When Does a Contract Become Real?

Whether it’s a lease agreement, signing on to take a new job or buying a home or other big-ticket item, sooner or later we all are faced with having to review and sign a contract to close the deal. Once we’ve “signed our life away,” on the dotted line, we are now obligated to live up to the terms of the signed contract.

While this scenario is played out a countless number of times per day, a markedly different protocol is engaged when executing a grain contract. FEED & GRAIN again turns to attorneys Jacob D. Bylund and Kim J. Walker of the law firm Faegre & Benson LLP, to help wade through the vagaries of what constitutes an enforceable grain contract.

F&G: What makes a grain contract difficult to enforce vs. a more traditional signed contract?

Bylund: When thinking of a “contract,” most people think of a document stating the terms of the parties’ agreement signed by both parties. However, since grain contract agreements are typically conducted over the phone and because of the oral nature of such agreements, issues of enforceability can often arise when a dispute occurs. Fortunately, however, problems can be easily avoided with some attention to detail and clearly understanding the rules of how an “oral agreement” followed by a written confirmation, results in an enforceable contract.

F&G: What is the proper procedure which helps get the contracting process underway?

Walker: Reviewing and understanding Rule 3 in the NGFA Grain Trade Rules is a good place to start. In it, it states that both the buyer and seller shall send a written confirmation, to each other, no later than the close of the business day FOLLOWING the date of trade or on an agreed amendment.

F&G: And if something is amiss in the contract what happens next?

Walker: First of all, when you receive the written confirmation, you should check it immediately for accuracy. Upon finding any material differences, that party should immediately notify the other party to the contract by telephone and confirm in writing the correct terms and conditions of the agreement as previously agreed. Now, let’s suppose one of the involved parties fails to send a confirmation. In that case, the confirmation actually sent by the other party then becomes binding upon both parties, because that confirming party has not been immediately notified by the nonconfirming party as described in Rule 3(A), of any disagreement with the confirmation received.

F&G: What other protections or policies are used to confirm an oral agreement?

Bylund: NGFA Trade Rule 3 tracks with the Uniform Commercial Code (UCC), which is generally applicable to grain contracts. Confirmations are addressed in three separate sections of the UCC — namely sections 2-201, 2-202 and 2-207.

Section 2-207 allows for the inclusion of additional terms in a confirmation as proposals to add to the contract’s terms, while section 2-202 precludes the introduction of evidence contrary to terms set forth in writing between the parties. For example, if the confirmation states a price of $4.00, the seller can’t later introduce evidence in a proceeding where the contract is in dispute of a promise to pay $5.00. Section 2-201 outlines the Statute of Frauds which refers to the legal requirement that certain types of contracts be in writing to be enforceable.

F&G: How does Section 2-201, the Statute of Frauds, relate to grain contracts?

Bylund: The Statute of Frauds provides that a contract for the sale of goods for the price of $5,000 or more is not enforceable unless there is some record sufficient to indicate that a contract for sale has been made between the parties and signed by the party against which enforcement is sought or by the party’s authorized agent or broker. There is an exception to the Statute of Frauds for contracts between “merchants.” Between merchants, if one party sends the other party a confirmation and the receiving party does not object within a specified period, the contract is enforceable against the receiving party even if the receiving party never signed the confirmation.