CONTRACTING FOR GRAPE SALES

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1 CONTRACTING FOR GRAPE SALES Zach Brady Brady & Hamilton, LLP February 14, 2013 Texas Wine and Grape Growers Association 2013 Annual Conference and Trade Show, San Marcos, TX

2 CONTRACTING FOR GRAPE SALES PACA Texas Produce Recovery Fund Ag Production Contracts Uniform Commercial Code General Contract Principles Case Studies Standard Contract Development

3 PERISHABLE AGRICULTURAL COMMODITIES ACT An Overview (PACA)

4 PACA Enacted in 1930 Current: 7 U.S. Code 499a et seq.; ; 7 CFR Regulates Marketing of Perishable Agricultural Commodities in Interstate and Foreign Commerce Primary Purposes: Prevent unfair and fraudulent conduct in marketing and selling of perishable agricultural commodities Facilitate orderly flow of perishable agricultural commodities in interstate and foreign commerce USDA-Agricultural Agricultural Marketing Service (AMS): agency responsible for administering PACA Covered parties include buyers and sellers of fresh fruits

5 PACA Covered products Perishable agricultural commodity Any fresh fruit or vegetable, whether or not frozen or packed in ice Covered Parties Dealers Commission Merchants Brokers Covered Conduct Unfair, unreasonable, discriminatory, deceptive practice False or misleading statement Failure to perform Failure to fully and timely pay Protected Parties Unpaid producers

6 PACA Required Licensing Merchants, dealers, brokers Must obtain a valid and effective license from USDA Secretary* Failure to be licensed: Monetary penalty If failure is the result of knowingly operating without PACA license: Potential fines: $1200 each violation: $350 per day violation continues Prompt Payment Statutory Trust

7 PACA Statutory Trust Purpose: Protect PACA-licensed sellers of perishable agricultural commodities in the event a buyer becomes insolvent or refuses to pay; creates super-priority priority Buyer is required to hold all perishable commodities (includes all inventories, receivables, or proceeds received from sale of perishable commodities) in trust for benefit of unpaid sellers until full payment is made. Upon insolvency/bankruptcy of buyer, seller has priority status, as related to other creditors of the buyer PACA trust assets are not included in Bankruptcy estate Buyer holds PACA assets for benefit of seller PACA licensed seller is beneficiary of trust; priority with respect to PACA trust assets

8 PACA Statutory Trust, con d. PACA licensed seller must take certain steps to protect rights in statutory trust. Include sample language on invoice* The perishable agricultural commodities listed on this invoice are sold subject to the statutory trust authorized by Section 5(c) of the Perishable Agricultural Commodities Act, 1930 (7 U.S.C. 499e(c)). The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received. Provide written notice of intent to preserve trust benefits

9 PACA Violation of PACA Private Enforcement options Litigation Administrative proceeding PACA Reparations Proceeding Not mutually exclusive; PACA Reparations Proceedings provide remedy in addition to state law/common law remedies Violation of PACA Disciplinary Proceedings Standing: any officer/agency of any state or territory having jurisdiction over commission merchants, brokers, dealers

10 TEXAS: GENERAL LICENSE REQUIREMENTS AND An Overview TEXAS PRODUCE RECOVERY FUND

11 HANDLING AND MARKETING OF PERISHABLE COMMODITIES LICENSE Mission of HMPC Program - to protect and assist producers or produce dealers who do not receive payment for produce sold or handled in Texas. Texas Agriculture Code, Chapter 101 Who needs a HMPC License? Purchasers of perishable, Texas-grown commodities who plan to purchase on credit. Exceptions - HMPC licenses are not needed by: Consumers who do not resell produce Growers who grow and sell their own produce People who grow produce outside of Texas HMPC License must be renewed annually

12 HANDLING AND MARKETING OF PERISHABLE COMMODITIES LICENSE HMPC License Required License Holders General License Fee - $365 $115 license fee and $250 Produce Recovery Fund fee. Who s Licensed? Handling and Marketing of Perishable Commodities Currently Licensed Report (HMPC): ams/handlingandmarketingofperishablecommod ities/hmpcreportspublications.aspx

13 TEXAS PRODUCE RECOVERY FUND Mission: reimburse produce growers and dealers who do not receive payment for Texas-grown commodities sold on consignment or credit. Texas A griculture Code, Chapter 103 Comptroller holds fund; TDA administers program Claims Process Overview Producer Obligations/Protections Buyer Obligations/Protections

14 AGRICULTURE PRODUCTION CONTRACTS

15 CONTRACTS Contract Basics Contract Goals Grower Winery Length and Type of Contracts

16 CONTRACTS Why contract? UCC Article 2 Implications Clarify duties and responsibilities Price certainty Guaranteed market Possible technical help Plan for unusual or contingent situations Additional layer of protection

17 UNIFORM COMMERCIAL CODE Article 2 Overview

18 UCC ARTICLE 2 UCC Article 2 Scope: Sales of Goods Texas law: Texas Business and Commerce Code, Chapter 2, Sales Goods - includes growing crops Merchant deals in goods, or holds himself out as having knowledge/skill peculiar to the practices/goods involved UCC Article 2 Implications General Rule: Agreements for the sales of goods over $500 must be in writing and signed to be enforced Contracts between non-merchant and merchant Contracts between merchants Course of performance/course of dealing/usage of trade terms Gap fillers (price, delivery, payment; NOT quantity) Warranties

19 UCC ARTICLE 2 Performance & Breach of Contract Performance vs. Breach Opportunity to cure Terms of performance specific items/production methods or locations? Main Categories/Scenarios of Breach 1) Seller delivers according to contract terms; buyer rejects = Buyer breach 2) Goods do not meet contract terms; buyer rejects = Seller breach 3) Goods do not meet terms nonconforming goods = Buyer has option to accept or reject Even if buyer accepts goods, Seller breached contract. May seek remedies. If buyer accepts, Seller has limited opportunity to cure breach If buyer accepts goods, may subsequently return goods under certain conditions

20 CONTRACTS, GENERALLY Basic Contract Terms/Topics Contract Length Parties to the Contract Amendments Price Transportation/Delivery Point Production Practices or Methods Grape Quality Standards, Measurements, and Deductions Harvest: 4 W s Payment Insurance, Licensing, Bonding Requirements Contingent Performance and Allowed Exemptions

21 AGRICULTURAL PRODUCTION CONTRACTS LESSONS FROM OTHER COMMODITIES

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27 DEVELOPMENT OF A STANDARD CONTRACT TWGGA Importance of professional help Lawyer review Insurance Agent Accountant

28 Zach Brady THANK YOU Brady & Hamilton, LLP February 14,