At the Fruit and Vegetable Dispute Resolution Corporation (DRC), we often receive inquiries from growers and shippers regarding their continued responsibility for the quality and condition of the product until it reaches the final destination, particularly when the sale is made under Free on Board (FOB) terms. The FOB Incoterm is generally followed by a specific destination or port of entry, such as McAllen, TX, Nogales, AZ, or Windsor, ON, among others.
To clarify this, it is essential to understand the concept of “suitable shipping condition” as defined in DRC’s Trading Standards, Section 19, Subsection 24:
“In relation to direct shipments, ‘suitable shipping condition’ means that the commodity, at the time of shipment, is in a condition which, if handled under normal transportation conditions, will ensure delivery without abnormal deterioration at the contract destination agreed upon between the parties. The seller has no responsibility for any deterioration during transit if no specific destination is agreed upon.”
This definition emphasizes the seller’s responsibility for ensuring the commodity is shipped in a condition that guarantees it will arrive without abnormal deterioration at the agreed destination, assuming normal transportation practices are followed.
Key Concepts:
The term “suitable shipping condition,” often referred to as “Good Delivery” or “Good Arrival,” is particularly relevant for FOB transactions involving perishable commodities. It is important to note that certain restrictive terms may modify the standard FOB terms, such as “FOB acceptance final” or “shipping point acceptance final.”
Under standard FOB terms:
- The seller guarantees that the product will meet the agreed-upon quality and condition requirements at the time of shipment.
- The seller also ensures the product will not undergo abnormal deterioration during transit, provided optimal shipping conditions, such as the correct temperature and handling time, are maintained.
- It is understood that some deterioration is inevitable over time, even under ideal conditions.
However, while the Incoterm defines the transfer of risk and costs, it does not specify when the grower or shipper’s responsibility for the product’s quality and condition ends.
Consider an example where avocados are sold under “FOB Good Delivery McAllen” terms to a buyer in Montreal. Under these terms, the avocados must meet specific allowable defect thresholds upon arrival at their destination. In this case, DRC Good Arrival Guidelines would apply. For an FOB shipping point transaction, the maximum permissible defects for avocados are:
- 15% total allowable defects
- 8% total allowable serious defects
- 3% total allowable decay
These thresholds align with the PACA Good Delivery Guidelines.
A timely inspection by the Canadian Food Inspection Agency (CFIA) revealed that the product had 18% total defects ((C)5% discoloration, (C)4% decay, and (P)9% scars). The reefer download and temperature recorder confirmed that the product was maintained at the correct temperature throughout transit, with no delays reported. Despite this, the inspection indicated that the decay percentage exceeded the allowable limit, meaning the avocados did not meet the “Good Arrival Guidelines.”
Although the avocados exceeded the total average percentage of defects allowed by good arrival, permanent defects,* such as scars, are not computed in the total average defect calculation or checksum. Therefore, the CFIA inspection indicates 9% total condition defects (defects marked with a (C) before the named defect), which suggests that the avocados meet good arrival standards. However, the product still failed to meet good arrival because the decay exceeded the allowable percentage.
*Under FOB Good Delivery/Good Arrival terms, quality/permanent defects, such as defects marked with a (P) before the named defect in the CFIA inspection, like scars, do not count towards the total average defects or checksum.
Conclusion:
The key takeaway is that under FOB terms while the responsibility for transportation costs and risks may transfer at the point of shipment, the seller remains accountable for ensuring the product is in “suitable shipping condition” at the time of departure. The condition of the product upon arrival at the destination is critical to compliance with the terms, and factors like temperature control, packaging, and initial quality must be considered.
We hope this explanation clarifies any confusion regarding the grower/shipper’s ongoing responsibility for product quality under FOB terms. Should you have any questions, please feel free to contact our Help Desk.
