Business Clinic: Must buyer take whole crop under contract?

Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s experts can help.

Here, Ken Kaar of Thrings advises on what happens when a bumper crop causes contract tensions.

See also: Business Clinic – do I need planning permission to replace wall with fence?

Q: I have recently diversified into growing grapes for the wine industry. In spring 2018, I signed a five-year exclusive supply contract with a local winemaker, which means I am paid a set price for all of my grapes, provided they are of sufficient quality.

The 2018 harvest turned out to be the largest this country has ever seen and our yields were almost double what we had envisaged as potential maximum. Quality was also very high.

This year has been another good year and we are just about to start harvest.

Our winemaker has asked me to reduce the agreed prices and to agree a cap on how much he has to buy, saying he is under severe financial pressure after last year.

I do not want to force him out of business and I want our commercial relationship to continue, but I feel he is asking too much of me at a crucial moment. Do I have to accept his demands?

A: It sounds as if what you have is an exclusive supply and purchase agreement, meaning you have to sell everything you produce to your contracted purchaser, and he is obliged to buy your entire crop.

If no cap on what he would be obliged to buy was agreed, then he really has no way out without your agreement.

The courts have been very clear in recent years that the ordinary, natural meaning of the language in a contract will be enforced, even where a party has made an unfavourable bargain.

Long-term exclusive supply agreements are useful because they provide a degree of certainty, which, in turn, allows planning and investment. However, they need to be carefully drafted.

Overall, it seems like the arrangement works for both you and the buyer: you know how much you will be paid (assuming you can produce a crop) and your buyer knows how much he will have to pay (within certain assumed higher and lower limits).

For some products, such as eggs, a cap need not be agreed: output is naturally capped at one egg a day per bird.

Grapes are different, particularly in our marginal climate.

Even a month before harvest you will be unable to say with any certainty what quality and quantity of crop you might produce.

In this case, it sounds like your purchaser simply overlooked the possibility that he would be faced with having to purchase more grapes than he wanted.

The agreement is in your favour for this vintage but the tables may turn.

If next year a bad spring frost creates a significant shortage in the market and the spot prices for grapes jump, he will still be entitled to buy your grapes at what would then be below market value.

Varying a contract, especially in a stressful situation such as during harvest, has the potential to cause serious issues.

It is very important to understand some basic principles.

First, a written contract can be varied orally, although it is always preferable that any discussions about changes to the contract are put in writing (it doesn’t matter whether that’s in a letter, email or text message, so long as you keep a record).

Second, if you agree this variation, you cannot later claim from the buyer the loss you will inevitably suffer. You need to agree compensation for your loss now as part of the variation.

That loss will be the difference between current market value a tonne for grapes and the price set out in your contract, multiplied by the number of tonnes your buyer does not want to buy.

If you can sell elsewhere, he may be happy to make up the shortfall if it allows him to avoid purchasing the entire crop.

Try to agree what will happen in any given scenario: if you cannot sell, or you cannot find a buyer quickly and your harvest window passes, your crop could be either lost or seriously devalued.

Insist also that the contract terms revert to those originally agreed because it sounds like, overall, they are in your favour.

Finally, if no variation is agreed and your buyer rejects some of your crop, he is in breach of contract and you can claim your loss from him.

Remember though that you are obliged to mitigate your loss so do try to find a buyer for the rejected crop.

This is a complex situation and both the law and procedure heavily depend on your specific facts.

It is therefore recommended that you seek specialist, independent legal advice to assess your situation.

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