CONTRACT FARMING AND THE CONTRACT LAW
Updated: Jan 20
In a layman’s language contract farming can be understood as an arrangement Between the producer and the seller. Such agreement can be oral or written and shall specify the terms and conditions of the contract. Contract farming involves agricultural production of the crops that are decided beforehand by the parties to the contract, that are, the buyer and the farmer. Such contract farming agreements include production of previously decided crops and agricultural products at a predetermined price. One of the conditions in the contract also includes the promise of the buyer in helping the farmer/producer in production of assorted groups of crops in his capacity (in the form of technological advances and similar arrangements). The producer/farmer thus has an obligation to provide the best standard products in terms of quality and quantity which the buyer can purchase.
Contract farming agreements are usually based around three important key elements that are ensured throughout the viability of the contract. The conditions are set upon the pricing of the crop (mutually set by both the parties, i.e. , the farmer and the buyer), the quantity of the crops to be produced (specific quantitative value is decided for the desired crop) and the quality of such production (decided on the basis of the available resource present with the farmer along with the additional help extended by the buyer). Contract farming is viewed as the next big step towards growth in the agriculture sector. Features of contract farming include creation of new market opportunities for the farmers, increased efficiency and production scale, maintained quality products, access of modern machines to the farmers, low cost of transaction and low working capital and shared load of risk. Through the onset of contract farming practices, the agricultural sector will witness heavy monetary investments by private investors that shall, in the long run, pose as a steady income source for the farmers and producers.
Accordance with Contract Law
According to the Indian Contract Act, 1872, for a contract to be valid, it should comply with the essential requirements that are present. For instance, there should be an offer given by the party to the contract and acceptance of that offer shall be extended by another party to the contract. In the above mentioned occurrence, offer and acceptance is extended by both the parties. An offer to buy the crops produced by the farmers and the acceptance comes from the buyer.
Another essential for a valid contract is consideration. Consideration can be regarded as the value or the benefit that is provided in exchange of completion of a promise. Consideration should be validated in a mutual manner, that means, both parties shall be entitled to some consideration in a contract through which they can be benefitted. Consideration for the farmer is the money provided by the buyer, while for the latter, it is the products and crops given by the farmer.
Other essentials of the contract include lawful object, free consent and capacity to the contract that shall be adhered to by both of the parties.
Government infringement as third party
The new ordinance provides the government with adjudication powers and power to take up suo motu cases in farmer and buyer disputes. In such scenarios, where the government has the power to exercise suo motu jurisdiction, it can take up cases or disputes where the parties to the contract, that is, the farmer and the buyer do not have any difference but the authority vested with the government can enable it to make changes in the already decided terms and conditions of the contract. Such interference of the government acting as a third party breaks the fundamental principle of ‘privity of contract’ under the contract act. Sheer violation of principle mentioned above breaks the spirit and the viableness of the contract that may force the parties out of the contract.
The doctrine of ‘privity of contract’ envisages the principle of common law that enunciates that only the parties to the contract have the right to sue each other in case terms/provisions of the contract are violated. Third parties are not conferred with the right to sue the parties to a contract (In India, certain exceptions are available against the principle of privity of contract).
Farming sector practices - status quo
Contract farming has been covered under the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, through which a contract mechanism has been built that facilitates the farmers and the buyers to enter into direct contracts for sale and purchase of agricultural crops and produce in accordance to the terms of the contract. Previous practices and customs in the agriculture sector observed that farmers were not entitled for the sale of their produce directly to the consumer of the good. For a farmer to directly sell the crops he grew was not permitted, he had to go through a network of intermediaries, known as the licensed traders.
Agriculture produce market committees were set up by state governments to monitor and control the trade that took place between the farmers and the consumers. According to the laws prior to the ordinance made with respect to farming laws in the country, certain ‘market areas’ were designated for farmers to sell their produce. But such market areas were spread in a disproportionate manner in a way that a market area could be spread from a block to a whole district. The farmers were under obligation of the law to only sell their produce in the market space authorised to them.
Even the mere act of using another market instead of the designated market area for the farmers was prohibited by law. The laws under the APMC Acts made it a mandatory provision that buying and selling of agricultural produce takes place in the APMC set up market areas. The producers, farmers and the sellers were required to pay the market fees and other charges that were levied upon them. Such charges included commissions and miscellaneous monetary fees. The problem started arising when the chargers became mandatory even if the sale of products did not take place. The farmers were forced to pay such charges irrespective of the fact that they made sales in such markets or not. The chargers levied in such markets varied depending upon the state and the kinds of crops sold in the APMC markets.
Expected changes after the new bill
The new bill that provides for contract farming opportunities seeks to provide the farmers with a new avenue of exploring the corporate markets for agricultural produce. The government at central level aims to bring decentralisation in the state regulated APMC laws along with the goal to manufacture a steady and healthy income for the liberalisation of the farmers and the farming sector. Liberalisation will be in play when the farmers are acquainted with the opportunity to exercise their right towards choice to sell the crops and produce without any restriction. The role of middlemen has been eliminated through the new ordinance for reforms in the farming sector. The bill could possibly open new ventures in the market with respect to price discovery, healthy competition among the farmers, dynamic market responses etc.
Even though the bill promises to deliver exciting results and new opportunities for the farmers by abolishing the previously designed systems, it is hard to confer completely over the fact that a utopian state of changes can be ensured through such ordinances. There has been protest from around the country over the new bills, especially in the northern states of Punjab and Haryana. The farmers and the middlemen at the moment are hesitant towards the implementation of the new bill and demand a stay over the previously established state regulated AMPC laws. There exist serious and logical counter arguments against the implementation of new bills.
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