• Contracts allow us to customize or individualize our legal obligations and rights relative to the other contracting party, but our legal obligations to those who are not part of the contract are not altered.

• Contracts bring predictability to our interactions - both in terms of knowing what each other will do based on our agreement and knowing what each other will be required to do by the legal system if we do not fulfill our agreed-upon obligations. Thus contracts allow us to take subsequent actions knowing we have an agreement. Hopefully, these additional actions will lead to further benefits.

• Example - a landowner and farm operator enter into an agreement wherein the operator will lease the land from the owner. Once the agreement has been reached, each party can take additional actions confident that the agreement will be enforced. The owner may invest in materials to build a fence on the land knowing the operator will pay rent. The operator is now willing to borrow from the bank and purchase inputs knowing that the operator has permission (the right) to farm the land for the duration of the lease. Both parties also know that if the other party backs out, the legal system will require the breaching party to compensate the non-breaching party. In this example, the operator would be required to pay the rent at the agreed upon time and the owner would be required to transfer possession of the land to the operator for the agreed upon period.

• A contract is a voluntary arrangement . You decide whether to accept the legal obligations; no one can require you to assume a contractual obligation (do not confuse "requiring" with motivating, encouraging, or providing an incentive).

We enter into contracts for a variety of purposes. In class, we will focus on contracts businesses are likely to enter into; these generally pertain to the temporary or permanent transfer of economic resources such as land, labor, capital, information, and risk.

Examples of transactions involving economic resources:

• sale/purchase of land; leasing land;
• hiring an employee; hiring an independent contractor;
• lending/borrowing cash; investing cash in a busines; sale/purchase of inventory items such as seed, feed, livestock, fuel, building materials, parts; sale/purchase of capital assets such as equipment, machinery, vehicles; leasing capital assets such as equipment, machinery, vehicles;
• purchasing production information/technology; purchasing market information; acquiring permission to use copyrighted materials or patented technology; and
• managing risk through insurance, indemnity clauses, or wavier of liability clauses.

Each of these business transactions involves a contractual relationship.  This course will not address all of these in detail but will use a variety of these transactions to illustrate various legal concepts.

• Related reading:  Introduction to Production Contracts and Overview of Production Contracts

Many contracts involve more than one economic resource; e.g., sale and application of fertilizer in which case the contract involves both purchasing personal property (the product) and hiring the service of an independent contractor. Increasingly, contracts in agriculture address use and control of information and risk management, as well as sale or lease of assets or hiring a worker.

• Some contracts are a one-time occurrence that is immediately executed/fulfilled (e.g., purchase of gasoline at a convenience store), other contracts are arrangements/obligations that extend over a long period of time (e.g., a five-year lease agreement), while still other business arrangements may be a series of short contracts.

• Some contracts are primarily for the sale/purchase of property such as buying feed; other contracts focus on the characteristics of the item being purchases such as a commodity produced using organic practices versus GMO technology versus traditional production technology.  Some contracts focus on performing a service (hiring a custom sprayer to apply a pesticide or a harvestor to combine the crop); others focus on timely performance such as delivery dates for feed.

• But do not overlook that an important function of a contract is to manage risk, and increasingly, to control access to information.

Summary of Key Points

• Contracts are voluntary arrangements whereby we define our relative legal rights and obligations but the agreement will be enforced through our legal system.

Last updated October 29, 2007