Trading Tip – Damages & Amount Due

The produce industry has its fair share of terms with more than one meaning.

A produce “broker,” more often than not, is a buyer and reseller of produce.  A produce “shipper” is usually not the party that purchases the transportation service. And while everyone wants quality produce, “quality defects” (as opposed to “condition defects”) don’t usually score against “good arrival,” a.k.a. the warranty of suitable shipping condition.

Despite this jumble of terms, however, most of the time the produce buyer, seller, and transporter somehow understand one another.  Context is a wonderful thing.  Still, there are times when it helps to be more specific about what is meant.

For example, if I were to say, “My claim against you is for $3,000,” how would you interpret this?  Am I saying that I’m going to deduct $3,000 from the original invoice price and pay you the balance?  Or am I saying you owe me $3,000?  Too often we see firms negotiate what they think is a settlement, only to discover they were looking at different bottom lines.

In an attempt to avoid confusion, it is helpful to first consider damages and then the amount due.  When we use the word damages in a strict sense, we are referring to the difference between what the product should have been worth at the contract destination (had there been no breach), and what the product was actually worth in light of the breach, plus incidental expenses (e.g., inspection and dumping fees.).

So, if my damages were $3,000, this amount would need to be deducted from the original invoice price, to arrive at the amount due.  Deducting $3,000 in damages from a $5,000 freight invoice, we arrive at an amount due the breaching party of $2,000.

If, on the other hand, I’m claiming an amount due me (the injured party) of $3,000, I’ll need to support my claim with damages of $8,000.  Deducting damages of $8,000 from an original invoice price of $5,000, we arrive at an amount due from the breaching party of $3,000.

Of course, if the freight was paid in advance, then my damages and the amount due would be equal amounts.  But typically it’s helpful to consider damages and the amount due separately.

In our next Trading Tip we’ll discuss why we need to deduct damages from the original invoice price even in instances where the breaching party completely fails to perform.

Doug Nelson is the Vice President of Trading Assistance for Blue Book Services.