Widespread drought-related production shortages in 2021 left farmers with many questions about contract shortfalls and defaults. CCGA hosted D'Arcy and Deacon LLP for a practical session on grain contracts to provide an opportunity for farmers to better understand contractual obligations and to hear from lawyers on how best to manage contract and production risk in 2022.
Here are 5 questions farmers had about grain contracts and defaults:
1. HOW ARE LIQUIDATED DAMAGES CALCULATED?
Grain contract terms generally include language on how damages will be collected. The formula is normally the difference between the contract price and the replacement cost, plus any additional losses the company will incur. An administration fee may also be charged. If your contract doesn't stipulate the process for collecting damages, ask the grain company in advance how damage will be assessed and verify your understanding in writing.
2. CAN A CONTRACT BE TERMINATED AT ANY TIME?
Yes, deferred delivery contracts can be terminated at any time, providing you are willing to pay the liquidated damages (I.e. buying it out). A contract should be terminated in writing. Once the grain company is duly notified, the grain company's requirement to mitigate their damages begins. It is important to fully and realistically assess your production situation and make the decisions that best work for your farm. It is important to note that the ability to terminate a contract applies to both parties, and common law governs how both parties are treated.
3. WHAT IS THE DIFFERENCE BETWEEN DAMAGES AND PENALTIES?
A grain company can only claim the actual amount of their damages pursuant to the contract. Liquidated damages and administration fees should reflect the actual cost to the grain company and not be used as a barrier to terminating a contract. Most contracts outline how damages will be calculated in the terms of conditions. Only a government can charge a penalty.
4. HOW CAN I AVOID DAMAGES BEING CALCULATED AT A DIFFERENT DATE?
Inform the grain company—in writing—that you will be short or in default and ask that they take steps to mitigate damages. This creates a date and time stamp for which damages are to be calculated, and a record should a different date be used.
5. WEATHER-RELATED IMPACTS ARE OUT OF MY CONTROL. SHOULD I STILL BE LIABLE TO FULFILL THE CONTRACT IF I AM SHORT OR CANNOT MEET THE QUALITY REQUIREMENTS?
Unless stipulated in the contract, a farmer is still responsible for fulfilling the contract. Check your contract for language related to Act of God or Force Majeure clauses. The language is important as it sets out the instances for which the company can claim an Act of God. When included, pay special attention to the circumstances and process to invoke such a clause and who ultimately decides if a catastrophic event has occurred.
Watch CCGA's practical session on grain contracts recording to hear D'Arcy & Deacon LLP discuss contract defaults, liquidated damages, Acts of God, and verbal agreements.