January 23, 2019

Calculating contract compliance when all cartons shipped under a sales contract are not inspected at destination

By only taking a quick cursory review of the USDA inspection, a shipper may miss the full story as to whether there was an actual breach of contract (failure to meet good delivery). You must remember that a USDA certificate may in most circumstances reflect that the commodity failed to grade U.S. No. 1, but that does not mean the shipper failed to meet the terms of the negotiated sales contract under a “NO GRADE CONTRACT”.  Several critical best practices must become second nature for all shipper sales organizations, some of which are highlighted below:

  1. Date of inspection versus date of shipment.
  2. Are the fruits or vegetables unloaded or still loaded on the truck?
  3. Is the inspection a restricted or unrestricted inspection?
  4. What are the range of temperatures?
  5. Are all the cartons that were shipped, available for inspection?
  6. Under comments or remarks on the inspection, does that provide any insight into mishandling?

While the aforementioned are just a few key points, we want to focus on the sometime common situation that not all the cartons shipped, are available at the time of inspection. The guidance provided below will provide a technical formula for calculating percentages of defects for contract compliance purposes when not all of the cartons (full lot) shipped are inspected at destination. As a shipper, we want to assist that there is a thorough representation of what the entire load looks like, not just a select portion of the load. The best way to achieve this is to have ALL the cartons available at time of inspection.  

 PACA (precedent PACA decisions), has historically determined that any cartons not available at time of inspection are considered to effectively have zero condition defects. Therefore, the cartons which were not available at time of inspection with zero condition defects must be averaged with the condition defects disclosed on the USDA inspection in order to complete that full picture as to whether the product meets contract specification. While we know this is a very technical formula, and one you will rarely utilize, the following can be a roadmap when you are negotiating a consideration to adjusting a sales contract from a buyer.

The following formula is utilized to determine the percentage of defects for the entire lot:

# of cartons inspected     X     % of condition defects divided by number of total cartons shipped

As an example: 1248 cartons of cauliflower are shipped, with 384 of the 1248 not available at time of inspection. The 864 actually inspected reflect 21% yellow to brown discoloration with no other defects noted.

Remember:  We concern ourselves with condition defects only, not quality or permanent grade defects. The USDA inspector will differentiate between quality and condition on the USDA certificate.  

The 2-step calculation is as follows:
                Step 1:      864 cartons inspected multiplied by 21 % condition defects equals 18,144
                Step 2:      18,144 divided by 1248 total cartons shipped recalculates the full load percentage at 14.53% (which needs to be rounded up to 15%)
               Outcome:   15% under an FOB No Grade contract would meet contract terms on a 5-day transit to the east coast Meets a no grade contract requirement.

The most important first step is to understand how to read and understand what is on a USDA inspection certificates. There is invaluable information on a certificate, so establish a culture inside your sales organization that promotes ensuring your sales staff know their rights and remedies to protect your company.   Should you be faced with a  situation to interpret a USDA inspection, or when it comes to the formula of recalculating percentages of allowable defects, please feel free to contact Western Growers Trade Practices Department’s Bryan Nickerson at [email protected], 949-885-2392, or Matt McInerney at [email protected], or 949-885-2263.