July 15, 2020

Trade Practices: Protecting Your PACA Trust Rights In a Pandemic

Recently, a California grower-shipper sent me a copy of a March invoice for a properly executed transaction on which the wholesale buyer had written “P.O. canceled due to COVID-19.”

The amount of the invoice was less than $650 for 35 cartons of three specialty items, seemingly destined for foodservice consumption. The reaction by the buyer was indicative of the chaos that ensued immediately after restaurants all over the country were forced to close because of shelter-in-place regulations surrounding the novel coronavirus pandemic. The situation has settled down since then with restaurants and foodservice operations beginning to open, retailers returning to some semblance of normalcy and the world’s population learning to live a new normal.

Much has changed and will continue to change but the regulations governing produce transactions and the preservation of one’s rights under the Trust Provision of the Perishable Agricultural Commodities Act (PACA) remain the same. There is no doubt that many restaurants and wholesale distributors serving that sector are facing hardships and some will continue to struggle moving forward. But shippers must continue to be diligent about who you sell to and how you protect your rights.

In the example above, the invoice was sent back to the shipper on the day it was received. The shipper could have expressed regret over the buyer’s unfortunate circumstances and promise to work with the company by offering to change the original sales contract or offering to extend payment terms. While tempting, that would have been the wrong thing to do!

The PACA Trust was enacted 35 years ago to give sellers of fresh produce priority status in the event of a buyer’s bankruptcy. But with that advantage came a specific set of guidelines that you must follow. In tough times such as these, some buyers will ask for extended terms or a “break” on a particular invoice.

Be sure you follow the PACA Trust guidelines as you field those requests.

First and foremost, your payment terms must be consistent across all your sales documentation (sales confirmation, passing, invoice). Inconsistency can put your company in harm’s way as you seek payment on a sales transaction. A best practice is to review each of those documents every time for consistency. If you use PACA PROMPT, which is defined in the statute as NET 10 payment terms, due within 10 days of receipt of the goods at contract destination, make sure there is no ambiguity or conflicting terms anywhere else. For example, you may have “PACA PROMPT” on the top right corner of your invoice but conflicting standard language on your sales confirmation stating “payment due within 30 days of receipt”. This can cause confusion with your buyer, payment delay, and, most importantly, invalidate your Trust status and therefore your ability to enforce your Trust rights. Be crystal clear, accurate and consistent on payment terms.

Also, it is important to note that payment terms do not need to be printed on your Bill of Lading (BOL) and shouldn’t be. If you are working with a third party, have them omit the payment terms on that document, which reduces your exposure, as some courts have interpreted bills of lading as a warranted billing document when disputes arise.

It is also necessary to make sure there is a mutual binding agreement between the seller and buyer when payment terms are extended beyond NET 10 terms. If you agree to NET 15, NET 21 or even NET 30 days, make sure you have a signed agreement, prior to the sales transaction, by both parties on which those specific terms are spelled out as the contractual obligation. And it can’t be emphasized enough that you should NEVER memorialize payment terms verbally or in writing beyond 30 days. Doing so typically waives your PACA Trust Rights and makes your company an unsecured creditor for that transaction. Remember, the sale is not complete until the money is in the bank.

Though granting payment extensions or working out payment plans can be accomplished while preserving your PACA Trust, it rarely works out well and should be avoided except in the rarest of circumstances. The key is that no extension of terms or even informal discussions about such a possibility can occur until AFTER the buyer is in default. And the original payment terms have to be 30 days or less, and so stated in such a manner to make that transaction eligible for PACA Trust protection.

For example, if the sales transaction is sold as PACA Prompt and the buyer has not paid within the prescribed time, the seller can accept a partial payment or agree to a payment schedule because the buyer has defaulted. So, after a buyer defaults on the original payment terms, the seller may agree to extend payment terms and still maintain their trust rights. Please refer to the “PACA Trust” section on PACA’s website for further guidance on preserving trust rights.

In the example above, it is prudent that the seller should not discuss altering any terms of the transaction until it is in default. While it might seem difficult to play hardball in these trying times, preserving one’s rights under the PACA requires the seller to follow the regulations to the letter.

If you’re a Western Growers Regular member and would like your sales documentation reviewed for consistency or if you would like guidance on any problem files or disputes, please contact me in the Western Growers Trade Practices Department’s at [email protected] or 949-885-2392