Food safety and bearing the risk of loss
Product unmerchantable due to food safety advisory
The Problem: Product unmerchantable due to food safety advisory.
The Key Point: Sales terms determine when the buyer bears the risk of loss.
The Solution: When faced with a food safety advisory, a buyer’s rights and responsibilities vis-à-vis the seller are governed by familiar contracting principles.
We recently received three pallets of romaine lettuce from Arizona on a FOB (shipping point) basis. The three pallets in question (96 cartons of 6×2 chopped romaine, 80 cartons of 80/20 salad mix, and 80 cartons of 50/50 salad mix) were all processed in Yuma, AZ. Two days after we received the product, we became aware of a food safety advisory issued by the U.S. Centers for Disease Control and Prevention (CDC) regarding the E. coli outbreak associated with romaine lettuce grown in the Yuma, AZ region. After selling most of the product, my customers are now sending me dump receipts and telling me they will not pay. I asked my shipper for help and was told the product made “good arrival” and therefore we need to pay for the romaine in full. Is this true? What are my options? Please advise.
It sounds as though the product complied with the warranty of suitable shipping condition, i.e., made “good arrival.” However, the warranty of suitable shipping condition is not the only warranty produce sellers make.
As explained in the Perishable Agricultural Commodities Act (PACA) Administrative Newsletter, distributed by the USDA’s Agricultural Marketing Agency, in the aftermath of the 2006 spinach crises, the “warranty of merchantability” is implied in every produce contract, unless specifically excluded from the agreement. This warranty is, in essence, the seller’s promise that its product will “pass without objection in the trade” and be “fit for the ordinary purposes for which such goods are used” (see Uniform Commercial Code, Section 2-314).
So, the pivotal question here is, was this product merchantable when the risk of loss transferred to you? In the scenario you describe, the answer would be yes, because the CDC advisory was issued after the risk of loss had transferred to you upon loading in Arizona.
In other words, the product the seller provided to you was merchantable when title to the product, and the risk of loss, passed to you, as the buyer, at shipping point.
Of course, if the product in question is recalled at any time, we would treat this in the same manner as a rightful rejection, and recognize any properly supported and reasonable losses you, as the buyer, incurred as a result (e.g., freight charges, dumping fees).
The same contract principles would apply to a delivered sale, only in that case, title and risk of loss would not pass until acceptance at destination. Accordingly, the seller would be responsible for losses arising from an advisory issued while the shipment was in transit.
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