Ginners may pay thousands or even hundreds of thousands of dollars for a piece of equipment, says John Lewis, but many spend little or nothing on a very important piece of paper — a legal contract.
“This paints a bullseye squarely on them, and could open them up to potentially huge liability,” says Lewis, Nashville attorney and professor of contract law, who is working with the Southern Cotton Ginners Association and the Cottonseed Subcommittee of the National Cotton Ginners Association to develop a standardized contract for the sale of cottonseed.
“A contract should be just as important to your business as any other piece of equipment,” he told SCGA members at their annual summer conference at Baton Rouge, La.
Sledge Taylor, Como, Miss. producer/ginner and chairman of the NCGA Cottonseed Subcommittee, says, “there are some weaknesses” in the way ginners now handle cottonseed sales and “we're working to come up with some improvements.
“We'll continue meeting with other segments of the cotton industry on developing something that will work better for everyone.”
Lewis, who chairs his law firm's Contract Practices Group, noted that changes in the ginning industry place greater importance on effective contracts.
“Historically, ginners have ginned the producer's cotton in exchange for the seed, which was then sold to oil mills under a standard contract used by the mills. You either signed the contract, or you didn't sell your seed.”
Today, he says, most gins in the South and Southeast keep the seed as payment of ginning charges, “but little by little we're seeing scenarios in which gins are paying producers something for the seed. In the Southwest and West, many gins are either paying dividends or returning the seed to producers.
“Cottonseed isn't just going to the oil mills — it's going to dealers and being sold directly to dairies and other feeders. Oil mills, merchandisers, and brokers all have contracts, but dairies and cattle feeders usually don't.”
So, while there are increasingly different ways of doing business nowadays, Lewis says, “most gins still don't have any type of standardized contract, and they're hurting themselves with regard to legal protection.”
Every contract, he says, should have standard terms specifying quantity, quality, price, delivery dates, payment provisions, transportation methods, shipping schedules, and other vital information. It could even include provisions regarding aflatoxin.
A contract should also include a force majeure clause, specifying what happens in the event of failure to meet any of the contract terms. Example: You sell your tonnage in April and then your gin house burns. You can't deliver, so now what?
“You could be facing money damages or having to go someplace else to try and buy seed to meet your contract,” Lewis says. “You need force majeure provisions to protect yourself in such situations.”
Trade rules and dispute resolution are other items that can be included in a contract.
“If you don't protect yourself on which trade rules apply, you could have to abide by some very difficult rules. For example, the National Cottonseed Products Association has recently adopted some feed ingredient trade rules that could be very onerous for gins.
“Rule 5 in the cottonseed feed agreement rules is more insidious — it says if a dealer or oil mill sends you a shipping schedule and you don't object to it within 48 hours, it becomes part of your contract and it governs. It may be a shipping schedule that's not favorable to you, so you need to be aware of this and pay attention to it.
“If you use brokers, NCPA rules specify that the broker's contract will govern a transaction. Even though you have a contract form and the other party has a contract form, if there is a broker's contract, that contract will govern.
“NCPA Rules 1 and 61 are very important. Rule 1 says if a broker, oil mill, or dealer belongs to NCPA and specifies that NCPA rules will apply, those rules will trump your own contract unless it specifies otherwise. It's very, very important terminology.”
Provisions for dispute resolution should also be incorporated into a contract, Lewis says. “If a dispute arises over a transaction, the last thing you want, if you're a Mississippi ginner, is to have to resolve it in a court in Wisconsin, California, or elsewhere. You at least want to say which court will handle your case, or if you'll use arbitration or mediation to resolve a dispute.
“All these things you can do, if you specify them in a contract. The standardized contract we're working to develop will be a basic framework or checklist, and other terms can be negotiated from there.”
Generally, Lewis says, all terms must be in writing; otherwise, the contract may not be enforceable in court.
And terms should be defined: “Under older agreements, a carload was 50 tons; under new rules, it's 60 tons, or 85 tons for a double-hopper car. And there's potential for all kinds of confusion with truckloads, which can be anywhere from 25 tons to 50 tons. If you don't have a specific reference to what constitutes a truckload, your contract might fail.”
It's important to understand, Lewis says, that “once a written contract is executed and signed, that contract governs and supersedes anything that may have been said orally or otherwise agreed to. Unless you can prove there's been a mistake, fraud, misrepresentation, or illegality, you're stuck with that contract.”
With all the changes in the industry, he cautions ginners, “You need to be careful, be diligent, and be prepared. A carefully crafted contract can help you to do that. It's the best shield you can have against potential problems.”
Plans are to have a suggested contract available for discussion at the Beltwide Cotton Conferences in January, Lewis says. Preliminary versions will be circulated prior to that for industry comment.