FDA advisory warnings' impact on contract obligations: reprinted from the U.S. Department of Agriculture's (USDA) Perishable Agricultural Commodities Act (PACA) administrative newsletter, Summer 2007.

Last fall, the U.S. Food and Drug Administration's (FDA) advisory warning about the E. coli outbreak in spinach dominated the news. While the outbreak has ended, buyers and sellers have raised many questions about who should bear the cost for uncontaminated produce that was destroyed due to the FDA advisory.

If FDA issues another advisory in the future, understanding the following contract principles can help you decide what course of action to take.

The first, "warranty of merchantability," is implied in every produce contract, unless it is waived by the parties. This warranty means that the seller implicitly guarantees to the buyer that the produce sold will be of commercially acceptable quality and fit for human consumption.

The second, "allocation of the risk of loss," determines whether the buyer or seller will bear the financial loss if any damage or loss occurs to the produce before the buyer accepts it. This depends on the terms of sale. As most produce is shipped under a Free on Board (F.O.B.) contract, the risk of loss passes from the seller to the buyer once the seller delivers the produce to the carrier. Any damage or loss to the produce during transit that is not caused by the seller is borne by the buyer.

The other common term is a "delivered" contract. In this case, the risk of loss is not transferred from the seller to the buyer until the produce is delivered to the contract destination. Any damage or loss to the produce during transit that is not caused by the buyer is borne by the seller.

The effect that an FDA advisory warning has on contract obligations is illustrated in the following scenarios. Let's assume that the advisory warns U.S. consumers not to eat the affected produce and that there is nothing else wrong with the produce.

Scenario 1

A seller contracts to sell produce to a buyer. Prior to shipment of the produce, the FDA issues an advisory warning that the produce is the subject of an E. coli outbreak.

The effect of the advisory warning here is to make the produce unmerchantable at shipment. Since the advisory was issued prior to shipment, the risk of loss remains with the seller. If the seller ships the produce, the seller may voluntarily recall the produce subject to the outbreak. If the seller decides not to recall the produce, they buyer would have a claim against the seller for a breach of the warranty of merchantability and could reject the produce.

Scenario 2

A seller contracts to sell produce to a buyer. After the buyer has received and accepted the produce, the FDA issues an advisory warning that the produce is the subject of an E. coli outbreak.

In this example, the advisory warning made the produce unmerchantable after it was received and accepted by the buyer. Since the advisory was issued after the buyer received and accepted the produce, the risk of loss shifted to the buyer who must pay for the produce. This result is supported by a legal decision involving Chilean grapes where the presiding officer held that a buyer must pay for the grapes although a "Stop Sale" directive had made all Chilean grapes unmerchantable. The presiding officer stated that the seller should not suffer this loss because the "Stop Sale" directive was issued two weeks after receipt and acceptance of the grapes.

Scenario 3

A seller contracts to sell produce to a buyer. While the produce is in transit from the seller to the buyer, the FDA issues an advisory warning that the produce is subject to an E. coli outbreak.

In this scenario, the advisory warning makes the produce unmerchantable while in transit from the seller to the buyer. It establishes a breach of the warranty of merchantability. However, resolution of this scenario depends on which party bears the risk of loss, which as discussed earlier is also dependent on the contract terms.

If the terms are F.O.B. and the produce is in transit, the buyer bears the risk of loss in transit and must pay for the produce. If the shipment terms are "delivered" or "delivered sale," the seller bears the risk of loss in transit. Since the buyer in this situation has yet to receive the produce, the buyer would likely be able to reject the produce because the risk of loss rests with the seller.

These scenarios discuss possible effects of an FDA advisory on produce contracts, but outcomes may vary depending on specific terms entered into by the parties. For more information or clarification, consult with your attorney or contact the PACA Branch at 800/495-PACA.

RELATED ARTICLE: Fresh Festival 2007

The 2007 Fresh Festival was held in Washington, DC on September 13. The Fresh Festival is an annual reception organized by the United Fresh Produce Association (United) as part of their Washington Public Policy Conference. The event is held on Capitol Hill and gives the produce industry the opportunity to exhibit their products and visit with members of Congrees and Congressional staff. AMI was well represented this year. Attendees included Cheryl Abbate, Mushroom Council; Joe Caldwell, Monterey Mushrooms, Inc.; Bob Darm and Tyler Darm, Yamhill Country Mushrooms, Inc; Pete Gray, Phillips Mushroom Farms, Inc., Charlee Kelly, Monterey Mushrooms, Inc., Fred Recchiutti, Basciani Foods, Inc. and Jack Reitnauer, Modern Mushroom Farm, Inc. Thanks to To-Jo Mushrooms, Inc., Phillips Mushroom Farms, Basciani Foods and McDowell Mushrooms for providing mushrooms and transportation for this year's event.

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