The Handshake Shakedown: Formalizing Custom Farming Agreements

Understanding Custom Farming

Custom farming is where one party performs agricultural services for other farmers, sharing resources, potentially reducing costs, and preventing production interruptions. The general idea is a farmer will outsource certain activities to a custom farming company that, for a fee or at specific rates, uses their own equipment and personnel to perform the requested services. Custom operators are usually able to help with seeding, spraying, combining and swathing, baling, feeding, and hauling, so if a producer does not have the labour or machinery capacity, or merely finds themselves in a bind, they can hire custom operators to get the job done.

Because these services provide a great deal of convenience and efficiency, custom farming is a common and practical solution for many farmers. Depending on the farmer's needs or capabilities and the overall circumstances, it can be a gamechanger in lowering operating costs and capital expenditures while contracting out the labour and equipment requirements. According to Census of Agriculture data, about 39% of Canadian producers use some type of custom farming at least from time to time. Being a contractual arrangement, however, there are important legal implications farmers should be mindful of.

Custom Farming Agreements

When pursuing a custom farming arrangement, producers should first and foremost make sure there is a written agreement. Agriculture communities have relied on handshake deals for decades because trust and honour used to be taken seriously. Unfortunately, handshakes do not mean what they once did and not having a formal written agreement can cause serious problems that could give rise to litigation. Whether written or not, valid contracts need an offer and acceptance, certainty of terms, and consideration. Although oral contracts may be enforceable, without a written agreement, determining what the parties agreed to can be challenging because circumstances and objectives change, memories fade, there can be misunderstanding or miscommunication, and people can get nasty and dishonest if there is any disagreement. Courts will also not be able to refer to a written contract if the dispute ends up in litigation, in which case it is one person's word against another's and if the courtroom is where you end up, you want to have the best evidence possible.

For farm families, the operation is central. Taking risks and making bets is often necessary, but they must be calculated. Custom farming agreements can be high-value, high stakes arrangements where a producer relies on other people to care for their land, crops, and livestock. That requires a lot of trust with a lot of value, so the agreement should be properly documented to protect interests. While the terms of the agreement will vary by operation and depending on the services required, most custom farming contracts should generally include:

• Full legal names of the parties involved;
• Term of the agreement;
• Legal descriptions of the land to be serviced;
• Detailed scope of services to be performed;
• Fee schedule or rate details and payment terms;
• Responsibilities of all the parties;
• Use and procurement of inputs and materials;
• Maintenance and repair of equipment;
• Insurance, liability, and indemnification provisions;
• Termination provisions;
• Collection and enforcement procedures;
• A dispute resolution mechanism; and
• Other general terms and conditions as required.

Having the necessary terms that govern the custom farming arrangement in writing is a good start but it also important that those terms be sufficiently clear and detailed, and that the parties not only understand them but abide by them.

Wilgosh v. Good Spirit Acres Ltd., 2006 SKQB 25: A Case Study

The parties in this case entered into a custom farming agreement whereby the plaintiff would provide seeding, spraying, and harvest services to the defendants for a three-year period with an option to renew for another two years. In the first year of the term, the plaintiff did work that was not to the defendant's satisfaction and the relationship deteriorated from there. There were issues with crop quality and, because the plaintiff did not keep good records, the defendant was unable to determine whether the invoice amounts accurately reflected the services performed under the contract.

Payments owing to the plaintiff fell into arrears and the amount outstanding reached nearly $95,000. In the second year, the plaintiff got the crop off late and some of the production was missing which led to the defendant's suspicion that the plaintiff had taken some of their mustard crop. In January 2003, the beginning of the third year, the defendant repudiated the contract and ceased doing business with the plaintiff, leading to the plaintiff commencing an action for the amounts unpaid as well as the lost opportunity for prospective income in the renewal years of 2004 and 2005. The defendant's counterclaim alleged misconduct amounting to breach of contract which justified the repudiation.

The defendant argued that the renewal option clause in the custom farming agreement was void for uncertainty since it was incomplete and did not describe anything about the arrangement for 2004 and 2005. The Court agreed. More specifically, since there were no clear terms yet for the renewal years, it was an option to enter into a future agreement that was left open to be negotiated later. As such, the renewal option provisions were neither binding nor enforceable. Furthermore, the defendant conceded that the plaintiff was entitled to payment for the services performed but did not want him being paid for work he did not do, so the defendant claimed that any overcharges be offset against any amounts found to be owing.

In its analysis, the Court examined the issue of the missing mustard and, after reviewing the evidence, determined that the plaintiff converted the mustard for his own use out of spite after not being fully paid for his services. The Court referred to the custom farming agreement and determined that the plaintiff by and large actually performed the work he agreed to do and therefore could recover the value of those services on a quantum meruit basis, meaning he could not be denied the fruits of his labour. That amount, however, was to be set off by the value of the mustard the plaintiff converted and any overcharges and service charges that he imposed according to the contract.

This action was commenced in 2003 and was not resolved until 2007, having gone through two levels of court in Saskatchewan. Despite the duration of the legal battle and the fallout between the parties, the existence of the custom farming agreement greatly helped the Court resolve the dispute. Imagine how much more drawn out, contentious, and expensive the process could have been if there was not only a relationship breakdown but also no contract for the Court to consider or a contract with unclear or unhelpful terms.

Conclusion

In any custom farming arrangement, there will always be a level of trust and faith in parties to act honestly and fairly while adequately performing their end of the deal. Farmers have long relied on handshake deals and they will likely remain a time-honoured tradition of integrity and respect in the agriculture community. As farming businesses become more complex and risks increase due to tenuous interpersonal connections, however, producers must assess whether the stakes and circumstances justify getting an agreement in writing. Custom farming provides economic efficiency and may be beneficial in a broader farm management plan, but if the agreement is purely oral, the benefits of custom farming may be negated by increased legal liability. An enforceable written contract that specifies and governs the working relationship gives all parties involved a better sense of expectations and responsibilities. Formalizing custom farming agreements can accordingly achieve better clarity in business dealings and mitigate the risk of expensive, protracted legal disputes.

Contact Aidan Nicholson for assistance drafting custom farming agreements or other agricultural contracts.

Link to decision: Wilgosh v. Good Spirit Acres Ltd., 2006 SKQB 25