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Know Your Trade Terms: Protection

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.

The trade term “protection” has also caused its fair share of confusion.

Although the term is sometimes used by parties who intend for the product to be handled on consignment (or who have, by contract or course of dealing established a different meaning), PACA precedent makes clear that “protection” does not mean consignment—

A protection agreement has reference to a base price and concerns goods that are sold whereas in the case of a consignment there is no sale of the produce, and the shipper at all times retains title to the produce. Border Fruit Co. v. Fruit Distributing Corp., 45 Agric. Dec. 2453 (1986).

In other words, the term “protection” is usually interpreted to mean the parties have agreed to a baseline price and have further agreed that if the gross proceeds realized from a proper resale do not cover the buyer’s delivered cost, then the buyer may deduct the shortfall from the baseline price to arrive at the amount due the seller.

In this way, the buyer enjoys “protection from loss,” but, under this term, the buyer does not get to deduct “profit and handling” or a commission from the gross proceeds.

But if the product is showing appreciable defects, a U.S. Department of Agriculture (USDA) or Canadian Food Inspection Agency (CFIA) inspection should be taken to support the reasonableness of the gross proceeds.

The term “protection” must also be distinguished from the term “market protection.” Although the terms are similar in that they both use a baseline price as the starting point, the conditions that trigger a reduction in price are very different.

“Protection” is triggered by gross proceeds below the delivered cost, whereas “market protection” is triggered by a decline in the relevant markets’ prices—either the destination market or the shipping point market as agreed by the parties—from the date the product is ordered to the date it delivers, as reported by the USDA’s Market News service.

If, for instance, the average selling price for onions fell $3.00 a sack during the relevant timeframe, then the baseline price would be reduced by $3.00 a sack. It’s important to understand that the buyer’s gross proceeds do not affect the price owed to the seller when produce is sold with market protection.

Buyers and sellers are not restricted to established trade terms and, with few exceptions (e.g., something illegal), can agree to whatever they want.

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.

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