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July 8, 2020

Best Practices When Handling a Buyer’s Order Cancellation

The wrath of COVID-19 continues to blur the lines between buyer and seller liabilities, so it is important to know how to properly handle a buyer’s order cancellation. In the last few weeks, I’ve received a handful of phone calls from shippers wanting to know if it is permissible for their buyer(s) to cancel orders that were in transit since the load had not yet arrived at contract destination. After I climbed back into my chair, I explained that whether the truck has arrived is a moot point; your buyer cannot unilaterally cancel a confirmed order at any time without your consent.

As a shipper, when a buyer negotiates and confirms a sales contract for shipment, exchanging P.O. numbers and/or emailed terms and conditions, it demonstrates a clear meeting of the minds. That being said, when the shipment is still in-transit and the buyer attempts to cancel the order, what are your rights and remedies under PACA in such a situation?

As the seller, you have every right to accept the request from the buyer to cancel the confirmed order, but if you do so, the order is cancelled without recourse back to the buyer. The contract is simply voided altogether. On the other hand, should you wish to enforce the terms of a confirmed and documented sales contract, you’ll need to properly protect your sales contract rights against potential losses. To preserve your remedies, immediately place the buyer “on notice” in writing that you are not in agreement with the cancellation, and they will be responsible for any resulting loss by cancelling their order. 

In your written notice, the buyer must be advised that you will mitigate any potential loss by selling the product “for the account of whom it may concern”, and that you will be holding them (your buyer) responsible for difference between the contract price and actual sale price. When putting your customer on notice, make sure to reflect the number of cartons that were contracted, the agreed upon price, and any other relevant reference number(s) that connects the cancelled order to the sales contract. It is important to maintain the integrity of each individual sales contract as you mitigate losses, so the cancelled orders connect to the original contracted product.

Next, secure a detailed accounting from the company that actually sells your product or make sure to document the new sales contract with the new buyer. Damages are established by deducting the net proceeds (or new sales contract price) from the negotiated price with the original buyer. Any resulting difference is your loss/damages. When your loss is finalized, fully document and communicate that amount to the buyer and submit the invoice reflecting your aggregated loss with supporting documentation for payment immediately to the buyer. If they default or do not pay within the payment terms, you should contact me immediately for assistance in collecting or filing a PACA action within an 18-month period (from when invoice was due).

Finally, remember that damages from a contract cancellation is a two-way street. As the seller, you can also be responsible for damages if you need to cancel your contract for any reason, so be prudent with your buyer when negotiating and committing to volume, fully understanding with eyes wide open the consequences of failure to perform.

Do you have any questions, comments or concerns, or would you like guidance on any disputes? Please feel free to contact Western Growers Trade Practices Department’s Bryan Nickerson at [email protected] or 949-885-2392.