International Business Law: The Concept of a CIF Contract - Case Study Example

PROBLEM Virtually from the time that human beings have realized that it is well nigh impossible to produce everything in their own backyards, international sale of goods, or more particularly, the carriage of goods by sea has become a necessity. Historically fraught with difficulty, given both the natural perils of the sea and human error, legal systems have deemed it imperative to come up with rules to govern and protect not only international commerce so as to ensure its continued viability, but also the players involved - spelling out with no shortage of details the latter's rights and responsibilities. The laws have undergone shifts many times, perhaps owing to the fact that international commerce has itself undergone so many developments. Indeed, "each statement of a rule of law is a generalization drawn from this seething, pulsating background of life." (Corbin 1937, p449) A very common problem used to be that the buyer of goods is not the shipper of the goods and is therefore not privy to the contract with the carrier. (Sellman 2003, page 87). This becomes relevant when the goods or cargo are damaged or lost by the carrier. Even though there may be a bill of lading, such document transfers only ownership of the goods; it does not transfer the contract nor does it allow the buyer to step into the shoes of the seller. It is a fundamental precept of law that only the parties to a contract can file an action for breach of that contract. Hence, the buyer cannot sue the carrier to recompense his loss nor can the carrier in any way be made liable to the buyer for damages arising from the contract. Privity of contract essentially means that a contract cannot confer rights or impose obligations to anyone except the parties under it. In the case of Grant v. Norway (Court of Common Pleas 1851, 138 ER 263), the Court absolved the shipowner of liability for nonshipment of bales of silk, by virtue of the fact that the master of the ship who signed the bill of lading may not be considered an agent of the shipowner so as to bind latter. This particular case had the practical effect of reducing the value of bills of lading and rendering precarious its important role in the field of international commerce. Hence, the decision had an uneasy passage through time under the scrutiny of various 20th century English judges. (Leng 1992, page 133). These serious problems were solved by the passage of the Bill of Lading Act of 1855, which specifically allowed the transfer of the rights of suit to the consignee. But while the passage of the Act at least eliminated some of the problems of the previous legal regime particularly with regard to the impunity of the carrier of the goods, it was still deficient in many respects. A significant problem was with respect to undivided bulk cargoes, wherein the bill of lading endorsement still does not have the effect of transferring rights to sue. It still passes only during physical delivery. Moreover, the Bill of Lading Act does not apply to waybills. Waybills are used in situations wherein the goods are not the subject of a sale contract and the shipper retains the right to nominate the identity of the receiver. Hence, the consignee of waybills does not have a cause of action against the carrier, and may not proceed against him in cases of breach. Lastly, the Act does not apply, evidently enough, where the document is not a bill of lading, nor does it cover a situation wherein the property passed before endorsement. All these concerns were solved by the passage of the Carriage of Goods by Sea Act of 1992, or the COGSA. As stated by Robert Bradgate and Fidelma White (Bradgate & White 1993, p. 188) "the primary motive for reform was the recognition that, as recent cases showed, English law no longer dealt adequately with the problems created by modern trade and carriage practices, especially where goods were lost or damaged in transit and that those problems were better dealt with by other jurisdictions, including those of the United States and some other European states, creating a threat that lucrative shipping and insurance business, litigation and arbitration, might be lost to the city and the national economy." The most significant change introduced by the Carriage of Goods by Sea Act 1992, is that the consignee or endorsee now has a right of action against the carrier for loss or damage of the good, and by legal fiction he obtains the rights to sue of an original contracting party, regardless of when he acquires title to the goods. This is the essence of Section 2(1) of the COGSA. Section 2(4), on the other hand, states that when the person who has a legal right over the property and the person who has a right to sue by virtue of the bill of lading are two different persons, the latter "shall be entitled to exercise those rights for the benefit of the person who sustained the loss or damage to the same extent as they could have been exercised if they had been vested in the person for whose benefit they are exercised." Equally important is Section 2(5), which states that when the document is a bill of lading and there is a prior party in the said document, the rights of that prior party are extinguished from the moment of transfer to the person with beneficial interest in the property, or the consignee/endorsee for value. The COGSA also creates concomitant liabilities for all the parties involved. The person in whom rights under the contract of carriage are vested will become liable under the contract of carriage as though he were an original party to the contract of carriage if he: (a)takes or demands delivery from the carrier of any of the goods to which the document relates;(b)makes a claim under the contract of carriage against the carrier in respect of any of those goods; or(c)is a person who, at a time before those rights were vested in him, took or demanded delivery from the carrier of any of those goods. This is clear in Section 3(1) of the COGSA. The Act also limits the liabilities of a shipper only to those goods that are included in a ship's delivery order, if the goods in the delivery order form only a part of the goods covered in the contract of carriage. [Section 2(2)]. It is for reasons of fairness and equity that a shipper will no longer be held accountable for goods that are not covered by the delivery order of the vessel, and are therefore, beyond his custody. Another change in the COGSA that impacts heavily on holders of a bill of lading is that it may now be considered "conclusive evidence against the carrier of the shipment of the goods, or as the case may be, of their receipt for shipment." Even in cases when it has been signed by a person who had the express, implied or apparent authority of the carrier to sign bills of lading. It cannot be denied that this is clearly a response to the Grant v. Norway decision, wherein the consignee's arms were hamstrung by the fact that the master of the vessel was not given any clear authority by the shipowner. Although there were some attempts to address the injustice wrought by the decision on innocent consignees for value -- for example in the Bills of Lading Act and in Article III of the Hague Vizby Rules1 which state that the carrier must use dual diligence to assure that the ship is seaworthy, man and properly equip the ship, and make parts of the ship that are going to carry goods fit and safe for the reception, carriage and preservation of the goods -- it was only the Carriage of Goods by Sea Act 1992 that offered the most comprehensive layer of protection for the parties involved. Walter and Morse has this observation to make, however: "The quid pro quo is that the receiver then stands in the shoes of the original shipper. In certain cases, e.g. shipment of dangerous goods this could give rise to unexpected liabilities for the receiver." But then again, it is a stretch of the imagination to say that the receiver is not aware of the contents of the cargo. In a world where transnational crimes like drug smuggling are on the rise, the COGSA 1992 just might yield unexpected benefits. (Walter & Morse, ) Despite the development in other forms of transport, the sea is still the usual way of transporting goods overseas - about 90% of all goods are carried this way. (Pritchard Unpublished notes, 2005-2006). This is what makes the COGSA so important. It is crucial, not only for the preservation of the legal system, but for the stability of international commerce. PROBLEM 2. It is imperative to begin by discussing the concept of a CIF contract, or a cost insurance freight contract. According to Thayer, "few customs of merchants have had more far-reaching consequences on the conduct of international commerce, or have played a more important part in the shaping of mercantile practice." (Thayer 1940, p. 792) Under a CIF contract the seller must supply the goods and arrange contracts for their carriage and insurance during transit to the named port. The seller then send the relevant contract, carriage and insurance documents to the buyer, who pays on receipt of these documents and uses them to collect the goods when they arrive. (Pritchard). The CIF contract is just one of several standard form contracts that deal with goods transported by sea. The other standard form contracts are: ex works, free along side, cost insurance freight, free on board, and delivered ex ship. The two most common contracts are the CIF contract and the FOB contract, both of which have been around for more than a century and have simplified the relationships of the parties involved in the transaction. Documents play a central role in the CIF contract. The seller performs the contract by tendering to the buyer the bill of lading, insurance policy and invoice. These documents represent the goods, and protect the buyer from most risks during transit. They enable him to deal with the goods before they arrive at the port. Transfer of the bill of lading operates as delivery of the goods. The policy of insurance gives protection against the perils of the sea. The buyer, who in turn, is obligated to make payment. In order to sufficiently address the problem question at hand, however, the definition of a CIF contract must be read alongside the Sale of Goods Act 1979, which is the main piece of legislation governing the rights and duties of buyers and sellers in the United Kingdom. This Act replaced the original Sale of Goods Act 1893 and has itself been amended by the following: the Sale and Supply of Goods Act 1994; the Sale of Goods (Amendment) Acts 1994 and 1995. Now we proceed to analyzing the rights and obligations of the parties to the two contracts in the problem question given. CURTIS Curtis claims that he should not be made liable for payment of the goods because no insurance policy was provided to him. It is a basic principle of contract law that contracts are binding, and if one party fails to perform his obligations, then he may not compel the other to perform his, and may in fact even be liable to the other for damages. (Berman 1963). It is likewise elementary that failure to tender an insurance policy constitutes breach on the part of the seller. There is no express stipulation that allows the tendering of an insurance certificate, instead of an insurance policy, in the problem. Absent that, Curtis may still be able to invoke the defense that the other party failed to tender an insurance policy, even if the latter might have tendered an insurance certificate. This is consistent with the ruling in the case of Maine Spinning Co. v. Sutcliffe 1917. Even though Curtis received the bill of lading, it cannot be deemed acceptance as of yet, because he has not received the insurance policy, and therefore, there was a fatal defect that made the transaction unconsummated. Since Curtis may not be deemed to have accepted the goods, then two remedies are still available to him under the Sales of Goods Act - the right to repudiate the contract and reject the goods, as well as the right to sue for damages. On the issue of the delivery date that fell outside the period provided for in the bill of lading, it is settled jurisprudence (Bowes v. Shand 1877) that the shipment date forms part of the description of the goods, and hence, the buyer has a right to repudiate if the goods were shipped outside of the period agreed upon. According to Sc 13(1) where there is a sale of goods by description, then there is an implied condition that the goods will correspond to their description. Hence, Curtis may decide to reject the goods, as it came late. The Bill of Lading is evidence of the contract between the parties, it contains statements of fact that are useful later on. (Sirariyakul, 2001, p1) Of course, this must be reckoned with the ruling of the Court in the case of Harlingdon and Leinster v. Christopher Hull Fine Art (1991)2, where it was stated that a contract will not be a sale by description merely because the seller has made some statement about the goods. The buyer must show that the description influenced his decision to buy. What we can infer from the ruling in this case with respect to its application to Curtis' predicament is that Curtis may be made to prove that the element of time influenced his decision to purchase his car. Another point to ponder on is the statement of Mullis that the "question whether there has been a fundamental breach can only be answered by asking whether the breach results in 'such detriment to the other party as substantially to deprive him of that which he is entitled to expect under the contract'" (Mullis 1997, p8) If it is apparent that Curtis is only trying to look for a way to get out of fulfilling his duties, then the court must take cognizance of that. Estoppel, however, may not be used against Curtis. It may only be used when he accepted the documents, but this mean accepting these documents in their true and complete form. While he may have accepted the bill of lading, he did not get all the documents due him as the seller because he was not given an insurance policy. The next question is whether or not Curtis is entitled to retroactively justify his rejection of the goods. The answer may be found in the case of Boston Deep Sea Fishing and Ice co. v. Ansell 18883. The case is seminal in that it establishes the doctrine that it is sufficient that there was a fundamental breach of the contract, whether or not the other party did not know it at the time. Thus, applying this to Curtis' case, he can invoke the time delay of the other party, even if he found out about it only later on, and it would seem almost like an afterthought. BILLY It is the responsibility of the seller to make sure that the bill of lading is clean and free from any infirmity. The bill of lading must reflect the actual shipment, i.e., the name of the vessel, and Billy's bank could refuse to honor the goods. However, in the case of Biddel Bros v E Clement Horst Co 1911 stated that the seller is under a duty to ship the goods but this can be achieved by tendering goods that are already afloat - these may have already been shipped by the seller or bought from another person. So unless there is a clause in the contract to the contrary, the seller may fulfil his obligation under CIF not by shipping the goods, but by tendering the documents for goods that are already shipped. (Pritchard). This of course, does not preclude the bank from not accepting the goods, and from compeling the shipper to amend the Bill of Lading, The next question is whether or not the shipmaster can correct the mistake in the Bill of Lading. According to Troy-Davies, "the content of the face of a bill of lading alternatively can give rise to an estoppel at common law or can become actionable as constituting a fraudulent or negligent misrepresentation. Consequently, because the carrier is thereby placed at risk, the information inserted on the face of the bill of lading generally will be stated or deemed to have been supplied and warranted by the shipper, which will be required to indemnify the carrier against inaccuracies in the information provided for inclusion in the bill of lading." (Troy-Davies 1999) What this demonstrates is that the statements placed on a Bill of Lading are not trifling matters. It gives rise to rights and liabilities. Hence, to answer the question, absent any clear proof that the shipmaster had direct instructions from his principal to amend the Bill of Lading, he cannot do so on his own. Finally, with respect to the last question, the core question is whether or not there is an express stipulation as to the route to be employed. In the case of Tsakiroglou v Noblee Thorl 1962, the Court held that the contract is not avoided because of a change in route, absent any express stipulation by the parties and there being no indication that any of the parties' rights were imperiled. As stated by Lennon (2003), "The true test seems to be what departure from the contract voyage might a prudent person controlling the voyage at the time make and maintain, having in mind all the relevant circumstances existing at the time, including the terms of the contract and the interests of all parties concerned, but without obligation to consider the interests of any one as conclusive." REFERENCES Berman, H. 'Excuse for Nonperformance in the Light of Contract Practices in International Trade', Columbia Law Review, vol. 63, no. 8, pp. 1413 - 1439. Bradgate, R. and White, F. 'The Carriage of Goods by Sea Act 1992', Modern Law Review, vol. 56, no. 2. pp 188 - 207 Chuan, JCT Law Of International Trade 2nd Edition Corbin, A. L. 1937, 'Recent Developments in the Law of Contracts', Harvard Law Review, vol. 50, no. 3, p. 449. D'Arcy, L Murray, C Cleave, B Schmitthoffs Export Trade -The Law and Practice of International Trade Honnold, J 'Uniform Law for International Sales under the 1980 United Nations Convention (3rd ed. 1999) Kluwer Leng Sun Chan, 1992. 'The Undead: Grant v. Norway Revisisted', Singapore Academy of Law Journal, vol. 4, no. 133. Lennon, M., 2003. 'Deviation Then and Now'. St. John's Law Review. p1. Mullis, A., 1997. 'Termination for Breach of Contract in CIF Contracts Under the Vienna Convention and English Law: Is there a Substantial Difference' Contemporary Issues in Commercial Law (Essays in honor of Prof. A.G. Guest), pp. 137-160. Pritchard, N. Unpublished Notes. 2005-2006. Schlechtriem, P Uniform Sales Law. The UN Convention on Contract for the International Sale of Goods, in Law-Economics-International Trade, vol VI, Vienna, 1986 Sekos, G., 2000. 'Comparative Analysis of the Roles of Bills of Lading Under Greek, English and American Law'. Managerial Law Journal. . Volume 42. Issue 1. page 1. Sellman, P. 2003, 'The Law of International Trade', p. 187. Sirariyakul, S. 2001, 'Consequences of a Reservation on a Bill of Lading'. International Maritime Law Institute. p1 Takahashi, K 'Right to Terminate (Avoid) International Sales of Commodities' 2003 Journal of Business Law Thayer, P. 'CIF Contracts in International Commerce'. Harvard Law Review, vol. 53, no. 5 (Mar., 1940) , pp. 792-826) Todd, P Cases and Materials on International Trade Law Sweet and Maxwell 2003 Troy-Davies, K. 1999. An Introduction to Bills of Lading. www.essexcourt.net Visited on May 27, 2006. Read More