December 6, 2016

PACA Jurisdiction on Contemplation of Interstate/Intrastate Commerce Sales contracts and percentage of Allowable permanent Defects allowed on an FOB Sale

By: Tom Oliveri

I have been requested by some of the readers of this blog to explain the background by which the Perishable Agricultural Commodities Act (PACA) guidance to the produce industry based on the Act.  My reply is although the PACA regulations delineate the definitions of terms and other aspects of responsibility throughout the supply chain, not every disputed situation is black and white and therefore cannot be fully detailed by simply a reference to the PACA regulations. In essence, while the vast majority of the regulations were established many decades ago, the interpretation of the regulations is always evolving. It is for this reason why PACA Formal Decisions are so important, as they set precedent thereby providing the day to day administration and guidance of PACA.

The first example in this Decision with the relevant portion highlighted in blue , details how interstate commerce or contemplation of interstate commerce is viewed, thus allowing for PACA jurisdiction over disputed produce transactions.   In the sample PACA Decision not all of the sales transactions in the formal proceeding crossed state lines to establish irrevocable evidence of interstate commerce.  However, the PACA ruled that even though some shipments did not cross state lines, the burden of interstate commerce can be met by proving that the shipments were sold in, or in contemplation of interstate commerce by providing adequate evidence of one of the following:

(1) the shipments actually moved from a state to any place outside that state;  

(2) the shipments moved between points within the same state but through any place outside that state;  

(3) the transactions were negotiated by parties located in different states;  

(4) the parties entered into the transactions contemplating that the shipments would travel in interstate commerce;  or

(5) the shipments are of a type of produce that commonly moves in interstate commerce and were shipped for resale to or by a produce dealer that does a substantial portion of its business in interstate commerce.

If one of these is met, the PACA has jurisdiction!

The second example  concerns the number of grade defects a seller would be reasonably allowed under an FOB no grade contract, and still be compliant under the contract at  destination.  First, all grade defects or quality defects are permanent defects, meaning that they will not change over time.  As an example, let’s say you have 25% grade defects at shipping point; those 25% defects will be consistent at contract destination. Only condition factors increase with time; grade defects are a constant.

The sample PACA Decision details how excessive grade defects, which I have highlighted the relevant portion of the Decision in the link in yellow, caused a breach of the implied warranty of merchantability.  Therefore, for produce sold without a grade specification, where the documented defects are sufficiently extensive, such evidence can establish that the produce is not merchantable. To be merchantable, the rule of thumb is that permanent defects should not exceed one third or 33%.  This should always be kept in mind when negotiating sales contracts.

So, we as an industry look to the PACA Decisions that establishes “precedent” and then serves as a roadmap as to how the PACA offers guidance to the Trade. As notable Decisions are issued, I will share those decisions in future blogs.

If you have any questions, please contact me directly at or 949-885-2269.