Generally, the PACA requires that firms and individuals operating in the fruit and vegetable industry live up to the terms of their agreements. In order to do so, you should be familiar with the rights and responsibilities set forth below. The first part of this section describes rights and responsibilities generally applicable to all traders of fruits and vegetables. The second part of this section describes rights and responsibilities specific to individuals and firms operating in various capacities.
Express v. Implied Warranties
Express Warranties are created when:
- The seller makes an affirmation of fact or promise that relates to the goods, which then becomes part of the bargain; or
- The seller provides a description of the goods that is made part of the bargain; or
- The seller provides a sample of the goods that is made part of the bargain.
In each case, the seller’s promise, description or sample creates a warranty that the goods will conform to the promise, description or sample. Note: It is not necessary to the creation of an express warranty that the seller use formal words such as "warrant" or "guarantee" or that the seller have a specific intention to make a warranty. However, an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion of the goods does not create a warranty.
Implied Warranties may be present in a contract without any express agreement between the parties. For example, when a potato shipper sells a truckload of potatoes, a warranty that the potatoes will be merchantable is implied in the contract. This is called the "warranty of merchantability." For goods to be merchantable, they must at least:
- Pass without objection in the trade under the contract description;
- Be of fair quality within the description;
- Be fit for the ordinary purposes for which such goods are used;
- Be adequately contained, packaged, and labeled as the agreement may require; and
- Conform to the promise or affirmations of fact made on the container or label if any.
Unless excluded or modified, implied warranties may also arise from a "course of dealing" or "usage of trade."
A "course of dealing" is a sequence of previous conduct between the parties to a particular transaction that establishes a common basis of understanding for interpreting their expressions and other conduct.
A "usage of trade" is any practice or method of dealing done so regularly as to justify an expectation that it will be observed with respect to the transaction in question.
NOTE: These are legal definitions, and may be difficult to grasp. However, to prove a "course of dealing" or "usage of trade" in a PACA complaint, the party claiming the existence of either must provide multiple examples showing actual instances where the claimed procedure was used. Otherwise, the law will be applied to the specifics of the transaction in dispute.
Disclaimer or Modification of Warranties
To exclude or modify the implied warranty of merchantability or any part of it, the language must mention merchantability and, if it is in writing, must be conspicuous.
To exclude or modify any implied warranty of fitness, the exclusion must be in writing and be conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example, that "There are no warranties that extend beyond the description on the face hereof."
Unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like "as is," "with all faults" or other language that calls the buyer’s attention to the exclusion of warranties and makes plain that there is no implied warranty.
When the buyer, before entering into the contract, has examined the goods, there is no implied warranty with respect to any defects that should have been revealed by the examination (e.g., size, shape, scars, mechanical damage).
An implied warranty can also be excluded or modified by a "course of dealing" or "usage of trade" as defined above.
NOTE: In F.O.B. sales, the warranty of suitable shipping condition is considered an express warranty.
When a load of produce arrives showing a material breach of contract or a problem related to quality and/or condition, the receiver has the right to reject the load if the product has not been unloaded from the carrier. However, the receiver must first obtain an official USDA inspection to support that the product does not meet the terms of the contract.
Reasonable Time in Which to Reject:
With respect to fresh produce shipped:
- By truck, not to exceed 8 hours after the receiver (or a responsible representative) is given notice of arrival and the produce is made accessible for inspection.
- By rail, not to exceed 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 shall be extended until such time as an inspection can be made, plus 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 time periods described above (8 hours for truck, 24 hours for rail) that the load has arrived at its place of business and is awaiting inspection.
Also, keep in mind that the "rejection window" is extended in the following types of situations:
- The produce arrives on a non-working day; or
- The produce arrives after the close of regular business hours and the receiver’s representative, with authority to reject or accept, is not present.
In these situations the time between arrival and re-start of regular business hours are not counted against the 8 or 24 hour rejection windows.
Procedurally Effective vs. Ineffective Rejections:
A procedurally effective rejection is established when the receiver gives the shipper notice, in clear and unmistakable terms, of its rejection within a reasonable time as set forth in the proceeding section. (Note: Notice to broker is not sufficient, notice must be given to the seller of the product).
Any rejection that is not made within a reasonable time is ineffective.
"Rightful" vs. "Wrongful" Rejections: An effective rejection is not necessarily rightful, i.e., if a receiver effectively rejects a commodity that conforms to contract terms, the rejection would still, in most cases, be considered to have been wrongful.
Responsibilities After Rejection:
Regardless of whether or not the shipper has breached the contract of sale, it has a positive duty to take back rejected goods where there is an effective (i.e., prompt and clear) rejection.
If the rejection is later found to be wrongful, the receiver could be held liable to the shipper for the original contract price & incidental expenses, less resale proceeds received by the shipper.
A shipper does not have to take back goods that are ineffectively rejected. However, if the receiver refuses to sell the ineffectively rejected goods, the shipper should sell the lot in order to minimize damages. In so doing, the shipper should notify the receiver in writing that it is disposing of the lot only to minimize damages, and that it does not accept the ineffective rejection.
Assuming that a receiver makes an effective and rightful rejection, and the shipper refuses to take possession of the goods, the receiver should dispose of the goods, and would only be held to "good faith" standards in making the re-sale.
Acts of Acceptance: As previously noted, a receiver who does not communicate an effective rejection is generally deemed to have accepted the commodity in question. But what about other situations in which the receiver alleges that it is entitled to reject, but has legally accepted a load, such as:
The receiver has multiple customers and/or drop points and does not obtain an inspection on a representative portion of the load.
PACA defines a "commercial unit" as a single shipment of one or more perishable agricultural commodities tendered for delivery on a single contract. The PACA provides further that a commercial unit must be accepted or rejected in its entirety.
Under this definition, it is clear that if a receiver wishes to reject a load that it has sold to multiple customers; it must do so when the load arrives at the first customer’s place of business. This is because under the contract terms between the receiver and the buyer, the load would be considered a commercial unit. Therefore, a receiver with multiple customers who wishes to reject should have the entire load federally inspected at the first drop, and then reject or accept the entire load based upon the results of the inspection.
If, in the case of a receiver who has multiple customers, the first lot tendered for delivery under its contract with its customer is accepted, the acceptance functions as acceptance of the whole load under the contract terms between the receiver and the shipper. Any subsequent rejection of a portion of the load by any of the receiver’s customers could conceivably be effective as between the buyer and its customer, but would not be effective as between the buyer and the shipper.
The receiver diverts the load to a destination other than that called for in the contract.
In situations where a receiver diverts a load from its original destination, the diversion generally constitutes acceptance. Any rejection following an act of acceptance is ineffective.
The receiver offloads the commodity from the conveyance.
The PACA defines "acceptance" as any act by the consignee signifying acceptance of the shipment, including diversion or unloading. Therefore, a receiver that offloads a commodity (or commodities) constituting a commercial unit, or a portion thereof, for any purpose other than making the commodity(s) accessible for inspection, is deemed to have accepted the commercial unit. As such, any subsequent rejection would be ineffective.
General Legal Consequences of Acceptance of Goods:
- The buyer must pay the contracted price for the accepted goods.
- The buyer loses his right to reject.
- Time starts to run within which the buyer must complain of a breach or be barred from any remedy.
- The burden shifts to the buyer to establish a breach of contract.
Breach of Warranty
It is important to understand that just because the receiver has lost the right of rejection, it does not mean that the receiver has lost the right to recover from the shipper the losses it suffers due to the shipper’s failure to ship the agreed quality of produce.
Notice of a Breach
Where product has been accepted, the buyer must, within a reasonable time after he discovers or should have discovered any breach, notify the seller of the breach or be barred from any remedy.
The requirement that notice be given within a reasonable time is important, especially when the alleged breach concerns perishables. The purpose of the rule is to defeat commercial bad faith, i.e., if the seller is notified of a breach within a reasonable time it has the opportunity to ascertain for itself the nature and extent of the breach by having the product inspected, or by requesting an appeal inspection if it disagrees with any inspection already performed.
"Reasonable time" with respect to notice of a breach is not defined under the PACA. The relative perishability of the product must be taken into consideration in determining what constitutes timely notice.
Establishing Damages for a Breach of Warranty
Buyer’s Damages Where Goods Are Accepted
There are circumstances when a receiver will not want to reject damaged merchandise. The buyer who receives damaged product has the choice to reject it, or to accept it and handle it to establish its damages from the seller’s breach. The buyer cannot be required to return the product to the seller.
The general measure of damages for a breach of warranty as to accepted goods is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show damages of a different amount.
The value of accepted goods is best shown by the gross proceeds of a prompt and proper resale as evidenced by a proper accounting prepared by the ultimate consignee. A proper accounting should show a breakdown of sales of individual lots of produce with the number of containers sold at each price and the date on which sales of each lot took place.
The first and best method of ascertaining the value the goods would have had if they had been as warranted is to use the average price as shown by USDA Market News Service Reports. If applicable market prices are not available, the delivered (F.O.B. plus freight) value of the goods may be used as a measure of the value as warranted.
Buyer’s Damages Where Goods Are Rightfully Rejected
Where a buyer rightfully rejects, the buyer may either "cover" or recover damages for non-delivery.
"Cover" refers to the buyer’s purchase of goods in substitution for that due from the seller. When such purchase is made in good faith and without unreasonable delay, the buyer may recover the difference between the cost of the cover purchase and the contract price. The substitute goods need not be identical with those involved but commercially usable as reasonable substitutes under the circumstances of the particular case.
RIGHTS AND RESPONSIBILITIES OF SPECIFIC PRODUCE TRADERS
Written Contract: The PACA requires, first and foremost, that the growers’ agent have a written contract with its growers. The contract should clearly define the duties and responsibilities of both parties, and the range of authority granted to the agent in the marketing of the growers’ product. If a contract with each grower is not practicable, the agent is required to describe its marketing policies in a written statement that must be mailed or delivered to the grower before or upon receipt of the first lot of produce to be handled for the grower.]
Accounts and Records: Once the terms are settled and the deal begins, the agent is obligated to prepare complete records to cover the disposition of the produce and the expenses incurred. Each grower’s product must be identified from the time it is harvested or delivered to the agent, through the steps of packing, shipping and selling. Lot numbers are necessary to distinguish each grower’s product.
Pooling: The agent and grower can agree that the grower’s product will be pooled with that of others for the purpose of selling it, with the returns to be based on the average return for the total pool. This provision must be specified in the written contract.
Expenses: Some record requirements can be waived by special agreement, especially those having to do with expenses. Usually this takes the form of a flat per-package or per-weight fee to cover harvesting, packing and selling charges. Once again, this agreement should be reduced to writing so that both parties have a clear understanding. In the absence of such an agreement, the agent must detail its expenses in the accounting it issues to the grower, and its records must support those expenses.
Use of Other Sales Agents: The growers’ agent is not entitled to use the services of other agents, brokers, commission merchants or auction companies to sell the grower’s product, without specific prior approval from the grower.
Price Adjustments: Any price adjustments that the agent grants his customers must be supported with documentation (such as destination inspection certificates).
Agent’s Liability: The growers’ agent can be held liable for any losses the grower suffers that are directly caused by the agent’s negligence or failure to perform its duties. However, the agent is not responsible for non-payment by its customers unless it has guaranteed payment or been clearly negligent in extending credit.
Trust Protection: The agent is required to preserve the grower’s right to trust protection. (See Course Unit VIII)
Assigning Lot Numbers: A commission merchant/consignee must be able to account for every package received on consignment. This is accomplished by assigning lot numbers to the consigned lot, and also to every other lot of similar product on hand during the sales period of the consigned lot. The lot numbers and consigned terms must be entered into the receiver’s receiving records and onto the sales tickets issued on the sales of each lot. The use of brands, shippers’ names or size identification does not satisfy this requirement.
Adjustments/Credits: If the commission merchant/consignee finds it necessary to give a price adjustment or take back product refused by a customer, a credit memorandum must be prepared showing the lot number, the original sales ticket number and the reason for the adjustment or refusal.
Use of Other Sales Agents: A commission merchant/consignee may not employ another person or firm, including auction companies, to dispose of the consigned produce without the specific prior authority of the consignor.
Prohibition of Sales Outside the Consignee’s Market Area: A commission merchant/consignee may not sell consigned produce outside the market area where they are located without obtaining the permission of the consignor.
Pooling: Averaging or pooling of sales is not permissible unless the receiver obtains the specific written permission of the consignor prior to rendering the accounting.
Record Keeping: Complete and detailed records must be prepared and maintained showing the produce received, sales, quantities lost, dates and cost of repacking or reconditioning, unloading, handling, freight, demurrage or auction charges, and any other expenses that are deducted on the accounting.
Accounting: The accounting rendered should consist of an accurate and itemized report of the sales, including the dates of sale and the quantities sold at each price, and the expenses charged against the shipment.
Commission Fees/Other Charges: Before accepting produce on consignment, the parties should reach a definite agreement on the amount of commission or other charges that will be assessed by the commission merchant/consignee. In the absence of such an agreement, only the usual and customary commission and other charges are permissible.
Purchases by Consignees: A commission merchant/consignee may not purchase produce received on consignment or sell the produce to any firm it has control over or is controlled by without the specific prior approval of the consignor. However, the commission merchant/consignee may clean up remnants of the shipment by purchasing them at the market price.
Carrier Claims: Without prior consent of the owner of the produce, a commission merchant/consignee has no authority to file claims with carriers in its own name or any other name.
General: The function of a broker is to facilitate good faith negotiations between parties that lead to valid and binding contracts. It is the duty of the broker to fully inform the parties concerning all terms and conditions of the proposed contract.
Confirmation of Sale: After the parties agree to the terms and the contract is effected, the broker should prepare in writing and deliver promptly to all parties, a confirmation or memorandum of sale setting forth truly and correctly all of the essential details of the agreement between the parties. The confirmation or memorandum of sale should also identify the party who engaged the broker to act in the negotiations. A copy of the confirmation or memorandum of sale should be retained by the broker as a part of its accounts and records. A rule of thumb is that all parties should have the broker’s confirmation in their hands before the product arrives at destination.
Broker’s Liability for Payment: Unless otherwise specifically agreed, the broker does not guarantee the performance of the contracting parties and is entitled to receive prompt payment of the brokerage fee whenever a valid and binding contract is negotiated.
Brokerage Fees: Brokerage fees may be charged to only one of the parties unless there is a prior agreement between the parties to split the brokerage fee.
Use of Other Brokers: A broker may not employ another broker or selling agent to negotiate the sale of the produce without the approval of its principal.
Collect and Remit Brokers: A broker authorized to sell, invoice the buyer, collect and remit to its principal, should render an itemized accounting to the principal promptly on receipt of payment, showing the true gross selling price, all brokerage fees deducted, and any other expenses incurred in connection with the sale of the shipment. Agreement to collect from the buyer and remit to the seller is not, however, a guarantee by the broker that the buyer will pay for the produce purchased. Such brokers must show their authorization on their confirmations. A collect and remit broker cannot pursue a PACA claim in its own name unless it first obtains an assignment of interest from its principal, the seller.
Buying Brokers: A buying broker who negotiates a purchase in his own name under an agreement with his principal is responsible for payment of the purchase price of the seller.
Allowances: A broker has no authority to grant allowances or adjust the seller’s invoice price to the buyer without the specific prior approval of its principal.
Brokers Who Also Act as Dealers: Licensees who operate both as dealers and as brokers must disclose their status in each transaction to the parties with whom they are dealing. When licensees purchase or sell produce as dealers, they may not request or receive a brokerage fee.
Broker’s Relationship to Contracting Parties: Brokers should not negotiate transactions where they are controlled by or have control over any of the parties to the transaction other than their principal.
General: The responsibilities of shippers vary with their contracts with growers to purchase produce or handle produce on joint account, and their responsibilities to their customers depend on their contracts to sell, consign, or joint account produce with dealers on terminal markets.
Receiving Records: Each shipper should prepare and maintain a record of all produce handled, including its own production. The record should be in the form of a book with numbered pages, showing the following for each lot:
- Whether purchased or received on joint account
- Purchase price or joint account cost
- Name and address of the supplier
Receipts should be issued to growers and others for all produce received.
Disposition Records: When shippers purchase produce from growers or others, their records should also show the following:
- The disposition of the produce, i.e., whether sold or consigned
- Car number or truck license number
- Name and address of carrier
- Name and address of buyer, commission merchant, or auction
- Other pertinent details of the transaction, e.g. sale terms, selling price, date of payment, etc.
Joint Account Transactions: When shippers enter into joint account agreements with growers or receivers, the agreement between the parties should be reduced to a written contract clearly defining the terms of the agreement. The shipper should prepare and maintain records that show in detail the expenses that may properly be charged to the joint venture. At the conclusion of the transaction, a detailed and accurate accounting should be furnished promptly to the joint account partner.
If you have any questions regarding this course material, please direct them to John Koller, Director, Dispute Resolution Section, PACA Branch, Washington DC; phone 202-720-1442, or via email at firstname.lastname@example.org