As your teenagers might put it — “Duh!” But too often, contracts are signed without studying the details.
Contracts have become a mainstay in modern pork production. We have oral agreements, written agreements, manure easements, swine feeding contracts, building leases and more.
There's no substitute for this critical first step, explains Eldon McAfee, an attorney with Beving, Swanson & Forrest, P.C. in Des Moines.
“Beyond the whereases and heretofores, there are some practical aspects for anyone dealing with contracts,” McAfee told attendees at an Iowa Pork Congress seminar in January. “And the ultimate advice is you review it and have your consultants and your attorney review it — before you sign it.”
McAfee listed several contracting issues that apply whether the contract is verbal or written:
- Read and understand the contract before signing it
“You're the one who has to deal with that contract, so you need to understand it. Sit down and read through it; that's the starting point,” he says.
- Know the other party's financial and business history
“You need to know who you're contracting with. That doesn't mean you shouldn't contract with someone if they have a poor history of business dealings or if they are in poor financial situations. It just means you should be aware of it, and know the risk you are taking if you enter into a contract with this person, and what you should do to protect yourself from that risk.
“If you know something could be a problem, but you're aware of it up front, then you should be able to plan for that,” McAfee says.
- If it's in the contract, you must do it
“As an attorney, probably the No. 1 issue that I deal with is the producer who says: ‘That isn't what I was told; that isn't what we agreed to.’
“When disputes arise, chances are you will be dealing with an attorney, not the person who told you differently. The bottom line is, if it is in the contract, and you signed it, you have to assume it will apply,” he emphasizes.
- If it isn't in the contract, it isn't part of the agreement
“This is the other side. If you are told to do something a certain way, but it isn't in the contract, get it in writing,” he says.
The argument, “I just haven't gotten around to changing the contract,” will not stand. “If push comes to shove, you have to go by what's in writing. So make sure that everything you agree to do is included in the written contract,” he says.
- Oral agreements are binding in most cases
“Although a lot of people don't think oral agreements are binding, they are. The problem with oral agreements is they are more difficult to prove. The basic issue is both sides have to have pretty good memories when you enter into oral agreements. Put it in writing so you don't have to rely on memories,” he urges.
- Written agreements
“There's a fundamental premise in contracting, which states: ‘This contract supersedes all previous oral agreements.’ So an oral agreement, when you have a written agreement, is probably worse than just having an oral agreement,” he says.
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- Any amendments to the contract must be in writing and attached to the contract
When both parties of a contract agree to do something differently, it should be documented as an amendment to the contract and signed by both.
“I see that issue most often in hog feeding contracts. If you agree to do something different, you must memorialize that as an amendment to the original contract — even if you ‘mutually agree’ to the change,” he says.
- Negotiating contracts
“I am not here to tell you how to negotiate a contract or how to get the best deal possible,” McAfee says. “But if you negotiate something that's too good to be true, it probably is, and it's probably going to be a problem.
“Everything is negotiable — including whether to sign the contract. If there's something in the contract that is so egregious that you don't want to sign it — don't,” he recommends.
“Go through the contract line by line. Discuss all provisions of the proposed agreement with the other party. Even if the other party will not change a term, at least you will know their interpretation. Then you can at least factor that into the risk that you are taking.
“Have the proposed agreement reviewed by a consultant or legal advisor. As you negotiate a contract, make it clear that there is no contract until everything is in writing and signed by all parties.”
- Performance issues
“It's important to go through the contract in detail so you know what is required of you,” McAfee states.
If you put the original contract in a safe or other secure place, keep a copy handy so you can refer back to it. This is particularly important if there are deadlines in the contract. Then be sure to build those requirements into your recordkeeping system.
If contract requirements cannot be fulfilled, let the other party know in advance. At least you've made an effort to avoid bigger problems.
The term “force majeure” often appears in contracts. It means “impossibility of performance.”
“In other words, if you can't do what the contract says you're supposed to do — and it's out of your control due to a factor covered by the clause — then you will be excused from performance under the contract and you will not be in default,” he explains.
“A good example is when a fire burns down a hog building. Under your contract, you're to feed hogs for that person. If there is a force majeure clause in the contract, you are excused, not penalized, and not in default for not being able to feed their hogs while you rebuild.
“Read that clause carefully. Usually they list fire, storm, government intervention, strikes, etc. Most often, market forces, such as the market price of hogs or the price of corn, and disease, do not qualify as force majeure. Therefore, $4 corn may be a financial hardship, but in most cases won't qualify for force majeure.”
- Contract assignment
This is an important feature because if you decide to sell your operation, you will want to know whether you can assign the contract to someone else. “Assignments of a contract are often prohibited,” McAfee continues.
- Right to correct a default
“Now we're into the part of the contract discussion where something's gone haywire — one party is not doing something they were supposed to do according to the contract. The law provides, under the uniform commercial code, that you have the right to cure any default after notice,” McAfee explains.
“Most contracts say, if there's a default, the party that didn't do anything wrong has to give notice to the other side saying you have 30 days (or whatever) to correct the default.
“Especially in hog feeding contracts, for example, there is usually a clause that says the person feeding the hogs pays the utilities. It's pretty important that those utilities be paid. So if they're in default of the contract (not paying utility bill), you'd get damages if anything happened to your hogs. But more importantly, you want to protect your property, so you should have the right to step in, pay the utilities, and then charge it back to the person who didn't pay. That is ‘the right to correct a default,’ and most contracts do provide that,” he notes.
- Mediation, arbitration, mitigation
“Many contracts have an arbitration clause. Arbitration is a process where instead of going to court, you go before an arbitrator,” he explains. “An arbitrator will make a decision about who's right and who's wrong, just like a judge would, but you chose that process by contract instead of going through the court system.”
Is arbitration a good idea?
“I'll leave that up to you and your attorney,” says McAfee. “But you have to be careful with arbitration clauses, because — and remember this — although the court system does have its faults, you as a taxpayer have paid for that system. With arbitration, you and/or both parties pay the arbitrator, depending on how the contract is worded. In other words, whatever time they put in at the hearing, doing their research, making their decision, you will pay for.
“There's a lot of misunderstanding about terminating contracts,” he continues. “The courts have a standard rule where all reasonable steps to resolve the problem have to be taken. It's called mitigation of damages.
“Courts do not like to regulate the activity of two parties. They like to render a decision and be done with it. For example, if somebody is supposed to buy something from you (pigs) and they don't do it, the court would most likely terminate the contract and then you would be eligible for damages for their failure to perform over the life of the contract, instead of making them perform under the contract,” he says.