Packer Insight - Who takes the loss on tossed romaine

Contracts between individual parties will determine who foots the bill for romaine made unsalable last week by a broad food safety advisory from the Centers for Disease Control and Prevention.

On Nov. 20, the CDC told consumers to avoid all romaine and asked the industry to stop harvesting and dump all product in the supply chain. Guidance has since been issued by the USDA on how the alert could affect contracts governed by PACA — whoever owned the romaine at the time of the advisory is stuck with it, basically — but contracts may specify otherwise.

“There’s a huge variance depending on the bargaining power and contracts of the parties,” said Larry Meuers, managing member of Meuers Law Firm, which works with produce companies.

“Many of the retailers’ contracts are written broadly enough so that (the CDC advisory) would be considered a food safety event triggering reimbursement of their damages and removing the product,” Meuers said.

While sweeping indemnity clauses are common for retailers, contract terms are often different elsewhere in the supply chain.

“That wholesaler selling to the retailer, the retailer may have an agreement that says, if there’s an advisory on products of the same type, that’s deemed to be a recall and we don’t have to pay for the product and you have to pay our damages — not only are we not going to pay for it, you’ve got to pay us a dollar a case to remove it from the shelves,” Meuers said. “So they’re taking a big loss, but then they go back to the processor and say they’re not going to pay. Well, if they don’t have that same contract term in their contract with the processor, they’ve got to pay the processor.”

The USDA’s Agricultural Marketing Service, the USDA branch that oversees PACA, offered the following scenarios as examples of which party ends up taking the loss on the product if there are no other relevant contract terms.

  • If the advisory comes out before a supplier has shipped an order of romaine, the supplier takes the loss.
  • If the advisory comes out after a retailer has accepted a shipment of romaine, the buyer must pay for the product.
  • If the advisory comes out while a shipment is in transit, the buyer must pay for the produce if the terms of the contract are f.o.b., but if the contract terms are “delivered,” the supplier takes the loss.

Meuers noted that it will take some time to see whether many legal disputes arise from the current situation around romaine.

“We really haven’t heard a lot about it yet, it won’t be for a few weeks or months until people aren’t just paid or they’ve gotten deductions or they don’t want to fulfill a contract,” Meuers said. “(For example), somebody has a contract that they’re supposed to buy 10 loads a week of romaine, and as a result of this incident, the demand for romaine falls in half and now they only want to buy five. It’s going to take a while for those things to play out.”

Michael Droke, a partner in law firm Dorsey & Whitney, commented on how the industry has changed rapidly in the last few decades.

“I remember the days when the packinghouse contract with a grower was ironed out on the back of a pickup truck and a handshake was all it took and everybody knew everyone,” Droke said. “The industry has become much more professional in my tenure ...

“This recall really should be a wakeup call to anybody who’s in the industry to do a couple of key things,” Droke said. “Obviously first, make sure that they have in place a quality management program so that these things don’t occur. The second thing is to understand what their obligations are and what their exposure is if a recall happens that’s caused by them or if it’s not caused by them, so they at least have an awareness, and third they have systems in place to handle a recall should one occur knowing that for many producers ... they don’t necessarily have the capacity to handle 1,000 phone calls in a day or some of the other things that are required in the event of a food-related recall. This really has been, like I said, a wakeup call and a reminder that the exposures can be very significant.”

 

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