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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 #19758 – Parties Domiciled – United States v. Canada

 

Facts

The Claimant sold two loads of Mexican broccoli crowns to the Respondent.

 

First Load

  • Confirmation of Sale dated June 27, 2016, shows the Claimant sold 1,248 boxes of broccoli crowns to the Respondent.
  • Invoice #43030 indicates the shipment was sold FOB No Grade Contract, at USD$8.75 per box for a total invoice price of USD$10,920.
  • On June 30, 2016, the shipment arrived at the Respondent’s warehouse in Toronto, Ontario. The BoL shows the shipment was received under protest due to the poor quality of the product (hollow stem). It also mentions there was not much ice in the boxes and no ice on top of the pallets.
  • A CFIA Inspection was requested and performed the same day that product arrived. The results of the inspection indicate the broccoli crowns were affected by 2% decay, 9% bruising, 2% discoloration, 3% discoloration of cut end and 24% decay at stem end. In addition to the results, the inspector also noted that a trace amount of pack ice accompanied most cartons, and some cartons were accompanied with no pack ice.
  • Respondent supplied to Claimant an account of sale for the 1,248 boxes, reflecting a negative return on CAD$7,116.71. This was the result of three rejected sales due to the quality of the product and the deduction of freight, customs charges, inspection, quality control, dump fees and storage. 

 

On this load, Claimant sought 60% of the original invoice value amount (USD$6,552), less the cost of the CFIA Inspection (CAD$236.70) for a total amount of CAD$6,315.30. The Respondent sought CAD$7,116.70 plus DRC fees of CAD$928.86 plus interest in the amount of CAD$498.12 for a total amount of CAD$8,543.68.

 

 

 

Second Load

  • Confirmation of Sale dated July 11, 2016, shows Claimant sold 1,344 boxes of broccoli crowns to the Respondent.
  • Invoice #43220 indicates the shipment was sold FOB No Grade Contract at USD$8.75 per box for a total invoice price of USD$11,424.
  • On July 19, 2016, the shipment arrived at the Respondent’s Warehouse in Toronto, Ontario. On arrival an in-house inspection was performed, indicating the broccoli crowns were affected by 4% yellowing, 5% enlarged buds, 8% bruising, 12% hollow stem, 6% discoloration, 6% brown cut stem and 3% decay.
  • On July 20, 2016, the Respondent requested a CFIA inspection which was performed the same day. The results of the inspection indicate the broccoli crowns were affected by 5% bruising and 45% hollow stems. The inspector also noted that nearly all skids showed 5-7 inches of top ice and all flaps open and nearly all skids showed a top layer of skids with pack ice remainder of cartons on skids show no pack ice.
  • Parties agreed on a price adjustment in the amount of USD$0.65 per box, thereby reducing the invoice price to USD$10,550.40 (equivalent to a unit price of USD$7.85/box). 
  • On August 3, 2016, communication between the parties shows that the Respondent indicated that the problem with icing had led to decay, which in turn led to rejections, estimating the damage to be potentially 9-10 pallets and advising the Claimant not to pay its supplier for this load “until we talk.” The Claimant responded, demanding payment in full, pending final resolution of any claim that might be made against this load. Respondent replied that he would not clip any bills but wanted to talk before remitting any funds.
  • On October 6, 2016, the Respondent stated it had a problem with the load. The Claimant rejected responsibility for any issues related to icing, indicating his belief that this problem was the responsibility of the truck.

 

On this load, Claimant sought payment in full of the original invoice of USD$10,550.40. The Respondent sought CAD$4,110.60 plus DRC fees of CAD$928.86 plus interest in the amount of CAD$233.88 for a total amount of CAD$5,273.34.

 

Issues

  • Whether the Respondent fulfilled his duties according to the DRC Rules after receiving a commodity in deteriorated condition.
  • Whether there was an agreement between the parties that the condition defect of hollow stew would be scorable.

 

Arbitrator’s Analysis/Reasoning

First Load: The CFIA inspection results for this load are condemnatory. The 40% average condition defects identified during this inspection far exceed the tolerance set by the DRC Good Arrival guidelines.

 

Respondent’s description of the quick return of the three consignments it attempted from this load is consistent with what one would expect with product showing this degree of damage. Claimant’s argument that the 60% of ‘sound’ product in the load should have been salvaged via re-packing and sold at normal market prices does not reflect the reality of condition problems of this magnitude.

 

Condition defects are, by definition, progressive, getting worse over time; this means that the 40% average defects identified by CFIA could normally be expected to grow to 45% or 50% or more over the week following the inspection date; this would be particularly true for product which moves from Respondent’s cold storage to ambient temperature, then to customer’s conveyance and on to customer’s place of business, all under the warm temperatures of mid-summer Toronto (with highs ranging from 73°F to 86°F during the 15 days following the load’s arrival in Toronto).

 

It would be unreasonable to expect even the most experienced and specialized re-packer to re-work product with such a high percentage of condition defects and restore the re-packed portion to ‘mostly market’ quality for the 7-10 days needed to move the product through the supply chain. Moreover, Claimant does not appear to have requested such a re-pack effort prior to the time when the cargo was dumped. While I find the final outcome of this shipment to be credible, I must note that, procedurally, Respondent failed to comply with a basic DRC rule: in the case of a dumping event, it is the responsibility of the receiver (here, the Respondent) to obtain a dumping certificate from a reliable third-party inspector (here, CFIA). While Respondent’s account of sale for this load includes CAD$2,745.60 for dump costs, and CAD$289.35 for “Dump CFIA Witness”, no CFIA dump certificate was presented in evidence. Respondent’s failure to meet this dump certification requirement will be an important factor in the calculation of damages for this item.

 

Second Load: This case bears a close resemblance to the case decided by PACA in 1994 (Anthony F. Martori, et al., 53 Agric. Dec 887). The PACA ruling concerned a case where hollow stem was found on 37% of the load of broccoli, with a range from 7-79%. Quoting from the PACA finding, “Even though the broccoli had no decay, the huge percentage of hollow stem defects indicate that the broccoli was not merchantable…In this case broccoli with 37% hollow stem can hardly pass without objection in the trade.

 

Therefore, we find that complainants breached their contract with Respondent.” If such was true in the case of 37% hollow stem, such would be all the truer in the case at hand, where the level of hollow stem attained an average of 45%. As to Claimant’s contention that there existed a pre-sale agreement excluding hollow stem as a cause for claim, I take note of the affidavits furnished by individuals connected to Claimant but find no such corroborating documentation from Respondent.

 

Where default rules are waived by the parties to a transaction, DRC rules require that such waiver be formally recognized in writing by both parties. While there may well have been a verbal agreement with regard to this issue, the lack of bi-lateral recognition of such an agreement precludes me from giving it credence in this deliberation. While I am thus pre-disposed by precedent to consider Respondent’s counterclaim favorably, I find that consideration complicated by several issues:

  1. Calculation of damages in the PACA case requires a comparison of the value that would have been received for the product had it arrived in merchantable condition, set against “the actual gross proceeds of a prompt and proper resale”. Regrettably, Respondent has furnished no adequate accounting for this load of broccoli.
  2. While Respondent was quite vocal in its initial communications with Claimant regarding the lack of top ice (for which it received an allowance), there was no comparable urgency shown in declaring intent to reject this load, or to handle the load for shipper’s account (such as was clearly the case with Item #1 above). Indeed, I find only one message from Respondent, dated 3 August (14 days after the initial inspection), where Respondent indicates to Claimant that a problem exists with the load which might involve as many as 9-10 pallets. The next email exchange submitted in evidence is dated 6 October, once again indicating that “WE HAVE A PROBLEM WITH THIS LOAD”. Of course, neither of these two email exchanges can be construed as constituting timely notice of Respondent intention with respect to this load.
  3. Respondent’s Quality Intake Report, dated 19 July, describes the general appearance of this load as “GOOD”. Comments by the inspector read as follows: “Found some bruising, some yellow and discolored crowns. But in overall is ok. Boxes do not have ice. Only top pallet/boxes have a lot of ice. Boxes are open lids. Pallets need to be re-iced.”

 

These three issues all serve to mitigate the force of Respondent’s arguments regarding the merchantability of the load and will be taken into consideration in the calculation of damages for this item.

 

Arbitrator’s Decision

For First Load, the Arbitrator has rejected Claimant’s claim according to the logic detailed in the above Arbitrator’s Analysis/Reasoning and found in favour of Respondent’s counterclaim in the counterclaimed amount of USD$8,543.68, less a 25% reduction in value in consideration of Respondent’s failure to obtain a valid dump certificate upon disposal of this load, for a net award in the amount of CAD$6,407.76.

 

For Second Load, the Arbitrator has rejected Claimant’s claim, according to the logic detailed in the above Arbitrator’s Analysis/Reasoning and found in favour of the Respondent’s counterclaim. Unfortunately for Respondent, its failure to notify Claimant of a rejection of this cargo constitutes acceptance of the load, carrying with it, under DRC rules, a responsibility to provide a full and fair accounting of sale. No such accounting of sale was submitted as documentation for this file.

 

While the arbitrator did not doubt that some discounts were required to move the hollow stem portion of the load into the market, it was impossible to assess adequately what the extent of those discounts might have been, or what monetary damages Respondent might have incurred in the process. Lacking any firm basis to rule otherwise, I find in favor of Claimant, in the amount of USD$10,550.40. Had Respondent followed DRC rules with respect to timely notice and preparation of account of sale, the decision on this item could well have been considerably different.

 

 

DRC Comments

Regarding the first load, the Respondent followed DRC Trading Standards by giving timely notice of a problem upon arrival, requested a CFIA inspection in a timely manner, claimed damages by providing the Claimant with an acceptable account of sales showing reasonable sales/rejections and deducting the costs incurred as a result of the breach of contract.

 

Regarding the second load, the results of the CFIA Inspection indicate that more than one-third of the shipment was affected by hollow stem which is a quality/permanent defect, and quality/permanent defects are not normally considered in computing total percentage of defects on transactions where no grade was agreed upon. When quality/permanent defects are substantial, they affect the warranty of merchantability. The warranty of merchantability is a warranty that asserts that the product is fit for the intended purpose for which they are sold.

 

While the Respondent requested a CFIA Inspection in a timely manner, showing that broccoli crowns were affected by 45% hollow stem, the arbitrator noticed that the Respondent was only complaining about the lack of ice, but otherwise the product looked good. Additionally, the Respondent failed to properly prepare an account of sales, which prevented the arbitrator from understanding how the hollow stem affected their sales.

 

For more information regarding the sections of DRC Trading Standards applied to this dispute, refer to the following sections: