Produce Pointers: Payments and set-offs

The Problem- Can I withhold payment on an unrelated invoice to recoup losses on a shipment?

The Key Point- Set-offs may be justified as long as the deduction is claimed in good faith and fully supported. 

The Solution- Deal in good faith.

Q: I’m a produce receiver located in Chicago. I purchased a load of lemons FOB. The lemons arrived horribly distressed and we had to reject to the shipper. The rejection was supported with the temperature recorder and reefer download (both showing normal transportation) and a timely federal inspection certificate showing 29 percent condition defects. Now I’m at a $5,000 loss due to the freight expenses and the cost of the inspection. The shipper is not taking my phone calls or responding to emails. We do owe the shipper $6,000 on an unrelated invoice. Can I just short pay the invoice, so my losses are recouped? Please advise.

A: Set-offs against a seller’s invoice are typically permissible provided the deduction is claimed in good faith and fully supported. 

We’ve received inquiries from buyers in similar situations who want to know if they can “set up” a follow-up transaction with a seller to recoup losses from a previous transaction. Setting up a trading partner in this way is, in our view, inconsistent with the requirements of good faith.

As used in our Guidelines, and consistent with Uniform Commercial Code (UCC) Sec. 1-304, “good faith” means honest intentions, fair dealing, and avoidance of practices that may mislead or deceive.

The UCC, which generally applies to the sale of goods (including produce) throughout the United States, provides that every contract imposes an obligation of good faith (Sec. 1-304). Further, PACA regulations define “good faith” as “honesty in fact and observance of reasonable commercial standards of fair dealing in the trade.” (7 CFR 46.2 (hh)).

Arranging a transaction with a trading partner with the secret intention of withholding payment as a means of recouping losses strikes us as contrary to any standard of good faith dealing. 

In your scenario, however, because the $6,000 you owe the supplier for a separate transaction arose in the normal course of business, your $5,000 set-off is usually permissible unless prohibited by a specific agreement between both parties.

This article was originally published in the November/December 2024 edition.