The International Sale of Goods Contracts - Essay Example

This factual scenario raises various issues relating to international sale of goods contracts and I shall deal with the following in order to evaluate Sweet plc’s legal position: 1) Legal position regarding obligations to pay for the lost goods in the August consignment; and 2) Legal position regarding obligations vis-à-vis the damaged sugar stock in the September consignment. 1) August Consignment The contract between Sweet plc and the Polish sugar importer (“the Seller”) was a CIF (cost, insurance and freight) contract and as such, the Seller is required to arrange the carriage of the goods, their insurance in transit and all costs of such arrangements are usually included in the contract price1. Furthermore, an essential element of a CIF seller’s duty is to obtain a bill of lading, an insurance policy, any other document required by the contract2 and to forward these to the buyer. The buyer then pays on the invoice only when they have received the correct shipping documents3. In the current scenario, we are told that the agreed shipping documents were tendered, which would indicate a prima facie obligation of Sweet plc to make payment in respect of the August consignment. The contract between Sweet plc and the Seller is an international sale of goods contract and we are not told which law is applicable. Although the UK is not currently a signatory to the Vienna Convention on Contracts for the International Sale of Goods (CISG), Poland is a signatory4 and as the seller is based in Poland, the parties may have adopted the CISG by agreement. However, this analysis will advise on the basis of English law being applicable, with comparisons with the CISG position where relevant. 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 buyer5. Indeed, it was described in the case of Hindley v E India Produce Co. Limited6 as “a contract for sale of the goods performed by delivery of documents”7. As such, the CIF contract imposes duality of obligations on the seller 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 contract8. Furthermore, in the case of The Julia9, 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 late10. 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 lading11, a bill of lading failing to provide the buyer with “continuous documentary cover”12, all of which have been found to be “defective” documents. With regard to the current scenario, we are told that the agreed shipping documents were duly tendered, which 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 Inc13 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). As Sweet plc would prefer to validly avoid payment against the August shipment, one method would be to argue that the tendered documents were defective, which will be difficult on the basis of the facts provided. Under English law, Sweet plc will be entitled to reject a tender of shipping documents either where they are submitted late or “defective”14. Furthermore, in the Hansa Nord case15, 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”16. Accordingly, a buyer’s position is strong from the outset as in the Hansa Nord case itself it was held that a CIF buyer could reject documents disclosing a defect even where the defects in the goods would not itself justify rejection of the goods. Alternatively, the common law demonstrates that there is an exception to the requirement that the documents must be perfect in all respects17, however the parameters of this exception are uncertain and ultimately appear to be a question of fact18. For example, in the case of Tradax Internacional S.A. v Goldschmidt S.A.19, 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 “here the certificate is a good certificate in that it does state what is the quality, what is the percentage of impurities. It shows that there was not a full compliance with the contractual term as to quality and it does what it was intended to. It is a valid document…. Capable of being transferred as part of a subsequent sale”20. This has created uncertainty however, compounded by the implementation of Section 15A of the Sale of Goods Act 1979. 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 rejected21. 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 contract22. 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.H23it 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 rejection24, 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 Buyer to reject the goods, the documents cannot be rejected. In any event, with regard to Sweet plc’s position, it will clearly be difficult to reject the documents and the goods were never delivered, which negates the ability to reject the goods. Moreover, 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 Shippers25. Furthermore, if Sweet plc have no right to reject the documents, it may be advisable for them to pay against the tender of the shipping documents in the first instance to avoid being in breach of contract and to retain the possible right to bring a claim for fundamental breach of contract for failure to deliver26. As the cargo has been lost and the Seller has therefore been unable to deliver the goods for the August shipment, under the CIF contract principles, this may constitute fundamental breach of contract and will entitle Sweet plc to terminate the contract and thereby justify non-payment on grounds of fundamental breach27. Alternatively, it is evident that on a strict interpretation of CIF contracts, the tendering of agreed shipping documents (if including the insurance documents) means that the risk in August shipment would have been with Sweet plc28. As such, this means that Sweet plc will most likely have to make payment and rely on the terms of its insurance to recover for the consignment lost in transit. Additionally, the damage and loss was not caused by the Seller and was caused after shipment when the risk had passed and the loss was caused by the carrier vessel and not the Seller’s breach of contract. As such, Sweet plc will be unlikely to avoid payment for the August shipment and the more appropriate method of recourse will be against the carriers29. Moreover, the carriage of the goods by sea to Sweet plc 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”)30. The Rules set out the liabilities and responsibilities of parties under these contracts. Under the Rules, the carrier will be liable to Sweet plc for the loss 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. 2) September consignment As discussed above, one option to avoid payment would be to reject the documents, which does not appear to be available as an option to Sweet plc on the basis of facts provided. With regard to the damaged consignment of sugar in the September shipment, whilst the damage is thought to occur at the port facility prior to loading, if the shipping documents tendered included insurance as required by the c.i.f. contract and were tendered prior to loading, then the risk in the goods passed to Sweet plc as soon as the documents were tendered31. In CIF contracts there is a separation of risk and the passing of property as in CIF contracts the risk passes on shipment and in the case of Biddel Brothers v E Clemens Horst32it was asserted that “the goods are at the risk of the buyer at the time of shipment, against which he has protected himself by the stipulation in his CIF contract that the seller shall, at his own cost, provide him with a proper policy of marine insurance intended to protect the buyer’s interest and available for his use if the goods should be lost in transit”33. Therefore, whilst property may not pass until payment, if the shipping documents had been tendered, risk in the sugar will have passed and therefore Sweet plc may potentially be in breach of contract for failing to pay for the Sugar. However, as stated in the case of Kwei Tek Chao v British Traders and Shippers 195434, the CIF contract effectively imposes a duality of obligations, namely, the documentary obligation and the physical obligation of delivery. Furthermore, the acceptance of the documents tendered does not impact Sweet plc’s right to reject the goods35. With regard to Sweet plc’s rights in respect of the damaged sugar stock in the September shipment, 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 goods36, 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 if the sugar becomes soggy and deteriorates it would be useless for Sweet plc’s production of chocolate and thereby constitute a breach of the implied conditions of the SGA. Furthermore, 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 breach37. 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 contract38. If we consider this in context of Sweet plc’s position, it is evident that the fact that if the deterioration to the sugar stock is such to render its use in the chocolate production impossible, it will clearly have deprived the company of what they were entitled to expect under the terms of the contract. As such, Sweet plc will be entitled under both the SGA and CISG to reject the goods. Whilst the Seller is likely to refute a claim on the grounds that under the CIF contract passes risk to the buyer on shipment,39 in the case of Kwei Tek Chao v British Traders and Shippers40 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. In summary, on a strict application of the standard terms of a CIF contract, it would appear that unless Sweet plc can establish grounds to reject the tendered shipping documents, it will be obliged to pay for the August consignment due to the passing of risk and insurance policy protection. Alternatively, as the loss of the goods was not caused by the Seller, Sweet plc will not be able to claim fundamental breach of contract however it may be able to bring an action directly against the carrier vessel under the Carriage of Goods by Sea Act 1971. With regard to the September consignment, whilst the risk in the goods may have passed to Sweet plc under the CIF contract, it is likely to have the right to reject the goods, which is an independent right under a CIF contract. If Sweet plc rejects the goods, the goods will re-vest in the seller, which will be Sweet plc’s strongest grounds for legitimately avoiding its payment obligations. Bibliography Michael Bridge (2007). The International Sale of Goods: Law and Practice. 2nd Edition Oxford University Press. Chitty on Contracts (2007). 29th Edition Sweet & Maxwell. G H. Treitel., (2007). The Law of Contract. 12th Revised Edition Sweet & Maxwell. Ewan McKendrick, “Contract Law”, 5th Edition (2003), Palgrave Macmillan D’Arcy, L.Murray, C, and Cleave B (2000). Schmitthoff’s Export Trade “The Law and Practice of International Trade”, Sweet and Maxwell. P Todd (2003) “Cases and Materials on International Trade Law”, 1st edition Sweet and Maxwell. L.S Sealy, Hooley, (2003) “Commercial Law Text, Cases and Materials, 1st edition 2003, Sweet and Maxwell. John Wilson (2007). Carriage of Goods by Sea. Longman. The Carriage of Goods by Sea Act 1971 available at www.opsi.gov.uk Read More