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Best Practices – PACA Trust Compliance

INVOICE TERMS AND PROCEDURES

In order to ensure that your company has properly invoiced its customers and preserved its rights as a PACA trust beneficiary, we have the following suggestions for your company in documenting its transactions. These suggestions will also provide greater protection for you to recover interest, attorneys' fees, and costs if legal action is needed.

Payment Terms

Your company's invoices must include payment terms. PACA requires prompt payment terms of 10 days after acceptance, however the statute also permits the parties to alter these terms provided that (1) they do so in writing and (2) the terms do not exceed 30 days after acceptance. Your company will lose its PACA trust protection if payment terms longer than 30 days are agreed upon. If your company intends to use terms other than PACA 10 day prompt payment terms, prior to the transaction your company must obtain the buyer's signature on a written agreement that states the agreed payment term. Both parties are required to keep a copy of this agreement in their files. This is called a written payment term agreement.

Your company must include the written payment term agreement on its invoices, accountings and other documents related to the transaction. Other documents related to the transaction refer to any documents in which your company expects to receive payment. If the payment terms on these documents do not match, your company risks losing its PACA trust protection.

Also, in instances where the invoice states a payment term other than 10 days, and there is no written payment term agreement, your company may risk losing its PACA trust protection. In order to avoid this problem, all documents must be consistent. We strongly recommend using PACA's prompt payment terms of 10 days.

Invoice the Correct Customer

Although it may appear somewhat basic, your company must invoice its customers using their full legal name and the correct address. If the wrong name is used, your company may not be able to enforce its rights if this customer does not pay. If your company's invoices are simply made out to John's Produce, it may have difficulty attempting to enforce your rights against John's Produce Company, Inc. for nonpayment. It may be confusing as to who was the actual buyer, and the company could raise the defense that it wasn't the company that you were actually selling.

Terms of Sale

Your company's invoices should identify the terms of the sale. The most common terms are FOB Shipping Point or Delivered. The following chart explains how the term of sale affects which party bears the transit risk, what the price includes and the warranty provided by the Seller to the Buyer:

 

FOB Shipping Point

Delivered

Transit Risk

•· Seller responsible to load produce on board truck at shipping point.

•· Buyer assumes all risk of damage and delay in transit.

•· Title transfers to the Buyer upon shipment.

•· If the contract is silent, the assumed term is FOB shipping point.

•· Seller is responsible to deliver produce to Buyer at destination.

•· Seller assumes all risks of loss and damage in transit.

•· Title passes to the Buyer upon unloading at destination.

Price

•· Buyer taking direct billing for freight.

•· The Seller is paying for the freight, or using its own trucks and building the freight charges into the cost of the produce.

Warranty

•· Warranty of suitable shipping condition applies. Seller warrants the produce will not arrive at the destination with excessive deterioration.

•· If produce has abnormally deteriorated, the Buyer is entitled to damages.

•· The Seller is only responsible for deterioration in transit to the agreed contract destination.

•· Warranty of suitable shipping condition does not apply.

•· Produce must meet the specified grade at destination.

See Risks of Delivered Sale Below

Risk of Delivered Sales

The warranty of suitable shipping condition does not apply to delivered sales. We do not recommend that Sellers sell produce on a delivered basis. The risk that the produce will not make the actual grade on arrival is too great. We recommend that Sellers who deliver produce to their customers, use the sales terms of FOB as to grade, quality and condition and delivered as to price. This can be accomplished by using one of two options when documenting the sales. First, under terms of sale, list FOB sale at delivered price or second, under terms of sale, list FOB Shipping Point and when listing the price make sure it is clear that the price is delivered by placing the term Delivered at the top of the column that lists the prices or next to the price, for example $12.50 Delivered.

Invoice Date

If your company's invoice includes an invoice date, the date listed should be the actual date the invoice is prepared and transmitted to the buyer. Many companies set their computer programs to automatically list the invoice date as the date of shipment. The problem with this practice is that you do not have an accurate record as to when the invoice was actually sent to the buyer. The buyer could argue that your invoices are misleading. The shipment date should also be accurate.

Description of Goods

When we are trying to enforce your company's PACA trust rights, its claim will be scrutinized in a claims review process. Most often individuals who review the claims have no experience in the produce industry and are not familiar with industry lingo. As a result, the invoices should describe the produce in a manner that will allow a layperson to understand that the goods sold are in fact perishable agricultural commodities. For example do not describe asparagus as grass, pineapples as pines or flame seedless grapes as flames. In addition, do not overly abbreviate the description of the produce. This may seem silly to you, but objections are often made when the description of the produce is confusing, which results in unnecessary expense and delay.

Preservation of PACA Trust Rights

Your company cannot take advantage of the benefits of the PACA trust unless the buyer is given written notice of your company's intent to preserve its PACA trust rights within 30 days after expiration of its payment terms. If your company has a valid PACA license, it can use its invoices (or other billing statement) as a means of providing this written notice if it includes the following exact language on the front of the document:

The perishable agricultural commodities listed on this invoice are sold subject to the statutory trust authorized by Section 5(c) of the Perishable Agricultural Commodities Act, 1930 (7 U.S.C. Sec. 499e(c)). The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received.

The invoice containing this language must be sent to the buyer within 30 days after expiration of the payment terms, or notification that a check has been dishonored. If your company's payment terms are 10 days as required by PACA, it has 40 days after the buyer's receipt and acceptance of the produce to send the invoice. We suggest you have some method of tracking when your invoices are sent. If your invoices list an invoice date, your employees could testify that the ordinary course of business is to send the invoice on the day it is prepared, which is the listed invoice date. It is not uncommon for buyers to claim they never received the invoice.

Attorneys' Fees, Costs, and Finance Charges

Courts have ruled that attorneys' fees and finance charges are part of a PACA trust claim if the fees and interest are part of the contract between the seller and its customer. As a result of these decisions, produce sellers have the right to add attorneys' fees and finance charges to their PACA trust claim when trying to collect from their customers.

If you want the opportunity to recover attorneys' fees and finance charges, you must contract with your customers for payment of finance charges and attorneys' fees. The standard for determining what constitutes a contract for finance charges and attorneys' fees is governed by state law. In some states, finance charges and attorneys' fees provisions become part of the contract by placing these provisions on all your invoices. Because invoices are sent after the transaction, some states require more than an invoice provision to make attorneys' fees part of the contracts.

The best method of ensuring that finance charges and attorneys' fees are part of your contacts with customers is, in addition to placing the provisions on invoices, to obtain a signed written agreement from the customer that finance charges and attorneys' fees are part of all transactions. We suggest including finance charges and attorneys' fees provisions in a payment agreement letter with customers confirming that sales are made on PACA's prompt payment terms of 10-days or in a credit application. If a letter is used, the invoices must state payment terms of 10-days. If you would like a copy of a sample letter, please contact us.

We recommend the following attorneys' fees and finance charges provisions on invoices, credit applications or payment term letters:

In the event any action or proceeding is commenced to enforce the terms of any transactions or to enforce the seller's PACA trust rights, the buyer agrees to pay all costs and expenses of enforcement, including reasonable attorneys' fees, as additional sums owed in connection with the transaction.

Finance charges will accrue on any past-due balance at the rate of 1 ½ % per month (18% per year) from the date each invoice becomes past due, or the maximum rate of interest allowable by law, and will be computed daily and compounded annually.

Collateral Fees and Expenses

The 1995 PACA Amendments legalized the payment of promotional allowances, rebates, and service or material fees. However, PACA law requires that an invoice issued with a sale must disclose all terms of the sale. If a company grants its customers any form of discount-program, in order to ensure that its invoices comply with the law, we suggest that company include the following language on its invoices:

The prices reflected on this invoice may be subject to promotional allowances, volume discounts, corporate rebates or other programs.

Electronic Data Interchange (EDI)

PACA was amended to provide that EDI invoice transmissions that contain the PACA trust language listed above qualify for PACA trust protection. Your company's rights are protected only if the PACA trust language is included in the transmission. In our experience, most customers do not allow the PACA trust language to go through with the sales information. As a result, we recommend that your company develop another method of preserving its PACA trust rights. Our suggestion is that you set up a system to send a paper invoice to the buyer with the PACA trust language on it within 20 days after your payment term expires. Under this system your company will only send follow-up paper invoices when timely payment has not been made. This allows your company to protect its trust rights on those transactions at risk for non-payment. The invoice can also help collections by serving as a past due notice by indicating that the invoice is past due.

We hope that this information is beneficial to you and that your company will apply it to its invoices and billing statements. In the event that it becomes necessary to enforce your company's PACA rights against the buyer, your company will be properly protected to maximize its recovery.

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