Category Archives: USDA Regulatory Practice Tips

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.

An “Open Price” Sale or “Price After Sale” is Still a Sale Requiring Prompt Payment Within 10 Days of Delivery

USDA LogoNeither the UCC nor the PACA recognize the term “Price After Sale.”  The term is a subcategory of “Open Price.”  A.P.S. Marketing, Inc. v. R.S. Hanline & Co., Inc., 59 Agric.154 Dec. 407 (2000), Sucasa Produce v. A.P.S. Marketing, Inc., 59 Agric. Dec. 421 (2000), and Well Pict, Inc. v. Ag-West Growers, Inc., 39 Agric. Dec. 1221, 1227-1228 (1980).  See Eustis Fruit Co., Inc. v. The Auster Co., Inc., 51 Agric. Dec. 865 at 877 (1991) (“The term “price after sale” usually contemplates the parties agreeing to a price following the prompt resale of the produce.); Bonanza Farms, Inc. v. Tom Lange Co., Inc., 51 Agric. Dec. 839 at 846 (1991); M. Offutt Co., Inc. v. Caruso Produce, Inc., 49 Agric. Dec. 596 (1990).  This fact becomes important because the regulations (other than the rules of practice) under PACA (7 CFR Part 46) (the “Regulations”) do not place a duty to account upon a buyer who purchases on an open basis.  Ronnie Carmack v. Delbert E. Selvidge, 51 Agric. Dec. 892 (1992) (emphasis added).

Why is this important to a produce supplier?

As the industry knows, “a PACA supplier must [sell] produce on a cash or short-term credit basis.”  Patterson Frozen Foods, Inc. v. Crown Foods International, Inc., 307 F.3d 666, 669 (7th Cir. 2002).  As a matter of fact, the Secretary of Agriculture has determined that ‘the maximum time for payment for a shipment to which [parties] can agree and still qualify for coverage under the trust is 30 days after receipt and acceptance.’”  7 C.F.R. § 46.46(e)(2) (emphasis added).  Taken together, PACA and the Regulations provide both parties to a sales transaction with the ability to calculate the seller’s last day to perfect its PACA trust rights with the level certainty needed to ensure the credit agreement does not exceed the statutory maximum of 30 day terms.

The Regulations state, in relevant part, that “[f]ull payment promptly’ for the purpose of determining violations of [PACA], means: [p]ayment for produce purchased by a buyer, within 10 days after the day on which the produce is accepted.’” 7 C.F.R. §46.2(aa)(5) (emphasis added).  Once the seller delivers its produce to the buyer, both parties possess the immediate ability to calculate two important dates.  The first date is the payment due date, which is generally 10 days later.

The second critical date is the seller’s last day to perfect PACA trust rights, which is within 30 calendar days after the expiration of the time prescribed by which payment must be made as set forth in the Regulations.  See 7 U.S.C. §499e(c)(3)(i).  This means the seller has a 40 calendar days (10 day payment terms + 30 days thereafter to perfect) in which to preserve its PACA trust rights.

A Seller who sells produce with “Open Price” terms or “Price After Sale” terms must preserve its PACA trust rights within 40 days pursuant to 7 C.F.R. §46.2(aa)(5) and 7 U.S.C. §499e(c)(3)(i).  This is true even if the parties have not agreed upon a price or the buyer has not provided any type of account of sale.  Remember, the buyer in an “Open Price” term contract has no duty to provide the seller with an account of sale because the sales contract becomes valid and binding as soon as the produce is accepted.  Also, the uniform commercial code will not allow an otherwise valid and binding contract to fail simply because there either is no agreement on price or there is a dispute as to the price term.  See UCC Section 2-305.

Important Take Away:  Seller Beware!

An unpaid seller of produce CANNOT sit back and wait for the resolution of any missing price term before it acts to perfect its PACA trust rights.  The clock starts ticking on the seller’s ability to preserve its PACA trust rights as soon as the produce is accepted.  The failure of the buyer to provide an accounting or the inability of the parties’ to agree upon the proper price will not toll, delay or otherwise modify the calculation of the seller’s last day to preserve its PACA trust rights.

Is My Produce Buyer Creditworthy?

CreditworthinessNothing is more important to a produce company’s cash flow than ensuring the creditworthiness of its customers.  This statement begs the question:

How do I evaluate a buyer’s creditworthiness?

First, make sure your buyer has a PACA license and that the license is in good standing with the USDA.  To do this, simply go to the USDA’s website (http://apps.ams.usda.gov/pacasearch/) and search for your buyer.  If your buyer is a PACA licensee you will be able to see a summary report of their license, which has key information about the buyer.  Specifically, you will be able to see the buyer’s license number, the status of the license, the buyer’s business name and trade names, the buyers contact information, branch office information, and the principal of the buyer.  All of this information is free to those who know where to look and those who bother to look.

Your due diligence does not stop here.  The next step is for you to use either (or both) the Blue Book Services or the Red Book Credit Service to get credit and trade information about your buyer.  For those of you who do not know, the Blue Book Services and the Red Book Credit Services are companies who publish credit information about produce companies.  If one or both of these books list your buyer, you will be able to see whether that buyer possesses an industry credit rating and to what extent others extend credit to your buyer.  You may also be able to see how quickly the buyer pays its bills or if there are payment problems associated with your buyer.  With that said, it is important to note that not all payment problems are the result of financial problems.  Credit reporting agencies generally do not distinguish between a buyer’s inability to pay and a buyer’s legitimate refusal to pay an invoice.  As you can see, we are developing a buyer profile that helps us predict the amount of risk associated with a given buyer.

Next, you should take the information you have gathered thus far and look to the buyer’s secretary of state (usually the state in which the buyer is located, but not always) for copies of any publicly available incorporation documents, which are often online.  These documents show the buyer’s organizational structure (e.g. company, partnership, LLC, etc.) and they name the buyer’s registered agent.  A quick review of the buyer’s incorporation documents will tell you whether the company is in good standing and where you need to go to chase them for money, if needed.

Not to sound obvious, but it never hurts to simply spend time researching your buyer on the internet.  Look for articles about the buyer, look to see if the buyer maintains a website, look for any negative press about the buyer, look the buyer on various social media outlets, etc.  Gather as much information as you can about each buyer and save it in your client file.  You should also update this information from time-to-time.

Lastly, you can always call the PACA and ask a representative whether there are any pending PACA cases against your buyer at the USDA.  The representative may not give you too many details, but they will tell you whether there are any cases against your buyer for non-payment.

Every produce company should set up a due diligence process designed to help the company evaluate the creditworthiness of its customers.  The time invested in learning about your customers will help you make good credit decisions and will greatly reduce the amount of bad debt on your books.  As you know, a sale is never complete until you are paid in full.

Restrictive Endorsements: What you need to know about accord and satisfaction

Savvy credit managers need to understand how to use restrictive endorsements to their advantage and how to deal with any restricted check they may receive.

As a matter of policy, a company should make it a practice not to deposit any check containing a restrictive endorsement until they have discussed the issue with their legal counsel. 

With that said, here is an overview of what credit managers should know about accord and satisfaction: 

To constitute a valid accord and satisfaction it is essential that what is given shall be offered in full satisfaction and extinction of the original debt.  That the debtor shall intend it as a full satisfaction of the original debt and that such intention shall be made known to the creditor in some unmistakable manner. 

It is equally important that the creditor shall have accepted it with the intention that it should operate as a full satisfaction of the original debt.

Generally, an accord and satisfaction requires:

  1. a bona fide dispute, plus
  2. tender which is clearly made as payment in full. 

1 Am. Jur. Accord & Satisfaction, Section 22 et. seq.  See also Louis Caric & Sons v. Ben Gatz Co., 38 Agric. Dec. 1486 (1979); Mendelson-Zeller Co. v. Michael J. Navilio, Inc., 34 Agric. Dec. 903 (1975); Kelman Farms v. Bushman Brokerage, 34 Agric. Dec. 1146 (1975); Mendelson-Zeller Co. v. The Season Produce Co., 31 Agric. Dec. 1288 (1972). 

“To constitute an accord and satisfaction it is necessary that the money be offered in full satisfaction of the demand, and be accompanied by such acts and declarations as amount to a condition that the money, if accepted, is accepted in satisfaction; and it must be such that the party to whom it is offered is bound to understand therefrom that, if he takes it, he takes it subject to such conditions. The mere fact that the creditor receives less than the amount of his claim, with knowledge that the debtor claims to be indebted to him only to the extent of the payment made, does not necessarily establish an accord and satisfaction.” 

Spada Distributors Co. v. Frank KenworthyCo., 17 Agric. Dec. 347 (1958). (emphasis added).  Quoted in Mendelson-Zeller Co. v. The Season Produce Co., 31 Agric. Dec. 1288 (1972).

Clear and CONSPICUOUS terms required

Words: “This check is in settlement of the following invoices: . . .” and words: “This check is in settlement of the following. If incorrect please return.” did NOT constitute clearly conditional tender.  Half Moon Fruit & Produce Co. v. North American Produce, 40 Agric. Dec. 1610 (1981) (emphasis added); Harvitz Brothers v. David Goldsamt, 20 Agric. Dec. 391 (1961).

Words: “Payment in Full” or “similar words” held effective. Kelman Farms v. Bushman Brokerage, 34 Agric. Dec. 1146 (1975) (emphasis added); Southmost Vegetable Co-Op v. M. & G. Tomato, 28 Agric. Dec. 966 (1969); Johnson & Allen v. Fernandez Bros., 27 Agric. Dec. 1127 (1968); Zinno v. Marvin, 24 Agric. Dec. 396 (1965); National Produce Distributors, Inc. v. Stewart Produce, 21 Agric. Dec. 955 (1962) [Transaction lacked bona fide dispute, and check was not offered in good faith where accord language was pre-printed on the check].

Where a partial payment check was tendered on the condition that it be accepted as payment in full, but debtor did not specify to what debt it was to be applied, and there were several open accounts at the time of tender, creditor was within its rights when it applied the payment to an open freight bill, and no accord and satisfaction of the produce debt was accomplished. Jody DeSomma d/b/a Impact Brokerage v. All World Farms, Inc., 61 Agric. Dec. 821 (2002).

Bona Fide Dispute Required!

One of the biggest misuses of restrictive endorsements arise from the mistaken belief that placing a restrictive endorsement on all checks as a matter of company policy provides some benefit if a unknowing recipient deposits a partial payment.  NOT TRUE!  There must be a bona fide or good faith dispute that the partial payment is intended to resolve.  A “gotcha” move will not carry the day and will be resolved in the payee’s favor.

Although respondent’s partial payment checks stated that the checks were tendered as payment in full, it was found that no accord and satisfaction existed as to several transactions because respondent had not proven that a dispute existed between the parties as to such transactions.   Eustis Fruit Company, Inc. v. The Auster Company, Inc., 51 Agric. Dec. 865 (1992).  Where a Respondent presented evidence of a breach by the Complainant this was not enough to show that there had been a dispute.  Richard Ruiz v. Pacific Sun Produce Co., 48 Agric. Dec. 1105 (1989).

Good Faith Tender As Full Payment Necessary

Debtor tendered payment in one check for six produce transactions. Four of the transactions were undisputed, and the check covered these transactions in their full amount. The remaining two transactions were disputed, and as to these the check tendered only partial payment. The creditor negotiated the check, and then sought to recover the balance alleged due on the disputed transactions. The debtor pled accord and satisfaction. It was held that the good faith tender requirement of UCC 3-311 would not be met by such a check, especially in view of the “full payment promptly” requirement of the Act and Regulations. Lindemann Produce, Inc. v. ABC Fresh Mktg., Inc., et al., 57 Agric. Dec. 7389 (1998).

In C. H. Robinson Company v.TrademarkProduce, Inc., 53 Agric. Dec. 1861 (1994) the words “Full and Final Payment” were pre-printed on all of respondent’s checks in very small type.  Referencing Official Comment 4 to UCC Section 3-311 it was held that the requirement of “good faith tender” had not been met, and there was no accord and satisfaction.

Although respondent’s partial payment checks stated that the checks were tendered as payment in full, it was found that no accord and satisfaction existed as to one transaction because there was no manifested intent that the payment should apply to all the items on the invoice where respondent paid in full for one of the types of fruit.  Eustis Fruit Company, Inc. v. The Auster Company, Inc., 51 Agric. Dec. 865 (1992).

Return the Check!

Under UCC  Section 3-311 the return within 90 days of an amount paid in full satisfaction of a claim disputed in good faith precludes the discharge of the claim.  Pacific Tomato Growers, LTD v. American Banana Co., Inc., 60 Agric. Dec. 352 (2001).  Simply put, you must return the check containing a restrictive endorsement to the sender within 90 days of your receipt.  If you keep it as a partial payment you will be deemed to have accepted full payment.

BEST PRACTICES

  • If you use a lock box service to receive payments, consider notifying your bank in writing not to deposit any checks containing a restrictive endorsement.  Instead, these checks should be forwarded directly to the company for assessment.
  • If you place a restrictive endorsement on a check, use the correct terminology and make it CONSPICUOUS. 
  • Do not bundle or combine payment for both disputed and undisputed invoices.  You may lose the benefit of the restrictive endorsement if there is not a bona fide dispute. 
  • Always reference the disputed invoice the check is intended to resolve.
  • Be prepared to return the partial payment if you are not willing to accept it as full payment.
  • Return the check in a timely manner and include a cover letter articulating your position.
  • Don’t deposit checks containing a restrictive endorsement until you have assessed the situation.

The law does not recognize “Price After Sale” terms…

Neither the UCC nor the PACA recognize the term “Price After Sale“.  The term is a subcategory of “Open Price.”  A.P.S. Marketing, Inc. v. R.S. Hanline & Co., Inc., 59 Agric. 154 Dec. 407 (2000), Sucasa Produce v. A.P.S. Marketing, Inc., 59 Agric. Dec. 421 (2000), and Well Pict, Inc. v. Ag-West Growers, Inc., 39 Agric. Dec. 1221, 1227-1228 (1980).

See Eustis Fruit Co., Inc. v. The Auster Co., Inc., 51 Agric. Dec. 865 at 877 (1991) (“The term “price after sale” usually contemplates the parties agreeing to a price following the prompt resale of the produce. Such a sale is either f.o.b., delivered, or some variation thereof, in accordance with the agreement of the parties.  If the parties do not specify f.o.b. or delivered then the Department assumes that the sale is f.o.b.”); Bonanza Farms, Inc. v. Tom Lange Co., Inc., 51 Agric. Dec. 839 at 846 (1991); M. Offutt Co., Inc. v. Caruso Produce, Inc., 49 Agric. Dec. 596 (1990).

Here is what you meant to say… “OPEN PRICE TERM”

UCC 2-305(1) defines an “Open Price Term” as follows:

(1) The parties, if they so intend, can conclude a contract for sale even though the price is not settled. 

This first section means that a valid and enforceable contract may exist for the sale of goods even if the parties have not settled on an agreed price term.  If the parties fail to agree upon a fixed price, the price will be set at a “reasonable price” and the question becomes: “what is a reasonable price?” 

Under UCC 2-305(1), the price is a reasonable price at the time for delivery if:

(a) nothing is said as to price (i.e. no party timely objects); or

(b) the price is left to be agreed by the parties and they fail to agree; or

(c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded.

Here are some examples of how the USDA deals with Open Price Term cases:

“Open Price” assumes parties will negotiate a price after the goods are sold.  If they do not the reasonable value of the goods should be imputed.  A.P.S. Marketing, Inc. v. R.S. Hanline & Co., Inc., 59 Agric. Dec. 407 (2000), and J. Macchiaroli Fruit Co. v. Ben Gatz Co., 38 Agric. Dec. 565 (1979).  See also Anonymous, 5 Agric. Dec. 494 (1946).

The buyer cannot expect a seller to share in any losses which might be incurred in an open sale.  Sharyland L.P. d/b/a Plantation Produce v. C.H. Robinson Company, 55 Agric. Dec. 1341 (1996).   (emphasis added).

The term “open” is a generic term used to describe a SALE without a price being agreed to when the contract is first made.  Other similar terms, which all fit under the generic term “open“ are:

  •  “price after sale”
  • “price arrival”
  • “deferred billing”
  • “price after”  

These terms should be examined with care because they do not all have the same meaning. 

  • “price after sale” usually means that the parties will agree to a price after the buyer completes its resales at destination.
  • “price arrival” means that the parties will agree on a price when the goods arrive at destination after opportunity for inspection (see 7 C.F.R. 46.43 (cc)).

The terms “price after” and “deferred billing” are so vague that one must look solely to the context of the transaction and perhaps guess at what the parties intended.  See Eustis Fruit Co., Inc. v. The Auster Co., Inc., 51 Agric. Dec. 865 at 877 (1991) (The term “price after sale” usually contemplates the parties agreeing to a price following the prompt resale of the produce.  Such a sale is either f.o.b., delivered, or some variation thereof, in accordance with the agreement of the parties. If the parties do not specify f.o.b. or delivered then the Department assumes that the sale is f.o.b.).  See also Bonanza Farms, Inc. v. Tom Lange Co., Inc., 51 Agric. Dec. 839 at 846 (1991); M. Offutt Co., Inc. v. Caruso Produce, Inc., 49 Agric. Dec. 596 (1990); Dennis Produce Sales, Inc. v. Caruso-Ciresi, Inc., 42 Agric. Dec. 178 (1983); Northwest Fruit Sales v. The Norinsberg Corporation, 39 Agric. Dec. 1556 (1980); and Slayman Fruit Co. v. Wholesale Produce Supply, Inc., 30 Agric. Dec. 1751 (1971).

TAKE AWAY…

The KEY point here is that WORD CHOICE matters.  It is perfectly acceptable to use Open Terms on sales contracts, but clear and unambiguous language is needed.  Buyers bear the risk here… Don’t accept questionable language about price terms from your suppliers.  Vague terms should be deemed a red flag and steps should be taken as early as practicable to clarify the open terms.

A buyer’s failure to clearly define its open term contracts invites disputes about reasonable prices.  To this end, the USDA will not make a seller share in any losses.  So, if you have a deal to move distressed produce… the terms of that deal better be clear or the seller will assume all the risk.  You know what they say, no good deed goes un-punished.

Words produce buyers should NOT rely upon…

Use of words such as “work out the load“or “sell the product and we will settle at a later date” by the seller are NOT sufficiently specific to constitute an authorization that the buyer handle the produce on consignment.  Granada Marketing, Inc. v. Jos. Notarianni & Co., Inc., 47 Agric. Dec. 329 (1988); Royal Packing Co. v. William D. Class, Jr. d/b/a W.D. Class & Son, 42 Agric. Dec. 2077 (1983); B&L Produce of Arizona v. Mim’s Produce, 37 Agric. Dec. 201 (1978).

Similarly, “do the best you can” does NOT constitute permission to handle on consignment.  Relan Produce Farms v. Rushton & Co., 38 Agric. Dec. 1636 (1979); B & L Produce, Inc. v. Harry Becker Produce Co., 36 Agric. Dec. 913 (1977); Barkley Company of Arizona v. Ifsco, Inc., 31 Agric. Dec. 279 (1972).

Nor does:

“the buyer should work it out.” See Frank Gaglione & Sons v. Theron Hooker Co., 30 Agric. Dec. 528 (1971).

or “handle best possible” or “handle to best advantage.” See Ralph Samsel v. L. Gillarde Sons Co., 19 Agric. Dec. 374 (1960).

or “handle” or “open.”   See Ronnie Carmack v. Delbert E. Selvidge, 51 Agric. Dec. 892 (1992).

or respondent “should keep the shipment, [and] do with it what respondent could. . ..”  See Chiquita Brands, Inc. v. Joseph Williams, Jr. Co. Inc., 45 Agric. Dec. 374 (1986).

Still further, the phrase “customer will keep + Work Out” did NOT signify an agreement that the load could be handled on a consignment basis.   See The Lionheart Group, Inc. v. Sy Katz Produce, Inc., 59 Agric. Dec. 449 (2000).

Buyer’s Obligation to Modify Agreement or Reject Produce

When a buyer is seeking permission from the seller to sell a troubled load of produce on a price after sale (“PAS”) basis the buyer must take steps to ensure that the parties’ fixed price agreement (e.g. the invoice) is modified.

To convert a fixed price term agreement to PAS terms, the buyer must obtain clear, definite and unequivocal authorization from the seller.  Absent such authority, the Seller may successfully enforce the terms of its fixed price invoice and they buyer may have lost the opportunity to properly reject the produce or otherwise protect itself.

Is Unloading Produce an Act of Acceptance?

As a general rule, the unloading or partial unloading of the transport is an act of acceptance.  UCC 2-606(1) (c).  See also 7 C.F.R. 46.2 (dd)(1).

M. J. Duer & Co., Inc. v. The J. F. Sanson & Sons Co. and C. H. Robinson Co., 49 Agric. Dec. 620 (1990); Jim Hronis & Sons v. M. Pagano & Sons, Inc., 46 Agric. Dec. 1010 (1987); Harvest Fresh Produce, Inc. v. Clark-Ehre Produce Co., 39 Agric. Dec. 703 (1980); Crown Orchard Co. v. Mid – Valley Prod. Corp., 34 Agric. Dec. 1381 at 1385 (1975); Theron Hooker Co. v. Ben Gatz Co., 30 Agric. Dec.1109 (1971); Conn & Scalise Co., Inc. v. Frank J. Crivella & Co., Inc., 20 Agric. Dec. 415 (1961); Charles P. Tatt Fruit Co. v. Mac’s Produce, 9 Agric. Dec. 802 (1950).

Where tomatoes were unloaded prior to inspection, and Respondent, after seeing the results of the inspection, notified Complainant that the load was being rejected, it was held that Respondent’s attempted rejection was illegal and ineffective because the unloading of the tomatoes amounted to an acceptance.  J&J Produce Co., Inc. v. Weis-Buy Services, Inc., 58 Agric. Dec. 1095 (1999).

Where Respondent gave notice of rejection following the unloading of produce the rejection was ineffective, and the load was deemed to have been accepted. The Lionheart Group, Inc. v. Sy Katz Produce, Inc., 59 Agric. Dec. 449 (2000).

WHEN UNLOADING IS NOT AN ACCEPTANCE

Where Complainant was notified prior to unloading and specifically requested an unrestricted inspection.  Under limited circumstances such as unloading for the purpose of inspection or to retrieve other produce from the nose of the truck, and where the product is then placed back on the truck within a reasonable time, unloading will not be deemed an acceptance.  Pope Packing & Sales v. Santa Fe Veg. Growers Coop. A’ssn., 38 Agric. Dec. 101 (1979).

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.