Adhesion Contracts in Farming, Summary of Issues

I.  Introduction

            Farmers face unique adhesion contract problems in two primary situations.  The first is called the “production contract,” where farmers contract with food processor companies to produce crops or livestock that the processor agrees to buy in advance.  Production contracts can cause serious problems for farmers because of unfair compensation terms, unilateral termination clauses, and mandatory arbitration clauses.  The second adhesion contract problem that farmers can face arises when farmers plant genetically modified crops.  Genetically modified seeds come with adhesion contracts that can contain a broad range of unfair terms.  Farmers can become unwittingly bound to harsh terms under such contracts, sometimes even if they have not read or signed anything.  Genetically modified seed contracts can also punish farmers for saving seed and can include harsh provisions such as inspection provisions, one-sided limitations of remedy, notice provisions, and choice of law provisions.

II.  Production Contracts

            An increasing number of farmers are now working on a contract basis for large processing companies.  In a production contract, the farmer (the “producer”) agrees to grow produce or livestock to supply a processing company (the “processor”).  These contracts are offered on an adhesion basis, often containing unfair provisions that reflect the unequal bargaining power of the large processors and much smaller producers.

            The nondisclosure clause is one of the most serious unfair terms imposed on producers.  These clauses prevent producers from disclosing their production contracts to others.  This effectively prevents producers from seeking outside advice on the contracts, or comparing their contracts with those of other producers to make sure they are getting a comparable deal.

            Production contracts can also use unfair systems to determine how producers are paid.  In the poultry industry for instance, it is common for processors to use a “tournament” system of compensation, where producers are paid based on their performance relative to other producers.  This system places producers at the mercy of processors, who supply producers with the chicks and feed they will use to grow their chickens.  If a producer arouses the processor’s ire, the processor can send inferior chicks and feed, causing a drop in the producer’s quality and thus a drop in compensation.  This effectively places producers at the mercy of processors.

            Another pay-related term that appears in production contracts is the “ledger” system.  In most production contracts, the producer is paid a set amount for the product, regardless of whether the market price increases or decreases after the contract is signed.  However, under the ledger system, if the price falls, the producer will owe the processor the difference between the contract price and the market price.  These provisions work in favor of producers as well, in case the price increases.  However, the much smaller producers can ill afford to pay for unforeseen price drops, and can end up irrevocably in debt to processors.  Processors, on the other hand, are typically large enough to absorb price increases without going bankrupt.  As such, ledger systems at first appear to be balanced, the lesser financial strength of the producers makes ledger clauses unfair to producers.

            Another oppressive term in production contracts is the termination clause.  A termination clause allows processors to terminate a production contract, potentially at any time and for any reason.  This is highly problematic for producers, because production contracts often require producers to make substantial capital investments.  When a contract begins, producers must typically pay for facility upgrades to meet the processor’s required standards.  Clauses allowing the processor to terminate the agreement can thus be extremely destructive to producers, since contracts can be canceled after producers have gone into debt to make the required upgrades, but before they have seen a single penny in return.

            Finally, production contracts routinely include mandatory arbitration clauses.  These clauses keep disputes between producers and processors out of court, forcing producers to litigate before private arbitration panels that can be expensive and biased, and offer little chance for meaningful appeal.

            Some jurisdictions have reacted to the injustice in producer contracts.  In 2001, sixteen state attorneys general (Colorado, Indiana, Iowa, Kentucky, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, North Dakota, Oklahoma, Vermont, West Virginia, Wisconsin and Wyoming) proposed adoption of the Model Producer Protection Act.  To date, only seven states (Arkansas, Georgia, Illinois, Iowa, Kansas, Minnesota, and Wisconsin) have passed any legislation regulating production contracts.  Each of these states provides varying level of protection for producers, but the majority offer no special protection at all.  Federal regulation has imposed limited reforms to protect producers, but the unfair adhesion contract terms outlined above are still completely legal in most jurisdictions.

Sources: 

Susan E. Stokes, The Dilemma of Contracting:  Risk Management or Risky Business? (Farmers’ Legal Action Group, Inc.) (2006), available at http://www.flaginc.org/topics/pubs/arts/CLE_SES.pdf

Alison Peck, State Regulation of Production Contracts (The National Agricultural Law Center) (2006), available at http://www.nationalaglawcenter.org/assets/articles/peck_contractregulation.pdf

III.  Genetically Modified Organism Contracts

            When planting genetically modified seed, farmers (called “growers” is this context) are required to abide by an adhesion contract (a “GMO contract”) that can include some very unfavorable terms.  Signing such an agreement will bind the grower to its terms, whether or not the grower has read or understood said terms.  The Monsanto GMO contract (Monsanto being one of the largest GMO seed supplier) takes things a step further: the grower need not even sign the contract to be bound by it.  The Monsanto Technology/Stewardship agreement provides that the grower agrees to the contract simply by opening a bag of seed.

            Signing a GMO contract does not just bind a grower to the contract itself.  Growers can also be held to supplementary “Technology Use Guides” that accompany such contracts.  A Technology Use Guide is an often lengthy document which specifies how the seeds are to be planted, including such issues as pest control and compliance with environmental standards.  Monsanto publishes a single 60-page Technology Use Guide which includes the requirements for many different seed products.  Other companies publish shorter guides for single products or a more limited range of products.

            GMO contracts also ban growers from saving seed produced by their GMO crops.  This forces them to buy new seed every season, unlike traditional crops that can be replanted freely.  The contracts provide for severe penalties if growers save their seed.  This can be particularly harsh in the case of growers who never see the contract, but are bound merely by opening a bag of seed, as they may save their seed and incur penalties inadvertently.

            Another troubling aspect of GMO contracts are the inspection provisions.  GMO contracts may allow companies to inspect a grower’s land and business records to ensure compliance with the contract and accompanying Guide.  These inspections may be authorized by the contract itself, or specified in the guide, or both.  In Monsanto’s case, for instance, inspections are provided for in the Guide, which is 60 pages long.  A grower could easily miss these provisions, buried as they are in a lengthy document, and thus could unwittingly open his land to corporate agents.

            In addition to these harsh terms, GMO contracts generally contain limitation of remedy provisions.  These provisions state that, if wronged by the company, the grower can only recover the value of the seed purchased from the company.  The Monsanto contract goes even further than this, providing that if the company desires, the company can pay the grower’s damages in seed, not cash.

            GMO contracts are made particularly one-sided because, while GMO contracts limit the remedies available to growers, they typically reserve all remedies, even extraordinary remedies, for the seed company.  These extraordinary remedies can include attorney fees, inspection costs, and even liquidated damages.

            In addition to cutting off a grower’s remedies, GMO contracts can effectively cut off a grower’s right to sue in the first place, thanks to notice provisions.  Notice provisions in GMO contracts require growers to give the company notice of problems with the seeds before they can sue.  While the length of time permitted is not always oppressive, it can deprive a grower of legal rights by giving a more limited time to sue than would otherwise be available under the statute of limitations.  And in Monsanto’s case, the grower must give notice of any problems to Monsanto within 15 days of first noticing the problems, an extremely oppressive deadline by any measure.

            And finally, GMO contracts can deprive famers of the benefit of local law using choice of law provisions.  These provisions require growers to submit to state laws that might be less favorable than their own states’ law.  The Monsanto contract goes a step further and requires growers to litigate all cases in the Eastern District of Missouri, potentially preventing lawsuits by adding travel costs to the already considerable expense of litigation.

 

 

 

 

 

Appendix A

Table Comparing Terms Offered by Specific GMO Contracts Obtained by Citizen Works.

	How Entered	Saving seeds allowed?	Inspections	Grower’s remedies	Company’s remedies	Pre-suit notice	Choice of Law
Monsanto 2009 Technology Use/Stewardsip Agreement	Signature OR opening bag of seed	NO	Can inspect grower’s business records and government records on grower.  Inspections of land authorized in 60-page Technology Use Guide.	Limited to value of seed purchased, can elect to repay by replacing seed only.	Right to attorney fees and inspection costs for breach of patent claims against grower.	Written notice required within 15 days of problems being discovered.	Exclusive Jurisdiction in Eastern District of Missouri.
Syngenta Seeds, Inc. Stewardship Agreement	Signature	NO	Inspections of land authorized in 28-page Stewardship Guide.	Limited to value of seed purchased.	Not limited	Must notify syngenta “promptly” after problems discovered, must file suit within one year.	Minnesota law applies; claims based on Monsanto patents (licensed to Syngenta) under exclusive jurisdiction of Eastern District of Missouri.
Dow AgroSciences Herculex Insect Protection Bt Corn Grower Agreement	Signature	NO	Can enter land, take crop samples, inspect government’s records on grower, and inspect grower’s records with seed and chemical dealers.	Limited to value of seed purchased.	Not limited	Must provide written notice of problem with sufficient time to allow in-field inspection.	Indiana law applies.
BASF Clearfield* Wheat Stewardship Grower Agreement (2003-2004 Season)	Signature	NO	Must give BASF right to enter on land during contract term “and thereafter.”	Not specified	Can recover all attorney fees for breach of contract; liquidated damages of $100 per acre for crops planted with saved seeds.	Not specified	North Carolina law applies.

 

Note:  BASF Clearfield* wheat is not a GMO, but it is a patented crop variety accompanied by an adhesion contract similar to what GMO companies use.

 

 

 

 

 

 

Appendix B

2009 Monsanto Technology/Stewardship Agreement

SEE ATTACHED PDF