CONTRACTS AND ACTS OF GOD
BY NEIL TOWNSEND
In its simplest form, a contract is an agreement between two or more parties that creates a legal obligation. Most commonly, it is a deal to exchange a good or service in return for something, usually financial compensation.
Many contracts are explicit written documents while others are inferred by action, and all must exhibit certain attributes to be legally binding. Certain legal terms used in contract law include offer, acceptance, awareness, consideration and capacity. Contracts can fail if one or more or these attributes have not been established or are weak. For example, many contracts fail because the pricing formula (consideration) was not established.
Everything in life is a matter of probability. We have all heard the adage that death and taxes are the only two certainties. However, there is another: wherever humans conduct commerce there will be disputes. Contract law is a repository of both intentional and unintentional failures. Blame is typically allocated to the party that failed to conform to one of the requirements of a binding contract. However, over the centuries, a third pathway has developed to alleviate a contractual requirement: force majeure.
Defined as a great force often related to catastrophe, in law, force majeure is a circumstance beyond the control of either party that prevents the fulfilment of a contract. Sometimes it is described as an Act of God beyond human control. Sinking ships, fires, earthquakes and the like are often utilized in force majeure claims. Its invocation might simply spark a delay, or it could be utilized to void an entire contract.
A template of force majeure rules that applies to all contract situations does not exist. Like all contract elements, it can be defined or even waived in the verbal or written agreement that constitutes a contract. I’d like to stress this point: contracts are formed between parties and can take many forms. Many companies standardize contracts, but even then, the parties can overwrite or discuss an actual agreement that amends one of the clauses. The courts are full of such he said–she said disputes as to contract terms.
Many farmers in Western Canada were surprised that a severe drought in 2021 was not enough to create a force majeure. Post-harvest, without the grain to deliver on previously signed contracts, farmers were liable. But is a drought not the very definition of an Act of God beyond the control of either party? For a layperson this might seem the case. However, for all parties involved in agriculture there is an understanding that risk is involved in primary production, which relies on weather conditions. In many contracts, for generic crops, force majeure due to production shortfalls is specifically omitted as a clause. Thus, many farmers wrote cheques to line companies to absolve their obligation to deliver grain.
The lack of force majeure opportunities in grain contracts should be a component of farmers’ risk management calculations. The existence of specific Act of God contracts for some crops could be interpreted as an acknowledgement there is a marketplace adjustment to production risk and the inertia it creates for farmers, traders and processors. These contracts protect farmers who suffer production disruptions while allowing companies to forward plan deliveries. Of course, the price determination accounts for this protection.
A second recent example from Western Canada is a bit more specious. In 2023, Purely Canada Foods invoked force majeure to void contracts for gluten-free oats (all oats are gluten free, but contamination from volunteer wheat can occur) due to an equipment failure. At first glance, this may appear to be prudent use of a force majeure. However, machinery can be fixed, delivery delayed and an alternative delivery point can even be established. This is different than if the processing equipment ceased to exist due to a catastrophic event, such as a factory fire. In this case, the courts would determine whether force majeure was appropriate.
Ultimately, what constitutes a catastrophic circumstance is subjective. Obviously, time is a precious commodity, and the parties involved cannot take hundreds of hours to create a contract, but this is yet another example of why care must be taken in the grain contracting process. Furthermore, if the force majeure provision within a contract appears as a gray area, this should be a market signal to farmers when determining where to allocate their business.
Neil Townsend is chief market analyst with FarmLink Marketing Solutions.
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