The U.S. Food and Drug Administration (FDA) recently issued an advisory warning about an E. coli outbreak in romaine lettuce. The U.S. Department of Agriculture’s (USDA) Perishable Agricultural Commodities Act (PACA) Division provides the information below concerning the impact of the advisory on commercial sales contracts governed by the PACA.
The “allocation of the risk of loss,” determines whether the buyer or seller bears the financial loss if any damage or loss occurs to the produce before the buyer accepts it. Which party bears the loss depends on the terms of sale. For produce shipped on F.O.B. contract, the risk of loss passes from the seller to the buyer once the seller delivers the produce to the transportation carrier. Any damage or loss to the produce during transit that is not caused by the seller is borne by the buyer.
Where the contract terms of sale are “delivered”, the risk of loss is not transferred from the seller to the buyer until the produce is delivered to the contract destination. Any damage or loss to the produce during transit that is not caused by the buyer is borne by the seller.
The effect of an FDA advisory warning on contract obligations is illustrated in the following scenarios. The scenarios are based on the assumption that the advisory warns U.S. consumers not to eat the affected produce that would otherwise meet contract requirements.
Scenario 1: A seller contracts to sell produce to a buyer. Prior to shipment of the produce, the FDA issues an advisory warning that the produce is the subject of an E. coli outbreak.
In this instance the effect of the advisory warning renders the produce unmerchantable at shipment. Since the advisory was issued prior to shipment, the risk of loss remains with the seller. If the seller ships the produce, the seller may voluntarily recall the produce based upon the advisory. If the seller decides not to recall the produce, the buyer would have a claim against the seller for breach of the warranty of merchantability and could reject the produce.
Scenario 2: A seller contracts to sell produce to a buyer. After the buyer has received and accepted the produce, the FDA issues an advisory warning that the produce is the subject of an
E. coli outbreak. In this instance, the advisory warning rendered the produce unmerchantable after it was received and accepted by the buyer. Since the advisory was issued after the buyer received and accepted the produce, the risk of loss had shifted to the buyer who must pay for the produce. This result is supported by a legal decision involving Chilean grapes where the presiding officer held that a buyer must pay for the grapes although a “Stop Sale” directive had made all Chilean grapes unmerchantable. The presiding officer stated that the seller should not suffer this loss because the “Stop Sale” directive was issued two weeks after receipt and acceptance of the grapes.
Scenario 3: A seller contracts to sell produce to a buyer. While the produce is in transit from the seller to the buyer, the FDA issues an advisory warning that the produce is subject to an E. coli outbreak. In this scenario, the advisory warning renders the produce unmerchantable while in transit from the seller to the buyer. The advisory establishes a breach of the warranty of merchantability. However, resolution of this scenario depends on which party bears the risk of loss which, as discussed earlier, is dependent on the contract terms. If the terms are F.O.B. and the produce is in transit, the buyer bears the risk of loss in transit and must pay for the produce. If the contract terms are “delivered” or “delivered sale,” the seller bears the risk of loss in transit, and since the buyer in this situation has yet to receive the produce, the buyer would likely be able to reject the produce because the risk of loss rests with the seller.
These scenarios discuss the possible impact of an FDA advisory on produce contracts, but outcomes may vary depending on specific terms entered into by the parties. For more information or clarification, consult with your attorney or contact the PACA Branch at 800-495-PACA.