Growing changes in the political climate is forcing requirements in grape contracts that growers may be unaware.
Whether it’s the imprecise definitions of “sustainability” and new contract language demanding sometimes proprietary information from growers, or efforts to get growers to waive their legal rights to a producer’s lien, grape growers need to know what they’re signing before they put ink to paper.
“You need to know who you are committing your life to over the next 1-15 years,” says Nat DiBuduo, president of Allied Grape Growers in Fresno, Calif.
DiBuduo and AGG Vice-President Jeff Bitter understand wine grape contracts since the grower representatives review or write about 500 grape crush contracts (wine grapes and grapes for concentrate) for AGG members annually.
They estimate that more than 95 percent of the California wine grape supply is contracted on template agreements written on behalf of the winery, mostly by attorneys. In buyer-grower contract negotiations, some wineries will change the contract to accommodate grower concerns; others may not.
Some contracts are written by grower representative organizations, including AGG.
“Sometimes growers see the price on top, the length of the term, and then sign the contract,” DiBuduo said. “In doing so, growers sometimes give up their rights.”
Dale Stern, an attorney with Downey Brand in Sacramento, works with agricultural clients on contract issues. He said one of the newer efforts is to get growers to waive their rights to a producer’s lien. This is a legal mechanism created by the California Legislature that Stern says protects producers if a processor fails to pay the producer.
That lien is important, Stern says. It puts the producer near the front of the line in getting paid should a processor file bankruptcy or otherwise fail to pay a grower.
Here’s how it works in simple terms.
“Acme Winery” purchases “Joe Grapegrower’s” wine grapes for $100,000. Acme then creates $1 million worth of wine from those grapes. Based on California law, that $1 million worth of wine immediately has a $100,000 lien on it. The grower does not have to file any additional paperwork or do anything. By law the lien automatically happens.
For instance, if the winery files bankruptcy, Joe Grapegrower still has a lien for $100,000 against the winery for his grapes.
The lien supersedes any other lien against the winery accept for two: employees and the warehouse. That means, before “Grapegrower” can be paid for his grapes, employees must be paid and the third-party warehouse where “Acme Winery” stored finished bottles of wine must be paid.
The producer’s lien supersedes even the IRS and banks, meaning the banks cannot recover their loan costs from “Acme Winery” until “Grapegrower” is paid.
“That’s a pretty powerful lien the Legislature gave to growers,” Stern said. “Why would a grower ever want to waive or give up that lien position?”
According to Stern, the banks have apparently interpreted language in the law to allow growers to waive these rights, and are leaning on the wineries to include such language in the contracts.
DiBuduo says growers should not agree to the language because it increases their financial risk should a winery fail to pay a grower, regardless of the reason.
“The producer’s lien is a very important issue and the attempts to get producers to waive that lien are expanding,” Stern said.
DiBuduo was able to successfully get language waiving the producer’s lien out of a contract with one winery on behalf of his members, though contracts between other growers and the same winery do include such language.
“A lot of these growers sign these and they have no idea what’s in them,” DiBuduo says.
Eight essential components
As Allied’s chief contract negotiator and reviewer, Bitter reads every word in a proposed contract.
“We are always on guard for contract terms which are unfavorable to growers.”
He lists eight essential components in a wine grape buyer-grower agreement. These include:
One – precisely identify what is traded
The contract should clearly state purchase specifications – the varietal, acreage, and locations from which sourced, specific appellation (if any), and if a limit exists on the purchased/produced tonnage.
“If a crop comes up short in tonnage (due to weather for example), the contract should state if the grower is responsible to find grapes from another source to make up the difference,” Bitter said.
A contract should clearly state whether the winery will purchase all the tonnage from a specified number of acres (with or without limitation), or whether the purchase is strictly based on certain tonnage total, not acreage.
Two – agreement terms
The contract should state the specific years of the agreement – one-year or multi-years.
A contract can be an “evergreen” agreement where the contract is continuous from year-to-year until one party wants out. The evergreen should be worded precisely so both parties understand how to terminate the agreement.
In most evergreen clauses, the agreement is honored for one full crop year after the termination notice is given. This gives both parties time to replace the tonnage or replace the buyer.
Three – method of price determination
A grape contract should include either a fixed price or negotiated price.
For a fixed price, state the price for the length of the contract. For a negotiated price, a price per ton minimum may be stated over the contract period.
Negotiated contracts are common with large wineries. Wineries can offer to pay a higher price to the grower depending on the wine grape market.
Four – payment terms
Spell out exactly when and how the grower will be paid.
Many wineries prefer to stretch out the cash flow since it takes a while before a bottle of wine appears on the retail shelf. Many smaller coastal wineries request extended payment timelines which can exceed one year after crushing.
“For growers, there is no reason not to get paid 30 days after delivery unless a tax reason exists,” Bitter said.
Five – quality standards
Minimum and maximum brix (sugar) standards should be stated in the contract and whether the winery prefers brix in the mid-range level. This is usually not stated and can lead to problems.
Another issue is grape quality near harvest or at delivery. Wineries may want to discount the price or reject the load due to a too high or low brix level, rot, mildew, or excessive plant trash in the load.
Bitter says growers should be aware of the grape quality wording. While a grape load may pass a state inspection, the buyer may have more stringent standards in the agreement which is almost always graded subjectively.
Six – inspection and adjustments
If a grape-quality disagreement exists between the buyer and the seller, a third-party inspection is an option through a State of California contractor. These inspections are common in the San Joaquin Valley.
If one test of a load suggests a problem (brix level for example), Bitter says it is best to conduct a second test of the load to determine if a problem truly exists.
“From the grower standpoint, it is desirable to use the brix level for the entire field versus grading each load independently,” Bitter says. “After all, it usually goes into the same tank at the winery.”
Seven – viticulture practices (farm plan)
Additional viticulture practices are often required to produce higher quality wine grapes for wineries which want premium grapes. Some of these practices - shoot thinning and leaf pulling, for example, can be outside of the grower’s normal, customary farming practices.
Wineries sometimes want a specific farm plan spelled out in the contract which specifies the required viticulture practices.
“A farm plan is fine as long as the winery and grower jointly agree to it,” Dibuduo says.
Eight – harvest and delivery
The contract should specify whether the grapes will be harvested by hand or machine. While both parties have agreed to machine harvest the grapes in the past, it does not mean this will occur in the future.
Types of containers to transport grapes to the winery should also be specified.
The certified weight of the crop can also be an issue. Some wineries do not have a certified scale. The grower must utilize an independent scale on the way to the winery and on the way back to gain the actual weight of the grape load.
“The grower and the buyer should make sure issues like this are understood upfront so there is no misunderstanding,” Bitter said.