Kargs Legal Position with Regard to the Damaged Cargo - Case Study Example

Karg’s Legal Position With Regard to The Damaged Cargo 1. Introduction In order to evaluate Karg’s potential claims with regard to the damaged cargo, it will be necessary to evaluate the following: 1) Their rights under the CIF contract with Unimeal plc in light of payments made on the bills of lading; 2) Their rights under the contract with Kurt Van der Valk; 3) Jurisdiction and ability to sue Unimeal plc and Kurt in foreign jurisdictions; and 4) Any potential claims against the carrier International Meal Export Corporation in relation to the negligence causing damage to Karg’s cargo as the carrier under the contract of carriage by sea. I shall deal with each issue in turn and summarise with a conclusion of Karg’s legal position with regard to the damaged cargo. 2. Karg’s rights against Unimeal plc under the CIF contract With regard to the contractual rights against Unimeal plc, the contract between Karg and Unimeal plc was concluded on CIF terms and therefore provides different rights with regard to documentary obligations and delivery, which will impact Karg’s rights to claim. Moreover, the UK has not ratified the Vienna Convention on Contracts for the International Sale of Goods (the Convention)1 and Professor Guest propounds the primary justification for this as being the fact that “the Convention is not well adapted to sales on c.i.f and other terms common in overseas sales, and its often vague or open textured terminology would, if it were to displace the present relatively settled English judge made rules governing contracts on such terms, be a source of considerable (and regrettable) uncertainty2”. Additionally, Treitel argues that the Convention fails to specifically address common international commercial contract conventions and terms such as CIF contracts and is far too general3. The failure to ratify renders the UK in an anomalous position vis-à-vis its primary trading partners, often leading to pressure to accept the law of a contracting party that is a signatory to the Convention4. This position has led to a marked difference between the approach in international trade law to contract termination and buyer remedies regarding risk for lost goods under the Convention, in contrast to the position under CIF contracts, which relies on the application of developed principles of private international law,5which clearly impacts Karg’s legal position vis-à-vis Unimeal plc6. As a CIF contract in the current scenario regulated under English law, the CIF (contract, insurance and freight) contract requires the seller to arrange the carriage of goods and their insurance in transit, and all costs of such arrangement are included in the contract price7. Additionally, the essential obligations on Unimeal plc as CIF seller was to obtain a bill of lading, a policy of insurance and any other document required by the contract, and to forward these to the buyer who pays on the invoice when they receive the shipping documents8. Indeed, Zekos highlights that bills of lading are vital documents in international trade and commerce particularly in relation to international contracts negotiated and concluded at a distance9. Additionally, if a seller has agreed to sell goods under a CIF contract, the performance obligations are effectively in two stages. First, the seller has to supply information regarding the cargo, and secondly, the seller has to tender the corresponding shipping documents in accordance with the documentary obligations.10 Furthermore, CIF contracts are often concerned with the sale of unascertained goods, and issues concerning the passing of risk and property are often involved11. However, a common problem arises where unascertained goods are lost before the CIF seller has appropriated the goods to the contract, yet submits the correct documents12as the right to reject documents is distinct from the obligation to deliver goods under a CIF contract, which again impacts Karg’s legal position in relatiozn to any claims against Unimeal plc. In the current scenario, the cargo formed part of a larger consignment and section 1(2) of the Sale of Goods (Amendment) Act 1995 provides that with regard to unascertained goods forming part of an identified bulk, then “if the bulk is reduced to (or to less than) that quantity, then, if the buyer under that contract is the only buyer to whom goods are then due out of the bulk- (a) the remaining goods are to be taken as appropriated to that contract at the time when the bulk is so reduced; and b) the property in those goods then passes to that buyer”. Additionally, section 1(4) provides that this position remains applicable where “a bulk is reduced to (or to less than) the aggregate of the quantities due to a single buyer under separate contracts relating to that bulk and he is the only buyer to whom goods are due out of that bulk”. On this basis, Karg may try and claim entitlement to the part of the cargo that is not damaged under section 1 of the 1995 Act particularly as the remaining cargo on the ship was all destined for Karg after the stops in Hamburg and Rotterdam. Alternatively, if all the cargo is damaged, as the CIF contract was negotiated under English law, it was an implied condition under section 14 of the Sale of Goods Act (SGA) that the goods supplied under the contract were to be “of satisfactory quality”. The definition of satisfactory quality is further clarified in Section 14(2A) of the SGA, which provides that goods should “meet the standards that a reasonable person would regard as satisfactory, taking account of any description of the goods”. In addition to the implied condition as to quality, section 13 of the SGA stipulates that goods should comply with their description. Failure to comply with these conditions enables a buyer to reject the goods13, however the right to rejection is qualified by section 15A of the SGA, which prevents a buyer’s right to reject if the breach is so slight as to effectively render a breach of warranty. However, in the current situation the cargo has been ruined and thereby constitutes a breach of the implied conditions of the SGA. The fundamental feature of a CIF contract is that once a seller has shipped the goods, they have “performed” the contract by tendering conforming documents to the buyer, 14as in the current scenario Unimeal plc tendered the bills of lading and thereby appear to have satisfied the documentary obligation. Indeed, it was described in the case of Hindley v E India Produce Co. Limited15 as “a contract for sale of the goods performed by delivery of documents”16. As such, the CIF contract imposes duality of obligations on Unimeal plc to deliver the goods and deliver the documents. The documentary obligations require the seller to procure and submit to the buyer the exact documents stipulated in the contract17. Furthermore, in the case of The Julia18, Lord Porter asserted that in the absence of a provision in the contract to the contrary, the documents provided should include a bill of lading, an insurance policy and an invoice. Under English law, a CIF contract entitles buyers to reject a tender of shipping documents on grounds of the document being “defective” or alternatively, where they are tendered late19. With regard to the current scenario, the documents were not tendered late. With regard to the definition of “defective”, various scenarios have addressed this, including a non-genuine bill of lading20, a bill of lading failing to provide the buyer with “continuous documentary cover”21, all of which have been found to be “defective” documents. It is further important to consider electronic bills of lading in maritime contracts. The Committee Maritime International (CMI) implemented Rules for Electronic Bills of Lading in 199022however these Rules are voluntary and therefore dependant on agreement of the parties to a contract of carriage by sea. Under the CMI rules, electronic bills of lading operate by way of the carrier issuing the bill of lading to the shipper the electronic bill of lading, by the use of an electronic message and private code, entitling the bill holder to control the goods23. The “right of control” under the code is then transferred after notification by the shipper to the carrier, whereby the original code is cancelled. Once this process is completed, a new code is created and given to the person entitled to control the goods24. To this end, “the key holder should have the same rights as the bill of lading holder25” and is useful in addressing the individual rights of buyer, seller and carrier under the contract. With regard to the current scenario, the International Meal Export Corporation negotiated the 12 bills of lading in favour of Karg who have paid against them. It is not evident whether the certificate of insurance and an invoice for the contract price have also been submitted and in the absence of further information I shall proceed in the assumption that the International Meal Export Corporation prima facie appears to comply with the documentary requirements as stipulated in the Julia case. Moreover, in the case of Gill & Duffus SA v Berger & Co Inc26 it was asserted that if the documents conform to the contract stipulations, then the buyer is obliged to accept them otherwise they will be in breach of contract even if the goods themselves do not comply with the contract on arrival (which is subject to the separate right of rejection). Under English law, Karg will only be entitled to reject a tender of shipping documents either where they are submitted late or “defective”27. Furthermore, in the Hansa Nord case28, Roskill L.J asserted that: “the seller’s obligation regarding documentation has long been made sacrosanct by the highest authority and….. The express or implied provisions in a c.i.f. contract in those respects [are] of the class ….. Any breach of which justified rejection”29. Accordingly, Karg’s position as buyer is strong from the outset as in the Hansa Nord case itself it was held that a c.i.f. buyer could reject documents disclosing a defect even where the defects in the goods would not itself justify rejection of the goods. However, there are two possible exceptions allowing a degree of flexibility for allowing documents that are “nearly alright”30, namely, under the common law and section 15A of the Sale of Goods Act (SGA), which I shall now evaluate. The common law demonstrates that there is an exception to the requirement that the documents must be perfect in all respects, however the parameters of this exception are uncertain and ultimately appear to be a question of fact31. For example, in the case of Tradax Internacional S.A. v Goldschmidt S.A.32, the contract provided that the goods should contain no more than 4% foreign matters and a certificate of quality was required to be submitted with the other standard shipping documents. The buyers subsequently rejected the documents on the grounds that the certificate of quality showed 4.1% of foreign matters. However Slynn L.J. presiding stated that the buyer could not validly reject the documents on this ground and that the certificate was what it was stated to be, in other words a “certificate of quality”. Slynn L.J further asserted that regardless of the certificate complying with the documentary requirements the actual goods did not comply with the requirement of quality. Nevertheless, Slynn J suggested that the certificate of quality itself served its intended documentary purpose33. This has created uncertainty however, compounded by the implementation of Section 15A of the SGA34. Indeed Treitel argues that a document is not defective merely because it states something different to what the contract provides for and that only if the defect in the documents relate to a defect in the goods which amounts to a breach of condition can the document be rejected35. However, this obfuscates established law that the right of a buyer to reject a document is separate from the right to reject the goods under a CIF contract36. For example, in the Tradax case it was indicated that as the buyer could not reject the goods, there was no right to reject the documents. However, in the case of Vargas Pena Apeztieguia y Cia v Peter Cremer G.m.b.H37it was held that the buyer was entitled to reject the goods which included a certificate of quality stating that the goods had a fat content in excess of 15%. In that case, there was an express clause providing that the goods were “rejectable at the buyer’s option” if the goods had a fat content in excess of 15%. Accordingly, the decision was distinguished as they disclosed a breach in the goods justifying rejection38, and therefore the buyer was entitled to reject the goods. However, it has been submitted that this decision may be difficult to justify under section 15A of the SGA as a discrepancy “so slight” as to prevent a buyer to reject. Accordingly, on this basis it is arguable that unless the goods themselves entitle Ian to reject the goods, the documents cannot be rejected. In any event, with regard to Karg’s position, there was no express provision in the bill of lading that the charter party was to be presented to Karg as part of the documentary requirements. Accordingly, in the absence of an express requirement in the contract between Karg and Unimeal plc itself; it will be difficult for Ian to validly reject the documents. However, it is important to reiterate that the right to reject documents and goods are both distinct as asserted in the case of Kwei Tek Chao v British Traders and Shippers39. Additionally, in the case of Kwei Tek Chao v British Traders and Shippers40 it was stated that if due to fundamental breach the buyer is entitled to reject goods, this will repudiate the contract and as such, the rights in the goods will vest back in the seller, irrespective of previous risk passing to the buyer upon shipment. However, it the facts demonstrate the damage to the cargo was caused by the shipowner’s lack of proper care for the cargo. On this basis, it is arguable that Karg’s preferred course of action in respect of the damaged goods should be against the International Meal Export Corporation as carriers41. Additionally, the Carriage of Goods by Sea Act 1971 regulates the contracts dealing with the carriage of goods by sea. The Act also provides that any contract of carriage covered by a bill of lading (which is the case here) is regulated by the Hague-Visby Rules (the Rules)42, which prescribe detailed liabilities of carriers under such contracts. With regard to the current scenario, the International Meal Export Corporation will be liable to Karg for damage to the cargo caused as a direct result of its negligence, which will be discussed further below. As against Unimeal plc, if the poor quality of the cargo provided is in breach of a condition, Karg will be entitled to reject the goods43. There may an express condition in the contract that the cargo must be of a specified quality. If not, as highlighted above, the SGA implies certain conditions as to quality of goods provided under a contract for the sale of goods. In particular, Section 14(2) expressly provides that “where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality”. Furthermore, section 14(2A) of the SGA provides that “goods are of satisfactory quality if they meet the standards that a reasonable person would regard as satisfactory, taking account of any description of the goods”. Section 13 of the SGA also provides that goods must comply with their contractual description however this is qualified by section 15A of the SGA which asserts that if the breach is so slight then it will be a breach of warranty and not a breach of condition. If we apply this by analogy to the current scenario, the entire cargo delivered to the port appears to have been soaked with sea water due to the negligence of the carrier. As such, the cargo is commercially worthless, which clearly points to a fundamental breach of the implied conditions under the SGA. The CISG imposes a stricter standard for rejection of goods and cancellation of the contract and under the CISG, a buyer cannot reject defective goods unless there has been fundamental breach44. The CISG restricts a buyer’s right to reject goods and avoid the contract in circumstances where the buyer would be substantially deprived of what he is entitled to expect under the contract45. If we consider this in context of Karg’s position, it is evident that the fact that cargo is severely damaged has clearly deprived them of what they were entitled to expect under the terms of the contract. As such, they will be entitled under both the SGA and CISG to reject the goods. Unimeal plc is likely to refute a claim on the grounds that under the CIF contract passes risk to the buyer on shipment46 (provided that Unimeal has complied with their insurance obligations). Furthermore, the damage to the goods appears to have been caused by the negligence of the carriers in failing to care for the cargo and not securing the hatches covering the holds properly, which in turn has let water entering the hold. However, the significance of the passing of risk on shipment to Karg is that it theoretically prevents them from claiming against Unimeal plc for damage caused after shipment47. However, in the case of Kwei Tek Chao v British Traders and Shippers48 it was asserted that if a buyer is entitled to reject the goods, this results in the discharge of the contract and as such, the rights in the goods re-vest in the seller, notwithstanding the previous passing of risk to the buyer on shipment. 3. Karg’s rights against Kurt With regard to the rights of Karg against Kurt, the agreement doesn’t appear to have been negotiated on either CIF or FOB terms. Additionally, in the absence of any indication of the governing law we shall presume that the agreement is governed under English law. As such on the basis of the application of the SGA, Karg would have the right to initiate proceedings against Kurt for fundamental breach of the implied terms pertaining to quality and fitness for purpose. Additionally, it is possible that as an international commercial contract that Karg may have some rights against Kurt for breach of contract under the UN Convention on Contracts for the International Sale of Goods49. However, another significant issue for Karg in any claim against both Unimeal plc and Kurt is jurisdiction in terms of the ability to initiate proceedings against defendants in extra-territorial jurisdictions, which I shall now address in section 4 below. 4. Jurisdiction The contract between Unimeal plc and Karg is stated to be subject to English law and even if the contract between Karg and Kurt is subject to English law, the central obstacle to any claim will be jurisdiction to initiate proceedings against defendants in another territory50. The Brussels Regulation51on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Regulations) came into force on March 1 2002 and replaced the Brussels Convention. The Regulations automatically apply to all EU countries with the exception of the UK, Ireland and Denmark, who are not subject to Title IV of the EC Treaty52. However, the UK has formally adopted the Regulations53. The Regulations largely follow the form of the previous Brussels and Lugano Conventions54 however clarifies some of the previous uncertainties of the Conventions. In particular, in the context of civil and commercial disputes, the Regulations attempt to ensure that only one set of court proceedings can be pursued in cross-border disputes55. Article 27 of the Regulations (previously Article 21 of the Brussels Convention) provides that where proceedings involve the same cause of action between the same parties and are instituted in different member states, any court other than the court where the first set of proceedings was commenced must stay its proceedings until jurisdiction of the first court is determined. Furthermore, Article 27 provides that if the first court rules that it has jurisdiction under the Regulation, then any other courts (the second seized court) must decline jurisdiction. From the perspective of the English courts, a strict interpretation of Article 27 suggests that if the cause of action has been instituted in one jurisdiction and then subsequently commenced by another party to the same proceedings in the English courts, the English court will have a strict obligation to stay its proceedings until the first court determines its jurisdiction. However, this raises issues regarding the enforcement of jurisdiction clauses in contract, which have been addressed by the European Court of Justice (ECJ) in two recent cases56. With regard to the English court approach, the general practice has been to enforce breaches of exclusive jurisdiction clauses though ordering antisuit injunctions57. This was reviewed by the ECJ in Turner v Grovit 58and Gasser v MISAT59. The central issues for determination in these cases were: 1) Whether exclusive jurisdiction clauses could be enforced by national courts; and 2) Which court (the first or the exclusive jurisdiction) court should hear the case. In Turner v Grovit, the ECJ asserted that it was incompatible with Article 27 of Regulations for the courts of one jurisdiction to grant an antisuit injunction restraining a party from pursuing proceedings in another member state where proceedings had been commenced first. Furthermore, in the case of Gasser v MISAT, the dispute involved an Austrian and Italian party. The contract between them expressly incorporated an exclusive jurisdiction clause in favour of Austrian courts. However MISAT commenced proceedings in the Italian courts notwithstanding the jurisdiction clause. The Austrian party subsequently commenced proceedings in the Austrian courts arguing exclusive jurisdiction as provided for under the contract notwithstanding the fact that proceedings had been commenced in the Italian court first. However, in relying on Article 21 of the Convention (Now Article 27 of the Regulations), the ECJ held that the procedural timetable in Article 21 superseded the contractual exclusive jurisdiction clause and as such, the second seized court in Austria had to stay its proceedings, whilst the Italian courts determined whether it had jurisdiction. However, in addition to creating costs implications, compounded by practical difficulties of appeal rights, the decisions clearly undermine the intentions of the contracting parties in commercial negotiations when completing the contract60. The practical consequences of this have been evidenced in the Primacon litigation61 where proceedings had been instituted in the German courts first notwithstanding the English exclusive jurisdiction clause in the contract. The result was that the English courts were required to stay proceedings and were unable to issue an antisuit injunction to prevent German proceedings in breach of the jurisdiction clause. However, the Court of Appeal did assert in the Primacon case that the English courts could permit proceedings to continue where although related to proceedings already commenced in the German courts were substantively concerned with a different cause of action from the German proceedings. This was based on Article 28 of the Regulations, which expressly grants discretion to courts where actions are pending and related but do not involve the same cause of action. Distinctions have also been made in relation to arbitration clauses where English courts have continued to grant anti suit injunctions where proceedings have been started in breach of express contractual terms in other European jurisdictions62. For example, In Through Transport63, the Court of Appeal asserted that arbitration clauses were outside the Brussels regime and that there was no objection to enforcing anti-suit injunctions where there was an agreed arbitration clause in the contract. Accordingly, in light of the recent case law, the general position is that if proceedings relating to the same cause of action are commenced in another jurisdiction first, the English court will have to stay proceedings under the Brussels Regulation notwithstanding an exclusive jurisdiction clause in favour of the English Courts in the contract. The only way to circumvent this is if the clause is in respect of an arbitration or alternatively relates to a separate cause of action under the same contract. 5. Liability of International Meal Export Corporation as Carrier As highlighted above, as the damage was not caused by Unimeal plc and was caused after shipment when the risk had passed and although the goods do not comply with the contract, it was a direct result of the carrier’s negligence as opposed to Unimeal plc’s breach of contract. As such, it is reiterated that the more appropriate method of recourse for Karg will be against the carriers64. Moreover, the carriage of the goods by sea to Karg is also regulated by the provisions of the Carriage of Goods by Sea Act 1971. Under this Act, every contract of carriage which is covered by a bill of lading is subject to the provisions of the Hague-Visby Rules (“the Rules”)65. The Rules set out the liabilities and responsibilities of parties under these contracts66. Under the Rules, the carrier will be liable to Karg for the damage to the goods. Under the Carriage of Goods by Sea Act 1971, if the carrier issues the bill of lading to the consignee of goods, the carrier is liable for any damage to the goods. Whilst the ship made some stops en route, as the contract with Unimeal plc was regulated by the Hague-Visby Rules and therefore under the rules, the period of coverage is from the time of loading to the time they are discharged from the ship67. Accordingly, the Hague-Visby rules place Karg in a stronger position to initiate proceedings against the International Meal Export Corporation as carrier. For example, Article IV(i)-(xviii) places the burden of proof on the carrier with regard to demonstrating compliance with due diligence68. This was highlighted in Riverstons Meat Co Ltd v Lancashire Shipping Co. Ltd69 where Lord Radcliffe held that the duty was to ensure that due diligence was undertaken in ensuring that a ship was seaworthy and had to account for anything that went amiss during carriage and any stops due to the rules on the period of coverage70. 6. Conclusion In conclusion, it would appear that under the CIF contract Karg will prima facie be entitled to return the goods and claim for fundamental breach of contract, however as the breach was not caused by Unimeal plc or Kurt, then the prima facie action should be against the International Meal Export Corporation under the Carriage of Goods by Sea Act 1971. Bibliography Adrian Biggs & Peter Rees (2005). Civil Jurisdiction and Judgments. 4TH Edition. LLP Publishing. Michael Bridge (2007). The International Sale of Goods: Law and Practice 2nd Edition Oxford University Press. Bridge (1991). International Private Commodity Sales (1991). 19 Canadian Business Law Journal 485 Indira Carr., & Peter Stone (2005). International Trade Law. Routledge Cavendish Jason Chuah (2005). Law of International Trade. 3rd Edition Sweet & Maxwell. Chitty on Contracts (2007). 29th Edition Sweet & Maxwell. Creasy, J., & A, Wanigasekera, Comparison of Hague-Visby and Hamburg Rules at www.juliusandcreasy.com/inpages/publications accessed February 2010. D’Arcy, L.Murray, C, and Cleave B (2000). Schmitthoff’s Export Trade “The Law and Practice of International Trade”, Sweet and Maxwell. R, Goode., H, Kronke., E, McKendrick., & J Wool. (2007). Transnational Commercial law: Text, Cases and Materials. Oxford University Press. Jonathan Hill (2005). International Commercial disputes in English Courts. 3rd Edition Oxford University Press. Hsu, L. (1996). Remedies Available for Breach of Contract under the UN Convention on Contracts for the International Sale of Goods. Singapore Academy of Law Journal, Volume 8, p.113. Livemore, J & Euarjai, K. (1998). Electronic Bills of Lading and Functional Equivalence. Journal of Information, Law and Technology. Llorens S. Z. (2007). Validity of Choice of Jurisdiction Clauses on Bills of Lading. International Law Office. David McClean & Kisch Beevers (2005). The Conflict of Laws. 6th Edition Sweet & Maxwell. McDorman, T. (2006). The Carrier’s Liability under the International Maritime Conventions: the Hague, Hague-Visby and Hamburg Rules. Journal of Maritime Law and Commerce Ewan McKendrick, “Contract Law”, 5th Edition (2003), Palgrave Macmillan Mullis, A. (1997). Termination for Breach of Contract in CIF contracts under the Civenna Convention and English law. Is there a substantial difference? Contemporary Issues in Commercial Law, Sweet & Maxwell, pp137-160. A G Guest. (2006). Benjamin’s Sale of Goods. 7th Edition. Sweet & Maxwell. Reynolds, F. (1990). The Hague Rules, the Hague-Visby Rules and the Hamburg Rules. Available at www.austilii.edu.au/au/journals/ANZMLJ Accessed February 2010. Simon Schnitzer (2005). Understanding International Trade Law. Law Matters Publishing. L.S Sealy, Hooley, (2003) “Commercial Law Text, Cases and Materials, 1st edition 2003, Sweet and Maxwell. Tetley, W. (2004). Interpretation and construction of the Hague, Hague-Visby and Hamburg Rules. Published in 2004, Volume 10, JMIL, pp30-70 P Todd (2003) “Cases and Materials on International Trade Law”, 1st edition Sweet and Maxwell. G H. Treitel., (2007). The Law of Contract. 12th Revised Edition Sweet & Maxwell John Wilson (2007). Carriage of Goods by Sea. Longman. Zekos, GI (1997). The Contractual Role of Bills of Lading under International Conventions and Reports. Journal of Managerial Law, Volume 39, Issue 2, pp.5-19. Legislation The Carriage of Goods by Sea Act 1971 Sale of Goods (Amendment) Act 1995 Read More