She writes:
A question I’m asked a lot by farmers is: 'What makes a dairy contract a good contract, or a bad contract?' I’ve reviewed a lot of dairy contracts over the years and in my experience most dairy contracts are a game of two halves; most contain some good terms, and most contain some bad terms. Overall, some are certainly worse than others, but generally speaking I’m yet to find a contract that doesn’t have a bad term lurking in it somewhere. With a bit of luck, the effect of that bad term will never be felt by the farmer, but it’s always better to make sure that your contract is as good as it can be, should the worst happen.
In this article I’m going to flag some excellent dairy contract terms that I’ve seen. I’ll cover plenty of bad terms that I’ve seen. And then I’ll tell you about the downright ugly terms that sadly can still be found in some contracts today. I’ll explain what the clause says, and why (in my view) it’s a good or bad term.
I’m going to do this anonymously, to save the blushes of the people who drafted these contracts (some of whom certainly should be blushing). But rest assured that whoever you supply your milk to, you’re guaranteed to find some of these gems buried away in the small print.
It's also worth saying that my views on what’s good and bad are based purely on the objective legal effect of the term. Whether a term is good or bad for your individual business may well be a different question.
You can click on the links below to jump straight to the relevant sections:
Good contract terms
Let’s start on a good note and look at some very good terms I’ve seen in dairy contracts.
Variation by agreement
This is a rare beast indeed, but I have seen a clause in (a very few) dairy contracts that allows variation to the terms only by written agreement of both parties. This is a fantastic clause – it gives a farmer certainty that once they have signed a deal, their contract terms are not going to change without their agreement. The vast majority of dairy contracts, however, allow processors to vary the terms as much and as often as they like, meaning the farmer has no certainty about the deal they have signed up to.
Right to terminate for late payment
Usually if payment is delayed or made late, you don’t have a right to terminate the contract (unless you had specified in the contract that in respect of payment time is of the essence). You may well have a right to sue for damages or for interest on the late payment. But late payment by processors can be a big issue for farmers, especially if it becomes a persistent problem, because it impacts upon cash flow.
Another rare but excellent term that I have seen in some dairy contracts is a right for farmers to terminate the contract if the processor delays payment either for a length of time, or on a regular and persistent basis.
Reasonable notice periods
Thankfully not as rare as the other clauses I’ve mentioned so far are reasonable notice periods – a notice period that allows the farmer to terminate the contract on a reasonable amount of notice (three months or less). Such clauses are especially important in contracts where the farmer is bound to supply all of his milk exclusively (pretty much every single dairy contract in the UK requires this) and where the processor can change the price and/or terms of the contract at will. When a farmer has a reasonable notice period, they are not tied in for too long to prices or terms that they are unhappy with.
By contrast, some contracts have terrible notice periods – for example some say the farmer has to give 12 months’ notice and can only issue that notice on two specific days in a year! There’s no justification in my view for such a long notice period and such restrictions on when notice can be served.
Payment for contaminated milk if notified in advance
Some contracts provide that if the farmer becomes aware of contamination of the milk in the tank on farm before it is collected and notifies the processor, then they will still get paid for that milk even though it will need to be disposed of. Such clauses are usually limited to a certain number of occasions in a rolling 12-month period, but they provide the basis of a good and open dialogue between the farmer and the processor.
Bad contract terms
Exclusivity plus volume management
My personal view is that exclusive dairy contracts rarely provide any benefit to the farmer. For a farmer to give up his commercial right to sell his milk wherever he likes, he could – and should – expect a premium or other benefit in return. But in my experience exclusivity is taken for granted in the industry – it is included in the dairy contract without discussion and without any benefit to the farmer.
Processors argue that the quid pro quo for exclusivity is that they will buy all the milk a farmer produces, however much that may be. The problem is that many current contracts have a clause in that says this, but then includes other clauses that seek to limit and control the volume produced and to include mechanisms to penalise or pay less to the farmer for over production.
So the farmer gets all of the downside of exclusivity – they can’t sell elsewhere – and very little of the benefit – they can’t supply as much milk as they like for the same price. So, whatever your views about exclusivity generally, it’s certainly the case that exclusivity coupled with volume and price management leaves farmers with all of the risk and very little of the reward.
Click here to read NFU dairy board chairman Michael Oakes’ views on exclusivity.
Complete discretion on price
Most dairy contracts give the processor complete discretion on price – meaning the processor can pay as much – or as little – as they like for the milk. And many of these contracts allow the processor to change the price with little notice, and sometimes with no notice at all. This means that while the price might look tempting today, tomorrow that price could be awful.
If you couple complete discretion on price with a long notice period, the effect can be crippling on a farm business. Imagine if the processor drops the price tomorrow to 15ppl and you are tied in for 18 months to that price.
I’ve never seen any other contract where the price is at the complete discretion of the buyer, with no parameters (e.g. 30ppl, +/- 5ppl), and no safeguards (e.g. you can terminate if you aren’t happy). Imagine if you could simply decide, on the day, how much you are going to pay for your feed, fuel, and electricity.
Subjective rejection clauses
It’s entirely legitimate for buyers to stipulate the quality requirements for the milk that farmers supply. But any milk supplied should be tested against objective criteria and any rejections should be made solely based on the milk’s failure to meet those objective standards, and ideally any testing should be done by an independent third party.
Nonetheless, I still see plenty of clauses allowing the processor or the tanker driver to reject the milk based on their own views about whether the milk meets the contract requirements, without any check or balance in place.
Click here to read NFU dairy board chairman Michael Oakes’ views on discretionary pricing.
Processor’s right to assign
Processors often insert a term into the contract allowing them to assign the contract without the farmer’s consent. This allows them to transfer your milk contract to someone else, without your consent. Technically your old processor remains on the hook for paying you, but it’s likely they have a contract with the new processor requiring them to pay you on their behalf. All of which can lead to quite a muddle if your milk cheque is not paid on time.
To add insult to injury, processors often prohibit a farmer from assigning his contract, meaning if a family member wants to take over the farm business, they will need to enter a new contract with the processor (assuming the dairy contract is personal to the outgoing farmer).
All of this means that you could end up supplying milk to someone you don’t want to supply milk to. If a processor wants to assign the contract and require you to supply milk elsewhere, that should be with your consent. If you’re not happy with the assignment, then you should be able to terminate the contract before the assignment takes effect.
The worst examples
No right for the farmer to terminate on processor’s insolvency
Many farmers assume that if their processor goes bust, they can supply their milk elsewhere. That’s not necessarily the case, however. If, for example, an administrator is brought in to run the insolvent processor while a new buyer is found, a farmer can remain contractually obliged to keep selling milk to the insolvent business, unless the contract has a clause allowing the farmer to terminate the contract immediately in these circumstances. Without that clause, the farmer is inevitably going to get a very poor price for milk, if any payment at all.
It is a fairly standard clause seen in most commercial contracts that a party can terminate with immediate effect on the other party’s insolvency, and you’ll see that many processors include a term allowing them to terminate the dairy contract if the farmer is insolvent. But many dairy contracts still don’t contain a clause allowing the farmer to terminate the contract with immediate effect if the processor is insolvent. That is pretty shocking; no farmer should be required to sell milk to an insolvent processor.
Farmer obliged to keep selling milk even after death
Some dairy contracts contain a clause that obliges a farmer’s personal representatives to continue to supply milk under the contract after the farmer’s death. The only option the representatives have in this situation is to give notice under the terms of the contract, and if this clause is coupled with a long notice period, the representatives could be obliged to sell milk for a long time. There is no justification for a clause like this. The farmer’s personal representatives should be able to decide freely whether to continue to supply milk or to cease dairying on the farmer’s death.
Farmer prevented from taking legal advice on the contract
Very sadly, a common clause in dairy contracts is a vicious confidentiality clause that prevents the farmer from discussing the dairy contract with anybody at all. No exception is made for discussions within the family, and no exception is made so that the farmer can at least discuss the dairy contract and its effect on their business with professional advisers – a lawyer, accountant, or banker. Any farmer with such a clause who takes legal advice on the contract, or who talks to his accountant about the contract, is in breach of that confidentiality clause and can be sued for damages. It is frankly outrageous to include such a wide confidentiality clause in a dairy contract.
Hideous drafting
My last lowlight on the ugly list is shocking contract drafting. Sadly, this is all too common. Dairy contracts range from the overly-engineered (think hundreds of pages of unintelligible legal waffle) to the amateurish (looks like the summer intern got the contract-drafting job). Often incomprehensible, even to a lawyer who spends far too much of their time reading dairy contracts, the badly drafted contracts cause issues constantly because it’s just not clear what the terms are. There’s no excuse these days for not having a straightforward, plain English contract that clearly sets out each party’s obligations and I’d encourage all processors to review their contracts with a decent lawyer on hand to tidy the contracts up where needed.
Check the small print before you sign
This has been a very quick tour around some of the best and worst clauses in dairy contracts. This isn’t a comprehensive run down of all of the issues that I see, but I hope it gives a flavour of what’s out there. The best advice that I can give any dairy farmer is to take advice on your contract terms before you sign up – even if you feel there’s limited scope to negotiate the contract, at least know what you’re signing up to. It might look like a good deal on the first page, but it’s worth checking the small print to see what’s lurking there.
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