Module 4: What to do when things go wrong?

http://www.fao.org/in-action/contract-farming
Course on
OPERATIONAL AND LEGAL ASPECTS OF CONTRACT
FARMING OPERATIONS
MODULE 4: WHAT TO DO IF THINGS GO WRONG?

LEARNING OBJECTIVES
You will better understand:
• What to do if things go wrong?
▫ Force majeure
▫ Managing risks
▫ Breaches and remedies
▫ Options to resolve conflicts

WHAT TO DO IF THINGS GO WRONG?
3 SCENARIOS:
• Neither party is at fault
• Farmers can’t keep their side of the agreement
• Buyers can’t keep their side of the agreement

SCENARIO 1: NEITHER PARTY IS AT
FAULT

SCENARIO 1: Neither party is at fault
• Sometimes, things can happen
independently of the intentions of the
parties but with negative impacts on the
contract agreement.
• Legal systems often define events like these
as force majeure.

• Natural phenomena that can affect farmers’
performance:
▫ Floods, droughts, unpredictable climatic changes, plagues
attacking crops, livestock diseases, etc.
• Man made phenomena that may affect
either the production process or the
availability of transport for delivery, etc.
▫ Government decisions to change policies related to
agriculture (e.g. export bans and import regulations),
armed conflicts and strikes

Force majeure
Sorghum crop destroyed by mud
left by flooding caused by
Hurricane Mitch in Nicaragua
Wheat crop attacked by locusts
In Australia

Force majeure
Weather disasters: droughts,
floods, frosts, hail, hurricanes
Pests, disease, plagues (crop)
Epidemics (livestock)
Changes in government policy
(e.g. export ban)
Social events: strikes and arm
conflicts
• Force majeure clauses can be
included in contracts and
excuse the farmer from the
obligation to deliver the
product.
• As laws provide only general
principles, buyers and farmers
need to agree on specific force
majeure circumstances to be
included in the contract.

• Consequences of force majeure
A suspension of the parties’ obligations
for the duration of the force majeure event.
The right to terminate the contract
immediately.
The possibility to renegotiate the terms of
the contract.
FORCEMAJEURE
1
2
3

• Note that in case of force majeure
 Suspensions cannot be indefinite:
• Contract must indicate a time-limit
• Contract must say what will happen after this period
(e.g. termination or renegotiation of the terms)
 Force majeure clauses do not usually entitle the
farmer to receive any payment, nor excuse them
from repaying any loans received → Possible to include
some risk-sharing clauses
• Accepting partial repayment from farmers for
outstanding loans for inputs provided
• Deferring repayment until the subsequent harvest.

• Prevention. As a means to prevent farmers
from becoming indebted as a result of force
majeure events, contractors may:
 include stipulations in the contract that all
contracted farmers must purchase
agricultural insurance from an approved
provider and provide evidence of this insurance
prior to entering into an agreement with the buyer.
 help to secure this insurance at a reduced
price for farmers.

• Managing risks:
Before drafting a contract,
it is important to envisage
all the risks that can occur
and affect contract
enforcement!

Managing risks
BUYER
FARMER
Which solutions could provide the parties
through contractual clauses to prevent risks?
1. Non/late payment
2. Quality
manipulation by
the buyer
3. Non-compliance
with agreed quality
Possible risks
Possible solutions
(clauses to be included in the contract)
1. Specify timing of payment, indemnity
fund provided by the buyer
2. Detailed quality requirements, quality
assessment procedure
3. Technical assistance, monitoring
mechanisms, price reduction, premiums

Managing risks
BUYER
FARMER
4. Weather disasters, pests,
disease and changing on
government policy
5. Increases in market
price
6. Sale to a different buyer
outside of the contract
Possible risks
Possible solutions
4. Suspension of delivery
obligations, contract
renegotiation, insurance
5. Price renegotiation if market
price exceeds an agreed rate
6. Exclusivity clause and penalties
for side-selling

Managing risks
BUYER
7. Diversion of inputs
intended for
contract production
Possible risks
Possible solutions
7. Monitoring, penalties, agreed feed
conversion rates for livestock and
baseline performance yields for crops
Conversion 1.90 1.92 1.94 1.96 1.98 2.00 2.02 2.04 2.06 2.08 2.10
Points 115 110 105 100 95 90 85 80 75 70 65
D. Table of Feed Conversion Points
Price is based on the ratio between the feed supplied and the weight gained

SCENARIO 2: Farmers can’t keep
their side of the agreement

• Farmers can fail to perform properly and comply with
their contractual obligations for other reasons other than
force majeure.
• This can result in a breach of the contract and the
obligation for the parties to put in place remedies
(actions) to address the breach
Breach: Violation or
infraction of a contract or a
law.
Remedy: Measure provided by law or
by contract to protect the interest of one
party against the failure of another
party to perform properly.

• Common contract breaches for farmers:
o Side- selling
o Failure in land preparation
o Diversion of inputs for uses other than those
intended under contract,
o Non-compliance with the agreed quality standards,
o Failure to deliver all or part of the agreed quantity

• Side-selling
 Definition:
• Farmers sell the product to a different buyer who may have offered
a higher price compared to the one agreed in the contract or may
offer instant cash payments.
 Impacts: side-selling can:
• cause the termination of the contract
• ruin farmers’ reputation
• prevent farmers from engaging in other relationships with trusted
buyers.
 Causes:
• Purely opportunistic reasons
• Need of instant cash.

Common remedies
• Types of remedies
▫ In-kind
 The party that has failed to perform must adjust his/her behaviour by carrying
out the activities as specified in the contract or by applying corrective actions
agreed upon with the aggrieved party.
▫ Witholding performance
 If one party fails to perform, the other party can withhold his/her performance
of their respective obligations
Ex: if farmers don’t deliver the products, buyers can refrain from paying
them.
▫ Price reduction
Ex: If farmers fail to provide the agreed quantity and quality, buyers may
reduce the price; criteria for price reduction, clearly specified in the contract

Common remedies (cont.)
▫ Restitution
 someone not entitled by contract or by law to retain goods or money in their
possession must return them to the owner
Ex: When possible, if farmers have failed to produce inputs should be returned to
buyers. If some inputs have already been used, then the farmer could be requested to pay
the contractor for the value of the inputs used.
▫ Damages
 may be sought on their own or in combination with other remedies
Ex: If late or partial delivery has caused losses for the buyer, the farmer may have to
pay for it if damages are sought.
▫ Cooperation
 Usually the most desirable remedy
▫ Termination
 The most severe form of remedy

SCENARIO 3: Contractors can’t
keep their side of the agreement

SCENARIO 3: Contractors can’t keep
• Buyers can also breach a contract.
• Causes:
▫ Late delivery of inputs and/or poor quality inputs
▫ Failure to accept delivery of products at the place
and time specified
▫ Failure to pay.

SCENARIO 3: Contractors can’t keep
• Common remedies:
▫ Witholding performance: ex. farmers can withhold production until
inputs have been delivered. If farmers are able to identify the poor quality of inputs they
should provide prompt notice to buyers and ask for instructions.
▫ Damages: ex. In cases where the buyer does not take delivery of the product or
where this occurs at a different location or time to that agreed in the contract, the contract
should permit the farmer to claim for all the costs connected with storage, preservation and
transportation of the goods. Compensation for loss of quality should also be considered.
▫ Cooperation or termination: When problems with payment arise, the
farmer should make a formal request to the buyer for payment → cooperative solution.
If this has no results and no cooperative solution can be agreed upon → the farmer might
have to obtain a court judgment. As a remedy of last resort, the farmer may seek
termination of the contract.

OPTIONS TO RESOLVE CONFLICTS

How can we solve a disagreement and
who do we turn to if we need help?
• Prevention is an important part of minimising the
potential for breach by aiming to foresee possible risks and
incorporating solutions into the contract.
• But if disagreements occur and parties are not able to find
a shared solution, there are the following options:
▫ Option 1: Communication
 Try to resolve difficulties through discussion and re-negotiation directly
between parties.
• Help from a trusted facilitator (e.g. government extension agent, NGO,
representative from local/national farmers’ associations, etc.)

▫ Option 2: Mediation
 If option 1 doesn’t work, the parties may agree to use an
independent third party to bring them together and try to help
find a solution
 The mediator assists the parties in settling their dispute, but does
not have the authority to impose a solution
 Preferable approach to resolve differences
 Contracts should be specific as to how mediation is to be done
 Legal systems may regulate this issue

▫ Option 3: Arbitration
 Refer dispute to a neutral third
party whose decision will be
binding and enforceable under
the law.
▫ Option 4: Legal action
 AVOID BY ALL MEANS!
 Costly, time-consuming, bad for
the corporate image
 Only as a last resource
mechanism.

http://www.fao.org/in-action/contract-
farming

Module 4: What to do when things go wrong?

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