Ask a Banker | Get It in Writing
Whether you’re buying or selling cattle, a contract provides the protection both parties want and need. But what makes a good one? We asked Ken Leiber, president of Texas Livestock Marketing Association and National Finance Credit Corporation of Texas, for his tips.
Evaluate your risk.
There are 2 sides to every story — and contract. Remembering that is key, Leiber says.
“The first thing I say to anyone considering entering into a contract is to be sure to evaluate the counterparty risk to it,” he says. “You have to really look at the situation and decide how confident or comfortable you are that the other party has the financial ability and the integrity to meet the negotiated and agreed terms.”
After all, a contract is intended to provide the buyer and seller with protection from risk, but it’s only as good as the people signing it.
“A contract will not provide the intended protection from risk if the other side can’t or won’t perform,” Leiber says. “The reality is you don’t need a written contract until you really need it. And when you really need it, then it needs to be there to work for you.”
In other words, if you have a contract to sell your cattle, the market goes down before delivery and the buyer doesn’t show up, you are going to be harmed because you can’t sell the cattle at the higher contracted price anymore. Conversely, if you’ve contracted to buy the cattle, and the market goes up before delivery and the seller doesn’t perform, then you will be harmed because you have to find other cattle at a higher price than the contract.
Be partial to print.
A man’s word may be his bond, but sometimes in business, you need more.
“There are handshake deals and then there are written contracts,” Leiber says. “The clarity of a written, executed contract makes for a lot better and a longer relationship between the parties because you start out with a good understanding of the deal.”
Be ready for change.
Even the best contracts may need revisions, and Leiber says it’s important to anticipate that need and agree at the time of the execution of the contract how any changes can or will be made in the future.
“Typically, the parties would agree that any future changes to the contract must be made in writing, and both parties must agree to them.” he says, “Otherwise, the original terms of the contract stand.”
Think big picture.
Details are important in any written agreement, but Leiber warns cattlemen not to get ahead of themselves.
“There is a reason you’re making this contract, so spend the time to really study it and make sure it achieves your goals,” he says. “If it’s a price risk transfer and you make this contract now for future delivery, one of you will probably wish you hadn’t made the deal by the time it comes up for delivery because of the market volatility. That contract is what ties both parties to the performance of the agreement that was made when each party felt that they were on equal ground.”
What’s in a name? A lot.
One of the biggest mistakes Leiber sees on the banking side of marketing cattle is as simple as a moniker misstep.
“You have to know who you’re dealing with,” he says, adding that the contract must identify, clearly and correctly, all parties whom you want to be bound by the contract.
“If you’re buying from or selling to an individual, then an individual signature is fine,” Leiber says. “But if it’s an entity, an LLC, a corporation or the like, you need to be clear that the contract is executed by that entity, and signed by a person who has the authority or the capacity to sign for that entity.”
That means if the contract is executed Doe Ranch LLC by John Doe, as manager or member, the only party to that contract is Doe Ranch LLC, not John Doe, individually.
Get specific.
Leiber says that when it comes to a contract, generally the more details the better. Of course, you’ll want to include names and addresses of all parties, head count and pricing, but don’t forget payment details (including method of payment and timing) and any warranties or representations. It’s also important to describe handling (will the animals be fed, or just grazed?), weighing conditions, transportation details and how the buyer/seller will deal with any death loss or shortages.
Maybe most important, though, is the description of the cattle: Their breeds, quality, weight and condition.
“If you’re buying cattle, you want to look at them,” Leiber says. “If you have made a contract to receive them in the future, you want those to be the same cattle you looked at when you made the contract. That’s why it’s so important to have a description that is clear and identifies only the cattle you want to buy.”
Then what happens if the right cattle arrive, but something is wrong with one or more? Document up front what constitutes a cull or unmerchantable and how you will handle it.
“If you’re the buyer, you want to document some protection so you won’t have to take a lesser quality, non-performing, sick or injured animal,” Leiber says.
Consider the liens.
As a seller, Leiber says you must understand that the transfer of the possession of the cattle to the buyer without a simultaneous payment can result in the seller becoming an unsecured creditor of the buyer. As that buyer gains possession, he has rights in the cattle to give liens to his secured lender upon his possession.
“If you don’t cover the terms of the payment at the time you deliver the cattle, then there’s another set of risks you need to be aware of,” he says.
On the other side, if you’re buying cattle, you want to look at the lienholder situation of the seller and make sure you understand who, if any, lienholders are involved in the cattle, and what kind of required payment instructions they have for releasing their lien.
“Getting clear title to the cattle you purchase gets into UCC (Uniform Commercial Code) law,” Leiber says. “It’s different in central-filing states than it is in direct-notice states, so be sure to familiarize yourself with that and follow the applicable requirements so that you ensure that you get the cattle free and clear.”
You won’t need it till you do.
Leiber says that whichever side of the contract you’re on, it’s always easier to remember the parts of the agreement that benefit you and forget the ones that don’t. It’s the same with the parties on the other side of the contract. That’s why getting it all down and agreed to on paper is so important.
“Fortunately, we are in an industry where most of the time agreements for the buying and selling of cattle are performed as agreed by the parties, whether it is verbal or written. This can lead to apathy and the parties may conclude that a written contract is unnecessary,” he says. “But it’s a lot like loan agreements — you only need them on the bad deals. Of course, there’s no way of knowing ahead of time.”
“Get It In Writing” is excerpted from the February 2017 issue of The Cattleman magazine.