We are continuing with our series of articles summarizing past DRC arbitration decisions. This will help members understand how the DRC Dispute Rules and Standards (R&S) apply in a dispute. R&S states that all DRC arbitrations are private and confidential. As such, the names of all parties, including arbitrators and companies, are not included. A reminder that DRC’s sole role is as administrator of the arbitration process; DRC does not participate in any hearings. Therefore, this summary is based solely on the arbitrator’s written decision and may not reflect important information shared with the arbitrator through written briefs or verbal testimony.
Case: DRC File #13145 – Parties Domiciled – United States and Canada
- On or about March 8th, 2003, the Claimant sold and shipped to the Respondent a load of 1,344 boxes of red peppers, which included X brand (medium and large), Y brand (medium and large), and Z brand (medium).
- According to the invoice, the Claimant sold their red peppers FOB at USD$12.95 per case plus USD$23.50 for a temperature recorder for a total invoice price of USD$17,428.50.
- On March 13th, 2003, the product arrived at its final destination, and a Canadian Food Inspection Agency (CFIA) inspection was requested and performed the same day, showing the following results:
448 Cartons – Medium, X Brand
1% Scars, 7% Bruises, 1% Decay of Edible Portion, 9% Soft and/or Shrivelled.
224 Cartons – Large, X Brand
8% Bruises, 1% Decay of Edible Portion, 8% Soft and/or Shrivelled.
280 Cartons – Medium, Z Brand
17% Bruises, 4% Soft and/or Shrivelled.
98 Cartons – Medium, Y Brand
1% Scars, 4% Bruises, 2% Decay of the Stem, 2% Decay of Edible Portion, 8% Soft and/or Shrivelled, 2% Sunken Discolored Areas.
294 Cartons – Large, Y Brand
1% Scars, 6% Bruises, 1% Decay of the Stem, 3% Decay of Edible Portion, 7% Soft and/or Shrivelled.
- On March 21st, 2003, the Respondent provided an account of sales to the Claimant showing a total of USD$12,248.09 and CAD$19,229.50, deducting a total amount of USD$4,792.92 in expenses (handling, freight, inspection fees and entry fees) for a total return to the Claimant of USD$7,455.17.
- The Respondent paid the Claimant the amount shown as a return amount on their account of sales. The Claimant disagreed with the returned amount arguing that the returned amount was unreasonably low.
Issues: Deciphering whether the Respondent’s return was reasonable.
The arbitrator found no dispute between the parties concerning the original contract terms, nor did the Claimant question that the inspection results revealed a breach of the warranty of suitable shipping condition by the Claimant. The Claimant argued, however, that the resale prices reported by the Respondent are too low, considering the state of the peppers and general market conditions. Both parties addressed whether the contract terms were changed by mutual agreement; therefore, the arbitrator concluded that the original contract terms remained the same. Therefore, the arbitrator decided it was appropriate to determine the amount of damages the Claimant was entitled to recover from the Respondent for breach of contract.
The usual formula for determining the amount of damages is to determine what the receiver of goods failing to meet contract terms would have gotten for the goods at the time of delivery (generally based on government market news reports), less what the receiver realized from a prompt and proper resale of the damaged goods. In this instance, the Arbitrator used as the most reliable source of market price quotes The International Report Fresh Fruit, Vegetable and Ornamental Crops ; Volume XII – Number 21, which showed prices for Large Red Peppers on the Montreal market on March 14th, 2003, ranging from US$22.50 to US$27.66. The Claimant refers to reports purportedly issued by the “International Office of Market News” but does not provide copies of those quotes or any information about that company. The Arbitrator utilized the quotes from March 14th, as the inspection was completed at 1:10 PM on the 13th, after most sales would have been made for that day. The Respondent’s accounting of sales shows that sales of the peppers began on March 14th; hence this date most closely meets the definition of “at the time of delivery.”
The Claimant describes the peppers at issue as “choppers.” Such peppers are not generally considered to be of particularly high quality and do not normally bring prices to the top of the market. In addition, the market quotes are for large peppers, and 826 cartons of the peppers at issue were medium-sized. For the above reasons, the Arbitrator utilized USD$22.50 as the measure of the value that conforming goods would have had at the time of delivery. This gives a value of USD$30,240.00 for the 1,344 cartons of peppers.
The best measure of the actual value of the peppers at issue is the result of a prompt and proper resale. Respondent’s accounting shows that sales began promptly on March 14 and continued daily until March 20th. The prices realized ranged between CAD$17.50 and CAD$12.00. While these prices are equivalent to US$11.15 and USD$7.64, the Arbitrator found no evidence of mishandling, given that the product failed to meet the suitable shipping warranty. Typical evidence of mishandling would be delays in initiating sales, large quantity sales at extremely low prices or extremely long sales periods. None of these conditions appear here. Therefore, the Arbitrator found that the value of the peppers at issue was the gross proceeds reported by Respondent, USD$12,248.09.
The Respondent’s basic damages from the Claimant’s breach of contract are the value of conforming goods (USD$30,240.00) less the actual value of the goods at issue (USD$12,248.09), or $17,991.91. In addition to this amount, the cost of the inspection (USD$132.99) is incurred as a consequence of the breach of contract. The total amount of damages is then valued at US$18,124.90. As its damages exceed the original amount of the invoice, the Arbitrator found no amount due to the Claimant from the Respondent.
As a side note, even if the Arbitrator had used the International Office of Market News quotes from March 10th – 14th, 2003, as urged by the Claimant, the Arbitrator would have arrived at the same result. Utilizing the lower quote of USD$16.66, there would be even less reason to question the Respondent’s sales results, and its damages would total USD$10,275.94. This amount, deducted from the invoice total of USD$17,404.80, would leave an amount due of USD$7,128.86. The Respondent has already paid the Claimant USD$7,404.80.
The Arbitrator found that the Claimant failed to uphold the burden of establishing that the Respondent’s returns were unreasonably low. Therefore, the Arbitrator decided to dismiss the claim.
It is not uncommon to find cases where there is no disagreement between the parties regarding the deteriorated condition of the product upon arrival, provided a timely government inspection was performed confirming a breach of contract. The disagreement is normally linked to the return offered by the buyer, which may or may not include an account of sales showing how the product was handled.
This arbitration decision highlights the importance of a buyer/receiver submitting an account of sales showing the date, price and amount sold for each lot and the expenses associated with the breach of contract, which would be the freight, brokerage, inspection cost and any other expense agreed upon.
Without an account of sales or a proper account of sales, an arbitrator may have to use a different method to determine what a fair return could be.
The arbitrator concluded that based on the timely inspection showing a breach of contract, an itemized account of sales, and available market prices, the return presented by the respondent was reasonable.
For more information regarding the sections of DRC Trading Standards applied to this dispute, refer to the following sections:
DRC Trading Standards:
• Receiver Duties – (Fruit and Vegetable Dispute Resolution Corporation Trading Standards s.10 (2)(b)(ii))
• Back to basics: Account of Sales – (https://fvdrc.com/solutions/back-basics-account-sales/)