Contract Considerations

SOME THOUGHTS ON WINERY CONTRACTS

By Michael Welsh

(Reprinted with permission from Michael Welsh)

This information was initially printed in a Grape Grower newsletter in August 2000. Michael Welsh’s updated comments are in italics.

For those of you who do not have a written contract (and those who do but haven’t looked at it too closely), this is probably a good time to look at the terms on which we sell our grapes. Most of us when negotiating focus on price. Once that is sorted out, the contract presented by the winery is signed without any changes. (Note: Some growers and wineries function on a hand=shake verbal agreement. This is fine so long as no disagreement arises. If it does, there is no written proof of the agreement to rely on and the grower may be the one to suffer the most as the grower must have a buyer for his/her crop.) However, there are some other important considerations. They include:

1. How long do you want the contract to run? Terms seem to vary from a minimum of about three years to a maximum of ten. Others are open-ended, continuing until one party give notice of termination. The important thing to consider here is the stability you need in your market. What is the time you will need to find a new winery or other market? The contract term and the length of notice should be long enough for you to find an alternative when the contract runs out.

(Note: Many wineries are now trying to buy on a year to year basis only and obtaining a multi-year contract is becoming more difficult. In this market, you may thus wish to push for a multi-year contract, even if it means a slightly lower selling price. You can propose a base price, with extra monies to be paid if grape spec’s exceed a certain base level.)

2. What is a pricing formula? Is it by variety only with the winery to review your vineyard practices on a periodic basis and determining pick dates or does it contain specifications on degrees Brix, titratable acidity, and pH, or is it based on tonnage or is it a mix of all of these things? Does the price vary for a variety depending on these and other factors? Is there any premium for grapes that exceed certain quality measurements? Does the winery have the right to refuse to take your grapes in certain cases? Many contracts spend pages on these issues and are very confusing. As a grower you want it simple and certain. Make sure you understand what is being presented and if you don’t understand it or don’t like it, then change it before you sign it.

(Note: It is becoming more popular to look at a price per acre regardless of the tonnage. The price is based on a reasonable rate of return to the grower, perhaps based on what the grower traditionally makes when selling by the ton. The winery can then decide if it wishes the grower to reduce tonnage to improve quality and the grower will not suffer economically. On the other hand, if the winery believes it can obtain a better quality grape by this crop reduction, it should be able to increase the wine’s price to off-set the increased cost of the grapes.)

3. If the contract runs for a number of years, what is the formula for fixing prices over that time? Is it the fair market values for the preceding year based on data collected by some body such as the BCWI, or based on average prices or mean prices? How often does the pricing get reviewed? Is there any maximum percentage amount by which prices can change up or down? Is there a method set out in the contract to resolve disputes over pricing? If you are looking for a stable market, you need to resolve these matters before you sign.

4. Who supplies bins? Is the winery responsible for pickup of the grapes after harvest or do you deliver? Most wineries supply bins and arrange pickup.

5. On what basis can the winery or grower cancel the contract? Most contracts contain a section called “Force Majeure”. It is a fancy French name for catastrophic events that make it impossible to carry on with a contract, such as a hurricane devastating the vineyard or bombardment of a winery during a war. Read this section closely. Many contracts include things like the market for wine being bad or some changes in governmental rules that make it more difficult to operate a winery. Some even make it completely up to the winery if it cancels. This section should only include catastrophic events.

6. Are you restricted in the tonnage you can sell and, if so, can you sell any excess tonnage elsewhere? Some contracts penalize a grower who sells grapes to any other party. Think carefully about the capacity of your vineyard and the requirements of the winery and get this clarified before you sign.

There are many other considerations. These are simply some thought to get growers thinking. As a final note, read the contract carefully and get some legal advice. Your winery contract is vital to the success of your vineyard. Don’t shortchange yourself.