UNIDROIT/FAO/IFAD Legal Guide on Contract Farming
Jointly drafted by UNIDROIT, FAO and IFAD, this publication provides a legal analysis of contract farming arrangements, which are increasingly used worldwide for the production of agricultural products.
The Guide provides legal guidance based on internationally accepted standards of practice for agricultural producers and agri-businesses engaged in the processing, exportation and marketing of agricultural products. The Guide is a useful tool and reference point for a broad range of users involved in contract farming practice, policy design, legal research and capacity building. Above all, the Guide will contribute to the creation of a favourable, equitable and sustainable environment for contract farming.
Book content: Introduction, 1 – The legal framework for agricultural production contracts, II – The parties to the contract, formation and form, III – Obligations of the parties, IV – Excuses for non-performance, V – Remedies for breach, VI – Contract’s duration, renewal and termination, VII – Dispute resolution
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The practice of producing under a contract is used for a broad array of agricultural commodities in many countries of the world and is growing significantly in developing countries. As demand for agricultural products increases dramatically, contract farming is expanding as a tool to organise and link production capacities and market needs to increase and diversify the availability of products on local and global markets, and to improve value chain efficiency.
Under production contracts entered into with agricultural producers, food processors and distributors secure the supply of a specified produce (vegetables, tree crops, grain, husbandry and dairy products, poultry, fish etc.) in the required quantity and quality, at a future designated time and at a predetermined price. Depending on the type of agreement, very often the contractor provides inputs (seeds, fertilisers or young animals) and typically manages the production process by requiring the producer to apply designated technology and growing or raising methods. For producers, agricultural contracts offer the opportunity to secure an income generating activity, guaranteed access to markets and also better access to credit and to technology.
Contract farming arrangements reflect multiple commercial practices and their success depends on many elements. One key element is the capacity of the parties to build stable, commercially sound and fair relationships, based on clear commitments and mutual compliance.
In this respect, the legal framework is essential to give legal effect to parties’ stipulations and to supplement them as the case may be. This is all the more important in view of the imbalance of economic power between the parties that generally characterises agricultural contracts. Depending on each legal system, legal provisions may apply mandatorily to certain aspects of the contractual relationship, excluding the parties’ ability to derogate from such legal provisions. Understanding the interplay between the terms and practical implementation of the contract and the applicable legal provisions, including the default rules, increases the security of the parties by making them aware of possible critical issues regarding their rights and remedies throughout the life of the contract.
The Guide intends to serve as a “good practice” reference by providing guidance for parties engaged in contract farming operations throughout the whole life of the contract, from negotiation until termination, thus helping to build trust between the parties and support mutually beneficial relationships. The Guide may also serve as a reference in the context of the formulation of public governance instruments to sustain agricultural development. In view of its various potential applications, the Guide will provide an additional tool available to international organisations and bilateral cooperation agencies as well as nongovernmental organisations engaged in strategies and programs in support of contract farming in developing countries.
The Guide walks through the conceptual stages of the contract farming relationship. It offers a thorough analysis of substantive legal issues involved in agricultural production contracts. It identifies problem areas and possible solutions in light of trade usages and legislation.
After first presenting the basics of contract farming in the Introduction, the Guide discusses in Chapter 1 the legal framework for agricultural production contracts. Chapter 2 presents the parties (i.e. essentially a producer and a contractor, describing also the role of other stakeholders) and discusses how contracts are negotiated and formed, as well as the key elements of agricultural production contracts. The various obligations bearing upon the producer and the contractor in the context of integrated relationships are discussed in detail in Chapter 3. Determining the consequences of a failure by the producer or contractor to abide by the terms of the contract is the next question that arises. Accordingly, Chapter 4 explores excuses for non-performance (such as force majeure) and Chapter 5 examines remedies for breach of contract. Chapter 6 then covers issues related to the contract’s duration, termination and renewal. Lastly, Chapter 7 discusses mechanisms for dispute resolution in the context of agricultural production contracts.
In accordance with the authorization given by the Governing Council at its 91st session in May 2012, the Secretary General of UNIDROIT set up a Working Group for the preparation of a Legal Guide on Contract Farming. Relying upon the partnership formed with the Food and Agricultural Organization of the United Nations (FAO) and the International Fund for Agricultural Development (IFAD), the Working Group was composed of contract law experts representing different jurisdictions and legal backgrounds. It included observers from other multilateral organisations as well as representatives of agricultural producers and agribusiness.
The Group held four sessions at the seat of UNIDROIT in Rome in 2013 and 2014, under the chairmanship of Professor Henry D. Gabriel (Elon University School of Law, Greensboro, USA), member of the UNIDROIT Governing Council.
· Doc. 1 rev.: UNIDROIT Preparation of a Legal Guide on Contract Farming – A preliminary
outline of issues (prepared by the UNIDROIT Secretariat)
· Doc. 2: Report on the First Meeting of the Working Group (Rome, 28 – 31 January 2013)
· Doc. 7: Report on the Second Meeting of the Working Group (Rome, 3 – 5 June 2013)
· Doc. 16: Report on the Third Meeting of the Working Group (Rome, 3 – 6 March 2014)
· Doc. 26: Report on the Fourth Meeting of the Working Group (Rome, 17-20 November
A round of regional consultations with farmers’ representatives, industry stakeholders, interested Governments, IGOs and NGOs, took place in 2014. The main objectives of the consultations were to discuss the diverse legal frameworks applicable to contract relations between producers and buyers; to share stakeholders’ experiences, recommendations, and best practices and to seek feedback on the Guide’s adequacy to meet practical needs. Consultations were held in: Buenos Aires (Argentina), Bangkok (Thailand), Addis Ababa (Ethiopia), and Rome (Italy).
· Doc. 18: Report on the Consultation Workshop in Buenos Aires, 25 March 2014
· Doc. 20: Report on the Consultation Workshop in Bangkok, 26 september 2014
· Doc. 21: Report on the Consultation Workshop on Corporate Practices in Contract
Farming (Rome, 10 October 2014)
· Doc. 22: Report on the Consultation Workshop in Addis Ababa, 31 October 2014
The Guide was adopted by the Governing Council of UNIDROIT at its 94th session on 6 May 2015 and was released in paper and electronic form on 28 July 2015 and is accessible on line on the websites of UNIDROIT, FAO and IFAD.
Promotion and implementation of the Legal Guide
The Legal Guide has served as a key reference for the elaboration of a series of implementation instruments:
– FAO, with funding from IFAD, has developed knowledge and implementation tools (including a Synthesis of the Guide, Briefs for farmers) as well as extension and outreach material to be used in training and development programmes. FAO & IISD have issued a Model Agreement for Responsible Contract Farming. These documents, as well as other useful resources on practical aspects of contract farming, are accessible on the FAO Contract Farming Resource Centre
– UNIDROIT has set a Forum on Legal Aspects of Contract Farming. The Forum webpage provides information on relevant projects and activities and contains a wealth of legal resources (relating to Internet and bibliographical references, legislative and regulatory instruments, soft law, good practices and standards)