Tag Archives: USDA

Selling Distressed Produce and Quantifying the Implied Warranty of Merchantability

WarrantyIn all sales of goods where the seller is considered a merchant with respect to the goods in question, there is an implied warranty that the goods will be merchantable, which means the goods must be of the quality and type ordinarily acceptable among sellers and buyers.  See U.C.C. § 2-314(1).  For goods to be merchantable they must, inter alia, “pass without objection in the trade under the contract description.”  Id.  This means that sellers of perishable agricultural commodities (“Produce“) sell their Produce subject to an implied warranty of merchantability and this warranty is a necessary part of the selling price.

In the Produce industry, the parties to the primary or original sale include the seller of the Produce who sets a sale price based on market conditions and a buyer of Produce who agrees to the sale price based on market conditions and the expectation of a bargained for level of quality.  If the seller delivers Produce to the buyer that is rejected or otherwise objectionable based on quality or condition defects, the seller has breached its implied warranty of merchantability because the Produce did not “pass without objection.”  A seller’s breach of the implied warranty of merchantability justifies rejection of the Produce or the modification of the contract of sale.

After Produce has been rejected or subjected to objection due to quality or condition defects the Produce is either dumped or sold at a discount as distressed Produce.  The sale of distressed Produce constitutes a secondary market sale because it involves the sale of Produce after said Produce was rejected or otherwise subject to a timely quality or condition objection in connection with the original sale.  The sale of distressed Produce on a secondary market is materially different than the sale of merchantable Produce on the primary market because merchantable Produce (e.g. unobjectionable and un-rejected) is entitled to a premium.  Part of this premium (fair market value) includes the value of any and all express or implied warranties.  By way of an example, a new car with full factory warranty costs more than the sale of a used car that no longer has an effective warranty.  The presence or absence of warranties affects the value and price of the product.  The purchase and sale or Produce is no different.

So how do you value the implied warranty of merchantability?

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 the USDA Market News Service Reports. Pandol Bros., Inc. v. Prevor Marketing International, Inc., 49 Agric. Dec. 1193 (1990).  The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted (assuming the contract is modified and the Produce not simply rejected) and the value they would have had if the Produce had been as warranted (e.g. no objection based on quality or condition).  See U.C.C. § 2-714(2).

The value of the goods accepted (e.g. accepted after objection and pursuant to a modified sale contract) is best shown by the gross proceeds of a prompt and proper resale.  R.F. Taplett Fruit & Cold Storage Co. v. Chinook Marketing Co., et. al., 39 Agric. Dec. 1537 (1980).  While PACA’s regulations do not place a duty to account upon a buyer who purchases on an open or price after sale basis, a buyer who fails to account accurately and in detail does so at his own risk, as a properly prepared account of sale may be useful in determining the reasonable value of the goods in the event the parties fail to agree upon a price.  A.P.S. Mktg. v. R.S. Hanline & Co., 59 Agric. Dec. 407, 411 (2000); Carmack v. Selvidge, 51 Agric. Dec. 892, 898 (1992).

Buyer’s Risk

This is important because the buyer stands to lose if the parties fail to agree upon a price term after the fixed price term sale contract is modified to reflect open price or price after sale terms.  If such a dispute arises and the buyer does not have a proper account of sale the USDA Market News Service Report will be used to decide the disputed price term.  This hurts the buyer who elected not to reject the Produce, but rather to change the contract of sale and move the product under open or PAS terms because the USDA Market News Service Report reflects the sale of Produce that passed between sellers and buyers without objection as to quality or condition.  As such, the USDA Market News Service Report price information fails to take into account any type of discount for the seller’s breach of the implied warranty of merchantability.  You don’t want to be stuck in a position that requires you to defend your returns on the sale of distressed Produce against the reported sale of non-distressed Produce.

The difference between the USDA Market News Report price and the gross sale proceeds identified in a proper account of sale (assuming prompt and proper resale) represents the value of the warranty of merchantability.  For example, if the USDA Market News Report price for a given commodity is $5.00 per carton and proper account of sale shows a prompt and proper resale at $2.00 per carton, the value of the warranty of merchantability is $3.00 per carton.  Therefore, the value of the distressed Produce (e.g. Produce sold without the benefit of a warranty) is $2.00.  Stated another way, the seller could command $3.00 more per carton had its Produce been accepted without objection by the buyer.  This also means that without a proper account of sale the buyer would not be in a position to quantify the value of the missing warranty and could be forced to compare its sale of distressed Produce to the market price for good Produce.  If this happens, the buyer could lose money on the transaction post-objection based on its own failure to prepare a proper account of sale.


Do Canadian Produce Sellers Really Need Surety Bonds?

US_and_Canadian_FlagsOn October 3, 2014, The Packer reported that “as of October 1, 2014, Canadian produce sellers now have to have a surety bond that’s twice the amount of the claim, so selling $100,000 worth of product will have to have a bond of $200,000.”  See Make your own PACA

This bond requirement is found in Section 499f(e) of the Perishable Agricultural Commodities Act, which states, in relevant part, as follows:

“In case a complaint is made by a nonresident of the United States [Canadian produce seller]… the complainant shall be required, before any formal action is taken on his complaint, to furnish a bond in double the amount of the claim conditioned upon the payment of costs, including a reasonable attorneys’ fee for the respondent if the respondent shall prevail, and any reparation award that may be issued by the Secretary of Agriculture against the complainant on any counter claim by respondent….”  7 U.S.C. § 499f(e)

To be clear, the foregoing only applies to nonresident (e.g. Canadian) produce sellers who elect to bring a claim against a PACA licensee before the USDA.  Importantly, the USDA’s PACA Division provides a two tier dispute resolution process.  The first tier involves the filing of an informal complaint and the PACA division will work with both parties to reach an amicable resolution to a PACA dispute.  The second tier involves filing a formal complaint against a PACA licensee wherein the complainant alleges that a violation of Section 2 of PACA has occurred and seeks a reparation order.  While the USDA may not require a bond as a condition precedent to the nonresident complainant’s participation in the informal dispute resolution process, a bond will be required before the USDA will accept a formal complaint seeking a reparation order.

How Do I Avoid the Bond Requirement?

To avoid the bond requirement, the unpaid Canadian produce seller could elect to follow the these steps:

  1. Preserve its PACA trust rights against the PACA licensee buyer by issuing a timely and properly formatted Notice of Intent to Preserve Trust Rights.
  2. Attempt to resolve disputes arising out of the produce transactions in-house or with the assistance of third parties (e.g. PACA counsel)
  3. File all complaints related to your unpaid produce transactions with a given PACA licensee in the U.S. District Court closest to the PACA licensee’s principal place of business.  (e.g. if in Chicago, file in the Northern District of Illinois).

You must retain counsel to file a complaint in federal court, but you will not be required to post a bond if you elect to file a civil complaint in federal court.  With that said, utilizing the USDA’s PACA Division for dispute resolution purposes is a cost-effective way to handle smaller (less than $15,000 – $20,000) PACA claims.  Also, these same types of smaller claims may not justify the costs of retaining counsel to prepare and file a civil action in federal court.  But, when you add the cost of the USDA’s double bond requirement to the regulatory equation (e.g. the cost of filing an administrative claim with the USDA vs. a civil action in federal court ) the scale of efficiency may now tip in favor of filing a civil action with an experienced PACA attorney who can work efficiently.

The bottom line is that the USDA’s double bond requirement only applies to administrative actions and Canadian produce sellers do have other options.

USDA Practice Tip – Single Transaction Rule

A produce buyer is not at liberty to breach a contract with a produce seller via nonpayment on an invoice simply because the buyer perceives that a seller is indebted to them.  A buyer who accepts produce becomes liable to the seller for the full purchase price thereof, less any damage resulting from any breach of contract by the seller.  Ocean Breeze Export, Inc. v. Rialto Distributing, Inc., 60 Agric. Dec. 840 (2001)(emphasis added).  

An offset is not a defense to a buyer’s non-payment.  See Standard Fruit & Steamship Company v. Jos. Notarianni & Company, Inc., 41 Agric. Dec. 1425 (1982)(finding the buyer defenseless against a seller’s unpaid invoice claim and holding that the buyer owed the gross invoice amount, unless it can prove offsetting credits. )

What does this mean?  Every produce transaction/file must stand on its own.  It also means that a buyer cannot justify its failure to make full payment promptly under the Perishable Agricultural Commodities Act simply because the seller may owe the buyer some amount on an unrelated produce transaction/file.