Although personal injury lawsuits are a common point of reference for food safety legal liability, it’s not the only legal action that can result. Contract laws also play an important role in the legal effect of a food safety incident. We are going to discuss just two of the potential ways contracts can come into play: indemnification clauses and agreements to maintain specific standards.

Indemnification

Indemnification is a legal concept that basically means if Person A does something that harms Person B, Person A will pay Person B back for their damages. It’s like the negligence concept discussed in the previous chapter. One big difference centers on how a person becomes liable. Negligence relies on an implicit societal responsibility to meet unspoken but commonly accepted standards. For example, you can sue someone for negligence even though they never agreed to be responsible for their negligence. Society assumes we all have that responsibility. Indemnification is a contractual obligation: You are responsible to indemnify someone if you agreed to indemnify them. (Of course, there are always exceptions. In the interest of space, this is a basic distinction.) Indemnification is a part of many business relationships. Folks all along the supply chain jockey to avoid indemnification themselves while securing it from others.

When it comes to food, many people may become potentially responsible for a contaminated product, from producer to warehouse to distributor to retailer. As a result, businesses are especially keen on protecting themselves. Businesses do this by requiring their partners to sign an agreement with an indemnification provision. The indemnification provision may be restricted to specific circumstances (such as negligence of the farmer) or specific claims (such as personal injury lawsuits). Or, indemnification provisions may be very broad by covering all damages, lost sales, degradation of reputation, and more.

Indemnification can quickly come into play during a food safety incident involving a grocery store or other retailer. A grocery store may suffer loss of sales from all products of the type (all spinach or all apples) regardless of the source. The grocery store’s reputation may be damaged. The store itself may be sued for negligence, perhaps for negligently working with a farmer who did not meet standard safety protocols. If the farmer agreed to indemnify for these damages, the farmer would then have to pay the grocery store back for all these things. Indemnification can pile up fast and quickly put a farmer out of business.

Managing the risks of indemnification

Fortunately, many insurance policies will cover liability incurred by indemnification of others. Commercial policies often provide this coverage; however, the precise language of the insurance policy may limit the types of indemnification. For example, the distributor you contract with may require risk- shifting indemnification provisions (requiring one party to assume all risks of claims and lawsuits whether that party was at fault or not) rather than risk-sharing provisions (requiring one party to indemnify the other only for the first party’s own negligence or fault). It is important to read both the insurance policy and the sales agreement closely to make sure the indemnification offered to the buyer is the type covered through the insurance policy.

Contract breach risks

When one party violates a term of a contract to which they have agreed, they have “breached” the contract. The other party can then bring a lawsuit to force the breaching party to pay for damages the non-breaching party suffered. Contract breach—or violating the contract terms—is another way farmers may end up with legal consequences from a food safety incident. By contrast, indemnification (discussed just prior to this section) is an example of becoming responsible by agreement without necessarily breaking the contract.

What contract terms might a farmer breach? In terms of food safety, many sales agreements obligate farmers to adhere to specific food safety practices or standards. Buyers might want farmers to maintain GAP (Good Agricultural Practices) certification, buy specific levels of liability insurance, follow specific sanitation practices, offer broad indemnification, or even follow vague guidelines like the “highest” food safety practices. These provisions seem innocuous enough. Small breaches fly under the radar and no one cares.

But, when bad things happen resulting in bills or lawsuits, everyone starts looking around for ways to eliminate or reduce their damage. The buyer—or, more likely, their insurance company—might take a look at the sales contract to find terms that the farmer wasn’t following. Even small breaches can end up leading to large damages. When things are already going wrong, farmers don’t need yet another penalty because they didn’t follow the terms of a contract. It’s so important to understand and follow the terms of any agreement.

Write down the sales agreement with terms and measurable production standards you can achieve

Contracts are incredibly flexible. The law gives contracting parties plenty of leeway to come to an agreement that works for them. When negotiating and drafting a sales contract, be sure to agree only to terms you can in fact follow through with. If the contract says to get GAP certification or obtain a certain level of insurance coverage, be sure to get it. Otherwise, try to negotiate different, achievable terms. In addition, strive to create objective standards or criteria rather than vague guidelines such as “best” quality or “highest” food safety practices. That way if there’s an issue, you can turn to these objective, measurable standards.

Many buyers and sellers agree on which damages are available for specific breaches and document the procedure for recovering from other parties. By writing it down ahead of time, folks know exactly what they agreed to do and how to handle problems. If the contract doesn’t spell out everything, the court will rely on state law to fill in missing details. Of course, that can be unpredictable. So, the best way to manage contracts and control breaches is to write a detailed sales agreement ahead of time. A good sales agreement clearly lays out responsibilities and a procedure for handling problems.

Understand the contract terms

The reality is that from email services to software, insurance, banking, health care, and nearly every other facet of life, we are presented with contracts that we have no opportunity to negotiate and must sign to utilize the service being offered.

Despite their ubiquity, it’s a mistake to assume these contracts aren’t binding. A court will enforce many of these contracts. Even if the pages are filled with legal “boilerplate,” we may be held to our agreement.
To state the obvious, farmers should take some time to thoroughly review the terms of any important sales agreement. Even if it seems like an exercise in futility, farmers may have more opportunity to negotiate than they realize. Farmers have product that grocery stores and institutions want to purchase. Many buyers truly want to build effective relationships with farmers. Understanding shared responsibility for food safety is an important part of that relationship. If a farmer thinks proposed sales terms are unfair, that farmer should feel comfortable bringing it to the buyer’s attention. As with any negotiation, having an alternate proposal in one’s back pocket can boost confidence and help everyone find a resolution quickly.

 TAKING ACTION ON CONTRACTS

• Thoroughly read your sales contracts and draft or negotiate terms that set achievable production standards.
• Negotiate sales contracts that limit indemnification and/or check the farm’s insurance policy to see if it provides coverage for indemnification.

 Farmer Sally Takes Action on Contracts

Farmer Sally is looking at selling her products wholesale, and she wants to avoid the problems plaguing Alexi. Sally realizes that if she’s standing in the receiving area, being asked to sign a contract to complete a sale, she’ll have no time to understand or negotiate the contract. Doing a little homework ahead of time might make it easier. Sally does the following things:

• Writes down exactly how she would like a sale to proceed with each buyer and uses that procedure to create an effective sales contract. She also includes procedures for when things go wrong. Sally plans to use this agreement with buyers who don’t already have an agreement of their own.
• Prepares by getting copies of any buyers’ existing contracts ahead of time (perhaps from other farmers who sell to them) and reading them thoroughly.
• Reads any proposed contract, looking for an indemnification provision.
• If there is an indemnification clause, will Sally’s insurance cover her for it? Sally may need to ask her agent about this. Her insurance agent may recommend she buy a “contracts and agreements endorsement.”
• What else does the contract obligate Sally to do? Is she prepared to adhere to each clause? If not, are there other options Sally could propose to the buyer? Something that might accomplish mutual goals without undue burden on Sally?
• Signs a written contract before making a sale to larger buyers such as grocery stores.