Dispute concerning an adequate return offered after receiving a product that does not comply with the contract terms.
The Fruit and Vegetable Dispute Resolution Corporation (DRC) has developed a series of articles summarizing past arbitration decisions. These articles will help members understand how the DRC Dispute Rules and Standards (R&S) apply in a dispute.
The DRC 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 the DRC’s sole role is to administer the arbitration process; the 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.
Abstract:
The arbitration decision concerns a dispute between parties in the United States and Canada. The conflict arose when the Claimant received the Account of Sales prepared by the Respondent’s customer for two loads of red onions. The Respondent contended that these two shipments did not meet the contract terms, prompting them to seek damages for the loads.
The arbitrator concluded that the Respondent did not provide sufficient evidence to demonstrate that the return offered by the Respondent’s customer for the two loads was reasonable, based on the results outlined in the inspection certificates.
This summary provides an essential overview of the arbitration decision and its implications for international commercial disputes.
CASE: DRC File #18587 – Parties Domiciled – United States and Canada
Summary of Facts (SOF)
The matter in dispute involves two truck shipments of red onions shipped by the Claimant from Hatch, New Mexico to the Respondent at the agreed destination of Montreal, Quebec on June 22 and 23, 2009.
Claimant’s Invoice #9310
The Claimant sold to the Respondent a total of 1,680 25 lb. bags of Jumbo Red Onions at CA$7.50 FOB plus “Temp” at CA$8.00, Shipping Point Inspection Fee of CA$110.00 and 21 pallets at CA$6.00 for an invoice total of CA$12,844.00. The Claimant shipped the onions to the Respondent’s customer in Montreal on June 22, 2009, on an unrefrigerated truck. The Bill of Lading reads, in part, “Tarp onions, but roll tarp up on both ends (front and back). Keep onions dry and well ventilated. Keep free of rain and smoke.”
This shipment apparently arrived sometime on Friday, June 26. The Respondent filed a request for inspection shortly after 8 AM on Saturday, June 27. A CFIA inspection was made on Monday, June 29, and revealed that the onions contained an average of 9% decay, with a range of 4-18%. The pulp temperature of the onions was reported as 12ºC (54ºF).
On July 6, the Respondent forwarded the Claimant an accounting of sales and expenses prepared by Respondent’s customer. The accounting reads as follows:
| 800 bags sold at CA$8.00 | CA$6,400.00 |
| 400 bags sold at CA$7.50 | CA$3,000.00 |
| 480 bags sold at CA$6.50 | CA$3,120.00 |
| Total Sales: | CA$12,520.00 |
| Exchange 1.19% | US$10,521.00 |
| Expenses | |
| Freight (1680 X US$3.50) | US$5,880.00 |
| Destination Inspection | US$252.00 |
| Commissions (10% of sales) | US$1,052.00 |
| Total Expenses | US$7,184.00 |
| Due Shipper: (US$10,521.00 – US$7,184.00) | US$3,337.00 |
Claimant’s Invoice #9310
The Claimant sold to the Respondent a total of 1,680 25 lb. bags of Jumbo Red Onions at CA$7.50 FOB plus Inspection Fees of $110.00 and 21 pallets at CA$6.00 for an invoice total of CA$12,836.00, and shipped them to the Respondent’s customer in Montreal on June 23, on an unrefrigerated truck. The Bill of Lading reads, in part, “Tarp onions, but roll tarp up on both ends (front and back). Keep onions dry and well ventilated. Keep free of rain and smoke.”
This shipment apparently arrived sometime early on Saturday, June 27. The Respondent filed a request for inspection shortly after 8 AM on Monday, June 29. A CFIA inspection was made immediately and revealed that the onions contained an average of 19% decay, with a range of 11-29%. Pulp temperatures ranged from 24ºC (75ºF) to 26ºC (79ºF). The temperature in the warehouse was recorded as 22ºC (72ºF).
On July 6, the Respondent forwarded the Claimant an accounting of sales and expenses prepared by Respondent’s customer. The accounting reads as follows:
| 400 bags sold at CA$3.50 | CA$1,400.00 |
| 640 bags sold at CA$3.00 | CA$1,920.00 |
| 600 bags sold at CA$2.50 | CA$1,500.00 |
| Total Sales | CA$4,820.00 |
| Exchange at 1.19% | US$4,050.00 |
| Expenses | |
| Freight (1680 X US$3.50) | US$5,880.00 |
| Destination Inspection | US$252.00 |
| Commissions (10% of sales) | US$405.00 |
| Total Expenses | US$6,537.00 |
Due Receiver: (US$4,050.00 – 6,537.00) = Loss: (US$2,487.00)
The Claimant seeks a net total of US$22,278.00 for the two shipments, after an allowance of US$3,402.00 for decay.
SUMMARY OF ARBITRATOR’S ANALYSIS AND REASONING:
The dispute involves two separate loads of onions, and the arbitrator has discussed each load individually.
Claimant’s Invoice #9309
The parties are in agreement regarding the terms of sale and shipment up to the time the load arrived at the destination in Montreal. Although the file reflects that discussions took place between representatives of the two parties regarding the disposition of the load after it arrived, there is no evidence offered that establishes a clear rejection of the product by the Respondent.
The parties differ as to whether the Claimant agreed to move the product to another receiver, but as the party making the claim, the Respondent had the burden of proving this assertion. Again, there is no clear evidence that the Claimant agreed to void the contract and move the onions elsewhere. In addition, at the time the CFIA inspector arrived, the onions had been unloaded into the Respondent’s customer’s warehouse, an act of acceptance by the Respondent. Therefore, the arbitrator concludes that the Respondent received and accepted the onions and is responsible for paying the invoice amount, minus any damages incurred due to the Claimant’s breach of contract.
It is clear that the Claimant did, in fact, ship onions that failed to meet the FOB no-grade contract terms. The onions arrived at destination showing 9% decay, with a range of 4-18%. For FOB shipments such as this one, the DRC Good Arrival Guidelines establish a maximum tolerance for decay at destination of 4%. There is nothing that would establish carrier mishandling, and Respondent is therefore entitled to recover the damages it suffered as a result of Claimant’s breach.
The preferred method for calculating damages from a breach of contract is to compare the market value of a product meeting contract requirements against the actual sales price obtained from the sale of the damaged goods. In this case, there were no market quotes available for New Mexico red onions in the Montreal market at the time the onions were sold, so we must seek an alternative measure of the value of goods that meet the contract terms.
The first preferred alternative is to compare the delivered value of the product to the actual sales price obtained from the prompt and proper sale of the damaged goods. The accounting was issued seven days after inspection, and nothing would establish improper handling of the sales on the part of Respondent’s customer. In this instance, we have information regarding the freight charge, which appears on Respondent’s customer accounting and, in the absence of a freight bill, is accepted as a reasonable amount. The calculation of damages is as follows:
| Market Value | |
| 1,680 X US$7.50 FOB | US$12,600.00 |
| Shipping Point Inspection Fee | US$110.00 |
| Pallets | US$126.00 |
| Freight | US$5,880.00 |
| Total Market Value | US$18,716.00* |
| Less Gross Sales | (US$10,521.00) |
| Basic Damages | US$8,195.00 |
| Plus Destination Inspection | US$252.00 |
| Total Damages | US$8,447.00 |
The Claimant’s invoice total was US$12,836.00*. Subtracting the Respondent’s damages of US$8,447.00 leaves a balance of US$4,389.00 due and unpaid.
*There is a US$8.00 charge on the Claimant’s invoice for “Temp”. This was apparently for a temperature recorder. Respondent states that there was no recorder on the load, and that none was called for on this non-refrigerated load. The arbitrator agreed and eliminated this charge from the delivered value of the shipment and from the invoice total.
Claimant’s Invoice #9310
The parties are in agreement regarding the terms of sale and shipment up to the time the load arrived at destination in Montreal. The file reflects that discussions took place between representatives of the two parties regarding the disposition of the load, but there is no evidence offered that establishes a clear rejection of the product by the Respondent.
The parties differ as to whether the Claimant agreed to move the product to another receiver, but as the party making the claim, the Respondent had the burden of proving this assertion. Again, there is no clear evidence in the record that the Claimant was willing to void the contract and move the onions elsewhere. In addition, at the time the CFIA inspector arrived, the onions had been unloaded into the Respondent’s client warehouse, an act of acceptance by the Respondent. Therefore, the arbitrator concluded that the Respondent received and accepted the onions and is responsible for paying the invoice amount, minus any damages incurred due to the Claimant’s breach of contract.
It is clear that the Claimant did, in fact, ship onions that failed to meet the FOB no-grade contract terms. The onions arrived at destination showing 19% decay, with a range of 11-29%. For FOB shipments such as this one, the DRC Good Arrival Guidelines establish a maximum tolerance for decay at destination of 4%. There is nothing to prove mishandling by the carrier, and Respondent is therefore entitled to recover the damages it suffered as a result of Claimant’s breach.
The Claimant notes that the pulp temperatures recorded during the inspection are considerably higher than those from the previous load. While this is true, the shipment was in the Respondent’s customer’s warehouse for one day less than the first load, and the fact that the load was shipped in an open truck from New Mexico to Quebec at the end of June indicates that the Claimant did not consider the onions particularly temperature-sensitive. In addition, given the extremely high degree of decay found in the onions, it is likely that the decay process itself elevated the pulp temperatures somewhat.
As in the case of the first load, the preferred method for calculating damages from a breach of contract is to compare the market value of good condition product against the actual sales price obtained from the prompt and proper sale of the damaged goods. The accounting was issued seven days after inspection, and there is nothing that would establish improper handling of the sales on the part of Respondent’s customer. Since the extent of decay in the onions was nearly five times the allowable tolerance, it is not unusual that the sales value of the onions would be drastically lower than might have been expected for product meeting contract. Again, there are no market quotes available for New Mexico red onions on the Montreal market at the time the onions were being sold, so we must seek an alternative measure of the value of goods meeting contract terms.
As before, the first alternative is to compare the delivered value of the product to the actual sales. Again, we have information regarding the freight charge, which appears on Respondent’s customer’s accounting, which, in the absence of a freight bill, is accepted as a reasonable amount. The calculation of damages is as follows:
| Market Value | |
| 1,680 X US$7.50 FOB | US$12,600.00 |
| Shipping Point Inspection Fee | US$110.00 |
| Pallets | US$126.00 |
| Freight | US$5,880.00 |
| Total Market Value | US$18,716.00* |
| Less Gross Sales | (US$4,050.00) |
| Basic Damages | US$14,666.00 |
| Plus Destination Inspection | US$252.00 |
| Total Damages | US$14,918.00 |
Claimant’s invoice total was US$12,836.00. Subtracting Respondent’s damages of US$14,918.00 leaves a loss of US$2,082.00, for which Claimant is liable to Respondent.
Arbitrator’s Summary Decision
Claimant’s Invoice #9309
The Respondent is found liable to the Claimant for a total of US$4,389.00.
Claimant’s Invoice #9310
The Claimant is found liable to the Respondent for a total of US$2,082.00.
As a result, the Respondent is ordered to pay the remaining balance of US$2,307.00 within 30 days of this order. This amount is only US$1,457.00 more than what the Respondent initially offered. Since the Respondent has effectively prevailed in this matter, no award will be granted for the Claimant’s filing fees.
DRC Comments
There are two main takeaways from this decision. First, properly understand the difference between a rejection and an act of acceptance. The second is to ensure that, when submitting an account of sales, it complies with the requirements.
Acceptance and Regection
On a FOB transaction, a term that is defined in DRC Trade Standards Section 20, a receiver can proceed to reject a load if it has not committed an act of acceptance as defined in DRC Trade Standards Section 19:
“Acceptance” means:
(1) Any act by the consignee signifying acceptance of the shipment, including diversion or unloading, except for the purposes of inspection under the supervision of a recognized inspector;
(2) Any act by the consignee which is inconsistent with the consignor’s ownership, but if such act is wrongful against the consignor it is acceptance only if ratified by him; or
(3) Failure of the consignee to give notice of rejection to the consignor within a reasonable time: Provided, that acceptance shall not affect any claim for damages because of failure of the produce to meet the terms of the contract.”
To legally reject a load, proper justification is required, such as:
i. Evidence of a breach of contract in a timely manner, such as an inspection report confirming the breach
ii. Timely and proper notice of the intention to reject the load
iii. Have not committed an act of acceptance
In this case, the arbitrator decided that a proper rejection was not made.
Account of Sales
Because expedited arbitration proceedings only required the arbitrator to issue a limited reason decision, we can observe that the arbitrator used the information provided in the Respondent’s account of sales, but calculated damages differently. We assume the arbitrator proceeded this way because there was one element in the Respondent’s account of sales that failed to comply with the claim for damages, which is the “commission” expense. A commission is only warranted when the transaction is based on consignment terms, or the parties agree to change the contract from a fixed price to a consignment.
In this case, the arbitrator’s calculations were not far from the Respondent’s Account of Sales results.
This case also highlights the importance of a proper account of sales and understanding the distinction between acceptance and rejection, as that decision often determines the rights, obligations, and potential damages available to the parties. For a more detailed discussion of these concepts, see the article titled Accept or Reject linked below.
Additional Resources
To access the full redacted arbitration decision, click here.
Fruit and Vegetable Dispute Resolution Corporation Trading Standards s. 10
Solutions Newsletter Articles
Dealing with Bad Load? Your Options as a Buyer/Receiver Revealed
Discussed, Understood and Agreed (DUA)
Claimant Damages: The Power of an Itemized Accounting of Sales
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