Regulation of Agricultural Contracting:
the U.S. Perspective
Prof. Neil D. Hamilton, Dwight D. Opperman Chair of Law
and director, Agricultural Law Center, Drake University Law
School, Des Moines, Iowa USA
Drake University Agricultural Law Center
Introduction: Why Consider Regulating Contracting
Do you want farmers to have the freedom to consider any production
contract a company may offer or should the state protect farmers from bad
deals?
Should companies be required to give farmers notice and reasons before
terminating agreements?
If farmers make long-term investments in facilities or equipment should the
contract be of an equal length?
These are the questions many state legislatures in the U.S. have tried to
answer. In addition in recent years proposals have been introduced in the
U.S. Congress for federal legislation to protect producers in agricultural
production contracts.
Drake University Agricultural Law Center
Introduction: Issues to Consider about Regulating
Agricultural Contracting
When considering how agricultural contracts may be subject
to legal regulation there are several basic issues to consider:
First, the arrangements are subject to existing contract and
commercial laws - such as common law contract principles
and any special legislation on commercial activity, such as
the Uniform Commercial Code. In the U.S. issues of
contract law are state law questions. There is not a federal
law of contracting. This means state law - and state courts are the primary sources of legal guidance on contracting.
Drake University Agricultural Law Center
Introduction: Issues to Consider about Regulating
Agricultural Contracting
Second, the arrangements may be subject to special laws
enacted to address particular issues in the use of production
contracts. This outline addresses examples of state laws
enacted for this purpose.
Third, one important legal issue in determining which law may
apply - and in drafting remedial legislation - is the question of
how to classify the parties’ relation. Agreements commonly are
described as “contracts” and classify the farmer as an
“independent contractor”. However the legal relations may be
viewed in other ways, such as: employment agreements,
agencies, or even franchises. The status of the parties will
determine their legal relation and their rights and obligations
under the agreement.
Drake University Agricultural Law Center
Introduction: Issues to Consider about Regulating
Agricultural Contracting
Fourth, while contract law is primarily an issue of state law,
there are ways the regulation of agricultural contracting can
become a federal matter. The central question in application of
federal law is existence of some form of regulatory jurisdiction
over either the parties or the commodity being produced. For
example, the Congress and USDA have long been involved in
regulating the marketing of poultry and livestock, which is one
avenue for potential federal regulation of contracting.
Fifth, efforts to regulate contracting can implicate questions of
federalism and state’s rights - as well as raise constitutional
issues, such as the application of the dormant commerce clause.
Drake University Agricultural Law Center
Contract Regulation by U.S. States
Several states, such as Arkansas, Illinois, Iowa, Minnesota, Wisconsin and
Kansas have enacted laws regulating some uses of production contracts.
While legislatures in many Southern states have chosen not to adopt laws
designed to protect poultry growers, in 2005 Arkansas did adopt the
“Livestock and Poultry Contract Protection Act” - at section 2-32-201 of the
Arkansas Code.
Legislation to regulate contracting is a controversial issue which will help
determine the future of agriculture. The type of laws proposed and enacted
have a strong influence on what type of production contract relations are
developed and even where the practice is used.
Drake University Agricultural Law Center
Legal Options for States to Regulate Contract Production
In recent years a number of U.S. states have enacted contracting laws.
For an excellent review of these laws, see “State Regulation of
Production Contracts” by Alison Peck, May 2006,
A National Agricultural Law Center Research Publication,
available at www.NationalAgLawCenter.org
The U.S. laws can be divided into two categories:
a) laws creating substantive rights for producers which can
be enforced by private court actions, and
b) laws designed to regulate contract formation and performance with
the goal of equalizing the bargaining power between the parties.
Drake University Agricultural Law Center
Direct regulation of contract production
There are at least four different approaches states have used.
1. Direct Prohibitions - this approach, found in Iowa's restriction on feeding
of livestock or contracting for swine by meat packers, attempted to ban the
use of contract production by certain parties. It was struck down in federal
court as an unconstitutional interference with interstate commerce. Today
contacting is seen in most states as an essential component of agriculture.
2. Regulating Contracting Methods - this approach establishes minimum
requirements for parties who engage in contracting and may require
including certain terms in the contracts being used. There are several
approaches states can follow when regulating contracting methods.
Drake University Agricultural Law Center
Proposed Standardized contract
One approach is to establish a standardized form for all production contracts used in a
state. In 1990 the Iowa House of Representatives adopted a bill requiring the state to
develop model livestock production contracts. The law was ultimately not enacted by
the Iowa legislature but it is an interesting idea. Under it the producer was to receive
the model contract and be given 24 hours before signing any contract being offered. If
the producer was not given the model the other contract was voidable. The law did not
require companies to adopt any provisions of the model contract. The model contract
was to be developed by the farm division of the Iowa Department of Justice. The bill
provided that:
“Each model contract shall provide terms expressing alternative methods of structuring an
agreement, including but not limited to methods of compensation. A model contract shall
not state a price to be paid under the contract. It shall provide for the division of
expenses and losses. A contract shall include provisions relating to the following:
Drake University Agricultural Law Center
Iowa model contract
The required provisions included:
1. exchange of financial information, including any perfected security
interests in the livestock. The contractor could grant the grower a
security interest to secure the contractor's performance.
2. the party responsible for insurance.
3. delivery of livestock to the feeder, including terms on notice, delays,
and compensation for delays.
4. the grower's right to refuse livestock when delivered, if it was in less
than "normal" condition.
5. information on the payment of expenses related to feeding and
sheltering the livestock.
6. terms on the use of veterinary care.
Drake University Agricultural Law Center
Iowa model contract
7. any requirements relating to construction of required capital
improvements.
8. a term on death or loss of the livestock and who bears the risk. Cost of
disposal was to be shared.
9. procedures for contract termination, including:
a) the actions which could result in termination, but the contractor couldn't
remove livestock due to a grower's refusal to accept changes in the
contract;
b) grounds for termination couldn't be based on a subjective evaluation of
feeder's husbandry practices unless done by a person other than owner.
The provision required a method for notice of termination and a minimum
period of notice. Terms for automatic renewals were also to be provided.
10. compensation paid to the feeder, including the manner and when it is due.
11. mediation or arbitration requirement for resolving disputes.
Drake University Agricultural Law Center
2. Regulating the contract relation In 1990 Minnesota was the first state to enact a law setting mandatory terms
for inclusion in contracts and for interpreting the agreements.
[Minn. Stat. Ann §§17.90-.98 and §514.945 (1993)]
The legislation was the result of a report prepared by the "Agricultural Contracts Task
Force" created by the legislature in 1988 to explore the subject. The task force met
fifteen times in preparing its final report which included a series of legislative
proposals. The laws enacted as a result of the task force effort established a
number of requirements for all "agricultural contracts.”
Drake University Agricultural Law Center
Regulating the contract relation These include:
a) dispute resolution - The law requires a "contract for an agricultural
commodity between a contractor and a producer must contain language
providing for resolution of contract disputes by either mediation or
arbitration."
b) recovery of investments - When a producer is required by a contract "to
make a capital investment in buildings or equipment that cost $100,000 or
more and have a useful life of five or more years," the contractor must not
cancel or terminate the contract until:
Drake University Agricultural Law Center
Minnesota contract regulation 1. "the producer has been given written notice of the
intention to terminate or cancel the contract for at least 180
days notice before the effective date of the termination or
cancellation" ... [except when the producer abandons the
contract or is convicted of an offense related to the
contract business], and
2. "the producer has been reimbursed for damages incurred
by an investment in buildings or equipment that was made
for the purposes of meeting minimum requirements of the
contract."
Drake University Agricultural Law Center
Minnesota contract regulation c) right to cure - If the producer breaches the contract the contractor must still give
the producer 90 days notice before terminating the agreement and must give the
producer 60 days to correct the breach.
d) parent company liability - Parent companies of subsidiaries licensed to purchase
agricultural commodities are "liable to a seller for the amount of any unpaid claim
or contract performance claim if the contractor fails to pay or perform according to
the terms of the contract."
e) implied promise of good faith - All agricultural contracts must be interpreted by the
Minnesota courts as including an "implied promise of good faith." If the court
finds there has been a violation of the implied promise of good faith, the court may
allow the party to recover "good faith damages, court costs, and attorney fees."
(f) return of prepayments - If a producer makes prepayments "for agricultural
production inputs that include but are not limited to seed, feed, fertilizer, or fuel for
future delivery, the producer may demand a letter of credit or bank guarantee from
the provider of the inputs to ensure reimbursement if delivery does not occur."
Drake University Agricultural Law Center
Other Forms of State Direct Regulation
3. Mandatory dispute resolution – A state may not want to regulate
the terms of production contracts, but still require any legal
disputes involving contracting to be submitted to mediation
prior to filing a court action. Iowa enacted this law in 1990.
4. Required Contract Terms – One of the most common forms of
state law regulating contracting is to mandate the inclusion of
certain provisions – such as risk disclosure, methods of
termination, and clearn payment terms.
Drake University Agricultural Law Center
Indirect Regulation of Contract Production
Another approach to regulating contracting is to use indirect methods of
controlling their use or for protecting producers who sign contracts.
1. Producer bargaining protections - increased use of contract production can
raise concerns about the ability of contract producers to organize to bargain for
more favorable contract terms. Several states, including Maine and
Washington, have enacted state "Agricultural Marketing and Fair Practices"
acts to protect the interests of producers who form associations to bargain for
better contract terms. [See, Washington: Wash. Rev. Code Ann. §§ 15.83,005
- ,905; and Maine: Me. Rev. Stat. Ann. tit. 13 §1953, et seq.]
Drake University Agricultural Law Center
Federal Involvement In Contract Production Relations
A. Agricultural Fair Practices Protections
Federal and state laws have been enacted to protect the rights of producer to
organize and bargain in marketing commodities. The laws, in particular the
Agricultural Fair Practices Act of 1967, have been used by poultry producers to
challenge the manner in which contracts were terminated. Congress passed the
AFPA to protect the right of farmers and ranchers to join with other growers to
form associations to bargain for better prices and terms with handlers and
processors. The Act sets out a number of prohibited practices for handlers, which
is defined to include persons engaged in "contracting ... with .. producers .... with
respect to production or marketing of any agricultural product ... ." The act
focuses on prohibiting handlers from discriminating against or intimidating
producers because of membership in or exercise of the right to organize.
Drake University Agricultural Law Center