Contract Farming and The Law:: What Do Regulators Need To Know?
Contract Farming and The Law:: What Do Regulators Need To Know?
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Contract farming
and the law: What do regulators
need to know?
PART 1
WHY IS THE REGULATORY FRAMEWORK IMPORTANT FOR CONTRACT FARMING?
Appropriate regulatory frameworks are instrumental for clear and balanced CF operations. Legislation
recognizes people’s rights and protects those rights. It gives security to contractual relations and clari-
fies the mechanisms available to facilitate agreed solutions.
From a public policy viewpoint, legislation brings stability to agricultural policies, because laws – by
the nature of their creation process – are difficult to change. For the parties involved in CF, this sustain-
ability and enforceability of rights provides legal security. They know that their legal rights and obliga-
tions will be respected and that they will remain constant in the future. This can give them the peace of
mind they need in order to enter into an agricultural production contract.
There are different possibilities for regulating CF. Some countries regulate CF through general contract
or agricultural legislation, whereas others introduce CF provisions in commodity based legislation, or
enact specific CF legislation. Contractual practices might also be governed by other sources, including
legal principles, customary rules, usages and practices.
There is no one best regulatory solution to facilitate CF. The most appropriate regulatory and policy
framework will depend on the national policy and regulatory objectives, the existing legislation and
legal tradition.
©FAO/Florita Botts
PART 2
BOX 1 CONTENT OF THE LEGAL GUIDE
The Legal Guide
on Contract Farming 1. Regulatory frameworks for contract farming
To help understand CF, the Legal Guide discusses the international and
national legislation that may have an effect on the CF relationship.
interests the best. It generally best takes into account the national cir-
cumstances and is also the most familiar for the producer. In addition to
UNIDROIT FAO IFAD national legislation, countries may find relevant regulatory frameworks
Legal Guide on in regional harmonization initiatives, such as the legal framework of the
contract farming Organization for the Harmonization of Business Law in Africa (OHA-
DA), in Box 2.
BOX 2
CF under the legal framework of the Organization for the
The International Institute for the Uni- Harmonization of Business Law in Africa OHADA
fication of Private Law (UNIDROIT),
the Food and Agriculture Organiza- OHADA is an international entity currently comprising of 17 member
tion of the United Nations (FAO) and states in Central Africa, West Africa, and the Indian Ocean. OHADA
the International Fund for Agricultural aims to ensure legal security for economic activities and to stimulate
Development (IFAD) collaborated to investment.
develop the UNIDROIT/FAO/IFAD Legal OHADA has enacted nine uniform acts, some of which cover aspects
Guide on Contract Farming (the Le- of CF. The legal structure of parties is determined by OHADA law. The
gal Guide). The Legal Guide provides pledge of farming products to a food industry in exchange for financ-
guidance on the elements that should ing will be covered by the OHADA uniform act on securities. The trans-
be incorporated into an agricultural portation of farming products by road will be covered by the provisions
production contract. It analyses all the of OHADA uniform acts. Disputes arising from CF can be submitted to
elements of the contract throughout official courts and, in that case, the common court of justice and arbi-
the contract life cycle and thus helps tration – the common Supreme Court for the 17 member states in mat-
to build trust between the parties and ters related to the application and interpretation of OHADA law – may
support mutually beneficial relation- intervene. For arbitration, OHADA has a uniform act on arbitration and
ships. It is a useful tool and reference also a specific arbitration system located in the common court of justice
point for a broad range of users in- and arbitration.
volved in CF practice, policy design,
legal research and capacity-building. OHADA is heading towards a more extended coverage of CF. Work cur-
The Guide is freely available on the rently under development is focusing on several aspects relevant for CF,
websites of FAO, UNIDROIT and IFAD. including an instrument on commercial mediation, work on developing
leasing, private public partnership contracts, and joint venture.
Source: UNIDROIT/FAO/IFAD, 2017.
Source: UNIDROIT, 2014.
2
Contract farming and the law
What do regulators need to know?
3
Asier_relampagoestudio (Freepik)
clarity, completeness, enforceabil- ing for a part of it allows both are the various services pro-
ity and effectiveness. parties some degree of autonomy vided by the buyer, such as
in marketing decisions, without tilling the producer’s land.
breaching their contractual obli- Another form of input is the
»» Producers can participate in CF gations. financing provided directly
either individually or as a group,
by the buyer, for example
for example through producer
organizations.
B) Production process in the form of advance pay-
»» Producer organizations can be i) Production methods, ments. The contract typical-
instrumental in improving a con- compliance and control ly has requirements on how
tractual relationship between Cooperation between the the inputs are to be used. The
the producers and buyers. parties is important to make producer generally must
»» A producer’s acceptance of a CF successful. Cooperation pay for the inputs by having
buyer’s offer is enough to create requires fair behaviour and their price deduced from the
a binding contract.
timely and diligent action to final contract price.
»» Written contracts facilitate clar-
ity, completeness, enforceability
support, communicate, and
and effectiveness. provide advice for the other C) Delivery
party. This is especially im- Delivery is a key moment in
portant when the buyer has the performance of the con-
a great level of control over tract. The buyer’s obligation to
3. Obligations of the parties the producer’s agricultural take delivery of the goods and
The Legal Guide discusses the ob- production processes. the producer’s obligation to de-
ligations of the parties and offers liver them are basic obligations
best practices on ways to organize Compliance with specific in any CF relationship. With
them. Particular attention is paid standards or procedures delivery, the ownership and the
to the kinds of obligations which during the production pro- associated risks for the product
are likely to cause disputes and cess is connected to compli- generally pass from the produc-
may require the national regula- ance with quality obligations er to the buyer. Delivery also
tor’s attention. at delivery. The contract may triggers the buyer’s obligation to
require specific quality char- pay the price.
A) Quantity and quality acteristics in the final prod-
of the product uct, or the use of special pro- The buyer may have an obliga-
CF can contribute to better qual- duction methods, such as fair tion to inspect the product at
ity of agricultural products, es- trade or organic production. delivery. If the buyer does not
pecially when the buyer provides In the case of organic prod- inspect, he or she might lose the
quality inputs. Product quality can ucts, for instance, producers right to remedies for any appar-
be improved through a producer’s will need to have their farms ent defects. To guarantee trust in
obligation to meet requirements certified. Certification can be the inspection, the producer or a
as specified in the contract. Third done by a third party organ- third party should be allowed to
party certification of the product ization or under alternative be present when the products are
or the production process can arrangements, such as partic- inspected.
help to ensure that these requisites ipatory guarantee systems.
are met. D) Price
ii) Inputs Price is a crucial element in any
The parties can contract either for Inputs are often provid- agricultural production con-
the producer’s entire production ed by the buyer and can be tract.
or a part of the same, depending physical, such as seeds and
on their needs and preferences. pesticides, or non-physical, There are different methods to
Contracting for the total produc- such as technical assistance calculate the price. Some of the
tion reduces market uncertainty and know-how. An example most common ones are fixed
for the producer, while contract- of the non-physical inputs prices, or variable prices depend-
4
Contract farming and the law
What do regulators need to know?
»» In CF, the parties’ obligations are interlinked – one party’s performance de- During the life of the contract,
pends on the other party’s compliance. the circumstances surrounding
»» The producer’s main obligation is to produce following the specifications
the contract may also change in
agreed upon in the contract and to deliver the product to the buyer.
»» The buyer’s main obligation is to take delivery and pay the price. a way that goes beyond the risks
contemplated by the parties at the
time of entering into the contract.
If this makes one party’s perfor-
ing on market changes or per- To ensure that both parties trust mance significantly more diffi-
formance measurements. Fixed that the prices paid have been cult, the affected party may be
prices do not necessarily have to fairly established, the producer or able to rely on the legal concept
be a set monetary amount, but a third party should be allowed to of “change of circumstances”.
they may also refer to the mar- verify all information used in the
ket price at the time of delivery, calculations performed. When an intervening event hap-
or to other objective indicators. pens or circumstances change
Ultimately, it is up to the parties Regardless of how the price is cal- dramatically, it is often beneficial
to choose the price setting meth- culated, a contract should clear- for the survival of the CF rela-
od that best suits their needs. ly state the price to be paid, or tionship that the affected party
Box 4 provides an example of a describe in a clear and transpar- gives notice to the other party.
price-setting mechanism for rub- ent way how it will be calculat- To the extent of its capacity and
ber in Ghana, which can be con- ed. This will benefit both parties acting in good faith, the affect-
sidered as good practice. by fostering trust and creating ed party may also be required to
certainty. minimize damages.
5
©FAO/Giulio Napolitano
6
Contract farming and the law
What do regulators need to know?
BOX 6
Importance of trust in contract farming: experience from India
Enforcement of contracts does not necessarily have to include court proceedings. In fact, buyers in India tend to
view court-based enforcement as detrimental to farm-firm relationships in a way that undermines the handshake
ethic. Instead of going to court, the buyers can use their relationship of trust to leverage producers into compli-
ance. Active participation in the everyday life of the community, such as by donating to schools or conducting
medical camps, can go a long way towards establishing the required trust. Additionally, buyers often choose to
overlook certain levels of breach, in order to keep the relationship alive.
7
©FAO/Alessia Pierdomenico
Multiple dispute resolution meth- FAO. 2012. Guiding Principles for FAO. 2013b. Contract farming for
ods can also be used in a sequence. responsible contract farming operations. inclusive market access. Rome.
Available at: http://www.fao.org/ Available at: http://www.fao.org/3/
Following a breach of contract, docrep/016/i2858e/i2858e.pdf a-i3526e.pdf
the parties can try to resolve their FAO. 2013a. Review of smallholder FAO. 2016. Legal aspects of contract
difficulties through discussion and linkages for inclusive agribusiness farming agreements: a synthesis of the
re-negotiation. If direct talks do development. Paglietti, L. & Sabrie, R. UNIDROIT/FAO/IFAD Legal Guide on
FAO. 2015a. Gender Opportunities and Contract Farming.
not succeed, parties may rely on
Constraints in Inclusive Business Models – FAO. FAOLEX: a comprehensive and
mediation and subsequently, if an The Case Study of Unifrutti in Mindanao, up-to-date legislative and policy
agreement is not reached, on ar- Philippines. Rebeca, L., Martha, O. & database. Available at:
bitration or law courts. This may Menguita-Feranil, M.L., Rome. http://www.fao.org/faolex/
allow the parties to resolve their Indira Gandhi Institute of Development GiZ. 2013. Contract farming handbook.
Research. 2012. Notional Contracts: A practical guide for linking small-
differences first through less for- The Moral Economy of Contract scale producers and buyers through
mal methods, potentially saving Farming Arrangements in India. business model innovation. Deutsche
money and time. Narayanan, S. Indira Gandhi Institute Gesellschaft für Internationale
of Development Research: Mumbai. Zusammenarbeit: Bonn.Available at:
September 2012. https://www.giz.de/fachexpertise/
UNIDROIT. 2014. Report on the downloads/giz2013-en-contract-
Consultation Workshop “The legal farming-manual.pdf
»» Alternative dispute resolution dimension of contract farming” Addis GiZ. 2015. Contract farming handbook.
mechanisms are particular- Abeba, 31 October 2014. International Volume II – Selected tools and case
ly suitable for disputes arising Institute for the Unification of Private examples. Available at: https://www.
from CF. Law. Available at: http://www.unidroit. giz.de/expertise/downloads/giz2015-
»» Using a sequence of dispute org/english/documents/2014/study80a/ en-contract-farming-handbook-
resolution mechanisms (from s-80a-22-e.pdf volume-2.pdf
negotiation to mediation and if UNIDROIT, FAO and IFAD. 2015. IIED, FAO, IFAD & SDC. 2010.
no agreement is reached, arbi- UNIDROIT/FAO/IFAD Legal Guide on Making the most of agricultural
tration) gives the parties time to Contract Farming. Rome. Available at: investment: a survey of business
http://www.unidroit.org/english/guides/ models that provide opportunities
overcome the dispute and con-
2015contractfarming/cf-guide-2015-e.pdf. for smallholders. Vermeulen, S. &
tinue their relationship. Cotula, L. International Institute for
Resources Environment, the Food and Agriculture
FAO. 2015b. Inclusive business models. Organization of the United Nations,
Guidelines for improving linkages the International Fund for Agricultural
between producer groups and buyers Development and the Development
References and resources of agricultural produce. Available at: Swiss Agency for Development and
FAO, UNIDROIT and IFAD have all http://www.fao.org/3/a-i5068e.pdf Cooperation. London/Rome/Bern.
created material on contract farming. FAO. 2001. Contract farming: UNIDROIT, FAO & IFAD. Community of
Some of these, as well as other notable partnerships for growth. Available at: practice on legal aspects of contract
resources, are indicated below. http://www.fao.org/docrep/004/y0937e/ farming, which promotes a favourable
y0937e00.htm legal environment for contract farming.
References FAO Contract Farming Resource Available at: http://www.unidroit.org/
Decreto Legislativo Nº 490 - Ley de Centre, for a wealth of material on community-of-practice/home
la producción, industrialización y contract farming. Available at: World Farmers Organisation. 2013.
comercialización de la agroindustria http://www.fao.org/contract-farming/ F@rmletter September 2013. Available
azucarera de El Salvador. at: http://www.fao.org/uploads/media/
WFO_Famletter_09_2013.pdf
Financed by:
Food and Agriculture Organization
©FAO, 2017
I7580EN/1/07.17
International Fund for Agricultural Development (IFAD) of the United Nations (FAO)