Introduction to Risk Management
Legal Issues Associated with Agriculture
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.
Structural 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.
Contract Arrangements
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.
Statutory Obligations
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
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.
Environmental Liability
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
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- 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?
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Summary
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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