Produce Pointers: Inspections, grades, compliance, and invoices

The Problem

Inspection certificate says, “fails to grade U.S. No. 1 account condition.”

The Key Point

Failing to grade U.S. No. 1 at destination doesn’t necessarily mean the seller breached.   

The Solution

Review all the facts when assessing responsibility.

Q: We are an importer-shipper based in McAllen, TX. Occasionally our customers will send us USDA inspection certificates indicating the product we shipped “fails to grade U.S. No. 1 account condition.” Does this mean we breached the sales agreement and customers can take a deduction from our invoice?   

A: Your confusion is understandable. If your product “fails,” that certainly doesn’t sound positive. In fact, however, you may still be entitled to your full invoice price.  

The first question we typically ask is, did you sell the product with a U.S. No. 1 grade? If this is disputed between the parties, does the sales confirmation or purchase order specify graded product? Is the product labeled U.S. No. 1? Are there texts or emails showing you agreed to provide graded product?

If not, you were under no obligation to meet a specific grade standard and your customer’s decision to ask the USDA to inspect the product on a U.S. No. 1 basis doesn’t change your sales terms.

Most of the transactions we see at Blue Book involve fresh produce sold without a grade. And when you sell product without a grade, a key difference is that quality defects—those that do not change over time, such as scarring or being mishappen—do not score against the PACA Good Arrival Guidelines used to assess whether the product arrived at the contract destination without abnormal deterioration as required by the warranty of suitable shipping condition (7 C.F.R. Sec. 46.43.(j)).  

So, presuming the product was sold without a grade, when reviewing the inspection certificate for a possible failure to make “good arrival” (as opposed to a failure to make grade), it’s important to only score condition defects against the relevant guideline.  

If the total percentage of condition defects is within the guideline, then your product complied with the warranty of suitable shipping condition and you are entitled to full payment of your invoice in the absence of some other breach (e.g., wrong size, wrong pack, merchantability, etc.).

If the total percentage of condition defects is within the guideline, then your product complied with the warranty of suitable shipping condition and you are entitled to full payment of your invoice in the absence of some other breach (e.g., wrong size, wrong pack, merchantability, etc.).

What’s more, even if you did sell the product on a U.S. No. 1 basis, it’s important to remember that if the product was sold on an f.o.b. (shipping point) basis, technically speaking, you only committed to providing product that would meet the U.S. No. 1 grade standards when title to the product transferred at shipping point, not days later when the product was inspected at destination.

For example, the U.S. No. 1 grade standard for strawberries calls for no more than 10% average defects, 5% serious defects, and 2% very serious defects.

If you were to sell a load of U.S. No. 1 strawberries on an f.o.b. basis for delivery in Chicago, an inspection certificate completed in Chicago three days after loading showing total average defects of 12% (let’s say 6% condition defects and 6% quality defects) would not be sufficient to establish a breach of the sales agreement because some deterioration in transit would be expected.

The PACA Good Arrival Guidelines for strawberries, in fact, provide that average defects of 13% three days after shipping are “not abnormal.”      

Admittedly some of the details are confusing. Meeting the grade standard and complying with the warranty of suitable shipping condition are actually two different warranties, and each must be assessed on their own merits. 

But the key takeaway is simple: do not rely on “fails to grade” language on a USDA inspection certificate as conclusive proof that your product failed to comply with the sales agreement. A review of all the relevant facts is needed.