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GUIDE TO THE PREPARATION OF SMALLHOLDER CONTRACTS
INTRODUCTION
1. Where smallholders grow a particular crop or crops on part of their own land and sell the product to a company, it is desirable to formulate an agreement between the producer and the purchaser. This constitutes the smallholder contract.
2. It is important that such contracts specify clearly the rights and obligations of both smallholders and purchasers, and indicate the penalties that will be imposed on either party in case of non-fulfilment of agreed obligations. This note outlines the components which one would normally expect to find included in a smallholder contract, and presents a brief guide to the preparation of such an agreement.
FORM OF CONTRACT
3. A smallholder who is contracted to grow a particular crop and sell it to a company is generally free to enter a scheme and free to leave it if it does not prove to be to his or her advantage. This gives the smallholder an automatic protection against the company and any other party who may have interests in the scheme. However, the effectiveness of this protection will depend on whether the smallholder has made a substantial investment in the holding (e.g. by planting long-term crops), and on whether there are satisfactory alternative uses for the land.
4. The point of legal contact between smallholders and a company is normally a contract in which the smallholder agrees to use a specified area of land to produce the crop in question, and the company agrees to purchase the smallholder's produce and perhaps to provide finance, production inputs and technical advice.
AREA OF LAND TO BE USED
5. The contract should specify the area of land on which the crop may be planted, defining it in terms of land type, slope, accessibility, distance from the purchasing or processing centre, and other relevant criteria.
6. In some cases it may be appropriate to specify the maximum area that may be planted, in terms either of the labour available to the household, the management ability of the smallholder, or the need to ensure that a part of the holding is retained for subsistence food crops, firewood reserve, etc.
DURATION OF THE CONTRACT
7. For annual crops a contract will normally be issued for a single season, with renewal to be negotiated at the appropriate time. For long-term crops a longer term contract will be needed.
8. The duration of the agreement should be specified in the contract, along with the procedures for its renewal or renegotiation.
CHARGES
9. The contract should specify the charges to be paid by the smallholder, indicating whether they are calculated as payments for inputs supplied on credit, a cess on produce delivered, or a service charge related directly to the cost of services rendered by the company.
10. If the charges are variable or subject to periodic increase, and if they include a proportion of the overhead costs of the company, it is particularly important that the contract explains clearly the basis of calculation of the charges.
SALE OF PRODUCE
11. The smallholder contract should specify the following points relating to sale and purchase of farmers' produce:
| (1) | Any restrictions on smallholders selling produce through alternative channels to those specified by the contracting company; | |
| (2) | The quality requirements of smallholders' produce which the company guarantees to purchase; | |
| (3) | The purchasing and payment procedures; | |
| (4) | Any charges deductible at source. |
12. The method of calculating the price to be paid for the smallholders' crop should be clearly explained.
OBLIGATIONS OF PARTIES TO THE CONTRACT
13. The obligations of the crop purchaser should be specified in the contract. These would normally include the following:
| (1) | Supply of seeds or planting material, other production inputs and services; | |
| (2) | Provision of technical advice, managerial support and training; | |
| (3) | Agreement to purchase all production that meets agreed quality standards; | |
| (4) | Maintenance of relevant infrastructure; | |
| (5) | Maintenance of smallholder accounts in a form that is comprehensible to the smallholders. |
14. The obligations of the smallholders should also be specified. These would normally include the following:
| (1) | Agreement to use the designated land area and inputs supplied for the purposes specified in the contract; | |
| (2) | Agreement to follow any production regulations attached to the contract; | |
| (3) | Agreement to sell the crop through the specified channels; | |
| (4) | Agreement to repay the loans received from the purchaser; | |
| (5) | Agreement to contribute to maintenance of common services where appropriate. |
15. Every effort should be made to ensure that a fair and mutually acceptable balance is achieved between the rights and obligations of both parties to the agreement
SANCTIONS FOR FAILURE TO FULFIL OBLIGATIONS
16. The crop purchaser should be empowered to impose sanctions on the grower for failure to fulfil obligations covered in the contract. These sanctions would normally take the form of warnings, graded fines or similar penalties, and ultimate cancellation of the contract
17. The contract should equally include provision for imposition of penalties on the cropo purchaser in the event of failure to fulfil the obligations under the contract. These penalties would normally take the form of compensation payable to the growers for losses incurred as a result of the purchaser's shortcomings
18. A procedure for arbitration in the event of disagreements or disputes between contractor and smallholder should be built into the contract document (see paragraphs 21 and 22)
COMPENSATION AND SUCCESSION
19. In the event that a contract is compulsorily terminated by the company, provision should be made for payment of compensation to the smallholder for buildings erected, unexhausted improvements made and standing crops on the holding
20. Provision should be made for the smallholder to nominate an heir to inherit the remaining period of the contract in the event of the smallholder's death
21. If disposal of contracts is to be restricted this should be clearly stated, and the terms under which a transfer can take place should be made clear
ARBITRATION
22. A procedure should be established for arbitration in the event of disputes between company and smallholder. This could take the form of an Arbitration Committee with representatives of smallholders and company and with an independent chairman. The Arbitration Committee should develop a system for resolving disputes and imposing sanctions, which should be specified in the contract or its attached regulations
23. All disputes relating to the contract, other than those involving activities of an alleged criminal nature, should be referred to the Arbitration Committee in the first instance. Recourse to legal action outside the contract should be restricted until internal arbitration has been attempted
STYLE AND PRESENTATION OF THE CONTRACT
24. The contract document should be prepared in terms and in a language which is comprehensible to the smallholders. If necessary a summary should be prepared and translated into the local language. The contents of the contract document should be carefully explained to the farmers before they are asked to sign.
Source: Guidelines on Contracted Outgrower Schemes and Nucleus Estates: Briefing Note for the Special Programme for Food Security, Antony Ellman, FAO Investment Centre, April 1998
Related information: Example of standard buyer-seller contract.
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