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Coronavirus and agri-supply contracts - guidance for farmers and growers

View profile for Julie Robinson
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In this article we give some pointers to producers whose scheduled deliveries have been cancelled or curtailed by their customers due to the coronavirus crisis.

For the most part, producers’ relationships with their suppliers and customers are long term and difficulties caused by weather events and disease are often dealt with informally, with a view to ‘seeing each other right’ in due course.

The current coronavirus crisis will test relationships. We know that liquid milk, potatoes for chipping, ornamentals, hops, broilers and other meat products destined for food service outlets have been particularly affected, with knock-on effects further up the chain.  Producers will need to take a pragmatic view about courses of action open to them. However, it is worth checking your contractual “backstop”, to help with negotiations and decide how to respond to short-notice changes to delivery schedules or quantities from your customer.

Scenario: We don’t want your scheduled delivery

In normal circumstances you would supply your buyer with an agreed quantity of product every day, week or other period. Your buyer contacts you at short notice to say they will not be collecting/accepting your next scheduled delivery.

The first step is always to check your written contract and any agreements that have been made alongside or after it (e.g. by email or text).

It is important not just to look for any force majeure clause, but to look for any right of your buyer to amend delivery schedules or suspend collections, and to check whether a delivery schedule is merely indicative (with confirmation to follow) or a firm schedule which you, the supplier, are expected to respect.

Force majeure clause examples

Let’s say there is a clause in the agreement along the following lines:

“Our purchase of your Produce under this Agreement may be suspended during any period in which there occurs any event beyond our reasonable control which prevents or restricts the normal working of arrangements for transport, storage, processing or onward sale of the Produce.”

That is a broad clause which would, in our view, cover situations where e.g. food service outlets have been closed so that produce cannot find an end home. It may also cover a processing plant having to close or re-organise its production lines because of worker safety concerns or coronavirus-related illness.

Here is another clause, found in some potato supply agreements:

Neither party shall be deemed to be in breach…or otherwise liable to the other party…for any failure or delay in performing its obligations due to circumstances beyond the reasonable control of that party including, without limitation, Acts of God…war or national emergency…fire, explosion, flood, epidemic..”

This force majeure clause is, again, quite widely drawn. The list of events is not exclusive; it gives examples of the kind of things that constitute ‘circumstances beyond the reasonable control’ of a party and mentions ‘epidemic’ explicitly. Again, that would seem to cover the coronavirus pandemic.

A third example is from the AIC standard contract of the supply of home-grown grains and pulses:

“Neither the Buyer nor the Seller shall be responsible for delay in delivery of goods or any part thereof occasioned by any Act of God, action by any government, strike (including dock and/or shipping strikes within the United Kingdom), lock-out, combination of workmen, break-down of machinery, power failure or fire…”

Here, in contrast to the other two examples, there is no catch-all reference to ‘circumstances beyond the reasonable control’ of the parties. Instead, we have a list of specific examples. Two of the examples are ‘any Act of God’ and ‘action by any government’.  These two may be helpful to the party who is seeking to be free from liability to collect or take delivery of produce due to the impact of coronavirus.

‘Act of God’ has been defined in case-law as:

such a direct and violent and sudden and irresistible act of Nature as the [parties] could not by any amount of ability, foresee would happen, or, if he could foresee that it would happen, he could not be any amount of care and skill resist, so as to prevent its effect”. (Nugent v Smith, 1876)

It could be argued that a pandemic such as the one we are experiencing falls into this category, but there is no express case-law covering the point. A party may feel more comfortable relying on the Government’s action in imposing ‘lockdown’, but – again – there may be an argument about whether the closure of, say, pubs further down the chain, actually prevents your buyer taking delivery of your  output.

Other points to consider

  • There may well be clauses in the contract dealing with conditions that must be met before a party can rely on the force majeure clause. In the AIC grain contract the affected party must send written notice to the other party within five business days of the occurrence or not later than five business days after the beginning of the contract period (whichever is the later). The potato supply contract cited above has a clause which requires written notice in writing to the other party within one month of the force majeure event first occurring.  
  • There will normally be provisions that deal with the effect of any suspension (does it merely allow a delay in taking delivery or collecting your product, or does it mean that those orders are, in effect, cancelled?).  If products you supply are perishable (fresh fruit or milk) then it is unlikely that supply is merely postponed. In the AIC contract, a party relying on a force majeure event is initially given time to perform, rather than a complete release.
  • Depending on the overall delivery period, there should also be some provision dealing with resumption of supply, particularly in longer term contracts e.g. for milk supply.
  • Does the contract say that each delivery will be treated as a separate contract? This is usual in contracts where separate deliveries over a period are envisaged. In other words, one or more delivery may be cancelled without penalty if the force majeure clause is engaged, rather than whole contract amount.

Frustration

Force majeure is not the only principle that applies in supply contracts. There is also frustration, a common law principle which comes into play when “without the default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract” (Davis Contractors v Fareham UDC, 1956).

This is a complex area of law, and the outcome of a claim can be difficult to predict. Points to note are:

  • If your buyer can successfully argue that the supply contract has been frustrated then the whole contract is ended. This argument is probably only going to be brought into play in single supply/single season contracts such as the supply of strawberries to a sporting event which – in compliance with Government regulations – is cancelled.
  • In deciding whether a contract has been frustrated an arbitrator or court would likely look at the interplay between the force majeure provisions in the contract and the circumstances which have led to non-performance by the buyer. The broader the force majeure provisions, the less likely it is that a claim that the contract has been frustrated will succeed (the parties have already agreed where the risk should lie for events beyond their control).  And if ‘pestilence’ or ‘epidemic’ is already listed in the force majeure clause, allowing a variation to the usual terms of the contract, a party will find it difficult to argue that the whole contract has been frustrated.

Dispute resolution clause

Most written contracts will say something about how disputes are to be resolved if parties cannot agree how matters should be dealt with.

Points to note are:

  • If a clause imposes a deadline re: notification of a dispute, it will need to be respected or you will risk losing your opportunity to take forward your grievance. Check also how disputes are to be notified – sometimes email communication is not enough and hard copy letters are needed unless you agree otherwise with your customer.
  • If mediation is the first step outlined in the clause, check whether participation is compulsory, and how a mediator is to be appointed.

Legal arguments v practical solutions

Ultimately, however frustrating and damaging a unilateral cancellation of a contract or delivery is, you will need to take a view. Legal disputes can be uncertain, lengthy and expensive. Negotiated outcomes help to maintain relationships and may pave the way for future business to be done.

The above is intended as general guidance only; producers are advised to take legal advice based on their particular circumstances and contractual arrangements.

Please feel free to contact Julie Robinson or Tim Russ with any queries about the issues raised.

 

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