Grape Supply, Winemaking and Contract Law: The Perfect Blend

Australian wine-making is an iconic production industry with global fame. Many of our wines are frequently recognised among the best in the world. The precursor to the global success of our wines is the production and supply of grapes to these wineries. Although some wineries have their own vineyards, the vast majority of winemakers in Australia source grapes from independent growers. This relationship is governed by a grape supply contract between the growers and winemakers.

Australia currently suffers from an oversupply of wine grapes; the supply produced by viticulturists vastly exceeds demand from winemakers. This places pressure on the contractual relationships between grape growers and winemakers. The oversupply has placed winemakers in a position of negotiating power, which is increased by their relative size compared to growers. Furthermore, once grapes are harvested, they have a short shelflife during which growers can arrange a sale. Growers are unable to delay the harvest of the grapes once their ideal sugar, acidity and tannin levels are reached, as doing so causes a rapid deterioration in quality. This combination creates an interesting dynamic in the context of grape supply contracts.

Whether written or verbal, every grape supply transaction entered into in Australia is governed by a contract. Unfortunately, there are some difficulties with grape supply contracts that are particular to this industry. Purchase agreements are almost always made before the grapes are harvested, and consequently before their quality can be accurately determined. Winemakers that utilise cheaper grapes often enter into short-term contract arrangements as they provide them with flexibility to secure the best grape prices. In contrast, wineries using premium grapes often enter into long-term agreements to ensure they have access to product of a consistently high standard.

The resulting grape supply contract landscape is one filled with confusion, uncertainty, and unbalanced negotiations. The regrettable consequences of this dynamic are numerous and frequent contractual disputes.

 Problems in the wine industry

Contractual disputes between grape growers and winemakers have been growing in the grape supply industry in recent years. Australian Vignerons have received numerous complaints of this nature, and the issue has even been the subject of a parliamentary inquiry at a federal level. The disputes continue to raise similar issues regarding the contractual arrangement between growers and winemakers.

The two most common and significant issues arising from grape supply contracts concern the quality of the grapes and the price at which they are traded. The nature of the grape supply industry makes it difficult to have an objective standard by which grape quality is assessed, or a method of regulating the processes that are used. In most situations, grapes are assessed based on appearance and taste. These criteria are inherently subjective, and often differ from person to person, and season to season. The result is uncertainty for growers in terms of what they can expect the quality of their grapes to be graded as, and uncertainty for winemakers in terms of the quality of grapes they are purchasing. Whilst some supply contracts allow for the involvement of the winemaker in how their grapes are cared for, it does not solve the problem. The consequence being that a large proportion of the disputes that arise in the wine industry relate to the quality of grapes.

Grape prices, and in particular the negotiation process, is another cause of much distress in the grape supply industry. Again, there is no clear and objective method by which grapes are priced, and in many situations they are determined on a ‘take it or leave it’ basis. In 2005, the Riverland Winegrape Growers Association noted that difficult financial circumstances for winemakers often lead to situations whereby they cannot afford the price of grapes required under a supply contract and so instead offer a reduced price. Growers often feel they have little choice but to accept the lowered price, or risk not selling their grapes at all. The determination of these prices often occurs as, or after, the grapes are harvested, so it is difficult for growers to estimate the income they will receive for their grapes. When coupled with the wild variations in prices for essentially the same product, no minimum price protections, and discretion ultimately resting with winemakers, growers are often left vulnerable to the whims of the industry.

Although some grape supply contracts are implemented for an extended period of time, they are often not renewed. This causes a number of difficulties, particularly for growers, who may have invested significant amounts of money to improve technology in reliance on these contracts. By not renewing them, not only are growers put under financial pressure, but the relationship between growers and winemakers is often seriously damaged.

Perhaps most concerning is that despite the issues mentioned above that continue to cause disputes, grape supply contracts rarely contain clauses that govern the method by which the parties resolve these disputes. The consequence of this is that parties face uncertainty, and either allow a breach to remain un-remedied, or turn to litigation to resolve a dispute. This is not ideal, but is regrettably all too common.

By gaining a better understanding of the basic principles of contract law, and where appropriate engaging the assistance of a lawyer, growers and winemakers can begin to remedy these issues.

 

Contract law – the basics

Most people know generally what a contract is, but few will actually be aware of the requirements that make a contract valid and legally enforceable. In simple terms, a legally enforceable contract requires the following:

  1. Offer;
  2. Acceptance;
  3. Consideration;
  4. Certainty of Terms;
  5. An intention to be bound; and
  6. Capacity.

The most basic premise of a valid and legally enforceable contract is that it must be in the form of an offer, and an acceptance of that offer. An offer does not need to be made to a specific person or party, but it does require a definite promise on the basis of specific terms. An offer can be withdrawn at any point prior to acceptance. Acceptance must occur by way of a specific statement or action of intent, indicating the party’s willingness to accept the terms of the offer. Acceptance cannot be determined to exist simply on the basis of a failure to expressly reject an offer. In law, a counter-offer is a rejection of the previous offer, and the making of an entirely new offer.

Consideration is a fundamental component of any agreement. It is what each party gives to the other in exchange for a benefit, for example, payment for goods received, although consideration need not be cash. The courts generally do not concern themselves with whether or not particular consideration is adequate in the circumstances, so long as some form of consideration is given.

The third requirement is that the terms of the contract be sufficiently certain. This includes details such as who the contract is between, as well as more specific terms, for example, a timeframe for when a payment is to occur. If a term of a contract is not certain, the Court has the power to void that term entirely – and in some particular cases, the entire contract. A common example of terms that are void include ‘agreements to agree’ – for instance, a contract to agree to a price for the supply of grapes in the future. Such a term would likely be found to be invalid and unenforceable.

The final two requirements of a contract largely go hand in hand. The first of these is that the parties to a contract must have an intention to be legally bound by the terms of that contract. It is often an issue that the Court must determine retrospectively based on the circumstances of the arrangement, and in the case of a written contract, it is indicated by the signature of an authorised person. The second is the requirement that the parties have capacity to enter into a contract. Not everyone is legally entitled to enter into a contract, for example, minors (people under the age of 18), and people with a mental impairment of some description. A company, however, does have legal capacity to enter into a contract, subject to the relevant legislation.

What is often not realised is that a contract does not need to be written for it to be a valid and legally enforceable agreement. Contracts can be verbal, and in the form of a ‘handshake agreement’ provided the above requirements are satisfied. As a result, the consequences for a breach of a verbal contract are just as severe as for a breach of a written contract – the difficulty is simply in proving the terms of the agreement. Both growers and winemakers should be aware of this when making agreements.

It is also important that growers and winemakers are aware of who exactly a contract is between, and who they can pursue in the event of a breach. For example, let us assume that Gary Grape is a primary producer of grapes. Vinnie Vine works for a company known as Shiraz Wineries in the Barossa Valley. Gary enters into a contract with Vinnie to sell his grapes to Shiraz Wineries. Gary has a good working relationship with Shiraz Wineries and benefits substantially from their business. Gary and Vinnie, however, do not get along at all. Unfortunately, a dispute arises over the price of the grapes, and Gary wants to commence legal proceedings to recover the money he believes he is owed. Gary wants to issue proceedings against Vinnie because he believes Vinnie was the one who misled him regarding the price. Unfortunately for Gary, his contract is actually with Shiraz Wineries, and he can only pursue the company for his debt. This principle is known as the privity of contract - the concept that a contract can only be enforced against the parties to the contract. Generally, Gary will have no recourse against Vinnie, personally. It is an often underappreciated principle of contract law – and one that frequently raises issues for parties wronged by a breach of contract.

Growers and winemakers will also benefit from knowledge of the principle of implied terms. Although a contract should contain specific terms that outline the basis on which the parties conduct business, there are certain circumstances in which implied terms may exist. The most common of these is in a contract for the sale of goods, which is interpreted to contain an implied term that the goods sold are fit for their intended purpose. There can be more elaborate implied terms, such as when a written contract has been entered into by the parties, however the actual business practice differs from this contract. In this case, the Court will likely read implied terms into this contract to give effect to the actual business practice. It is important to note, however, that parties cannot simply assert that an implied term exists unless it serves a purpose; implied terms are only interpreted by a Court to give effect to the specific terms of an agreement, or the intentions of the parties. For example, in a written contract it may be apparent that a term is ‘missing’, and that without it the contract doesn’t make sense. In these circumstances, a court will ‘fill in the gap’ with an implied term. 

 

The perfect grape supply contract

There are some components that every single contract should have, no matter which industry it relates to, such as clearly defined parties to the agreement, their registered addresses, and the time period to which it relates. Grape supply contracts specifically have some additional requirements, which are particular to this industry.

A grape supply contract should be balanced so that it benefits and protects both growers and winemakers. The parties should be happy that the contract adequately gives effect to their intentions, and that their interests are appropriately protected. To that end, it should not include any unfair terms. Not only will this damage relationships between those in the industry, but the Australian Consumer Law voids any term that is considered to be unfair in a contract for the supply of goods. Unfair terms can include a term that permits one party (but not another) to unilaterally terminate, or otherwise vary, the agreement.

When considering the problems mentioned above, one of the most important requirements of a grape supply contract is that the terms should be as specific as possible. Doing this helps to ensure that the parties are aware of their obligations. With regard to the quality of grapes produced, contracts should specify what is required with regard to:

  • quantity;
  • tonnes per hectare limit;
  • purity;
  • chemical levels (e.g. baume, pH etc.); and
  • condition.

This offers winemakers certainty with regard to the product they will be receiving, whilst simultaneously providing them with protection in the event of unforeseeable circumstances, such as natural disasters. Similarly, growers benefit from having these terms specifically included as they know exactly what is required of the grapes they produce; they no longer have to fear the goalposts being moved.

In terms of the quality of the grapes, supply contracts should include a reference to how this is determined. One option would be for the contract to include a term by which the parties agree to engage an independent industry expert to determine the exact quality of the grapes supplied. This will avoid disputes between the parties in circumstances where there is a disagreement over the quality of the grapes supplied. Although the parties may not necessarily agree with the expert’s opinion, the specificity of the terms lowers the potential for a dispute to arise, and limits a grower’s reliance on the winemaker’s discretion.

Another term that should be adequately specified is the price at which the grapes are supplied. Although there may be no clear method for determining exactly what price grapes should be traded at under a supply contract, parties can implement measures by which they are afforded protection, limiting the potential for disputes. For example, the parties could agree to a term that governs how grape quality will affect price and at what quality the purchaser has the right to reject the grapes altogether. Similarly, the grower can benefit from the inclusion of a minimum price clause, whereby provided the grapes reach a minimum standard of quality, the winemaker will be required to pay a minimum price for them. By including these clauses, although the price itself may not be specifically calculable, many disputes can be avoided.

With regard to construction of the contract, the choice of words should be simple. Parties should not seek overcomplicated ‘legalese’ wording, as this discourages transparency in the agreement and between the parties. If terms of the contract are kept simple and drafted in plain English, the parties are in a better position to understand and comply with their obligations.

With a similar goal in mind, parties should also arrange for any agreement to be governed by a written contract that gives effect to the terms of an arrangement. Written contracts provide substantially more certainty than verbal contracts, and again, promote transparency and a healthy relationship between the parties.

The final component and arguably the most important clause for a grape supply contract to have is a dispute resolution clause.

 

Alternative Dispute Resolution

In both personal and professional relationships, disputes inevitably arise no matter how strong that relationship may be. Having a clearly defined procedure by which to resolve these disputes is essential in maintaining the relationship as much as possible. This is generally achieved through the use of alternative dispute resolution or ‘ADR’. Particularly in the context of an industry with no objective method of determining grape quality, ADR clauses become essential to any contract.

A well drafted contract will include a clearly defined ADR process for the parties to follow. It provides the parties with certainty and minimises stress. An ADR procedure can be tailored to suit the needs of the parties, and often includes a series of individual methods of ADR. There are a number of methods that parties can consider, including, but not limited to:

  • Mediation;
  • Arbitration; and
  • Expert determination

Mediation is the most common form of ADR and is a process most people are familiar with.  It involves the parties, facilitated by a neutral party – the mediator – negotiating to resolve the dispute amicably. It is a favourable option for many as it involves no obligation, and the parties have control over the exact terms of any resolution.

Arbitration is different to mediation. The parties appoint a third party to facilitate a resolution, without any negotiation between the parties. Instead, the arbitrator is given all the facts and evidence and makes an independent decision as to how the dispute should be resolved. Unlike a mediation, before the arbitration commences the parties agree to be bound by whatever decision is made.

Expert determination is another method that parties can pursue and is similar to arbitration. The key difference however is that the parties appoint an expert in the field of the dispute. Like in arbitration, this expert then makes a determination based on the facts of the situation which is binding.

Regardless of which method(s) of ADR are agreed upon by the parties, well drafted contracts with proper provisions for ADR can help to maintain relationships between growers and winemakers. The strength of these relationships is essential to the long term welfare of the industry and parties should be doing all they can to maintain these relationships well in to the future. Unfortunately, ADR does not guarantee a resolution and sometimes litigation remains the only solution.

It is important to remember that litigation, by its very nature, is filled with uncertainty. No matter how strong a particular party’s case may be, that party will have to appear before the Court and make their case. Ultimately this decision will come down to an opinion formed by a judge or a jury. This opinion can never be predicted with absolute certainty. The only certainty in this entire process is the cost.

Litigation is an extremely expensive proposition, with many trials costing in excess of $10,000 per day per party. Those costs are ultimately paid for by a party to the dispute. In many instances, the losing party is also responsible for 60% of the legal costs incurred by the successful party, meaning that even the ‘winner’ is out of pocket for legal fees. Litigation is also time consuming and disputes resolved in this manner can become protracted and drag on for years. This puts the parties under considerable stress and can have far-reaching implications on not only the businesses, but also on the personal lives of those involved. To avoid the consequences of litigation, any contract should have a clearly defined ADR procedure. Although it has a place in the resolution process, litigation should undoubtedly be a last resort.

 

But what can I do?

Unfortunately, some disputes cannot be reconciled through ADR methods and litigation becomes the only option. In such circumstances, parties should always seek advice and assistance from a lawyer. Litigation can be overwhelming and having proper legal counsel to grapple with the issues objectively is vital. The difficulty faced by lawyers tackling contract disputes is that they often have to attempt to retrospectively assemble the facts, particularly the context in which the agreement was entered into. This is often a difficult and time consuming process.

Parties can take steps to make the litigation process smoother and less stressful. Primarily, the first step is to engage a lawyer to draft the contract initially. Whilst template style ‘plug-n-play’ contracts may seem an attractive proposition due to their low cost and ease of creation, they can become particularly difficult to deal with when resolving disputes, as many terms will not be relevant or correctly drafted. In extreme circumstances, this can cause the entire contract to be void.

In addition, growers and winemakers can take additional steps to help resolve disputes faster and with less stress. The most important thing is to keep  records, or a ‘paper trail’. Whilst this may not always be the easiest thing for growers and winemakers to do, having records of telephone conversations, meetings or correspondence between parties will ultimately assist in resolving any dispute. A possible alternative is the use of emails to record correspondence. Using our example from before, if Gary thinks he is not being paid correctly for his grapes, in addition or instead of ringing Vinnie to discuss the dispute, Gary can send an email containing the details of his concerns for future reference. The benefit of this is that if the dispute progresses to litigation, Gary’s lawyers will have a clear record of his discussion with Vinnie.

Along the same lines, a good system for organising paperwork is critical. It is a very costly exercise to pay a lawyer to sort out 20 years of receipts in order to find a particular transaction. If properly organised files are kept, not only can this cost be avoided, but it may assist the parties to resolve a dispute without the need for litigation, as discussions and transactions can be easily verified by reference to records.

Lawyers often also encounter issues regarding timing. Again referring to our example of Gary, Vinnie and Shiraz Wineries, let us assume Gary has entered into an agreement with Vinnie for the supply of grapes to Shiraz Wineries. Gary issues invoices for his grapes and is compensated accordingly, but not in the full amount as there is an issue regarding how the parties price the grapes. Two years go by and Gary has finally had enough. Gary’s lawyer will encounter difficulty in resolving the dispute by litigation as Gary has been accepting of the issue for so long. It is important that both growers and winemakers raise and resolve any issues that may arise as and when they happen.

One final tip for both growers and winemakers is to maintain good financial records. This includes both yearly financial statements, as prepared by an accountant, and other financial documents including invoices, receipts, records of cash transactions, bank statements and any other financial documents. Keeping good records assists in establishing a financial position at any given point in time, but also provides a reference point that the parties can use to hopefully work through any difficulties that may arise and potentially avoid litigation altogether.

Each of these tips will not only help your lawyer when commencing legal proceedings, but they will also substantially lower the cost of your legal fees and make the entire process smoother. They may also reduce the likelihood of a dispute arising, and assist the parties to resolve disputes without the need for litigation.

 

Where to from here?

Contracts in general play an important role in the success of any business. They provide certainty for parties, making them aware of their obligations and entitlements under business arrangements. When combined with friendly and honest negotiations, and a willingness to work together, a contract can be used to promote healthy long term relationships between growers and winemakers. These relationships are the basis of the industry’s long term sustainability and success. By strengthening them, growers and winemakers benefit themselves, each other, and the industry at large.

There are, however, no illusions as to the difficulties of drafting an appropriate contract to properly give effect to the terms of an agreement. To that end, Mellor Olsson Lawyers are more than happy to provide assistance to anyone in need of help with a particular contract, or with dispute resolution, litigation or any other legal services that may be required.

A version of this article first appeared in the Australian Vignerons magazine

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