For farmers intending to engage in contract farming, understanding how contracts are regulated by law can be important, particularly when the contract is unclear or silent on certain aspects of the agreement. Specific regulations on contract farming, aimed at protecting both farmers and buyers, do exist in some countries. Where this is not the case, general contract law and rules governing other types of contracts may be relevant. Before signing a contract, at a minimum, farmers should know where they can seek guidance and advice to better understand the rules and regulations that govern this type of agreement.

Appropriate regulatory frameworks for contract farming help to recognize and protect people’s rights in general, provide legal security to contractual relations and facilitate enforcement. Moreover, the choice of an adequate domestic legal system may facilitate the parties’ access, in particular for the weaker party, to justice and procedural protection. This is especially helpful during the dispute resolution procedures and at the enforcement stage.

Similar outcomes could be obtained by fostering national policies and strategies that promote sustainable contract farming. However, laws are harder to change than policies and are thus more likely to survive longer. This can increase the security and mutual trust between the involved parties.

Contract farming regulations can be found in specific regulatory laws and other non-specific laws related to this issue.

Specific contract farming laws

Specific contract farming laws are not very common in practice, but are increasingly gaining significance for contractual agrifood regulations.

Through outlining regulations specifically for contract farming environments, its characteristics can best be taken into consideration. Power imbalances, the nature of the agricultural production or the interconnectedness of the parties’ obligations are central aspects that regulators need to take into account. Usually they will contain requirements regarding structure and content of a contract, as well as its negotiation process. Balancing the relationship between the involved parties is vital to the regulatory frameworks on contract farming. As the farmer in general tends to be the weaker party, special protection is essential. There are various regulatory possibilities to improve this type of protection: procedural protection, substantive protection and the establishment of special institutions or modalities to help ensuring compliance with the regulations.

In some cases specific contract farming laws require a list of topics to be covered in the contracts in order to be legally binding. For example, in Morocco the Law n° 04-12 on agrégation agricole provides and extensive list of clauses, such as on the provision of inputs, acceptable minimum quality and either the price or a method for setting the price for the final product. Such regulations also exist in France, Malawi or Brazil. In the latter case, the contract farming law of May 2016 only affects resource provision contracts. The Brazilian law essentially promotes fairness, transparency, power balance, representation and conflict minimization through good practices and mediation. Furthermore, it makes clear that contract farming does not constitute a labour relation between farmers and/or their employees and buyers, as this issue has been a frequent source of judicial disputes. The law mandates contractors to prepare detailed pre-contractual information documents that should be presented to farmers interested in joining a contract farming operation. It also requires that all contracts are written and requires contractual clarity in all clauses. The effect this law will have on agribusiness agreements is assumed to remain neutral. The law ultimately prescribes good practices which are standardized by most contract farming operations in Brazil.

Non-specific laws relevant to contract farming

Each country has basic laws and rules governing contracts. Such general frameworks also apply to the formation of contract farming agreements, which should comply with the minimum legal requirements of the country where they take place. Non-specific legislation relevant to contract farming can be found in civil codes and general contract laws, agricultural laws and codes, commodity-specific legislation or any combination of these, as seen in the box on the right side.

General contract law will usually specify fundamental aspects such as the contractual formation process, validity and interpretation, content or object, non-performance and remedies, limitation periods, assignment of rights and obligations as well as agency and restitution.

However, country-specific regulations may apply and hence it is recommended to take prevailing local practices into account and pay attention to societal attitudes regarding contractual obligations of the parties involved. This can affect the acceptance of contracts as some societies might only respect contracts if certain aspects, such as climatic, political or personnel conditions, remain constant. In such situations it can be seen as socially acceptable to disregard the contract even if the legal agreement or local laws state otherwise.

Decisions regarding the type of contract, its complexity and level of detail should be taken with regard to local practices. Despite the existence of highly specialized contracts which are aiming to cover every eventuality, many contract farming agreements in developing countries are nevertheless based on informal arrangements. Furthermore, as the costs of legal actions often exceed the amount claimed by companies and legal action threatens the relationship and trust between all parties it is highly unlikely buyers will take legal action against smallholders. Similarly, it is very unlikely that farmers take action against companies in case of contractual breaches.

However, this does not mean that formal agreements are redundant. The clear communication of responsibilities, rules and expectations within the contractual relationship can be beneficial to both involved parties. Especially the identification of dispute resolution mechanisms is central with regards to the improbability of legal actions to be taken by both parties. For this type of environment it can be advisable to create certain structures such as a body representing the company, the farmers and other involved parties or the establishment of government agencies or other fora. Regulations should be independent and ideally governed by a governance system with equal participation of all parties involved in order to offer fair protection measures for all. Whether it is of advantage to have a single body managed by the industry, the government or regulation is taking place between smallholders and companies, has to be decided individually with regards to the legal and local environment.

Within agrifood production there is a variety of contracts which can be used. Certain rules or legal aspects which these contracts are based on might be similar to the principles related to contract farming. In some limited cases these might be applicable through a common consensus, if the domestic legal system allows. In order to avoid overlapping and inconsistency between already established regulatory frameworks and new, resembling rules on contract farming, new contract farming related requirements should be incorporated into already existing legal frameworks.

Soft law instruments

In order to promote fair contractual practices between producers and buyers in the agrifood industry, certain governments have increasingly been involved in alternatives or additions to mandatory regulations such as soft law. Soft law instruments are based on recommendations by a government, or voluntary codes of practices or good conduct that rely on collaboration with stakeholders for their preparation and implementation. This however, depends on the jurisdiction the soft laws are based on. Additionally, if it is not possible to apply international instruments directly, certain tools may still be applicable as soft law.

Examples of soft instruments are the UNIDROIT/FAO/IFAD Legal Guide on Contract Farming (2015) and the FAO Guiding Principles for Responsible Contract Farming Operations. The Legal Guide gives advice on contract farming practices, policy design, legal research and capacity-building.

Interpretation and understanding of concepts such as fairness or equity, for example, are not necessarily universal and may vary between countries. However, it is widely accepted that certain types of conduct are reasonable or necessary to ensure the protection of interests on both sides, while others are inacceptable and should be sanctioned (such as acting in bad faith; abusing rights; exploiting unfair power relationships; pressure; insufficient transparency; and many others).

Guidance instruments often reflect generally accepted concepts and advocate for good business practice. Especially with regards to human rights in business conduct companies have a significant responsibility to respect such rights regardless of the states’ ability or willingness to fulfil their own human rights obligations. Accountability, participation, empowerment, non-discrimination, transparency, human dignity and the rule of law are some of the principles that business models such as contract farming should incorporate, particularly as they are vital for fostering the role of vulnerable parties. These concepts can also be used by governments as practical tools through which social objectives can be achieved and enforced.

In general it is possible for the parties engaged in contract farming to design their contracts individually according to their needs. The freedom of contract, however, may be limited due to private law rules or the broader regulatory environment. Typically, agricultural production contracts have strong ties to the producer’s country. Due to the character of the agreement, the producer’s domestic legal system will usually pertain. This system is also likely to apply to most legal situations involving parties other than the producer and contractor. Therefore, countries should look for their best regulatory option in consideration of their legal framework, system and policy priorities.

So, what type of regulatory framework works best for contract farming? There is no one-size-fits-all approach to this issue. Countries may want to improve enforcement and implementation of existing legislation before initiating new legal reform processes. In many instances, there is no need for specific legislation on contract farming. Moreover, trying to imitate foreign [contract farming] laws as frameworks for contract regulations might even create some issue due to conflicts with local laws.

In this exercise it is useful to have in mind that the final outcome of the regulatory reform should be guided by the following criteria:

1. Clarity and transparency. The most important aspect for any regulatory framework is that it should be clear and easy to understand. Hence, the integration of stakeholders is vital both at the central and local level as well as in urban and rural settings.
2. Existence of a participatory process. One criterion to determine whether an existing regulatory framework enables contract farming is whether it has been developed following participatory processes involving all stakeholders. The engagement of a broad variety of stakeholders is central to the quality and implementation success of a new legal framework (FAO, 2005). Its creation process can be determinative of facilitating or hindering the future implementation. The role and responsibilities of the public sector in this process need to be clarified, especially as governments might need to be careful while balancing and prioritising competing interests in order to prevent powerful or vocal groups to hijack the regulatory process to their advantage.
3. Adequate level of detail and flexibility. Well-considered and well-drafted legislation can offer many benefits for contract farming. An excessive level of detail within the regulatory framework may hinder agricultural and contractual innovations. Parties might be forced to subordinate to very strict regimes and prescriptive regulations. This in turn implicates a high level of inflexibility. The involved parties may not be able to adapt sufficiently to the constantly evolving and fluctuating dynamics of agriculture. In some cases, too inflexible and intrusive regulations on the pricing of agrifood goods may encourage the involved parties to seek alternative ways. In order to achieve the desired results and avoid restrictions attempts to bypass the law and operate outside of the legal framework are not uncommon. This finding can be generalized to cover other regulatory overreaches (Jull, 2016).

Ensuring that contract farming is adequately regulated is a sine qua non condition for fostering sustainable contract farming, but there are other alternatives: governments can also implement policies which support contract farming or design and adopt programmes and projects supporting contract farming schemes. This contributes to creating a conducive environment for contract farming.

Many developing and developed countries have introduced programmes in order to use their demand for food and procurement power as a tool to foster local development and, moreover, promote agrifood production and market integration for smallholders.

Contract farming policies as well as programmes are flexible and efficient instruments, however, they do not ensure long-term continuity. While they are useful for introducing contract farming in a country or a value chain (pilot initiatives), they can also align various existing support tools around contract farming, such as technical assistance, public-private partnerships, financial instruments or others. Below some examples on the promotion of contract farming: 

1. A unique approach has been developed in Malawi through a task force where contract farming strategies have been used as a tool to prevent child labour. The task force on contract farming was hosted by the Working Group on the Commercialization of Agriculture, and chaired by the Ministry of Agriculture, Water, Irrigation and Development. The country adopted the national contract farming strategy in 2016 to embed social dimensions and decent work regulations. Malawi’s approach aims to create a supportive environment to improve work conditions, secure income and balance the rights of all parties involved. Furthermore, the Agricultural Sector Wide Approach targets farmers to shift from sub-sector production towards greater commercialization and international competitiveness.
2. In Spain, a code of good business practices in food contracting was introduced in 2013. This code was based on the prior experience with self-regulation in the agrifood sector in Spain[1]. It offers farmers incentives and opportunities to regroup and organize new structures and cooperatives in order to concentrate supply more efficiently. 

Examples on alternative promotion in other countries may be found in Morocco (The Green Morocco Plan (PMV)), India (The Agricultural Produce and Marketing Act (APMC); The NABARD initiative), Vietnam (Decision no. 80/2002/QD-TTG of June 24, 2002 on Policies to Encourage the Contractual Sale of Commodity Farm Produce), Honduras (Law of economic support to coffee producer. Decree No.84-99) or Mexico (Regulations of Operation of Direct Support Program to Producer for Marketing Surplus for Productive Restructuring, Agrifood Chains Integration and Attention to Critical Factors).

[1] In particular, the “Commercial good practice code throughout the food chain in Catalonia”, the “FIAB/ASEDAS Agreement on Good Practice Recommendations” and the Recommendations of the AECOC for “Efficient Commercial Management”.