A marketing agreement is difficult to enforce unless it is tightly written. The basic components of a marketing agreement should:

o be in writing and follow the minimum requirements of the Uniform Commercial Code.

o identify the product committed to the cooperative and the individual plots it is grown on (or ranches were it is raised). The cooperative needs to keep annual production records on the individual plots committed to it. This allows it to build a valuable history which can be useful in market planning as well as enforcing the marketing agreement. Members should also provide the cooperative with seasonal production estimates. One hundred percent of any commodity to be marketed through the cooperative should be committed to the cooperative, but a specified volume is also workable.

o state the cooperative will use its best efforts to sell the members' production at the highest and best prices possible. If the cooperative is unable to increase its members' income over the long run, it can not justify its existence or expect to be used. (In weighing the benefits of a cooperative, members must also look at non-price factors such as the stability of the market created by the cooperative and improved terms of trade.)

o establish a multiple year commitment and give members an annual opportunity to terminate the contract. Single year contracts are more difficult to renew, hinder the cooperative's ability to do effective long range planning, and leave the cooperative vulnerable to members who see short term gains elsewhere. Multi-year contracts can considerably strengthen a cooperative's marketing position. Members, however, should have an annual opportunity to terminate a multi-year contract. The ideal time to give notice is a specified period well after the end of the season--this gives members time to review the cooperative's performance and restore any tempers lost in the heat of the season.

For example, California Canning Peach Association (CCPA) members have a two week period in November in which they can terminate their marketing agreement by filing a written notice with the cooperative. The notice is effective for the following season--not for the coming season. This gives the cooperative time to attract the leaving member back as well as adjust its marketing plans.

o outline a payment schedule that is realistic and provides for any contingencies. If the cooperative uses a pool, the terms of the pool should be described. (Pooling is a way of combining members' volume so the cooperative 1) takes title on delivery and sells on its own account, 2) commingles products of like grade, kind, and classification, and 3) pays members the same price for products of like grade, kind, and classification for products delivered during a specified period (ie., week, month, season, or year).

For example, tomato growers who pool their tomatoes would get paid the same price (by grade and size) regardless of where their tomatoes were sold. If they used weekly pools, their price would be the average price the cooperative received (by grade and size) for all tomatoes delivered to each pool during the week.)

o outline its quality requirements. At the very least, the cooperative should not take any product unless it meets minimum commercial standards. The marketing agreement should also state the rules governing the method of weighing, handling, sampling, quality analysis, storage and delivery.

o outline the liquidated damages that will be assessed against a producer for willful nondelivery. Liquidated damages are assessments that reflect actual monetary damages and are based on a dollar amount per carton or pound. (Liquidated damages are different than penalties. Penalties are assessments against members for an amount that may be substantially beyond the actual monetary damages. A $5,000 fine for any violation, even one nominal in value, is a penalty and is not permitted by the Hawaii State statute (421-18). Liquidated damages should be high enough--ie., 25 percent of the selling price--to make outside sales unprofitable if the member gets caught.)

Enforcing Marketing Agreements

A cooperative needs to enforce its marketing agreement if it is going to protect its reputation in the market and the interests of the members who comply. If it is too lenient, it will enter a downward spiral as members reason "If he can do it, why shouldn't I?" If it is too strict, it can develop the reputation of being "sue-happy" and scare potential members from joining. A good approach is to use both the carrot and the stick: the carrot is the way to keep members enthused and the stick is the legal route to be used as a necessary, but last, resort.

The carrot is the way to keep members enthused in the cooperative. To do this the manager and board must increase the members' emotional involvement in the organization:

o The annual meeting is an important time for members to catch up with each other and focus on the cooperative. To get members to turn out, CCPA has a barbecue for members and their spouses and features a popular keynote speaker--usually a big name politician or major food industry figure.

o Have grower meetings to estimate upcoming production. This not only gets members involved, it gives the cooperative invaluable market intelligence. At the grower meetings, CCPA producers do not discuss their projected yield in terms of quantity but as a percent of last year's crop or a percent of a normal year.

o Assign a committee to bring issues to the attention of the directors. The CCPA committee meets every once in a while for breakfast and wrestles with major issues being discussed by the board, coordinates the cooperative's early market intelligence efforts, and nominates candidates for the board of directors. This not only gets members involved, it develops leadership. Out of 600 CCPA members, 100 are on these grower committees.

o Mail out a monthly newsletter. Members hear a lot of misleading information from their neighbors and buyers--the newsletter is an ideal way to clear up any rumors. CCPA finds that the newsletter is most effective when it is no longer than one page.

The cooperative needs to reach out to those members who are violating or terminating their marketing agreement with the cooperative (or just thinking about doing so). These members feel that they can do better on their own, that the cooperative has not lived up to its promises, or that they can have it both ways. Ideally, the cooperative will be able to persuade them back through friendly visits with the manager, neighbors, friends, and other committed cooperative members. These talks can go a long way in reminding the discontented producer of the importance of the cooperative and clearing up any rumors or bitter feelings.

The cooperative also needs to give notice to buyers of its intent to protect its marketing agreement. This can be done by a letter sent by the cooperative's attorney. (Under the Hawaii agricultural cooperative statute, a cooperative can also file a copy of its member marketing agreement and membership list with the bureau of conveyances (421-18d). Filing the contract gives constructive notice of the described terms and the cooperative's rights to members' contracted production.) If buyers continue to buy from members, the cooperative may have to sue or threaten to sue them.

Flagrant violations that occur on a continuing basis must be dealt with. Otherwise other members will begin to opt for short term gains and the problem will snowball. Such a situation can force a cooperative to switch from pooling to individual accounts and may mean the beginning of the end for the cooperative. The integrity of the cooperative must be protected.

If the cooperative takes a member to court, it must be able to show 1) a breach and 2) the amount of the damages incurred. Since the damages should have already been agreed to in the marketing agreement, this would leave the cooperative with just the responsibility of proving a breach.

To prove a breach the cooperative must be able to persuade the judge and/or jury that there was a breach. It has a very strong case if it kept good production and delivery records. A big variation in production needs to be explained by the member in question, especially if the cooperative can show that other members had normal years (or less drastic reductions). As a critical step in discovering the cause behind a major variation in delivery, the cooperative can ask for a deposition. A deposition is a sworn written testimony of a witness taken out of court--it is a discovery procedure. In a deposition the producer is required to bring all records (such as tax returns, delivery invoices, and bills of lading) and truthfully answer pointed questions. If the case has come this far, it is usually at this stage that a violating producer will admit to a violation.

Arbitration is another option available to a cooperative. Arbitration is the submission of a dispute to an extrajudicial authority for a decision. Arbitration procedures are generally much quicker and less expensive than litigation. The decision made in arbitration is final on all issues submitted and will be enforced by the courts as if it were a judgment of the court.

As a cooperative board plans its enforcement strategy, it should consult with its attorney and ask him or her to outline all the possible alternatives. The board then needs to select the approach that is best suited to the needs of the cooperative. Frank cautioned that some attorneys may want to use the most radical solution right away--the board must be careful not to let an attorney run its business.

Other notes on enforcing marketing agreements:

The cooperative should put a limit on the amount of time it takes to go from the initial reporting of the suspected violation to the final finding by the board. Because of the seriousness of a breach, this take no longer than a week. This, along with an additional week to file an injunction if it is needed, would give the cooperative two weeks from the time a breach is reported to when a injunction is filed.

If the board determines that a violation has occurred, it should also send a letter of protest to the buyer. This is a measure to prevent further violations of the contract and is separate from invoking penalties for inducing a breach of the marketing contract or filing an injunction.

While a board recognizes the importance of enforcing the marketing agreement, it also is confronted with the difficulty of discovering violations. To this end, it is essential that all members understand that their interests and those of the cooperative are damaged whenever someone violates the marketing contract. Members should feel compelled to report any violations they know of to the board and not see it as "ratting" but as a way to protect their market. For its part, the cooperative should keep an ongoing tabulation of the volume marketed and compare it with the original estimates. If there is a major discrepancy, an inquiry should be made as to why.

If a member breaks the agreement, the cooperative can suffer damage to its "reputation in the agricultural and agribusiness communities as a reliable marketer and supplier, loss of volume processing efficiencies,...disruption of product supply, and loss of margins." It is not enough to collect monetary damages.

To protect its marketing agreement, the board should take the following action:

o File a copy of its marketing contract and members' names with the bureau of conveyances.

o Develop a strategy to enforce its marketing agreement. The plan should be cleared by the cooperative's attorney.

o Act quickly to stop any action which threatens the marketing agreement. This includes taking action against outside shippers who solicit members, members who threaten not to ship to the cooperative, and members who willfully do not ship to the cooperative.

Last Revised: August 29, 2001

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