Grain Sale Leads to Legal Battle

September 26, 2007 | Roger McEowen

A contract for the sale of goods for $500 or more is generally not enforceable unless there is a written agreement signed by the party against whom enforcement is sought.  But, there are exceptions to the general rule.  For example, under the “Merchant’s Confirmatory Memo Rule,” oral contracts between merchants are enforceable if a written confirmation of the oral agreement is received within a reasonable time, and the recipient doesn’t object to the writing within ten days. The rule often comes into play in the context of grain sales between buyer and sellers of grain.  Generally, the grain buyer will send a confirmation memo to the prospective seller indicating the amount of grain to be sold at a specified price (which creates a forward contract).  If the seller doesn’t sign and return the confirmatory memo, the oral agreement is still enforceable if the seller is a “farmer.”

Usually, the person who controls the grain enters into the forward contract. However, it is possible for that person to delegate that responsibility to someone else.  Agency is a relationship between a “principal” and an “agent,” where the agent is authorized to act on the principal’s behalf.  An agency relationship need not necessarily be explicit, it may be implied based on the conduct of the parties. 

This case involved the “Merchant’s Confirmatory Memo Rule” and the issue of agency in a dispute involving a forward contract for the sale of soybeans.  Ultimately, the court held that a confirmation document did not constitute a written contract and that there was insufficient evidence on record to establish a principal/agent arrangement.  A confirmation for sale of grain, in this instance, was nothing more than a tool offered to prove the existence of the oral contract.

This case involved a father and his son.  The son had gone through bankruptcy proceedings and had a judgment lien against his assets.  The son placed a call to grain manager, requesting a bid for October beans. The son accepted the grain manager’s bid and a customer account was created for him. The grain manager sent a “Purchase Contract Confirmation” to an address provided by the son.  But, address was his father’s address.  Upon receipt of the contract confirmation, and knowing his son’s financial situation, the father scratched out his son’s name, replaced his own as “Seller,” and signed and returned the document to the grain elevator.  

In October 2004, the son delivered the soybeans and the grain manager prepared to make payment to him. The father learned of this and demanded that the father was the party that had a written contract with the elevator, which invalidated the prior oral transaction between son and grain manager and, as a result, the father should receive payment for the grain. The elevator sued, and the trial court found in favor of the grain elevator, holding that the contract to sell grain was between his son and the grain elevator, and that the father’s subsequent signing was not enough to invalidate the prior oral contract.  On appeal, the Iowa Court of Appeals affirmed.  

The court’s rationale was three-fold.  First, proof was shown that the only parties to the contract were the grain buyer and the son - the father was unaware of the existence of the contract until the confirmation came through the mail.  Second, the father was unable to establish, through testimony and depositions, that he was a substituted party to the oral contract. Finally, there was insufficient proof that the father actually owned or had control over the contracted soybeans.   

On a cautionary note, witness credibility appears to be central to the court’s decision here.  The court cites several instances where the father, in an attempt to cover for his son, changed his story substantially when testifying.  Perhaps, the most important lesson to take away from this case, is that defined relationships in the family farming operation are of utmost importance to the successful functioning of the farm.  DeBruce Grain, Inc. v. Mitchell, No. 6-1010/05-1934, (Iowa Ct. App. Jul. 25, 2007)