Different and often conflicting interpretations of trade terms play a significant role in the commercial disputes that come before the PACA Branch. Making sure that all the parties to a transaction are using the same terms, and that all the parties have a clear understanding of what those terms imply, is the best insurance against finding yourself involved in a commercial dispute. In this regard, some of the most commonly used terms and their definitions are set forth below:
"F.O.B." means that the commodity is placed "free on board" the carrier at shipping point in suitable shipping condition, and that the buyer assumes all risk of damage and delay in transit not caused by the seller. This means, for example, that if a load is wrecked or stolen in transit, the buyer must pay the invoice price to the seller and file a claim with the carrier to recover damages. Under F.O.B. terms, the seller guarantees that the product, when loaded onto the carrier, is in "Suitable Shipping Condition."
"Suitable Shipping Condition," or what is commonly referred to as the warranty of suitable shipping condition, is applicable only in F.O.B. sales, and means that produce, at the time of shipment, is in a condition which if handled under normal transportation conditions will assure delivery at the contract destination without abnormal deterioration.
The underlined words in the above definition imply that since fruits and vegetables are perishable, some amount of deterioration is normal and can be expected. This means that it is possible that a product which grades U.S. No. 1 at shipping point could arrive at destination with total defects exceeding the limits established in the U.S. Grade Standards and still meet the terms of the F.O.B. contract.
For example, suppose a load of bell peppers shows 4 percent scars and 4 percent turning red at shipping point, for a total of 8 percent defects. The peppers would grade U.S. No. 1 at that time, since the U.S. Grade Standards allow 10 percent defects. After a normal four to five day trip across the country, an inspection at destination shows 4 percent scars, 6 percent turning red, and 1 percent decay. The peppers now have 11 percent defects and do not meet U.S. No. 1 standards. However, 11 percent defects would not show that the peppers were abnormally deteriorated, since there are only 3 percent additional condition defects since shipment.
The italicized words in the above definition imply that when transportation conditions are not normal, the warranty of suitable shipping condition is not applicable.
For example, suppose a load arrives late and a USDA inspection made at destination shows considerable condition problems in the product, along with high temperatures. Following the standard that abnormal transportation voids the warranty of suitable shipping condition, the buyer would pay the shipper in full and take up the matter of damages with the carrier.
There are, however, three instances where a buyer may claim damages for a breach of warranty by the seller despite the existence of abnormal transportation conditions:
1. When a seller loads product on a carrier with obviously faulty or inadequate equipment, or mis-loads the product in such a way as to block air flow; or
2. When the nature of the damage found at destination is such as could not have been caused by or aggravated by the faulty transportation service; or
3. When the defects appearing at destination are so extensive and/or advanced that they would have been present even if transportation conditions had been normal. Example: A load of cantaloupes arrives one day late, but with good temperatures and showing 35% decay. The decay is too extensive to have been caused by the late delivery.
"Good Delivery" is the term used in F.O.B. sales to describe the arrival of goods at the contract destination without abnormal deterioration, i.e., goods that are shipped in suitable shipping condition will make "good delivery" at the contract destination. For all commodities other than lettuce (for which specific good delivery standards exist) what is "normal" or abnormal deterioration is determined on a case-by-case basis.
"Delivered" means that the produce is to be delivered at the market specified in the contract, free of any transportation charges. In this case, the seller assumes all risks of loss and damage in transit not caused by the buyer. It also means that if potatoes, for example, are sold "U.S. No. 1 delivered Chicago," the potatoes, upon delivery in Chicago, must meet all quality and condition requirements of the U.S. No. 1 grade, with no allowance for normal deterioration.
"Open" describes a sale, like any other sale, except that the price has not been settled. An "open" sale is either F.O.B. or delivered, depending upon the agreement of the parties. The purchaser of produce on an "open" basis has all the benefits of the normal sales warranties, and may accept, or reject and claim damages if the seller breaches the contract. If the parties fail to agree upon a price, the purchaser of product on an "open" basis is liable to the seller for a reasonable price.
"Price after sale" is not defined in either the Act or the Uniform Commercial Code (UCC), however, it has been interpreted as meaning that the parties will agree upon a price after the buyer completes its re-sales at destination.
Note: The PACA regulations do not place a duty to account upon a buyer who purchases on an "open" or "price after sale" basis. However, in cases where the parties fail to agree upon a price and a reasonable price must be determined, a properly prepared accounting showing timely re-sales of the product may be the best evidence of the reasonable value of the product. In the absence of a detailed accounting, USDA Market News prices generally determine what is "reasonable."
"Consignment" is NOT a sale. It creates an agency relationship between the consignor and the consignee, where the produce continues to belong to the consignor until the consignee sells it on the consignor’s behalf. After such sale, the proceeds of the sale belong to the consignor, with the consignee allowed only to retain expenses of the resale and commission.
There is no F.O.B. suitable condition warranty, no warranty of merchantability, nor any other "sale" warranty applicable to consigned goods. Consequently, a consignee cannot normally reject consigned goods. When a consignee receives goods that it does not believe can be sold, the consignee should consult with the owner of the goods to determine what the owner wants done with them. The same advice applies if the goods are salable, but in poor condition. In both cases, the consignee would be well advised to secure a federal inspection in case any dispute arises in the future over how the goods were handled.
In the case of a consignment, the shippers choose the agent, and absent a showing of fraud or other hard evidence of violations of the PACA, the shipper must bear the risk of his agent not having done a good job selling the product.
OTHER TRADE TERMS:
"F.O.B. acceptance" means that the buyer accepts the product at shipping point and has no right to reject the product. The buyer has recourse against the seller if the product is not in suitable shipping condition or for a material breach of contract, providing the shipment is not rejected. The term "material breach" generally means a breach of contract that is related to factors other than quality and condition, such as size, variety, label, etc.
"F.O.B. acceptance final" has the same meaning as "F.O. B. acceptance" except that suitable shipping condition is inapplicable and the buyer’s only recourse is for a material breach of contract. Use of this term must be clearly established given the harshness of the conditions it imposes.
"Purchase after inspection" means a purchase of produce after inspection or opportunity for inspection by the buyer or his agent. Under this term the buyer has no right of rejection and waives all warranties as to quality and condition, except warranties expressly made by the seller. Note: If this term is to apply, both parties must expressly agree to it.
"Shipping Point Inspection Final" means that the seller is required to obtain a Federal or Federal-State inspection, or a private inspection as has been mutually agreed upon, to show that product meets contract specifications, and that the buyer has no recourse against the seller on account of quality, condition, and grade.
"Protection" is not defined under the PACA, however the term is often used throughout the industry in two main contexts:
"Market protection" or "price protection" is understood as meaning that the buyer is protected against any market decline that might occur between the date of sale and the date the product is received. Note: the shipper and receiver must clarify, prior to shipment, whether the decline is to be based on the shipping point market or the destination market.
"Protection," "full protection," and "protection against loss" usually have the same meaning, and should be distinguished from "market protection," or "price protection." A protection agreement is a modification of the original sale contract that leaves the original sale price as the base line price for determining whether the buyer makes a profit, or is entitled to protection. The potential for profit remains after the conclusion of the protection agreement, and this potential can only be realized in the same manner as it is realized in any sale contract, namely by the buyer reselling at prices above the original price plus expenses. Therefore, when a buyer with protection fails to re-sell at such favorable prices and experiences a loss, the protection should only compensate the loss, and should not include a profit in the form of a commission or handling fee.
Since a protection agreement is intended to protect a buyer against any loss, a buyer who has paid freight must be credited with the freight paid. If gross proceeds of the buyer’s resale exceed the F.O.B. contract price plus freight, then the buyer gets to keep the excess as profit. On the other hand, if gross proceeds of the re-sale are less than the buyer’s costs (F.O.B. price plus freight), then the buyer deducts the freight expense from the gross proceeds and remits the balance, thus suffering no loss. If gross proceeds are not enough to cover freight, then the seller who grants full protection must chip in and pay the remainder of the freight costs.
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