When your buyer is unwilling to renegotiate the original sales price with you on a shipment that fails to meet contract specifications at contract destination and he wants to keep the product, how do you determine what payment should be rendered by the buyer? In other words, what do you do if there is no meeting of the minds on an adjustment or settlement on the shipment? As I have pointed out in a previous blog (Buyers Do Not Have Carte Blanche When it Comes to Paying for Distressed Product), if you are unable to agree on amending the contract, the next step would be calculating provable damages.
Now how do you calculate provable damages? The best method would be to obtain the representative’s prices for the commodity shipped for date of arrival utilizing the USDA Federal State Market News Service for the closest location where the product will be sold. Looking at the price quote range, you would use the average price for product. If you are presented with a detailed accounting from your customer, you can determine the average actual sales price from this accounting. Now by subtracting your customer’s actual sales price from the average Federal State Market News price from the area where the product was sold you will obtain the damages per carton. Remember when it comes to the detailed accounting, all you care about is the average actual sales price. Freight charges and other expenses do not come into play because the Federal State Market News prices already include those costs.
Example: Federal State Market News Range for your commodity is $18-$21.00 per carton (average $19.50). Your customer’s average actual sales price is $15.75. $19.50 – $15.75 = $3.75 of damages. Therefore your customer would be allowed a $3.75 per carton adjustment from the original per carton price.
If no Federal State Market News prices are available for the area to which the product is shipped, a delivered price can be substituted for the Federal State Market News price.
Now what happens if your customer does not supply you with a detailed accounting to determine his average actual sales price? If this is the case you would take the amount of total condition defects shown on the USDA inspection, which caused the breach of contract in the first place, and utilize the Federal State Market News quote if available or the delivered price and get a percentage to determine damages.
Example: Total condition defects reflected on USDA inspection certificate; let’s just say you had 22% condition defects. Federal State Market News or delivered price was $19.50. 22% x $19.50 = $4.29 damages. Therefore your customer will be allowed a $4.29 per carton adjustment from the original per carton contract price.
Should you be faced with a similar situation when it comes to the calculation of provable damages when a settlement cannot be amiably reached with your customer, please give me a call or send me an email, and I would be happy to walk you through these calculations. Should you have any questions on this or any other topic please contact me at 949-885-2269 or TommyO@wga.com.