Legal Issues of Risk Managementin Agriculture
Russell A. Flint
Snyder & Company, 30th Flr., 10303 Jasper Avenue, Edmonton, Alberta, T5J 4P4
# Take Home Messages
Most agricultural operations have to consider two complete groups of legal risks. Since most farming operations involve personal use of agricultural property, there are all the legal issues concerning the family that have to be addressed. In addition, there are farm business risks that must be considered.
For both personal and business legal issues, we generally consider the basic concerns revolving around the legal concept of contracts and breaches thereof, or tortious issues such as acts of negligence resulting in injury, loss or damage. There are other risks, relating to governmentally imposed liabilities, as well as matrimonial and related issues which must be considered.
It is important to prevent, ensure and secure risk.
#Categories of Risk
Obviously legal issues can have serious consequences for the agricultural operator. It is also possible that there is a more serious application in particular for a dairy farmer where there are certain health, environmental and production issues that have to be addressed on a daily basis. Risk management decisions have to be made constantly. There are conceptually four risk management issues that one has to address. These are:
1. risks that could result in small damage and would likely occur infrequently;
2. risks that could result in small damage but would likely occur frequently;
3. risks that could result in severe damage and would likely occur infrequently;
4. risks that could result in severe damage and would likely occur frequently.
Although, it might be apparent each type of risk described above has to be addressed on an individual basis. If the chance of the risk occurring is slim and the damages small then we tend to accept responsibility for the risk management concern. An example might be where your favourite cow escapes from your normally secure fences and ends up in the vegetable garden. Hopefully your fences are sufficiently secure to avoid this happening on a regular basis and the damage will not likely be that great (depending on whether your prize winning corn was consumed in the process). This is an example of the first category of risk.
In the second situation, if your fences are badly maintained then this type of event could occur on a regular basis and risk management would indicate that you must control this activity and generally that control is exercised by the individual so as to limit the risk issue.
In the third category if the amount of the damage could be large, it is important that insurance be used wherever possible. If that same cow escapes on to a public highway, and becomes entangled in a motor vehicle accident then there could be serious consequences for those parties in the motor vehicle, (not to mention the cow). However, a wise operator would take steps to transfer the financial risk by utilizing some insurance to cover this issue.
If there is a potential for serious damage and it is likely to occur on a frequent basis then it is probable that insurance will not be available because those parties selling insurance are not interested in taking unreasonable risk. In this case the control aspect has to be considered on behalf of the risk taker.
# Tort Liability
Farm risk has to be considered traditionally from the view of tort law which relates to the common law concept of negligence. We all owe a duty of care to our family and to our neighbours. If we or those items or things that are under our control, through negligence or other act cause damage to others, then the law of the land would indicate that a degree of responsibility would have to pass to those negligent parties. When assessing risk management issues, the tortious aspect of the problem has to be looked at both from the view of the injured party and the tortfeasor. If the damages are small, then it would simply be a matter of arranging to compensate the party that was injured. If the resulting injury or loss is substantial, then hopefully some insurance could be considered for the benefit of both parties.
# Contract Liabilities
Risk management has to also be considered from the point of view of contractual arrangements. Agricultural business depends on contracts. If you are the victim of a breach of contract or if you cause a breach of contracts, you are going to suffer damages or perhaps be responsible for the consequences. In agricultural business today, we have to be constantly conscious of the consequences of such a breach and the potentially injured party has to be aware to protect him or herself from the damage that could be occasioned by such a breach.
# Other Risks
In addition, we have to consider other risk elements that have become inherent and go in effect beyond the common law but are related to law such as the risks that are caused pursuant to income tax responsibilities, governmental liability for things like environmental damage, and other responsibilities and obligations that may be imposed by competent authorities. All of these items must be considered by the agricultural operator.
# Matrimonial Risk
Another important aspect of risk management are the aspects of the matrimonial property legislation in the Province of Alberta. In many situations the use of promissory notes, securities and prenuptial agreements can be utilized so as to avoid the consequence of potentially difficult matrimonial situations. Most often the matrimonial laws of the Province are used to ensure the proper protection of both spouses and children. Sometimes, where family farms are involved security devices, prenuptial agreements and other types of documentation are useful.
# Specific Examples of Common Agricultural Tortious
Beyond the normal motor vehicle liability issues, a review of what appears to cause the most common problems for farm operations are set out below:
In Alberta, the owner of cattle can be held liable for trespass when his cattle leave the field and wander onto the land of others. Liability for trespassing cattle is dealt with in the Stray Animals Act (1). Section 5 states that when livestock trespass and damage is done to real or personal property by the livestock, or expenses are reasonably incurred in capturing, maintaining and transporting the livestock and in ascertaining the owner of the livestock, the owner is liable for the damage and/or expenses.
Section 6 of the Act exempts an owner from liability where the damage or expense was not "wholly" the owner's "fault." It is unclear what "fault" means. It is made clear, however, that there is no duty on the person who has suffered the damage or expense to have prevented it by fencing. Furthermore, section 7 of the Act provides that the conduct of third parties is a defence; for example, in permitting the cattle to escape by leaving a gate open.
There are statutes similar to Alberta's Stray Animals Act in other provinces.
Cattle which Stray Onto Highways and Cause Accidents
Farmers must ensure that the fences and gates which contain their cattle are properly maintained and effective in keeping the cattle off the road. In regard to this matter the courts have held that traffic on a highway creates a danger which a prudent owner of cattle will clearly see (2). The courts have stated that there is a foreseeable risk of accident to motor traffic on the highway if cattle are on it unattended. Accordingly, the owner of cattle can be held negligent if his cattle stray onto the highway and an accident results. In determining whether a farmer is negligent in this type of situation, the Court will consider several factors, including the nature of the highway and the amount and nature of the traffic that might reasonably be expected to be upon it. Thus, to avoid being held liable for negligence, much more care must be taken by the farmer who keeps cattle in an enclosure bordering on a major highway than upon a little travelled road in a sparsely settled district. Corresponding to this is the positive or active duty which the courts place upon a farmer to reasonably inspect and maintain the means used to contain his cattle.
In one case, a ranch turned 19 yearling bulls into a field adjacent to a highway (3). The field's fences, which were 70 years old, were checked and tightened. A few days later the bulls escaped after a corner post broke. At night, the driver of a car stuck one of the bulls. The driver brought an action in negligence for damages against the ranch. The Court found the ranch negligent in failing to ensure that the fence was adequate.
Cattle Driving Along Highways
To move cattle from one field to another, cattle owners often drive the cattle along a highway. The owner of cattle who deliberately brings them onto a highway owes a duty to use reasonable care that they do not cause damage to other persons lawfully using the highway. That is, if a cattle owner brings his cattle onto a highway, he must exercise reasonable care to control them.
One must be wary of what the court may consider to be reasonable care. For example, in one case, a dairy farmer was driving two of his cows along a highway, and exercising what he thought was reasonable care in controlling them (4). One of the cows ran out from the shoulder of the highway into the middle of it and was hit by an oncoming car. The Court stated that it was not usual when cows are being driven carefully along the highway that one of them is to be found running or galloping. Accordingly, he found the dairy farmer liable for negligently driving the cows along the highway. This ruling makes one wonder if the judge has himself ever driven cattle along a highway.
The courts have served warning; farmers who fail to properly control their cattle can face liability. Farmers can minimize this risk by exercising reasonable standards of care in regard to the means and manner they control their cattle. This includes regular and thorough inspection of fences, gates, and corals, as well as exercising a very careful approach to cattle driving. However, if a farmer wants to ensure that the financial burden he would bare if found liable is minimized, he may want to explore the various forms of insurance coverage that are available.
When Farmers can be held Liable for Substances which
Escape from their Property even though they were not
In certain circumstances, a farmer can be held strictly liable for injuries caused by his non-negligent conduct. That is, a farmer will be said to be strictly liable when he is held liable for an injury which he has caused, despite the fact that he exercised reasonable care in attempting to prevent it. This principle arises out of an old English case called Rylands v. Fletcher. (5) In that case, the Court stated that the occupier of land who brings on it anything likely to do damage if it escapes is bound at his peril to prevent its escape, and is liable for all the direct consequences of its escape, even if he was not acting negligently.
This principle has been applied in a number of situations which are relevant to dairy farmers. For example, in one case the plaintiff's domestic water supply became contaminated when animal manure which the defendant had spread on his agricultural fields was washed by heavy rains into the plaintiff's well (6). Despite the fact the Court conceded that the defendant's activity was "normal agricultural husbandry," it applied the principle of Rylands v. Fletcher to it. Accordingly, the defendant was held strictly liable to the plaintiff for the damage caused even though he was not negligent by engaging in the common practise of spreading manure on his fields.
In another agricultural case, the Rylands v. Fletcher principle was applied to the aerial spraying of herbicides which damaged neighbouring crops. In reaching his decision, the trial judge conceded that the aerial spraying of herbicides was not an unusual operation (7). In fact, he stated that it was "standard good farming management on cereal growing farms." However, he went on to say that it was not the aerial application that made the user of herbicide liable for damages, but rather it was the action of allowing the herbicide to escape beyond the boundaries of his own property that made him liable for damage to the neighbours' crops.
Thus, the courts have served warning to farmers who use manure, herbicides, pesticides, fertilizers, and other substances on their land: even if the use of such substances is in accordance with common farming principles, a farmer can still be held liable for damages caused by their escape from his property.
# Limitation of Risks - Insurance - Security
Risk can obviously be limited by utilizing insurance, assuming the insurance option is available and practicable from a cost point of view. Another method of providing similar type protection is through the utilization of various security devices so as to permit a lending party or person involved in a contractual relationship with another party to secure their position. We are all familiar with this through various bank type financing where lenders secure themselves. Many times there are situations in agricultural business where operators can secure their position using the same techniques that the bank utilizes. This is usually done in conjunction with a corporation.
# Liability Protection through Corporations
The choice of the method of carrying on an agricultural operation is obviously significant in determining the risk management that is being accepted by the agricultural operator. An individual who operates in his own name is obviously standing forward and accepting the responsibility for his or her actions. Often certain responsibility can be tempered by using insurance. However, sometimes insurance is not good enough. Furthermore, there have been occasions where insurance companies denied liability and refused to compensate parties who thought they had covered themselves and protected the risk aspect of their operation. Many dairy operators are operating their agricultural business through corporations. There are substantive reasons for this undertaking, particularly in dairy operations.
At law a corporation is a person. Parties dealing with this person accept the corporate personality for what it is, and if there is loss or damage caused by that corporate person through its agents then the assets of that corporate person would be put forward to recompense the party suffering the loss or damage. Effectively we have the concept then of limited liability. Only the assets of the corporation would be available for creditors subject to certain rules regarding Guarantees of which the agricultural community is already quite well aware. The exposure is generally limited to the extent of the corporate assets.
# Sale of Assets to Corporation
Often this is not a solution to the problem. In many situations the corporation running the family farm has the farm assets and effectively has all of the valuable assets of the family and of course these are at risk through the corporation. The fundamental advantage that dairy operators have over other corporations is the ability to create, through the transfer of qualified farm property into a corporation, certain assets which qualify for the capital gain exemption as described in the provisions of Section 110.6 of the Income Tax Act, and then to utilize these to create a personal debt from the corporation to the farmer and then to provide security to the farmer. For example, assume a farmer has a piece of land worth $100,000.00. Assume that he also has a quota worth $200,000.00. Assuming that all of the complicated tests as set out in the Income Tax Act can be met and all of the transfers are carried out properly and within the confines of the law, then the land and the dairy quota could be transferred into the corporation and the farmer would thus have his family farm company owing him $300,000.00. Assuming the farmer had access to the accelerated farming capital gain exemption, the farmer could claim the benefit of such an exemption for gains and effectively claim to have a tax free sale (subject to some other considerations such as cumulative net investment losses and alternative minimum tax which does not apply to dairy quota). Some particuarly enlightened farmers operate partnerships that can be sold into corporations and the advantage is ever greater.
Taking Security to Control Risk
After the sale, the farm corporation could grant to that farmer security on the assets of the corporation. This security could be by way of a specific charge on the assets of the corporation or could be in the nature of a General Security Agreement properly registered against all of the assets of the corporation which would effectively give a charge to that farmer. The charge might rank behind "bank" financing but would likely have a substantial value. Effectively this would provide a vehicle whereby there would be an additional level of security and reduction in the risk that would be available to the farming corporation. In the event of a problem and a potential law suit or liability, the farmer controlling the debt could require that the corporation pay back the money owed to that farmer on a preferential basis. If the funds were not repaid then the company could be placed into receivership or could be petitioned into bankruptcy, and assuming all security devices were properly registered the secured interest of the farmer could be realized prior to that of other creditors. A secured creditor can often take the entire operation back and eliminate any risk.
Often this provides perfect security. In many situations the assets of the corporation could be substantial, but if the assets were sold on a piece meal basis, or on a forced basis the asset value would not be substantial. Accordingly, as consideration for his preferred position, the entire operation could be handed back to the farmer. Needless to say this is a complicated issue. However, it is not difficult to undertake this type of activity in conjunction with professional advisors who could make sure all the necessary documentation and procedures are properly carried out.
# Advantages of Incorporation
Sometimes there is a general feeling that corporations are an inappropriate way to run a family farm. In the last few years these feelings have tended to decline. There are substantial advantages to operating a farm through a corporation where of course you have the ability to limit the liability and for dairy farmers particularly because of the ability to sell in and secure valuable quota to provide security protection. Because of the low rate of tax that qualifying business can access (which in Alberta is about 19%), company's are becoming more attractive. The tax rate issue of course is probably more complicated than to state it so simply because we do have the concept of integration in our tax structure. However, companies can reduce risks and provide for income splitting. They can be used for a potentially less expensive method of providing for personal life insurance. In today's market where farming operations are often highly capital intensive and there are substantial loans to be considered companies are a tremendous advantage in that companies will most often qualify to pay tax at the small business rate of about 19% on the first $200,000.00 of annual profits and then the net proceeds can be used to pay off a corporate debt. If the debt is substantial as is the case in most capital intensive operations, personal farmers often cannot possibly pay off the debt personally in that they would have to face tax consequences in the top marginal rate in the range of 46% before they will have money left over to make payments on a bank debt.
# Risk and Financing
An important aspect of risk management is exercising caution when granting security to other parties. Generally banks are requiring individual farmers who borrow funds to execute documents where they pledge their entire equity in all of their assets. Often this pledge supersedes the provisions of the Exemptions Act on all of the farmer's assets including personal possessions and could be attached and seized subject only to the delays that might be occasioned by the Farm Debt Review Legislation. Great caution has to be exercised in granting security to lenders. Do not give more security than is required but be sure the security is properly placed, particularly if granting security through a corporation where the debt is personally guaranteed. For example, if your corporation promises to pay the bank $200,000.00 and the bank does not take proper security on the assets of the company, then a problem would arise in that if the bank isn't paid and your other creditors take action against the corporation the bank does not have a prior security, and accordingly there may not be sufficient assets left to satisfy the bank's claim in full. This could result in personal liability under personal guarantees which our financial institutions generally require.
# Rural Risk Management
The difficulty with risk management issues in the rural community is that they are extremely complex. To a certain extent they are more diverse than those which a normal business encounters. The extent of the diversity of most operations broadens the responsibility, and liability on farmers can be substantial.
Generally speaking, the normal caution that we exercise in carrying out our daily living is sufficient to limit the occurrence of any substantial catastrophe. However, whether it is fate, the odds or negligence, there is always the risk of a problem and considering the risk and issues prior to the eventual problem is an important part of farm management.