Webinar: Force Majeure: How Extraordinary Events Can Impact Ag Contracts (June 18, 2020)
UNL Agricultural Economics
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06/22/2020
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33
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Description
With J. David Aiken, Professor and Water & Agricultural Law Specialist, University of Nebraska-Lincoln.
Many agricultural contracts have an “act of God” clause in them which usually provides that because of the occurrence of the unforeseen extraordinary event, neither party is held to the contract. For contracts that do not have an “act of God” clause, other elements of general contract law may relieve one or both of the parties of liability for not performing under the contract. We will explore these issues as they might apply to the ag industry challenged by the current coronavirus pandemic.
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- [00:00:17.340]Brad Lubben: Good afternoon, are registered attendees are beginning joined. So I'll wait a moment until, until they're able to join it. And we'll begin
- [00:00:56.580]Brad Lubben: Alright, it looks like the participants of
- [00:01:00.240]Brad Lubben: All began to make their way in. Good afternoon. Again, welcome. I'm Brad Lubin I'm an extension, associate professor and policy specialist in the Department of Ag economics at the University, Nebraska, Lincoln.
- [00:01:12.930]Brad Lubben: On behalf of the Department and our farm and ranch management team from Nebraska extension, I welcome you to our webinar today.
- [00:01:21.120]Brad Lubben: This webinar is part of a series of webinars that we use as a team are prepared to help Nebraska deal with and the rescue culture address issues related to Copa 19th impact on Nebraska AG
- [00:01:33.510]Brad Lubben: You can find recordings of these sessions a schedule of our upcoming webinars and other resources on our website@farm.us.edu
- [00:01:43.380]Brad Lubben: As we get started with today's program. I want to remind participants at one of our ongoing resources from Nebraska extension and
- [00:01:52.950]Brad Lubben: And our system that resource that we want to highlight is the Nebraska real response hotline in terms of stress, knowing when to reach out as essential
- [00:02:01.860]Brad Lubben: Nebraska response hotline can provide mental health counseling information regarding legal assistance financial clinics mediation and more
- [00:02:10.590]Brad Lubben: hotlines toll free number is shown there on the screen is 1-800-464-0258. In addition, a wealth of resources related to stress and wellness can be found at rural wellness.us now it to you. So you see University resources as well as an Alaska rural response hotline.
- [00:02:32.370]Brad Lubben: During today's webinar. We won't be able to directly interact with our speaker, but we invite you to submit any questions you have, in either the Q AMP a box or the chat box. So I'm I will moderate those and continue to watch those and ask our speaker as as we go today so
- [00:02:54.720]Brad Lubben: I'm the impact of Cobra 19 on Nebraska's I economy is being felt by producers operators landowners and others across the state.
- [00:03:03.930]Brad Lubben: amongst the many topics that we've addressed in this webinar series.
- [00:03:07.650]Brad Lubben: We want to touch on the topic of agricultural contracts and forced mature or the act of God causes which usually provide that when an unforeseen extraordinary event occurs, neither party is held to the terms of the agreement.
- [00:03:21.600]Brad Lubben: For contracts that don't have such a cause. Sometimes there are other elements of general contract law or language specifically in contracts that may relieve one or both parties of liability for not performing under the contract.
- [00:03:34.710]Brad Lubben: To discuss these topics and address the the fancy term of forced mature.
- [00:03:41.010]Brad Lubben: We are pleased to be joined by Dave bacon professor and Ag law and and Waterfall policy specialist in the Department of Ag economics Dave is a long time expert on these issues and a longtime member of the department's program.
- [00:03:56.910]Brad Lubben: I won't say how long day because it ages, both of us. But I remember taking your language classes and undergraduate students and
- [00:04:04.230]Brad Lubben: I certainly appreciate the insight you have and look forward to your discussion today. So they welcome to the program and we look forward to your discussion that forced mature and other legal contract issues.
- [00:04:22.290]dave aiken: Okay. Well, thank you, Brad.
- [00:04:25.980]Brad Lubben: This is
- [00:04:27.120]dave aiken: An interesting topic that actually Brad.
- [00:04:31.140]dave aiken: brought to my attention. So we will
- [00:04:37.020]dave aiken: Get into it and see if we can
- [00:04:40.470]dave aiken: See what we can make it this
- [00:04:43.380]dave aiken: Okay, I think.
- [00:04:45.930]dave aiken: We're all aware of some of the impacts of the the coven
- [00:04:53.490]dave aiken: Illness distancing and the state home orders. This is lead to much reduced
- [00:05:03.030]dave aiken: Driving by consumers, this is
- [00:05:08.730]dave aiken: Resulted in less purchases or purchases of gas flame. Let's purchases have less demand for ethanol.
- [00:05:16.860]dave aiken: And it during this, you know, ethanol production has has fallen by it by half. So, under these conditions, you know, we've had FL plants Nebraska notifying producers that
- [00:05:30.990]dave aiken: That they could not accept delivery of corn that they had contracted for because of force mature and like what we'll be exploring today is, is this legal for the ethanol plant to do or not.
- [00:05:49.050]dave aiken: And just, just a few other introductory comments and the most you know we understand that in the real world, you know, most farmers are just going to sort of hunker down and and and wait this out and
- [00:06:03.960]dave aiken: Hope that it doesn't take too long for ethanol demand to revive and get our plans to begin
- [00:06:14.490]dave aiken: Taking a delivery of corn, but you know it's and this has this has happened to some extent. But we're not we're not where we were before. Before covert yet.
- [00:06:26.910]dave aiken: But the way we're the way we're going to approach it in. This is the way you would like it a lot of class or something like that. So we'll pretend that we're in court.
- [00:06:34.950]dave aiken: That the farmers have sued the ethanol plant and so that they can get a judge's ruling on whether force majeure applied in this situation or not.
- [00:06:45.360]dave aiken: And I just had to give a real quick disclaimer, you know, this is this is education. This is not legal advice if you want to go feel like you need to go after
- [00:06:58.470]dave aiken: Say the ethanol plant or something like that. You should definitely seek legal advice and and you're not going to get the answer that you need from this
- [00:07:09.150]dave aiken: Okay, so what is forced mature.
- [00:07:12.450]dave aiken: It is
- [00:07:14.790]dave aiken: I believe French
- [00:07:17.580]dave aiken: That means superior force and it's a long standing legal principle, going back to the Middle Ages, even before the middle ages do and England.
- [00:07:31.080]dave aiken: For that the judges basically made it up as they went along when they were when these cases came before them. But what it does is it provides an excuse for
- [00:07:43.830]dave aiken: Basically
- [00:07:45.750]dave aiken: Not doing what you were what you had promised to do under contract, but only because of very exceptional and unforeseen forces that are completely beyond the control of view on the parties.
- [00:08:00.390]dave aiken: And a another related concept that we're more familiar with his act of God clauses and we'll talk about them in just a second. But, you know, force mature is goes a little bit beyond the standard ACT OF GOD class, excuse me, ACT OF GOD clause and
- [00:08:20.130]dave aiken: You know, and we'll explore what some of those differences are, you know, pretty quick. Now,
- [00:08:25.920]dave aiken: I put exceptional into into bold type because you know
- [00:08:35.700]dave aiken: In order to claim force Majora really does have to be an exceptional
- [00:08:41.790]dave aiken: Very much out of the ordinary type of situation. You know, if the contract turns out to be not as good as you for you as you thought it was when you went into it. You can't use force mature to get out of it.
- [00:08:57.840]dave aiken: But and and from court judges talk about foreclosure. They do they make that point again and again, because it's easy to try to turn some of these examples into something that would let anybody get out of any
- [00:09:13.170]dave aiken: Any contract under a wide variety of circumstances and it's much more narrow them down. Okay, so let's take a quick look at some examples of what cost or what could constitute a forced mature event.
- [00:09:30.120]dave aiken: Of the natural catastrophe side we have floods, droughts Hurricanes, tornadoes, earthquakes fires lightning strikes volcano eruptions. These sorts of
- [00:09:42.720]dave aiken: Rare and
- [00:09:45.480]dave aiken: Devastating natural catastrophes our major category of force major events. These are the ACT OF GOD events that that we might have heard about. And, you know, instead of talking about
- [00:10:01.830]dave aiken: You know, reduced ethanol demand because of coven 19 and stay at home or stay at home orders. I'm not striving if there had been
- [00:10:12.690]dave aiken: A lightning hit the strike the ethanol plant and you know damaged equipment and so forth. And, you know, so they had to go offline.
- [00:10:23.160]dave aiken: Until they can make repairs and something like that, you know, we probably wouldn't be having this this webinar because people would understand. Yeah, they can't make ethanol while you know
- [00:10:33.960]dave aiken: The stuff that makes ethanol isn't working. So, you know, we're just gonna have to hold our horses until they can get things back up and running again.
- [00:10:43.380]dave aiken: But that's, you know, but but force Bonjour.
- [00:10:47.280]dave aiken: Also includes events where the cause and effect may be a little less harder to see and hard to understand.
- [00:10:55.140]dave aiken: Examples. Other examples of force majeure events include more labor strikes riots insurrections these will be like, you know, really bad riots Werther's shooting, stuff like that.
- [00:11:07.620]dave aiken: Government actions making Contract Compliance illegal or impossible or impractical and we'll get about we'll get into this impossible and practical stuff a little later in the talk.
- [00:11:19.560]dave aiken: But these are examples of forced mature events that are beyond your typical ACT OF GOD type events. So these are the the ACT OF GOD ones are more than natural catastrophes.
- [00:11:34.800]dave aiken: And as we'll see in just a second. In the old days, that would have included pandemics as well.
- [00:11:40.500]dave aiken: But these other things are more social or human
- [00:11:46.080]dave aiken: Sourced types of things like war labor strikes that kind of stuff and so and so forth mature includes both of these categories.
- [00:11:55.740]dave aiken: And so that that makes it a little bit, a little different than, than the act of God.
- [00:12:01.140]dave aiken: Now,
- [00:12:03.090]dave aiken: What do these forced mature.
- [00:12:06.690]dave aiken: Contract clauses look like
- [00:12:09.990]dave aiken: And they're you know they're there, they could write them they're written a variety of rate ways, but the most common way is that boilerplate thing that will
- [00:12:20.940]dave aiken: Say, you know,
- [00:12:23.400]dave aiken: Contract Compliance is suspended for the occurrence of forced mature events such as, you know, the list a few natural catastrophes, the list a few
- [00:12:34.560]dave aiken: Human base catastrophes and then they'll say, and and other similar events.
- [00:12:41.940]dave aiken: And, you know, if you've got if you went back a few generations.
- [00:12:46.800]dave aiken: Under the natural capacity clause pandemics would have been included because pandemics were much more widespread. We didn't have the
- [00:12:57.330]dave aiken: Antibiotics and we didn't have the vaccines that we can use to control these these diseases that would have, you know, caused pandemics in the past. And so, you know, a lot of boiler plates.
- [00:13:14.010]dave aiken: Forced Bashir clauses won't have pandemics in them anymore but
- [00:13:20.580]dave aiken: You know the boiler plates are very common and there you know you can find two or three dozen boilerplate clauses that have minor wording changes, but they all basically say,
- [00:13:33.600]dave aiken: The same thing when I when I said just a little bit of while ago, but sometimes parties made negotiate very specific force majeure clauses.
- [00:13:44.100]dave aiken: You know, they can they can list and said force mature means these five things but nothing else.
- [00:13:51.510]dave aiken: Or could say these five things and other things that are like these five things
- [00:13:56.160]dave aiken: Or could say, you know,
- [00:13:58.620]You know,
- [00:14:00.240]dave aiken: events that are beyond the reasonable control the parties. I mean, that's very open ended and could read mean a lot of things and you know so. There's just, there's no one way that it's done.
- [00:14:11.250]dave aiken: But the boiler plates are probably most comments. So if you had a contract and you pulled one out and had a forced clause entered it would probably log lines that that I suggested.
- [00:14:25.080]dave aiken: Now,
- [00:14:26.760]dave aiken: Not every contract will have a force majeure clause.
- [00:14:32.760]dave aiken: But as we'll see in Nebraska. That doesn't really matter a lot because we have
- [00:14:37.950]dave aiken: Other contract law elements that basically serve a function very similar to the force was your clause.
- [00:14:48.330]dave aiken: So, you know, but, you know, not every but not every contract as well. But there's more than one way to interject that same kind of, you know, we have to call a contract off because it was you know these bad things happened that that messed everything up, you know, that kind of thing.
- [00:15:07.230]dave aiken: Okay.
- [00:15:09.030]dave aiken: A couple of examples that I pulled from Nebraska cases.
- [00:15:14.520]dave aiken: Of force maturity advance or ACT OF GOD events, one of them. First one was a an older case. I think this was back in the 50s.
- [00:15:25.320]dave aiken: This is an act of God event where somebody agreed to deliver
- [00:15:31.110]dave aiken: You know, high quality. Hey,
- [00:15:33.900]dave aiken: So that will be cut and everything.
- [00:15:36.630]dave aiken: And the field was flooded before
- [00:15:41.130]dave aiken: The hay had to be delivered, and so they had you know the the crop was was was ruined. You know, I couldn't they couldn't you know deliver the high quality. Hey, that they promised in the contract.
- [00:15:53.790]dave aiken: And the buyer was saying, well, you know, by substitute hand deliver that or something. And the judge says no, they don't have to do that because this was an act. This was an act of God event. And so we will recognize that as a legal excuse to not hold the a producer to that contract.
- [00:16:14.850]dave aiken: THE NEXT CASE WAS IN THE 70s, and this was where you know the grain elevator wrote the farmer said look you know we can't take your grain. Now, you know,
- [00:16:25.140]dave aiken: But what we will be, we should be able to take your brain at the beginning of the next month. And he went out and sold his, his corn on the open market because market prices were higher than then what he was going to get from the elevator.
- [00:16:40.650]dave aiken: And so that elevator soon and because they had to cover and they so they had to buy, you know, the higher price corn.
- [00:16:49.050]dave aiken: To cover their own obligations and so they sued the farmer said well you you pull a force majeure Romney and when you did that you know i that really for me, my obligation to deliver so that man. I could go out and sell it and
- [00:17:07.860]dave aiken: The judge said no, they, they didn't claim force mature. Rather, they said, you know, we can't. We don't have room for your core. Now, but we will
- [00:17:16.620]dave aiken: In, you know, we will in a few weeks. So we can take delivery then instead of right now. And so he said force majeure was not was not a factor at all, but the rail car unavailability was flipped the foreign was arguing created the foreclosure about
- [00:17:34.080]dave aiken: Okay. Is Carbonite team a force majeure event, excuse me, particularly within the context of the, you know,
- [00:17:44.700]dave aiken: The ethanol plant saying, you know, we can't take your we can't take your corn because you know because of all these force mature things that have happened that you know we can't sell or ethanol and in my event, excuse me, and in my opinion.
- [00:18:00.840]dave aiken: Again, I'm not a practicing lawyer. So take this with a grain of salt, but to me it looks very clearly, like a force for sure that, as well as an act of God again. So I think that basic dancer that basic question has to be yes and will trace through some of the some of the
- [00:18:17.010]dave aiken: You know, what does it mean in terms of the specific CONTRACT SITUATION. Just as a quick note.
- [00:18:24.060]dave aiken: I got an email yesterday saying that we had a at least an early force majeure rolling for Chicago restaurant.
- [00:18:36.750]dave aiken: You know with all stakeholders, you know, their business was bad. And so they
- [00:18:42.330]dave aiken: You know they claimed that to chapter 12 reorganization bankruptcy and they hadn't been paying their rent on the restaurant.
- [00:18:54.840]dave aiken: Excuse me. So a bankruptcy, but the owner of the restaurant. The lesser landlord said you know they need to pay me back went and the judge ruled that because of course I'm sure they were only liable for 25% of the rent.
- [00:19:14.520]dave aiken: And so that was, you know, that's just entry, but it just goes to show that
- [00:19:20.640]dave aiken: You know, at least one judge said it's worse mature and gave you know modify the contract pretty. In this case, the lease contract curry dramatically.
- [00:19:31.500]dave aiken: Okay.
- [00:19:33.060]dave aiken: So I believe the
- [00:19:35.940]dave aiken: ethanol plant can claim force mature.
- [00:19:39.480]dave aiken: And why do I say that well the the coven the spread of the coven
- [00:19:46.470]dave aiken: Pandemic led to stay at home orders widespread, you know, in the United States that will just limited to the United States for now.
- [00:19:55.920]dave aiken: As a consequence of people stay at home, they, they weren't going to work, they you know they did very low driving, which led to a big drop in
- [00:20:05.820]dave aiken: Gasoline consumption and gas prices which can lead to a drop in the ethanol demand and I think certainly the ethanol attorneys would argue that if the ethanol plants had Otter their corner Purchase Agreements throughout this
- [00:20:23.160]dave aiken: coven period.
- [00:20:26.070]dave aiken: You know that they would eventually they eventually would would go into insolvency perhaps need to you know get bankruptcy protection and stuff like that.
- [00:20:37.320]dave aiken: Now if you if you think I've got it wrong, you know, or if you want another somebody else's opinion on it. Feel free to consult an attorney.
- [00:20:46.710]dave aiken: To see to see what they have to say about it, but to me it's a I think force was your is a legitimate response by the NFL player in this situation.
- [00:20:59.610]dave aiken: Okay, one one clarification, just real quick.
- [00:21:05.520]dave aiken: Does the mirror occurrence of a
- [00:21:09.750]dave aiken: A forced mature event justify canceling contract non performance. And the quick answer that is no.
- [00:21:20.220]dave aiken: You know, for example, if you know we had the coven
- [00:21:25.200]dave aiken: Situation, we have now, but that the drop in
- [00:21:30.360]dave aiken: Driving was only 5%, you know, people were basically behaving pretty much like they did and only a few people stayed at home.
- [00:21:42.540]dave aiken: The fact that we had this coronavirus epidemic.
- [00:21:47.820]dave aiken: Would not in itself justify the ethanol plant canceling the corn purchase agreements they you'd have to go move through the chain of cause and effect until you move to the fact that, you know, there was no demand for the ethanol.
- [00:22:03.960]dave aiken: Before you can get to the, the force majeure event, just find the excuse in the in you know saying we can't take corner right now.
- [00:22:14.430]dave aiken: And so that's
- [00:22:16.470]dave aiken: It's not just that you've got this force majeure event, but that force mature event has to get in and mess up.
- [00:22:23.790]dave aiken: The contract directly, you know, 5%, you know, there's probably monthly variations that are, you know, even more than that, you know, goes up in the summer for vacation, stuff like that. But, you know, here we've seen a decline of 70% and here's the slide. This is in
- [00:22:45.390]dave aiken: The. This is millions of miles over here. So, here this 14,000 that's basically 14 billion miles. This is where we were in early March, you know, soft cotton 14 billion here. We're down at 4 billion.
- [00:23:02.910]dave aiken: So we lost 10 billion out of 14 billion. You know that's that's five seven that's over 70% so that's a pretty significant decline so less gasoline being sold less less ethanol needed for
- [00:23:20.010]dave aiken: To make sense.
- [00:23:21.780]dave aiken: And here's some oil. Here's the oil market, the oil or petroleum side of it. Here's oil prices. I think this is national here's
- [00:23:31.260]dave aiken: What I was Googling this stuff I found in Nebraska one. So here's Nebraska sweet. I didn't realize that was
- [00:23:38.460]dave aiken: I know we have oil production in Nebraska, but I didn't realize that. But you know where that came from. Anyway, here you see that the
- [00:23:46.800]dave aiken: Prices maybe these are feature prices dropped on it and make it a territory for a while, you may have read, we all read maybe within the last month or so that oil prices went negative for a while and and all those features went negative issues because they didn't have storage for it.
- [00:24:03.060]dave aiken: And here's a graph of ethanol production.
- [00:24:08.340]dave aiken: From last June, June 2019 to the beginning of June 2020 and you can see this video we're kind of moving along here and it seems pretty steady and all sudden in March of 2020 I just kind of
- [00:24:25.440]dave aiken: Takes a pretty precipitous decline and down here was, you know, this is the lowest point the trough. This was about 50% of normal production from a year ago and now there's been a rebound. So now it says that, you know, we're down basically 20 21%
- [00:24:44.730]dave aiken: But, you know, so hopefully the rebound has helped a little bit in terms of corn farmers been able to make deliveries.
- [00:24:53.460]dave aiken: And then this is just a global
- [00:24:56.790]dave aiken: One that goes back few years. This is from the Energy Information Administration.
- [00:25:02.310]dave aiken: The
- [00:25:04.050]dave aiken: brown line is the consumption of liquid fuel products push them include gasoline and diesel.
- [00:25:16.560]dave aiken: And so you can see again the sharp drop you know production didn't drop as much
- [00:25:22.830]dave aiken: Despite
- [00:25:24.750]dave aiken: Various efforts to try to get oil producers to agree to reduce production anyway. But, you know, and they're expecting, they're expecting mile the sales to come back up later in the year.
- [00:25:38.910]dave aiken: But again, just a quick summary. I think force majeure is justified under the circumstances, we've had in the effects that the state home orders and bad on on consumer driving and and that
- [00:25:53.340]dave aiken: Now what happens if the contract does not have a farm as your or an act of God clause.
- [00:26:02.190]dave aiken: Well in Nebraska our state Supreme Court has recognized a legal doctrine referred to as the commercial and possibility or in practicality defense.
- [00:26:16.380]dave aiken: For, you know, stopping performance in a contract that is, you know, telling farmers, they can't deliver you know it you're not going to pay him, that sort of thing. And this is based on the 2017 Nebraska Supreme Court decision. And so it is
- [00:26:34.140]dave aiken: fairly recent it's based on section 261 of the Restatement of Contracts and contracts is an area of State law that is not based on Nebraska statues that are adopted by the legislature.
- [00:26:52.260]dave aiken: You know we have a lot of areas that do not have a lot of statutory law as their foundation, you know, towards that's personal injury type stuff contracts property law. I mean, we have some requirements of for recording
- [00:27:08.790]dave aiken: certain type of real estate records and stuff like that. But most property law is is is not based on Nebraska statutes and it's based on Nebraska court decisions, you know, this is the
- [00:27:22.920]dave aiken: You know, the force mature was invented by judges back in the Middle Ages and England and they recognized it as a as an excuse for basically been able to get out of a contract and
- [00:27:38.460]dave aiken: So this is the same kind of thing. And so I'm going to read what the rest of Supreme Court says about this in practicality defense.
- [00:27:47.490]dave aiken: So this is quoted language from the case. The doctrine of the practicality of performance. Excuses, excuses, excuse me, a promise source failure to perform a duty under contract.
- [00:27:59.790]dave aiken: Or performance has been rendered severely impractical or impossible by unforeseen circumstances and so that you know the promise or could be anybody. It could be the
- [00:28:11.940]dave aiken: FL plants promise to pay or it could be the farmers promise to deliver the corn, you know, either one of them can take advantage of this of this impracticality defense.
- [00:28:22.620]dave aiken: If, if they need to. Okay. And there are three requirements that go into this. The two first two are the most important. The third one is not so important. But the first one is the occurrence of the event, causing the impracticality was unexpected.
- [00:28:40.770]dave aiken: And, you know, nobody nobody expected a global pandemic from a new coronavirus that will lead to the shut out orders and you know basically the contraction of the economy, reduction of the mileage driven and all that stuff.
- [00:29:00.030]dave aiken: That nobody really anticipated that except maybe a few people go, whose job it was to worry about those sorts of things.
- [00:29:08.280]dave aiken: I was in a meeting this morning, or a university administrator referred to coach. My team is under your pandemic.
- [00:29:14.820]dave aiken: And if you think, at least in the United States. The last time we had something this bad was the Spanish flu back in 1917 so that would put it pretty close to 100 years ago.
- [00:29:24.330]dave aiken: But the point about it is that it's something that's very rare. It's not likely to occur, and it is difficult to predict so it can't be garden variety
- [00:29:37.080]dave aiken: market fluctuations or stuff like that has to be something that's really out of the ordinary. Okay, so you've got the enforcement mature event that's that's really rare doesn't happen very often.
- [00:29:49.380]dave aiken: But it also has to affect contract. So that's the second feature, excuse me, the second requirement says performance of the duty by the promise or would be extremely difficult and burdensome, if not impossible.
- [00:30:08.010]dave aiken: To get the idea that, you know, if you, if the judge says no, you have to buy the corn, even though you can't sell the ethanol.
- [00:30:15.630]dave aiken: You know, they would
- [00:30:18.060]dave aiken: If that if it went on for very long. The
- [00:30:22.440]dave aiken: Plant would become bankrupt. And that's, you know,
- [00:30:27.780]dave aiken: For something that's unforeseen that's that's not the outcome that you want. Okay. Now third one. This is one that's not that big a deal because it's hardly ever going to happen, but the promise or did not. And I've added explicitly assume the risk of the events occurrence.
- [00:30:45.510]dave aiken: And, you know, some some lawyers would say, well, if they already done if the if the contract doesn't say anything about these extraordinary events, then each party assumes the risk that it's going to occur.
- [00:30:58.620]dave aiken: And that's not what this what this
- [00:31:03.390]dave aiken: Third requirement is because if that's what it meant. Then, you know, there would be no purpose for the rule because everybody could, you know,
- [00:31:12.750]dave aiken: Everybody could claim it and and
- [00:31:16.680]dave aiken: Or if people didn't say anything about it, then they're saying, well, you're, you're assuming the rest of that is going to happen and
- [00:31:25.920]dave aiken: And there's nothing in you know I can't imagine that contract laws that would say even even boilerplate that would say, yeah, we assume the risk of have some supervening event that would bankrupt us and, you know, but we're okay with that risk we explicitly assume that risk.
- [00:31:44.490]dave aiken: If you know the ethanol lawyers for the ethanol plants would never put anything like that and their claws, because it would put their, their client at such a severe disadvantage.
- [00:31:56.970]dave aiken: Now and then this again. This is from the Nebraska Supreme Court, but it's very important. It's very convenience is not commercial in practicality.
- [00:32:05.460]dave aiken: Since performance of a contractual duty is not impractical, merely because it becomes inconvenient, or more expensive.
- [00:32:12.780]dave aiken: Mere difficulty, you know that's not enough. And that's, you know, that's the 5% reduction in gasoline sales. I said, Well, there's a pandemic.
- [00:32:20.310]dave aiken: You know, and, you know, we could make more money if gasoline prices went up. So we're just gonna, you know, we're gonna we're gonna call off, we're just gonna back off on production until, until gasoline prices get better. That would not be a justification for claiming enforcement, you're
- [00:32:40.170]dave aiken: Now,
- [00:32:41.970]dave aiken: Risk Management is really important for producers.
- [00:32:46.080]dave aiken: And Brad, who is kind of our risk management leader and the Department
- [00:32:51.540]dave aiken: Asked me to think about, you know, what could great producers do to protect themselves in these types of circumstances. And the honest answer is really not very much. I mean, one thing that comes to mind is insurance.
- [00:33:08.880]dave aiken: You know, maybe farmers could go to RMA or could go to farm bureau insurance or something like that and say we want insurance contract that would protect us from these ACT OF GOD tidy dance.
- [00:33:25.320]dave aiken: And, you know, maybe they say, okay, well, you know, we'll come up with something. And here's what it costs you know it costs five cents a bushel.
- [00:33:35.040]dave aiken: To get this, this kind of insurance and the farmer said oh well you know if it's going to cost me, it's going to cost me five cents a bushel. I think I'll just roll the dice. I'll just ensure the risk myself.
- [00:33:47.880]dave aiken: And I suspect it unless this
- [00:33:53.370]dave aiken: insurance contract was very, very, very inexpensive, you know, like a 10th of a penny per bushel or something like that. Most farmers would say well you know these things don't happen very often. So I'll just, I'll just roll the dice and and not worry about it and take my ultimately come
- [00:34:11.340]dave aiken: The other one
- [00:34:13.290]dave aiken: I didn't think about how you might want to deal with with something like this in one of these
- [00:34:22.560]dave aiken: ethanol plant corn purchase contracts and
- [00:34:28.230]dave aiken: I could see a clause in the contract that would say you know that the FL plant would have the option to suspend
- [00:34:37.320]dave aiken: Purchases
- [00:34:39.390]dave aiken: On these, you know, corn purchase agreements will grab gasoline prices fall below a specific level.
- [00:34:48.450]dave aiken: And then
- [00:34:50.040]dave aiken: Would be required to begin repurchases when the gas prices rise to, you know, a different level. Maybe a little higher level.
- [00:34:59.910]dave aiken: And there I mean there are lots of ways to do it. I mean, you can set the price. It could be gasoline prices, it could be crude oil prices, you know, it could be, you know, there are lots of different
- [00:35:10.500]dave aiken: bellwethers that you could look at in terms of whether you do it, but I think the price of gasoline would probably be as good as good as any
- [00:35:17.370]dave aiken: And you might want you know
- [00:35:20.160]dave aiken: You might want to say that it's got to be an average price for for a minimum of 30 days or you know 45 days or whatever, you know, there are lots of different ways you could set it up.
- [00:35:31.650]dave aiken: But the advantage of something like this would be to that the core grower would understand that when they, when they agreed to this this contract to sell the corn.
- [00:35:42.330]dave aiken: To the ethanol plant that you know if things turn really bad in terms of the gasoline market that the ethanol plant when I had the option to cancel the contract.
- [00:35:52.650]dave aiken: And there might be something in there that says that, you know, they'll cancel contract but they had to pay you know 20 cents a bushel or something like that, you know, whatever. I mean, there are many ways you can negotiate it but that would certainly at least put it, but buyers.
- [00:36:08.160]dave aiken: Excuse me, this doesn't rain sellers on notice. And, you know, some of the bacon, they would have to confirm that risk. A little bit. A little bit more explicitly
- [00:36:19.590]dave aiken: Okay, that's all I have. And so I will
- [00:36:24.990]dave aiken: stop sharing this I am assuming that sooner or later the slide set will be available on that farmed out you know.edu website. And so people want to look at it and get my contact information to be able to be able to get that get that they're
- [00:36:47.610]Brad Lubben: ALL RIGHT. Dave, thank you very much for the presentation and the discussion of forced mature and other legal contract issues I, as I mentioned, the beginning we invite questions via either the chat box or the Q AMP a box and we have some questions there to address.
- [00:37:05.580]Brad Lubben: But to set that up some discussion as you reference the the ethanol market. That's our example for discussion. It's not only about ethanol markets.
- [00:37:14.370]Brad Lubben: But, but for the purposes of example, we know that with a slow down and travel and the reduced demand for motor vehicle fuels and just reduce demand for ethanol for blending
- [00:37:25.410]Brad Lubben: We saw utilization in the ethanol industry back up maybe as much as 50% we saw storage capacity filling up and so your discussion about when forced mature is sort of legally defensible. And when it's not.
- [00:37:42.000]Brad Lubben: The fact that ethanol production, processing becomes unprofitable is not itself.
- [00:37:48.810]Brad Lubben: This is the question, is the fact that ethanol production becomes unprofitable itself sufficient for declaring force mature or is it that
- [00:37:58.950]Brad Lubben: Literally capacity filled up and there was nowhere to store the ethanol and thus there was no way to run the plant and and that's no way to serve the contracts. Is that what justifies force mature.
- [00:38:13.530]dave aiken: Okay, good question. Very good question.
- [00:38:17.580]dave aiken: The
- [00:38:19.620]dave aiken: Something I I should have pointed out in my presentation was that whether or not forced mature applies.
- [00:38:29.220]dave aiken: Is
- [00:38:32.880]dave aiken: Is often make a question of fact rather than a question of law.
- [00:38:39.240]dave aiken: And so
- [00:38:41.730]dave aiken: Somebody will have to make the factual determination that, you know, the sort of domino series of events that I that I sketched out you know the stakeholders less driving, you know, blah, blah, blah. When, when it put the ethanol plants in such a precarious position that if they
- [00:39:05.910]dave aiken: You know, we're not really from their contracts that they would be facing bankruptcy that's that's the, that's the picture that I painted
- [00:39:15.870]dave aiken: I don't, I don't know that they would be that they literally would be facing bankruptcy and if it dragged on for six months.
- [00:39:23.520]dave aiken: I think that would be that would sure blow through a lot of working capital and everything else. So that would be that would be pretty bad. But that's, but that is a question of fact and
- [00:39:37.350]dave aiken: You know, people, people can disagree on that, so I can't say that you know force mature, as a matter of law applies to the ethanol situation. There are lots of important factual determination. So they have to be made that that would be part of that, and I should
- [00:39:54.840]dave aiken: There are well well over 100
- [00:40:00.060]dave aiken: Foreclosure cases being litigated in the United States and five cases that are being litigated in Nebraska, or at least the cases have been filed
- [00:40:11.310]dave aiken: I, I took a quick look at the information that I can find it. It didn't look like any of them dealt with agriculture or this you know this this ethanol situation, but I wouldn't be surprised that there might not be one that dealt with ethanol somewhere, but I just haven't
- [00:40:28.680]dave aiken: I haven't
- [00:40:31.080]dave aiken: I haven't heard about that if I if I you know if there is or not, but
- [00:40:37.500]dave aiken: But, you know,
- [00:40:39.300]Brad Lubben: I
- [00:40:39.570]Still
- [00:40:41.250]dave aiken: So that, so there's a lot going on but you know the one case I did reference that I did add some information about their, their they did find
- [00:40:52.020]dave aiken: Basically made a force mature type of finding but there isn't a bankruptcy proceeding where there's a lot of flexibility in terms of how they reorganized and stuff like that so
- [00:41:02.580]Brad Lubben: David additional question the release at first. At first, a question you in one of your earlier slides you discuss some case on Nebraska, including
- [00:41:13.560]Brad Lubben: The case where the
- [00:41:16.140]Brad Lubben: Where the merchandiser couldn't take green because the railroad real car shortage or or lack of access.
- [00:41:23.700]Brad Lubben: And that's the farmer when soul green elsewhere, but then was found by the court to be liable to to deliver to that elevator, so did the elevator didn't explicitly declared forced mature. That sounded like from your discussion.
- [00:41:37.050]Brad Lubben: Right. But the elevator declared conditions that allowed them to negate at least terms of the contract in terms of delivery period.
- [00:41:48.210]dave aiken: Right.
- [00:41:48.660]Brad Lubben: The fact that the elevator did that.
- [00:41:50.520]Brad Lubben: Doesn't relieve the producer from their side of that contract.
- [00:41:55.800]dave aiken: Right node and the judge, and the judge found in favor of the elevator and said that the farmer had to pay the difference between
- [00:42:03.630]dave aiken: The contract price, which was lower and the cover price that the elevator paid to replace the grain that the farmer didn't deliver. So the farmer lost that case. No, he was trying to raise force matures of defense in it and it didn't work.
- [00:42:16.530]dave aiken: Right. But, I mean, the courts, the courts discussion, excuse me, made it clear that you know that force was your is is a viable legal doctorate in Nebraska, but
- [00:42:30.060]dave aiken: Not qualified you have to jump through all the hoops.
- [00:42:32.640]dave aiken: In order to get you know force maturity to help you out.
- [00:42:37.260]Brad Lubben: So to clarify if one party declares force mature in and demonstrates legally that that's an appropriate defense does that then relieve the other party the contract is null and void or as the other party's still responsible for performance.
- [00:42:54.960]dave aiken: This, this depends an awful lot on the facts and a lot of times
- [00:43:00.750]dave aiken: All you're talking about might be a delay, you know, you might say, you know, like, We'll wait till that it tell people are driving again and and gasoline consumption improves and and the demand for ethanol improves and that sort of thing.
- [00:43:19.500]dave aiken: And, but, you know, there are lots of, you know, a lot of these cases are course mature cases are construction cases, excuse me, and
- [00:43:32.220]dave aiken: That's, you know the facts, the facts, the facts are different edit and sometimes it may say, yeah, we're just gonna, you know, we're just going to back out of it.
- [00:43:41.730]Brad Lubben: And, you know,
- [00:43:44.250]dave aiken: You know, if you, if there were some prepayments I have to refund those or whatever, but we'll just back on contract and things like that.
- [00:43:54.150]Brad Lubben: So another contracting question relating from a farmer perspective.
- [00:44:00.360]Brad Lubben: We have this discussion about how the buyer might not be able to. In this case, the ethanol plants example, they might not be able to perform on the contract and by the corn because of the act of God or because you also mentioned a a case Hall of
- [00:44:18.270]Brad Lubben: ACT OF GOD relative to flooding on. Hey, and this the the seller couldn't do ever on the contract terms but but they were found to be relieved to their of their responsibility.
- [00:44:29.730]Brad Lubben: How does that act of God. Apply someone forward contracted green, but because of drought didn't produce or flood or whatever.
- [00:44:39.270]Brad Lubben: Right river natural event didn't produce the quantity due to do ever on our contract.
- [00:44:46.770]dave aiken: We, we now have the Uniform Commercial Code.
- [00:44:51.870]dave aiken: And under the universal under the universe. Excuse me.
- [00:44:57.120]dave aiken: Uniform Commercial Code. Excuse me.
- [00:45:00.090]dave aiken: There.
- [00:45:01.980]dave aiken: If they're if they're flooded out their stock, they still have to, they have to buy it on the open market to cover their contracts.
- [00:45:08.310]dave aiken: And so that's, you know, the, the those cases were both before I think the Uniform Commercial Code was adopted in Nebraska at 1972 so that would kind of be, you know, kind of the cutoff date. And both of these cases that the contract.
- [00:45:23.490]dave aiken: Was before 19 while before 1972 I think that the the rail car case there was like this was the 1967 production here and the hay case was back in the 50s, so
- [00:45:37.740]dave aiken: Uniform Commercial Code has changed some of these some of these contract rules for the sale of goods and services sale far commodity should be the sale of goods.
- [00:45:49.590]dave aiken: And so bad that would limit the application of these other doctrines, because the you know where you got a statute, the statute controls, rather than the common law common law fills the gaps, the legal gaps left by the left by the statutes.
- [00:46:11.490]dave aiken: So, so be careful and Ford contracting
- [00:46:15.390]Brad Lubben: Understood, understood relative to the management implications you discuss on the on the final slide.
- [00:46:24.330]Brad Lubben: The idea of pursuing litigation to to force contract performances, obviously.
- [00:46:33.360]Brad Lubben: Costly and fraught with its own challenges.
- [00:46:37.680]Brad Lubben: So what can a producer do relative to, say, demanding some language that better spells out these terms plants processors go through periodic
- [00:46:49.800]Brad Lubben: Maybe maintenance shutdowns, etc. We had a year ago, issues of flooding the shutdown access to certain
- [00:46:58.950]Brad Lubben: Markets and processors for for a short period of time.
- [00:47:04.380]Brad Lubben: What does, what does contract language or typical case Hossein about
- [00:47:11.130]Brad Lubben: If I'm new to deliver at a certain period of time, but it's inaccessible.
- [00:47:15.210]Brad Lubben: Have I violated in terms of contract or do we have a clause that says deliver as soon as as possible, or what
- [00:47:23.130]Brad Lubben: I'm presuming it's more efficient to try and work through a delay than it is to try and cancel a contract but
- [00:47:29.400]Brad Lubben: Oh yeah, how do we address that.
- [00:47:31.740]dave aiken: Right well
- [00:47:34.140]dave aiken: The first thing to think about is, you know, what would parties regionally, try to do in those circumstances and, you know, if I can't, if I can't deliver
- [00:47:45.000]dave aiken: The promise grain by my preferred or most direct route. Is there some other longer more securitas route that I could take and still make those deliveries and clearly my holocausts would go up. So, you know, I'd be I'd be
- [00:48:03.240]dave aiken: I'd be heard that way but you know I call up whoever I'm delivering it to say CFL plan say look I can get it to you, but I'm going to need another 10 cents a bushel to cover mine to cover my extra
- [00:48:20.310]dave aiken: Hauling costs and negotiate with them, you know, they might they might say no or they might say, well, we'll give you a nickel or yeah I mean, or they might say, no, you have to deliver
- [00:48:30.240]dave aiken: Or make reasonable attempts to deliver or
- [00:48:33.060]Brad Lubben: Or that could also be the negotiation of
- [00:48:36.000]Brad Lubben: You're telling me to wait a month for do every well I'm not this three cents a bushel storage or
- [00:48:41.010]dave aiken: Right, yeah. Yeah, right.
- [00:48:44.520]dave aiken: And and the, you know, hopefully most of those things can be worked out. And it's where there were there were where they can't work out that if there's a lot of people on happy, you might end up in court.
- [00:48:57.690]dave aiken: But you know court is is going to be a last resort type of thing.
- [00:49:03.000]dave aiken: And also use cases.
- [00:49:06.330]dave aiken: And
- [00:49:08.190]dave aiken: You know, just just just a real candid observation.
- [00:49:14.850]dave aiken: It's a lot easier. It's often easier for
- [00:49:19.680]dave aiken: Well, I don't want to pick on the ethanol plant but whoever you're delivering the corn to
- [00:49:26.730]dave aiken: Their the scale of their enterprise is probably stopped that they
- [00:49:33.300]dave aiken: Can have ready access to a lawyer if they need one. They probably have somebody on retainer. And so, you know, they can
- [00:49:42.600]dave aiken: If they tell you that know if you don't do it well. So, you know, they'll back it up. And for most farmers.
- [00:49:49.560]dave aiken: They don't have enough skin in the game to to make it worthwhile for lawyers to take the case, you know, and you know, so they they they can get old, maybe pushed around a little bit that way.
- [00:50:00.720]dave aiken: But we hope that that people want to be good neighbors and and good business partners and look at it in a long term or short term perspective and and try to accommodate both parties reasonable
- [00:50:15.180]Expectations.
- [00:50:17.640]Brad Lubben: And Dave to follow up on that. One more question that has come in.
- [00:50:22.440]Brad Lubben: Really sort of addresses the idea of let's negotiate differences or or let's let's discuss reasonable accommodations here but consider the the the sort of the relative size of the harm or the burden.
- [00:50:39.000]Brad Lubben: Delaying delivery for a month from say march to April or from from June to July may not be a major imposition on the on the producer doing delivery from, let's say, August until October.
- [00:50:54.690]Brad Lubben: causes all kinds of logistical problems of storage and the next harvests, etc. Is there, is there a legal precedent or is there a way to sort of address how to how to negotiate those some balance of damages. When you know which which can be very specific to the period and question.
- [00:51:16.680]dave aiken: Well,
- [00:51:19.200]dave aiken: You know, there's a million combinations and permutations of these things. He also your I can't come up with a formula. It's got a crank out there that might be your answer every time.
- [00:51:31.410]dave aiken: Maybe even half the time.
- [00:51:33.960]Brad Lubben: But
- [00:51:36.570]dave aiken: You know, I think it gets. I think it goes back to, you know, people trying to really accommodate each other and try to take a long term perspective people, you know, and
- [00:51:50.760]dave aiken: Especially, you know, if you're working with somebody like an elevator.
- [00:51:53.820]dave aiken: That may be a co op that's got a board of directors, you know, or something like that, you know, they may be a little farmer friendly and how they address these things then then then those that are just private and not you know cooperatives.
- [00:52:08.460]dave aiken: That sort of thing. So
- [00:52:11.400]dave aiken: You can always make the case but it's got, it's going to be an awful lot of bushels before
- [00:52:17.940]dave aiken: It'll pay to go go to court because they didn't pay the storage costs open summer.
- [00:52:23.760]dave aiken: Right. Or, you know, had to store the ground on the ground, they
- [00:52:27.540]dave aiken: Have a degradation quality and stuff like that.
- [00:52:31.860]Brad Lubben: And we made reference in the examples here generally to the, the green contract for delivery to a plant.
- [00:52:38.550]Brad Lubben: Course plants are also involved in in producing and delivering ethanol to a buyer and you can't store ethanol on the ground. You can't store oil on the ground.
- [00:52:48.780]Brad Lubben: That's the storage capacity challenges that we saw but But along with that as the co product of distillers grains.
- [00:52:56.400]Brad Lubben: And so if you can't produce because you can't store ethanol on the ground and that imply that you also aren't producing distillers grains and not serving not serving contract and buyers of those products so
- [00:53:10.530]Brad Lubben: So it's both sides of that.
- [00:53:12.870]Brad Lubben: Equation, or both sides of that.
- [00:53:15.300]Brad Lubben: Merchant that that have these issues coming out, ya.
- [00:53:19.080]dave aiken: Know there's there's lots of repercussions and and there's lots of ripple effects.
- [00:53:26.010]dave aiken: As a lawyer, I would hope that the ethanol.
- [00:53:30.000]dave aiken: Plant in their agreements on the distillers grains. Would you know make it clear that that they're not obligated to any amount of
- [00:53:39.750]dave aiken: Production ethanol production, you know, they'll, they'll sell it on as as it's available, you know, or if it's available, you know, that kind of thing, but
- [00:53:52.050]dave aiken: I haven't seen any of those contracts. So I don't know what they I've never seen a distillers grain contract. So that'd be good one to look at
- [00:53:59.070]dave aiken: The funnel and look at
- [00:54:01.590]Brad Lubben: David. Just a final comment to note from our participant that it's, yeah, maybe the hope or the expectation is, these are almost always things that end up being negotiated now negotiations, I presume, or or more efficient outcome than litigation.
- [00:54:18.450]Brad Lubben: Not being the lawyer right I presume that but
- [00:54:22.410]Brad Lubben: But it could still be a challenge to determine what damages are and and what an appropriate to the associated compromises.
- [00:54:33.150]dave aiken: Oh sure, yeah. And, but if you can, if you can negotiate anything, I consider that to be a big positive development.
- [00:54:45.300]Understood.
- [00:54:47.550]Brad Lubben: Dave, I believe that takes care of our questions and discussion for today. We thank you for the time. Thank you for your insight and expertise and providing discussions of force majeure, an act of God and other contract challenges here in the midst of coven
- [00:55:05.310]Brad Lubben: We thank everyone for participating with us this afternoon on our weekly webinar.
- [00:55:10.860]Brad Lubben: recording of this webinar and of course recording of all of our previous webinars can be found on our website at farm you announce it to you.
- [00:55:19.290]Brad Lubben: And you can also find the schedule of upcoming webinars. They're typically scheduled out at least two to three weeks in advance.
- [00:55:25.920]Brad Lubben: You can find that schedule and register for those upcoming webinars as you wish. As a reminder, you know, check the the farm you and all that. EDU website for those webinars and for other resources.
- [00:55:38.790]Brad Lubben: The series continues next Thursday. Thursday, June 25 at noon again for a session on managing risk in the hot market.
- [00:55:50.670]Brad Lubben: As you linguists today you will be receiving a short 32nd survey in your email, and we would appreciate your feedback on today's webinar as well as your input into
- [00:56:00.840]Brad Lubben: Future programs and sessions that we're offering. So again, we thank you for the time. We appreciate your participation and look forward to visiting with you again at a future time
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