The following case study is based on an arbitration filed with Blue Book Services. The facts described below set up a relatively common dispute between a truck broker and a produce shipper following a retailer’s rejection of a shipment of produce.
Facts
The claimant, a produce shipper (the Shipper), sold 450 cartons of organic red seedless grapes out of Mexico to a major retailer (the Retailer). The grapes were sold free-on-board (FOB) from Nogales, AZ for delivery to the East Coast. The Retailer hired the respondent, a truck broker (the Truck Broker), to arrange for the transportation of these grapes and 1,395 cartons of grapes from another supplier (ABC), on the same truck.
The Shipper’s bill of lading instructed the carrier to maintain transit temperatures at 32°F and indicates the grapes were pulping at 32°F as well. The rate confirmation issued by the Truck Broker instructed the carrier to maintain temperatures at 35°F. What, if any, temperature instruction was given from the Retailer to the Truck Broker is not known.
Upon arrival, the Retailer inspected the grapes and subsequently rejected them, complaining of “quality issues.” The Retailer’s Quality Assurance Form reports “splits, decay/mold, leakers, shrivel, webbing” and specifically indicates that the grapes were not damaged in transit. Pulp temperatures of 37°F were reported.
An inspection by the U.S. Department of Agriculture (USDA) was performed the next day, after the product had been unloaded at a local wholesaler’s warehouse, indicating the grapes were affected with a total of 7% condition defects, including 1% wet and sticky, and less than 1% decay, good enough to meet the U.S. No. 1 Table Grape grade standard. The inspection certificate reported 41 to 42°F pulp temperatures.
Unfortunately, the transit temperature information related to this shipment is incomplete. Per the bill of lading issued in connection with ABC’s grapes, a portable temperature recorder was placed in the trailer. Yet, although the Retailer confirms ABC’s grapes were “received in full,” both the Shipper and the Truck Broker report being unable to obtain a copy of the temperature tape from the Retailer. The Retailer’s receipt of this recorder is also indicated by its Quality Assurance Form, which answers “yes” to the question “Temp. Recorder: Is it present?”
The Truck Broker did, however, obtain a temperature download from the refrigeration unit. The download indicates return air temperatures within the trailer reached 40°F at different points during the trip before returning to temperatures in the mid-thirties.
The following case study is based on an arbitration filed with Blue Book Services. The facts described below set up a relatively common dispute between a truck broker and a produce shipper following a retailer’s rejection of a shipment of produce.
Facts
The claimant, a produce shipper (the Shipper), sold 450 cartons of organic red seedless grapes out of Mexico to a major retailer (the Retailer). The grapes were sold free-on-board (FOB) from Nogales, AZ for delivery to the East Coast. The Retailer hired the respondent, a truck broker (the Truck Broker), to arrange for the transportation of these grapes and 1,395 cartons of grapes from another supplier (ABC), on the same truck.
The Shipper’s bill of lading instructed the carrier to maintain transit temperatures at 32°F and indicates the grapes were pulping at 32°F as well. The rate confirmation issued by the Truck Broker instructed the carrier to maintain temperatures at 35°F. What, if any, temperature instruction was given from the Retailer to the Truck Broker is not known.
Upon arrival, the Retailer inspected the grapes and subsequently rejected them, complaining of “quality issues.” The Retailer’s Quality Assurance Form reports “splits, decay/mold, leakers, shrivel, webbing” and specifically indicates that the grapes were not damaged in transit. Pulp temperatures of 37°F were reported.
An inspection by the U.S. Department of Agriculture (USDA) was performed the next day, after the product had been unloaded at a local wholesaler’s warehouse, indicating the grapes were affected with a total of 7% condition defects, including 1% wet and sticky, and less than 1% decay, good enough to meet the U.S. No. 1 Table Grape grade standard. The inspection certificate reported 41 to 42°F pulp temperatures.
Unfortunately, the transit temperature information related to this shipment is incomplete. Per the bill of lading issued in connection with ABC’s grapes, a portable temperature recorder was placed in the trailer. Yet, although the Retailer confirms ABC’s grapes were “received in full,” both the Shipper and the Truck Broker report being unable to obtain a copy of the temperature tape from the Retailer. The Retailer’s receipt of this recorder is also indicated by its Quality Assurance Form, which answers “yes” to the question “Temp. Recorder: Is it present?”
The Truck Broker did, however, obtain a temperature download from the refrigeration unit. The download indicates return air temperatures within the trailer reached 40°F at different points during the trip before returning to temperatures in the mid-thirties.
Although the grapes were sold from the Shipper to the Retailer on a FOB basis and consequently, the Retailer, not the Distributor, hired the Truck Broker, both parties agree, in essence, that per their respective agreements with the Retailer, following a rejection, the Shipper and the Truck Broker are responsible for allocating responsibility for any losses between one another, without seeking payment from the Retailer.
Following the rejection, in view of this agreement, the Retailer did not pay the Shipper for the grapes, or the Truck Broker for its freight; instead, the Shipper and the Truck Broker looked to one another for payment.
Assessment
In our experience, this type of agreement—whereby retailers purchase product on a FOB basis, but following a rejection “wash their hands” of any disputes with suppliers and/or transportation providers by requiring they allocate responsibility between one another—tends to work well for all interested parties in most cases.
In our view, however, this approach presumes two things: first, that at least one of the parties breached its agreement with the Retailer; and second, that the Retailer will provide the basic information needed to allow the supplier and transportation firm to determine responsibility between one another.
In other words, we do not interpret agreements of this kind as allowing a retailer to reject shipments in the absence of a breach by at least one of the parties, or without providing the basic information needed to allocate responsibly between the parties.
Fundamentally, a contract is a promise made in exchange for a promise: for example, “We will provide (or transport) grapes in exchange for your promise to pay us for our produce (or service).” If, however, the retailer can reject without establishing a breach, and without providing supporting documentation, then, in effect, the seller and transportation firm have promised to perform, while the retailer has promised nothing.
We do not understand or interpret agreements of this kind to allow retailers to operate outside the bounds of fundamental contracting principles. Therefore, at the outset, we ask, does the documentation provided show that the Shipper or the Truck Broker failed to perform to industry standards, or otherwise breached their respective contracts with the Retailer?
With respect to the question of whether the Shipper breached, we look first to the USDA inspection certificate, which shows the grapes were within the U.S. No. 1 Table grade standard, and well within PACA Good Arrival Guidelines.
In the absence of a special agreement between the Shipper and the Retailer, defects at this level are not sufficient to show that the Shipper, as an FOB seller, failed to ship the grapes in suitable shipping condition or otherwise failed to comply with industry standards for grapes sold U.S. No. 1 Table.
While it is possible the sales agreement between the Shipper and the Retailer provided a stricter standard (i.e., more restrictive than U.S. No. 1 Table) the grapes failed to meet, no proof that the parties agreed to a stricter standard was provided. If stricter product specifications were agreed to between the Shipper and the Retailer, then we would expect the Retailer to disclose this to the Truck Broker as basic information needed to fairly allocate responsibility between the Shipper and the Truck Broker following the Retailer’s rejection of the product.
Without proof of a specific standard that the Shipper’s grapes failed to meet, the Truck Broker relies instead on the fact that ABC’s grapes were received to suggest the transportation service must have met the Retailer’s standards, and therefore the quality (and condition) of the Shipper’s grapes must have been the cause of the rejection.
Although we follow the Truck Broker’s reasoning on this point, we are always reluctant to infer too much from a receiver’s decision to reject only a portion of a truckload. It is, of course, likely the other product on the trailer (the product that was accepted) was better product than the product that was rejected. But produce sellers are not obligated to ship the best product on the truck; they are only obligated to provide product that complies with the sales agreement entered into with the buyer.
Furthermore, it is possible that factors unrelated to the condition of the product entered into the decision. For example, perhaps the product that was accepted (whether distinguished by brand or pack or otherwise) was perceived to be in greater demand at the time, or, perhaps both lots were in very similar condition, but the buyer believed it needed at least some grapes on hand, and so it made a decision to reject some, but not all, the grapes on the truck.
All this to say, especially in light of the USDA inspection certificate showing the Shipper’s product met the U.S. No. 1 Table grade standard, we do not believe the Truck Broker can point to the Retailer’s acceptance of ABC’s grapes as proof that the Seller’s grapes failed to comply with the sales contract, or as conclusive evidence that its transportation service complied with its agreement with the Retailer.
That said, however, it is not at all clear that the transportation service provided by the Truck Broker (and its carrier) failed to comply with industry standards or its agreement with the Retailer. First, we believe it is appropriate to give at least some weight to the Retailer’s receipt of ABC’s grapes as evidence that the transportation service provided by the Truck Broker complied with its agreement with the retailer.
Second, the Retailer’s Quality Assurance Form, presumably completed by the Retailer’s receiving personnel, indicates the grapes were not damaged in transit. Specifically, the receiver selected the “no” response to the question on the form that reads, “Damaged in Transit?” This unequivocal statement made contemporaneously with the rejection, and after pulping the product, suggests the Retailer did not believe the transportation service failed to comply with industry standards or its agreement with the Truck Broker.
This, in our view, is particularly significant in the absence of a temperature report from the portable temperature recorder, which per the bill of lading, was loaded with ABC’s grapes. Because the ABC grapes were received, and because, based on the documentation provided, we see no indication that the temperature recorder was missing upon arrival, we must presume this portable temperature recorder was delivered to the Retailer.
Having received this recorder, the Retailer was in a position to review the temperature tape before it declared on its Quality Assurance Form that the Distributor’s grapes were not damaged in transit.
We believe it is fundamental that if the Retailer believed the carrier damaged the grapes in transit, then it should have provided the Truck Broker with a copy of the temperature tape to (1) support its claim (its rejection); and (2) so the Truck Broker could support any corresponding claim it might chose to file against the underlying carrier.
The Retailer’s apparent failure to provide a copy of the temperature tape to the parties is, in our view, inconsistent with industry standards and its fundamental responsibility to provide support for claims.
And while it’s true that the carrier was equipped with a reefer download, which in our view shows warmer than expected readings, we do not believe these readings are conclusive, especially in view of the Retailer’s finding—after having an opportunity to review the temperature tape—that these grapes were not damaged in transit.
In addition, we note that if the Retailer’s instruction or expectation for temperature control was consistent with the temperature instruction the Truck Broker gave to the carrier of 35°F (warmer than we would recommend, but not unusual in our experience), then arguably at least the readings recorded by the reefer unit were not warm at all.
For these reasons, we do not believe the documentation provided shows either the Shipper or the Truck Broker breached its agreement with the Retailer. Accordingly, we see no proper basis for the Retailer’s rejection of the grapes, and no basis for allocating responsibility for losses between the Shipper and the Truck Broker, neither of which has been shown to have breached the contracts in question.
Summary
In summary, we found that the Retailer’s rejection of these grapes was wrongful and its claims against the parties were unsupported. Therefore, we denied both the Shipper’s claim against the Truck Broker, and the Truck Broker’s counterclaim against the Shipper.
We believe the full amount of the Shipper’s claim, which is the FOB selling price of the grapes, would be properly pursued with the Retailer. Similarly, we believe the full amount of the Truck Broker’s claim, including its assessorial charges (e.g., layover), would be properly pursued with the Retailer.
