Advanced Winery and Vineyard Law Natinal Business Institute Grape Purchase Agreements and Grwer Cntracts Vigrish Imprts, LLC
Agenda Grape Grwer Cntracts General Overview Key Prvisins in Grape Grwer Cntracts t Minimize Risk Negtiatin Strategies in Wine Grape Purchase Agreements Shifting Risk in Wine Grape Purchase Agreements
Eight essential cmpnents One precisely identify what is traded Tw agreement terms. Three methd f price determinatin Fur payment terms Five quality standards Six inspectin and adjustments Seven viticulture practices (farm plan) Eight harvest and delivery
Grape Purchase Agreements and Grwer Cntracts: Overview The way it was Agreements that begin with a simple handshake must be fllwed with cncrete prtectins fr bth the winery and the grwer. Written cntracts have nt always been the rule f thumb between grape-grwers and their winemaking clients and many tns f grapes have changed hands with a simple handshake fr generatins. The wine business is built n a fundatin f gd relatinships and yu dn t need a 20 page agreement in every grape grwer/ buyer arrangement. but yu d need a lt mre than a handshake and gd intentins in these mdern times.
Grape Purchase Agreements and Grwer Cntracts: Overview Grape cntracts have tw integral parts grape and legal cmpnents. Written agreements cdify the relatinship between sellers (e.g., grwers/farmers) and buyers (e.g., prcessrs/vintners) and prtect bth parties Cntracts can be at the grape cultivatin r planting stage (i.e., signed prir t the establishment f a vineyard)
Grape Purchase Agreements and Grwer Cntracts: Overview Wine grape cntracts are cmplex due t: Uncertainties related t quantity f grapes t be grwn Wine grape demand and supply = ut f sync Cntracts written at pre-planting stage require years t develp vineyard with all the uncertainties f success Changing ecnmic cnditins unfavrable unexpected turns in crps and markets Differences between the parties regarding expectatins arund the quality r type f grape under cntract Unexpected issues that may arise (Frce Majeure) Weather, Labr, Pestilence
Grape Purchase Agreements and Grwer Cntracts: Overview Exact transactins vary, but typical terms, as with mst agricultural prduct sales, are: Sale and purchase timeframe Price the mst sensitive prvisin/ grapes as a cmmdity are a unique prduct Payment terms Prduct Variety f grape, vineyard surce being sld, vineyard name/trademark Quantity Quality and ther specific requirements (e.g., farming technique (hand r machine picked), degree f ripeness, physical maturity, etc.) Term: Between agreement n grape price and grape delivery Standard legal language fr default, free f third party interests, dispute reslutin, cntract terminatin, prducer s lien
Negtiating Wine Grape Purchase Agreements Pricing may be fixed r indexed, fr example: Specify a price per tn fr the first year and then an escalatin based n fixed rates (CPI) r ther inflatin index Price is calculated based upn change in average prices fr a lcal area (Pas Rbles Estrella District) frm the last 2 crush reprts. Price is calculated based upn change in selected index, such as a state psted price list f average price per tn frm the last crush reprt minus a certain percentage. Price per tn is based upn the average bttle price r the brand the grapes are used t prduce. A $40 bttle f wine x 100 = $4,000 per tn. The price per acre is based upn nrmal year expectatins
Negtiating Wine Grape Purchase Agreements Fixed price fr the vintage(s) Typical pricing mdel May be calculated based upn weight, lt, acre, r published grape prices Duratin: Typically annual beginning with agreement n price and ending with delivery f grapes r autmatic renewal Shrt-term cmmitment Can be tied t previus year s crush price r fixed price per tn Less prne t cnflict Disadvantage: Subject t market fluctuatins in pricing Wh assumes the risk f wine prices that are t lw t cver prductin cst at the cntract grape price Minimize risk by detailing bligatins shuld such a situatin arise Include clause fr mdificatin with written agreement
Grape Cntract Pricing - Indexed $1700 per tn $1600 per tn
Grape Cntract Pricing - Indexed Index pricing t reprted average f grape prices r ther grape market standard Advantage: Less discnnect between cntract price and spt price. Disadvantage: Pssibility f changes t methd f calculatin by the index, index is discntinued, r ther unexpected changes t index. Lng-term cmmitment Cannt prtect against drastic changes in price, but can minimize lsses if a frmula is included fr allcatin f hardship if the prices change beynd a certain range
Negtiating Wine Grape Purchase Agreements Market swings affect risk assciated with pricing Value Issues Arise: Did the buyer/seller get a reasnable price? Did bth act reasnably? Wh lst prfit? Wh benefited frm the bargain? Did the parties try t mitigate their damages? Include pricing adjustments fr shifting risk and minimizing damages E.g., Adjustments accrding t wine shelf prices, awards, etc. Quality f grapes can affect value f prduct Unexpected lw quality grapes will result in lwer price pint Use penalties and bnuses t reduce risk t pricing frm quality issues Detail viticultural practices Grwer cntrlled Winery cntrlled cntract shuld prvide fr price adjustment in the event that the practices the winery insists n cause a reductin in the ttal tnnage prduced
Negtiating Wine Grape Purchase Agreements Payment Terms The mst typical is 30 days after the last harvest, r 50% 30 days after the last harvest and the remainder by a specific date such as Dec 31st, etc. Grwers may charge interest n utstanding balances Grwers may be advised t check credit wrthiness. A grwer may insert a grwer lien clause n wine prduced frm the grapes. Cntract may be fixed term r evergreen. Evergreen cntacts may have a tw r three year cancellatin clause fr ne r bth parties
Key Prvisins in Grape Grwer Cntracts Defining Terms is Essential fr Minimizing Risk Risk is reduced by clearly stating buyer and seller expectatins, including tailring the grape cntract t buyers preferences/standards s bth parties are clear n requirements frm grwth t delivery Clarifying terminlgy shifts risk t the party respnsible shuld issues arise as ambiguity can lead t cnflict and increases risks f lss fr ne r bth parties Clarifying standard cntract terms als shifts risk t respnsible party shuld issues arise, AND allws fr mitigatin f risk fr the respnsible party fr lng term relatinships
Key Prvisins in Grape Grwer Cntracts Defining Terms is Essential fr Minimizing Risk Beynd Standard Terms f a Cntract, Grape Grwer Cntracts Shuld Detail: Grape Variety: Specifying Variety, Vineyard Grape Quantity: Defining Vlume (e.g., entire crp r winemaker s full requirements) Grape Quality: Defining Cntent, Cnditin f Grapes, Harvest, and Inspectins Viticultural Practices: Defining Methdlgy (e.g., cultural practices, trellising methd) As Well As Cntrl (grwer r winery) Delivery: Timing, Technique, Wh Pays fr Shipment, At What Pint Title and Respnsibility fr Shipment Shifts Frce Majeure: Definitin f What is Cnsidered as Out f a Party s Cntrl, Hw Damages Will Be Mitigated
Key Prvisins in Grape Grwer Cntracts Defining Terms is Essential fr Minimizing Risk Grape Variety Specifying Variety, Vineyard Wine grapes are nt merely a cmmdity Specific variety and exact lcatin grwn affect prduct Clarifying language within a cntract may prvide fr cntrl in pre-planted vineyard sites ver varietals, rtstck and clnes Detailing what part f the vineyard yur grapes are t be harvested frm insures the quality yu seek t be delivered Vineyards may sell t mre than ne buyer r a single buyer Multiple buyers may affects cmpetitiveness f prducers prduct and prducers prduct can affect vineyard reputatin f the vineyard
Key Prvisins in Grape Grwer Cntracts Defining Terms is Essential fr Minimizing Risk Vineyard name licensing Vineyard names can be quite valuable and shuld be specified in all cntracts that have a vineyard designated name. Limitatins n licensing based n quality issues Trademark prtectin: What are the terms f use? Is it an exclusive use f the buyer r can ther buyers f the fruit use it? Is there a premium fr the use f the vineyard designated name? Is that a separate charge? Des the grwer exercise any cntrl f the use? Fr example, Lee Hudsn, wner f Hudsn Vineyards in Carners, negtiates the pprtunity t taste the wine made with grapes frm his vineyard with wineries wishing t use the Hudsn Vineyard designated name. He als includes a prvisin t allw him t vet the use f the vineyard name. Clarifying grape variety and vineyard ensure the seller and buyer d nt take n risks assciated with unexpected cmpetitin, delivery f a different prduct than expected, r trademark r licensing issues arising
Key Prvisins in Grape Grwer Cntracts Defining Terms is Essential fr Minimizing Risk Grape Quantity Defining Vlume Entire crp r winemaker s full requirements Detail vlume: by cases, tnnage, adjustments fr nn-grape items (MOG) Prices can be quted in price per tn (mst cmmn) r price per acre MOG: Fr example, particularly with manual harvesting, there are always parts f the stem, leaves, sil, rcks, even small animals may be caught up in the grapes Clarify ambiguus vlume terms (e.g., carlad, trucklad, bx) Reduce risk f prduct vlume shrtage by ensuring receipt f expected quantity f grapes, nt ther items Reduce risk f cmpetitin r create greater understanding and ability t handle market cmpetitin fr wines prduced frm the same vineyard r wine grapes
Key Prvisins in Grwer Cntracts Defining Terms is Essential fr Minimizing Risk Grape Quality Vinicultural Practices Harvest Requirements
Key Prvisins in Grape Grwer Cntracts Defining Terms is Essential fr Minimizing Risk Viticultural Practices (farming practices) Defined as grape grwing methdlgies and practices, including Cultural practices Leafing Trellising Mnitring and cntrlling pests and disease techniques Fertilizatin Irrigatin Canpy management, mnitring fruit develpment and characteristics, vine pruning. Determine Whether Grwer r Winery Cntrlled Vineyard management effects the grape characteristics Acre cntracts give a winery selling high-priced wines mre cntrl ver farming practices
Key Prvisins in Grape Grwer Cntracts Defining Terms is Essential fr Minimizing Risk Viticultural Practices Reduce risk f grwing grapes that are unacceptable t the buyer by ensuring that there is a clear understanding f expected and preferred viticultural practices. Respnsibility fr assciated and/r extra farming cst An Appendix f viticultural practices may be attached An annual farming plan may be attached Specify and assign the respnsibility f extra csts that culd result frm mandated farming prtcls
Key Prvisins in Grape Grwer Cntracts Defining Terms is Essential fr Minimizing Risk Defining Cntent and Cnditin f Grapes at Harvest Harvest Criteria cntrl prduct quality, and delivery Harvest methdlgy Manual r machine Types f cntainers used Certified scale fr weighing the grapes Cntent: Brix, acid, PH, MOG, r Other Grape Materials Analyses f Brix (sugar cntent), acid, ph level, etc. upn delivery can spark disagreements Excess MOG water, rganic materials, r critters Defects (e.g., rt, mildew)
Key Prvisins in Grape Grwer Cntracts Defining Terms is Essential fr Minimizing Risk Quality terms in a cntract can be ne f the greatest surces f risk fr ne r bth parties Fr example, disputes ver quality r cnditins f grapes may require cstly experts t reslve the dispute Agriculture cnsultants, plant pathlgists, wine marketing and sales prfessinals, ecnmists, wine tasters, and prfessinal industry members Quality Inspectins Wh, When, Cnsequence f Results That D Nt Meet Requirements E.g., sub-standard grapes can shipment be rejected r bught at a lwer price Addressing specific quality requirements reduces the risk t the buyer and creates clear expectatins fr the seller, reducing ptential cnflict
Key Prvisins in Grape Grwer Cntracts Defining Terms is Essential fr Minimizing Risk Delivery Timing, Technique, Wh Pays fr Shipment, At What Pint Title and Respnsibility fr Shipment Shifts Lgistics Issues: If picking r delivery was delayed r deficient, wh s t blame? Wh pays fr a Frce Majeure (i.e., weather r labr prblems make delivery prblematic) Frce Majeure Definitin f What is Cnsidered as Out f a Party s Cntrl Detail hw damages will be mitigated Insurance Cverage Crp insurance with buyer named Reduce the risk f lss fr bth parties Additinal risk reducing clause wuld be the intrductin f Crp Interest, which enables the recvery f farming csts in the event f a lss f the crp
Key Prvisins in Grape Grwer Cntracts Defining Terms is Essential fr Minimizing Risk Dispute Reslutin: Detail Venue and Reslutin Methdlgy Venue fr disputes is particularly imprtant fr internatinal cnflicts Respnsibility f legal csts Litigatin is cstly, time cnsuming, and enfrcement, particularly acrss brders Arbitratin Nnbinding and binding Can be delayed, requires pre-agreed enfrcement prcedures, will nt prvide injunctin r prcessr licenses and may be mre expensive than curt. Reduce Risk f Being Unable t Reslve Disputes and Csts: Mediatin recgnized acrss brders, can start right away, reasnably cheap Mandates a cmprmise agreement, which requires self-evaluatin f issues, s thse wh cannt admit they are at fault will have n reasn t cmprmise
Key Prvisins in Grape Grwer Cntracts Defining Terms is Essential fr Minimizing Risk Payment Security Reduce Payment Risk Payment risk is reduced by detailing: What is the disadvantaged party s bligatin? Can the party perfrm it? Des the advantaged party want t maintain the business relatinship? Is renegtiatin necessary t accmplish that gal? Can the advantaged party get adequate cmpensatin, at least in the lng run, fr freging full exercise f their rights nw? Is the disadvantaged party willing t utilize debtr-in-pssessin rerganizatin? Reduce Risk with a Prducer s Lien: Statutry lien against the grapes delivered r any wine subsequently prduced (may cause a tracing issue) that secures the grwer s right t payment fr the grapes Reduce Risk with a Security Interest: Grwer payment security Granting a simple security interest frm winery t grwer in the cntract is essential, even if it ften trumped by a secured lender.
Adam Vignla Vigrish Imprts, LLC PO Bx 651046 Sterling, VA 20165 inf@vigrishimprts.cm Vigrish Imprts is a prfessinal service prvider, specializing in the wine and liqur industry. With 15 years f experience, we have assisted businesses and assciatins t increase revenues, build brand awareness, implement grwth strategies, and train wrk frces.