In this dispute, the arbitrator determines whether the Respondent was responsible for paying the invoices in their entirety based on the Claimant’s arguments: poor product quality delivered due to non-compliance with temperature instructions, CPT terms and an unacceptable return.
The Fruit and Vegetable Dispute Resolution Corporation (DRC) has been creating 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 as administrator of 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 brief relates to a dispute between parties from Mexico and Canada over the quality and compliance of avocado shipments. The Claimant argued that the Respondent be responsible for paying the full invoices as the avocados were shipped in excellent condition according to Codex Alimentarius standards and that the Respondent failed to follow temperature instructions for transit.
The arbitrator’s analysis focused on the adherence to DRC’s Good Arrival Guidelines and the inspection results provided by the Canadian Food Inspection Agency (CFIA). Furthermore, it was noted that the Codex Alimentarius standards for avocados were not discussed or agreed upon between the buyer and the seller, thus making the DRC rules determinative.
Based on the findings, it was determined that the Respondent was not responsible for paying the invoices in their totality. However, the decision was made in favour of the Claimant, highlighting the importance of properly handling the product received in a distressed condition.
This summary provides an essential overview of the arbitration decision and its implications for international commercial disputes.
CASE: DRC File #20948 – Parties Domiciled – Mexico and Canada
SUMMARY OF FACTS:
The Claimant sold the Respondent three (3) loads of avocados on CPT (Carriage Paid To) Laredo, Texas, terms in October and November 2021. All three loads were loaded at origin onto Mexican-registered trucks, which crossed into the United States at the Laredo port of entry. From there, the cargoes continued their transit onward to Montréal, Canada after cross-docking. The value of each load was US$44,480, US$47,040, and US$44,128, respectively.
All three shipments were inspected by the CFIA in a timely manner, showing the following results, which failed DRC’s Good Arrival Guidelines:
| Defect |
First Shipment |
Second Shipment |
Third Shipment |
| Discoloration |
19% |
22% |
23% |
| Scars |
5% |
n/a |
n/a |
Following the inspections, the Respondent offered the Claimant two options: move the cargo to a different receiver or allow the Respondent to handle the cargo for the shipper’s account. The Respondent proceeded to sell these three shipments to one of its clients, which yielded proceeds net of freight, inspection, clearing and lost profits of US$20,286.65. The Claimant was dissatisfied with this and demanded full payment for all three shipments.
SUMMARY OF ARBITRATOR’S ANALYSIS AND REASONING:
The Claimant argues they should receive the full FOB (Freight on Board) invoice value based on their five principal arguments. Each of these were then addressed by the arbitrator as follows:
1. The Claimant shipped excellent quality fruit according to Codex Alimentarius standards.
For avocados, the DRC Good Arrival Guidelines for products arriving in Canada stand at 15% total defects, 8% serious damage and 3% decay. Exceeding any of these three maximum values based on an inspection performed by CFIA personnel proves that the product did not meet DRC’s Good Arrival Guidelines. For each of the three shipments under review in this dispute, total defects exceeded the 15% threshold. They thus failed to meet DRC’s Good Arrival Guidelines.
The Codex Alimentarius standards for avocados speak only in general terms regarding the minimum quality requirements and state that Class I avocados should have only “slight defects in shape and colouring.” The percentages identified in the CFIA inspection reports certainly exceed this standard. In addition, Codex standards were never discussed between the buyer and the seller; therefore, they cannot be considered to prevail over the default provisions of the DRC Good Arrival Guidelines.
2. The Respondent failed to follow the Claimant’s temperature instructions for the transit from Laredo to Montréal. This failure led to surface discolouration upon arrival, as noted in CFIA’s inspection reports.
To be proven, this contention would have needed to demonstrate conclusively that the Respondent failed to follow sound temperature practices during the transit between Laredo and Montréal and that this failure alone was responsible for the surface discoloration upon arrival noted in the inspection reports.
While the possible role of cold airflow, as the Claimant’s expert witness emphasized, is only one of several potential causes for the discoloration discovered during an inspection in Canada.
3. By stating in its invoice that its terms of sale were CPT Laredo, the Claimant maintains that its responsibility for the quality of its shipments transferred wholly and completely from seller to buyer at the moment of transshipment in Laredo.
The Claimant states CPT terms on its invoice to the Respondent. Under the International Chamber of Commerce’s Incoterms, its rules for the use of domestic and international commercial terms, Carriage Paid To (CPT) means that
“the seller delivers the goods – – and transfers the risk – – to the buyer by handing the goods over to the carrier contracted by the seller. Once the goods have been delivered to the buyer in this way, the seller does not guarantee that the goods will reach the place of destination in sound condition, in the stated quantity or indeed at all.”
According to DRC Trading Standards, Section 20, transactions characterized as CFR (Cost and Freight), CIP (Cost and Insurance Paid), and CIF (Cost, Insurance, and Freight) sales are to be treated as FOB sales.
CPT transactions would fall under this same treatment, whereby they would be deemed the same as FOB sales, except that the selling price shall include the correct freight charges to the specified intermediate destination (in this case, to Laredo).
4. Based on its post-sale interviews with other Mexican shippers who had collaborated with the Respondent in recent years, the Claimant is of the opinion that the Respondent is guilty of abusive practices as a way to extract price reductions on purchases from Mexican suppliers.
While this survey of the experiences of Mexican avocado shippers with the Respondent might have been a worthwhile exercise for the Claimant before entering into these three transactions, the arbitrator disinclined to incorporate hearsay as of probative value in the course of this deliberation.
5. Despite the findings of the CFIA inspections, a return which delivers only $0.15 on the dollar is out of proportion and unacceptable.
Of the five arguments raised by the Claimant, the arbitrator finds this argument to be most compelling. Unlike most fresh produce condition problems, lenticel damage becomes less of a problem over time as the natural colour progression proceeds during the maturation cycle. While there are some differences of opinion among experts as to the root causes of lenticel damage, there is universal agreement that it is purely cosmetic and has no adverse effect on the fruit’s internal presentation or eating quality.
Based on the CFIA inspection results, the Respondent would have been within its rights to reject each of these three cargoes entirely.
The Respondent, through its sole customer for these 5,656 cartons of avocados, was able to market the entirety of the three shipments, providing de facto evidence that all portions of these shipments were marketable. The timeliness of these sales, as highlighted by the Claimant, can also be called into question.
Taking as a basis the purchase prices agreed by both parties for each of these three shipments, the arbitrator determined that fair market value, net of total defects and including a 50% addition to incentivize timely sale, would produce the following results:
| |
First Shipment |
Second Shipment |
Third Shipment |
TOTAL VALUE |
| FOB, Original Invoice |
US$44,480.00 |
US$47,040.00 |
US$44,128.00 |
US$135,648.00 |
| Total Defects |
24% |
22% |
23% |
|
| +50% for quick sale |
12% |
11% |
12% |
|
| Total Discount |
36% |
33% |
35% |
|
| Adjusted FOB Value Net of Defects + |
US$28,467.20 |
US$31,516.80 |
US$28,903.84 |
US$88,887.84 |
ARBITRATOR’S SUMMARY DECISION:
As to the claim that the Respondent owes the Claimant compensation for failure to make every reasonable effort to market its fruit on a timely basis, the arbitrator finds in favour of the Claimant and orders the Respondent to pay the sum of US$88,887.84 to the Claimant. As to the DRC filing and arbitration fees, the arbitrator ordered the Respondent to reimburse the Claimant for half of this amount, or US$5,152.50.
Calculation of the amount due from the Respondent to the Claimant is as follows:
| Less than a reasonable effort to market the fruit |
US$88,887.84 |
| The Respondent’s share of the arbitration cost |
US$5,152.50 |
| Total due to the Claimant |
US$94,040.34 |
The Respondent was hereby ordered to pay the Claimant US$94,040.34 no later than 30 days from the date of this decision.
DRC COMMENTS:
We strongly recommend our members to be more familiar with the INCOTERMS. Understanding transit risk, whether products are shipped via ground transportation, maritime, or air, can save you from future headaches. INCOTERMS were developed to avoid costly misunderstandings by clarifying the tasks, costs, and risks in the international delivery of goods from sellers to buyers. Failure to understand and agree to these terms can lead to significant financial losses for you and your valuable business partners.
In a FOB transaction, if the buyer/receiver discovers while unloading the product that it has deteriorated, they should load it back into the truck immediately. After that, the buyer/receiver must request a government inspection to retain the right to reject the load. Unloading the truck for any purpose other than making the product accessible for an inspection is deemed an act of acceptance, and rejecting the product is no longer an option unless the shipper accepts the product back.
We understand that selling products in a deteriorated condition can be complicated, but it is also important to recognize that when a product is accepted, the receiver has a greater responsibility to salvage it and minimize the loss. Therefore, if you receive a product that fails to meet contract terms or fails to meet DRC Good Arrival Guidelines, and you don’t feel like you can do a good job salvaging the product, make sure the seller/shipper understands the situation and try to change the terms of the contract to a consignment transaction.
ADDITIONAL RESOURCES:
To access the full redacted arbitration decision, click here.
Incoterms – Q&A’s – North American Terms vs. INCOTERMS
Dealing with a bad load – Options as a buyer/receiver
Accept or reject – Acceptance and Rejection
