Terms, Rights and Responsibilities
SALES – TERMS, RIGHTS AND RESPONSIBILITIES
Produce transactions are governed by state laws under the Uniform Commercial Code and the Federal Perishable Agricultural Commodities Act (PACA). Generally, the PACA requires that persons and entities operating in the fruit and vegetable industry live up to the terms of their agreements and comply with the law. In order to do so, traders must be familiar with sales terms, applicable law, and their rights and obligations. The first part of this article describes sales terms and law applicable to produce sales transactions. The second part of this article describes rights and responsibilities of the parties to the sale.
1. FIXED PRICE
In a “fixed price” sale, the seller and buyer negotiate an agreeable price prior to shipment of the produce. This is the most common method of pricing produce.
In an “open” sale transaction, the price is not agreed upon at the time the sale is made, rather, the price is set at a later date. Other than when the price is agreed upon, the sale is like any fixed-price sale, and the buyer may accept, reject and claim damages if the goods are nonconforming.
3. PRICE AFTER SALE
In a “price after sale” (PAS) transaction, the seller and buyer negotiate an agreeable price after the buyer has re-sold the produce. The sale is like any other sale, and the buyer may accept, reject, and claim damages if the goods are nonconforming. PAS transactions become complicated if the parties cannot agree on a price. In those cases, the USDA and courts typically impose a “reasonable price” on the parties. This can be established in one of two ways: (1) A properly prepared account of sale from the buyer showing timely resale of the product is the best evidence of the reasonable value of the produce; or (2) the USDA Market News prices are used to determine the reasonable price. The USDA recommends that the buyer prepare an account of sale. While there is technically no requirement of the buyer to prepare an account of sales, it is in their best interest to do so. If the parties are unable to reach an agreement on price, a detailed account of sales showing a prompt and proper resale may be viewed as the best evidence of the value of the goods the buyer accepted and may be used to determine the reasonable price owed by the buyer to the seller. If no account of sales is available, and the buyer cannot prove that the produce was of sub-standard quality, reasonable price owed by the buyer to the seller will be determined based on relevant USDA Market News reports.
A consignment is not a sale. A consignment creates an agency relationship between a principal who owns the produce and an agent who agrees to sell the produce. The owner transfers custody or control of its produce to the agent who agrees to sell the produce with the understanding that it will pay the owner for the produce from the proceeds. The principal is legally referred to as the consignor and can be any supplier along the distribution chain who owns produce, from a domestic or foreign grower to a wholesaler. The agent is referred to as the consignee and can also be anyone along the distribution chain who sells produce, including a grower’s agent, importer, terminal market wholesaler or a retailer. The agent does not obtain title to the supplier’s produce; it only has custody or control of the produce. After the agent sells the produce, the proceeds belong to the supplier. The agent may deduct an agreed upon commission and reimbursement of the expenses it incurred for selling the produce from the proceeds and pay the supplier the remaining proceeds.
Legally, consignments and sales are two completely different animals. Produce sales are primarily governed by the laws of sales as established by the Uniform Commercial Code (UCC) and the PACA Statute and Regulations. Since consignments are agency relationships, they are governed by agency law, which imposes fiduciary duties on the agent. The PACA Statute and Regulations define the fiduciary duties an agent has to its supplier. The PACA Statute and Regulations classify all agents selling produce on consignment as Commission Merchants, regardless of whether they are a grower’s agent selling a grower’s crop at shipping point, a wholesaler at a receiving terminal market selling produce for a shipper, or a retailer selling a wholesaler’s distressed produce. The PACA Regulations have separate sections setting forth the duties of receiving market agents and growers’ agents. The agents are responsible for the duties specified by the PACA Regulations unless they agree in writing to different terms with the supplier.
In addition to the PACA Regulations, the U.S. Department of Agriculture has issued many PACA Reparation Decisions that set forth additional duties of agents and grant suppliers additional rights. Arguably, all produce consignments are subject to these rules.
If a dispute arises regarding the return amounts, frequently one of the parties will claim that the transaction was not a consignment but a sale. It can be difficult to determine whether the transaction is a sale or a consignment. If it is not clearly set forth in writing that the transaction was a consignment, it will be deemed to be a sale. If the transaction is determined to be a sale and the parties did not agree on a price because one party thought it was a consignment, a reasonable price will be imposed upon the parties.
If the transaction is determined to be a consignment, the supplier will argue that the returns should have been higher and that the low returns are evidence that the agent breached its fiduciary duty to sell and market the produce for the best advantage of the supplier. Many USDA PACA Reparation Decisions addressing similar situations have found that the supplier simply alleging low returns compared to market prices is not a basis for finding the agent liable for how it sold the produce. Instead, the supplier must demonstrate that the agent acted negligently or breached its fiduciary duties under the PACA Regulations. The USDA maintains that this higher burden of proof is required because the supplier selected the agent; therefore, it must accept the good returns as well as the bad returns. The USDA will not play “Monday Morning Quarterback” in analyzing the manner in which the agent sold the supplier’s produce.
But, if the supplier shows that the returns were “unreasonably” low, such as half of the USDA Market News price, or the produce remained in storage for an unusually long period of time, the burden shifts to the agent to explain the low returns. In such situations, the agent must provide evidence to justify the “unreasonably” low returns.
It is important to note that unlike sales transactions, consignments do not include warranties by the supplier of suitable shipping condition or merchantability. The agent must attempt to do its best to sell the supplier’s produce, regardless of the condition. If the agent receives produce it believes is in poor condition upon arrival, it may not be able to later claim poor quality as the basis of the low returns. Instead, the agent should protect itself by notifying the supplier in writing of the produce’s condition and obtain a written acknowledgement of the poor condition or obtain an inspection substantiating the poor quality of the produce.
5. PRICE PROTECTION
A. Market Protection and Price Protection
The USDA, in its decisions on reparation cases filed under PACA, has defined the term “market protection” or “price protection” to mean that the buyer is protected from any market decline that occurs between the time of the sale and delivery.
While this may seem like a simple concept, like most issues in the law, the devil is in the details, and you should be aware of several nuances. First, like any contract, the party who is trying to enforce the “market protection” or “price protection” agreement must be able to prove the existence and terms of the agreement. Courts are typically reluctant to enforce an agreement that is not specific enough or that lacks the basic details. In order to take advantage of a price protection agreement, you must be able to prove its details. Like all contracts, the best way to do this is to have a written agreement with the seller confirming the existence and terms of the protection agreement. Second, the buyer and seller need to determine the duration of the market protection. In a single sale situation, this may be simple to determine, but may be more difficult in situations of repeated sales such as weekly deliveries. Third, the parties should clarify what market is being used to measure the decline. For example, is it the shipping point market or the destination market? Finally, the price that triggers the price protection needs to be clear. Let’s assume, for instance, that the market drops by $2 between the sale date and the date of delivery. Is that enough to trigger the price protection agreement? Here, the parties may want to agree that the price protection is effective if the market drops by a specific amount, such as more than $5 per box.
B. Protection, Full Protection and Protection Against Loss
While these three terms are generally interchangeable, they have a distinct meaning and are not the same as the terms “market protection” or “price protection” discussed above. “Protection,” “full protection,” and “protection against loss” refer to an agreement to modify the original sale contract and typically arise when the product arrives in a defective condition. In that scenario, the seller who delivered defective product agrees to “protect” the buyer from any losses caused by the defective condition of the product. It is important to note that the buyer is protected from a loss but is not guaranteed a profit. The USDA has held that “profit” includes commission and handling fees. Unlike a consignment sale, a buyer under a protection agreement is not entitled to deduct profit, commission or handling fees from the returns. The underlying rationale for this lies in the purpose of a protection agreement – namely, to protect the buyer from a loss. If the sale proceeds are not enough to cover the expenses, then the seller is required to pay those to the buyer.
As with a “price protection” agreement, a buyer who is claiming the existence of a “protection” agreement bears the burden of proving its existence and its terms. Again, we suggest you make sure that there is a writing confirming the agreement and its basic terms. That way, if a dispute arises as a result of payment of less than the original price, you will be prepared and able to prove that the original contract has been modified by a “protection” agreement.
II. Transit Risk and Warranty
1. FOB Shipping Point or Delivered
In any contract for the sale of produce, the responsibilities, freight charges, transit risks, and warranties associated with the sale, transportation, and delivery of produce are primarily determined by term of sale. The most common terms are FOB Shipping Point or Delivered. If the contract is silent, the assumed term is FOB Shipping Point. Any documentation of a sale, including confirmations and invoices, should clearly communicate the terms of the sale. The following chart explains how the term of sale, being either FOB Shipping Point or Delivered, affects the different aspects of the transaction:
FOB Shipping Point
• Load produce on board carrier at shipping point.
• Deliver produce to Buyer at destination.
• Buyer assumes all risk of damage and delay in transit.
• Seller assumes all risks of loss and damage in transit.
• Buyer is responsible for freight charges.
• Seller is responsible for freight charges or uses its own trucks.
• Price of produce does not include freight charges.
• Price of produce includes freight charges.
• Title passes to the buyer once the truck leaves the shipping dock.
• Title passes to the buyer upon unloading at the arrival destination.
• Warranty of suitable shipping condition applies. Seller warrants the produce will arrive at the destination without 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 Sales Below
2. Risk of Delivered Sales
The warranty of suitable shipping condition does not apply to delivered sales, and 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.
3. International Sales
When determining the term of sale, be careful when using the terms FOB or Delivered on international sales. The International Chamber of Commerce (ICC) has published a series of pre-defined three-letter trade terms related to international commercial transactions called the International Commercial Terms or “Incoterms” for short. The Incoterms were amended in 2010 to include seven rules for any mode of transportation and four rules for transportation conducted entirely by water. FOB is an Incoterm for transportation conducted entirely by water and usually does not apply. There are three different Delivered terms, and you must be careful as to which one applies.
4. FOB Acceptance.
In an “FOB acceptance” sale, the buyer accepts the produce at shipping point, rather than at destination. The buyer may not reject the shipment thereafter, but may assert a claim for damages against the buyer if the produce sustains abnormal deterioration under normal transportation conditions. In other words, the warranty of suitable shipping condition applies to an “FOB acceptance” sale.
5. F.O.B. Acceptance Final.
In an “FOB acceptance final” sale, on the other hand, the warranty of suitable shipping condition does not apply. The buyer accepts the produce at shipping point and may not reject it thereafter; the sale is “final.” The buyer may only seek recourse against the seller for a “material breach” of the contract, which is generally understood as a breach so significant that it effectively destroys the value of the contract.
6. Purchase After Inspection.
A “purchase after inspection” sale is exactly what it purports to be – a sale consummated after the buyer has had an opportunity to inspect the shipment. Here, the warranty of suitable shipping condition is waived. The buyer has no further right to reject the produce, nor may he claim damages from the seller if the produce fails to meet quality and condition standards upon arrival at destination. The theory here is that the buyer was under no obligation to purchase the produce but did so based upon his own inspection and determination of its suitable condition.
7. Shipping Point Inspection Final.
Similarly, in a “shipping point inspection final” sale, the buyer may not reject the shipment after the sale is consummated, nor may he assert a claim for damages against the seller based upon quality or condition of the produce. The distinction between this and a “purchase after inspection” sale is that the seller is required to obtain a Federal or Federal-State inspection to show that the produce meets the contract specifications, rather than simply relying upon the buyer’s inspection.
An inspection by the USDA certifies the quality and condition of produce shipped and supports breach of good delivery claims by receivers. An application for inspection may be made by any party financially interested in the produce or their agent. Shipping point inspections can be used to ensure that produce meets the marked description and provide shippers with a means of monitoring the quality of their produce being shipped. Receiving point inspections serve as proof of the damages claimed by receivers, support a carrier claim, and substantiate that produce dumped had no commercial value.
IV. GOOD DELIVERY
An FOB sale automatically comes with a warranty of suitable shipping condition, or good delivery, where the seller warrants that the produce will not have abnormally deteriorated from the time it was shipped to the time it arrived at its agreed-upon destination. If the destination is not agreed upon, there is no warranty of suitable shipping condition. If the produce is delivered to a destination other than the agreed-upon destination, the warranty only applies to a destination equidistant from shipping point as the original destination.
The warranty of suitable shipping condition, for transit times of five days, is usually 150% of the USDA grade standard for that product. In other words, if total defects allowed at shipping point are 10%, the good delivery standard would be 15% at destination.
The receiver must prove that the produce was transported under normal transportation conditions. If the transportation conditions were abnormal, the warranty of suitable shipping condition is voided. The receiver may still be entitled to damages from the seller if transportation conditions were abnormal, and the type of damage found on arrival would have occurred even if the transportation conditions were normal or the damage was so excessive that the produce would not have made good delivery regardless of whether aggravated by abnormal conditions. Since transit temperatures are so important, it is always wise to include a temperature recorder on all shipments.
The quality and condition of the produce upon arrival must be proven. For sales in the United States, a prompt USDA or state inspection is the only evidence allowed to determine the condition of the produce at the time of arrival. In Canada, a government inspection is also required. For sales to other countries, independent marine surveys are allowed.
Whether or not the produce made good delivery is a function of the above factors. The ultimate condition of the produce at destination is weighed against the contract terms and applicable good delivery standards to determine whether or not they were adhered to. This is only the case if the transportation conditions were normal. In my experience, whether or not the transportation conditions were normal is the biggest area of dispute.
A buyer who accepts produce is liable to the seller for the full purchase price. If the seller breaches the contract either in kind, quality, or quantity of produce shipped, the buyer is entitled to deduct his damages from the purchase price. Once accepted, the buyer may not reject the shipment, even if a breach by the seller occurred. Acceptance occurs when:
1. Failure to Timely Reject.
Under the Perishable Agricultural Commodities Act (“PACA”), a receiver must notify the seller of his rejection within a specified time, depending upon the mode of delivery. For fresh produce, rejection must be communicated within 24 hours of notice of arrival (and availability for inspection) by rail or boat, or within 8 hours of arrival by truck. Rejection of frozen produce must be communicated within 48 hours of delivery by rail or boat, or within 12 hours of delivery by truck. If the receiver fails to notify the seller of his rejection within these time frames, the produce is deemed accepted and any later attempt to reject will be ineffective. However, the receiver may still claim damages for shipments that are in breach of the contract requirements, even though he may not reject the non-conforming commodities.
2. Unloading – Full or Partial.
The act of unloading all or part of a shipment is deemed acceptance of the entire load. If the shipment is unloaded for the purposes of an inspection, notice must be given to the seller prior to unloading. If the shipment is unloaded without notice to the seller, the receiver may not reject it based upon a subsequent inspection. An exception exists where produce is unloaded for the purposes of retrieving other commodities in the truck or container, provided that the produce is reloaded within a reasonable amount of time.
Acceptance will also be found where a shipment is unloaded for storage in a warehouse or cold unit. The simple rule of thumb is, if you unload it, you own it.
3. Diversion of a Shipment.
If a shipment is diverted while in transit from its intended destination by the buyer, the diversion will be deemed an act of acceptance. Once diverted, the buyer may not reject the shipment. This is due, in part, to the fact that the seller warrants the shipment to make good delivery at the intended destination. The seller may not be held to the warranty if the shipment is diverted to a previously undisclosed destination, particularly if the new destination results in a longer time in transit.
4. Consignment and Resale.
If the receiver places the shipment on consignment or resells it to a third party, he has accepted the produce from the seller. The receiver is no longer entitled to reject the produce. The issue of consignment and resale may be complicated, however. Many produce transactions involve a chain of sales wherein the shipment is delivered directly from the original seller to the end user with potentially several “paper” transactions occurring in between. If the end user rightfully rejects the shipment after an inspection, he will communicate the rejection to the seller from whom he purchased the produce. Often, the rejection will then be communicated back up the chain of sales to the original seller. If at any point in the chain a buyer is deemed to have accepted the produce, the right to reject ends.
The results of an inspection must be interpreted in connection with the terms of the sales contract between the parties. In a no-grade sales contract, only the non-permanent condition factors count against the contract. In contracts that specify a grade, such as U.S. No. 1, the percentage of permanent quality defects may not exceed the percentages specified in the U.S. Grade Standard. When the inspection summary statement reads “Fails to grade account quality defects,” the contract has been breached by the shipper. In a no-grade sales contract, failure to grade is meaningless.
VI. DOCUMENTING TROUBLE
If produce arrives with quality or condition problems, the receiver must notify the seller of the problem within a reasonable time or lose the right to assert a claim against the seller for damages. Reasonable time is determined on a case-by-case basis depending upon the facts of the situation.
The receiver, however, has a specific timeframe to reject the produce shipment. When the shipment consists of fresh produce shipped by truck, the seller must be notified no later than 8 hours after the receiver is given notice of arrival and the produce is made accessible for inspection. If the produce is shipped by rail, the seller must be notified no later than 24 hours after notice of arrival and the car has been placed in a location where the produce is made accessible for inspection. If, within the periods described above, the receiver cannot obtain an inspection, the period will be extended until an inspection can be obtained, along with an additional two hours after either an oral or written report of the results of the inspection is made available to the receiver. In such a situation, the receiver must notify the shipper during the above time periods that the load has arrived and is awaiting inspection.
Even if a rejection is effective because it was timely made, it is not necessarily considered a rightful rejection. The receiver still may not be able to prove that the shipper breached the contract, in which case, the rejection will be considered to have been wrongful.
VII. OPTIONS WITH PROBLEM LOADS
When produce fails to meet good arrival standards, the receiver has three options: (1) it may reject the shipment; (2) it may deduct damages suffered as a result of the poor quality; or (3) it may agree with the seller to modify the sales contract. The appropriate option in a particular circumstance depends upon the extent to which the receiver believes it can work with the produce given the quality issues.
The PACA Regulations set forth specific time frames for rejecting shipments of produce, depending upon the mode of delivery and whether the produce is fresh or frozen. If the receiver rejects the shipment within the applicable time frame, title automatically reverts to the seller. This is an exceedingly important point that is often misunderstood by sellers. Many sellers are of the opinion, quite incorrectly, that if their shipment is rejected, they can essentially refuse to accept the rejection. Most often, such refusals are based upon the sellers’ claims that quality issues resulted from abnormal transportation conditions.
In reality, when a receiver rejects produce for failure to make good delivery, the seller may not refuse to accept the rejection. If the seller truly believes that quality issues resulted from abnormal transportation conditions, he bears the burden of proof. This may be accomplished through temperature recordings taken during transit or other shipping records. If the seller meets this burden of proof, the warranty of suitable shipping condition will be voided, and he will be entitled to damages from the receiver for its wrongful rejection.
In the alternative, if a receiver chooses to accept poor quality produce, he is entitled to deduct damages from the original invoice price. The measure of damages for failure to meet good delivery standards is the difference between the value of the produce “as is” compared to the value had it arrived in good condition. Market News Reports may be utilized to establish the value of “good condition” produce.
The value of the produce “as is” is best determined by the receiver’s gross sales proceeds in a properly prepared account of sales. Damages may then be calculated by comparing the sales receipts to the value of similar produce arriving in good condition at the same destination, on or near the same date. If an account of sale is not available, the receiver may use a “percent of defects” calculation of damages by multiplying the percent of total defects revealed during inspection by the invoice price of the produce in dispute including freight, which is commonly referred to as the “laid-in” cost of the produce.
Lastly, the receiver and seller may agree to modify the original agreement by replacing it with a new agreement. Several options exist for modifying an agreement. The parties to the transaction may convert the sale to a consignment, convert the sale to a price after sale, agree to grant the receiver “protection” for less-than-expected returns, or agree to adjust the original invoice price. Whichever option is chosen, the parties must come to a “meeting of the minds,” just as they would be required to do for any contractual relationship.
Each of the options for modification has specific legal ramifications for the parties. Briefly, a “consignment” requires the receiver to give the seller a valid account of sale. The dispute over the value of the produce ends when the seller is satisfied that the accounting is accurate, although he has no recourse simply because the prices were low. In a “price after sale” transaction, on the other hand, the parties must negotiate and agree to a price after the receiver sells the produce, thus ending the dispute. If a receiver is granted “protection,” this means that he is protected by the seller against losses related to the poor quality of the produce. The receiver must provide the seller with documentation of the sales prices, plus expenses, to establish the accuracy of the losses. Finally, an agreed price reduction is negotiated by the parties and ends the dispute over the value of the produce.
The party claiming a modification to the original contract has the burden of proving it. Therefore, it is important for the parties to be clear on the terms of the new agreement and to document the terms in writing.
Receiving poor quality produce is a problem; failing to properly handle a quality dispute is an even bigger problem for the receiver. Rejections, deductions, and modifications are all effective tools for limiting the losses associated with such produce. As with most things in life, doing it right the first time will avoid a lot of headaches in the future.