Blue Book Services recently launched the “New Hire Academy,” an online training program designed to help new hires learn produce industry fundamentals and avoid costly setbacks. The program consists of five sessions covering: (1) trading customs and rules, (2) the PACA trust, (3) sales and account management, (4) Blue Book ratings, and (5) transportation customs and rules.
In this article we recap some of the key points from the first session on trading customs and rules. The “PACA Trust” and “Transportation Customs and Rules” sessions will be covered in subsequent Blueprints articles. Each of the sessions is available for online viewing at www.producebluebook.com.
#1 – Confirming Verbal Agreements
Produce buyers and sellers will sometimes say, “There was no contract, it was all done over the phone.” Verbal agreements are binding and usually just as good as written agreements, provided you can prove the alleged agreement was really made. The same is true of modifications to the original agreement, such as price adjustments. All too frequently disputes arise when a buyer alleges that the original agreement was modified and the seller denies agreeing to the modification. It’s important to keep in mind that the party alleging the modification has the burden of proving it.
Thankfully, proving that an agreement was made is easy enough by simply sending a confirming fax or email to the other party. It doesn’t have to be formal or even signed by the other party. It is the other party’s failure to object to the confirmation that gives it its significance. Simply establishing the habit of carefully confirming all agreements and modifications in writing will help prevent costly setbacks.
#2 – Suitable Shipping Condition
Produce sellers implicitly warrant that their product will make “good arrival” at the contract destination when they sell on an f.o.b. (free on board) basis. Technically this is called the ‘warranty of suitable shipping condition’ and U.S. Department of Agriculture (USDA) Perishable Agricultural Commodities Act (PACA) regulation (7 CFR 46.43(j)) provides—
Suitable shipping condition … means that the commodity [at time of shipment] is in a condition which, if the shipment is handled under normal transportation … conditions, will assure delivery without abnormal deterioration at the contract destination agreed upon between the parties…. The seller has no responsibility for any deterioration in transit if there is no contract destination agreed upon between the parties.
There’s a lot packed into this warranty, but essentially f.o.b. sellers promise that their product will hold up during normal transportation and arrive at the contact destination without excessive deterioration as defined by the applicable “good arrival guidelines” (see below).
#3 – Good Arrival Guidelines
The good arrival guidelines published by PACA and the Fruit and Vegetable Dispute Resolution Corporation (DRC), in effect, define the term “abnormal deterioration” as used in the warranty of suitableshipping condition. These guidelines are available at www.ams.usda.gov for PACA and for product sold into Canada at DRC’s www.fvdrc.com.
The example guideline here is for sweet peppers. At the top, after the header, you’ll see the commodity identified, followed by the U.S. grade standard in the next row, which (in essence) is the amount of defects permitted at shipping point. Still tracking downward by row is the optimum transit temperature.
Blue Book Services recently launched the “New Hire Academy,” an online training program designed to help new hires learn produce industry fundamentals and avoid costly setbacks. The program consists of five sessions covering: (1) trading customs and rules, (2) the PACA trust, (3) sales and account management, (4) Blue Book ratings, and (5) transportation customs and rules.
In this article we recap some of the key points from the first session on trading customs and rules. The “PACA Trust” and “Transportation Customs and Rules” sessions will be covered in subsequent Blueprints articles. Each of the sessions is available for online viewing at www.producebluebook.com.
#1 – Confirming Verbal Agreements
Produce buyers and sellers will sometimes say, “There was no contract, it was all done over the phone.” Verbal agreements are binding and usually just as good as written agreements, provided you can prove the alleged agreement was really made. The same is true of modifications to the original agreement, such as price adjustments. All too frequently disputes arise when a buyer alleges that the original agreement was modified and the seller denies agreeing to the modification. It’s important to keep in mind that the party alleging the modification has the burden of proving it.
Thankfully, proving that an agreement was made is easy enough by simply sending a confirming fax or email to the other party. It doesn’t have to be formal or even signed by the other party. It is the other party’s failure to object to the confirmation that gives it its significance. Simply establishing the habit of carefully confirming all agreements and modifications in writing will help prevent costly setbacks.
#2 – Suitable Shipping Condition
Produce sellers implicitly warrant that their product will make “good arrival” at the contract destination when they sell on an f.o.b. (free on board) basis. Technically this is called the ‘warranty of suitable shipping condition’ and U.S. Department of Agriculture (USDA) Perishable Agricultural Commodities Act (PACA) regulation (7 CFR 46.43(j)) provides—
Suitable shipping condition … means that the commodity [at time of shipment] is in a condition which, if the shipment is handled under normal transportation … conditions, will assure delivery without abnormal deterioration at the contract destination agreed upon between the parties…. The seller has no responsibility for any deterioration in transit if there is no contract destination agreed upon between the parties.
There’s a lot packed into this warranty, but essentially f.o.b. sellers promise that their product will hold up during normal transportation and arrive at the contact destination without excessive deterioration as defined by the applicable “good arrival guidelines” (see below).
#3 – Good Arrival Guidelines
The good arrival guidelines published by PACA and the Fruit and Vegetable Dispute Resolution Corporation (DRC), in effect, define the term “abnormal deterioration” as used in the warranty of suitableshipping condition. These guidelines are available at www.ams.usda.gov for PACA and for product sold into Canada at DRC’s www.fvdrc.com.
The example guideline here is for sweet peppers. At the top, after the header, you’ll see the commodity identified, followed by the U.S. grade standard in the next row, which (in essence) is the amount of defects permitted at shipping point. Still tracking downward by row is the optimum transit temperature.
Next, the left-hand column provides the days in transit to the destination city, in which five days coast-to-coast is the norm, and this paired with the right-hand column—where the real action is—shows a series of numbers that refer to the percentage of defects found on a USDA inspection certificate. The first number in this series represents the percentage of average defects; the second number represents the percentage of serious defects; and the third is for very serious defects, such as decay.
On USDA inspections, defects are classified according to average, serious, and very serious. If any of these percentages is exceeded, the seller may have breached the warranty of suitable shipping condition. The buyer must then determine: first, were transportation conditions normal? Second, was the inspection timely? And third, was the entire lot inspected? (for more information, see #6 in the Three Ts of Good Arrival section)
#4 – Inspection Certificates
With few exceptions a USDA or CFIA (Canadian Food Inspection Agency) inspection is required to quantify defects and establish a breach of contract. In-house inspections are not considered “disinterested” or objective evidence of the quality and condition of produce. Ultimately, in-house inspections only represent what the buyer said—and, of course, claiming product failed to make good arrival based only on the buyer’s say so isn’t going to be sufficient to prove a claim.
When interpreting USDA inspections beware of statements that read “Fails to grade U.S. #1 account condition.” Just because the product exceeded U.S. #1 at destination does not necessarily mean the product was “abnormally deteriorated” in breach of the sales contract, because with f.o.b. sales, additional defects are allowed based on the number of days to the destination city. What’s more, if the product was sold “no-grade,” the seller never promised the product would meet the U.S. #1 standard.
#5 – Grade vs. “No-Grade” Sales
Produce may be sold with a grade, e.g., U.S. #1 or Canadian #1, or “no-grade” meaning the produce was sold without a specified grade. When produce is sold with a grade, quality defects score against “good arrival.” The percentage of quality defects is simply added to the percentage of condition defects to arrive at the total percentage of scorable defects.
But when produce is sold without a grade, only condition defects score against the warranty of suitable shipping condition. Quality defects, on the other hand, do not, and need to be subtracted from the total percentage of defects to arrive at the relevant percentage.
Condition defects are progressive in nature: bruising, decay, wilting, and live insects; while quality defects are more permanent in nature: misshapen, scarring, hollow heart, and dead insects. On USDA inspections, quality defects are clearly identified as “quality.” On CFIA inspections quality defects are called “permanent” defects and are identified with a “P” next to the defect in question.
#6 – The Three Ts of Good Arrival
When the defects reported on an inspection certificate exceed the percentage of defects set forth in the good arrival guidelines, it is important to consider the “Three Ts of Good Arrival” before concluding the seller breached the warranty of suitable shipping condition.
The first T is for total: was the total lot inspected? Because good arrival guidelines are based on averages, any missing product is factored in as defect-free product. To account for missing product, simply multiply the
percentage of defects shown on the inspection certificate by the number of cartons inspected, then divide the resulting number by the total cartons sold. If the resulting percentage exceeds the percentages provided for in
the good arrival guidelines, the shipper may have breached the warranty of suitable shipping condition.
The next T is for timeliness. It must be remembered that f.o.b. sellers warrant the product will make good arrival on the day of arrival, not on the day the inspection is taken. If the inspection is taken after the day of arrival, then the question becomes, “Does this inspection show that good arrival percentages were exceeded one, two, or three days earlier when the product arrived?” Inspections taken more than three days after arrival may be deemed ‘too remote’ to prove the condition of produce upon arrival, even if the defects significantly exceed the percentages put forth by the good arrival guidelines.
The third and final T is for transportation conditions. Trucks are required to maintain air temperatures in transit at or near the instructed range. Blue Book Services’ Transportation Guidelines provide guidance for assessing the adequacy of transit temperatures and provide that trucks are generally expected to cover approximately 500 miles per day. A warm or late arriving truck will increase the percentage of defects at destination and must be factored into the “good arrival” determination. For example, if defects exceed good arrival guidelines by 1 percent at destination, but transit temperatures were warm and the truck arrived late, then the percentage of defects would not be sufficient to prove the shipper failed to load the product in suitable shipping condition.
Conclusion
Understanding these fundamental trading principles will serve as a good primer for the New Hire Academy’s session on Trading Customs and Rules. Look for articles on the PACA Trust and Transportation Customs and Rules in coming issues.
Good Arrival Guidelines: Peppers, Sweet
U.S. Grade Standard: 10-5-2
Optimum Transit Temp: 45-55º F
After X Days in Transit, % of Defects Allowed
5 days: 15-8-4
4 days: 14-8-4
3 days: 13-7-3
2 days: 12-6-2
1 day: 10-5-2
