Managing Risk In Contracts

Entering into contracts is an important part of every agribusiness.  No one enters into a contract expecting it to go sour, but sometimes they do.  While it is not possible at the time of contracting to anticipate and avoid every potential risk, strategies exist to help minimize exposure and avoid costs down the road.  The list below covers the fundamentals:

Investigate risks before contracting

Be sure that you know why you are entering into the contract and what you expect to gain from the contract.  In this volatile economic climate, it is more important than ever to carefully evaluate whether changed circumstances or increased input costs in the future could affect the abilities of the parties to satisfy the agreement.  Be comfortable with the terms of the agreement. 

Know who you are contracting with

Are you doing business with a corporation, limited liability company, partnership, or individual?  Are they a Michigan business, or could litigation end up out of state?  What assets does that entity have, in case you need to collect on a debt later? Answering these questions will help ensure you understand whether the person has the money to pay, and whether you would be able to collect in the event of a breach.

Put it in writing

People may forget or misconstrue the terms of an oral contract.  Plus some contracts must be in writing to be legally enforceable and avoid the statute of frauds.  Put the interest rate (not over the usury limit) or time price differential in writing.

Be specific

Ensure that the contract contains all the essential terms.  For example, identify the goods that are being purchased, the quantity and quality of the goods, the price and time of payment, the time and method of delivery.  Detail any obligations of a party to be insured.  Be sure that all parties agree on the terms.

Take action if the contract is breached

If the goods you receive do not conform to the contract, give notice.  Follow-up if payments are not made when due.  Do not sit on your rights, as statutes of limitations or other legal requirements could affect your abilities if you wait too long.

Get advice

Not sure whether you have covered all of the essential terms?  Confused by legalese?  Remember that it is better (and probably much cheaper) to get help understanding the terms of the contract before you sign it than to wait until the contract has been breached, or you find yourself in a lawsuit.  Attorneys can help you ensure you have a perfected security interest, draft contracts to fit your needs, and explain what contract language means.

Be proactive on your contracts. Remember, attorneys can help efficiently and effectively manage your risk.

This piece was originally published as an article on January 10, 2012 in the Foster Swift Agricultural Law News Update.