BizCLIR

Contracts are legally recognized and enforceable agreements between two or more parties for the exchange of goods or services for something of value in return—“consideration.” Consideration is typically money or other assets but can consist of almost anything, even a promise not to do something. The more informal an agricultural enterprise, the more likely contracts will be unwritten (oral) and/or enforced by social and community norms and processes. Nonetheless, even the simplest informal agribusiness, by its nature, necessarily involves a contract (agreement). The larger scale and more formal an agribusiness, the more likely contracts will be written by lawyers or specialized contract managers, international in scale, and enforced by both local and international law. The range of possible forms of agreement between these two extremes is broad.

A maxim in the globalizing world is that the ability to enter into contracts without face-to-face contact facilitates more widely dispersed trading patterns and market efficiency, but also requires sophisticated systems for informed, calculated allocation of risk that do not usually exist in settings where oral agreements between merchants are the norm.

Contracts are important to agribusinesses for key purposes: securing labor and other inputs; selling products, especially across borders where other business laws may apply; and managing business processes over time (for example, “forward” contracts that commit buyers to purchase crops still to be produced).

Technology agreements associated with the purchase of transgenic seeds are a specialized form of contract, committing the purchaser to their use in only one season. The provision of supplier credit in the form of in-kind production inputs is another form of contract; the recipient of the input contracts to deliver a specific amount of product at some time in the future. Leasing arrangements (e.g., rental of land, equipment) also fall into the area of contracting, and typically require a specialized legal regime.

Established grades and standards for defined products and services are fundamental to the contracting process in the agricultural sector. When a contract is made to deliver “Number 2 hard red wheat” with a specific degree of moisture content, all parties have to agree on exactly what that product is and have a way of verifying it at time of shipment and/or delivery. The lack of such standards is a key barrier to effective use of contracts and agricultural market development in many developing countries. Technical barriers to producers’ abilities to meet such standards reliably compound the problem.

Non-performance on contracts is normally subject to penalties that should be understood by both parties entering into the contract. In some cases, e.g., for late delivery, for lower quality, these penalties are written into the contract itself. When contracts are poorly written or are established verbally, there is great scope for disagreement between the parties as to the quality or timeliness of the contract’s fulfillment. Adjudication and other dispute resolution services are thus integral to the maintenance of a system of contracting. In fact, it is the efficiency of the judicial system in resolving commercial disputes that forms the core of the World Bank Group’s Doing Business analysis of enforcing contracts.

For local contracts, traditional courts or mediators might be sufficient to resolve disputes between contracting parties. For more complex contracts, formal legal entities following codes of civil procedure or other court regulations are likely to be involved, though the dispute may be resolved through private or semi-private sector arbitration/mediation structures that comply with mandatory legal provisions. Small claims may be easily reimbursed, but non-performance on international contracts, e.g., the export of raspberries from Guatemala to a Whole Foods in Florida, may be significantly more complex.

Work on the evolution of supermarkets as key players in the food business in both developing and developed countries has highlighted the importance of contracting in agribusiness. Small agricultural enterprises and cooperatives need training and technical assistance to enable them to move from local, verbal contracting processes to the kinds of contracts that underpin the global horticulture business, for example. Penalties for non-compliance with sanitary-phytosanitary standards (SPS) can be severe. Rejection of an entire shipment of green onions for SPS reasons at a U.S. port of entry may mean the loss of an entire season’s work and significant capital investment, a critical blow for an exporting cooperative.

Timing is often crucial as well. In the example of a rejected shipment for contract non-compliance, getting the right kind of third-party inspection and setting in motion the process for legal redress must be done within hours of notification of non-compliance. While a shipment of steel can sit in a warehouse without damage for weeks, the green onions must be reinspected almost immediately. This not only requires that the sellers have contract representation on the spot but also places a premium on communications facilities. In these cases, contract management can incur considerable costs.