ARBITRATION DECISION BRIEF: Whether the Respondent fulfilled his duties according to the DRC Rules after receiving a commodity in deteriorated condition

Continuing with our series of articles summarizing past DRC arbitration decisions. We believe this will help members to better understand how the DRC Dispute Rules and Regulations (R&R) apply in the event of a dispute. DRC Dispute R&R state that all DRC arbitrations are private and confidential. As such, the names of all parties, including arbitrators and companies are not included. A reminder that DRC’s sole role is as administrator of the arbitration process; DRC does not participate in any hearings. Therefore, this summary is based solely on the arbitrator’s written decision and may not reflect important information shared with the arbitrator through written briefs or verbal testimony.

 

Case: DRC File #11138 – Parties Domiciled – United States v. Canada

 

Facts

The Claimant sold two loads of Fresh Tomatoes to the Respondent.

 

First Load (INV#40135)

  • On October 21, 2001, a load of 1,600 cartons of Fresh Medium Tomatoes at US$5.45 per carton for a US$8,750.00 total invoice were sold FOB from California to Montreal, QC. The invoice also included a USD$20 temperature recorder charge.
  • On October 27, 2001, a CFIA Inspection was performed on 1,000 cartons of the 1,600 cartons that were shipped. The results of the inspection indicate the tomatoes were affected by 2% decay, 2% soft, 20% bruising, 8% abnormal color and 3% sunken discolored areas.

 

Second Load (INV#40136)

  • On October 23, 2001, a load of 1,600 cartons of Fresh Large Tomatoes were shipped from California to Montreal, QC.
  • Invoice #40136 indicates the shipment was sold FOB at USD$8.95 per carton for an invoice total of USD$14,320.
  • On October 29, 2001, a CFIA Inspection was performed on the 1,600 cartons. The results of the inspection indicate the tomatoes were affected by 25% total condition defects and 9% decay.

 

Respondent provided an Account of Sale to the Claimant, which contained 33 invoices reflecting the cumulative sale of 3,533 total cartons of tomatoes, whereas only 3,200 cartons of tomatoes were actually shipped.

 

Issue

  • Whether the Respondent fulfilled his duties according to the DRC Rules after receiving a commodity in deteriorated condition.

 

Arbitrator’s Analysis/Reasoning

 

Both transactions in issue were FOB sales, and no evidence has been submitted that either sale was made on anything other than a “no grade” basis.  Under established DRC precedent, when parties to a shipment between the U.S. and Canada do not agree on destination tolerances to be applied, DRC Good Arrival Guidelines will govern. 

 

Invoice # 40135.

Having accepted the tomatoes, Respondent bears the burden to prove breach of contract.  The inspection for invoice #40135 covered only 1,000 of the 1,600 cartons shipped. Under established DRC precedent, we must assume that the 600 missing cartons of tomatoes were free from defects. 

 

Applicable good arrival standards allow a maximum of 15% total defects with no more than 5% soft or decay. The CFIA inspection results on the 1,000 cartons of tomatoes showed 35% total condition defects in the aggregate, including 2% decay, 2% soft, 20% bruising, 8% abnormal color and 3% sunken discolored areas. However, upon factoring in the 600 missing cartons, the cumulative defects are reduced to 21.9%, including 1.25% decay, 1.25% soft, 12.5% bruising, 5% abnormal color and 1.9% sunken discolored areas.

 

Accordingly, Respondent has met its burden of proof that the tomatoes sold under invoice #40135 failed to make good delivery. This leaves the question of the amount of damages due Respondent for the breach of contract. Typically, the measure of damages for breach of contract is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted.

 

In this case, determining appropriate damages based on the evidence submitted is problematic, to say the least. First, Respondent has not provided any evidence of the fair market value the goods would have had upon acceptance had they been as warranted. In the absence of any such evidence, we can use the FOB contract price plus freight as the value of the goods had they been as warranted. The contract price for the tomatoes was USD$8,740.00 and the net freight bill for this load submitted by Respondent was USD$2,890.00. Therefore, the value of the goods upon acceptance had they been as warranted is determined to be USD$11,630.00. 

 

Second, although Respondent has submitted an account of sales of sorts, this accounting is far from detailed. The evidence submitted by Respondent consists solely of 33 copies of invoices evidencing the sale of size 6×6 and size 6×7 fresh California tomatoes and one invoice showing the resale of size 5×6, a size which is not the subject of this dispute.  All 33 invoices have been submitted as a single group exhibit for both invoice #40135 and #40136. Moreover, the 33 invoices submitted by Respondent reflect the cumulative sale of 3,533 total cartons of tomatoes whereas only 3,200 cartons of tomatoes were actually shipped, of which 82 were dumped and are therefore not reflected on these invoices. 

 

The only logical conclusion for the excessive carton count on the accountings is that the submitted invoices likely reflect the sale of 415 cartons of tomatoes that are not the subject of this dispute.  Moreover, even though the invoices reflect the size of tomato sold (either ‘6×6’ or ‘6×7’) any attempt to trace the tomatoes by size is equally unhelpful because the invoices reflect the sale of 1,781 cartons of 6×7’s and 1,752 cartons of 6×6’s, whereas only 1,600 of each size were shipped and even fewer were sold given that 82 cartons were dumped. Thus, without a detailed accounting from Respondent, it is virtually impossible to accurately identify which of the submitted invoices reflects the resale of tomatoes that are actually the subject of this dispute without significant speculation. To engage in such speculation would be improper.

 

Although the evidence submitted by Respondent is seriously deficient, it is not wholly without probative value. In the absence of other evidence, the Arbitrator used the average selling price for medium tomatoes (6×7) reflected on the invoices to calculate a fair return for Respondent’s resale of the tomatoes. The average per carton selling price is CAD$8.14 [CAD$14,497.00/1,781 cartons], which converts to USD$5.12 based on an exchange rate of 0.62940, the average rate in effect between October 29 ,2001 and November 9, 2001. Therefore, total amount returned to Respondent for invoice #40135 was determined to be USD$8,017.92 [USD$5.12 x 1,566 cartons actually sold].

 

Accordingly, based upon the evidence submitted, Respondent’s damages for invoice #40135 are USD$4,311.49, itemized as follows:

          

  1. USD$3,612.08, which is the difference between the value of the tomatoes upon acceptance had they made good arrival (USD$11,630.00) and the amount determined to have been returned to Respondent for its sale of the tomatoes (USD$8,017.92).
  2. Inspection fee (CAD$475.71 x .62940) = USD$299.41.
  3. Handling/brokerage fee: USD$400.00.

 

When Respondent’s damages are deducted from the total invoice price of USD$8,740.00, Respondent is liable to Claimant for USD$4,428.51 for invoice #40135. The Arbitrator noted that Respondent had not submitted evidence of any other charges incurred in connection with the breach, such as repacking or dump charges, and therefore no amounts for these charges can be awarded. 

 

Invoice #40136.

The inspection for invoice #40136 covered the entire 1,600 cartons shipped. There is no dispute as to the timing or validity of the inspection. 

 

As stated above, applicable good arrival standards allow a maximum of 15% total defects with no more than 5% soft or decay. The CFIA inspection results on the 1,600 cartons of tomatoes showed 25% total condition defects in the aggregate, including 9% decay. Based on the inspection, this load failed to make good delivery. 

 

Accordingly, Respondent has met its burden of proof to establish breach of contract. This leaves the question of the amount of damages due Respondent for the breach. The evidence submitted by Respondent in connection with invoice #40136 suffers from the same deficiencies as the evidence submitted in connection with invoice #40135, as explained above. Accordingly, the damages analysis used for invoice #40135 equally applies here. 

 

The value of the tomatoes upon acceptance had they been as warranted is determined to be USD$17,260.00, which is the contracted invoice price of USD$14,320.00 plus freight charges of USD$2,940.00 per the freight invoice submitted by Respondent. 

 

Based on the invoices submitted, Respondent received the cumulative amount of CAD$13,398.00 for its sales of 1,751 cartons of Large (6×6) tomatoes. The average per carton price was CAD$7.65, which converts to USD$4.81 based on the average exchange rate in effect between October 29, 2001, and November 9, 2001. Of the 1,600 cartons of 6×6 tomatoes sold under invoice 40136, 48 were dumped leaving a total of 1,552 cartons to be sold. Therefore, the amount determined to have been returned to Respondent for its sale of 6×6 tomatoes is USD$7,465.12 [USD$4.81 x 1,552]. 

 

Accordingly, based upon the evidence submitted, Respondent’s damages for invoice #40136 are USD$10,374.86, itemized as follows:

          

  1. USD$9,794.88, which is the difference between the value of the tomatoes upon acceptance had they made good arrival (USD$17,260.00) and the amount determined to have been returned to Respondent for its sale of the tomatoes (USD$7,465.12).
  2. Inspection fee (CAD$285.92 x .62940): USD$179.98.
  3. Handling/brokerage fee: USD$400.00.

 

When Respondent’s damages are deducted from the total invoice price of USD$14,320.00, Respondent is liable to Claimant for USD$3,945.14 for invoice #40136. The Arbitrator noted that Respondent had not submitted evidence of any other charges incurred in connection with the breach, such as repacking or dump charges, and therefore the Arbitrator did not award amounts for these charges.

 

Arbitrator’s Decision

The Respondent was required to remit to Claimant the amount of USD$8,373.65, plus its DRC arbitration commencement fee of USD$535.00 for a total award of USD$8,908.65

 

DRC Comments

We cannot stress enough the importance of having a representative sample of the load (more than 75%) available for an inspection. We understand that sometimes, an opportunity to sell part of the load at a good price comes along but, when that happens, it is better to communicate with your supplier to confirm it is ok to get a partial inspection.

 

Additionally, when claiming damages, it is very important to present an itemized account of sales showing the date, time, price and volume sold per lot, and when subtracting expenses such as freight, inspection cost, storage, brokerage fees, etc., that all these expenses are supported by the respective bill or invoice.

 

DRC Trading Standards: