International Sale, Carriage, and Contract of Goods - Essay Example

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International Sale, Carriage & Contract of Goods “Critically examine and evaluate the legal and practical problems an exporter of goods to an overseas buyer is likely to encounter, and consider the various ways and means by which he might minimise or avoid some of the pitfalls with which the export/import transaction is usually associated.” Table of Contents 1.0 Introduction: Overview of the Legal and Practical Issues in International Trading 1.1 The Uncertainty Brought About by the Transit of Goods by Sea 1.2 Conflict of Laws 1.3 Potential Problems Pertaining to Payment 1.4 Political Instability 2.0 Contract of Sale 2.1 The Sale of Goods Act 1979 2.2 The UN Convention on International Sale of Goods 3.0 Contract of Carriage 3.1 The Hague Rules 3.2 The Hague-Visby Rules 3.3 The Hamburg Rules 3.4 Rotterdam Rules 4.0 Payment Issues 5.0 Conclusion 1.0 Introduction: Overview of Practical and Legal Issues in International Trading The advent of globalisation and free trade has resulted in the rapid burgeoning of international commercial trade, including the export and import of goods from one country to another. In the United Kingdom, the nature of a sale transaction, as to whether domestic or international, is determined in accordance with the places where the contracting parties hold their principal places of business. If the parties hold their places of business in different jurisdictions, the sale is characterised as international, otherwise it is domestic. This is the approach taken by the s. 26 of the Unfair Contract Terms Act 1977 as well as Article 1 of the United Nations Convention on Contracts for the International Sale of Goods (CISG hereafter).1 Many types of risks are being borne by long distance sellers in an international sale of goods, which include, inter alia: the uncertainty resulting from the transit of goods by sea; possible political uncertainty; conflict of law, and; payment issues. 1.1 The Uncertainty Brought About by Transit of Goods by Sea It has been said that the management of international business is the management of risk, a fair assessment considering the geographical distance between parties and the political and legal disparities between and among various jurisdictions. International sale of goods is complicated by the likely sea transit of goods. The uncertainty of having the goods travel from one point to the other for a considerable period of time from the time the seller brings his goods to the carrier for shipment to the time these goods are actually delivered to the buyer often entails risks that parties are eventually forced to assume. Thus, it is an often told tale in the international business world of goods damaged, spoiled, rusted, contaminated or lost while aboard vessels or when the vessels sink because of bad weather as they are being taken from one point to another. 2 1.2 Conflict of Laws Additionally, when a transaction of sale of goods involves parties coming from different states or countries a conflict of laws is likely to ensue. Thus, when conditions necessitating resolutions of dispute regarding the contract crop up, the problem of what law should govern the interpretation of the contract as well as the proper forum of the dispute resolution become a problem. After resolution, the problem of enforcing them in the other jurisdiction remains.3 1.3 Problems Pertaining to Payment If the sale, for example, is agreed to be on credit terms the main problem of the seller is how to ensure payment. Allied to this is the problem of currency fluctuation that may occur at any time during the pendency of the transaction, which can potentially change the complexion of the transaction from being profitable to disadvantageous.4 1.4 Political Instability If the other party comes from a state with an unstable political environment and changes in government policies in international transactions occur during the pendency of the transaction, this could lead to changes as well in the nature of the original contract between the parties.5 To minimise risks inherent in international sales, a UK exporter must take preventive measures as well as plan ahead in case of such eventualities. This entails knowledge of relevant laws and information valuable in the world of international transactions. He must, for example, familiarise himself with laws on contract, sales, commerce, letters of credit, aviation and maritime and marine insurance, both of domestic and international applications. 2. Contract of Sale When two parties agree to enter an agreement for the sale of goods, such agreement must be covered by a written contract of sale especially in international transactions. A written contract plays a very significant role because not only does it provide in black and white the terms agreed upon by the parties, it also anticipates solutions to future problems that may arise. Additionally, it saves the parties from the difficulty of subsequently collating evidence to prove what has been agreed orally. It therefore, provides certainty in what is normally a highly uncertain transaction made so by the likelihood of a considerable number of risks. Such a contract must be detailed enough to provide for future eventualities. Other significant issues include quantity, price, “payment terms, shipping and insurance arrangements, specifications and warranties, remedies on defaults”6 as well as the party that would bear the loss in the event the goods in transit are lost or destroyed. Also, it must expressly state the national or international law that should govern the contract in the event a dispute or which legal jurisdiction should serve as the venue for its resolution. This is often called the “choice of law” clause. A seller in the UK would find it very advantageous to negotiate for the UK law as the choice of law. Failure of the parties to expressly state a choice of law imply that when a dispute arises, one of the international conventions applicable to any or both parties will automatically govern it. 2.1 The Sale of Goods Act 1979 In negotiating for the choice of law, it is important for the seller to understand the basics of his own national law on the subject, viz., Sale of Goods Act 1979 (SOGA hereinafter), the domestic governing law on sales contracts, not only to understand its application on him as a seller, but also to convincingly persuade the other party of its advantages. SOGA primarily deals with the rights and obligations of the parties, seller and buyer, as well as the transfer of goods.7 A provision significant to international sale of goods is Section 13(1), which provides that the sale by description implies that goods must correspond precisely with its description in the contract. This especially useful where goods are brought from catalogues or brochures or if they are merely described in the contract without the buyer having seen them first as may likely happen in an international sale of goods. SOGA gives the buyer the right to reject the goods under certain conditions: they do not match the description, and; quality is not satisfactory.8 The right, however, can be lost if the buyer does not exercise it within a reasonable time as was held in the case of Berstein v Pamson Motors Ltd. 9 However, if the refusal is unwarranted, the seller may sue for damages if ownership has not yet passed but if it has, he is entitled to sue for the price of the goods.10 Sections 32 and 33 of the SOGA are significant to international sale of goods because they deal with delivery to carriers and risks involved in distant places deliveries. Under s 32, delivery to carrier, when warranted, is prima facie delivery to the buyer. This section also obliges the seller to negotiate with the carrier for the safe transport of the goods, failure of which gives the buyer the right to reject them, if damage results. Moreover, the seller must also notify the buyer if insurance is needed, otherwise, he shall bear any damage or loss to the goods as a result. Under s 44, the seller has the right to retake possession of the goods whilst they are in transit if the buyer has in the meantime become insolvent. Being in transit covers the period from the time the seller lodges the goods with the carrier to the time of delivery to the buyer. However, such transit period can be interrupted by obtaining their delivery before their arrival in the place of destination or when they arrive at the place of destination but the carrier, instead of delivering, merely notifies the buyer that it is holding the goods for him. Similarly, when the carrier refuses wrongfully to deliver to the buyer transit is likewise ended and in cases where partial delivery is made, transit is ended as to those goods delivered but not so with respect to those undelivered. 11 2.2 The CISG The CISG, which was opened for signature in 1980, is the fruit of long years of crafting a law that would harmonise laws on sale of goods. Its primary objective is to “facilitate international trade by providing a set of uniform rules to govern contracts for the international sale of goods. By providing a set of uniform rules, parties from different countries will all understand the sales law to which their transactions will be subject, thereby reducing at least one barrier to trade that has traditionally existed.”12 The UK, however, is not a signatory to the Convention, but 71, more or less, countries are as of 2007, including the likes of the US, Australia, China, France, Germany, Italy, Russian Federation and Spain, amongst many others. Collectively, these countries account for more than 2/3 of world trade and it is very likely that a UK exporter would be dealing with any of them.13 It is therefore important that the UK exporter familiarises himself with the salient features of the law. The applicability of the CISG is not mandatory and parties may even opt out of its application. In the event that only one of the parties is a signatory to it and the parties have not incorporated a choice of law, the applicable law is that of the country with the closest connection to the contract.14 In the case of a UK exporter contracting with a buyer whose place of business is in a state signatory to the CISG, the possibility that the CISG provisions will apply in the event of a dispute is high considering that the contract is to be performed (delivered) at the place of the buyer. The CISG covers only contract formation but not their validity, as well as rights and obligations of the seller. Neither does it govern the competence of parties or make a finding in cases of fraudulence and misrepresentation.15 3.0 Contract of Carriage International trading is necessarily riskier because of the necessity of sending the goods to the buyer, whose place of business is in another country. The UK exporter must, therefore, take necessary precautions so that even if the goods are subsequently damaged or lost in transit he will not suffer debilitating loss as a result, by insuring the goods and incorporating terms that will protect him as a seller. As earlier indicated, the UK exporter entering into a contract with an overseas buyer necessarily needs to ship the goods by sea to affect delivery. The case of Heskell v Continental Express16 summarised the seller’s obligations in shipping: find a reliable and suitable ship destined to the buyer’s port of calls; book and take the goods to the port, and demand a corresponding receipt; complete the bill of lading, present it to for confirmation and wait for it to be issued back, and; send the bill of lading either to the buyer or his own agent, if it is agreed that the buyer has to make the payment first in exchange for the bill of lading. 17 Contemporary practice has made some parts of the Heskell procedure obsolete. Nevertheless, the actual extent of the obligation of the seller in shipping the goods may depend on the kind of contract he entered into with the buyer. In Johnson v Taylor Bros,18 a contract in CIF terms (or cost, insurance freight) obliges the seller to do the following: issue an invoice for the goods sold; take them to the port for shipment; secure a contract for their delivery to the proper port of destination; insure them for the benefit of the buyer; send the relevant documents. A variation of such procedure is when the goods are already afloat at the time the sale is consolidated. On the other hand, in Scottish & Newcastle International Ltd v Othon Galanos Ltd19 an FOB (free on board) contract obliges the seller to ship the goods at a specific port of loading and whilst he may pay for its freight, he is not liable for any possible increase. The UK exporter must keep in mind the importance of the bill of lading because it serves as the receipt of the goods, it is a document of title and it evidences the contract of carriage. Moreover, various laws and international conventions regulate bills of lading and shipment of goods in general: The Carriage of Goods Act 1971 and 1992, a UK domestic enactment that incorporated The Hague and the Hague-Visby Rules; the Hamburg Rules and recently; the Rotterdam Rules. The UK exporter must also take note that some provisions of these treaties may result in conflict, such as provisions between the Hague-Visby Rules and the Hamburg Rules on the jurisdictions of actions in the event of loss or damage to the goods, where the former indicates the place of loading and the latter gives the port of discharge as an option. 3.1 The Hague Rules The Hague Rules was opened for signature in 1924 and is officially called the International Convention for the Unification of Certain Rules of Law relating to Bills of Lading. It covers liability for loss or damage when shipment of goods is by sea and a bill of lading is correspondingly issued for it. The UK is a signatory to it as well as some 49 other countries, but aside from the US, there are no other big states that are signatories to it. 20 These rules apply to exports coming from countries which are parties to it, which means this is applicable to the UK exporter. Their salient features are: minimum terms for the carriage of commercial goods; non-delegable exercise of due diligence by the carrier at the start of the voyage, and; adequate care of the goods whilst in transit. Nonetheless, carriers are not liable for loss and damage to the cargo resulting from negligence in navigation, management and fire, unless fault is proven.21 3.2 Hague-Visby Rules The Hague-Visby Rules, also known as the Brussels Protocols, were agreed into by various states in Brussels in 1968. The UK is a signatory to these rules, as well as its protocols22 and has incorporated its salient provisions into the COGSA 1971 and 1992. However, there are a few states, viz. less than 30, that have signed and ratified them.23 The Rules are applicable if the bill of lading is issued in or the carriage originates from a contracting state,24 which means that it is applicable to the UK exporter since the UK is a contracting party. Moreover, parties whose states were not signatories thereto can, nevertheless, decide to expressly make it a choice of law.25 The Hague-Visby Rules has features that are advantageous to the UK exporter because of the obligations they impose on the carrier, such as the following: non-delegable due diligence before and the start of the voyage; proper handling of the goods from the time of loading until unloading; issuance of bill of lading upon the shipper’s demand, and; liability for loss and damage resulting from deviation, unless such deviation is reasonably necessary.26 3.3 The Hamburg Rules The Hamburg Rules took effect in 1992 although it was adopted as early as 1978. It is also called the UN International Convention on the Carriage of Goods by Sea. Albeit the UK is not a signatory to it,27 there is nevertheless, a possibility that the UK exporter may come to deal with it because his buyer may insist on it as the contract’s choice of law in “clause paramount.” In addition, The Hamburg Rules, unlike The Hague and the Brussels Protocols, does not exclusively apply only when the port of loading is a contracting state. The Hamburg Rules is not dependent upon the issuance of bill of lading, but apply to all contracts of carriage including waybills.28 Aside from the point of loading, the Rules is also applicable when the port of discharge is a contracting party, the bill of lading or other documents evidencing the contract of freight is issued in a state, which is a contracting party, or when the bill of lading or other contract expressly chooses the Rules as the applicable law. Moreover, the Rules give the claimant the prerogative to sue in any of the following: the defendant’s principal place of business or habitual residence; the place of contract if the defendant has an office thereat; the port of loading or discharge; any other place so specified by the parties in the contract.29 3.4 The Rotterdam Rules The Rotterdam Rules was adopted in September 2009 and officially carries the title The UN Convention on Carriage of Goods Wholly or Partly by Sea, implying an expansion of coverage or a multi-modal form of goods transport. Moreover, it also widens the coverage of liable parties, such as stevedores. The carrier’s liability is increased as well as the shipper’s responsibilities more clearly set out. The time limit to bring an action to court is also extended to two years from the previous one year bar set by previous Rules. The Rotterdam Rules also keep the laws in touch with the advances in technology such as the concept of e-commerce.30 At present, however, the UK has not yet signed the treaty and only 21 did such as US, France and Spain.31 4.0 Payment Problems The CISG provides for payment issues between seller and buyer. Articles 53 to 59, thereof, provides for the obligation of the buyer to pay, and how and when such payment is to be made. Under Art 71, the seller can suspend delivery if he suspects the buyer to default payment and may only proceed upon proof assuring payment. In this connection, a common payment mechanism in Europe used in international sale of goods is the documentary collection where a draft is drawn against a documentary collection, with the exporter as drawer, the buyer as drawee and the exporter’s bank as the payee. Once the seller forwards the documentary collection, which includes the bill of lading and other documents, to its agent, a bank, in the country of the buyer, the latter has to make payment of the draft for the documents to be released.32 On the other hand, the seller may also opt for the use of a Letter of Credit, a usual form of payment employed by first time parties in an international sale of goods. The parties involved here are the issuing bank, the buyer, the notifying bank, the confirming bank and the seller. The issuing bank guarantees, through the LOC, that the seller’s draft will be paid upon the presentation of a documentary collection. It is important to read the ICC Uniform Customs and Practice (UCP) for Documentary Credits before the draft is crafted.33 Another option for the UK exporter is to demand cash in advance, which entails the buyer paying the price of the goods even before delivery is made. This, however, necessarily implies that the buyer has a high confidence in the seller, which for first transactions is highly unlikely. On the other hand, the open account scheme is riskier for the seller because it entails obliging the buyer to pay only after shipment at a time expressly agreed to by the parties, which may mean 30, 60 or 90 days after the goods are shipped.34 5.0 Conclusion The conduct of international sale of goods necessarily opens a wider commercial horizon for the large or small businessman, and can be an indication for business expansion and therefore, more success. It is, however, fraught with risks and this is because of the distance between the seller and the buyer and the time gap between loading the goods for shipment and actual delivery of the goods to the buyer. The time the goods are in transit by sea could result in either loss or damage considering that carriers are oftentimes at the mercy of the unpredictability of the weather or lapses by the carrier’s agent may occur. The differences in jurisdictions can also result in conflict of laws, whose significance may arise when events subsequently occurs prompting for the resolution of any dispute between the parties and between the party and the carrier. Distance can also spell problems in payments as the seller is not likely in a position to check the creditworthiness of the buyer. Other risks such as changes in political conditions at the other end or refusal of the buyer to take delivery also hang above the head of the seller like the sword of Damocles. There are steps however, that the seller may take to minimise all these risks and this begins by familiarizing himself with relevant international treaties that has the potential of governing his contract of sale with the buyer or his contract of carriage with the carrier. Additionally, he should look into the different payment schemes available to him as a long distance seller that would most likely to pose the least risk. References: Baughen, S. Shipping Law (4th Edn Taylor & Francis, Oxon 2009). Bradgate, R. & White, F. Commercial Law (Oxford University Press, Oxford 2007). Branch, A. Elements of Shipping (8th Edn Taylor & Francis, 2007). Carr, I. & Stone, P. International Trade Law (4th Edn Taylor & Francis, 2009). Carriage of Goods Act 1971 and 1992. Dabydeen, S.R. Legal and Regulatory Framework: For Business in the UK (iUniverse, 2004). Heskell v Continental Express [1950] All ER 1033. Hinkelman, E. A Short Course in International Payments: How to Use Letters Of Credit, D/P And D/A Terms, Prepayment, Credit, And Cyberpayments in International Transactions (2nd Edn, World Trade Press, 2002). Informare. International Conventions: Membership List (31 January 2011) http://www.informare.it/dbase/convuk.htm. Johnson v Taylor Bros [1920] 122 LT 130. Klotz, J. International Sales Agreements: An Annotated Drafting and Negotiating Guide (2nd Edn Kluwer Law International, 2008). Morrissey, J. & Graves, J. International Sales Law and Arbitration: Problems, Cases And Commentary (Kluwer Law International, 2008). Sale of Goods Act 1979. Schaffer, R. & Agusti, F. & Earle, B. International Business Law and Its Environment (7th Edn Cengage Learning, 2008). Scottish & Newcastle International Ltd v Othon Galanos Ltd [2008] 1 Lloyd’s Rep 462. Unfair Contract Terms Act 1977. United Nations Convention on Contracts for the International Sale of Goods (CISG). The United Nations Convention on Carriage of Goods by Sea (The Hamburg Rules). The International Convention for the Unification of Certain Rules of Law relating to Bills of Lading of 1924 (Hague Rules). The Brussels Protocol (Hague-Visby Rules). UN Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea (The Rotterdam Rules). United Nations Treaty Collection, United Nations Convention on Carriage of Goods Wholly or Partly by Sea. UN. http://treaties.un.org/pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XI-D-8&chapter=11&lang=en Read More