the color test be done in a certain fashion. The manner of testing was not specified.
Hubbard testified that he submitted samples from the rejected shipments for testing and that Agtron readings on those samples were, for the most part, within the required range. Sample A and B were part of the October 7 shipment. Sample C was part of the August 24 sample (collected by Smith during his visit to Hubbard) and Sample D was part of the October 1 shipment.
These samples were analyzed first by Dr. Robert Plaisted and Kenneth Paddock at Cornell University in January 1993. They determined that Sample A and a reading of 60/60; Sample B was 59/53; Sample C was 62/64; and Sample D was 54/51.
Even by this analysis Sample D with an Agtron reading of 54/51 did not meet the contract specifications which required at least a No. 2 color designation, which was at least a 55 Agtron reading. Similarly, Sample B with an Agtron reading of 59/53 was borderline, since it overlapped designations 2 and 3.
Another expert, Dr. Wilbur Gould, performed Agtron tests during the summer of 1993, and he found that all of the samples exceeded 60 which placed them in the No. 2 color category. These reports show that, assuming that the same sample was tested by Gould and by Cornell's experts, there is variation even when using the Agtron device. And, as mentioned, at least some of the Agtron readings support UTZ' decision to reject the potatoes.
But aside from these internal inconsistencies, I am concerned about the reliability of the samples used in the testing. There was very little control over the samples from the time they were turned back to Hubbard until they were tested, several months later. Portions of the samples were consumed by Hubbard and his family and the rest were stored in Hubbard's parents home but with very little security or supervision. There was confusion, even at trial, as to how the samples were preserved, maintained and delivered for later testing.
Therefore, I am not able to place much weight on either of these tests because of the confusion surrounding the maintenance and preservation of the samples returned to Hubbard by UTZ.
Concerning testing, the primary issue is whether UTZ was required to use Agtron readings and whether its rejection based on visual inspection was unreasonable. In other words, was it unreasonable for UTZ to visually inspect Hubbard's potatoes when more sophisticated machinery was allegedly available?
I find as a fact that under all the circumstances that existed in the fall of 1992, it was reasonable for UTZ to rely on visual inspection when it determined whether Hubbard's installments complied with the contract.
As mentioned, the contract did not require Agtron readings. Therefore, the contract did not prevent UTZ from using visual inspections. Second, the testimony was uncontradicted that those in the industry consistently used visual inspections when grading potatoes under contracts of this nature. Even at the trial, almost three years after the events at issue, visual inspection is still the norm. Hubbard's expert, Wilbur Gould, testified that in his view the Agtron machine was the preferred method for testing, but he conceded that visual inspection is used in the industry. Some processors did not wish to incur the $ 20,000 cost of obtaining an Agtron machine and so visual inspections persist.
Furthermore, both Smith, UTZ' Potato Manager, and Jack Corriere, UTZ' General Manager, testified that the first Agtron machine obtained by UTZ was in October 1992, and that it was not properly calibrated and used until late October 1992, well after Hubbard's potatoes had been rejected. Both Smith and Corriere testified that visual inspection of chips was the standard in the industry at the time Hubbard presented his potatoes for inspection. Hubbard presented no evidence to contradict that testimony. Smith testified that he had been potato manager for UTZ for over 30 years and during that time he relied on visual inspection and his expertise to determine whether to accept or reject loads.
I credit the testimony, and I find as a fact, that in September and October 1992, visual inspection of potatoes was the standard used in the industry. I also find that plaintiff understood that his crop would be judged by the visual observations of UTZ' inspectors at the plant, since that was the standard procedure that had been used prior to 1992 when Hubbard and his father had sent potatoes to UTZ for processing.
Motivation of UTZ.
Hubbard has also failed to convince me, by a preponderance of the evidence, that UTZ benefited by its rejection of Hubbard's potatoes. Smith and Corriere testified that they had suffered significant losses in the past when their potatoes had turned bad in storage. In 1992, UTZ took steps to see that such a disaster did not reoccur and so they were careful in their decisions to accept or reject potatoes.
Furthermore, there is no compelling evidence that UTZ purchased potatoes at lower market prices after it rejected Hubbard's crop. On the contrary, the evidence (Ex. 39) suggests that the market price during late 1992 and early 1993 was equal to or higher than Hubbard's contract price. Hubbard has failed to convince me that UTZ' motivation for rejecting his potatoes was to obtain similar potatoes but at a reduced cost. Therefore, I find as a fact, that UTZ' reason and motivation for rejection was its belief that the potatoes failed to meet the quality standards in the contract.
UTZ' Rejection of Hubbard's Potatoes.
The primary legal issue in this matter is whether UTZ' rejection of Hubbard's potatoes was proper or wrongful. It is clear that the transaction at issue is a sale of goods governed by the New York Uniform Commercial Code ("UCC") Article 2. Indeed, the parties have stipulated that both Hubbard and UTZ are "merchants" as defined by UCC § 2-104(3).
It is also clear that the contract between the parties is an "installment contract" as that term is defined in UCC § 2-612(1): it contemplates "delivery of goods in separate lots to be separately accepted." That the contract is an installment contract does not appear to have been disputed by the parties. However, it is also evident as a matter of law from terms found throughout the contract.
For instance, in paragraph 1, the contract calls for the sale of "11,000 hundred weight of new chipping potatoes ..." to be shipped in quantities of "2,000 to 4,000 hundred weight per week" starting around September 5, 1992. This language clearly contemplates between 3 and 6 total shipments.
Additionally, paragraphs 3(a) and 3(b) specifically note that standards must be met by "all shipments," which suggests that more than one shipment is contemplated.
Finally, paragraph 4, concerning payment, states that "buyer agrees to pay for all potatoes accepted within 30 days of acceptance ... ." This language suggests paying per shipment, since each shipment is separately subject to inspection (and acceptance), as indicated by paragraph 3. Clearly this is an "installment" contract as defined in UCC § 2-612(1).
As an installment contract, the question of whether UTZ' rejection was wrongful or proper is governed by UCC § 2-612(2) and (3). UCC § 2-612(2) states that a "buyer may reject any installment which is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured ... ." UCC § 2-612(3) states that "whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole."
The purpose of this "substantial impairment" requirement is "to preclude a party from canceling a contract for trivial defects." Emanuel Law Outlines, Inc. v. Multi-State Legal Studies, 899 F. Supp. 1081, 1995 U.S. Dist. LEXIS 12596, *19, 1995 WL 519999, *7, (S.D.N.Y. 1995). In this case, UTZ rejected Hubbard's potatoes based upon their failure to satisfy the color standard set forth in paragraph 3(c) of the contract. Thus, the issue for me to decide is whether the failure of Hubbard's potatoes to meet the required # 1 or # 2 color minimum constitutes a "substantial impairment" of the installments.
Whether goods conform to contract terms is a question of fact. See Emanuel Law Outlines, Inc., supra, at *6 (citing Interoil v. Apex Oil Co., 604 F. Supp. 978, 981 (S.D.N.Y. 1985)); see also, Processed Minerals v. AMF Tuboscope, 123 A.D.2d 511, 507 N.Y.S.2d 102 N.Y.S.2d (4th Dep't 1986). Moreover, in determining whether goods conform to contract terms, a buyer is bound by the "good faith" requirements set forth in N.Y.U.C.C. § 1-203 -- "Every ... duty within this Act imposes an obligation of good faith in its enforcement or performance." Thus, UTZ' determination that Hubbard's potatoes failed to satisfy the contract terms must have been fairly reached.
The UTZ - Hubbard contract contains many specific requirements regarding the quality of the potatoes. In paragraph 1 the contract states that "only specified varieties as stated in contract will be accepted ... ." Paragraph 3(a) states that
All shipments shall meet the United States Standards For Grades of Potatoes for Chipping, USDA, January 1978..., in addition to other provisions enumerated in this 'Section 3'. Loads that do not meet these standards may be subject to rejection... . (emphasis added)
Paragraph 3(b) sets forth specific size requirements (85% or better ... graded to a 1-7/8" minimum size); paragraph 3(c) sets forth specific gravity requirements (at least 1.070 in a standard eight pound test); paragraph 3(d) contains the color requirements at issue in this case; and paragraph 3(f) sets forth a number of other defects or incidents of improper treatment or handling of the potatoes that provide UTZ with the right to reject the potatoes.
Clearly, the quality standards are of great importance to UTZ. They are the most detailed aspect of the contract -- far more so than timing or even quantity specifications.
In a contract of this type, where the quality standards are set forth with great specificity, the failure to satisfy one of the specifically enumerated standards is a "substantial impairment." UTZ obviously cares the most about the specific quality specifications, as is evident from the numerous references throughout the contract.
Additionally, I find that UTZ' determination that the potatoes did not meet the required # 2 color standard was made in good faith, as required by UCC § 1-203. As noted above, the manner of visual testing utilized by UTZ was reasonable and customary. Further, Smith and DeGroft, the UTZ testers who rejected Hubbard's potatoes, provided credible testimony about their respective experience (Smith - 30 years, DeGroft - 5-6 years) and method of making such determinations. Accordingly, I find that UTZ fairly and in good faith determined that Hubbard's potatoes were nonconforming.
Thus, I find that Hubbard's failure to meet the proper color standard amounted to a "substantial impairment" of the installments (§ 2-612(2)), substantially impairing the whole contract (§ 2-612(3)). Accordingly, I find that UTZ' rejection of Hubbard's potatoes was proper.
UTZ' Refusal to Transport.
Finally, Hubbard asserts that UTZ failed to perform as required when, after October 8, 1992, UTZ refused to send trucks to New York to pick up and transport Hubbard's potatoes to Pennsylvania. The contract does not require that UTZ arrange and pay for transportation. In fact, the contract terms expressly state that the "Seller shall ship... ." (Contract paragraph 1.)
However, it is not disputed that the usual practice was for UTZ to send its trucks to New York to pick up Hubbard's potatoes. According to the parties' testimony, this was because if the potatoes were accepted, UTZ was responsible for the transportation charges. However, if the potatoes were rejected, Hubbard was responsible for those expenses.
Although the parties' practice is not disputed, the absence of an express contractual requirement limits Hubbard's ability to claim UTZ' refusal to transport after September 8th constituted a breach. Indeed, in light of the fact that the last four shipments had been rejected (thus becoming Hubbard's financial responsibility), it was not unreasonable for UTZ to require Hubbard to pay for future transportation charges "up front." In the event the future shipments were accepted, Hubbard would have had a right of reimbursement from UTZ (subject to any set-off arising from moneys owed by Hubbard for the transportation costs incurred by UTZ for the previously rejected shipments).
Hubbard's responsibility for the transportation of his potatoes is further supported by UCC § 2-504. That provision states in relevant part that:
Where the seller is required ... to send the goods to the buyer and the contract does not require him to deliver them at a particular destination, then, unless otherwise agreed, he must (a) put the goods in the possession of such a carrier and make such a contract for their transportation as may be reasonable having regard to the nature of the goods and other circumstances of the case ... .
Because the parties' contract states that the "seller shall ship," this provision applies and compels Hubbard to be responsible for the transportation of his potatoes.
Accordingly, I find that UTZ' refusal to send trucks to New York was not a breach of the parties' contract. I find that it was Hubbard's contractual and statutory responsibility to arrange and pay for transportation. UTZ' failure to assist does not breach the contract.
I find that plaintiff has failed to establish the claims set forth in his complaint by a preponderance of the evidence and, therefore, I find in favor of defendant on plaintiff's claims. Plaintiff's complaint is dismissed and judgment shall be entered accordingly in favor of defendant.
Defendant has failed to prove its counter-claims against plaintiff, and they are all dismissed.
IT IS SO ORDERED.
DAVID G. LARIMER
UNITED STATES DISTRICT JUDGE
Dated: Rochester, New York
October 19, 1995.