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PACA Archive

Legal Tools for Food Hubs, Part 2: Contracts Are Not Evil

April 10, 2014

by Lauren Handel

Earlier this week, I wrote about intellectual property as a valuable legal tool for food hubs and all food businesses.  This second installment on legal tools for food hubs is about contracts. In particular, supply and sales agreements can be important tools for risk management and to take advantage of special protections afforded to produce sellers.

First, I feel the need to dispel some misconceptions about contracts. Contracts are critically important legal tools for food businesses. Yet, so many values-based businesses seem to feel that contracting is a hostile act. But legal contracts are not inherently antagonistic, unfair, or devoid of values. To the contrary, a contract should be the foundation for a cooperative, mutually beneficial relationship. And a contract can be instilled with the parties’ values — for example, by requiring that suppliers use sustainable practices, raise animals humanely, and pay workers fairly. Parties to a contract have enormous flexibility to define the terms of their relationship and transactions. However, if parties do not spell out their agreement in a contract, the law will apply default rules, which may not be consistent with the parties’ intent. 

Contracts are an essential part of an overall risk management strategy. Food can be a risky business. And every seller in the supply chain — from the farmer or manufacturer to the distributor to the retailer — is potentially on the hook if a consumer gets sick from tainted food. Therefore, food hubs, or anyone selling food produced by someone else, should use their supply contracts to ensure that producers and processors use safe practices, that the buyer will be indemnified for harms it did not cause, and that the suppliers have sufficient insurance coverage. With regard to insurance, buyers should require that their suppliers name them as additionally insured on the suppliers’ general liability policy which must include product liability coverage. Contracts also can address what will happen in the event of a product recall by defining the parties’ roles and their responsibilities for the costs of the recall.

In addition, food hubs should use their sales contracts and invoices to take advantage of the special protections afforded to produce sellers under the Perishable Agricultural Commodities Act (PACA). PACA applies to dealers, brokers and commission merchants of fresh or frozen produce who, on any given day, buy/sell/broker the sale of at least 2,000 pounds of produce. The law does not apply to retailers until they sell at least $230,000 worth of produce in a calendar year. In general, food hubs are subject to PACA and, therefore, required to be licensed by the US Department of Agriculture.

PACA provides some extraordinary protections for produce sellers, including food hubs, provided that they take steps to preserve their rights. PACA requires produce sellers to be paid promptly, which means within 10 days unless the parties agree in writing to a longer term, not exceeding 30 days, before the transaction takes place. The law also creates a trust for the benefit of unpaid produce sellers, by which the buyer must hold in trust all produce in the buyer’s possession, all of the buyer’s inventory of goods derived from produce, and any proceeds the buyer receives from the sale of produce until full payment is made to the seller. These rights can be lost, however, if the seller does not notify the buyer of its intent to preserve its rights under PACA. If the seller is a PACA licensee, such notice may be given in the invoice using particular language specified in USDA regulations.

It is not possible to discuss here all of the contract tools available to food hubs and other food businesses. Feel free to contact us at (888) 908-4959 or info@foodlawfirm.com to discuss your business’s contracting concerns.