Trade terms save us from having to work through boilerplate legalese with each new transaction. They are essentially shorthand versions of various rights and responsibilities buyers and sellers incorporate into sales agreements.
A term like “FOB Salinas” (free-on-board Salinas) is an example of a well-understood trade term that packs a lot into few words.
When produce is sold “FOB Salinas”—both buyer and seller understand that (i) any loss or damage in transit will be the responsibility of the buyer; (ii) the buyer will be responsible for hiring and paying for the transportation from Salinas (and filing any transportation claims); and (iii) the seller will be responsible for loading product in suitable shipping condition. For more information, see Perishable Agricultural Commodities Act (PACA) regulations, 7 CFR 46.43(j).
Combined with other contract specifications such as size, pack, grade, contract destination, and payment terms, the buyer and seller are generally able to negotiate a satisfactory contract with very few words.
But when terms are misused or poorly understood, the resulting contract may cost time, money, and aggravation. As we’ll discuss in this article, even some very common domestic trade terms are not always fully understood.
Buyers and sellers occasionally forget that when product is sold on a “delivered” basis, PACA’s Good Arrival Guidelines do not apply because title doesn’t pass until the product is accepted at destination.
In other words, the allowance that FOB sellers rely on to account for normal deterioration in transit (after title passes) is not available when produce is sold on a delivered basis, unless expressly provided for in the sales agreement.
Because many commodities have a delivered tolerance that permits only 10 percent average defects—rather than the 15 percent typically allowed after 5 days in transit for produce sold FOB—sellers are sometimes surprised to learn that a checksum of say 12 percent reported on a timely inspection may represent a breach of a sales agreement if the product was sold on a delivered basis.
Unfortunately, there is no standard trade term that provides for a delivered sale with an allowance for deterioration in transit.
There is a term that sounds like it might accomplish this in PACA regulations: “FOB sale at delivered price,” but, in fact, this term is defined as an FOB sale where title and risk of loss passes to the buyer at shipping point, even though the seller bills the buyer for the freight.
In our experience, this and other “cost and freight” terms defined in the regulations can be cumbersome when carrier claims arise, which is perhaps one reason they’re rarely used.
So how can produce be sold on a delivered basis and still allow for the normal deterioration in transit allowed by FOB good arrival guidelines?
Because of the lack of a standard trade term to accomplish this, the best option would seem to be to spell out, explicitly, in a written agreement or a written confirmation of a verbal agreement what the parties are agreeing to.
For example: “Peppers sold delivered in all respects except that normal deterioration in transit as defined by FOB good arrival guidelines will be allowed between shipping point (Salinas) and the contract destination.”
Of course, having an attorney review any nonstandard language inserted into agreements is always recommended.
But the established trade terms, if correctly understood, can usually help the parties reach a suitable agreement without getting too far off the beaten path.
This is an excerpt from the Trading Assistance feature from the May/June 2021 issue of Produce Blueprints Magazine. Click here to read the whole issue.