Ag Contracts – What if Goods Don’t Conform to the Contract?

Overview

Not all contractual transactions for agricultural goods function smoothly and without issues.  From the buyer’s perspective, what rights does the buyer have if the seller breaches the contract?  One of the ways in which a breach can occur is if the contracted-for goods fail to conform to the contract requirements.  That can be a particularly important issue for contracts involving agricultural goods.  Ag goods, such as crops and livestock, are not standard, “cookie-cutter” goods.  They vary in quality; size; shape; germination rate; and moisture content, for example.  All of those aspects can lead to possible non-conformity issues. 

Non-conforming agricultural goods – when is a nonconformity significant enough to constitute a breach.  Contracts and non-conforming ag goods – it’s the topic of today’s post.

Non-Conformity and the Right of Rejection

A buyer has a right to reject goods that do not conform to the contract.  Under the Uniform Commercial Code (UCC), a buyer may reject nonconforming goods if such nonconformity substantially impairs the contract.  A buyer usually is not allowed to cancel a contract for only trivial defects in goods.  Triviality is highly fact dependent.  It is tied to industry custom, past practices between the parties and the nature of the goods involved in the contract. 

For example, in Hubbard v. UTZ Quality Foods, Inc., 903 F. Supp. 444 (W.D. N.Y. 1995), a manufacturer of potato chips rejected shipments of potatoes for failure to conform to the contract based on the color of the potatoes. The contract provided that the potatoes had to meet certain quality standards.  The buyer was entitled to reject the potatoes if they failed to do so. The potatoes had to meet USDA standards for No. I white chipping potatoes. They had to have a minimum size and be free from bruising, rotting and odors which made them inappropriate for use in the processing of potato chips.  The main issue was the color of the potatoes.  That issue was decided in accordance with industry custom.  Based on industry custom, the court held that the failure to conform substantially impaired the contract and justified the manufacturer’s refusal to accept the potatoes.  The defect was not merely trivial.     

In a more recent case, Albrecht v. Fettig, 27 Neb. App. 371 (2019), the plaintiff raised Red Angus cattle with operations touching every stage of cattle production, including a feedyard. The plaintiff contacted the defendant (who was not the plaintiff’s usual cattle buyer) to purchase calves for the yard. In May of 2015 the defendant purchased cattle for the plaintiff, with the load consisting mostly of black cattle. The plaintiff accepted the load but stated that he would reject any subsequent load if it consisted primarily of black cattle. Two months later, the defendant purchased another batch of cattle for the plaintiff, promising that there would only be “five or so black hides this time.” The contract for this transaction stated "APPROX 150 - HD," that would be "80% Red Angus cross [and] 20% Bl[ac]k Angus cross steers" at a base average weight of 780 pounds. The price was specified as “$235 per hundredweight with a $0.15 slide.” The contract specified a delivery window of between October 10 and 25, 2015. In early October the defendant contacted the plaintiff with an additional 10 head at $185 per hundredweight. The defendant felt that these 10 head would fall under the “approx” in the contract but notified the plaintiff out of courtesy. The plaintiff never looked at the cattle before delivery.

The cattle were delivered to the plaintiff late at night on October 14, after it was dark outside. The next morning, the plaintiff saw the cattle in the daylight and observed that there were many black-hided steers.  The plaintiff stated that he "knew there was more than 20 percent without even counting them...” From a video taken of the cattle the Plaintiff counted 88 red steers, 68 black steers, and 4 “butterscotch” steers. That amounted to 160 head of cattle that were 55 percent red hided, 42.5 percent black hided, and 2.5 percent Charolais influenced. The plaintiff called the defendant on October 15, expressing frustration and displeasure at receiving so many black steers. The defendant offered to take back the black steers, leaving the plaintiff with 88 head of red steers. The plaintiff rejected the offer. The next day, after discussions with family and an attorney, the plaintiff rejected the load. The defendant sent trucks to pick up the rejected cattle on October 17, and the plaintiff requested the $6,000 deposit back. Another agreement for the deposit and trucking costs to be covered by the defendant was also signed on October 17. The defendant never attempted to cure the issue before the specified October 25 date. The defendant kept and fed the cattle himself and later sold them for a loss. On November 9, the plaintiff texted the plaintiff to inquire about the $6,000 deposit refund. The defendant replied that he had filed a lawsuit and that his attorney instructed him not to discuss the matter.

On November 11, the plaintiff sued for breach of the July 15 contract to recover the $6,000 deposit, yardage fees, feed costs and labor and miscellaneous costs associated with loading the cattle for the return trip. The defendant counterclaimed that the plaintiff breached the July 15 contract by refusing to accept delivery of cattle. The defendant requested that the court award damages in the amount of the value lost on the cattle between their delivery and their eventual sale on December 5, 2015, along with associated costs and expenses. The trial court found that the plaintiff did not breach the sale contract and could reject all or part of the delivery. The trial court also found that the defendant failed to cure under the contract before October 25th and the only cure attempted, to take the black calves, would have breached the quantity amount of the contract. The trial court ordered the defendant to refund the $6,000 deposit and 12 percent prejudgment interest on the $6,000 deposit from October 17, 2015, and 12 percent post-judgment interest. The trial court also ordered the defendant to pay incidental damages based on the costs incurred in caring for the cattle on his property from October 14-17, totaling $449.53, and post-judgment interest at the rate of 3.61 percent until paid in full. The defendant filed a motion to alter or amend arguing that prejudgment interest was inappropriate and that a post judgment interest rate of 12 percent was also inappropriate. After a hearing the trial court agreed, dropping the prejudgment interest and setting post-judgment interest at 3.61 percent. Both parties appealed.

The appellate court affirmed the award of the refund of the $6,000 deposit to the plaintiff, and incidental damages for the cost of caring for the cattle between the time of delivery and their return. The appellate court also awarded court costs to the plaintiff, and the denial of prejudgment interest. The appellate court determined that the plaintiff was entitled to reject delivery notwithstanding the contract's additional ground for rejection if the cattle were unmerchantable. The contract, the appellate court noted, was specific as to quantity and weight but the hide colors were more than a trivial variation and the defendant had time post-rejection to correct the error and deliver the correct color of cattle. The appellate court took the issue of interest under advisement. 

Inspecting Nonconforming Goods

A buyer has a right before acceptance to inspect delivered goods at any reasonable place and time and in any reasonable manner.  The reasonableness of the inspection is a question of trade usage and past practices between the parties. If the goods do not conform to the contract, the buyer may reject them all within a reasonable time and notify the seller, accept them all despite their nonconformance, or accept part (limited to commercial units) and reject the rest. Any rejection must occur within a reasonable time, and the seller must be notified of the buyer's unconditional rejection.  For instance, in In re Rafter Seven Ranches LP v. C.H. Brown Co., 362 B.R. 25 (B.A.P. 10th Cir. 2007), leased crop irrigation sprinkler systems failed to conform to the contract.  However, the buyer indicated an attempt to use the systems and did not unconditionally reject the systems until four months after delivery.  As a result, the buyer was held liable for the lease payments involved because the buyer failed to make a timely, unconditional rejection.

The buyer’s right of revocation is not conditioned upon whether it is the seller or the manufacturer that is responsible for the nonconformity. UCC § 2-608. The key is whether the nonconformity substantially impairs the value of the goods to the buyer.

A buyer rejecting nonconforming goods is entitled to reimbursement from the seller for expenses incurred in caring for the goods. The buyer may also recover damages from the seller for non-delivery of suitable goods, including incidental and consequential damages.  If the buyer accepts nonconforming goods, the buyer may deduct damages due from amounts owed the seller under the contract if the seller is notified of the buyer’s intention to do so.  See, e.g., Gragg Farms and Nursery v. Kelly Green Landscaping, 81 Ohio Misc. 2d 34; 674 N.E.2d 785 (1996).

Timeframe for Exercising Remedies

The UCC allows buyers a reasonable time to determine whether purchased goods are fit for the purpose for which the goods were purchased, and to rescind the sale if the goods are unfit.  Whether a right to rescind is exercised within a reasonable time is to be determined from all of the circumstances. UCC §1-204.  The buyer’s right to inspect goods includes an opportunity to put the purchased goods to their intended use.  Generally, the more severe the defect, the greater the time the buyer has to determine whether the goods are suitable to the buyer.

Statute Of Limitations

Actions founded on written contracts must be brought within a specified time, generally five to ten years.  For unwritten contracts, actions generally must be brought within three to five years.  In some states, however, the statute of limitations is the same for both written and oral contracts.  A common limitation period is four years.  Also, by agreement in some states, the parties may reduce the period of limitation for sale of goods but cannot extend it.

Conclusion

Most contractual transactions for agricultural goods function smoothly.  However, when there is a problem, it is helpful to know the associated rights and liabilities of the parties.