Legal Issues Focusing on the Transfer of Risk and Property - Research Paper Example

International Trade & Finance (Shipping Laws) Business Report The Legal Manager, Organics Manufacturers Limited, London, United Kingdom. Dear Sir, SUB: Legal advice on relevant legal issues focusing on the transfer of risk and property, against shipment of 50,000 bags of Coromandel groundnuts, (CIF Hamburg). Sl. Date of shipment Terms Number of bags Contract rate US$ Vessel used Method of storage Result 1. 18.10.2008 CIF, Hamburg 20,000 9.20/bag Golden Princess (owned by OML) Stored with other general cargo Surveyors report – Consignment damaged – not of merchantable quality 2. 11.10.2008 CIF, Hamburg 30,000 9.20/bag Private float Commingled with larger cargo Float ground and sunk – constructive total loss Total 50,000 It is necessary to bifurcate the two transactions in order to gain a better control over them, and to be able to explain in better detail. Both these shipments have been shipped under different Bill of Lading and forward contracts. “Forward contracts are agreement between a buyer and a seller of a certain asset, such as a commodity” etc. (What are forward contracts? 2009). In most cases it is seen that under CIF, the cost of insurance and outward freight charges are borne by the seller, and become a part of the cost price. Under such normal circumstance, the “risk” of the goods passes on to the buyer as soon as the goods have been placed on carriage. (Cost, insurance and freight 2000). It is necessary, in terms of liability, to split the shipment into two parts: 1. In terms of the 20,000 bags shipped under cover of Bill of Lading (BL) XFR 23869 which has been shown as paid basis. A BL is “used to acknowledge the receipt of shipment of goods.” (What is a bill of lading? 2009). 2. In terms of the 30,000 bags shipped under cover of Bill of Lading MSK 56901A, which surprisingly, shows as freight to pay basis, when the contract itself is CIF, Hamburg, and thus the seller has to make arrangements for all the freight, insurance and incidental costs, etc. The main aspects that need to be considered in this case are firstly, the passing of risks and “how to avoid and deal with them.” (What is the risk management process? 2009). Secondly, it also envisages the passing of property. We shall analyze them separately, in order to find out their respective impacts. Passing of risk: In international trade “it is important to understand there is a degree of risk associated with every transaction.” (How can I mitigate risk? 2009). It is seen that in the case of CIF contracts, the risks pass once the goods have been handed over by the seller to the carrier, or his authorized agent. Thus, under normal circumstances, it could be said that in this case study, the risk could have actually passed on when the cargo was loaded on to the Golden Princess by the sellers, Pure Nature Traders Limited (PNTL). Thus, in this case, it could be very well said that, taking the risk aspect into account, it would be necessary for the buyers, OML, to make payment to the sellers even if the goods were lost in transit. They could claim the amount later from either the carrier company, or the insurance undertakers. Thus, under CIF, unless there are specifics in the contractual agreement, the risk passes on to the buyer upon delivery to the carrier or is loaded on board the ship. But nowadays, there is one more aspect with regard to ascertainable and non ascertainable goods. In this case, it is seen that the 20,000 bags were not kept separately, but were stored with other cargo. Thus, it could not be said with any degree of firmness and confidence that the intent of the parties at the outset was to distinguish the goods belonging to the general cargo. The next aspect would be with regard to when the property would pass on to the buyer under an “unconditional contract.” (Kixmiller & Spencer 2009). Under normal circumstances, it is when the payment is made to the seller; the goods become part and parcel of the buyer. In some cases, the seller may stipulate certain pre-conditions which need to be honoured before the ownership is decided. In this case, it is seen that an irrevocable letter of credit was established in favour of Pure Nature Traders for the amount of US$ 460,000, payable only on submission of manually signed commercial invoices, SGS certificate, full set of clean shipped on board B/L. There being no other pre-conditions, it could be safely believed that the receipt of relevant documents of title is the pre-condition for payment for the goods, and the property in this case does pass on to the buyer, when the seller, has endorsed these documents in favour of the buyer, OML. The decided case is of “Ross T Smyth and Co Ltd v T D Bailey, Son and Co [1940]3 All ER 60 at 68 per Lord Wright.” (Fisher & Fisher 1998. p.135). In this decided case, “The Court held that the buyers committed a breach by wrongfully refusing to accept the first documents which were in accordance with the contract and covered the total quantity which the sellers were bound to deliver. It was also held that the breach was not waived by the mere act of sending the amended invoice, which was no more than an attempt by the sellers to meet the buyers objection.” (Introduction n.d). There are three major aspects in deciding cases of contracts under the Sale of Goods and Services and they are: 1. The contractual terms of the agreement 2. Conduct of the parties 3. Circumstances surrounding the case. In this case, the terms of the contract are quite cogent and so is the conduct of parties to create contractual relations. However, it is the intent of parties that is the main issue in this case. “The primary factor being whether the parties to contract intended the contract to be legally binding or legally enforceable.” (What is contract? 2009). Another aspect that needs to be kept in mind in as far as this case is concerned is that the place of jurisdiction for settlement of disputes is the UK, and the laws that could be applicable are UK laws. Thus, it would appear to attract the provisions of the “Sale of Goods Act 1979” in the UK context. (Furmston & Furmston 2001). Certain sections of SOGA 1979 have been subsequently amended to Supply of Goods and Services Act 1982, especially which relate to implied condition as to fitness of quality of the goods. In this case, it is seen that 20,000 bags did not meet the fitness test, but the role of the seller in a CIF contract may possibly relieve the seller of responsibility. However, it is seen vide Section 4, Sub section (2A) of SGSA, that “ For the purposes of this section and section 5 below, goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances.” (Part I: Supply of goods 1982, p.2). Although the bill of lading was issued in favour of the buyer, 20,000 bags of the first shipment, upon inspection at the buyers’ end, was found to be damaged and rendered not in a state of merchantable quality. Under the legal procedures binding shipping law, in the first part, the risk and property of the business had passed on to the buyer, and thus, although the property was of unmerchantable quality, he is bound to make payment to the seller and claim losses from the carrier company, or the insurance company, through “endorsement.” (Insurance terms 2009). However, the buyer cannot renege from making payment for the goods, although he could make a separate claim for damages for loss of quality of the goods from the other intermediaries in the shipping and forwarding operation business. It is now necessary to consider whether incoterms are to be considered as “implied into contract” terms. (Hinkelman 2005, p.253). It would be wrong to consider that incoterms are implicit terms; they are expressed and need to be entered in the terms of contract in order to be enforceable. However, they cannot be treated as laws that the Courts need to take cognizance of. This is because usually the Courts lay more emphasis and importance on aspects like the terms of contract, conduct of parties, whose custody the goods are not in, the situation enveloping the case, etc. In most cases, incoterms are used only for ensuring that delivery is based on correct lines, in terms of the fact that it could aid in completing the sales contract, ascertain rights, liabilities and responsibilities of parties, how one party ensures fulfilment of contractual obligation by the other, transference of risks, etc. In this case, with regard to 20,000 bags, it is seen that the risk and possession have been transferred, once PNTL made out the bill of lading, SGS and other documents in favour of the buyer, OML. Both aspects of the transfer of possession and risks have taken place once this has been rendered, according to the terms of the contractual obligation. Conclusions on the first part dealing with 20,000 bags of groundnuts: It could be said with a reasonable degree of accuracy that since the risk and possession has passed on from the seller, PNTL to buyer OCL, with the handing over of the documents of title to the carrier, in this case the own vessel of OCL, the rights and liabilities now vest with the buyer. Although the goods have been rendered inconsumable due to defect that may have occurred in transit, the buyers could raise no claim, since the ownership now vests on them, and they needed to take proper care in storing the goods etc. Moreover, the vessel belonged to the company and therefore, they possessed adequate control over it which they did not exercise. The mixed packaging in which the identification of their bags may be difficult, giving rise to unidentifiable goods could be a major argument for the buyers to rescind the contract and claim damages from the sellers Remedies: “The arbitration process is a kind of dispute resolution procedure where an arbitrator listens to a dispute in a private setting and makes a final decision for the parties involved.” (What is involved in the arbitration process? 2009). Under normal circumstances, OCL could refer this dispute to arbitration, since there is an arbitration clause in the contract. Their argument could be that the sellers did not take adequate care for the safety and security of the goods, as a result of which damages occurred causing total loss of merchantable quality. But, here the main factor is that possession, through endorsement of Bill of lading is now in the hands of the buyers, and they are responsible for the goods at this stage. If it were an FOB contract, the sellers would have been responsible for the losses/damages. They could proceed against the carrier (if third Party) and/or insurance agent to recover their losses. Alternatively, with the permission of the sellers, they could dispose off the cargo at cheaper rate and claim the difference from the carrier/insurance company. Thus, in this case it could be said that the contract of CIF is that “The seller is liable” only “for any losses or damages before the goods reach the ship” and not beyond. (Kauladis 2006, p.201-211). Even though the damages had accrued during transit, the seller may not be responsible for the losses and the buyer has to meet them in association with carrier/insurance companies. It is now necessary to consider the next part of this business report, which is with regard to shipment of 30,000 bags of groundnuts. The following aspects could be seen in this regard: 1. The contract was not followed in that while it is CIF, the seller has billed the buyer for the freight paid. 2. The goods are unascertainable, in that the bags have been commingled with other bags belonging to other clients, and it is perhaps impossible to distinguish the 30,000 bags. Since the goods are unascertainable, it is quite possible for the buyers OCL to argue that the risk have not passed on to the buyers, but still lie with the sellers, PNTL. Under such circumstances, being a CIF contract, and the fact that the risk and property lies with the sellers, the ultimate loss will have to be borne by the sellers and not the buyers 3. There has been a variation in the CIF contract with regard to freight and because of this, it is very well within the powers of the buyers to rescind the contract and claim damages. Even if extra amount has been paid for the float, it is the sellers’ responsibility under CIF to incur these expenses and this is not supposed to accrue to the buyer. When the matter comes up for arbitration in an English Court (jurisdiction being UK as per contract) the lawyers of OCL need to argue that there has been a material violation of the contract in as far as the shipment is concerned, for which the buyers need an amicable settlement . However, force majeure has taken place and the entire cargo has sunk. There has been a constructive total loss of this shipment without any chances of salvage or recovery value. Under such circumstances, the main question that would arise in the minds of the Court of law and arbitrators would be in terms of the fact that, at the time of the mishap, who was the true possessor of the cargo and on whom the risk was apparent. While the sellers, PNTL may argue that with the endorsement of the bill of lading in favour of the buyer, it needs to be established whether the buyers had agreed to the use of the float on which the cargo was loaded. If not, the liability still lies with the sellers. “Inland and ocean bills of lading may be negotiable or non-negotiable.” (What is bill of lading? 2009). Again, the terms of the contract categorically state CIF – Hamburg, meaning that all costs up to the port of discharge is on the seller. There has been a variation in this contract in that this has been treated as freight collect basis. It is also seen that there has been total constructive losses, or in other words, “An instance in which the cost of recovering and/or repairing damaged goods would exceed the insured value.” (Johnson n.d). Under the English laws, it is possible that damages could be awarded where the parties could have a certain degree of clairvoyance. It could be “foreseeable by the party in breach at the contract time.” (Sarcevic & Volken 2001, p.136). Thus, applying it in this case, it is very much reasonable to believe that PNTL, the sellers, were very much aware of the fact that the float may not be able to withstand the tonnage that was being hauled. Moreover, it is also seen that the goods of OCL were mixed with other goods, rendering it impossible for being differentiated. This definitely points to the fact that the sellers had no intention of passing on the title of the goods to the buyers, although in terms of paper work, they may have assigned the Bill of Ladings (BL) for gaining the payment. At this stage, it is also necessary to consider two other aspects, the first in terms of the Arbitration Act 1996, that could be invoked as per the covenant between the buyers, OCL and sellers, PNTL. According to the Arbitration Act 1996, arbitration may decide a dispute either “in accordance with the law chosen by the parties as applicable to the substance of dispute.” (Part VIII: Award n.d). In the event this is not possible, it could be done based on the conflict resolution that may be necessary or any other mutually agreed method. One of the major hindrances in this case would be that the terms of the order have not been carried out: 1. The float which was used and capsized – whether it met the approval of the buyers. 2. Extra freight charged by the sellers on the second part of goods which are under CIF, that is Cost, Insurance, Freight – Hamburg. 3. The entire cargo was lost in transit and the seller incurred losses, since the goods were still at his risk and possession being “unascertained goods”, commingled with other goods and not identifiable. Thus, in such circumstances it would not be judicious to put the blame on the buyer, since he was not aware of the fact that the goods were commingled and it was done without his knowledge or concurrence. Coming now to Section 9 of the Sale of Goods Act, “where there is an agreement to sell specific goods and subsequently the goods, without any fault on the part of the buyer and seller, perish before the risk passes to the buyer, the agreement is thereby avoided.” (Commercial law: Sales of goods: Risk and frustration notes n.d, p.4). Thus, it could be seen that in the second case, the terms of contract have not been strictly followed and thus, it is well within OCL’s privilege to nullify the contract and claim damages. Overall position: The advice would be that this contract has not been very beneficial from OCL’s point of view. For one thing, the sellers have not conducted themselves in a manner that would best suit international business of this kind, in that they had violated the CIF agreement in terms of delivery and charging for excess freight, but also because of their lapses in sending cargo in undefined vessels causing substantial losses for the buyers. Thus, action may be instituted for claiming damages for loss of cargo and for supply of sub standard groundnuts (from the carrier company and the insurance undertakers). Thanking you, Sincerely, S. Ray Legal Consultant Reference List Commercial law: Sales of goods: Risk and frustration notes n.d. LAI Ting Wai Fontaine. [online]. P.4. Available at: http://www.viperfusion.com/wordpress/wp-content/uploads/2008/11/commercial-law-risk-and-frustration.pdf [Accessed 25 December 2009] Cost, insurance and freight 2000. Incoterms. [online]. Available at: http://www.iccwbo.org/incoterms/preambles/pdf/CIF.pdf [Accessed 25 December 2009] Fisher, S., & Fisher D., 1998. Export best practice: Commercial and legal aspects. Federation Press. [online]. P.135. 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