Frustrated Contracts - Essay Example

Frustrated Contracts Question References: Shipping Contract of Carriage by sea Total Loss of Cargo When Property Passes Who may sue Whether property and right to possession of cargo passed to buyers Ship’s Name: Enterprise Companies: C. I. F. consignees Charter’s right for action against carrier 1 Frustrated Contracts The question arises whether the owner of the Enterprise, due to the ship’s sinking in the Atlantic Ocean (no reason was offered as to exact cause), whether the ship’s owner is liable and if so, what is the extent of his liability? Does Dixie Wholesalers have the right to sue? And what are the rights of the c.i.f., who did not receive the future goods which they were promised by Dixie Wholesalers? What is the predominant principle of law which underlie this case? In addressing these issues we will first view the Carriage of Goods by Sea Act 1971, Article 6 – Supplement S(4) which in part states: “It is hereby determined that for the purpose of Article VIII of the rules, section 502 of the Merchant Shipping Act 1894, (which as amended by the Merchant Shipping (liability of ship owner and others) Act 1958, entirely exempts ship owner and others in certain circumstances from liability for loss, or damage to goods) is a provision relating to limitation of liability”(CGSA). Further, the Hague-Visby Rules as Amended by the Brussels Protocol 1968, Articles 4 sections ( c ) and (d) in part states: “Neither the carrier nor the ship shall be liable for loss or damage arising from unseaworthiness unless caused by want of due diligence on the part of the carrier to make ship seaworthy, and to secure that the ship is properly manned, equipped etc., whenever loss or damage has resulted from unseaworthiness the burden of proving the exercise of due diligence shall be on the carrier or other person claiming exemption from this article. (2) Neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from i.e., ( c ) perils, dangers, and accidents of the sea or other navigable waters or (d) act of God”(Hague). Dixie Wholesaler nominated the Enterprise as their vessel of choice and the goods 2 were loaded onto the Enterprise on 31 August 2006. At this time Dixie Wholesalers made payment in cash for the cost of the voyage, f.o.b. These two acts by Dixie Wholesalers on their own behalf, effectively gave them two faces in regards to their cargo and its transport. It put Dixie Wholesalers in the position of ‘consignor’ and ‘consignee’, of a f.o.b. shipment. The process which Dixie Wholesalers initiated is elucidated in The El Amira and the El Minia [1982] 2 Lloyds’s Rep 28. Where Mr. Justice Devlin instanced three types of f.o.b. contracts. The first type mentioned by Mr. Justice Devlin in El Amira; which he characterized as a classic type, is the same type initiated by Dixie Wholesalers in their transaction with the owners of the Enterprise. Where the buyer nominates the ship, and the seller puts the goods on board for account of the buyer, procuring a bill of lading. The seller is then a party to the contract of carriage, to which the buyer can become a party which is contained in or evidence by the bill of lading, which is endorsed to him by the seller. This is classic f.o.b., and there was no consignment, because Dixie Wholesalers nominated the vessel. With the freight on board, and with the bill of lading in hand, we are now faced with the question of when or has the property passed from consignor to consignee? The action taken by Dixie Wholesalers in this instance was the subject of a similar action taken in Dunlop v. Lambert (1838) 7 ER 824, where it was not conclusive enough to conclude that the risk had passed from consignor to consignee. Obviously, it is our intent to conclusively show, albeit Dixie Wholesalers in common law is one and the same, but under the umbrella of contract carriage by sea, they were exclusive entities during the course of this transaction. To make our point clear, we will begin with a look at Pyrene v. Scindia Navigation 4 Co. LTD Queens Bench Division [1954] 2 Q.B. 198, the facts of this case were as follows: The cargo ( a fire tender) was dropped and damaged by the negligence of the ship owner during loading. At this stage before the goods had passed the ships rail, they were still ( or so it was supposed) the property of the seller. The seller sued the carrier, for the full value of the damage ( 966 pounds), in tort of negligence. The issue was whether the ship owner could claim the benefit of an exemption clause written into the contract of carriage by virtue of the Hague-Visby Rules,the effect of which was to limit his liability to 200 pounds. It was essentially a privity of contract, in effect whether the seller was party to the contract of carriage. The seller claimed that he was not, and that therefore he was not bound by the exemption clause”(Pyrene) Devlin J. held that, “at least where ( as in the case itself) the ship owner had taken the responsibility for the entirety of the loading and discharging process. This aspect of the case is an interpretation of Article 1 (e) of the Rules, which remain unchanged under the revised Visby Rules”(Devlin) Thus, the case is still an authority on the issue, even though the Hague Rules have been revised in other respects in the UK. The aforementioned case was later treated as authority for the broad proposition that the consignor may recover substantial damages against the ship owner if there is privity of contract between him and the carrier for the carriage of goods, although if the goods are not his property or at his risk, he will be accountable to the true owner for the proceeds of the judgment. In the law of contracts, it is critically important that there be the presence of privity, which either party of the contract can effectively enforce. This enforcement is initiated by a law suit against the other party. It is important to note, there are two types of privity (horizontal-when there is a third party and vertical-when only two people are 5 involved). The situation which we have been addressing in this instance involves, vertical privity. When we view Davis & Jordan v. James, 5 Burr 2680, a decision of the Court of King’s Bench in an action in assumpsit against a common carrier for non-delivery. “The defendant contended that the action should have been brought in the name of the consignee and not the consignor, because the property in the goods had passed from the consignor to the consignee on their delivery by the consignor to the carrier. The plaintiffs argued that the question of title to sue did not turn on the strict property in the goods. The carrier had nothing to do with the vesting of the property, and it did not lie in his mouth to say that the consignor was not the owner. He was the owner, with respect to the carrier, who had undertaken him, and was paid by him.”(Davis) Further, Lord Mansfield, with whom Willes and Ashhurst JJ agreed, said at p. 2680; “there was neither law or conscience in the objection. The vesting of the property may differ according to the circumstances of the cases: but it does not enter into the present question. This is an action upon the agreement between the plaintiffs and the carrier. The plaintiffs were to pay him. Therefore the action is properly brought by the persons who agreed with him and were to pay him”(Mansfeild) When Dixie Wholesalers entered into c.i.f. contracts with Hazels Handbags and Angel’s Accessories, which were made prior to the ship’s sinking, both companies were appraised of the status of the merchandise as per the Sale of goods Act 1979, they were classified as “future goods”. The companies were amenable to this and agreed to accept a c.i.f. contract. On September 14, 2006, one day prior to the sinking of the Enterprise Hazels Handbags plc, paid for their order of 250 bags. When we view Ginzberg v. 6 Barrow Haemetitic steel Co. [1966] 1 Lloyd’s Rep 343, it was McNair J’s view, “that it was common for the parties to a c.i.f. contract to intend that property in goods shall pass when payment is made”(Ginzberg) Also in Lickbarrow v. Mason Common Pleas (1787) 5 TR 63, “property passed to the consignee on endorsement, whether the endorsement be a named person or a blank”(Lickbarrow) And in C. Groom LRD v. Barber Kings Branch Division (1915) 1 KB 316, states; “risk passes on shipment under a c.i.f. contract”. Atkin J held, that, “a c.i.f. seller may validly and effectively tender documents relating to goods listed at sea at the time of the tender”(Atkin J). An extract from the Atkin J judgment at p. 324 reads as follows: “In my opinion the result is that the contract of the seller is performed by delivering to the buyer within a reasonable time from the agreed date of shipment the documents, ordinarily the bill of lading, the invoice, and the policy of insurance, which will entitle the buyer to obtain on arrival of the ship the delivery of goods shipped in accordance with the contract, or in case of loss will entitle him to recover on the policy the value of the goods if lost by peril agreed in the contract to be covered and in any case will give him any rightful claim against the ship in respect of any misdelivery or wrongful treatment of the goods. It therefore becomes immaterial whether before the date of the tender of the documents the property in the goods was the seller’s or buyers or some third person’s. The seller must be in a position to pass the property in the goods by the bill of lading if the goods are in existence, but he need not have apportioned the particular goods in the particular bill of lading to the particular buyer until the moment of tender, nor need he have any right to deal with the bill of lading until the moment of tender…The sellers obligation can not depend upon whether the goods are lost or not, 7 and if when there is no loss the property has to pass to the buyer before the delivery of the documents, at what stage of the transaction must it pass? Unless it be at the time of shipment I can see no reason for fixing upon any other time than on delivery of the documents, an if it be the law that a tender of documents is ineffectual unless in fact at the moment of shipment the property actually passed to the ultimate buyer, it appears to me that business operations would be very seriously embarrassed”(Atkin). It is also important that we view the statutes, which provide the broader guidance surrounding the principle and for this we will view the Sale of Goods Act 1979, S (5) s(2) and s (3) and S (6) which states: There may be a contract for the sale of goods, the acquisition of which by the seller depends on a contingency which may or may not happen. Whereby a contract of sale, the seller purports to effect a present sale of future goods, the contract operates as an agreement to sell the goods. Where a contract for the sale of specific goods, and the goods without the knowledge of the seller have perished at the time when a contract is made, the contract is void. Where there is an agreement to sell specific goods and subsequently the goods, without any fault on the part of the seller or buyer, perish before the risk passes to the buyer, the agreement is voided. I would advise Dixie Wholesalers to seek a settlement with Hazel Bags on their advance payment for the handbags. Albeit, the risk had passed, it would make good business sense to return the money and possibly save a good customer and preserve good will. On the matter with the shipping company I will advise Dixie that due to their privity in contract with the ship’s owner, they are in a position to bring suit because as consignor they had made a special contract. with the carrier and because of this special contract.the carrier can not dispute their right for suit. There is case law on this matter in Joseph v. Knox (1813) 3 Camp p. 320, Dunlop v. Lambert (1939) 6 Cl & f 600, Davis & Jordan v. James.[1770] 5 Burr, 2680, and Mead v. South Eastern Railway Co. [1870). On the matter of Angel’s Asccessories, I would advise Dixie Wholesalers to draft a letter to Angel’s which provides them with a detailed account of the ship’s sinking in the Atlantic. This letter should be on a consolatory plain, even though no monies were exchanged, they should be notified and thanked for their intent to patronize. It in my opinion, will serve as a great public relations enhancer and the preservation of good will, will enable the doors and minds to remain open for future business. Question #2 Subject References: Shipping Sales Contract Nomination Renomination Ineffective vessel Cleardays Ships Names Companies Frustrated Contracts 9 There are numerous forms of export contracts available to businesses, which elucidate the duties and rights of those involved; this includes the carrier, buyer and the seller. Given the many options available, the actors are able to distribute the responsibilities and risks which comprise the import/export process, and provide them to choose those options which are best suited for their purpose. It is a common occurrence for the parties to a contract to not be aware of the variances in trading practices within their own countries. Consequently, in the international trade arena the malady is compounded and the circumstance can lead to disagreements, miscommunication and even legal battles, resulting in enormous wastes of time and money. In an effort to avoid the standard sets of problems, “The international Chamber of Commerce first published in 1936 a set of International rules for the interpretation of trade terms. These terms were known as “Incoterms 1936”. Amendements and additions were later made in 1953, 1967, 1976, 1980, 1990, and 2000, in order to being the rules in line with current international trade practices”(Incoterm) Intercoms are a separate contract from the contract of carriage, it deals specifically with the contract of sale. They do not include all of the duties which the parties concerned may have concern of. Intercoms deal with very specific aspects of the sale eg. The contract between Lovely Gloves plc and Smarklook plc addresses three pertinent issues: Time band, clear days and the timely serving of notice. On 19 July 2006, Lovely Gloves plc entered into a contract with Smartlook plc for the sale to Smartlook plc of 20,000 pairs of woolen gloves, f.o.b., Liverpool. The first duty outlined in the sales contract is that the shipment should be during the month of September 2006, at Smartlook’s plc call; In Handel v. English Exporters, we see that even thought there is an obligation on the seller to secure the shipping space 10 this does not prevent it from being an f.o.b. contract”(Handel) “The seller must deliver conforming goods to the vessel, on time for loading. Late delivery to the port, causing delay in shipment would be a breach in contract by the seller and the buyer may be able to recover damages from the seller for this. If the vessel sailed without loading because of late delivery the buyer would be able to reclaim damages from the seller and could repudiate the contract of sale. There would be no obligation on the buyer to nominate a substitute vessel”( Incoterms 2000) “The buyer on the other hand must give the seller good and sufficient notice of the vessels name and berth. He should ensure that the delivery date is made known to the seller to enable the seller to expedite delivery per contract. Where the name of the ship had been agreed upon at the outset, it is up to the buyer to make an effective nomination Once the goods are delivered alongside the vessel, the responsibility to load passes to the buyer and so does the risk of the goods’( Incoterms). Also in Petro Trade v. Stinnes Handel the court held, “that the port of loading f.o.b., is a condition which must be complied with. There is no point in trying to show the port offered was more convenient. The nominated port must be complied with”( Petro Trade). According to Bowes v. Shand [1877] 2 APP CAS 455, “The contract of carriage must be made by the Seller with the vessel nominated by the buyer”( Bowes) Time is of essence in commercial contracts. Both the buyer and seller must ensure that they do everything required to of them to effect timely shipments of goods, with absolute adherence to specifications. According to Gill & Duffus v.Societe des Sucres [1986] Lloyd’s Rep 184, “where no time is specified in the contract, sufficient notice of arrival is required to enable the seller to arrange for the goods to reach the port in time for shipment”(Gill). And Napier v. Dexters 11 states, “a failure to give sufficient notice entitles the seller to repudiate the sales contract”(Napier). Then we find in Nordisk v. Eriksen [1920] 2 Lloyds Rep 71, the court confirmed, “that notice of readiness should be provided in sufficient time to allow the seller to reasonable time within which to load… The buyer asked for loading at once on 1 September. On the 15th of September the seller asked for a loading date. The court held that 14 days was reasonable. The seller was in breach for having failed to load already, within that time”. “Once they buyer selects the exact time of shipment the seller will rely on the notification to make arrangements for cargo to be taken to the port. Any attempt by the buyer to unilaterally change that specified date will have implications for the seller”(Incoterm2000). In Yello v. Machado [1952] Lloyd’s Rep 183, is the standing authority on, “the statement for the shipper must complete loading within a specified time band or the buyer can repudiate the contract”(Yello). On 14 September 2006, Smartlook plc served the following notice upon Lovely Gloves plc; “The Enterprise will be ready to load at Liverpool on 25 September 2006”. According to section B7 of the Incoterms 2000, “the buyer must give the seller sufficient notice of the vessel name, loading point and required delivery times”(Incoterms) “The buyer must nominate the vessel and notify place and time of arrival. The buyer is responsible for all costs and risks once goods arrive alongside the vessel and must pay for any failure of vessel to arrive or load the goods and is liable for costs caused by a failure to provide sufficient information specific in the sales contract”( Incoterms). The Rio Apa [1992] 2 Lloyd’s Rep 586, “concerned the sale of soya f.o.b. san Martin, 12 July shipment, subject to G. A. F. T. A. terms, which provided inter alia that ( a ) should the buyer not load within delivery period the buyer has to pay carrying charges, (b ) if the goods are not loaded withn 60 days of last day of delivery the buyer is automatically in default and shall pay default damages and carrying charges (c ) should the buyer not tender notice of readiness within the delivery period the buyer is in default, unless an extension is claimed. On the 18th July the buyer tended notice of readiness when the vessel arrived at the Common Zone. Notice was accepted by the seller and lay time commenced to run. The vessel berthed 31 July and loaded 2-4 August. No notice of extension was claimed. The seller claimed that there had been a failure to load within the delivery period and demanded carrying charges. The court held that there was no duty on the buyer to load within the shipping period, merely a duty to give notice of readiness to load”(Ria Apa) When we compare the Rio Apa with the normal situation where the seller is under a duty to load within the shipment period. A failure to comply is a breach of contract, but since the provision in the Ria Apa was for the buyers benefit, the buyer could waive the condition. In this instance the buyer had a duty to load for himself, so there was no breach. Also whilst it was an f.o.b. contract, the seller paid for freight so it was in fact an f.o.b. contract with additional duties.”(Incoterms) On 17 September 2006, Smartlook plc served another notice upon Lovely Gloves plc as follows; “as a result of the sinking of the Enterprise in the Atlantic, the Adventurer is substituted for the Enterprise. The Adventurer will be ready to load at Liverpool on 24 September 2006; “A contract requires a March shipment. The buyer is required to give 13 notice of a date of shipment. On the 9th of March the buyer chooses the 25th of March. The nominated vessel becomes ineffective. The buyer nominates a substitute vessel to arrive on the 15th of March, well within the time band for the shipment, but considerably earlier than the first nomination. Unless the contract states otherwise, specifying that renomination of vessel and or specifying that the nominated date of shipment is final and binding, the buyer would not have breached the time requirements of the contract. The seller would have to ship the goods in accordance with the new nomination and specification of time of shipment” (Incoterm 2000) Also, in Cargill v. Continental [1989] 2 Lloyd’s Rep 290, which states, “that if a notice period is given for nomination, a substitute vessel must be named that will arrive within that period” (Cargill). Further in Agricultores F. A. v. Ampro, the court held, “that nomination of the vessel is not normally final. If the vessel is ineffective and there is still time available to the buyer he can nominate a substitute vessel. Rejection of nomination by the seller prior to the expiry date of the band would therefore amount to a repudiatory breach by the seller. The requirement that the original vessel be ineffective is essential to the right to nominate a substitute. The buyer could not do so merely because he had found out that another carrier was prepared to carry the goods for a more advantageous price. If the vessel is ineffective, for instance because it would not arrive on time, the carriage could not take place. The contract is either frustrated or breached by the carrier, leaving the seller free to make a fresh contract with another carrier nominated by the buyer”(Agricultores) Lovely Gloves plc have had problems fulfilling the terms of the contract with Smartlook plc as there has been a strike in their factory and only half of the contracted quantity of gloves is ready. It is unlikely that the other gloves will be ready before April 14 2007. In Wertheim v. Chicoutim Pulp [1911] AC 301, the court stated, “that if it is evident that the seller is not going to deliver there is an anticipatory breach by the seller and the buyer is relieved of his duty to nominate an effective vessel”(Wertheim) I would advise Lovely Gloves that the contract with Smartlook plc and be repudiated by Smartlook plc as a frustrated contract. Consequently, I would advise Lovely Gloves plc to immediately enter into negotiations with Smartlook, in an attempt to salvage the portion of the contract which they have completed, It is possible that Smartlook plc, might be amenable to accepting a partial shipment. Chances are Smartlook plc has planned a campaign for the woolen gloves and have probably made some advance sales. Consequently, Lovely Gloves plc has some leverage in negotiating and should not take too much of a requested discounted loss on the inventory. As a long shot, I would further advise Lovely Gloves to exert the effort to sell the shortfall to Smartlook for next season. If Smartlook plc is interested in receiving the shortfall, subsequent to the strike, then I would advise Lovely Gloves to offer a modest discount on the items. I would caution Lovely Gloves plc, that the entire sales contract can be repudiated and it would be to their advantage to make some kind of settlement which may appear to be sweet to Smartlook plc. Works Cited Agricultires, F. A., v. Ampro Bowes v. Shand [1877] 2 APP CAS 455 C. Groom LRD v. Barber Kings Branch Division [1915] 1 KB 316 Cargill v. Continental [1989] 2 Lloyd’s Rep 290 Carriage of Goods by Sea Act 1971 Davis & Jordan v. James [1770] 5 Burr, 2680 Dunlop v. Lambert [1939] 6 CI & F600 EL Amira and the EL Minia [1982] 2 Lloyd’s Rep 28 Gill & Duffus v. Societe des Sucres [1986] Lloyd’s Rep 184 Ginzberg v. Borrow Haemetitic Steel Co. [1996] 1 Lloyd’s Rep 343 Hague-Visby Rules as Amended by the Brussels Protocol 1968 Handel v. English Exporters International contract Terms, The International Chamber of Commerce Joseph v. Knox [1813] 3 Camp p.320 Lickbarrow v. Mason Common Pleas [1787] 5 TR 63 Mead v. SouthEastern Railway Co. [1870] Merchant Shipping Act 1894 Napier v. Dexter Nordisk v. Erikson [1920] 2 Lloyd’s Rep 71 Petro Trade v. Stinnes [1877] 2 APP CAS 455 Pyrene v. Scindia Navigation Co. Ltd Queens Branch Division [1954] 2 Q.B. 198 Sale of Goods Act 1979 The Rio Apa [1992] 2 Lloyd’s Rep 586 Wertheim v. Chicoutim Pulp [1911] AC 301 Yello v. Machado [1952] Lloyd’s Rep 183 Read More