Know Your Grain Contracts: Part 3 – Defaults

This is the third blog in a three-part series examining the world of grain contracts.

Our first blog examined the defining features of the two most common types of grain contracts: grain production vs grain delivery. The second blog focused on some of the common issues that can arise at the preliminary stages of contract formation. In this third and final blog, we consider what happens when a party defaults on a contract by failing to deliver or produce all or some of the grain.

What Causes a Party to Default?

There are many factors that may cause a party to default on their obligations. Why a party defaults on an obligation might be relevant to the contract. Take, for example, a producer who is unable to produce the amount of grain they had already agreed to deliver. Does that render the contract void? That depends entirely on the terms of the contract.

In a grain production contract, an essential term may require the producer to grow the grain on their plot of land. If the grain on that plot of land does not grow or produce in sufficient quantities or quality for reasons beyond the party’s control, it could result in a couple different contractual outcomes. It may be considered a failure to meet a condition precedent, which means the contractual obligations to produce and deliver were never engaged or the purchaser’s obligation to pay never crystallized. Similarly, failed production could trigger an Act of God provision that relieves the parties of their obligations.

In contrast, the failure to deliver grain under a grain delivery contract would likely be an inexcusable default under the contract. The defaulting party generally has the opportunity to obtain the replacement grain on the open market and deliver it while the delivery window is still open. Once the delivery window has closed, however, or when the contract is cancelled or terminated, the party who is unable to deliver the grain is in default. Once a party is in default, the purchaser can normally purchase the grain at the current market value and obtain the additional costs as liquidated damages from the producer.

Liquidated Damages

Many contracts contain a liquidated damages clause. These clauses generally provide that if a party fails to perform their obligations, they must pay an amount using a pre-determined formula to the innocent party for the default. This provision must be a genuine pre-estimate of damages that would arise from the party’s default and not a penalty.

Whether relying on a liquidated damages provision or common law principles, damages are often calculated as the replacement cost of the grain. This principle is also outlined in section 50 of the Sale of Goods Act.[1] While the contract may entitle the buyer to the replacement cost of the goods, these damages sometimes need to proceed through the Courts to enforce it.

Calculating damages due to a default might appear simple but there are various factors to consider. The terms of the contracts, the communications between the parties, and the timing of purchasing replacement grain may have a significant impact on compensation and liability. A buyer that is  too eager to replace the grain could be in  breach of the contract. Typically, acting without a contractual foundation and under a presumption of an anticipatory breach is risky and may affect the contractual obligations of the party. Alternatively, failure to replace the grain in a reasonably  timely fashion could limit the recovery of some of the replacement costs. Further complicating  the issues is the unpredictability of the open market.

The terms of the contract are a critical feature, and it is best to obtain legal advice on how to proceed once a party indicates an inability or unwillingness to fulfil their obligations under a contract.

MLT Aikins takes tremendous pride in being Western Canada’s Law Firm. We have a large team of dedicated legal professionals who live and work in agriculture and would be happy to assist you in navigating the exciting world of grain contracts. Contact us to learn more.

[1] Sale of Goods Act, RSS 1978, c S-1.