International Sales Contracts - Essay Example

International Sales Contracts 0 Introduction: In a contract of sale it is important to understand when the to the goods passes and also when the risk in the goods passes to ascertain the rights and responsibilities of the various parties to the contract being the shipper or the seller, the consignee or the buyer and also the carrier. The law relating to a transaction of sale is so complex that it requires a number of details including the basic terms under which the contract was entered into to decide on the issues or disputes arising from the contract. Though in most cases the terms of the contract of sale are explicit and aid in deciding the issues, there are circumstances where the intention of the parties do matter apart from the legal terms forming part of the contract of sale. However as has been pointed out by Lord Wright in Ross T Smyth and Co Ltd Bailey, Son and Co1 the intention of the parties can not be subjected to any proof; rather the intentions can be ascertained “from the terms of the contract, the conduct of the parties and the circumstances of the case.” This paper brings out the implications of the observations of Lord Wright about the intentions of the parties to a contract of sale with regard to the FOB and CIF contracts and also the improvements if any brought about by section 20A newly introduced by the Sale of Goods (Amendment) Act 1995 on the position of the CIF buyer of bulk goods. 2.0 Intention of the Parties: According to the basic principle in the law relating to the contract of sale, all the terms of the contract depends entirely on the intention of the parties to the contract. Though this situation is true in a number of cases this position is usually forgotten by the parties involved. However such intentions cover even the terms governing the time at which the title and risk passes to the buyer. Hence it can be stated that only under the circumstances where the intention of the parties are not clear or if the agreement between them is silent the law relating to the sale of goods provides the missing terms to conclude the contract or settle the dispute if any. This position of importance given to the intention of the parties in a contract of sale is recognized even by the common law statutes and the civil codes. Under the Sale of Goods Act 19792 the ‘intention of the parties’ has been referred to in a number of instances. Under section 10 the phrases “unless a different intention appears from the terms of the contract” are being used. Sections 17(1), 18 and 20 of the Sale of Goods Act 1979 also have used the intention of the parties in different circumstances. Section 17(2) goes further to explain how the intention of the parties can be determined. Section 17(2) reads “For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case.” 3.0 Standard Terms in Sale of Goods: For understanding the impact of the intention of the parties on the different terms in the sale of goods it is necessary to understand the nature of the contract the terms signify. The most important terms in the contract of sale being in use in relation to international contracts are known as ‘incoterms’. The ‘incoterms’ are provided by the International Chamber of Commerce. The most important of such terms are ‘FOB’ (free on board) and ‘CIF’ (cost, insurance and freight). These terms are quite popular in the international carriage of goods by sea. A broad explanation of these terms is provided below: 3.1 FOB (Free on Board): “’Free on Board’ implies that the seller delivers when the goods pass the ship’s rail at the named port of shipment.3 This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that point.4The FOB term requires the seller to clear the goods for export. 5 This term can be used only for sea or inland waterway transport...” Generally the FOB term is regarded as the simplest form of sale contract from the point of view of the seller as it absolves the seller of his responsibilities to fix the carrier and take the burden of ensuring the goods safely reach the buyer. The seller’s responsibilities are over once the goods are handed over to the carrier for shipping nominated by the buyer. In the strictest form of a FOB contract the buyer becomes the shipper in so far as nominating the particular vessel by which the shipment needs to be effected. It also becomes the buyer’s responsibility in such contracts to collect the Bill of lading, and to pay the freight and the insurance premium after making suitable arrangements for insuring the goods against all risks that may arise during the transit. It may be noted that the seller is responsible to place the goods in the vessel nominated by the buyer at port of shipment. The seller must do so on the date or within the period agreed to in between the buyer and seller and such act of placing the goods ‘on board’ the nominated vessel according to the customs prevailing at the loading port. It is also the duty of the seller to pay all the charges at the load part that is necessary to deliver the goods over the ship’s rail. Immediately on such delivery he has to notify the buyer of having delivered the goods to the carrier and provide the buyer with all the documents necessary to enable the buyer to take delivery of the goods at the port of discharge. 3.2 CIF (Cost, Insurance and Freight): The CIF contract implies that the delivery is effected by the seller when the goods pass the ship’s rail at the port of shipment. However it is for the seller to pay for the all the costs and expenses to bring the goods to the appointed port of destination as prescribed by the buyer. But even when the cost of carrying the goods is borne by the seller, “the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer”6 In a CIF contract it is the responsibility of the seller to arrange for the marine insurance cover against any loss or damage to the goods during the transit till the port of destination. Also the seller must arrange for the export clearance of the goods at the port of loading. Under this term the seller merely arranges for the marine insurance and does not guarantee that the goods will arrive at the port of destination safely. In the event of any loss or damage during transit the buyer shall have his recourse against the carrier and the insurer. 4.0 Intention of the Parties and Contract Terms: As mentioned earlier under the Sale of Goods Act 1979 the intention of the parties is of vital importance in deciding whether the title in the goods has passed as laid down in section 17 (1) subject to the proviso that the unascertained goods must have acquired the character of ascertained goods under section 16 of the Act. It had been possible and the practice of the courts to arrive at inferences on the intention of the parties on the basis of the contract terms used in the sales contracts. As observed by Roskill L.J in the case of “The Albazero” 7there cannot be a pure CIF or FOB contract of sale and there are bound to be different variations in the contracts according to the wishes f the parties. Though the contractual terms of CIF or FOB is included in a contract amongst other terms, the purpose intended there of may be construed as a mere expression of the “incidence of liability for freight and insurance” between the parties to the contract. These terms cannot mean to denote the performance of the obligations of the seller towards the buyer or the buyer towards the seller. It may so happen that under a CIF contract other terms of the contract may imply that the property is intended to pass on shipment and not upon the payment against the documents. Similarly under a fob contract “other terms may show that the property was not intended to pass on shipment but upon tender and payment, the seller by the form in which he took the bill of lading intending to reserve his right of disposal of the property until he was paid against the shipping documents “Roskill L.J 4.1 Intention of the Parties under FOB Contracts: As has been decided in the case of Pyrene Co. v. Scindia Steam Navigation Co.8 if the parties had agreed that the sale will be concluded on FOB terms then the courts can prima facie assume that the parties intended that the title to the goods will be passed on shipment of the goods.9 It is also possible that the parties on their own volition modify this presumption. In Beaver Specialty Ltd. v. Donald H. Bain Ltd.10 for example, unascertained goods were shipped from Vancouver to a Toronto buyer under a contract of sale stipulating “FOB Toronto”. The goods became unmerchantable in the course of transit. The seller claimed that title had passed to the buyer upon shipment in Vancouver and the term “FOB Toronto” only indicated that the cost of carriage was included in the price. The Supreme Court of Canada held that the term “FOB Toronto” showed that the parties had intended title to pass at destination (i.e. Toronto) rather than upon shipment.11 Similarly in the case of Steel Co of Canada Ltd v The Queen12 it was held by the Supreme Court that in the ‘FOB Head of Lakes’ contract entered in to between the parties the title had not passed to the buyer until the time the delivery of the goods was made to buyer at the designated delivery point. This position is not altered by the fact that the seller had already sent the non-negotiable copies of the bill of lading made in the name of the buyer as consignee along with other necessary documents.13 4.2 Intention of the Parties under CIF Contracts: Under a CIF contract the general presumption is that the title to the goods will pass only when the shipping documents have been unconditionally delivered to the buyer. This presumption has been held in the case of The Julia (Comptoir d’Achat et de Vente du Boerenbond Belge S.A. v. Luis de Ridder Limitada)14. Similar stand had been taken by the court in the case of Johnson v. Taylor Bros.15 The buyer delivers the documents comprising commercial invoices, bill of lading, marine insurance policy and so on only on the payment by the seller of the invoice amount.16 In case no payment has been effected and the documents have been delivered still the presumption is that the title of the goods has not passed. This position has been settled by the court in the case of Ginzberg v. Barrow Haematite Steel Co17 It is also possible that the parties to a contract of sale to include a term in the contract to clearly express the time at which they intend the title to the goods should pass to the buyer18In the case of Sam Nicholas19 the contract of sale included a term specifying that “... the title to the molasses and the risk of loss of the molasses shall pass to buyers at the permanent hose connection of the vessel receiving the molasses at loading port.” Similarly in the case of Union Industrielle et Maritime v. Petrosul International Ltd. (The Roseline)20 the contract for the bulk supply of sulphur provided “Title and risk for the cargo shall pass from SELLER to BUYER as the Sulphur passes into the vessel’s hold at time of loading.” In Seng v. Glencore Grain Ltd.,21 the CIF sale contract expressly provided that: “The documents and/or goods remain property of the sellers until full and unrestricted payment has been received by the sellers.” “Despite the clear wording of the clause, the English Court of Appeal held that title passed to the buyers when the bill of lading was endorsed to them, rather than at the loading port, because the seller, by making the bill to sellers order, had reserved to himself the power of disposing of the title to the goods22 and therefore title did not pass to the buyers on shipment”23. As regards the passing of the property under a CIF contract it is observed It (i.e. the passing of property) is entirely a question of intention and no general rule can be laid down as to when the property passes under a c.i.f. contract. The intention has to be gathered from the terms of the contract, the conduct of the parties and the circumstances of the case".24 5.0 Intention of the Parties and Passing of the Risk under FOB/CIF Contracts: In order to determine the liability of the persons in case of loss or damage to the goods under a contract of sale it is important to ascertain the exact moment at which the risk passes on. Under Sale of Goods Act 1979 the risk passes with the title unless there is an agreement to the contrary between the parties. According to section 20(1) of the Sale of Goods Act 1979 “Unless otherwise agreed, the goods remain at the sellers risk until the property in them is transferred to the buyer, but when the property in them is transferred to the buyer the goods are at the buyers risk whether the delivery has been made or not.” However the position of the passing of the risk with title is often modified by the contract terms and other statutory rules as well as intention of the parties. In the case of a FOB contract it is the responsibility of the buyer to arrange for the space in a ship or vessel. If there is an unreasonable delay by the buyer to do so then the risk of any deterioration of goods on the wharf shall have to be borne by the buyer even though the title of the goods still remains with the seller. In a CIF sales though the title is presumed to be passed on to the buyer only on the payment against the shipping documents the risk passes to the buyer as at the time the shipment was effected. This applies retrospectively. This position was settled in the case of The Julia (Comptoir d’Achat et de Vente du Boerenbond Belge S.A. v. Luis de Ridder Limitada25 6.0 Intention of the Parties and Section 20A of the Sale of Goods (Amendment) Act 1995: Section 20A dealing with the undivided shares in goods forming part of a bulk has been introduced in the Sale of Goods Amendment Act 1995. Section 20A reads (1) This Section applies to a contract for the sale of a specified quantity of unascertained goods if the following conditions are met, (a) the goods or some of them form part of a bulk which is identified either in the contract or by subsequent agreement between the parties; and (b) the buyer has paid the price for some or all of the goods which are the subject of the contract and which form part of the bulk. (2) Where this Section applies, then (unless the parties agree otherwise), as soon as the conditions specified in paragraphs (a) and (b) of Ss.(1) above are met or at such later time as the parties may agree : (a) Property in an undivided share in the bulk is transferred to the buyer, and (b) The buyer becomes an owner in common of the bulk. (3) Subject to Ss.(4) below, for the purposes of this section, the undivided share of a buyer in a bulk at any time shall be such share as the quantity of goods paid for and due to the buyer out of the bulk bears to the quantity of goods in the bulk at that time. (4) Where the aggregate of the undivided shares of buyers in a bulk determined U/ss.(3) above would at any time exceed the whole of the bulk at that time, the undivided share in the bulk of each buyer shall be reduced proportionately so that the aggregate of the undivided shares is equal to the whole bulk. (5) Where a buyer has paid the price for only some of the goods due to him out of a bulk, any delivery to the buyer out of the bulk shall, for the purposes of this Section, be ascribed in the first place to the goods in respect of which payment has been made. (6) For the purposes of this section payment of part of the price for any goods shall be treated as payment for a corresponding part of the goods. Thus under section 20A of the Sale of Goods Act 1995, unless a contrary intention appears, “a buyer who has paid for some or all of goods forming part of an identified bulk becomes an owner in common of the bulk, with each such buyer’s undivided share in the bulk corresponding to the ratio between the quantity paid for and due to that buyer out of the bulk and the total quantity in the bulk”26. Further the property in respect of the undivided share of the bulk which remains unascertained but identified would be deemed to have been passed on to the buyer in the following circumstances: 1. When the bulk of the goods had been identified and 2. A part of the price is already settled by the buyer. 27 This rule applies only when no contrary intention appears from the conduct of the parties to denote that the property is intended to pass at a later point of time. As already observed, in a CIF contract though normally the title is presumed to be transferred to the buyer when he makes the payment against the shipping documents, still it may be the case the risk passes even before at the time of shipment. There may arise a situation when the ascertained goods in a CIF contract are subjected to a loss or damage without the seller’s knowledge and such incident occurs at a time when the goods have not been unconditionally apportioned to the contract. Under this situation it has to be decided whether the buyer under the CIF contract is exposed to the risk of the damage even though the title has not been passed to him since there was no unconditional appropriation of the goods. In the case of C. Groom, Ltd. v. Barber,28 Atkin J was of the opinion that the buyer has to undertake the risk in this case and the seller in turn is entitled to get the payment thereof from the buyer. The buyer has the remedy of claiming damages from the carrier for negligence as well as to claim under the insurance policy. But still there remains a question that when the goods have not been unconditionally appropriated to the contract before the loss occurred and there is no means of identifying the goods on the basis of shipping documents or the insurance policy. Section 20A when applied to this situation provides a different approach in respect of the buyer’s obligation under the CIF contract when the goods have not been appropriated. Under section 20A (1) the property in respect of the undivided share of the bulk that is identified but remains unascertained would be deemed to have been passed on to the buyer and the risk also passes only when there is an identification of the bulk and the part of the price is already settled by the buyer unless there is a contrary intention among the parties to get the property transferred at a later date. Hence the ‘payment of the part of the price’ has been made mandatory for the passing of the property and consequently the risk. So long as there is no payment effected even in part in respect of the goods under the CIF contract the property doesn’t pass. The condition of prepayment alters the position of the buyer in respect of his risk and liability for damages to unascertained but identified goods in a CIF contract. Unless and until some payment is effected the property in the goods does not pass to the buyer in respect of the unascertained, identified goods. In respect of ascertainment of the goods section 16 states that subject to 20A, the title to the goods which are unascertained will pass only in the event of the ascertainment thereof. The application of this principle extends both to quasi-specific and wholly unascertained goods. Section 20A added to the Sale of Goods Act (Amendment) 1995 provides for “the passing of the property in an undivided share of unascertained goods out of an identified bulk even before ascertainment.” With respect to the CIF contract unless the parties agree otherwise a buyer who has made a prepayment towards the cost of some of all of the bulk, “with each such buyer’s undivided share in the bulk corresponding to the ratio between the quantity paid for and due to that buyer out of the bulk and the total quantity in the bulk”. This implies the prepayment of the value of a part by the buyer of an identified bulk becomes an owner of a part of the bulk even before an ascertainment of the part for which the amount is paid. In this case the provisions of section 20A doesn’t provide for an exception to the provisions contained under section 16 of the Sale of Goods Act. It must also be noted that the 1995 amendment Act apply only to contracts where the transaction is relating to the sale of a particular quantity or part of the bulk identified before the ascertainment thereof. The amended provisions do not cover an identified or determined fraction or part of a bulk. Thus the effect of the new section 20A is that it allows for the prepayment by the buyer of a particular part of the goods forming part of the bulk to claim the ownership in that part of the bulk. The most advantageous part of the reforms made by 20A is the provision contained in subsection (2) (b) where it is provided that the buyer of the bulk goods are to be regarded as owners among others in respect of the bulk of the goods. This has the effect of transferring the part-ownership of the undivided share in the property to several buyers which also protects the buyer from any possible insolvency of the seller. However it may be noted that the buyer doesn’t own any particular goods. Once the goods due to the buyer are ascertained out of the bulk, the buyer automatically acquires the property in the goods. The acquiring of title to the property is subjected to the normal rules applicable to the passing of the property. Such passing of the property can either be according to the intention of the parties and when the intentions are not clear the property will pass according to the provisions of contained in section 18. 7.0 Conclusion: Form the foregoing discussions it appears that the Sale of Goods (Amendment) Act 1995 through the new provisions enacted have brought in more improvements in the law relating to the passing of the property in unascertained goods. However it needs to be mentioned that the provisions are inadequate in dealing with the passing of the property in unascertained goods. The foremost issue is that there are no effective provisions for the protection of the interest of those buyers who deal in the wholly unascertained goods. Secondly there are no effective solutions provided to the buyer who has become the owner by prepayment in respect of issues arising out of damages to the goods or on the insolvency of the buyer. Thirdly while the Act protects the buyer from the potential insolvency of the seller, it doesn’t provide any cover against the insolvency of the co-buyers. Word Count: 4070 List of Cases: Beaver Specialty Ltd. v. Donald H. Bain Ltd. [1974] S.C.R. 903 C-Art, Ltd. v. Hong Kong Islands Line America, S.A. 940 F.2d 530 at p. 533, 1991 AMC 2888 at p. 2891 (9 Cir. 1991) Carlos Federspiel & Co. S.A. v. Charles Twigg & Co. Ltd. [1957] 1 Lloyds Rep. 240 at pp. 247-48 Ginzberg v. Barrow Haematite Steel Co [1966] 1 Lloyds Rep. 343 at p. 353 Itochu International, Inc. v. M/V Western Avenir 1998 AMC 555 at p. 556 (E.D. La. 1997). Johnson v. Taylor Bros [1920] A.C. 144 at p. 156 (H.L.) Olbert Metal Sales Ltd. v. Cerescorp Inc. [1997] 1 F.C. 899 at pp. 904-906 (Fed. C. Can. per Prothonotary Hargrave) Pagnan S.p.A. v. Tradax Ocean Transportation S.A. [1987] 1 Lloyd’s Rep. 342, Pyrene Co. v. Scindia Steam Navigation Co. [1954] 1 Lloyds Rep. 321 at p. 332 Re Grainex Canada Ltd. (1987) 34 D.L.R. (4th) 646 (B.C. C.A.) Ross T Smyth and Co Ltd Bailey, Son and Co [1940] 3 All ER 60 Sam Nicholas [1976] 1 Lloyds Rep. 8 at p. 10 (C.A.) Seng v. Glencore Grain Ltd. [1996] 1 Lloyd’s Rep. 398 at p. 400 Steel Co of Canada Ltd v The Queen [1955] S.C.R 161 The Albazero 1977] AC 774 The Julia (Comptoir d’Achat et de Vente du Boerenbond Belge S.A. v. Luis de Ridder Limitada) [1949] A.C. 293 at p. 309 (H.L.) Union Industrielle et Maritime v. Petrosul International Ltd. (The Roseline) [1985] AMC 551 at p 553 [1987] 1 Lloyd’s Rep. 18 at p19 (Fed. C. Can.) Bibliography: Prof. William Tetley Q.C Chapter 7 Sale of Goods-The Passage of Title and Risk-A Resume McGill University Montreal Quebec Canada http://www.mcgill.ca/files/maritimelaw/ch7.pdf Bridge, The Sale of Goods, 1997 at p. 98 Kennedy, C.I.F. Contracts, 1st. ed. (1924) states, at p.139: Read More