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Rejections and freight: Who pays?

Q: I’m a receiver located in Chicago. I purchased a load of peppers f.o.b. from a shipper out of Michigan. Upon arrival, the product failed a USDA inspection due to condition problems. My truck had no issues with transit temperature and arrived on time. The shipper is okay with the rejection, but he’s refusing to pay the truck’s freight invoice. The shipper is telling me this was an f.o.b. sale, and therefore, he’s not responsible for paying the truck. Isn’t the shipper responsible for paying the freight following a rejection?

A: Your confusion is understandable, but while sellers are responsible for making you whole following a proper rejection, strictly speaking, f.o.b. sellers are not responsible for paying the freight bill.

From the carrier’s perspective this is easy to see: the carrier extended credit to you, not the seller, and now expects to be paid by you for the service it provided, and not by some third-party seller.

What must be remembered is that you are the party who hired the carrier, and from what you report, the carrier did its job without any issues. Consequently, it is your responsibility to pay the carrier’s freight invoice in full. Your recourse here is to recover your losses from the seller, who breached the sales contract by failing to ship product in suitable shipping condition (i.e., by failing to provide peppers that would make “good arrival”).

The amount of losses claimed against your seller following a proper rejection will, in virtually all cases, equal or exceed the f.o.b. value of the product plus the cost of the freight. We say in “virtually all cases” because, technically speaking, your losses should be based on the destination market value of the commodity in question on the date it was supposed to arrive.

So, if the destination market value of the peppers was to drop below the delivered cost while your carrier was en route (or if you paid too much for freight), your recovery against the seller could conceivably fail to cover the full amount of your freight invoice, but this would be a rare occurrence (note that you would likely have lost money in this scenario even in the absence of the seller’s breach).

Also, be aware, that in order to simplify damage calculations, many buyers simply claim the delivered cost of the product (i.e., the shipper’s invoice and the freight invoice) plus the cost of the USDA inspection following a rejection.

Accordingly, many sellers may be inclined to reimburse you for the cost of the freight regardless of any market volatility. The key point, however, is that you are responsible for paying the carrier, while the breaching seller is responsible for making you whole.


Cliff Sieloff is a claims analyst for Blue Book Services’ Trading Assistance group.