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Running Behind

Resolving late claims
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Late arrivals of fresh produce disrupt the flow of business and decrease the value of product, turning what was supposed to be a profitable transaction into a carrier claim. With the advent of electronic data loggers putting additional time pressure on the supply chain, we thought it would be a good time to review late claims and the fundamental issues that arise when a shipment arrives late.

Of course, the fact that a carrier arrived later than expected does not necessarily give rise to a claim. Late claims against carriers of fresh produce generally require proof that the carrier failed to use ‘reasonable dispatch’ and proof of resulting damages.

And while this may sound simple enough, there is a fair amount of devil in the details.

Reasonable Dispatch
At the outset, it is important to recognize that given the highly perishable nature of fresh produce, time is impliedly of the essence.

Consequently, in the absence of a contrary agreement, carriers are expected to use ‘reasonable dispatch’ to deliver fresh produce in a timely manner. Reasonable dispatch is generally defined as the ‘usual and customary’ time it takes to complete similar shipments.

“What is ‘usual and customary’ in transportation can depend upon the shipping characteristics of the commodities being transported,” explains attorney Dan Sullivan of Sullivan Hincks and Conway, based in Oak Brook, IL. “This was recognized by the now defunct Interstate Commerce Commission when it was considering a definition of reasonable dispatch for perishable commodities in the early 1970s.”

As part of that investigation, the Commission defined a “perishable commodity” as follows—[A]ny edible commodity which, during the course of transportation, is subject to rules, regulations, or charges for perishable protective service and requires the transporting carrier expeditiously to transport it and to produce and maintain as needed throughout transportation a controlled atmosphere for protection against heat or cold as one of the essential parts of the service in order to prevent deterioration of the commodity prior to arrival at destination.

“This is critical to understanding reasonable dispatch because it shows that notice of the need for the carrier to use reasonable dispatch is imparted by the product being shipped,” notes Sullivan.

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Late arrivals of fresh produce disrupt the flow of business and decrease the value of product, turning what was supposed to be a profitable transaction into a carrier claim. With the advent of electronic data loggers putting additional time pressure on the supply chain, we thought it would be a good time to review late claims and the fundamental issues that arise when a shipment arrives late.

Of course, the fact that a carrier arrived later than expected does not necessarily give rise to a claim. Late claims against carriers of fresh produce generally require proof that the carrier failed to use ‘reasonable dispatch’ and proof of resulting damages.

And while this may sound simple enough, there is a fair amount of devil in the details.

Reasonable Dispatch
At the outset, it is important to recognize that given the highly perishable nature of fresh produce, time is impliedly of the essence.

Consequently, in the absence of a contrary agreement, carriers are expected to use ‘reasonable dispatch’ to deliver fresh produce in a timely manner. Reasonable dispatch is generally defined as the ‘usual and customary’ time it takes to complete similar shipments.

“What is ‘usual and customary’ in transportation can depend upon the shipping characteristics of the commodities being transported,” explains attorney Dan Sullivan of Sullivan Hincks and Conway, based in Oak Brook, IL. “This was recognized by the now defunct Interstate Commerce Commission when it was considering a definition of reasonable dispatch for perishable commodities in the early 1970s.”

As part of that investigation, the Commission defined a “perishable commodity” as follows—[A]ny edible commodity which, during the course of transportation, is subject to rules, regulations, or charges for perishable protective service and requires the transporting carrier expeditiously to transport it and to produce and maintain as needed throughout transportation a controlled atmosphere for protection against heat or cold as one of the essential parts of the service in order to prevent deterioration of the commodity prior to arrival at destination.

“This is critical to understanding reasonable dispatch because it shows that notice of the need for the carrier to use reasonable dispatch is imparted by the product being shipped,” notes Sullivan.

In other words, when carriers agree to haul fresh produce, they are impliedly notified of the need to use reasonable dispatch to deliver expeditiously. Section 5.0 of Blue Book’s Transportation Guidelines provides the following—

Carriers are required to use “reasonable dispatch” to ensure goods are delivered in a timely manner consistent with normal and customary delivery times. In the absence of an agreement to the contrary, a Carrier (i.e., a motor carrier) that hauls a load 500 or more miles per day (1,000 miles per day if a “team” is hired) will be presumed to have used reasonable dispatch. A Carrier’s failure to cover 500 miles per day, in the absence of evidence of adverse weather conditions or extreme and unavoidable traffic conditions, may be used to help establish that a Carrier failed to use reasonable dispatch in breach of the contract of carriage; however, especially with shorter trips (e.g., one day), in light of the advent of electronic data loggers, which track a driver’s hours of operation more closely than ever before, assessing reasonable dispatch must be considered on a case-by-case basis. Evidence of a mechanical breakdown or other failure to keep the shipment moving as expeditiously as possible may also be used to establish a failure to use reasonable dispatch.

This notwithstanding, receivers will sometimes disregard reasonable dispatch and instead attempt to treat appointment times as if they were guarantees. But although guaranteed delivery times that can be met without violating hours of service regulations may be contractually enforceable (subject to force majeure provisions), appointment times, without language of guarantee, are not usually binding on the carrier.

Section 5.3 of the Guidelines states the following regarding delivery times or appointments—Since delivery times or “appointments” are customarily only estimates, a party alleging a guarantee should be prepared to prove the putative guarantee was made by clear and convincing evidence. A signed agreement which conspicuously states, “delivery time is guaranteed” is recommended.

Of course, receivers may give real meaning to delivery appointments by, for instance, making it a priority to unload carriers who arrive during their appointment times. But merely missing a delivery appointment is not usually grounds for establishing a breach of the contract of carriage.

Damages When Late Product Is Received
When a failure to use reasonable dispatch in breach of the contract of carriage can be established, the question that quickly follows is what, if any, financial damages did the receiver incur as a result of the breach?

Although damages from temperature claims can usually be supported with a U.S. Department of Agriculture (USDA) or Canadian Food Inspection Agency (CFIA) inspection and a detailed account of sales, damages resulting from a late arrival cannot necessarily be supported in the same manner.

If, for instance, the delivery is only one day late, carriers will often take the position that the receiver did not suffer any quantifiable losses resulting from the delay. After all, assuming temperatures were properly maintained, the condition of a shipment of bell peppers, for example, would not be expected to appreciably (i.e., quantifiably) change as the result of a one-day delay.

CALCULATING DAMAGES
Below is a hypothetical fact pattern and damage calculation intended to illustrate how damages may be assessed when the buyer accepts a load after a one- or two-day delay.

Fact Pattern
A buyer in Boston orders California lettuce at $7.00 per carton, FOB, with freight of $3.00 a carton. Using reasonable dispatch and traveling approximately 500 miles per day, the carrier should tender delivery of the lettuce no later than Monday morning.

The carrier, however, is delayed for 48 hours in the Midwest due to a mechanical breakdown. On Monday, when the carrier would have arrived had there been no breach, California lettuce is selling at the destination market for $11.50 to $12.50 per carton; on Wednesday, when the product arrived, California lettuce is selling at the destination market for $11.00 to $12.00 per carton. Transit temperatures were properly maintained.

Standard Damage Calculation
Because the average destination market value of the product reported on the date the carrier was supposed to arrive was $12.00, this figure is used as the value the product would have had, had there been no breach (i.e., the product arrived on time).

Taking the difference between this figure and the low-end price reported on the date the product actually arrived, or $11.00, we arrive at damages of $1.00 per carton.

Blue Book Services will generally use the low-end figure on the date the late product arrived, rather than the average price, because the late product will usually be one or two days less fresh than competing product on the market during the same timeframe. This method, i.e., using the difference between the average and low-end prices, may provide a basis for damages even when market prices hold steady during the relevant timeframe.

As a point of reference, Perishable Agricultural Commodities Act (PACA) Good Arrival Guidelines for bell peppers increase just 1 percent from the third day to the fourth, and just 1 percent from the fourth day to the fifth.

Accordingly, an accounting showing product that arrived one day late sold for just $10.00 despite an $18.00 market on the date the truck was supposed to arrive, suggests at least one of three things: (i) the product had quality and/or condition problems, in which case the receiver may have a claim against the seller; (ii) the receiver did a poor job selling the product; or (iii) the destination market selling price for the commodity in question declined during the period of the delay.

Of these, per Section 10.11 of our Guidelines, only market decline may be properly attributed to the carrier when the delivery is delayed by just one or two days. Section 10.11 of the Guidelines provides the following—

[W]hen delivery is only one (1) or two (2) days late (and temperatures were properly maintained in transit) it may be difficult or impossible for the buyer to establish that the produce was appreciably affected by the delay. Blue Book has generally taken the position that after a one (1) or two (2) day delay, damages must be supported by the USDA’s Market News Service reports for the dates in question.

This is a general guideline or rule of thumb and factors such as the perishability of the commodity in question must be considered. See the sidebar on page 14 for an example of how damages resulting from a one- or two-day delay would be calculated.

If, on the other hand, the product is three or more days late, Blue Book has generally taken the position that an injured party may rely upon the difference between the destination market value of the product in good condition on the date the product was supposed to arrive, and the actual proceeds realized from the sale of the late product, provided these proceeds are supported with a USDA or CFIA inspection certificate and a detailed accounting reflecting a prompt and proper resale of the late product.

Late Product and Rejection
A fundamental question that sometimes comes up is whether the receiver has the right to reject a shipment for lateness.

At the outset, it’s helpful to distinguish between a produce vendor’s rejection to a carrier it hired, and a vendor’s rejection to a seller it purchased from on a delivered basis (as opposed to a free-on-board or FOB basis). Let’s take the latter case first.

Section 2-601 of the Uniform Commercial Code (UCC), Buyer’s Rights on Improper Delivery, provides that “if 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 it supports the receiver’s right to reject to the seller if the carrier fails to use reasonable dispatch to tender delivery in a timely fashion.

It is, however, important to keep in mind that Article 2 of the UCC (as enacted by state law) only applies between buyers and sellers of goods, such as produce, and does not apply between buyers and sellers of services, such as transportation. Therefore, the perfect tender rule does not apply between the carrier and the produce vendor that hired the carrier.

The case law applicable to common carriage, on its face, is not as permissive of rejections as the UCC. The case law suggests that, depending on the facts of the particular shipment, there may be a duty to receive (or not reject) goods that have been damaged in transit unless the goods are “practically worthless.”

This purported duty, however, clashes with the perfect tender rule where delivered sales are concerned and hypothetically creates a situation where a receiver could reject a shipment for a carrier’s failure to use reasonable dispatch if the supplier hired the carrier (as when produce is purchased on a delivered basis), but not if the receiver hired the carrier (as when produce is purchased on an FOB basis).

From the supplier’s perspective, this creates, on its face, a situation where a receiver may reject a shipment it purchased on a delivered basis to the supplier due to a transportation problem; but the supplier does not necessarily have the right to follow suit and reject this same shipment to the carrier it hired.

A closer look at the “practically worthless” rule, however, reveals that this rule is not all it appears to be.

First, this rule applies to common carriers, not contract carriers. The question of whether a carrier acted as a common carrier or a contract carrier has been the subject of much litigation over the years and could be argued either way with respect to carriers of fresh produce.

But 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 the 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 regulations have ended the statutory distinction between contract and common carriage disregard the fact that fresh produce hauls are, with few exceptions, exempt from federal economic regulation per 49 USC Sec. 13506 (a)(6).)

Second, even if the carrier were to establish it was acting as a common carrier and that the goods were not practically worthless, this would not preclude the receiver from rejecting for lateness and recovering damages resulting from the carrier’s late delivery.

At most, the practically worthless rule would provide the carrier with a basis for arguing that any damages claimed against it should be reduced, provided it can show the vendor that rejected the product to the carrier (whether the receiver or an upstream supplier) could have salvaged the product for more than the carrier (using reasonable and good faith efforts) was able to realize.

Therefore, the practically worthless rule, even if it applies to the shipment in question, 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 in some circumstances could be inconsistent with rejecting fresh produce to a carrier.

Under either the practically worthless rule or the more generally applicable duty to mitigate losses, carriers can be expected to argue that they are not in as good a position to salvage fresh produce as a receiver or other produce supplier would be.

“Participation with the carrier to mitigate losses generally helps counter such arguments on the part of the carrier,” observes Sullivan.

For their part, receivers can be expected to argue they should not be required to stock their shelves with product that does not meet their specifications for freshness and condition. After all, if they were able to handle the product profitably, they would have every incentive to do so—or so the argument would go.

Meanwhile, produce suppliers (distributors and shippers) can be expected to point out that produce carriers (and truck brokers serving the fresh produce industry) have access to the same distribution channels as produce suppliers, following a rejection by the receiver under the perfect tender rule.

And to their point, in our experience, both produce suppliers and carriers alike usually arrange to have rejected product sold on consignment by a produce wholesaler, with returns determined by the sales proceeds realized by the wholesaler.

For these reasons, it is often difficult for carriers to show that the produce vendor that rejected the product to the carrier was in a quantifiably better position to sell the produce than they were. That said, the circumstances involved in each case must be considered. If, for instance, the carrier is not permitted to sell the produce because it is a private label product, then this may be a circumstance where the receiver’s rejection is inconsistent with its duty to mitigate damages, and where the carrier could effectively reduce the amount of the claim against it.

As a general rule, where it appears the carrier (relative to the produce vendor) is in poor position to salvage the product, produce receivers and suppliers should consider either receiving the product under protest or arranging to have the shipment handled on consignment, and then claim any shortfall against the late arriving carrier.

When arranging to have the product handled on consignment, however, it is important to insist that the salvaging firm properly support returns with a detailed accounting and a timely USDA or CFIA inspection certificate if the product is showing signs of distress.

All too often we see suppliers blindly accept whatever returns are offered by the salvaging firm, and then when the carrier objects to the low returns and/or lack of support, the supplier ends up absorbing a shortfall for what was the carrier’s breach.

Damages When Late Product Is Rejected
When product is rejected to a carrier for lateness, and particularly when the truck is rejected before it even arrives at destination (e.g., truck breaks down early in the trip without a repower), claimants will sometimes argue that “because the carrier didn’t deliver, it didn’t earn any freight,” and therefore seek to recover the full destination value of the product from the carrier. Damages, however, are not based on what the carrier may or may not have earned.

Damages are based on making the injured party whole; the breaching party (the carrier) is responsible for placing the injured party in the same position it would have been in had there been no breach, without regard to what the injured party feels the carrier earned.

The injured party’s damages, following a proper rejection, may be calculated by taking the difference between the value of the product the receiver would have received had it arrived on time, and the value of the product the receiver, in fact, received following the rejection—which would be zero, assuming the entire shipment was rejected. (Note that the “commercial unit” rule applicable to vendor-to-vendor rejections does not apply between vendors and carriers.)

The resulting figure must then be reduced by the amount of any unpaid freight which the injured party anticipated paying to the carrier under the original bargain.

If the injured party were to realize the destination value of the produce without any reduction for the cost to ship the product, it would realize an improper windfall. The injured party is entitled to be made whole, it is not entitled to a windfall.

In Conclusion
Produce vendors and carriers share a common interest in timely transportation. Vendors want their product as fresh as possible, and carriers want to free up their trucks as soon as possible.

Given this shared interest, there is certainly opportunity for vendors and carriers to work in partnership with one another, especially as the industry adjusts to the implementation of electronic logging devices. When late claims are necessary, a shared framework guiding the resolution of claims can be an important part of that partnership.

Image: Africa Studio/Shutterstock.com

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