Turning PACA Compliance into Profits for Fresh Produce Importers and Foreign Growers
The Perishable Agricultural Commodities Act offers protections to both U.S. importers and foreign growers of perishable fruits and vegetables. This article reviews the basics of this far-reaching law as well as a few ways that companies can use it to their advantage.
PACA has three main features to protect companies engaged in the produce industry. The law makes it illegal to operate in this industry without a license from the Department of Agriculture and imposes fines of up to $1,200 per violation and $350 per day that a company operates without a license; prohibits various types of unfair trade conduct and provides an administrative complaint procedure as an alternative to enforcement through litigation; and establishes a trust that gives produce sellers a legal priority to payment if their buyers become insolvent or file for bankruptcy protection, thus encouraging only financially responsible businesses to engage in fresh produce trade.
PACA applies to transactions connected with perishable agricultural commodities in interstate commerce. A transaction is a purchase or sale or the negotiation of a purchase or sale. Perishable agricultural commodities are those that are raw or have had only minimal processing, such as freezing or blanching. Interstate commerce refers to fresh produce that enters the stream of commerce with the expectation that it will ultimately move to or through another state, a criterion that is always satisfied when the seller is a foreign entity.
While PACA sets the rules of the road for selling fresh produce in the U.S., it also has an increasingly international application. PACA serves as the foundation for the fair trading standards used to resolve disputes between companies buying and selling produce among the U.S., Mexico and Canada and is also being used more often by savvy foreign growers to protect themselves in dealings with U.S. importers.
This international dimension is particularly important for importers and foreign exporters. Previously, PACA law was a combination of the federal statute, federal regulations, state law and judge-made law. New international applications of PACA must also take into account international laws, such as the United Nations Convention on the International Sale of Goods, and the judge-made law surrounding them.
Using PACA to Your Advantage
The PACA trust is designed to ensure that fresh produce buyers pay sellers, but there are strict requirements that either side may seek to manipulate.
A PACA-licensed buyer does not hold title to the produce until it has paid the seller in full. If the buyer does not pay on time, the seller can file an action against the buyer and its principals (executives, owners, partners, etc.), whose personal assets may be seized to pay the seller. However, the seller can only enforce this trust if two criteria are met.
One, the contract with the buyer must call for payment within 30 days after a shipment is accepted. As a result, sellers/growers will seek to ensure that their contracts provide for payment within this 30-day window to preserve their right to prosecute the buyer for any non-payment, while importers/buyers will work to include payment terms beyond 30 days to avoid such liability.
Two, the seller must meet all of PACA’s notice requirements, which vary depending on whether the seller is also licensed under PACA. If the seller is not licensed, it can be more difficult to meet the requirements necessary to enforce the trust.
PACA and the CISG allow the importer/buyer to reject a shipment if it fails to meet quality and condition requirements. Companies seeking to utilize these provisions should obtain a federal inspection rather than one conducted by an independent entity. Federal inspections are presumed to be accurate and their results are treated as fact, making their accuracy very difficult to challenge. However, parties should also make sure the federal inspection is unrestricted; i.e., the inspector takes samples from the entire load, not just the part accessible while the produce is still loaded. A restricted federal inspection may be trumped by an unrestricted independent inspection and open a party to litigation.
In a consignment deal the consignee does not take title to the produce but merely acts as an agent finding a buyer for, and conducting the sale on behalf of, the consignor. Consignments are usually characterized by payment of a commission to the consignor and the consignee’s deduction from the amount remitted to the consignor of all the costs incurred in marketing and selling the produce. By contrast, in a fixed price deal the buyer/receiver takes title to the produce on acceptance.
Although consignment deals spare importers many risks, they also create risks, which are largely related to the increased responsibilities the consignee owes to the consignor. These include maintaining detailed account records for two years, preserving PACA trust rights for the consignor, and acting with reasonable care and diligence.
This last requirement is deceptive in its simplicity, as importers may be found liable if they act negligently in selling the consigned produce or fail to perform any duty, express or implied. Importers in consignment deals should therefore be scrupulous about obtaining federal inspections and sending notices of rejection to the grower within 24 hours of the arrival of the produce. Growers, in turn, should insist that inspection and notice requirements be met and obtain government inspections before departure from the country of origin. These strategies can not only reduce the chances of litigation between the buyer and seller but may also reveal that any problem that may occur lies with the carrier, which can pave the way for a recovery from the carrier or an insurer.
Recordkeeping under a consignment arrangement can also be a challenge for importers. Ensuring that records are accurate can be expensive, but the cost of failing to meet this requirement can be high as well and may take the form of sanctions, suspension of the importer’s PACA license and other penalties. The best way to avoid such a situation is to set flat rates for any deductibles (e.g., repacking, storage and freight) at the outset, which eliminates the recordkeeping requirement for importers.
Having a strong understanding of PACA regulations and jurisprudence is critical to protecting both importers and growers in cross-border deals. The strategies outlined above are only a few of the many ways produce growers and importers can enhance profits and reduce potential liability.
For more information on the issues discussed in this article or other PACA-related topics, please contact Tiffany Comprés at (305) 894-1012.