When Does a Contract Become Real?
Feed & Grain partners again with the law firm of Faegre & Benson LLP to remind elevator and mill managers that while you cross your T's and dot your I's, you must understand all that goes in to having a signed confirmation of your contract.
F&G: Does anything change when dealing with farmers?
Walker: In most states the status of a party as a merchant, including the status of a “farmer as a merchant” is a question for the “trier of fact,” which determines if the farmer/merchant has the knowledge or skill to be deemed a merchant. In considering whether a farmer is a merchant, the trier of fact may consider evidence regarding the following:
• Length of time the farmer has been engaged in the practice of selling their product
• Degree of business acumen demonstrated by the farmer in their dealings with other parties
• Farmer’s awareness of the operation and existence of farm markets, and
• Past experiences with or knowledge of the customs and practices which are unique to the particular marketing of the product they sell.
F&G: All right, let’s suppose the party receiving the confirmation, a farmer for example, does not sign it and return a copy to the grain company. How does that affect processes like arbitration?
Bylund: When a farmer has not signed the confirmation, the farmer may be more likely to assert that the contract is not enforceable and that the farmer is not a merchant. This can affect the grain company’s ability to enforce the contract in the event of default and can materially affect the cost of enforcement. Section 5 of the NGFA Arbitration Rule sets out the procedure for initiating the arbitration process whereby, the National Secretary prepares a “contract for arbitration” for signatures by the parties. The Section 5 “contract for arbitration” is a contract between the parties and NGFA to administer the resolution of the parties’ dispute.
If the responding party fails to sign the confirmation and the party claims that no contract exists, the party may also refuse to sign the “contract for arbitration” with the NGFA, and the NGFA may refuse to hear the matter until the respondent is “compelled” to participate.
A party is “compelled” to arbitration by one party going into either state or federal court to secure an order compelling arbitration. This requires that the party establish that an agreement to arbitrate before NGFA exists and is enforceable. If the confirmation is unsigned — and no master agreement exists between the parties — then to prove up the arbitration requirement a party may need to submit evidence, engage in limited discovery and possibly an evidentiary hearing to determine if the respondent is a “merchant,” and, therefore, the Statute of Frauds is defeated. These proceedings are costly and entirely avoidable if proper contracting procedures are employed.
Walker: Other risks, unrelated to the counterparty farmer, can also flow from the unsigned confirmations. In times of high market volatility the likes of which we experienced last year or, in the uncertain economic times seen today, a grain company’s contracting practices may present an issue with respect to obtaining credit, for example. Lenders may inquire regarding the debtor’s portfolio of grain contracts. If a pattern of an unusually high number of unsigned confirmations begins to reveal itself, it could most certainly affect the debtor’s ability to obtain credit or continue a relationship. Simply put, unsigned confirmations present a higher likelihood of counterparty default.
F&G: Essentially what you’re saying here is, like anything, adhering to proper contracting procedures will save you time, money and needless hassles. What are the keys to proper contracting procedure?
Bylund: In the grain business, proper procedure begins at the original point of contact between the contracting parties. Document each oral agreement at its inception including names of the parties, contracting party, name of caller, time/date of the call, contract pricing and quantity information.
Then send the contract confirmation no later than the close of the business day following the date of the trade, or an agreed amendment (see Rule 3, NGFA Trade Rules), mail that confirmation and a return-stamped envelope to the other party, retaining a copy of the confirmation noting the date on which it was mailed to the other party.
