Analysis of Sale of Goods Law Case - Coursework Example

? Sale of Goods Law By s Due Q Obama is a specialist publisher of political material. He entered into a contract with David who sells political books. The contract was for the sale of 120,000 books entitled How to win votes on CIF terms. They had negotiated the terms of the contract over the internet via email. The books were to be shipped in three containers in January 2010 from New York (the US) to Southampton (the UK). Obama received a clean Bill of Lading and shipped the goods. However, when David received the books, he found that the entire contents of one container had been badly damaged because the carrier had not stowed the container properly. He also found that the books in another container were about gardening instead of politics. The books in the third container conformed to the terms of the contract of sale. There are some statutes that favor David in respect of the books that were about gardening. S 13(1) of Sale of Goods Act 1979 states that, “Where there is a contract for the sale of goods by description, there is an implied condition that the goods will correspond with the description.”1 According to the given facts, David made a contract for goods that fit a particular description i.e. the books entitled How to win votes. There was an implied condition that the books must have been the same. Books about gardening were unrelated to the terms of the contract. S 14(3) of SOGA states that, “Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known to the seller any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the seller's skill or judgment.”2 The books about gardening were certainly not fit for the purpose of David. David wanted books that were related to politics only and they bore a specific title. There was an implied condition that has been breached by Obama. David has now an option to treat the delivery of gardening books as a breach of warranty. He also has a right to reject the books because there has been a breach of condition. The contract between David and Obama is a non-severable contract. This means that S 11(4) is applicable which states that, “Where a contract of sale is not severable and the buyer has accepted the goods or part of them, the breach of a condition to be fulfilled by the seller can only be treated as a breach of warranty, and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is an express or implied term of the contract to that effect.”3 One of the containers had the books that were in perfect condition and were in conformity with the contract. David cannot reject those books. However, when he rejects a part of books, he would have to treat the breach of condition as a breach of warranty and would not be able to treat the contract as repudiated. He would be entitled to claim damages from Obama for the loss that he has sustained due to the delivery of wrong books. Obama’s view that David can easily on-sell the books based on gardening is of no consequence because the delivery of those books was not a part of the contract. Their contract was made through emails. This means that a written record of their conversations can be obtained easily. David discovered that the entire contents of one container were badly damaged. Obama is denying any responsibility for that and the Jardine Carriers, with whom Obama had contracted for the carriage of the books, say that it has “nothing to do with them” because there was no contract between JC and David. The contract between Obama and David was made on CIF terms. CIF (Cost, Insurance and Freight) means that the seller delivers when the goods pass the ship’s rail in the port of shipment. Also, S 32(1) of SOGA states that, “Where, in pursuance of a contract of sale, the seller is authorized or required to send the goods to the buyer, delivery of the goods to a carrier (whether named by the buyer or not) for the purpose of transmission to the buyer is prima facie deemed to be a delivery of the goods to the buyer.”4 This means that Obama was responsible to pay for the costs and freight that were necessary to bring the goods to the named port of destination (Southampton). However, the risk of loss of or damage to the goods, and any additional costs due to events that happen after the time of delivery, had passed to David from Obama. Another important aspect of CIF terms is that the seller is also bound to procure a marine insurance against the buyer’s risk of loss of or damage to the goods during the carriage. The seller has to contract for insurance and pay the insurance premium but he is required to obtain insurance only on minimum cover. If the buyer wishes to obtain protection of greater cover, he must make an express agreement with the seller or make insurance arrangements for himself on his own. Under the contract, Obama was bound to make a contract of marine insurance against David’s risk. A marine insurance with a minimum cover would have protected David from this loss because it was an “act of men”. If the carrier had stowed the container properly, the damaged would not have occurred. Obama has denied responsibility for the damaged goods. He obtained a clean bill of lading which means that the goods were received in a good condition on board. However, the given facts are devoid of the information whether Obama procured a marine insurance for David. Assuming that he did not procure a marine insurance, he could be held liable for breach of CIF terms. On the other hand, JC cannot excuse itself by stating that David was not a party to the contract. Bill of Lading Act clearly states in S 2 that, “Every consignee of goods named in a bill of lading, and every endorsee of a bill of lading to whom the property in the goods therein mentioned passes on or by reason of the consignment or endorsement, has and is vested with all rights of action and is subject to all liabilities in respect of those goods as if the contract contained in the bill of lading had been made with himself.”5 Therefore, JC is answerable to David as if he became a party to the contract. Article III(2) of Carriage of Goods by Sea Act, 1971 states that, “Subject to the provisions of Article IV, the carrier shall properly and carefully load, handle, stow, carry, keep, care for, and discharge the goods carried.”6 Article IV explains that the carrier or the ship-owner is not liable for the loss of or damage to the cargo unless such loss or damage is caused by want of due diligence on the part of the carrier to make the ship seaworthy and make necessary arrangements for the safe delivery of the cargo. This has not been the case in the given scenario. JC would be held liable for the damage caused to the cargo. Assuming that Obama had procured a marine insurance against David’s risks, David would be entitled to be indemnified by the insurer. Then, by the right of subrogation, the insurer would be entitled to recover damages from JC. The burden of proof that the carrier acted with due diligence and the damage to the books in the container was inevitable would lie on JC. Q.2 David’s financial state has become miserable and he has not been very lucky with the resale of the books. Shifty Banking had issued a letter of credit for David. When Obama made the delivery of the books to the carrier, he fulfilled his obligations under the contract. He presented the necessary documents to Shifty Banking which paid the LOC. The contract between David and Obama is a separate transaction from the credit that David has obtained from Shifty Banking. Article 4(a) of UCP 600 states that, “A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honor, to negotiate or to fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from its relationships with the issuing bank or the beneficiary.”7 Whatever that has gone between David and Obama is not related to Shifty Banking. Shifty Banking holds the bill of lading but David has already taken the delivery of the goods. It is safe to assume here that as all the communications between David and Obama have been through email, Obama must have sent an electronic copy of the bill of lading to David. David must have scanned that copy and taken delivery of the goods. The carrier is bound to deliver the cargo only against the original bill of lading. Since David is the consignee in this case, he would have been able to prove that he was entitled to the possession of the goods. However, Shifty Banking had incorporated a term into their contract which gave it a general charge over the cargo and the shipping documents until David paid for the credit. It can gain possession of all the books that were consigned by Obama and hold these against David till he pays for the credit. Although David has taken the delivery of the goods, the bill of lading can still be sufficient for Shifty Banking to take possession of the goods and exercise their right of lien. However, the given facts suggest that it is very clear that David would not be able to pay for his credit. Therefore, David stands in relation to Shifty Banking like any other debtor who is unable to pay his debt to a creditor. It is assumed that David is at the bankruptcy level and Shifty Banking is his only creditor. This case now falls under the Insolvency Act 1986 which states in S 264(1) that, “A petition for a bankruptcy order to be made against an individual may be presented to the court… (a) by one of the individual's creditors or jointly by more than one of them…”8 To initiate their action against David, Shifty Banking would have to make a demand from David in a prescribed form which requires him to pay the debt or to secure or compound for it to the satisfaction of Shifty Banking. Then Shifty Banking would have to wait for a period of 3 weeks. If David does not comply with their demand nor sets it aside, Shifty Banking would have complied with the requirements of S 268(a) of Insolvency Act9 and it would be entitled to make a petition against David. S 267(1) of Insolvency Act 1986 entitles Shifting Banking to make a petition for a bankruptcy order to be made against David. It states that, “A creditor's petition must be in respect of one or more debts owed by the debtor, and the petitioning creditor or each of the petitioning creditors must be a person to whom the debt or (as the case may be) at least one of the debts is owed.” Under S 267(2) of Insolvency Act 198610, Shifty Banking would have to present to the court that: a. The amount of debt is equal to or exceeds the bankruptcy level; b. The debt is for a liquidated sum payable to Shifty Banking immediately and is unsecured; c. The debt is a debt which the debtor appears to be either unable to pay or has no reasonable prospect of being able to pay; and d. There is no outstanding application to set aside a statutory demand served (under section 268) in respect of the debt or any of the debts. It is also very important that if Shifty Banking takes possession of the books, it would be willing to give up the possession of books in an event where a bankruptcy order has been made against David. Otherwise, the debt owed by David would not be deemed to be unsecure. When the court is convinced that under S 271 (1a) of Insolvency Act, “a debt which, having been payable at the date of the petition or having since become payable, has been neither paid nor secured or compounded for…”11 the court would make a bankruptcy order on Shifty Banking’s petition. Once a bankruptcy order has been made against David, a trustee would be appointed who would be obliged to sell David’s assets (realize them) and pay a dividend to his creditor, Shifty Banking. Q.3 David raised finance for the books under a confirmed irrevocable documentary letter of credit with Shifty Banking being the issuing bank. One of the reasons that prompted reformation in UCP 500 was that almost 70% of the letters of credit were rejected on first sight. It was because most of the times, the communication between the parties was not sufficient to eliminate the confusion between the parties. Additionally, there were also a huge number of frauds that were committed by remote parties. Therefore, UCP 600 allows only irrevocable letters of credit so that the payment to the beneficiary is ensured. Article 3 of UCP 600 states that, “A credit is irrevocable even if there is no indication to that effect.”12 However, there can still be cases where a buyer needs to stop the payment of the letter of credit. The issuing bank is not concerned with the fact whether the actual contractual obligations have been fulfilled by the seller. It pays the letter of credit just on the documented evidence that the seller has done so. When Obama presented the documents including the bill of lading that proved that he had sent the cargo to David, the letter of credit was paid. If David had known that one of the containers was carrying wrong books, he would not have been able to stop the payment of letter of credit under UCP 600. However, he could have obtained an injunction against Obama to stop the payment of letter of credit. Injunction is a relief for buyers against the beneficiaries but it can be deemed undesirable because it took years of effort to secure payments under letters of credit through UCP 600. Injunction affects the forum of litigation by affecting the beneficiary’s ability to use the funds and affects the parties’ costs. This is why the courts require the applicant of injunction to maintain a high degree of proof that the beneficiary is not entitled to the payment of letter of credit. David could have obtained injunction that would have stopped Shifty Banking from effecting payment under the letter of credit. David would have had to seek an injunction to enjoin Shifty Banking from honoring the letter of credit i.e. injunctive dishonor. Generally, two types of injunctions are granted: temporary and permanent. However, for a plaintiff to successfully obtain an injunction, he must prove on the balance of probabilities that the beneficiary is not entitled to a payment under the letter of credit. The courts look at (a) the strength of the plaintiff’s case as a matter of fact and law, (b) whether damages at law provide an adequate remedy, and (c) the balance of convenience. The plaintiff must show that there is a serious question of fact or law that is to be tried13 (Mugasha, 2003). In the case of David, he would have had to show that there was a breach of condition by Obama when he sent the wrong books. David could also have informed Shifty Banking of the delivery of the wrong books. Shifty Banking could have exercised an elected dishonor as a result. In that case too, David would have had to provide sufficient evidence to Shifty Banking so that it could successfully defend the letter of credit against Obama. In the case of elective dishonor, Obama would have certainly brought an action against Shifty Banking to receive his payment under the letter of credit. In Lloyd’s v Canadian Imperial Bank of Commerce14, the issuer exercised an elective dishonor and maintained that it was presented with such evidence that any reasonable banker could have easily inferred that there was a fraud. The issuer also argued that requirement of evidence of fraud must be less stringent in elective dishonor cases than the injunctive dishonor cases. The English Queen’s Bench Division rejected this suggestion and held that the issuer must only refuse to honor a credit when fraud is clear and obvious and not when it can be reasonably inferred. Therefore, Shifty Banking would have had to have sufficient evidence from David that Obama had breached a condition. David could also have obtained an injunction that would have stopped Obama from drawing on the letter of credit. In Deutsche Ruckversicherung AG v Walbrook Insurance Co Ltd15, the applicant sought an injunction to stop the beneficiary from drawing on the letter of credit. The applicant claimed that the beneficiary had committed a fraud and was not entitled to the payment under the letter of credit. He did not establish clear or obvious fraud and maintained only that the beneficiary was in doubt as to his claim on the underlying transaction. The court rejected the applicant’s claim and explained that the applicant who seeks to restrain the beneficiary from drawing on the letter of credit must prove fraud in the same way as one who seeks the issuer from honoring the letter of credit. In the case of David, it would have been easy for him to prove that one container from Obama had the wrong books which were not the subject of their contract. He could have easily provided the transcripts of the emails between them. It is very important for the obtainment of the aforementioned injunctions that Obama had not presented the documents to the bank when David came to know about the delivery of wrong books. From the given facts, it can be inferred that Obama had presented the necessary documents before the consignment reached David. In this case, David could have obtained an injunction to restrain Obama from dealing with the letter of credit proceeds. This injunction is quite similar to Mareva injunction in which the beneficiary is prohibited from disposing the assets. David would have to prove that there is a risk that Obama would utilize the proceeds and thereby foil any judgment that David may obtain against Obama. This injunction only requires an arguable case that usually involves a breach of contract, a risk of asset dissipation and the balance of convenience. However, the court may not grant such injunction if it is convinced that damages would be an adequate remedy. In Prime Deal (HK) Enterprises Ltd v The Hong Kong and Shanghai Banking Corporation Ltd16, the court allowed the beneficiary to deal with the letter of credit proceeds when it was convinced that damages would be an adequate remedy. It has been discussed above that when David would reject a part of books, he would have to treat the breach of condition as a breach of warranty. Damages are an adequate remedy for a breach of warranty under Sale of Goods Act, 1979. Therefore, David might not succeed in obtaining such injunction. Q.4 A standard form contract is a contract between two parties in which the terms and conditions are set by one of the parties and it is a “take it or leave it” situation for the other party. The other party is not in a position to modify the terms of the contract through negotiation. These contracts are not illegal but there is always a possibility of such contracts being unconscionable. However, these contracts are economically efficient because the buyer and the seller do not have to negotiate the details of the sale contract each time the product is sold. It is very important for the drafter of such contract to adhere to S 3(2) of Unfair Contract Terms Act 1977 which states that, “As against that party, the other cannot by reference to any contract term— (a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or (b) claim to be entitled— (i) to render a contractual performance substantially different from that which was reasonably expected of him, or (ii) in respect of the whole or any part of his contractual obligation, to render no performance at all, except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness.”17 This subsection has been enacted to minimize the element of unreasonableness from all contracts and also applies to the standard form contracts. In the case of David and Obama, they could have made a standard form contract. From the given facts, it can be reasonably assumed that Obama would have acted as the drafter of the contract. This is because Obama is a specialist publisher of political material and, importantly, the seller. The standard form of contract would have set out the responsibilities and liabilities of both the parties involved. It would have been stated in the contract as to how the books would be shipped to David. The Unfair Contract Terms Act 1977 would have stopped Obama from drafting such terms that would have unfairly limited his liability. However, it is hard to conclude whether the parties would have been better off if they had made a standard form contract. The given facts show that the parties made their agreement using the best available options. The practice of making a contract on CIF terms and obtaining insurance through a letter of credit is very common today. There might be an argument that as the liabilities of the seller would have been set out in the standard form contract, Obama would have not been able to deny responsibility for the delivery of the wrong books. The contract has been actually made between the two parties does not exonerate Obama from this responsibility either. Currently, his breach of condition, which is assumed to be a breach of warranty by David, requires him to pay damages to David. It is very certain that a similar scenario would have been faced had there been a standard form contract between the parties. Standard form contract could have saved some precious time for the parties though. Especially for David, this contract would have enabled him to enforce his rights under the contract right away. This is because Obama would have stated his liabilities under the contract in case of delivery of non-conforming goods. In the given scenario, time would have played a crucial role especially for David for whom this contract has been a disaster. There are some limitations of standard form contract which cannot be ignored. Mostly, these contracts are lengthy and are written in a complicated legal language which reduces the possibility of their being read in full. Buyers do not read such contracts in full as it is very rare that they would find some useful information. Even if a buyer finds such information, it is not much helpful because he cannot negotiate to modify that term or condition and he stays in a “take it or leave it” position regardless. Furthermore, reading such a lengthy contract is a time taking process and most of the buyers consider it a waste of their time. According to the given facts, Obama and David communicated through email. In such a communication, there is a possibility that David may not have had access to the full terms of the contract before acceptance. Clearly, the full terms of the contract would have been in a different location as David is in the UK while Obama is in the US. If David would have came across some terms of the contract after his acceptance, those terms would not have formed a part of the contract since all the terms of the contract are needed to be disclosed before the contract is executed. It is possible that David would have had access to the full terms when the books had reached him. In contracts of sale, the buyers are mostly concerned with the price and the quality of the goods. These terms are understood and agreed on before the standard form contract is signed. The rest of the terms of the contract have less importance for them. Therefore, these terms are likely to be skipped during reading or simply ignored by the buyer. When the main terms of the contract have been explained and negotiated, there is a possibility that a number of sources would put pressure on the buyer to conclude the bargain. Such social pressures compel the buyer to sign the contract without reading all the terms of the contract. When a party to a contract signs a written document containing the terms of the contract, it is considered that the party has read and agreed to all the terms of the contract. Also, assuming that David was facing a huge demand for the books and he really needed the books from Obama, Obama may have included such terms in the contract which might be fair in the legal sense but not acceptable for David. Out of necessity, David might have been forced to accept those terms and condition. Common law treats standard form contracts as any other contract. The legal obligations and rights of both the parties would have been the same. Standard form contract would have been economically efficient and could have saved some important time which proved to be crucial for David. There are some limitations to this contract too which could have given Obama an unfair advantage over David. If the standard form contract and the contract that was actually made between David and Obama are compared, the standard form contract seems to be a better option because of it being timely. The limitations of this contract could have been easily countered by Unfair Contract Terms Act 1977 as it would have nullified the impact of unfair terms in the contract, if any. Therefore, the parties may have been better off if they had contracted on a standard form contract. However, the liability of the carrier would have been the same as he did not stow one container properly which caused damage to the books. Also, the contract made between David and Shifty Banking would have had a similar effect because such contract is separate from the contract of sale. References Bill of Lading Act. (UK) s 2 Carriage of Goods by Sea Act, 1971. (UK) Article III (2) Deutsche Ruckversicherung AG v Walbrook Insurance Co Ltd [1995] 1 WLR 1017 Insolvency Act, 1986. (UK) s 264(1) Insolvency Act, 1986. (UK) s 267(1) Insolvency Act, 1986. (UK) s 267(2) Insolvency Act, 1986. (UK) s 268(a) Insolvency Act, 1986. (UK) s 271(1a) Lloyd’s v Canadian Imperial Bank of Commerce [1993] 2 Lloyd's Rep 579 Mugasha, Agasha, 2003, The law of letters of credit and bank guarantees, Federation Press, Sydney, Australia. Prime Deal (HK) Enterprises Ltd v The Hong Kong and Shanghai Banking Corporation Ltd [2002] 831 HKCU 1 (Hong Kong) Sale of Goods Act, 1979. (UK) s 11 (4) Sale of Goods Act, 1979. (UK) s 13 (1) Sale of Goods Act, 1979. (UK) s 14 (3) Sale of Goods Act, 1979. (UK) s 32 (1) UCP 600. (Int) Article 3 UCP 600. (Int) Article 4(a) Unfair Contract Terms Act 1977. (UK) s 3(2) Read More