Are you prepared when there are unexpected shortfalls of available produce you have contracted and agreed to ship to your customer? Whether it is a short-term ad commitment or an extended vendor agreement for a routine quantity of produce to be shipped, it is important to know your obligations and, more importantly, how you and your customer will handle any potential shortfall of supply. If you do not plan for such a contingency, you could expose yourself to potential liability for a failure to ship.
On short-term sales commitments, the threshold question to ask is: “Is there a contract between the parties?” Under normal circumstances, a shipper is deemed to have entered into a binding buy/sell contract when pick-up and P.O. numbers are exchanged. This represents compelling evidence that there was a mutual meeting of the minds where the contract calls for a specified number of cartons or multiple loads to be shipped at an agreed-upon price.
What if there are no other disclosures or contingencies documented in writing and you unexpectedly fall short of supply and are unable to ship to your customer as promised? Be prepared to take these next action steps:
1. Early communication and email documentation is critical. When you become aware that you as the shipper will not be able to cover your full commitments, immediately pick up the phone (and subsequently confirm with an email) and explain to your customer the extenuating circumstances that preclude your ability to ship. In many cases, it will be a local geographical situation that is affecting all shippers of that commodity. This situation should therefore be known to all buyers and make communication easier.
2. Document your production shortfall(s) and detail why you were unable to ship the full quantity. Offer to ship on a prorated basis some percentage of your harvested production. In circumstances where you have a well-developed business relationship with your customer, the conversation with proper (and early) disclosure of the situation will certainly be much appreciated, and may go a long way to mitigating the situation. If the customer is a new relationship, sometimes the customer can be less flexible and could demand full replacement cost of the produce not shipped. In this situation, the buyer calculates the damages by documenting full replacement cost and then subtracting the agreed-upon contract price with your company, the difference resulting in damages due the buyer from the shipper.
3. As part of your due diligence, make certain you thoroughly read any vendor agreement to determine how a shortfall in production and any failure to perform under the contract agreement will be handled. To protect against these types of damages, you should consider a provision at time of negotiations that stipulates the contract performance is subject to availability of adequate supplies, which could then allow you to prorate the shipments based on what supply you do have available, or in a case of a crop failure, cancel the order. Keep in mind that any stipulation to a contract relating to product availability or adequate supplies must be discussed when negotiating the transaction and detailed in an email to your customer or on a confirmation of sale. To avoid this situation, the following suggested language can be added to your sales confirmation or emailed to your customer:
“This sale is subject to (shipper’s company name) having product available. (shipper’s company name) shall not be required to supply product when sufficient supplies of product are unavailable to ship due to unforeseen weather conditions that affect yields, the elements, strikes, labor troubles, power shortages, truck shortages, water shortage, national emergencies, governmental guidance, quarantines, natural disasters, and/or any other events that are beyond the reasonable control of (shipper’s company name)”
To avoid potential pitfalls like this, consider making such extended agreements with buyers that you have established relationships with, and you have confidence that those buyers are willing to work with you in the event you are short on supply. Pick your opportunities to grow your business, but you must document and set expectations prior to making the agreement and prior to shipment.
If you are going to negotiate sales for future dates prior to the harvest season, then I strongly recommend that you place your customer on notice, both verbally and in writing that “availability of expected supplies at time of first shipment is a contingency of contract performance. Any crop shortage/failure will be basis for voiding the agreement.”
Be prepared to execute under the terms of the sales agreement, but plan ahead and prepare yourself and your customer in advance in case of an unexpected shortfall.
Have any questions, comments or concerns that you would like guidance on? 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] 949-885-2263.