Designing agreements that protect the rights of growers and buyers
Grape contracts used to be made on a handshake and the reputation of the parties involved. If reduced to writing, they were often limited to one-page letters setting forth the varietal, vineyard source, term and price per ton. As the wine industry continues to mature, growers and buyers are increasingly turning to detailed contracts containing multi-page exhibits on "Viticultural Practices" or "Quality Standards."
The question is not whether a handshake is better than a ten-page agreement but whether or not the agreement meets your needs. One way to analyze grape contract issues is to focus on control: who controls the viticulture, who decides how much fruit to drop and who decides when to harvest.
The more the grower controls these decisions, the more right the buyer should have to reject grapes that do not meet the agreed-upon standards. However, today buyers are increasingly asking for more control of the viticultural practices and harvest parameters – even the planting or replanting of the vineyard itself. If buyers demand and exercise such control, they should bear responsibility for their decisions.
Focusing on the issue of control, here are some tips:
- Giving up control can be good for the grower; and
taking control can be good for the buyer. The more
the buyer dictates viticultural practices and harvest
requirements, the less right the buyer should have to reject
the grapes. If the buyer has the right to determine the time
and date of harvest, then the buyer should bear
responsibility for picking too early or picking too late. If
the buyer demands that crop loads not exceed four tons per
acre, then the grower should ensure that grape prices reflect
this limitation. The buyer can also benefit from taking more
control. The buyer gains fruit that meets its quality
parameters and enhances its ability to plan harvest
operations. However, even the best plans and provisions
should leave some flexibility for growers to preserve fruit
quality and react quickly when required to do so by nature,
such as unusual frost conditions, unexpected rains or
excessive early heat.
- Make acceptance criteria as objective as
possible. Disputes over payment or rejection of
grapes often are framed in terms of quality issues, even if
the underlying reasons are economic or market-driven. The
more subjective and detailed the quality standards, the more
likely a buyer could use these standards as a basis for not
accepting delivery, not paying full price or terminating the
contract. If a buyer wants to – or needs to
– get out of a contract, the buyer will look for
grounds to terminate, or claim performance is excused. The
tighter and more objective the criteria is in a contract, the
less likely such "hooks" can be found to avoid
performance or terminate the contract.
- Have a quick and sensible dispute resolution
process in place to avoid disputes at the scale. If
the grape contract allows for the buyer to reject grapes at
the scale for anything other than purely objective matters,
consider designating a mutually agreed upon, independent
third party to make a conclusive determination at the time of
delivery.
- Avoid "best efforts" obligations;
"commercially reasonable" efforts are
better. "Best efforts" can be construed to
mean a party must do anything possible, whether commercially
reasonable or not.
- If payment risk is a concern, a grower could
shorten payment terms or consider taking a security interest
in addition to the automatic statutory growers lien.
A security interest perfected under the Uniform Commercial
Code (UCC) will give the grower the rights of a secured party
under the UCC. A security interest would extend A b o u t T h
e A u t h o r to products and proceeds of the grapes, which
may not be covered by the statutory growers lien.
- If the vineyard name will be used on the bottle,
include contract provisions to license the vineyard name as a
trademark and to allow the grower to exercise quality
control. When it comes to the issue of quality
control, actual control is what counts. The right to control
is not enough. At a minimum, taste the wines each year and
keep records of having done so. If the grower wants to
maintain a high quality of wine under the name, make sure the
grower has the right to terminate the license to use the
vineyard name – short of terminating the entire
contract – if the grower determines that wine
quality is not up to par.
As the wine industry continues to mature, so do relationships between growers and buyers. Care must be taken to ensure that the rights of both growers and buyers are protected. Our wine industry practice is dedicated to helping clients understand changes occurring in this marketplace so they can be prepared to meet these challenges and carefully navigate through evolving contractual arrangements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.