Documenting Supply Agreements in Horticulture

23 November 2017 –

One of the major culture changes being driven by the Horticulture Code of Conduct is the requirement for Growers and Wholesalers (Traders) to have Supply Agreements in place, or Horticulture Produce Agreements (HPAs) as they are described in the Code.

Establishing a documented Supply Agreement tends to create tensions between manufacturers/producers and the buyers of their products, not only because it is a legal document, but because the Agreement addresses some areas which may have previously been dealt with by the parties to the Agreement in a flexible and informal manner.

The HPAs required under the Horticulture Code of Conduct are no exception. These are contractual Supply Agreements and there is a legal requirement that they must be in place.

While the template Merchant HPA document developed by the wholesaling sector’s national representative organisation, Fresh Markets Australia (FMA), covers all the requirements of the Code, it also addresses a number of other matters commonly contained in business Supply Agreements.  This has resulted in the inclusion of two specific clauses in the FMA template document which have garnered significant attention – attention which FMA believes is unnecessary when the clauses are considered in their proper context.

The clauses in question relate to a Trader’s ability to claim a credit/refund from a Grower of produce which the Trader has purchased and on-sold and which has subsequently been shown to be out of specification, not as described by the Grower, or to have an inherit quality defect.

The HPA defines this product as “non-complying” and gives the Trader the ability to claim a credit/refund to recover the damages/loss they have incurred, up to a maximum of the sale price of the produce.

These provisions reflect what is commonly seen in Supply Agreements, not just in this industry, but generally in all industries. This point deserves emphasis, in that this is a standard type of clause in business Supply Agreements.

An example of how the clause operates is where a Trader, acting as a merchant, believes they are purchasing and selling Class 1 produce, and the purchaser of that produce returns half of it, having established that it is clearly Class 2. In this scenario, it is legitimate for the Trader to be able to make a claim back against the Grower for the losses suffered as a direct result of the supply by the Grower of non-complying produce.

Solutions for those who are unsure about the implications of these clauses and how to manage their perceived risk include:

  • Communicating with your Traders and being accurate in your descriptions of the quality and grade of the produce which you are selling and supplying;
  • Supplying produce which meets the description stamped on the packaging or the produce (Class 1, etc.);
  • Raising and resolving disputes quickly (e.g. the FMA – Growers hotline); and
  • Taking responsibility for the quality of the produce sent to Market and the relationships you have with your Traders.

It is concerning that some Growers and Grower representative organisations have the view that once a Grower sells their produce, they have no responsibility for that produce, even if it is clearly not what the Grower said it would be (quality, grade etc.) and, therefore, is in breach of the Grower’s obligations under the HPA.

Traders must also do the right thing and ensure that any claims made against Growers are supported by the appropriate documentation or evidence.

At the end of the day, what will work best for all parties is ensuring that there is a strong commercial relationship and documented Terms of Trade in place, supported by good communication and appropriate levels of trust.