PACA: Allocation of Risk of Loss from Romaine Food Safety Alert Depends on Terms of Sale
UNITED STATES - While we are still in the thick of the romaine E. coli outbreak, leaders from around our industry are already stepping up and attempting to settle matters that will help with inevitable outbreaks in the future. The Western Growers Association recently put out an educational piece intended to create a conversation between buyers and sellers regarding the legal ramifications of romaine that was received, in-transit, or being prepared for shipment.
“The primary purpose of this informational piece is to provide guidance to both the seller and buyer communities,” Matt McInerney, Sr. Executive Vice President of Western Growers, told me. “Western Growers tips its hat to the PACA division for providing the guidance that will at least give both parties standing to understand, from a technical standpoint, compliance and responsibilities. I think this piece gives a line of sight and an opportunity for both parties to know where they stand. In most cases, the buyers and sellers already have a very well-established relationship, so we’re using this piece to bring about conversations that will hopefully reach amicable conclusions regarding these issues.”
Within said piece, Western Growers provides insight on the gray areas seemingly unnavigable in the midst of an outbreak crisis, zeroing in on the allocation of risk and how it depends on the terms of sale, which includes the complexities of F.O.B contracts and shipping dates and damage or loss to the produce.
Western Growers includes the U.S. Department of Agriculture’s Perishable Agricultural Commodities Act Division’s examples to bring clarity, including the following scenarios:
A seller contracts to sell produce to a buyer. Prior to shipment of the produce, the FDA issues an advisory warning that the produce is the subject of an E. coli outbreak.
In this instance the effect of the advisory warning renders the produce unmerchantable at shipment. Since the advisory was issued prior to shipment, the risk of loss remains with the seller. If the seller ships the produce, the seller may voluntarily recall the produce based upon the advisory. If the seller decides not to recall the produce, the buyer would have a claim against the seller for breach of the warranty of merchantability and could reject the produce.
A seller contracts to sell produce to a buyer. After the buyer has received and accepted the produce, the FDA issues an advisory warning that the produce is the subject of an E. coli outbreak. In this instance, the advisory warning rendered the produce unmerchantable after it was received and accepted by the buyer. Since the advisory was issued after the buyer received and accepted the produce, the risk of loss had shifted to the buyer who must pay for the produce. This result is supported by a legal decision involving Chilean grapes where the presiding officer held that a buyer must pay for the grapes although a “Stop Sale” directive had made all Chilean grapes unmerchantable. The presiding officer stated that the seller should not suffer this loss because the “Stop Sale” directive was issued two weeks after receipt and acceptance of the grapes.
A seller contracts to sell produce to a buyer. While the produce is in transit from the seller to the buyer, the FDA issues an advisory warning that the produce is subject to an E. coli outbreak. In this scenario, the advisory warning renders the produce unmerchantable while in transit from the seller to the buyer. The advisory establishes a breach of the warranty of merchantability. However, resolution of this scenario depends on which party bears the risk of loss which, as discussed earlier, is dependent on the contract terms. If the terms are F.O.B. and the produce is in transit, the buyer bears the risk of loss in transit and must pay for the produce. If the contract terms are “delivered” or “delivered sale,” the seller bears the risk of loss in transit, and since the buyer in this situation has yet to receive the produce, the buyer would likely be able to reject the produce because the risk of loss rests with the seller.
These scenarios discuss the possible impact of an FDA advisory on produce contracts, but outcomes may vary depending on specific terms entered into by the parties.
To read Western Grower’s piece in its entirety, click here. For more information on contract obligations, read PACA Guidance on Commercial Contracts Because of FDA Advisory.
While this guidance offers clarity to both buyers and sellers, will it serve as the tool our industry needs? Keep following AndNowUKnow as we continue to navigate the latest outbreak.