The following case study is based on facts presented to Blue Book in connection with a claim filed earlier this year. This scenario is one that could surely keep the parties’ respective lawyers busy if it were to be decided formally. We will, however, describe how Blue Book, in attempting to mediate an informal resolution to this dispute, would approach the issues raised by the facts presented.
Facts A distributor sold a truckload of strawberries to a major retailer in Salt Lake City on a delivered basis. Due to the carrier’s delay en route, the truck arrived 24 hours late, causing the retailer to reject the shipment. Following the rejection, the distributor sold the berries to an area wholesaler for $15 per case (compared to the original price of $34 per case) and seeks to recover its losses from the carrier.
The carrier does not dispute that it was late delivering the product or that it knew “time was of the essence,” but claims the distributor did not do a good enough job reselling the product. The distributor wonders if it would have been better off simply rejecting the product to the carrier following the retailer’s rejection, rather than reselling the product following the carrier’s breach.
Assessment The first issue, from our perspective, is whether the retailer had a right to reject this shipment to the distributor. The Uniform Commercial Code (UCC), Sec.2-601, Buyer’s Rights on Improper Delivery, provides—“[I]f the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may reject…”
This is sometimes referred to as “the perfect tender rule” and is consistent with Perishable Agricultural Commodities Act (PACA) precedent recognizing a buyer’s right to reject for what the seller may consider to be a minor breach (e.g., wrong label).
Arguably, the perfect tender rule would support the retailer’s right (or any buyer’s right) to reject to the distributor, due to this one-day delay (keep in mind this was a delivered sale). The retailer’s right to reject to the distributor, however, does not necessarily mean the distributor has a corresponding right to reject to the carrier it hired.
It must be remembered that Article 2 of the Uniform Commercial Code (and therefore the perfect tender rule) only applies between buyers and sellers of goods. It does not apply between the distributor and the carrier. So, while the retailer may be able to properly reject the shipment, this does not necessarily mean that the distributor, in turn, can reject the shipment to the carrier.
The general rule from case law applicable to ‘common carriers’ clashes with the perfect tender rule where a delivered sale (as opposed to an f.o.b. sale) is concerned. It provides that there is a duty to accept damaged goods unless the goods are “totally worthless,” which, of course, the berries in question here were not. But was the carrier involved here a common carrier or a contract carrier?
The following case study is based on facts presented to Blue Book in connection with a claim filed earlier this year. This scenario is one that could surely keep the parties’ respective lawyers busy if it were to be decided formally. We will, however, describe how Blue Book, in attempting to mediate an informal resolution to this dispute, would approach the issues raised by the facts presented.
Facts A distributor sold a truckload of strawberries to a major retailer in Salt Lake City on a delivered basis. Due to the carrier’s delay en route, the truck arrived 24 hours late, causing the retailer to reject the shipment. Following the rejection, the distributor sold the berries to an area wholesaler for $15 per case (compared to the original price of $34 per case) and seeks to recover its losses from the carrier.
The carrier does not dispute that it was late delivering the product or that it knew “time was of the essence,” but claims the distributor did not do a good enough job reselling the product. The distributor wonders if it would have been better off simply rejecting the product to the carrier following the retailer’s rejection, rather than reselling the product following the carrier’s breach.
Assessment The first issue, from our perspective, is whether the retailer had a right to reject this shipment to the distributor. The Uniform Commercial Code (UCC), Sec.2-601, Buyer’s Rights on Improper Delivery, provides—“[I]f the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may reject…”
This is sometimes referred to as “the perfect tender rule” and is consistent with Perishable Agricultural Commodities Act (PACA) precedent recognizing a buyer’s right to reject for what the seller may consider to be a minor breach (e.g., wrong label).
Arguably, the perfect tender rule would support the retailer’s right (or any buyer’s right) to reject to the distributor, due to this one-day delay (keep in mind this was a delivered sale). The retailer’s right to reject to the distributor, however, does not necessarily mean the distributor has a corresponding right to reject to the carrier it hired.
It must be remembered that Article 2 of the Uniform Commercial Code (and therefore the perfect tender rule) only applies between buyers and sellers of goods. It does not apply between the distributor and the carrier. So, while the retailer may be able to properly reject the shipment, this does not necessarily mean that the distributor, in turn, can reject the shipment to the carrier.
The general rule from case law applicable to ‘common carriers’ clashes with the perfect tender rule where a delivered sale (as opposed to an f.o.b. sale) is concerned. It provides that there is a duty to accept damaged goods unless the goods are “totally worthless,” which, of course, the berries in question here were not. But was the carrier involved here a common carrier or a contract carrier?
This question alone has been the subject of much litigation over the years and could be argued either way. Given the way bills of lading tend to be used in the fresh produce industry (i.e., largely as a pickup receipt rather than a contract), and given the roughly equal bargaining power between carriers and the parties that hire them in the fresh produce industry (a far cry from the historical context in which laws applicable to common carriage arose to protect the public from one-sided terms imposed by railroads in the early 1900s), we have generally been inclined to view carriers that haul fresh produce as contract carriers. (Note: suggestions that deregulation ended the distinction between contract and common carriage disregard the fact that fresh produce hauls are generally exempt from federal economic regulation per 49 U.S.C. Sec. 13506 (a)(6)).
Consequently, it is not at all clear that the carrier can properly rely on the “totally worthless” rule to argue that the retailer was obligated to receive the berries. And even if the carrier were to establish that this rule should apply (i.e., that it was acting as a common carrier, and the perfect tender rule does not apply for some reason), it would still be responsible for damages resulting from its delay—as opposed to damages following the rejection.
In other words, even in cases where the “totally worthless” rule is applied, it does not prevent a consignee from refusing delivery and claiming damages against the carrier. At most, the rule provides a basis for reducing the amount of the claim, if the carrier can show the rejecting party could have salvaged the product for more than the carrier was able to realize.
Therefore, the “totally worthless” rule, even if it were to apply to the facts presented, is really very similar to the general principle that following a breach of the contract of carriage, all parties have a duty to take reasonable steps to mitigate losses—which, depending on the circumstances presented, may be inconsistent with rejecting the produce to a carrier.
Accordingly, for mediation purposes, when produce is sold on a delivered basis, we have generally recognized a buyer’s right to reject to the distributor under the perfect tender rule for transportation (delivery) problems. But when considering any right the party that hired the breaching carrier may have to reject to the carrier, we need to take a closer look at whether it appears the party that hired the carrier took reasonable steps to mitigate losses.
For instance, if after the retailer’s rejection to the distributor under the perfect tender rule, it offered to place the product with an area wholesaler on consignment for the carrier’s account (or “for the account of whomever it concerns”), but the carrier refused to take the product there for whatever reason, we would generally consider this a sufficient effort to mitigate damages prior to rejecting.
Of course, if the distributor can show it made continued efforts to find an acceptable wholesaler (nearby, reputable, etc.), this would further strengthen its position.
Based on the facts described, however, the distributor did not reject the product to the carrier. Rather, it sold the strawberries at a fixed price of $15 per carton, rather than on consignment, despite having sold the berries to the retailer for $34 per carton, in the absence of any showing that this product was distressed (i.e., there was no USDA inspection and no allegation of temperature abuse or condition problems with the strawberries).
Although we can understand why the distributor may have believed it was better to sell the strawberries at a fixed price rather than on consignment, where returns are uncertain and potentially open to manipulation, your selling price here, in our view, is simply too low.
In other words, it appears to us that you failed to mitigate losses—not by improperly rejecting to the carrier—but by failing to sell the product at a reasonable price.
If this was the best price the distributor could get for the product, then, in our view, it would have been better to have placed the product on consignment where the wholesaler would then be required to show that its returns were reasonable per industry precedent (i.e., with a detailed accounting reflecting a proper resale and a USDA inspection if the product was distressed).
After such a showing, it would be difficult for the carrier to argue that the salvage proceeds were unreasonably low, or that the distributor failed to properly mitigate losses, given that consignment handling is the customary practice following the rejection of produce shipments.
Summary Technically speaking, rejecting to carriers is different from rejecting to produce sellers.
Before rejecting to a breaching carrier, the vendor that hired the carrier is required to take reasonable steps to mitigate losses. By placing, or offering to place, rejected product on consignment, the distributor may avoid claims that it failed to sell the rejected product at a reasonable price.
