March 1, 2017

Contract Terms of Sale and Disclosure Requirement at Time of Negotiations for Exclusion of any Specific Condition Defects

By: Tom Oliveri

When you are negotiating your sales contract with your buyer, you must disclose and negotiate any condition and quality defects exclusions which will not be a factor for determining contract compliance at destination.  Most sales contracts that Western Growers shippers enter into with their customers are either FOB or Delivered sales No Grade contracts with Good Delivery standards applying. However, with a mutual agreement at time of contract negotiations, you can stipulate specific exclusions by verbalizing and then documenting them as part of the contract.  An example of a long standing and now industry accepted exclusion is on lettuce. It is common place to see on a lettuce sale the additional verbiage “all sales FOB No Grade contract with Good Delivery Standards applying, excluding bruising and/or discoloration following bruising.” During the winter months you may also see lettuce sold with additional exclusions such as “In addition, also excluded from this contract are all effects related to field freeze damage. For example, epidermal peel, blistering, feathering, discoloration of the wrapper leaves and all other related defects.”

These types of terms are very common in the lettuce industry and there have been many pervious PACA Decisions (precedent case law) to support the use of these additional terms. Most recently other commodity groups have also been adopting exclusions to their contracts as well. I have linked to my blog a recent PACA Decision and Order that opines on a number of issues. I would however, draw your attention to the highlighted portion of page 7 of the linked decision where it focuses on the terms of sale for the broccoli and the exclusions to the contact and reads in part… “There is also the issue of the exclusion that appears on Complainant’s passing.  Specifically, the record shows Complainant prepared a passing for the subject load of broccoli crowns that bears the statement:  “Broccoli Exception:  Bruising, discoloration after bruising and hollow stem not scorable.” (Compl. Ex. 3.)  The record also includes a copy of a fax confirmation sheet indicating that Complainant sent the passing to Respondent.  (Compl. Ex. 3a.)  Respondent does not deny receiving the passing or assert that it took exception to its contents.  It therefore appears that the 16 percent average bruising disclosed by the inspection would not be considered in the determination as to whether Complainant breached the contract.  This would reduce the average defects to just three percent, an amount that would not establish that Complainant breached the warranty of suitable shipping condition ever if the inspection was performed at the time of arrival.”

By the shipper disclosing an exclusion to the broccoli on its passing and invoice, where no objection was made by the buyer, the bruising was excluded from the contract and was not added to the calculation for the total percentages of condition defects against good arrival and thus, the broccoli met contract at destination.

The key to negotiating a valid and binding contract is to first verbally provide a detailed summary of all the terms of sale to your buyer. Once you and your buyer have agreed on “special exclusion terms”, it is imperative that you memorialize those terms in a Shipper’s Confirmation of Sale or passing. Once the Confirmation of Sale or passing is received by your buyer without objection, you will now have a firm contract. You are also obligated to have the exclusion language printed on the invoice and you must prepare and send promptly to your buyer. If that exclusion language is missing from either document (passing or invoice), you can jeopardize the sales agreement.

I encourage you to please contact me with any questions you might have on this blog. If you have any other issue regarding sales terms, please contact me directly at 949-885-2269 or