in the contract for the settlement of disputes or any other term that is to operate even aftertermination.49 Finally, it is important to highlight that when a producer has prematurely terminatedthe contract and has received financing from the contractor, the reimbursement obligations remaindue after the end of the contract.50

Commented [A6]: Online comments.Prof Fontaine: “Even though the concept oftermination for “just cause” is recognized inseveral systems, it is not universallyaccepted, and I am concerned about thelegal uncertainty and the openings toopportunistic behavior its presentation in theLegal Guide as a general principal could leadto. Also, Par. 36 seems to limit itsapplications to cases of radical breakdown ofthe parties’ mutual trust, but this is usuallythe result of alleged significant breaches,thusleading to a traditional case of terminationfor breach (at least in certain systems).”

Commented [A7]: Online comments.Prof. Fontaine suggested adding a sentenceabout past performance, generally notsubject to restitution.[I believe that the remedies chapter hasexhaustively dealt with this angle, and it istherefore not needed to reproduce it here.]

Commented [A8]: Online Comments.Min. Justice Canada holds that it is not clearwhether this will be the consequence in allcases. For details, see Doc. 23.


39. The parties may wish to specify in their contract those provisions that are to survive and tocontinue to bind the parties even after termination of the agreement. In the context of agriculturalproduction contracts, such post-contractual obligations may concern the return of seeds and plants,as well as documents or technical equipment that were necessary for the production process.Occasionally, so-called confidentiality or non-disclosure clauses may prevent the producer to divulgeinformation about technologies or the production process even after the end of the contractualrelationship with the contractor. Likewise, so-called non-compete clauses may prevent the producerfrom carrying out an activity in competition against the latter for a certain period after the end of itsrelationship with the contractor. Under most legal systems, such non-compete clauses may howeverbe struck down, or limited in their application by the courts, if they contain unreasonablelimitations as to the geographical area, time period and nature of the activity in regard of which theproducer may not compete.

* Sample contracts cited in this document have been collected from the FAO Contract Farming ResourceCentre at: http://www.fao.org/ag/ags/contract-farming/toolkit/en/1 Art. 6(1)(b) Cataluña law 2/2005 ; Art. 3(3) Loi relative à l’integration verticale dans le secteur de laproduction animale, 1976 (“Belgian law”); Art.11(1) Italian law for the regulation of agrifoods markets ; Art.62(1) Italian law on commercial relationships in the sales of agricultural and agro-food products; Art. 3(b)Spanish law 2/2000; Art. 6 Addendum on the Indian Contract Farming Agreement; Art. 49(3) Panama AgrarianCode; Art. 9 Marrocan Law on agricultural aggregation (“Marrocan law”); Art. L.326-6 French Rural Code; § 5-72 South Carolina Code of Regulations.2 “The said agreement shall have duration of ____ months effective from _____ Cf. Sample contract forfresh agricultural products in Trinidad and Tobago.3 “The period of the agreement is from the day of purchasing seed (…./…./…) up to the day of buying thelast part of the crop”Cf. Sample contract for paprika in Malawi.4 “This agreement will last for one growing season [i.e.] from the date of signing to the end of theharvesting and delivery of the contracted produce in line with the approved schedule”Cf. Sample contract of farmproduce in Granada.5 “The agreement will be valid for only six (6) months”Cf. Sample contract of milk in Indonesia.6 “The duration of the contract is for the period of ten (10) years”Cf. Sample contract of farm produce inGranada.7 “This is a permanent contract whereby the Parties to the agreement must adhere to [...]Cf. Samplecontract for sisal in the United Republic of Tanzania (Framer&Buyer).8 See e.g. Fairtrade Standards (2011) stating in Art. 4.1 that “Fairtrade aims to create sustainable tradepartnerships between producers and their buyers, which enable producers to have long-term access to marketsunder viable conditions […] It is important that these relationships […] are based on mutual respect,transparency and commitment”).9 E.g. Art. 4(2) Cataluña law 2/2005 (“La duración mínima del contrato de integración debe coincidir conla duración del ciclo productivo correspondiente”). But see also in general Art. 4.1 Generic Fairtrade Standards,cit. in fn no. 8, and Art. 185f Reg. (EU) No 261/2012 (encouraging Member States to impose a minimumcontract duration in the milk and dairy sector.10 See e.g. Art. 5(2) Belgian law.11 E.g. Art. 9 Maroccan law.12 E.g. Art. 51 Panama Agrarian Code.13 Art. L.326-6 and Art. R.326-1 French rural and fishery code; Art. 11 Italian law for the regulation ofagrifoods markets; Art. 6 (1b) Cataluña law 2/2005.14 “The present contract can only be renewed by written agreement between the parties.” Contrat typepour l'élevage à façon de veaux de boucherie (Arrêté du 15 mars 1988 relatif à l'homologation d'un contrattype d'intégration) in France.15 “The agreement is valid for a period of 32 weeks commencing the … (day) of …. (month) …. (year) andcontinuing through to the …. (day) of …. (month) …. (year) or any other period as may be subsequently agreedby the parties in writing. At the end of the said period, this agreement shall automatically come to an end.”Sample contract for pepper in Trinidad and Tobago.16 For this principle at international level see Art. 1.8 UNIDROIT Principles 2010 (“A party cannot actinconsistently with an understanding it has caused the other party to have and upon which that other partyreasonably has acted in reliance to its detriment”).

Commented [A9]: Online Comments.Min. Justice Canada holds that noncompetition clauses that are found to beabusive are not always struck down in theirentirety but may also simply be limited intheir application by the courts.


17 “The parties to this agreement agree that during the period between ____ and _____, they willattempt to negotiate a renewal of this agreement on terms and conditions acceptable to both parties with theintent of entering into a new written agreement before the end of the term of the agreement. Both parties willact in good faith […]. If the parties do not enter into a new written agreement prior to the end of the term ofthis agreement, then this agreement will expire on the date described above”Swine Production Contracts:Swine Management, Grow-Out and Feeding Agreement (Heartland Pork Enterprises Inc.) in Iowa.18 “This agreement will last for one growing season.[…] If both parties are satisfied with the performanceof the agreement it may be renewed for another enterprise cropping cycle […], but there is no obligation oneither party to renew the agreement. The producer will give notice in writing to the company a minimum of 60days before the expiration of the contract of its interest in renewing the contract and the company will informthe procuder within 30 days of receipt of the renewal request of its willingness to renew or renegotiate thecontract and the terms and conditions thereof.” Sample contract of farm produce in Grenada.19 “Any party who does not intend to tolerate the tacit renewal of the contract must give notice byregistered letter with recorded delivery ____ months prior to the end of the reference period […].”Contrat typepour la production de volaille de chair à façon (Arrêté du 15 mars 1988 relatif à l'homologation d'un contrattype d'intégration) in France. Art. L. 631-24 French Rural and Fishery Code (“A contract of sale of agriculturalproducts can be renewed by tacit agreement for the same period as the contract has first been concluded for”).20 “This contract has an initial 6-months term, which automatically renews unless either party terminatesthe contract. You or we may terminate this contract at the end of any 6-month term upon 30 days' notice.”Swine Marketing Contracts: short term Hog Procurement Agreement (Hormel Foods Corp.) in Minnesota. “Thepresent agreement is valid for one year […]. The agreement shall be reconducted, automatically, during an equalperiod, in case any of the parties does not denounce it expressly and in written terms, with a minimum of 60(sixty) days in advance of its end or of subsequent periods.” Sample contract for poultry in Brazil.21 See Art. 1.8 UNIDROIT Principles 2010, cit. fn no. 16; but see also Art. 1.7(1) UNIDROIT Principles 2010(“Each party must act in accordance with good faith and fair dealing in international trade”).22 Art. L.326-7 French Rural and Fishery Code.23 Art. 5 (5) Belgian law.24 “If COMPANY is in a negative cash position with Producer at the end of the initial term of thisagreement, COMPANY shall have the right to elect to extend the agreement for up to an additional five (5)years, or until such time as COMPANY has recouped its losses.[…] Producer shall be permitted to cancel[COMPANY’s] option to extend the Agreement at any time after the completion of the initial term by making acash payment to [the COMPANY] sufficient to balance out the negative cash position.” Swine MarketingContracts: Long Term Procurement Agreement Original (Hormel Foods Corporation) in Minnesota.25 Cf. Art. 3.2.7(1) of the UNIDROIT Principles (see Fn.33).26 Note that with respect to termination for breach the CISG uses the term “avoidance” (cf. Arts. 26, 49and 64).27 E.g. Art. L.326-6, Art. R.326-1 and Art. L.631-24 French Rural and Fishery Code; Art. 6 (1b) Cataluñalaw 2/2005.28 “The said agreement shall be terminated by either party serving […] notice in writing […].” Cf. Samplecontract for fresh agricultural products in Trinidad and Tobago. Similarly Art. 8 (a) Cataluña law 2/2005; KenyaCode of Conduct.29 E.g. Art. 5 (1) Belgian law.30 “The notice must be given taking into consideration the production cycle of the activity and the amountof the fulfilled investments.“ Art. 4 Brazilian Bill nº 330 of 2011. “Within a reasonable period which should beequivalent to a full production and marketing cycle of the produce.“ Kenya Code of Conduct. “At least half ofthe production cycle beforehand.” Art. 8 (a) Cataluña law 2/2005.31 “By giving 30 days advance notice.” Cf. Sample contract for rubber latex in India. “With previousnotice of 60 days.” Cf. Sample contract for poultry in Brazil (3).32 “[…] At the expiration of the said period, this agreement shall automatically come to an end.” Cf.Sample contract for pepper in Trinidad and Tobago. “This agreement shall be for the crop season 2009/2010and shall be deemed to have automatically expired after the end of such period.“ Cf. Sample contract fortobacco in the United Republic of Tanzania.33 Art. 5 (4) Belgian law; Art. 8 (a) Cataluña law 2/2005.34 ”This Agreement shall [...] terminate upon the GROWER handing over the entire yield of multipliedchip grade potatoes to COMPANY [...].” Cf. Sample contract for potato in India.35 Cf. e.g. Art. 48 (1) Panama Agrarian code.36 For such principles at international level see Art. 5.1.8 of the UNIDROIT Principles 2010 (“A contract foran indefinite period may be ended by either party by giving notice a reasonable time in advance”).37 “The term of this agreement is undefined and may be rescinded by either party, with previous notice of60 days.” Sample contract for poultry in Brazil (3). “The agreement shall be in force till any of the party cancelsthe agreement […] This agreement can be cancelled by either party by giving 30 days advance notice in writingto the other party.” Sample contract for rubber latex in India. “This contract shall commence on the date it isexecuted by the parties thereto and shall continue in full force and effect until terminated by either party as


provided herein or until a new Contract may be entered into by and between the parties. Either party to thiscontract may terminate this contract at any time, for any reason or for no reason at all by giving the otherparty ten (10) days written notice of that's party intent to terminate.” Poultry Contracts: Boiler Contract One ofAlabama.38 “Either the processor or the grower may terminate this contract by giving the other party 24 calendarmonths' notice provided that such notice may only be given so as to terminate the contract at the end of aproduction year, and may not be given until at least 10 production years have elapsed […] and the loan hasbeen repaid in full.” Sample contract for sugar beet in South Africa.39 “This is a permanent contract […] THE BOARD and FARMER each have the right to terminate theagreement by giving a ninety (90) days written notice and stating the reasons for doing so […].” Samplecontract for sisal in the United Republic of Tanzania (Board & Farmer).40 “The terms and conditions of this agreement shall be valid until June 30, 2012 and may be extended onmutual agreement until September 30, 2013. […] The BUYER is at liberty to terminate this agreement forthwitheven after the twelve month period and on such termination, the seller shall not be entitled to claim any damagesfrom the buyer and shall settle the accounts without raising any objections whatsoever.” Sample contract forpineapple in India.41 “This agreement between (Company)&(Farmer) will be effective from the above date & will be valid fora period of nine months. (Company) may terminate this agreement [...] without assigning any reason […].”Sample contract for paddy in India. ”The term of this agreement is for a period of five (5) years to ten (10)years from the date of receipt of the first hogs delivered on the contract set forth below. […] This agreement issubject to termination by COMPANY at any time if COMPANY discontinues the slaughtering of hogs.” SwineMarketing Contracts: Long Term Procurement Agreement Original (Hormel Foods Corporation) in Minnesota.42 At international level see Art. 3.2.7 (1) of the Unidroit Principles (“A party may avoid the contract or anindividual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave theother party an excessive advantage. Regard is to be had, among other factors, to (a) the fact that the other partyhas taken unfair advantage of the first party’s dependence, economic distress or urgent needs, or of itsimprovidence, ignorance, inexperience or lack of bargaining skill, and (b) the nature and purpose of the contract”).REFERENCE TO “GOOD PRACTICES”43 Cf. e.g. Section 45 (b) Illinois Agricultural Production Contract Code; Section 8 (b) IowaProducerProduction Act; Minnesota Agricultural Contracts Act, 17.92, Subdivison 1; French Arrêté du 15 mars1988 relatif à l’homologation d’un contrat type d’intégration pour l’élevage à façon de veaux de boucherie.44 “Either party may terminate the contract if, having regard to all the circumstances of the specific caseand balancing the interests of both parties, the terminating party cannot reasonably be expected to continuethe contractual relationship until the agreed termination date or until the end of a notice period”.45 “Either of the parties hereto shall, by notice given to the other party in writing, be entitled to terminatethe contract period immediately or on a date specified in the notice if such other party becomes subject of ajudicial order or proceedings, whether the contractvoluntarily or involuntarily, under any bankruptcy orinsolvency law or becomes subject to analogous proceedings having substantially similar effect or becomessubject to proceedings providing for its dissolution or winding-up or shall have a Receiver appointed of itsassets or any substantial part thereof […].” Sample contract for tea in the United Republic of Tanzania.46 As a possible model for such a provision see § 314 of the German Civil Code as amended in 2002 (“(1)Either party may terminate a contract for the performance of a recurring obligation on notice with immediateeffect if there is just cause for doing so. There is a just cause if, having regard to all the circumstances of thespecific case and balancing the interests of both parties, the terminating party cannot reasonably be expectedto continue the contractual relationship until the agreed termination date or until the end of a notice period. (2)If the just cause consists in the infringement of a duty under the contract, the contract may be terminated onnotice only after a specified period for remedial action has expired or notice of default has been given to noavail [...]. (3) The person entitled may terminate only if he gives notice of termination within a reasonableperiod after becoming aware of the cause for termination. (4) The right to claim damages is not precluded bythe termination”).47 So expressly Art. 7.3.5 (1) and (2) UNIDROIT Principles 2010.48 “Upon termination of this agreement howsoever occasioned the rights that may have accrued to theparties under this agreement shall survive and the parties shall have the right to enforce such rights.” Samplecontract for paddy in India. “Termination of this contract for any cause shall not release a party from anyliability which at the time of termination has already accrued to such party or which thereafter may accrue inrespect of any act or omission prior to such termination.” Sample contract for sugar beet in South Africa.“Continuation of this deed after completion: Completion does not discharge liability to perform any outstandingobligation under this agreement.” Sample contract for tobacco in the United Republic of Tanzania.49 So expressly Art. 7.3.5 (3) UNIDROIT Principles 2010.50 French Arrêté du 15 mars 1988 relatif à l’homologation d’un contrat type d’intégration pour l’élevage àfaçon de veaux de boucherie).

DISPUTE RESOLUTION

Prepared by Prof. Paripurna P. Sugarda and the UNIDROIT Secretariat

Table of contents

I. Disputes and dispute resolution in agricultural production contracts ................................................ 2

II. Considerations regarding the various dispute resolution methods available for the parties .... 3

III. Non-judicial dispute resolution methods .............................................................................................. 5

A. Amicable dispute resolution .............................................................................................................................................6

B. Arbitration .................................................................................................................................................................................9

IV. Judicial dispute resolution....................................................................................................................... 11

V. Enforcement of settlements or decisions resolving a dispute............................................................ 12

Commented [A1]: Online Comments.Min. Justice Canada suggests presentingthis chapter from the perspective of theparties. For details, see Doc. 23.Online Comments. UNCITRAL: Finally, weare also glad to note that Chapter 7 of thedraft Legal Guide, on dispute resolution,makes significant reference to UNCITRALtexts, and we confirm our readiness toassist in the field of alternative disputeresolution if so desired.

2. UNIDROIT 2014 – WG4 INF. 1 Dispute Resolution (ZERO DRAFT)

DISPUTE RESOLUTION

1. This Chapter will discuss the relevance of dispute resolution in the context of agriculturalproduction contracts, and will then provide an overview of the essential aspects of three kinds ofdispute resolution mechanisms, namely mediation, arbitration and judicial proceedings. Although itsmain focus will be on dispute resolution in a domestic setting, it will also consider the particularsituation regarding international contracts. It should be noted that this Chapter focuses only on theresolution of contractual disputes that arise out of the agricultural production contract within thepurview of this Guide.

2. However, it must be noted that in a number of legal systems, dispute resolution mechanismsmay also be provided for under competition law or unfair practices law. As indicated in theIntroduction Chapter “The Legal Framework” , competition law rules may be relevant for therelationship between producer and contractor to the extent that it may produce anticompetitiveeffects. Claims based on competition law are generally settled by anti-trust authorities. Suchmechanisms and their enforcement will depend on the scope of application of the relevant laws. Forexample, certain laws entitle an aggrieved party to file anonymous complaints in order not to beexposed to the other party’s retaliation, in particular in not renewing the contract.1 And, in a numberof cases, a public authority holds the power to impose fines or sanctions of a civil, administrative oreven in some cases of a criminal nature.2

I. Disputes and dispute resolution in agricultural production contracts

3. When entering into a contractual relationship, the parties should envisage thatdisagreements may arise that they would not be able to solve on their own. In some situations thecontracts will not automatically mention the use of dispute resolution mechanisms: it is importanttherefore that wWhen negotiating and drafting the contract, the parties are well advised to envisagea method for dealing with disputes that that they may not be able to solve directly, requiring theintervention of a third party. While parties could always bring their claims before a court, alternativedispute resolution procedures need to be considered as they sometimes offer more appropriatesolutions with regard to the nature of agricultural production contracts.

4. Certain areas of agricultural production relationships are particularly prone to giving rise tocontroversy, such as the quality or quantity of the delivered inputs or the final product; the producer’scompliance with production methods; the occurrence of legitimate reasons for discharging the partiesfrom their obligations; the application of the pricing mechanism; and the grounds for terminating thecontract. In addition, many obligations of the parties – especially of the producer – require diligenceand best efforts, a standard that may be more arguable than when an objectively assessable resultis to be attained.

5. The existence of effective and accessible means of dispute resolution is likely to be morecritical when the relative economic powers of the parties are particularly unbalanced, having negativeeffects on the resolution of disputes. The contractor will typically be in a better position to enforcethe contract and to apply legal remedies, usually by withholding payment, terminating the contractor not renewing it. Conversely, the producer may not be in a position to oppose the contractor’sbreach or unfair conduct or terms, let alone to raise a claim, because of the costs involved or generallogistical problems and in fear of not having the contract renewed or being subject to other formsof retaliation. Advocacy and collective action supporting individual producers in their dealings withcontractors thus have a very important role to play, especially in assisting producers that face unfairsituations and enforcing their rights. Yet, contractors may also face difficult challenges in resolving

Commented [A2]: Online Comments.Min. Justice Canada questions therelevance of discussion of competition law.For details, see Doc. 23.Commented [A3]: Online comments.Prof. Fontaine noted that competition lawrules are dealt under The LegalFramework, not IntroductionCommented [A4]: Mr Straathof, PrivateSector Workshop, session 2, made thiscomment. He said that for the resolution ofconflicts, some contracts witnessed by UTZdo not mention dispute resolution at all,or some mention national or regionalcourts, and some require amicableresolution.Commented [A5]: Mr Yap, internetconsultations, raised the point that moreshould be said about the relationshipbetween party unbalance and disputeresolutionCommented [A6]: Mr Salvador, session 4Bangkok, raised the issue of pricemechanisms are put as terms of thecontract so that the only way ofchallenging them is through recourse tothe court. This option is then unused bythe producer because of the costsassociated.Commented [A7]: Mr Yap, internetconsultation, says that factors derivingfrom the parties’ unbalance should bemore emphasised “For example,smallholder farmers in manycountries may find it difficult even tophysically travel to mediation orarbitration centers; contracts may be oral,so thatarbitration or mediation clauses arelargely irrelevant.”

UNIDROIT 2014 – WG4 INF. 1 Dispute Resolution (ZERO DRAFT) 3.

disputes with smallholders when the relatively small losses involved do not justify resorting to morecostly dispute resolution procedures.

6. When problems arise, the parties should first endeavour to overcome them throughnegotiations and cooperation based on general principles, on specific legal obligations and also veryoften, on the clauses of the contract itself. Very often reputational aspects and peer pressure mayenhance compliance with the contract and may help to resolve disputes rapidly at the negotiationstage. External entities may play an important role at this stage by providing advice, technicalopinions, monitoring or by facilitating the relationship. In addition, the parties may design proceduresto regularly review issues or to manage them as soon as they arise.3

7. Parties may agree on various dispute resolution methods on a sequential basis in order toavoid and solve conflicts. Due to their efficacy in certain situations, these multi-dispute resolutionprocesses may also be promoted by dispute resolution bodies. As conflicts Nnormally conflicts ariseand increase until they become a dispute, . Includingthe inclusion of different dispute resolutionmethods may enable the parties to address the conflict adequately at every stage. For instance,parties can agree to a first phase of negotiation, subsequent mediation and in absence of agreement,they can resort to arbitration. These clauses may be very useful to increase the probability of solvinga conflict amicably and they permit the parties to choose what steps to follow in the event of dispute.Parties can choose between a wide range of amicable dispute resolution mechanisms generally fallingunder the concepts of mediation or conciliation. This may avoid reaching a point where contractperformance is suspended and the business relationship is threatened or broken. In order to ensurethe enforceability of the clause special care should be taken in its drafting. Clarity in the wording ofthe clause and specifying the time limit of the negotiation or mediation steps are of essence.

8. Despite negotiation efforts, the continuation of the contract or relationship as it stands, oreven with different terms, sometimes becomes no longer possible or desirable. The priority thenshifts to settling the conflict in the best possible manner, on a fair basis and with effectiveenforcement. Indeed, the enforcement of rights and access to a fair trial are fundamental principlesthat are typically protected under civil and human rights, constitutional laws or other sources.4 Acontract party should therefore not be entitled to request the other party to waive its rights to seekredress through an appropriate dispute resolution mechanism.

9. While parties can usually bring their claims before a court, so-called alternative disputeresolution – or non-judicial – procedures frequently offer more appropriate solutions in the contextof agricultural production contracts. As a result, special regulations on agricultural productioncontracts, standard contracts, good practices and codes of conduct all invariably encourage or evenrequire the parties to have recourse to alternative dispute resolution methods. Such methods mayinvolve non-binding procedures, or binding arbitral proceedings leading to a final decision that willbe enforceable under the law. Regardless of the method chosen, by being aware of how controversieswill be settled, by whom and on what basis in a particular context, parties will increase thepredictability of the underlying transaction, which will in turn foster contract compliance andsuccessful contract farming relationships.

II. Considerations regarding the various dispute resolution methods available for theparties

10. As suggested by the discussion above, there are many possible methods of resolvingdisputes, which may be grouped into three broad categories. First, through amicable procedures, theparties seek a mutually acceptable solution with the assistance of a third party and, if found, applyit on a voluntary basis. Second, under arbitration, the parties appoint one or more arbitrator(s),agree on the rules governing the proceedings and are bound to comply with the decision. Both

Commented [A8]: Ms Grgic, internetconsultation, comment referring to theDRC.


amicable procedures and arbitration are considered non-judicial, “alternative” dispute resolutionmechanisms. Third, under a judicial process, parties are subject to the authority of courts, whichapply the rules of civil procedure enacted by the domestic law. The decisions rendered both underarbitration and judicial proceedings are binding and enforceable through public execution procedures.Accordingly, one of these two mechanisms for dispute resolution is typically stipulated as the choiceof last resort when other amicable methods have failed.

11. A number of factors may affect the application of these dispute resolution methods. The firstimportant factor is the nature of the dispute. Under domestic law, certain types of disputes are oftenprecluded from private settlement. This may be the case under certain legal systems when public orgovernmental parties are involved, making the dispute fall under the mandatory jurisdiction ofadministrative courts or other public entities. This may also be the case, in some countries, whenissues of public policy or third-party rights are at stake, for example in areas such as antitrust andcompetition, insolvency, intellectual property, employment, illegality and fraud, bribery, corruption,or some types of investments in natural resources.

12. The time factor can be very important in many disputes, favouring the use of mechanismsthat are typically quicker. In many instances, a prompt attention to a dispute will provide a betterunderstanding of the issues at stake, protect the interests involved, and preserve evidence.Expeditious dispute resolution may therefore avoid additional economic losses, restore the parties’trust and allow their relationship to continue. On the other hand, when the contract has already beenterminated, it will be a matter of efficient justice to settle the conflict and allow the aggrieved partyto obtain compensation within a reasonable time.

13. Parties should in principle be entitled to apply for interim relief when a prompt and publiclyenforced action is required pending a final determination of the dispute. Interim measures servedifferent purposes, such as preventing irreparable harm to a right, preventing destruction of goodsor evidence, ensuring enforcement of a future judgment, etc. The procedure may vary depending onthe dispute resolution method chosen – arbitration or a procedure with national courts - and theapplicable law.

14. Fairness is a crucial element that should be complied by any dispute resolution methodchosen by the parties. The proceedings must guarantee that both parties enjoy the sameopportunities to raise a claim and present their case, with a particular attention to the potentialimbalance deriving from one party’s weaknesses. In this context, it is essential for the producer inparticular to be adequately advised and represented. Depending on the applicable settlementmechanism, producer organisations, unions or associations with advocacy functions may play a veryimportant role in assisting an individual producer to raise a claim and navigate the disputemanagement process. Fairness also includes adequate access to a dispute resolution mechanism,which is often limited by geographical, social and economic factors. Moreover, fairness imposescertain requirements on the authority settling the dispute, including its independence from theparties, impartiality, integrity and professional skills and competence regarding the subject matterof the dispute – with possible nuances depending on the particular dispute settlement method.Fairness also requires taking into account all relevant technical and legal aspects of the case, directlyor by having recourse to expert opinions on particular issues.

15. In addition, some methods such as litigation are public while others such as mediation orarbitration may have a confidential character when so provided by the contract or the applicablelegal system, which may be a relevant factor to consider because of its potential impact on theparties’ broader commercial operations. Contractors, and even producers, may not want the resultsof a settlement or even its mere existence to affect their ability to conduct business or to enter into

Commented [A9]: This example issupported by Prof Panipurna, Bangkoksession 2, contract template “PartnershipAgreement” in Indonesia

Commented [A10]: It might be an idea toinclude a paragraph below ,that lists as oneof the factors something that would bealong the line of “outcomes.”The reason for such a paragraph is to befound in a recurring argument made at thePrivate Sector Workshop, sessions 2 and 3by some of the speakers (eg: Mr Joshi, MsMaglio, Mr Straathof, and Mr Kirke) on theimportance of seeing the drafting and thevarious stages of performance of thecontract under a light of preserving thecontractual relationship. This would inturn also affect the choice of disputeresolution, and ultimately fit in with theargument, made by Mr Kirke and MrPeltzer, about the difficulty andineffectiveness for a agribusiness to bringa producer to court for small claims.I have attempted a quick draft below:“Another important factor is the outcomethat is intended by the parties whenchoosing the dispute resolutionmechanism. So- called alternative disputeresolution could be more conducive atmaintaining the trust and preserving therelationship between producer andcontractor. It may also provide for asolution to the ineffectiveness of suingsmall producers in normal courtprocedures.”Commented [A11]: Online Comments.Min. Justice Canada in paras 14-16 it wouldbe appropriate to discuss theindependence and impartiality of themediator or arbitrator.


new contracts. Moreover, parties may want to prevent competitors from learning about the existenceor content of the dispute.

16. Finally, the steps following the resolution of the dispute may vary depending on the disputeresolution system that has been chosen. Under some instances the dispute may be submitted to asecond settlement body, either by bringing a claim under a different method, or through an appellateprocess. Furthermore, when a definitive decision is rendered, parties need to be certain that theaward or judgement will be publicly enforced failing voluntary compliance of the losing party. Someinstitutions that offer arbitration services publish the names of non-compliant parties in order toenhance voluntary execution of the awards. In any case, confidence in the effectiveness of the justicesystem is key to ensure contract compliance and fair behaviour by all parties.

III. Non-judicial dispute resolution methods

17.16. 17. As an alternative to court proceedings, which take place upon one party’s action, non-judicial settlement methods such as mediation and arbitration are based on both parties’ consent.To prescribe resort to these methods, parties may either include a term in their agriculturalproduction contract or may conclude a separate agreement to that effect, usually after the disputehas arisen. Non-judicial methods may be particularly suitable for disputes arising out of agriculturalproduction contracts since they are usually timelier and more flexible than judicial proceedings. Thechoice of the resolution mechanism to adopt can be based on the nature of the dispute. For examplecases of objective quality disputes the resolution might call for rapid expert adjudication whereasmore legally or contractually based disputes might require a more solid mechanism, such asarbitration. In some cases however, non-judicial methods might not work due to the complex layersof a contract farming arrangement which are unmanageable by a sole agency, may entail greaterprocedural costs for the parties due to their complexity requiring of expert guidance, and may presentenforcement issues. This is in part due to the fact the parties have to pay the mediator or arbitratorfees in addition to their own counsel’s fees if they choose to be represented. Enforcement of mediatedsettlement may require a party to bring a court application.

17. Alternative dispute resolution largely relies on the parties’ contractual freedom. In somecases, the parties may thus choose an ad hoc procedure whereby they appoint a third party to resolvetheir dispute and decide on the rules to be applied. Very often however, the parties resort to one ofthe various institutional systems providing mediation or arbitration services. Some of theseinstitutions are private, but may have governmental involvement to a greater or lesser degree. andThese institutions may either represent one category of stakeholders – typically commodity-basedtrade associations – or be based on the representation of both contractors and producers. Examplesof private institutions providing alternative dispute resolution methods may be found in manycommodity specific industries, either at international or national level.5 Private institutions providinggeneral alternative dispute resolution services can be found in most countries normally under thedenomination of “arbitration association.” Their role generally consists of assisting the parties inorganizing thethe choice of law for the dispute, the settlement, providing assistance in the choiceof a mediator or arbitrator, and offering logistical and administrative support for managing theprocedure. Each institution has regulations for the conduct of the proceedings, which the parties mayadopt. At the international level, well-known institutions are the arbitration court of the InternationalChamber of Commerce and the courts of international arbitration based in most capitals, especiallyin major trading countries. In other cases, tThese institutions are public or mixed and they areestablished by the applicable law. Special institutions, boards or otherwise designated bodies havingcompetence to mediate and/or arbitrate disputes on a voluntary or mandatory basis may be

Commented [A12]: Online Comments.Min. Justice Canada suggests deletingparagraph 16 as the content is misleading.Commented [A13]: Mr Yap suggests thatconsideration should be given also totraditional ADR mechanisms, citing theexample of Rwanda’s ubunzi mediationsystem, where traditional methods mayalready carry some degree of officialformal recognition.A short paragraph on this could be draftedat the end of this section after theUNCITRAL Model Law at paragraph 19,below is my attempt:

... [1]Commented [A14]: Ms Grgic suggeststaking into account the Dispute ResolutionCorporation. It is an international private... [2]Commented [A15]: Mr Yap, internetconsultation, raises the point that“different types of ... [3]Commented [A16]: This point of theinability of single agencies to deal with the... [4]Commented [A17]: Online Comments.Min. Justice CanadaCommented [A18]: Mr Salvador,Bangkok session 4, discusses the exampleof conciliation and mediation in the ... [5]Commented [A19]: Online Comments.Min. Justice Canada suggested the wording.Commented [A20]: This addition reflectsthe comment by Ms Grgic and theexperience of the DRC. In the article she... [6]Commented [A21]: Online Comments.Min. Justice Canada suggests adding more... [7]Commented [A22]: Ms Grgic, internetconsultations, suggests mentioning also... [8]Commented [A23]: Mr Waters, session 2Private Sector Workshop, said that thechoice of law term for disputes was ... [9]Commented [A24]: Online Comments.Min. Justice Canada suggested deleting, as... [10]


established by a general law on contract farming6 or by commodity-specific regulations.7 and mighthave the advantage of expertise in that area and informality, as many will not request theinvolvement of lawyers

19. It is also important to note that a majority of countries have adopted laws on mediation andarbitration, often based on model instruments elaborated at the international level within the UnitedNations Commission on International Trade Law (UNCITRAL) Although drafted for internationalcommercial transactions, the UNCITRAL Model Law on International Commercial Arbitration and theUNCITRAL Model Law on International Commercial Conciliation offer a possible model for the draftingof legislation intended for domestic transactions. Regarding the former, while most of the provisionscontained therein would apply as default rules, certain conditions are mandatory for an arbitral awardto be publicly enforceable. Special regulations on agricultural production contracts typicallyencourage or even require the parties to have recourse to alternative dispute resolution methodsand may also provide for particular rules to apply to such procedures.8

A. Amicable dispute resolution

20. Under amicable dispute resolution, the parties seek a mutually acceptable solution with theassistance of a third person, and commit to apply it on a voluntary basis.9 Commonly used conceptsare mediation – hereinafter used to refer to all amicable dispute resolution methods – andconciliation, but other terms may also be found. Although the UNCITRAL Model Law on InternationalCommercial Conciliation makes no distinction between mediation and conciliation, other national lawsrecognize differences between them.10 Whereas in a mediation process the neutral cannot giverecommendations to the parties, in a conciliation process the neutral can make recommendationsthat do not have a binding nature.

21. While mediation may be related to or used in conjunction with other methods of resolvingdisputes, it should also be seen as a stand-alone procedure. Under the prevailing approach in anumber of legal systems, mediation is clearly distinct from adjudicatory dispute resolution methods,namely arbitration and courts. Mediation is a separate process by which the mediator assists theparties in settling their dispute. Contrary to “negotiations,” where only the parties are involved, themediator’s intervention aims to facilitate dialogue between the parties and assist them in finding amutually-agreeable solution, generally in accordance with a defined structure, timeframe and rules.Mediation is usually the next step after a failure of the negotiations between the parties.11 Inparticular situations, mediation may also take place at a preliminary stage, even before the contractis concluded.12

22. Mediation has several major advantagesbenefits. Parties are free to organise the procedureaccording to their particular situation, with limited formality. It is generally simple to organise andtrigger, allowing parties to deal with conflicts at an early stage. Furthermore, mediation generallytakes place over a short period,13 has low cost implications and can be implemented both for smalldisputes and large conflicts that the parties would prefer not to bring before a court. While themediator should be aware of the legal aspects and implications of the particular situation, themediator will be guided by principles of fairness and justice rather than strictly relying on specificlegal sources,Mediation encourages a dialogue between the parties with the view of finding a solutionthat is acceptable to all parties. The mediator and will gives consideration to the circumstancessurrounding the dispute, including the technical, economic and social dimensions of the relationshipwhich contributes to assisting the parties in understanding the perspective of the other party. As aresult, mediation generally leads to rapid outcomes through comprehensive andcustomizedsettlement agreements, which should cover in an ideal situation all aspects of the dispute.A mediated solution, and may also preserve or restore the relationship between the parties ensuring

Commented [A25]: The issue of disputeresolution mechanisms in tradeassociations and body and its non- lawyercharacteristic was mentioned by Ms Vaglio(private sector workshop): “According tothose terms, disputes are resolved throughspecialized arbitrations where coffeebusiness experts (non-lawyers) typicallyserve as arbitrators and from which thefailure to comply with an arbitral awardmay result in a defaulter being blacklisted.”The same point on the absence of lawyersin certain dispute resolution mechanismswas made by Mr Waters, Private SectorWorkshop, session 2 “Lawyers wereregularly involved in drafting arguments,but did not appear on behalf of their clientsat the panel hearings”Commented [A26]: Online Comments.Min. Justice Canada suggested that the textshould provide a description of thedomestic arbitration legislation, as it isoften different from internaionalCommented [A27]: Online comments.Fondation pour le droit continental (ad hocexpert group) wishes to attract attentionto a specific mechanism in France, wherethe government may organize a mediation.Mediator intervenes for a whole series ofcontracts. This is a very good means ofsolving disputes when the parties are in avery unbalanced contractual relationship.Under French law (article 442-6 III of theCode de commerce) there is a possibilityfor the Ministre de l’èconomie to introducean action before the courts in case of unfiarcommercial practice.


that the contract is executed for the rest of the periodwhen possible. Agreements resulting frommediation are more likely to be complied with voluntarily, because resort to mediation requires theconsent of both parties in the first place. In any event, if mediation proves unsuccessful, the partiesmay then still turn to binding settlement procedures.14

23. Because mediation provides a sound approach to disputes arising out of agriculturalproduction contracts, most examples of specific legislation governing this type of contract providefor its use. Very often, this is a mandatory obligation for the parties,15 who are also generally requiredto include an express clause to that effect in their contract.16 This requirement is a proceduralguarantee ensuring that the parties are informed of their entitlement or obligation to resort tomediation, and may even appear as a condition for the validity of the contract (see Chapter __*).Even when not legally bound to do so, parties will always be well advised to provide for amicabledispute resolution procedures. Although such procedures may be chosen at any time, it is highlyrecommended that parties provide for them prior to any dispute arising, preferably in provisions ofthe agricultural production contract itself rather than under a separate agreement.

24. Mediation clauses may be more or less detailed in designing the proceedings, but twoelements should be considered essential. The first is an express determination to submit disputes tomediation. Although a general statement reflecting the parties’ willingness to solve problems or tosettle amicably any dispute may encompass resorting to mediation,17 it is preferable that clearlanguage be used. If parties intend to be bound by the clause, they have to make clear that mediationis set up as a pre-condition to be fulfilled prior to resorting to arbitration or litigation. In order toascertain the intention of the parties, national courts and arbitral tribunals have taken into accountdifferent elements that evidence a real consent, e.g., whether the parties have established the placeand language of the procedure or a time frame in which the mediation has to take place. If theparties fail to draft a precise clause, the latter can be considered by the court or arbitral tribunal asan agreement to agree which is not enforceable in many jurisdictions. Second, parties should alsoprovide for a particular institution to mediate,18 or for ways to appoint the mediator when the disputesarises, except when a mediation institution is mandatorily competent or is designated under thedefault rules of the applicable law.19 Appointing a particular person as mediator in the contract maylead to problems of enforceability of the clause if something happens to that specific person.Therefore, it is not recommended to appoint a specific person as mediator in the dispute resolutionclause.

25. While the legal framework of some countries leave the parties free to choose an ad hocmediation procedure, they generally refer – either on an optional20 or on a mandatory basis – to oneparticular institution which has authority for such settlements, either for this particular category ofcontracts21 or for agricultural disputes more generally. Frequently, the designated institution is adedicated department in the government administration,22 or a board or entity where the professionalorganizations representing the parties’ interests are members,23 but which is generally under thecontrol or coordination of a government authority.24

26. Institutional mediation, or mediation relying upon mediators recommended by an institution,should guarantee that the mediator is neutral and conducts the proceedings in an effective, impartialand competent way.25 In the context of ad hoc mediation, the parties may chose a mediator withqualities corresponding to their particular situation, provided that the mediator has both parties’trust. When production contracts are concluded with producers with a strong social dimension, suchas indigenous communities, special kinds of mediators may play an important role. Respectedpersons who, although not necessarily neutral, are perceived as being fair, may be seen as servingthe intended purpose. Described as “social network mediators,” they are generally concerned withmaintaining stable long-term social relations, and are able to draw on social or peer pressure toenforce agreements. From this point of view mediation can be seen as a method to ensure that the

Commented [A28]: Online Comments.Min. Justice Canada suggested thesechanges.Commented [A29]: Online comments.Fondation pour le droit continental (ad hocexpert group) objects any form ofmandatory mediation.


interests of both parties, and specially the rights of the farmers, are respected. Also, unlessspecifically appointed by the parties, a mediator would normally not act subsequently as an arbitratorin relation with the same dispute or relationship. Under other legal systems or specific legislationhowever, mediation is seen as an opportunity for the parties to amicably settle their dispute with theassistance of a third party who will have power, after a predetermined period, to settle the claim asan adjudicatory authority.26

27. Mediation proceedings involve a number of elements, which are dealt with by the rules of themediation institution or by the parties either in the mediation clause of the contract or at a furtherstage prior to entering into the proceedings, with the mediator’s assistance. Failing specificprovisions, default rules may be found in domestic legislation on mediation, or when no suchlegislation exists, under general contract law. The relevant elements typically include: the scope ofthe dispute covered by the mediation process; the appointment and role of the mediator(s); theimplementation of the proceedings; the exchange of communication between the parties; theadducing of evidence; disclosure and confidentiality issues; the drafting and enforceability of thesettlement agreement; the allocation of mediation costs; and the right to initiate arbitral or judicialproceedings. Mediation proceedings may be confidential, with a view to fostering a climate of trustbetween the parties and confidence in the mediator. As a result, the parties or the mediator shouldnot as a general rule be compelled to give evidence in judicial proceedings or arbitration regardinginformation arising out of or in connection with a mediation process.27 Clearly, this applies in legalsystems where – unless decided by the parties – the same person cannot act as mediator andarbitrator in respect of the same dispute or relationship.

28. When it exists, the obligation to resort to mediation based on the law and/or on the contractis binding for the parties. However, by entering into mediation, the parties do not commit to reachan agreement. General principles – or specific obligations as may be applicable – should govern theparties’ conduct, in particular to act in good faith. In certain countries, parties will not be entitled toinitiate binding resolution proceedings until the mediation has ended, subject to limitations for theprotection of rights.28 However, note that no such restriction may apply in other legal systems, andthat parties may include express wording to that effect.

29. When mediation does result in an agreement between the parties, it is advisable that theysign a settlement agreement. In all cases, the settlement is contractually binding and parties wouldbe expected to voluntarily comply. However, they may wish to state the binding character of theagreement, and its admissibility as evidence in any action or legal proceeding to enforce its terms.29

Compliance should also be guaranteed as a matter of law,30 and in certain countries, procedures arein place whereby an agreement may, at the request of the parties, be confirmed in a judgment,decision or authentic act by a court.31 Also, the settlement is, in principle, subject to confidentiality.32

30. As a final matter, when the agricultural production contract giving rise to the dispute has aninternational character, the law applicable to the contract will also govern mediation. This concernsboth the parties’ obligation to resort to mediation, either based on a mandatory law or on thecontract, and the default rules governing the proceedings. Parties may also take into considerationinstruments drafted by international institutions which are intended specifically for mediation ininternational relationships.33 Commented [A30]: Online Comments.Min. Justice Canada questions if thestatement is accurate. For details, see Doc.23.


B. Arbitration

31. Under arbitration, the parties refer the settlement of their dispute to a neutral third party(the arbitrator(s)), the decision of which will be binding and enforceable under the law. Disputessettled under arbitration cannot be subject to a second settlement under judicial procedures.

32. Arbitration is attracting increasing interest in many countries for solving domestic civil andcommercial disputes as an alternative to court proceedings because it is seen as combining theadvantages of flexible and expeditious proceedings with the effectiveness of judicial outcomes. Anumber of laws governing agricultural production contracts either encourage or impose upon theparties an obligation to resort to arbitration. Under the law or under their contract, parties may and– as seen in the previous section – are sometimes required to seek an amicable settlement beforeturning to arbitration.

33. Parties have a large autonomy to agree on the modalities of the arbitration and to choosetheir arbitrator, in a similar way as for mediation. However, since arbitration is an adjudicatoryprocedure and is intended to produce the same binding effects as a judicial decision, it must berecognised and isgoverned by domestic legislation, including a number of mandatory provisions anddefault rules. Under domestic arbitration, the arbitrator addresses the dispute based on the legalprovisions of the applicable law. However, an arbitrator’s decision may rest on principles of justiceand fairness (settling “ex aequo et bono” or as “amiable compositeur”), when the parties have soagreed and where the applicable law allows it.

34. To choose arbitration, parties should express their intent either in an arbitration clausecontained within the production contract, or under a separate agreement generally concluded aftera dispute arises. For the arbitration clause or arbitration agreement to be valid and enforceable ithas to fulfil some requisites that may vary depending on the applicable law. One importantrequirement establishes that the arbitration agreement should be in writing or at least evidenced inwriting. This formal requirement is intended to ensure that parties consented to arbitration. It canbe found in many national laws and in international instruments such as the New York Conventionon the Recognition and Enforcement of Foreign Arbitral Awards.34 The extent to which an arbitrationagreement is subject to this condition, and how the condition has to be interpreted including whetherelectronic signatures are valid, will depend on the applicable law.

35. In order to obtain an enforceable clause parties should also pay special attention to thedrafting of the clause. For instance, an unclear clause, providing for arbitration and at the same timefor the jurisdiction of national courts, could be declared unenforceable.35 When drafting the clauseparties are advised to use a language that demonstrates a clear intention to arbitrate and to providefor certain specifications such as the language of the arbitration and the seat of arbitration. However,the provisions and the degree of detail contained in the clause will depend on whether the partiesagree on ad hoc or institutional arbitration. Under ad hoc arbitration proceedings, the parties areleading the arbitration process and will be required to actively seek not only the constitution of thetribunal but also the organisation of the arbitral proceedings. In the case of institutional arbitration,after a notice of intent to arbitrate has been deposited with the arbitration institution, administrativesupport roughly equivalent to those of a court registry will be provided by the institution.

36. Parties may resort to ad hoc proceedings, and agree among themselves on the main aspectsof the arbitration, or they may resort to arbitration administered by an arbitral institution, whichgenerally provides arbitration rules, supervises the process and offers certain assurances regardingits quality and the enforceability of the award. If parties agree on institutional arbitration they shouldclearly state the institution to which they are submitting the dispute. An error on the designation ofthe institution chosen may also render the clause unenforceable since the intention of the partiesmay be difficult to ascertain. The arbitration law in each country will apply for every aspect which is


Commented [A32]: Online Comments.Min. Justice Canada suggested thiswording.

Commented [A33]: Online Comments.Min. Justice Canada suggested this additionto expand on the pros and cons ofinstitutional versus ad hoc arbitration.


not regulated by the parties or by their chosen institution. Parties’ intention to resort to arbitrationmay be reflected in their reference to the applicability of the particular domestic arbitration law.36

37. Specific legislation dealing with agricultural production contracts may provide for a specialauthority to arbitrate disputes.37 This might be advisable due to the special characteristicssurrounding contract farming and will invariably be the case when the type of contract is regulatedas part of public agricultural development programmes, for example as part of land or agrarianreforms or involving public financial support or incentives to the producers or the investors, or inrelation to regulated commodities. Matters that are commonly regulated include setting a maximumtime length for the proceedings, determining the possibility and modalities of an appellate reviewand establishing a timeframe for the appellate judgement to be rendered.38 To ensure expeditioussettlements, the arbitral authority is generally required to render its decision within a given period,for example, thirty days.

38. Since arbitration is an adjudicatory dispute resolution method, particular proceduralguarantees should however be in place to ensure the proceedings’ fairness, in particular to protectthe producer.39 This is especially true when, as is frequently the case, the arbitration takes placeunder one single instance and is not appealable. It must be noted that the arbitration clause oragreement binds only the parties which have expressly agreed to it, which would generally excludeany collective action in support of an individual producer in arbitral proceedings.

39. The neutrality and independence of the arbitral tribunal is of utmost importance, arequirement which may be questioned for example when the arbitral institution is a trade associationthat represents the contractor’s interests.40 This issue can be mitigated if the arbitrator(s) is selectedfreely by the parties and not from a pool of arbitrators part of the roster suggested by the tradeassociation. Arbitration may also have high cost implications for the parties, since it would involvenot only the arbitrator fees but very often also attorney’s fees, and possibly upfront deposits.

40. Under certain laws, the selection of arbitration proceedings is subject to conditions. Somelaws prohibit or invalidate mandatory arbitration clauses in agricultural production contracts, inparticular in standard contract forms.41 Others require that the arbitration agreement be signed onlyafter a dispute arises42 or else that the arbitration take place only upon the producer’s request.43

Some also require that any contract requiring arbitration must contain a statement allowing theproducer, before entering into the contract, to decline to be bound by the arbitration provisions.44

Parties also have to take into account time limitations to file a claim contained in the applicable law.45

If time limits are not respected the claimant may lose the right to initiate proceedings.46

41. In order to ensure theprotect its rights of thea partyies and the efficacy of the future awardmay wish to, a request for interim relief can be made before or pending the arbitration proceedings.Typically, interim relief take the form of an order directed at preserving the value of assets subjectto contract farming. For example, it make take the form of an order enjoining a party to takeimmediate action for the sale of perishable goods in order to limit losses. It may also be an orderrestraining a party from removing machinery or other assets from the jurisdiction where they arelocated. Interim relief can be sought by the parties either before national courts or before thearbitration tribunal once it has been constituted.47 Most arbitration laws recognize that when theparties seek interim relief before national courts they are not waiving their agreement to arbitrate.48

The procedure to follow will be determined by the applicable arbitration law and the procedural lawsof the forum. Recent development in the rules of several major arbitration institutions49 have alsoallowed for the use of “emergency arbitrators”, for situations where there is a need for urgent interimrelief and the parties cannot wait for the constitution of an arbitral tribunal.50

42. When the agricultural production contract has an international character it may also entailthe application of mandatory provisions. In the context of international commercial arbitration,

Commented [A34]: Online Comments.Min. Justice Canada holds that this isunclear. For details, see Doc. 23.Commented [A35]: Mr Dat, session 4Bangkok, suggests the introduction of aspecialist body to solve issues that arespecific to contract farming and theimpasse of dispute resolution in this areain Vietnam.

Commented [A36]: Online Comments.Min. Justice Canada suggested thiswording.

Commented [A37]: Online comments.Prof. Fontaine suggested adding a mentionon “emergency arbitrators”.


proceedings are fairly flexible and parties generally enjoy autonomy in choosing the legal rules to beapplied to the dispute. Parties may refer to an international arbitral institution by designating it inthe dispute resolution clause.51 The enforcement of a foreign arbitral award may usually take placeonly after confirmation proceedings have followed their due course after a final and binding awarddeciding all issues in dispute has been issued by the tribunal. Domestically, arbitral awards andjudgements can be used easily by the winning party to obtain payment. The main benefit of arbitralawards over court judgements is that they can be enforced after a simple ampliation procedure inall contries party to the New York Convention on the Recognition and Enforcement of Foreign ArbitralAwards as opposed to court judgments, which must be subject to a lengthier process of recognitionby the foreign court, except in situations where an existing treaty that facilitates their recognitionand enforcement is applicable, It is therefore good practice for the parties to consider at the time ofentering into an arbitration agreement, first whether the other party has assets in the jurisdictionand, second, when that is not the case whether the relevant jurisdictions where enforcement couldbe sought (generally the home jurisdiction of the other party) is party to the New York Convention.

IV. Judicial dispute resolution

43. If parties have not chosen to pursue arbitration, they may resort to the courts, which willapply the rules of procedure provided by domestic law. Regulation and the actual operation of publicjustice as well as the cultural approach for private parties to resort to court settlement vary widelybetween countries. However, every legal system should guarantee a fair and free access to justiceand enable private parties to settle their dispute before independent judges. Proceedings before thecourts are mainly regulated under mandatory law, generally with a high level of formality, justifiedby the need to ensure procedural guarantees for the litigants.

44. Rules relating to the forum’s jurisdiction can be seen as part of such guarantees, anddepending on the particular legal system and situation, the forum may be imposed or the possibilityof parties’ choice restricted to protect the weaker party. Jurisdiction – whether a court is competentto hear a dispute – may be based on the subject matter of the dispute or the capacity of the parties.Under a number of legal systems, claims involving agricultural producers would or may fall underthe jurisdiction of specialised tribunals or sections in common courts, for example dealing with civillaw or agricultural matters. Another ground of jurisdiction relates to territorial criteria. This is thecase under certain special laws on production contracts, which confer jurisdiction upon the courts atthe producer’s domicile,52 since following the usual rule that gives jurisdiction to the courts at thedefendant’s domicile may restrict the producer’s access to court as a claimant given the potentiallyhigh costs involved in raising a claim in a distant location. Based on a similar concern, certain lawsset the competent forum at the place where the contract - or its main part – is to be performed.53

When contracts are concluded with members of certain communities, especially aboriginal peoples,courts established under customary law may have jurisdiction over some types of dispute. With aview to providing information to the producer, the contract may state the particular court havingjurisdiction.54

45. In judicial proceedings, the parties may be required to act through legal representation.Although professional legal representation will in principle help parties adequately present their caseand defend their rights, it generally involves significant costs, which depending on the legal systemmay or may not be recoverable by the winning party,55 and if so only after the final judgement. Incertain jurisdictions, legal aid delivered by public services could be available for people unable toafford such costs, so as to ensure the right to a fair trial and the right to counsel. Producerassociations and other organisations may play an important role in providing advice and assistanceto individual producers in defending their rights through litigation.56



46. In many countries, public justice involves complex and lengthy proceedings which may lastfor several years in civil and commercial matters. This generally deters parties from relying on thejudicial system to obtain redress, particularly for the time sensitive issues that typically arise inagricultural production contracts. Many countries are implementing reforms aimed at increasingjustice efficiency, simplifying judicial proceedings, implementing electronic filing and administrationof claims. Some judicial proceedings provide for a preliminary mediation stage seeking fast andamicable settlement. Also, special attention is given in an increasing number of countries toimproving the settlement of small claims through flexible and simplified proceedings, in a reasonabletime and at affordable costs.

47. When the contract is international in character, issues of jurisdiction and identification of thelaw applicable to the substance of the dispute are determined by the judge seized of the dispute onthe basis of his own legal system, normally by applying the relevant private international law – or“conflict of law” – rules of the forum (see Chapter __*). In international contractual matters, partiesenjoy a large autonomy to choose the jurisdiction and the applicable law. While it is true that partiesdispose of a large autonomy to choose the jurisdiction (or forum) in which their dispute is to be settled,they seldom have the power to choose the particular court inside that jurisdiction. For example, onecould probably not choose the small claims court since its jurisdiction is limited by the amount claimed.

V. Enforcement of settlements or decisions resolving a dispute

48. After a dispute has been settled by one of the above methods, the enforcement phase is thefinal step which ranges from when the time to file an appeal has elapsed until the terms of thesettlement are fully implemented. In addition to protecting the interests of the parties involved,effective enforcement of binding decisions is necessary to foster confidence in dispute settlement byarbitral and State tribunals.

49. In many countries, obtaining execution is another long phase of the litigation process thatproves to be a disadvantage for parties engaged in production contracts. This could be overcome insome instances by promoting legislation that make non-binding mechanisms binding. Nonetheless,special legislation dealing with production contracts may contain provisions aimed at ensuringenforcement of the decisions rendered by the dispute settlement authorities set under suchlegislation.57 This may include locating and seizing the defendant’s movable assets, organizing andadvertising the public sale, holding the sale and recovering the value of the claim.58 Finally it shouldalso be noted that “informal” mechanisms may play a role in implementing compliance with theaward. Some dispute resolution bodies may for example de-list a firm which refuses to comply. Thiswould then be disseminated in trade journals, credit reporting services, member governments, andother fora. These reputational and peer-pressure effects could result in great compliance.

1 This is the case, in the UK under the Groceries Supply Code of Practice and the Groceries CodeAdjudicator Act 2013. The later has created an adjudicator that has the power to receive anonymous complaintsthat can be further investigated but also provides arbitration services for disputes falling under the scope of theCode.2 In certain jurisdictions, particular conducts or clauses considered as unfair may amount to a criminaloffence, entailing the application of criminal law. Under US Iowa (Id. § 202.5; see also IOWA CODE ANN. §§714.8, 714.11 (2003)), a contractor who executes a production contract with a confidentiality clause is guilty ofa “fraudulent practice” classified as an aggravated misdemeanor under Iowa criminal law.3 Under certain relationships, special and detailed procedures are in place to that effect. See also ChapterIII – Obligations of the parties. An interesting example is provided by the following clause (appearing underparties’ obligation part, while a stand-alone article refers to arbitration. Sample contract for sugar beets in SouthAfrica “15. COMPLAINTS – 15.1 The Grower shall make any complaint which he has in respect of the operation

Commented [A39]: This is a solution tothe problem of enforcement suggested byMr Dat, Bangkok session 4.

Commented [A40]: This point of informalmechanisms resulting in compliance andthe DRC, have been mentioned by Ms Grgic,internet consultations, and the article shequoted by Mr Gómez, Maleeha Rizwan andMs Ricketts


of this Contract or the conduct of the Processor to the Growers’ Representative who shall record such complaintin writing irrespective of the manner in which it is made. 15.2 The Processor shall convene Complaints Meetingsat regular monthly intervals throughout the Campaign Period (each a “Complaints Meeting”) […]. With additionaldetailed provisions regarding the manner in which complaints are managed by all the parties.4 Furthermore, these rights are sometimes restated under specific legislation on agricultural productioncontracts See US Wisconsin, ATCP 101.07: “Prohibited practices. No contractor may do any of the following: […](4) Fail or refuse to offer a vegetable procurement contract to a producer because the producer has done any ofthe following: (a) Filed a complaint with the contractor or a government agency. (b) Requested arbitration of acontract dispute. (c) Filed suit alleging a violation of this chapter or ch. ATCP 155. […]”.5 For example as regard the grain industry, the National Grain and Feed Association (NGFA) in the US orthe Grain and Feed Trade Association (GAFTA) with an international reach, based in the UK. Another interestingexample is presented by the Fruit and Vegetable Dispute Resolution Corporation operating between the US,Canada and Mexico.6 This is the case of the Cambodian Sub-decree on Contract Farming.7 See Model Contract for Tobacco in Tanzania which refers disputes to the Tanzania Tobacco Board createdunder the Tobacco Act of 2001.8 See: FAO, Guiding principles for responsible contract farming operations, 2012.9 Cf. UNCITRAL Model Law on International Commercial Conciliation, Article 1(3): “[…] ‘conciliation’ meansa process, whether referred to by the expression conciliation, mediation or an expression of similar import,whereby parties request a third person or persons (“the conciliator”) to assist them in their attempt to reach anamicable settlement of their dispute arising out of or relating to a contractual or other legal relationship. Theconciliator does not have the authority to impose upon the parties a solution to the dispute”.10 See Código Agrario in Panamá11 Contract sample for tea United Republic of Tanzania – Article 11 “Any dispute or difference arising outof this agreement or in connection therewith which cannot be amicably settled between the parties hereto shallin the first instance be mediated pursuant to the Laws applicable in Tanzania”.12 Regulation (EU) NO 1308/2013 of 17 December 2013 establishing a common organisation of the marketsin agricultural products – Article 168(3) “the Member State may establish a mediation mechanism to cover casesin which there is no mutual agreement to conclude such a contract, thereby ensuring fair contractual relations.”13 30 days is an average period in contract practice and under specific legislations ; However, the partiesmay agree on the period : Trinidad & Tobago : Sample contract for Green hot peppers “Where the parties heretofail to arrive at a resolution within ten (10) days of Mediation”14 And in order to encourage the parties to use mediation, States should ensure that their rules on limitationand prescription periods do not prevent the parties from going to court or to arbitration if their mediation attemptfails.15 See e.g. Vietnam Decision No. 80/2002/QD-TTg of June 24, 2002 on policies to encourage thecontractual sale of commodity farm produce, Article 4. Note that the obligation to resort to mediation may besubject to certain exceptions, in particular when urgent interim measures are sought before a State court. Cf.e.g. US Iowa Code § 654B.3. concerning situations of potential irreparable harm or claims included in a classaction.16 See e.g. Morocco, Article.12 US, Iowa, Producer Protection Act, September 2000 – Section 12 “Anagricultural contract must contain language providing for resolution of disputes concerning the contract bymediation”. Morocco : Law n° 04-12 on “agrégation agricole” of 17 July 2012 – Article 12 & 13.17 Contract sample: Lao – Supply of Tobacco: Art 9 “In case of any dispute, both parties undertake to findany necessary solutions to solve the problems.”

Tanzania – Supply of Sisal “5.4 The parties of this agreement shall use their best efforts to settle amicablyall disputes arising out of or in connection with this agreement or its interpretation”

Sample contract for cotton in Kenya – 9.1 “Any dispute whatsoever and howsoever arising out of thisContract shall be, at first instance, settled amicably by the parties through good faith negotiations. If nosettlement is reached by the parties within 30 days of commencement of the said good faith negotiations, thedispute shall be referred to arbitration (…)”18 Producer Protection Act (Iowa), September 2000 – Section 12 “If there is a dispute involving anagricultural contract, either party may make a written request to the [state inserts name of mediation service]for mediation services as specified in the contract, to facilitate resolution of the dispute”19 Sample contract for fresh agricultural produce in Trinidad & Tobago – 6 “Dispute Settlement Procedures– (a) The parties shall resolve disputes amicably amongst themselves. (b) Disputes shall be referred to a DisputeSettlement Panel (hereinafter referred to as the Panel) on failure to amicably settle disputes. (c) The Panel shallcomprise three (3) individuals mutually agreed upon by the Parties.”20 France Arrêté du 15 mars 1988 – Contrat type pour l’élevage à façon de veaux de boucherie :“Préalablement à toute instance judiciaire, à l'exception de la procédure des référés, les parties peuventsoumettre leur litige à la commission paritaire prévue à l'article 15.”21 Marocco, idem.22 Minnesota Statutes 2012 – “17.95 Department of Agriculture Ombudsman. – A position is created in theDepartment of Agriculture to provide information, investigate complaints arising from this chapter, and provideor facilitate dispute resolutions”; Philippines, Revised Rules and Regulations Governing Agribusiness VentureArrangements (AVAs) in Agrarian Reform Areas (2006): 3.16 – “Mediation is a method of voluntary conciliationwhereby the DAR Provincial Agrarian Reform Officer (PARO), acting as a neutral facilitator, assists the parties inreaching their own settlement through conference and discussion resulting to compromise“


23 France, Arrêté du 15 mars 1988 – Contrat type pour l’élevage à façon de veaux de boucherie. Article 15“La commission nationale paritaire est composée des organisations professionnelles représentatives des partiesau niveau national avec l’assistance, à titre consultatif, des organismes techniques compétents. ”24 France, Arrêté du 15 mars 1988 – Contrat type pour l’élevage à façon de veaux de boucherie. Article 15“La Commission nationale paritaire […] a pour mission: de veiller à l’évolution de l’application du présent contrattype ; de définir les normes moyennes de référence [en matière technique]; De définir les valeurs indicativespour les éléments de détermination de la rémunération de l’éleveur […]; De mettre en œuvre la procédure deconciliation prévue à l’article 16.25 As an example cf. the European Code of Conduct for Mediators.26 Sample contract for pepper in Trinidad & Tobago: “12 Governing law and dispute – […] Where the partieshereto fail to arrive at a resolution within ten (10) days of Mediation, the Mediator shall be appointed as arbitratorfor the final determination of the dispute under the Arbitration Act […]”27 See e.g. UNCITRAL Model Law on International Commercial Conciliation, Article 10.28 For example when interim measures are sought or when the judicial action may be barred as a result ofthe expiry of limitation periods; under Chapter 654B of the Iowa Code, mediation is mandatory before a producermay file suit in court with exceptions for potential irreparable harm or claims included in a class action.29 Contract clauses may expressly state the binding character of the mediation settlement: e.g Trinidad &Tobago “Any resolution arrived at in Mediation shall be binding upon the parties hereto”30 UNCITRAL Model law Article 14. Enforceability of settlement agreement: If the parties conclude anagreement settling a dispute, that settlement agreement is binding and enforceable . . . [the enacting State mayinsert a description of the method of enforcing settlement agreements or refer to provisions governing suchenforcement].” Also: Directive 2008/52/EC of the European Parliament and of the Council of 21 May 2008 oncertain aspects of mediation in civil and commercial matters, Preamble, para. 19.31 Directive 2008/52/EC of the European Parliament and of the Council of 21 May 2008 on certain aspectsof mediation in civil and commercial matters.32 UNCITRAL Model Law on International Commercial Conciliation – Article 9 “Unless otherwise agreed bythe parties, all information relating to the conciliation proceedings shall be kept confidential, except wheredisclosure is required under the law or for the purposes of implementation or enforcement of a settlementagreement.”33 If parties are to consider these instruments, maybe reference to them should be made in this text (or inthe bibliography).34 http://scholarship.law.missouri.edu/cgi/viewcontent.cgi?article=1344&context=facpubs35 See sample contract for sugar beets in South Africa36 Sample contract of farm producer in Grenada “50. – Any dispute arising between the parties hereto andpertaining to this Agreement shall be resolved in accordance with the Arbitration Act CAP 19 of the 1990 RevisedLaws of Grenada.”37 Catalunya LEY 2/2005, de 4 de abril, de contratos de integración Article 14 and Punjab Contract FarmingAct 2013 Article 26.38 India, Model Act on Agricultural Marketing, Chapter VII on Contract Farming, art. 3839 See UNCITRAL Model Law setting out fundamental requirements of procedural justice, in particular underArticle 18. “Equal treatment of parties – The parties shall be treated with equality and each party shall be givena full opportunity of presenting his case”, as well as under other principles applying to oral hearings, expertevidence, the communication of information.40 The impartiality requirement may not always be seen as of essence. See for example, in Winfrey v.Simmons Foods, Inc., 495 F.3d 549 (8th Cir. 2007), contract poultry growers sued the defendant for breach ofcontract. The trial court ruled that the production contract did not require the parties' selected arbitrators to beneutral, and even if the poultry growers' chosen arbitrator exhibited evidence bias, the defendant presented noevidence of prejudice.41 US Iowa – Chapter 679a Arbitration – 679A.1.42 US Farm Bill, Section 10203(b).43 US Wisconsin. Regulations governing “vegetable procurement contracts,” § 101.02(6). (6) Arbitrationof disputes. Under every vegetable procurement contract, the contractor shall agree to submit contract disputesto impartial arbitration at the request of the producer.44 US Farm Bill, 7 U.S.C. § 197c(a).45 See, for instance article 10 of UNIDROIT principles.46 In international contracts parties are advised to select the applicable law to the contract in order to moreeasily determine the time limits applicable to the claim. However, even when there is a choice of law problemsmay still arise if parties have agreed on referring their disputes to arbitration. This may happen where the law ofthe seat arbitration considers time limitations as a procedural element while the law applicable to the contractconsiders it to be a substantive issue47 Note, however, that although in the last decade most jurisdictions have recognised the power of arbitraltribunals to grant interim relief there are some important exceptions such as Italy, China, Thailand and Argentina.48 See article 9 UNCITRAL Model Law on International Commercial Arbitration: “It is not incompatible withan arbitration agreement for a party to request, before or during arbitral proceedings, from a court an interimmeasure of protection and for a court to grant such measure”49 Singapore International Arbitration Centre. Hong Kong International Arbitration Centre, InternationalChamber of Commerce, The International Centre for Dispute Resolution.


50 Chan S.C., Leng Sun and Tan, Weiyi, Making Arbitration Effective: Expedited Procedures, EmergencyArbitrators and Interim Relief (November 28, 2013). Contemporary Asia Arbitration Journal, Vol. 6, No. 2,pp. 349-371, November 2013 .51 Sample contract for tea in the United Republic of Tanzania “11.2 Any dispute shall be finally settledunder the rules of arbitration of the International Chamber of Commerce by one or more arbitrators appointed inaccordance with the said rules and the place for such arbitration shall be Tanzania, or such other place as bothparties may agree upon in writing. […]”.52 Belgian law, 1 April 1976. – Loi relative à l'intégration verticale dans le secteur de la production animale.“Art. 16. Les contestations relatives à l'intégration verticale dans le secteur de la production animale sont portéesdevant le juge du domicile de l'intégré.” Draft bill legislation on partnership agreements for integrated agriculturalproduction in Brazil (2011): “Cláusula relativa à solução de litígios judicialmente deberá indicar o fórum de justiçada localidade onde se situa o empreendimento do produtor integrado.”53 In the US, the Packers and Stockyards Act, 1921 (Section 209) as well as the 2008 Farm Bill providethat the forum for resolving disputes among the parties to a poultry or hog production or marketing contract willbe the federal judicial district in which the principal part of the performance of the contract takes place: for mostproduction and marketing contracts this will be the federal jurisdiction in which the poultry grower or hog producerlives.54 Sample contract for gherkins in India “14. This agreement comes under the jurisdiction of BangaloreCourt.”55 Note that under the (US) Kansas statute, a special rule to that effect: Statute 16-1701: Poultryproduction contracts “In such a civil action against the contractor, the court may award the poultry producer whois the prevailing party, reasonable attorney fees and other litigation expenses.”56 In certain countries, certain procedures may be in place allowing for the representation of groups ofindividuals in the same position to file a lawsuit. Further research will be need regarding this particular issue.57 India, Model Act on Agricultural Marketing, Chapter VII on Contract Farming, art. 38. “The decision bythe authority under sub section (3) and decision in appeal under sub section (4) shall have force of the decree ofthe civil court and shall be enforceable as such and decretal amount shall be recovered as arrears of landrevenue”.58 Further research may be needed regarding the specificity of enforcement in the context of contractfarming.

Page 5: [1] Commented AuthorMr Yap suggests that consideration should be given also to traditional ADR mechanisms, citing the example ofRwanda’s ubunzi mediation system, where traditional methods may already carry some degree of officialformal recognition.A short paragraph on this could be drafted at the end of this section after the UNCITRAL Model Law atparagraph 19, below is my attempt:“It is also important to remember that traditional dispute resolution mechanisms might exist parallel to theofficial ones, for example at village level. Because of their traditional element, some of them may play animportant role, having “official” recognition in their environment.”Page 5: [2] Commented AuthorMs Grgic suggests taking into account the Dispute Resolution Corporation. It is an international private disputeresolution body operating between the US, Canada and Mexico and including also members from other LatinanAmerican countries. It promotes fair, ethical and efficient trading practices and its mission is to establishharmonized trading standards and procedures within NAFTA parties, and provide services necessary toresolve commercial disputes in a timely and cost-effective manner. The DRC also provides effective measuresto secure that parties comply with an arbitral award (e.g. de-listing and advertising the name of a member thatis not complying with an award).Its establishment process may offer interesting perspectives to the Working GroupPage 5: [3] Commented AuthorMr Yap, internet consultation, raises the point that “different types ofdisputes may call for different ADR solutions”Page 5: [4] Commented AuthorThis point of the inability of single agencies to deal with the multifaceted levels of a farming contract areraised by Ms Goosomp, Bangkok session 4.

Page 5: [5] Commented AuthorMr Salvador, Bangkok session 4, discusses the example of conciliation and mediation in the Philippines whichrequire the, sometimes costly, services of a lawyer to guide through the process.Page 5: [6] Commented AuthorThis addition reflects the comment by Ms Grgic and the experience of the DRC. In the article she attached by MrGómez, Ms Rizwan and Ms Katie Ricketts, it is said that analysis of the DRC process " suggests that once anindustry-wide consensus is achieved through extensive consultation and deliberation among marketparticipants, a solution can be identified and implemented with government support"Page 5: [7] Commented Author 11/12/2014 10:46:00 AMOnline Comments. Min. Justice Canada suggests adding more discussion on the benefits and risks involved. Fordetails, see Doc. 23.Page 5: [8] Commented AuthorMs Grgic, internet consultations, suggests mentioning also the Fruit and Vegetable Dispute ResolutionCorporation (DRC)Page 5: [9] Commented Author

Mr Waters, session 2 Private Sector Workshop, said that the choice of law term for disputes was particularlyuseful as “there is greater certainty because no issue arising as to which law applies.” For this reason this termis present in the standard GAFTA contract.This comment might be added elsewhere, for example in section that discusses the advantages of properdrafting of dispute resolution in a contractPage 5: [10] Commented Author 11/12/2014 10:46:00 AMOnline Comments. Min. Justice Canada suggested deleting, as the text is intended to be focused on the domesticsetting (see para 1).