Rights and Remedies of a CIF Buyer under English Law for Breach of a of the Contract - Term Paper Example

Introduction. C I F de s "cost, insurance and freight". Generally, the seller contracts to deliver the goods to the purchaser at a destination designated by the purchaser and to pay the insurance premium and the freight. Subsequently, the seller delivers the shipping documents, comprising a commercial invoice showing the details of the cost, insurance and freight, the bill or bills of lading, the insurance policy and the certificate of quality and origin, to the purchaser. To understand the various rights and responsibilities of the shipper, the consignee, the cargo owner and the carrier it is necessary to understand when title to goods passes under a contract of sale and in particular when risk in the goods passes. In the United Kingdom and jurisdictions which treat its decisions as binding or persuasive; title, not risk is the most important criterion for the purposes of filing suit. Nature and Causes of the Breach of the CIF Contract under English Law. According to the Sale of Goods Act1, “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 delivery has been made or not.” the basic rule is that the risk passes from the seller to the buyer at the time agreed upon by the parties. In The Aliakmon2, it was contended by the plaintiff that a company which had agreed to buy a quantity of steel coils that were being transported in the ship should be able to recover damages in negligence against the ship owners for damage caused to the steel coils from bad storing in the ship. The House of Lords held that the principle of liability for negligence in respect of personal injury or damage done to goods owned by the plaintiff or which were in his possession should not be extended to entitle a person who has contracted to buy the goods to sue. Title — legal ownership or possessory title — rather than risk is the important criterion for determining who may sue the carrier in tort. In Sanix Ace3, it was held that it is the title in the goods which carries with it the right to recover damages for the loss due to damage to the goods. The insurance argument used by courts to avoid the necessity of finding who is at risk or who is at fault is usually an erroneous obiter dictum. A contract of sale is not only the contract whereby goods are transferred for a price but may also be the agreement to transfer goods for a price at some later time or under some particular term or condition. Thus both “sale” and the “agreement to sell” are contracts of sale. The distinction between them however is important because in “sale”, title to the goods and risk in the goods can pass upon making the contract, while in the “agreement to sell”, title and risk pass at some later time’. The exact moment of the passing of risk under a contract of sale is of prime importance to the parties to a contract of carriage, because, in most cases, it determines who will suffer the consequences should loss or damage ensue. The basic rule is that the risk passes at the time agreed upon by the parties in accordance with sect. 20(1) of the Sale of Goods Act 1979. Although the U.N. Sale of Goods Convention, 1980, does not elaborate on the role of the parties intention in the passing of risk; nevertheless, the same rule emerges from the tenor of the Convention4. In civil law the rule applied is that the risk devolves on the owner of the goods. The United Kingdom Sale of Goods Act 19795, which derives from the Sale of Goods Act, 18936 is the predecessor and progenitor of sale of goods acts throughout the English-speaking world and it defines contract of sale at section 2(1) as follows: “A contract of sale of goods is a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price.” This holds true until and unless the intent of the parties is different, for example Borden (U.K) Ltd. v. Scottish Timber Products7 contained such a clause which read as follows: Goods supplied by the company shall be at the purchasers risk immediately on delivery to the purchaser or into custody on the purchasers behalf (whichever is the sooner) and the purchaser should therefore be insured accordingly. Property in goods supplied hereunder will pass to the customer when: (a) The goods the subject of this contract; and (b) All other goods the subject of any other contract between the Company and the customer which, at the time of payment of the full price of the goods sold under this contract, have been delivered to the customer but not paid for in full, have been paid for in full the risk passes with title - res perit domino8. The Sale of Goods Act 1979 states that, “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 not9.” The rule in section 20(1) of the Sale of Goods Act 1979, that risk passes with title is often modified by contractual terms and other statutory rules. For example, section 20 provides several statutory exceptions these exceptions are: 1. Sect. 20(2) states that when delivery has been delayed by the fault of either the seller or the buyer, the goods are at the risk of the party who is at fault10, but only “as regards any loss which might not have occurred but for such fault.” If the buyer fails to do so within a reasonable time, the buyer must bear the risk of any deterioration of goods on the wharf, even though the seller would normally have had to bear the risk until actual shipment. Though this risk is imposed on the buyer, title remains with the seller. 2. When a designated bulk or source of supply, which is under the control of a warehouseman or carrier, is destroyed before the quasi-specific goods have been ascertained, the buyer will have to bear the loss and pay the price, even though title has remained with the seller11. Rights of a CIF buyer under English Law for the breach of the term of a contract. In CIF sales, though title is presumed to only pass to the buyer upon payment against the shipping documents (i.e. the bill of lading, etc.), risk passes to the buyer retrospectively as of the time of shipment12. A difficulty arises in CIF sales when ascertained goods are lost after shipment without the sellers knowledge, before they could be unconditionally appropriated to the contract and the question arises as to, whether the buyer has to bear the risk even though title cannot pass to him by unconditional appropriation. In Aliakmon13, the House of Lords affirmed that the buyer who takes up the shipping documents can by virtue of the Bills of Lading Act 185514 sue the carrier in contract for his loss even though title to the goods had not yet passed to him at the time of their loss. In CIF sales, there is a presumption that the parties intend title to pass to the risk-bearing buyer upon the transfer of documents, irrespective of whether unconditional appropriation is still possible. If a bill of lading has not been transferred to the CIF buyer or if the Carriage of Goods by Sea Act 199215 , which replaces the former Bills of Lading Act, 1855 does not apply and the risk-bearing buyer must sue the carrier in tort; the rule in the U.K. is that such a buyer will only be able to maintain his action if he had title to the goods at the time when they were lost or damaged16. This rule is at variance with the recent developments in the law of negligence17. When goods have deteriorated during carriage, even though title and risk may have passed to the buyer at the time when the goods were delivered to the carrier, the seller may be forced to bear the loss because the goods did not remain merchantable for a reasonable time, i.e. until the buyer could dispose of them upon arrival18. Title which had passed to the buyer would revert to the seller by the buyers rejection of the goods. The buyer could alternatively take an action in damages against the seller for failing to make a reasonable contract of carriage, having regard to the nature of the goods and other circumstances: sect. 32(2)19. e) When delivery of the goods by the seller to the buyer involves carriage by sea, the seller must provide details so as to enable the buyer to procure insurance covering the sea carriage. Failure to do so will entail the seller having to bear the risk during the sea carriage: sect. 32(3). This provision does not apply where, under the contract of sale, it is the seller, rather than the buyer, who must insure the goods, as for example in CIF contracts and FOB ex ship contracts20. f) If the goods, originally shipped in good condition, were lost, damaged or destroyed after shipment but before the contract of sale was even made, the buyer cannot be compelled to accept the tender of the shipping documents, because there were never any goods available to him which conformed to the contract description. During the period of transit and voyage the bill of lading is, by the law merchant, recognized as the symbol of the goods described in it, and the delivery of the bill of lading operates as a symbolic delivery of the goods. The holder of the bill of lading is entitled against the shipper to have the goods delivered to him to the exclusion of other persons. He is thus in the same commercial position as if the goods were in his physical possession. It is the duty of the seller to make every reasonable effort to send forward and tender to the buyer or his agent the shipping documents, including the bill of lading, as soon as possible after shipment of the cargo. The contract is performed by the seller and the goods are constructively delivered to the buyer on the date when the shipping documents are delivered to the buyer or the buyer’s agent in terms of the contract21. The provisions of English Law in respect of breach of contract are primarily two in number; these are a right to treat the contract as terminated and the right to claim damages. The right of a buyer to treat the contract as terminated can be exercised under two circumstances. First, where the term that had been broken by the seller was a condition of the contract, in such a case, the buyer is entitled to treat the contract as discharged even where the breach of term is minor22 subject to section 15A of the Sale of Goods Act 1979, which states that “A contract of sale is a contract for sale by sample where there is an express or implied term to that effect in the contract.”Thus, the buyer will be entitled to terminate the contract if, for example, the goods are shipped outside the shipment period23 or if the shipping documents are tendered late24 even where the shipment or tender is only one day late. Secondly, the innocent party will be entitled to treat the contract as discharged if the other partys breach of an intermediate term deprives him of "substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing these undertakings.25 "The right to treat the contract as discharged may be lost either by election, waiver or by acceptance26. In the case of any breach of contract, the innocent party is entitled to claim damages. In theory the buyer is entitled to an award of specific performance. In a typical sale of commodities, however, the buyer will almost never be awarded, or for that matter want, specific performance, which is usually available to the buyer only where the goods are unique27 and that to only at the discretion of the court. The general assertion is that the rules of English law in respect of breach of contract are generally clear and lead, in most cases, to relatively predictable results. Due to the law in this regard being well established, businessmen are generally well aware of their rights in respect of breach of many terms. It is not a simple task to determine how the English courts will classify an unclassified term28. Further, the courts’ reluctance, at times, to classify a term as intermediate, even in the international trade context is extremely disheartening and unhelpful29. Additionally, it is a difficult matter when a term is classified as intermediate, to determine when one party has been deprived of substantially the whole benefit which it was intended he would receive. The law relating to the classification of terms is unclear and the law relating to election and waiver is even more unclear. Remedies available to a CIF buyer under English Law for the breach of the term of a contract. The documentary obligations require the seller to procure and tender to the buyer the documents stipulated for in the contract. In the absence of a provision in the contract to the contrary, these should include a bill of lading, an insurance policy and an invoice30. These documents are required to be tendered in the proper form as a condition for obtaining payment. If the seller fails to perform one or both of these obligations then under English law the buyer has the right to reject in respect of any such failure. Thus, if the seller tenders defective documents, the buyer can reject them. Further, if the goods on arrival are not in accordance with the contract, the buyer may reject them. The mere fact that the buyer had accepted the documents, even if those documents were defective, does not thereafter disqualify him from rejecting those goods. Breaches of both the physical and the documentary obligations, give rise to two distinct rights to reject. Devlin J. held in Kwei Tek Chao v. British Traders and Shippers Ltd.31 "The physical and documentary obligations are distinct obligations and the right to reject the documents arises when the documents are tendered, and the right to reject the goods arises when they are landed and when after examination they are found not to be in conformity with the contract32." Thus, subject to waiver33, the acceptance of defective documents will not preclude the right to reject non-conforming goods. CIF buyers have to usually pay against the tender of documents before they have had an opportunity to inspect the goods. A buyer cannot under English law refuse to pay until he has seen and inspected goods and if he does so the seller can treat his refusal to pay as a repudiatory breach. However, even where a buyer has paid against conforming documents he does not thereby lose his right to reject the goods for non-conformity34. For example, if the documents tendered by the seller state that the goods were shipped in apparent good order and condition but the same on arrival were discovered to be defective, having deteriorated en route because they were unfit to endure a normal transit, the buyer would nevertheless be well within his rights to reject these goods35. There are two general issues of especial importance in international sales. These are, first, English courts are apparently strict in their insistence that the goods match their contractual description and, secondly, the impact, if any that s15A of the Sale of Goods 1979 may have in this context. Prior to the enactment of section 15A of the Sale of Goods Act 1979, English courts interpreted the requirement that the goods must strictly correspond to the contractual description36 and ideally to the construed description also. The fact that the failure of the goods to correspond with the contractual description causes the buyer no significant, or indeed any, loss has generally been treated as irrelevant to the buyers right to reject37. The demands of commercial certainty have resulted in such an approach. Despite Lord Wilberforce’s suggestion in Reardon-Smith Line Ltd. v. Hansen Tangen38 that some of the case law was "excessively technical and due for fresh examination in this House39", he conceded that there was a distinct possibility for a strict approach to be taken in respect of international sales of unascertained goods. While some ambiguity did persist in respect of whether certain descriptive words relating to the physical characteristics of the goods formed part of the description of the goods for the purposes of section 13 of the Sale of Goods Act 1979,40 nevertheless, it was possible to be flexible in relation to time stipulations in respect of the shipment of the goods. Bowes v. Shand41, has established that stipulations in respect of the time and place of shipment form part of the description of the goods and failure to comply with such terms entitles the buyer to reject even if the late shipment did not cause any loss to the buyer. Section 15A was incorporated into the Sale of Goods Act 1979 by the Sale and Supply of Goods Act 1994 which in turn was intended to give effect to the proposals of the Law Commission42. This section prevents a buyer who does not deal as a consumer from rejecting for breach of the terms implied by sections 13, 14 and 15 of the 1979 Act, "if the breach is so slight that it would be unreasonable to allow him to do so43." The purpose of this provision is to give effect to the Law Commissions view that rejection for trivial discrepancies should not as a matter of justice be allowed. The section by its terms applies only to breaches of the terms implied by the Sale of Goods Act and it therefore leaves the law relating to breach of any express terms untouched. Further, it does not apply where a contrary intention "appears in, or is to be implied from, the contract44." As per sections 51 to 54 of the Sale of Goods Act 1979, the remedies available to the buyer are that, they can claim damages for non-delivery if the seller deliberately neglects or refuses to deliver the goods to the buyer. Moreover, the buyer has the right to take recourse to the law against the seller to claim damages for such non delivery. These damages are to be determined by assessing the actual loss “resulting, in the ordinary course of events, from the sellers breach of contract and if there is an available market for the goods the measure of damages is the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered or, if no time was fixed at the time of the refusal to deliver”. Whenever specific performance is involved, damages will be awarded to the buyer, if in any action for breach of contract to deliver specific or ascertained goods the court deems it fit, that the contract shall be performed specifically, without giving the defendant the option of retaining the goods on payment of damages. Further, the court permits t he plaintiffs to approach it at any time before the judgment or decree has been passed.   In respect of breach of warranty the available remedy is the buyer can not only reject the goods but also initiate legal action against the seller for damages for such breach. If the breach of warranty is in respect of the quality of goods supplied then the compensation will be based on the loss which will be determined as the difference between “the value of the goods at the time of delivery to the buyer and the value they would have had if they had fulfilled the warranty”. In addition, The buyer can also initiate action for the same breach of warranty if he has suffered further damage. The Sale of Goods Act 1979, does not interfere with the right of the buyer or the seller to recover interest or special damages “where by law interests or special damages may be recoverable or to recover money paid where the consideration for the payment of it has failed”. Conclusion. In English law a CIF buyer is entitled to reject a tender of the shipping documents either where they are defective or where they are tendered late. Defects might arise in a document due to various reasons, for example, a non-genuine bill of lading has been held to be a defective document45, as has a bill of lading which fails to provide the buyer with continuous documentary cover46. In general, the sellers obligations with regard to the documents have been deemed to be stringent. Therefore, unlike a domestic sales contract CIF sellers have a duality of obligations imposed on them, namely, in addition to delivering the contract goods, they must also deliver the documents. Their obligations are thus both physical and documentary. There is no statutory definition of CIF in English law and its terms have been established by case law. Accordingly, the seller in a CIF contract has a duality of obligations; the physical obligations and the documentary obligations. The physical obligations require the seller to deliver the contractual goods on board in accordance with the terms of the contract or to buy goods afloat which match the contractual description. Bibliography. 1. Chuah, Jason. Law of International Trade, Sweet & Maxwell. 2. Dalhuisen on International, Commercial, Financial and Trade Law, Hart Publishing. 3. Lord Borrie, Ian Brown, Commercial Law, Butterworths. 4. Roy M Goode, Commercial Law, Penguin) ISBN 0 14 012534 5. 5. Schmittoff’s Export Trade – the Law and Practice of International Trade, Butterworths. 6. Todd, Paul. Cases and Materials on International Trade Law, Thomson, Sweet & Maxwell. Read More