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Course on
OPERATIONAL AND LEGAL ASPECTS OF CONTRACT
FARMING SCHEMES
MODULE 3: UNDERSTANDING THE CONTENT OF AN AGRICULTURAL CONTRACT
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CONTENTS
You will better understand:
• How are contracts developed?
• What does a contract usually look like?
▫ Form
▫ Content
• Understanding the responsibilities of the parties
• How long does a contract last?
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1. HOW ARE CONTRACTS DEVELOPED?
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Contract formation
• Several stages including:
Negotiations and exchange of information
Offer presentation
(buyer)
Acceptance (farmer)
Contract preparation
Signature
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Contract formation
• Common best practices:
▫ Negotiation carried out in a fair and transparent manner & in good faith to build trust between farmers and buyers
▫ Farmers need to be involved in discussions with the buyer from the beginning of the negotiation to make sure that: they understand all the contract conditions and
their interests and rights are considered.
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The negotiation stage
• Offer:
▫ The buyer provides the offer to farmers which outlines the conditions of the contract:
In writing
Give time for reviewing the document to understand well all the conditions & consult with advisors for support
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The negotiation stage
• Upon receiving the offer:
▫ The producer can request clarifications &changes to certain clauses (e.g. pricing, quality, payment, product delivery) if they seem unfair or impossible to achieve
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Who can help in contract formation?
PROBLEM
If farmers find it difficult to:
understand contract clauses written in confusing
legal jargon
feel capable to ask questions and negotiate with a
buyer on their own
SOLUTION
They should ask a trustworthy person to explain them the
detail included in the contract:
leader of the farmers’ organization
a government extension officer
NGO, etc.
Booking time limit: 19/07 by 3pm
Booking time limit: 19/07 by 3pm
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The last stage
• Ready for signing the contract: Signature, should come only after a full agreement
on all the conditions has been reached and the negotiation phase is completed.
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An example…
https://www.youtube.com/watch?v=_PtGCAI0sJA
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2. WHAT DOES A CONTRACT LOOK
LIKE?
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The contract• Fundamental principle
• Freedom of contract• Signataries are free to enter into a contract and to determine its
specific content
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Contract form
• Contracts should:• Be in writing!
• Use language that is well understood by the signing parties• In cases of illiteracy, a neutral third party should read clauses and
explain them as needed
• Ensure equal treatment when conditions are equal Standard contracts can be designed by companies, but :
• Preferably each farmer should sign them individually
• Preferably negotiate terms collectively
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Contract content
• Important recommendation
Always consult a lawyer!
• General principle▫ Apart from typical legal requirements such as the
identification of partners, a clear object and a signature, usually there is no detailed requisites on specific clauses. Good practices do exist though!
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Contract content
1. The parties • Typically the producer (individually or in group) and
the buyer
2. The purpose • Reason for the contract, inc. specific commodity
Ex: "The farmer commits to grow and sell all produced tomatoes to the
company in exchange for payment based on the prevailing market price”
3. The production site• Specify size and location of the farming area
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Contract content4. Obligations of the parties: Clear description of
contractual obligations
Ex: Poultry production contract
Farmers’ obligations Company’s obligations
Raise chickens according to pre-established methods
Pay the agreed price in accordancewith a pre-determined formula
Provide part of the inputs: power, water and material for the bed
Provide inputs: one day chicks, feed, medicines
Comply with technical rules imposed by the company
Provide technical assistance
Grant the company free access to the production area
Provide transportation from thefarm to the slaughterhouse
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Contract content
5. Price and payment: • Clear method for price determination
Not necessarily expressed in monetary terms – it may be set as a price reference, a formula, a percentage over production costs, etc.
E.g.: “All of the crops grown by the farmer will be sold to the company at
predetermined prices fixed by the company for each variety and specific grade quality level”
• Clear definition of when and how will farmers be paid
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Contract content
6. Input provision:• Description of inputs provided by the buyer
• When and where will be delivered
• How repayment will be calculated and made
7. Third parties may also sign:• Banks, NGOs, input suppliers, etc.
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Contract content
8. Excuses:
▫ Acceptable justification for failing to comply with the contract
Force majeur
Changes of circumstances
9. Remedies:
▫ refer to any legal measure provided by law or by contract to protect the interest of one party against the failure of another party to performproperly
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Contract content
10. Duration, renewal and termination
Ex: “The parties agree that either party may terminate the Agreement
by giving one month written notice to the other party of its intention to terminate” (Zambia, cotton contract)
11. Remedies ▫ refer to any legal measure provided by law or by
contract to protect the interest of one party against the failure of another party to perform properly
12. The signature
Ex: “Both parties signed this agreement on the day……..month
…….and year……. in the presence of two witnesses”
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3. UNDERSTANDING
THE RESPONSIBILITIES
OF THE PARTIES
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Responsibilities of the parties
• Re. the product
• Re. the process
• Re. the delivery
• Re. price and payment
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Product-related obligations
• Quantity
▫ Clear indication of the quantity to be produced
a) the whole production
Ex: “The farmer must supply the entire crop produced to the buyer”
b) a percentage of production
Ex: “The farmer shall supply to the buyer 70% of the total fruit
produced in the orchard”
c) a specified quantity
Ex: “The grower is contracted by the buyer to produce 150 kg of
paprika in the 2016/2017 season”
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Product-related obligations
• Quality: Clear indication of quality requirements
▫ Quality characteristics mayinclude: physical characteristics (e.g. colour, size,
shape)
contents (e.g. low fat milk, seedless grapes)
fitness for a purpose (e.g. seeds that are resistant to a certain virus or green beansthat are free of chemicals prohibited by the target market
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Contract content - quality
Contract for paprika - Zambia
Grades Specifications Price ($/kg)
A Dark maroon/purple without damages 7.0
B Dark maroon/purple with maximum 25% 6.5
C Red 5.0
D Orange/red 4.0
Contract for potato - India
Grades Specifications Price
I Size of minimum 40 mm, free from external and internal defects, minimum weight of 1 tonne
Established at deliveryII As above, but slightly bruised or damaged
III Second growth, greening or cut
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Process-related obligations
• InputsEx:“The farmer shall use only planting material supplied by the buyer,
and shall use only chemicals approved by the buyer in cultivation of the crop” (Trinidad and Tobago, pepper contract)
• Land, facilities and equipment
Ex: “The grower shall be responsible for all farming activities
including land preparation, irrigation, planting, plant protection measures and harvesting” (India, potato contract)
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Process-related obligations
• Standards and certification
Ex:“The grower shall adhere to the EurepGAP standard. Sanctions
may be applied to the grower in case of the EurepGAP requirements not being met” (Tanzania, vegetable contract)
• Intellectual property rights
Ex:“The company will supply the seedlings to the farmers. The
number of seedlings supplied shall not exceed the one agreed by the parties. Prohibitions and fines will be enforced for any farmer found to be multiplying this planting material” (Thailand, Eucalyptus contract)
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Price and payment-related obligations
• Clear method for price determination
▫ Not necessarily expressed in monetary terms – it may be set as a price reference, a formula, a percentage over production costs, etc.
Ex: “All of the crops grown by the farmer will be sold to the company
at predetermined prices fixed by the company for each variety and specific grade quality level”
• Clear definition of when and how will farmers be paid
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Price-related obligations
• Negotiated before the growing cycle
• Easily understood
• Yet, susceptible to conflict if markets change much
Fixed pricing
• Usually based in formulas associated with market or performance parameters
• More difficult to be understood
• Less susceptible to conflict but risk of firm manipulations exist
Flexible pricing
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Price-related obligations
• Base price paid out either at the beginning or end of season
• Final price calculated once buyer sells commodity
• A second payment is made after companies sort out costs and revenues
• Often used in commodity export markets (coffee, cotton, tobacco, etc.)
Split pricing
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4. HOW LONG DOES
A CONTRACT LAST?
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Contract duration, renewal & termination
▫ Duration: Short term or long term Ideally the production cycle of the products involved has to be
taken into account, as well as the parties’ financial obligations
▫ Renewal: Provisions for renewal may be included In some cases renewal is automatic
▫ Termination By mutual decision
Unilaterally: Usually requires advance notice
By failure of one of the parties: Usually in cases of contentious situations
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