Ag
Production Contracts:
Freedom to Contract, Public & Private Goods
Stephen
F. Matthews
Missouri Agricultural Law Center
Introduction
This is a tough article to write.
It’s not about taking sides, but it is about taking sides.
At least, that’s the way most of us approach uncomfortable topics:
you’re either with us, or one of them.
Probably just a sign of the times, given our national unity after the
recent terrorist acts. But are
there “good and valid points” to both sides?
Are there more than just two extreme sides or viewpoints to any issue?
Ironically, most of us have internal back-and-forth debates or second thoughts about most any subject, and not just about whether to get into an exercise program or to eat less (or more). So don’t be alarmed if you’re not clearly in one of two identifiable opposing camps about any issue. The devil’s advocate is more a part of us than we’ll probably ever give credit.
I’m going to write about “ag production
contracts,” more particularly swine and poultry contracts.
They aren’t necessarily “good” or “bad,” at least from my
viewpoint. What I have to say about
this increasingly common approach to raising pigs and chickens in Missouri is
meant to raise issues, to further the discussion, debate, conversation,
...”whatever,” as my Mother used to say when a topic wasn’t going to be
settled because the engaged participants were wedded to differing opinions.
But there usually is a “next time” encounter, and this article is
meant to take advantage in this lull in non-fighting "whatever's" and to explore
thoughts less likely to be entertained when in the heat of battle over long-held
opinions.
Main
Topics To Be Explored
Last year in Missouri and sixteen other mostly
midwestern states there were versions of a “model act” introduced as bills,
but few were enacted except some portions in Illinois (at least that’s what my
limited sources tell me).
What was this all about?
Well, it seems that the Iowa Attorney General and his staff led this
effort, and found willing ears in sixteen other state attorney generals,
including ours. They were concerned
that primarily in swine and poultry contracts the ag producers (farmers) were in
weak bargaining positions.
Here are the major themes (in no particular
order of importance) drafted for introduction in state legislatures:
Readability
of Contracts: Put the contracts
in “plain language” with captioned sections.
Prohibit
Confidentiality: Contracts
should be transparent and each party should be able to share and to discuss
his contract with anyone, including his advisors, journalists, producer
organizations, governmental officials, university extensionists &
researchers, etc.
Three-Day
Right To Review: Producers
should have the right to cancel a production contract within three business
days after the contract is signed.
Written
Termination Notice & Right to Cure:
Producers shall have a thirty-day period to correct any alleged
contract breach after written notice from the contracting company.
Right
to Joint Producer Associations: Contracts
cannot prohibit this.
Right
to Contract with Other Contracting Companies:
Contracts cannot tie up (make exclusive) a producer with the
contracting company.
Right
to be a Whistleblower: Producers
shall have the right to make statements actions (but not the right to be
libel or slander) regarding
alleged improper by the contracting company.
Right
to Use Contract Producer Liens (assuming the state has such provisions; Iowa
has such liens but Missouri doesn’t as of this writing):
Contracts shall not have the right to prohibit producers from using
such liens.
Right
to Observe Weighing: Producers
shall have the right to observe at the time of weighing the weights and
measures used to determine the producer’s compensation.
Prohibition
of Retaliatory Actions: Contracting
companies shall not engage in nor permit any employee or agent to take
actions to coerce, intimidate, disadvantage, retaliate against, or
discriminate against any producer who exercises or attempts to exercise any
producer rights.
Prohibition
of Providing False Information to Contract Producers or to Others Regarding
the Contract Producers
Prohibition
of Requiring Additional Capital Investments without the producer’s written
consent.
Mediation
or Arbitration: Contracts
should provide for the resolution of disputes by mediation or nonbinding arbitration. Contractual
language calling for binding arbitration shall be null and void, unless the
producer agrees to binding arbitration AFTER the dispute arises and where
all parties agree to the person(s) serving as the arbitrator or arbitration
panel.
Choice
of Law, Jurisdiction, and Venue:
Contracts
must apply the law of the state where the producer resides.
Provisions to the contrary are null and void.
Venue (location of the proper court) shall be determined by the
location of the livestock facility (or crop field, for crop contracts).
Remedies
and Enforcement: Either
contractual party may sue in court and obtain appropriate legal and
equitable relief, including punitive damages.
Treble
Damages and Recovery of Reasonable Attorney Fees & Litigation Costs:
Contracting companies violating any of these rights shall pay the
producer treble (three times actual) damages, as well as reasonable attorney
fees and reasonable litigation litigation expenses.
Wrongful
Termination Rights: Producers
shall have the right to recover the remaining value of the contract, and the
value of the remaining useful life of capital investments made to fulfill
the contract including land, structures, machinery, or equipment.
Attorney
General’s Right to Enforce Specific Producer’s Rights, such as the right
to join producers associations, to contract with other companies, to be a
whistleblower, to use state-authorized producer liens, and to observe
company weighings.
Environmental
Liability for Manure Pollution
When swine and poultry production is governed
by contracts, just who is liable for environmental violations?
The list of potential liabilities includes fines, litigation costs (not just
in-court costs but all the costs of discovery leading up to the trial date),
cleanup, and any other remedy sought by neighboring landowners or governmental
agency (city, county, state, and federal) for alleged violations of zoning,
health, and environmental regulations. Quite
an awesome and frightening prospect, right?
The basic answer is that the person responsible
for the harm is liable. Might that
include the contracting company, since they typically own the animals, and tell
the producers how to manage the entire operation including how to build the
manure handling facilities and maybe even how to treat the manure?
The answer is “yes” BUT FOR typical contract provisions which have
the producers assuming all environmental liability and further agreeing to
indemnify the contracting company should it be liable for any environmental
violations. These two separate
clauses are called the “disclaimer” and “indemnity (hold-harmless)”
clauses.
Here are examples of such language:
·
Disclaimer: Under no circumstances shall the contracting company be
liable to the producer for any losses, damages, whether direct, indirect,
special, incidental, consequential, or punitive damages. The contracting company makes no warranties regarding the
condition, merchantability, or fitness for a particular purpose of the poultry
or swine, feed, medicine, equipment, and other supplied provided by the
contracting company, and the producer accepts all such goods “as is.”
·
Indemnity
or Hold-Harmless: Producer shall indemnify, protect, and hold harmless the
contracting company, its employees, agents, servants, successors and assigns
from and against all losses, damages, injuries, claims, demands and expenses,
including without limitation, legal expenses of whatsoever nature, arising out
of or in connection with the producer’s raising of swine (or poultry) pursuant
to this agreement.
Proposal: Enact legislation at the
state or federal level which would make contracting companies “jointly”
liable for civil penalties assessed against contract producers
for environmental violations, as well as jointly responsible for any
remediation, cleanup, and/or closure requirements associated with such
violations. Why don’t the
state-level EPA (in Missouri, this would be the Department of Natural Resources
or DNR)) and the federal EPA (Environmental Protection Agency) require that contracting companies be co-permitted with
each of its contract producers? After all, the contracting company is significantly
participating in the management of the swine/poultry operations, and often owns
the swine/poultry. This would
provide greater incentive to producers and contracting companies to manage swine
and poultry waste responsibly. And
there would be less likelihood that taxpayers and nearby landowners and dwellers
would have to pay the costs associated with pollution from large swine/poultry
operations.
Missouri
was considered to have one of the toughest concentrated animal feeding operation
(CAFO) statutes when it enacted in l996 Chapter 640.700-.758.
But there was a “sunset” provision for five
years, and the statute has not been extended. So it expired June 25, 2001.
Some might argue the statute was too full of loopholes for “grandfathered” CAFOs, “exempt” CAFOs, and had few environment protecting requirements for any CAFOs but the newest (since June 25, 1996) and absolutely huge CAFOs.
Maybe the positive about this statute was that
it gave the state some “breathing room” to consider how to balance seemingly
ever-larger CAFOs and the resulting issues with substantial nuisance-like
burdens on neighbors and the potential pollution of public goods like the
state’s air and water as well as the threat to wildlife, particularly fish.
EPA’s
Proposed CAFO Regulations
In December, 2000 the federal Environmental Protection Agency (EPA)
proposed regulations which addressed primarily water pollution issues.
But the public hearings and open comment approach have significantly
delayed implementation, and any revised proposed regulations are likely to be
greatly restricted from the original proposal.
Here at the University of Missouri, both the
Commercial Agricultural Program and the Food & Agricultural Policy Research
Institute (FAPRI) have made their assessments of the proposed impacts if the
original proposed regulations were to be implemented.
Will there ever be any federal (all-state) approach to address the CAFO
water and waste pollution issues? Not
any time soon, if these past ten months are any indication.
Special interest groups are just too powerfully connected and well
represented with lobbyists. But
don’t count out entirely the tremendous impact citizen lawsuits and the many
groups which self-proclaim to speak on behalf of the environment.
Proposal:
Why doesn’t Missouri re-enact its expired CAFO statute, but this time
make it retroactive (no grandfathering)? Several
states have CAFO statutes, and while there is no standard model, most emphasize
buffers between CAFOs and the nearest occupied residence or public structure.
You might expect an agricultural economist (and lawyer) to end on a position that air and water are ambient, and belong to all (public goods) and not to the first to foul them with pollution from concentrated animal feeding operations. Neighbors to CAFOs should not have to “put up and shut up” with neighboring CAFOs which pollute the common waters and air.
Taxpayers are not the indemnifiers of a polluted environment. Rather, the potential for pollution should be prevented as much as possible by the required adoption of better waste-handling technology. Pollution should not be an “externality” imposing huge cleanup costs upon taxpayers. Even if the public purse were bottomless, often cleanup efforts are unable to restore the environment, at least without decades of slow recovery.
For further information, you are encouraged to visit the following web sites:
1. Missouri Agricultural Law Center http://aglaw.missouri.edu/MALC.htm
2. Hog Watch on Integrator (Company) Liability Proposals http://www.hogwatch.org/getthefacts/factsheets/integliab.html
3. Hog Watch on Proposed Solutions to Swine Manure Pollution http://www.hogwatch.org/getthefacts/hog_problem.html
4. EPA’s site on its Proposed Animal Feeding Operations Regulations http://cfpub1.epa.gov/npdes/home.cfm?program_id=7
5. Missouri Commercial Ag Program’s assessment of the EPA proposals http://agebb.missouri.edu/commag/news/srindex.htm
6. FAPRI’s Analysis of the Proposed EPA CAFO Regulations http://www.fapri.missouri.edu/FAPRI_Publications.htm
7. Community Rights Counsel: Are Right-to-Farm Statutes an Unconstitutional Taking of Neighbors’ Rights to Be Free of Unreasonable and Substantial Interferences with their Use and Enjoyment of their Property? http://www.communityrights.org/righttofarm.html
Prepared
October 15, 2001