The Problem: “No grade” breach of contract claim based on quality defects.
The Key Point: The implied warranty of merchantability applies to all produce sales where the seller is a merchant of produce.
The Solution: Be aware that excessive quality defects may be grounds for a breach of contract claim.
Q: I’m a shipper who recently sent a truckload of broccoli to Chicago. My buyer called for a USDA inspection and notified me he would be claiming damages against me since the broccoli had 44 percent hollow stems. I confirmed with the government inspector that hollow stem is classified as a quality defect. My company sells produce on a “no grade” basis, and it’s my understanding that only condition defects are scored unless a grade is specified. Can this customer claim damages against me for these quality defects?
A: You are correct that quality defects are not scored against good arrival standards for product sold without reference to a grade. However, this does not mean that excessive quality defects cannot be grounds for a breach of contract claim.
The warranty of merchantability is the seller’s promise that the produce will “pass without objection in the trade under the contract description” and is “fit for the ordinary purposes for which such goods are used.” (see UCC Sec. 2-314)
This warranty is implied and applies to all sales between merchants unless specifically excluded with words such as “as is” or “with all its faults.”
Per PACA precedent, produce affected with more than thirty-three (33) percent defects at the time title passes to the buyer (i.e., shipping point for FOB sales) may be deemed to have failed to comply with the warranty of merchantability in breach of the sales agreement.
In your scenario, the inspection certificate showing 44 percent quality defects would likely support a breach of the warranty of merchantability, entitling your buyer to recover damages resulting from your breach of the sales agreement.
