Many of the day-to-day activities of farmers and ranchers involve commitments that have legal implications. Understanding these issues can lead to better risk management decisions.

Legal issues cut across other risk areas. For example, acquiring an operating loan has legal implications if not repaid in the specified manner. Production activities involving the use of pesticides involving the use of pesticides have legal implications if appropriate safety precautions are not taken. Marketing of agricultural products involves contract law. Human resource issues associated with agriculture also have legal implications, ranging from employer/employee rules and regulations to inheritance laws.

The legal issues most commonly associated with agriculture fall into four broad categories: appropriate legal business structure and tax and estate planning, contractural arrangements, tort liability, and statutory compliance, including environmental issues.

The first legal issue that many family farms encounter is the nature of the entity under which the business is to be operated. Often, through lack of attention, sole proprietorship is automatically chosen. However, alternatives exist including partnerships, limited partnerships, limited-liability companies, and corporations (both Subchapters C and S) as well as a wide variety of trust arrangements. In addition, many States, and the Federal Government, have special statutory provisions for farms meeting certain criteria, such as "family farm" provisions.

Income and property tax consequences at the local, State, and Federal level vary significantly, depending upon the legal entity chosen. Some structures lend themselves to the avoidance of estate tax and the ease of administration during probate. Liability to third parties is also a consideration in structural decisions, as is ease of operation within the chosen structure.

Estate planning considerations may arise in the course of making structural decisions. Estate planning mechanisms range from simple wills to family farm corporations with complex inheritance provisions. Trusts, both living and testamentary, are often included in estate planning.

Contractural arrangements in agriculture take many forms. A contract is any agreement (written or verbal) where the parties exchange mutual promises in return for some sort of consideration or benefit.

Contracts include financial arrangements, such as promissory notes and mortgages. Leases and crop share arrangements are contracts. Many State and Federal farm programs are contractural in nature, such as the Conservation Reserve Program. Sale of agricultural products is often accomplished by contracts for future performance. Crop insurance coverage is also based on a contractual agreement. Even employment arrangements, although often not written, are treated as contracts.

A basic legal issue pertaining to contracts is their enforceability. For instance, many States have what is known as "statutes of frauds," which require that certain types of agreements be in writing before they can be enforced. Examples of contracts that often must be in writing before they are considered valid include agreements for the sale of real estate and agreements that cannot be performed within 1 year.

Assuming a contract is legally enforceable, a concern arises as to nonperformance by a party to the contract. Obviously, nonperformance can come from the farmer or rancher, or from the other party to the contract.

In many instances, contracts specify what constitutes events of default and the remedies of the various parties in the event of default. If the contract is unclear, the courts generally employ two types of relief for breach of contract: specific performance and damages. In the case of specific performance, the breaching party is ordered to remedy the default and fulfill the contract. If specific performance is not possible or reasonable, damages are awarded to compensate the party not the breach.

Contractual nonperformance can have ramifications well beyond the scope of the contract itself. For instance, the inability to meet contractual financial obligations to your mortgage lender may result in foreclosure. Alternatively, it may force you to seek other legal recourse, such as debt restructuring or liquidation in bankruptcy.

A huge variety of statutory mandates apply to farmers and ranchers. These include tax reporting and payment obligations, wage and hour and safety requirements, compliance with nondiscrimination statutes, termination of employees, use of pesticides and herbicides, participation in certain farm programs, and many more. Although many in agriculture are not fully aware of their legal obligations, failure to comply may have serious consequences in terms of fines, penalties, and abatement.

Tort liability arises from the negligent or intentional infliction of damage to a person or to property. This type of liability is currently insured under a general liability insurance policy.

The simplest type of tort arises where someone is injured on a farm or ranch property. In recent years, tort liability has broadened significantly to include what may be classed as employment torts, such as wrongful discharge. Another area of expansion has been in the so-called "toxic tort" area in which adjacent landowners, public groups, or others assert liability for damage to air and water quality on account of agricultural activity.

Pollution laws are a major concern for farmers. The line between point and no-point pollution is being erased by the courts. Many of the newer liability policies exclude coverage for pollution claims entirely, forcing farmers to purchase special pollution policies. The pollution policies that are available contain unique characteristics that are unfamiliar to farmers. Managing liability risk begins with understanding liability insurance coverage.

Beyond having the proper liability coverage as protection, farmers must be prepared to deal with possible criminal prosecutions by State and Federal agencies for environmental events. Liability insurance affords no protection from criminal penalties assessed against a farmer by a regulatory agency. Farmers can greatly reduce their criminal liability exposure by formulating and following environmental audit procedures. Many good farmers fail to keep records necessary to prove compliance. Accurate records should be kept on the applications of herbicides, pesticides, and fertilizers.

Some Questions for Your Risk Management Check-Up

Have I reviewed my property and liability insurance policies? Do they exclude areas that concern me, such as pollution or livestock? Am I covered in community service activity? What about leased buildings or equipment? Are my recent acquisitions covered, such as computers or antiques? Do I need to performo an environmental audit? Am I aware of and do I follow environmental recordkeeping requirements?

When entering into any contractual arrangement, either oral or written, you should be concerned about what happens if a disagreement between the parties arises. How will disputes be handled? What is the appropriate jurisdiction if the contracting parties do not reside in the same county or State? Is one party liable for court costs and attorney's fees?

When contacting an attorney, you should ask for basic information about the attorney's familiarity with the law for particular situations. Attorneys are like other professionals in that they often specialize. For example, a good contract attorney may not have much expertise in estate planning. You should have a good understanding of fee arrangements, billing cycles, expected costs, etc., for any matters that will involve your attorney.

It is good practice to visit an attorney prior to entering into a business transaction rather than after the transaction has gone bad. Preventive actions are often cheaper and less time-consuming.

Many States have publications on various legal topics available from the State Bar Associations. Some land-grant universities and State cooperative extension services also have lay publications about legal issues. However, for issues and concerns specific to your operation, contact a qualified attorney.

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