The Buyers Rights to Reject

1. Introduction

With the economic globalization, the trade between the countries are more and more frequent.These transaction are referred to as export transactions and are divided into two categories:those based on a contract for the international sale of goods and those which involve the supply of services.

In the sales of goods,the documentary sales are the most type of contract.To make the trade more convenient,there are many trade terms,such as the f.o.b and c.i.f..Due to the language barrier,the trade terms inevitably may be interpreted differently in different countries.Understanding the real meaning of the trade terms are very important in the international sales of transactions.

Take the c.i.f. contract for example,there still exist controversy on some aspects.The case law on the buyer’s right to reject non conforming documents in c.i.f. sales is aimed at preventing the buyer from engaging in sharp practices,and in pursuing this policy some question whether the principles governing the separateness of the seller’s documentary and physical obligations in c.i.f. contracts have been lost.

To discuss this question in this paper,I will focus on the essence of the c.i.f. contract in the scope of the case law, then analyse the obligations of the seller and buyer under the c.i.f. contract.The most important obligation of the seller is to delivery of goods in conformity with the contract on board vessel or at least duty to furnish to the buyer the requisit shipping documents within the stipulated time.From this,I will explain the principle of the separateness of the seller’s documentary and physical obligations.Accordingly,the buyer has rights of rejection of the documents and the goods.

Finally,I will illustrate the operating mechanism of the dual rights of the rejection of the buyer under the c.i.f. contract in the practice and try to find the real relationship between the rejections of the buyer to analyse the principles governing the separateness of the seller’s documentary and physical obligations in c.i.f. contract.

2. The Documentary Sales

2.1 The Definition of Documentary Sales of Case Law

The contract of sale is the most common type of contract.Unlike the act of purchase and sale in our daily life,the traders in the dealings pay more attention on the profit or the potential loss.By the classification that whether the document is necessary in the sales,in the practice,there are two types of sales :documentary and non-documentary sales.

In the documentary sales,”the seller agrees to dispatch goods rather than deliver them at their intended destination and to procure for the benefit of the buyer the contract of carriage and any other ancillary contracts that may be agreed,e.g of marine insurance,and make over to the buyer the contract documents or other documents embodying the essential terms.Documentary sales involve as a minimum the transfer to the buyer of documents of control over the goods-typically a bill of lading or a warehouse warrant [1] -to enable the buyer to sell of pledge the goods while they are still in transit or in independent warehouse”. [2]

2.2 The Trade Terms-FOB and CIF

In the categories of the documentary sales,FOB and CIF are the main types,play important roles in the international trade.Both of them are trade terms,which have developed by the international mercantile custom.The use of the trade terms have many advantages:

(a)conductive to trade and conclude contracts between buyers and sellers;

(b)conductive to count the price and cost between buyers and sellers;

(c)conductive to settle the disputes between buyers and sellers.

Due to the language barrier,the trade terms inevitably may be interpreted differently in different countries.Therefore,the UK exporter should make clear the meaning of any trade term adopted in the transaction. [3]

FOB means free on board,it is often used in the export transaction with three types.The first type is the “strict” or “classic” f.o.b contract.The second type is the f.o.b contract “with additional service”,the last one is the f.o.b contract(buyer contracting with carrier) or “simple” f.o.b.The f.o.b. Contract has many variants,and though the basic concepets as to delivery,property and risk are common to them all,other incidents of the relationship between the parties are not susceptible to rigid rules bue depend very much on the language of the contract and the surrounding circumstances.

Respectively, CIF means cost,insurance and freight.In the case Ross T Smyth & Co Ltd v T D Bailey Son & Co[1940]67 L1.L.Rep.147(HL),the Lord Wright described the main features of the CIF:

“The contract in question here is of a type familiar in commerce, and is described as a c.i.f. contract.The initials indicate that the price is to include cost, insurance and freight.It is a type of contract which is more widely and more frequently in use that any other contract used for the purposes of sea-borne commerce. An enormous number of transactions, in value amounting to untold sums, are carried out every year under c.i.f. contracts.The essential characteristics of this contract have often been described.The seller has to ship or acquire after that shipment the contract goods, as it which, if unascertained, he is generally required to give a notice of appropriation.On or after shipment, he has to obtain proper bills of lading and proper policies of insurance.He fulfils his contract by transferring the bills of lading and the policies to the buyer.As a general rule, he does so only against payment of the price, less the freight which the buyer has to pay.…In this course of business, the general property remains in the seller until he transfers the bill of lading…By mercantile law, the bills of lading are the symbols of the goods.The general property in the goods must be in the seller if he is to be able to pledge them.The whole system of commercial credits depends upon the seller’s ability to give a charge on the goods and the policies of insurance” [4]

As it was stated in the Arnold Karberg and Co v Blythe,Green Jourdain and Co[1915] 2 K.B.:

“It is not a contract that goods shall arrive,but a contract to ship goods complying with the contract of sale,to obtain,unless the contract otherwise provides,the ordinary contract of carriage to the place of destination,and the ordinary contract of insurance on that voyage,and to tender these documents against payment of the contract price.” [5]

The Duties of the Seller and Buyer under the c.i.f. Contract

The duties of the seller under a c.i.f contract can be summarised as follows [6] :

Delivery of goods in conformity with the contract on board vessel or at least duty to furnish to the buyer the requisit shipping documents within the stipulated time;

Shipment is the reference point by which the seller’s performance of his ordinary obligations as to the conformity of the goods to the implied and express terms is tested;

Procurement of contracts of carriage an insurance;

The sell may be required to nominate the vessel;

The seller is bound to tender to the buyer three conforming documents:a bill of lading,a policy of insurance and an invoice [7] ;

Possibility of valid performance either by shipping conforming goods or by buying goods afloat;

Once the documents have been tendered the seller must do nothing to prevent the goods from being delivered to the buyer;

The obligation of delivery of goods is separated to the delivery of documents.Documentary sales adds an extra dimension to the sale of the goods,namely the tender of documents,a separate aspect of the transaction.The delivery of documents is entirely independent of the delivery of goods.One way to view this construction is to see a documentary sale as an economic construction which can make the goods being sold negotiable financial instruments while the underlying sales contract is largely unaffected by the documentary aspects.The documentary sale,especially in CIF,focus on the economic interest represented by the goods and not the goods themselves.Therefore,in the case law,the separateness of the seller’s documentary and physical obligations,as a principle,should be governed under the CIF contract.

The duties of the CIF buyer:

Accept the documents,if they are in conformity with the contract;

Pay on tender of the documents;

Pay the price if the documents conform and cannot delay until he has examined the goods;

If the buyer knows that the goods are not in accordance with the contract,he must nevertheless pay against documents if they are in accordance with the contract except the seller’s fraud or the goods actually shipped differ fundamentally form those that have been sold;

Take delivery of the goods at the agreed destination and pay all unloading costs;

Pay customs and other duties at the port of arrival;

Procure any necessary import license;

In addition,the buyer have two rights:rejection of non-conforming documents and non-conforming goods.Devlin J. Observed in Kwei Tek Chao v British Traders and Shippers Ltd [8] that:

“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 not found to be in conformity with the contract.”

Mentioned the separateness of the obligation of the seller,some have questioned that the case law on the buyer’s right to reject non conforming documents in cif sales is aimed at preventing the buyer from engaging in sharp practices,and in pursuing this policy whether the principles governing the separateness of the seller’s documentary and physical obligations in cif contracts have been lost.

Before answering this question,we should find out the essence of the cif contracts and explain the buyer’s right of rejection.

3. The Buyer’s Rights to Reject under the c.i.f. Contracts

Most issues of the c.i.f. contracts caused from the involvement of the documents.An examination of the shipping documents is central to any other of the performance of the c.i.f. Transaction.,it includes the bill of lading and the insurance document and the invoice,which should provide continuous cover from the port of shipment to the port of discharge.

When referring to the two separate obligations of the seller,delivery of goods and delivery of documents,we always assumed they will arrive at the same time.But with the development of communication and technology,the documents always arrive earlier than the goods.Before the goods arrive at the buyer’s,the price of the goods may fluctuate in the market. To avoid the impact of this fluctuation,the transference of the documents are regarded as an instrument to warrant the trade.So the c.i.f. contract is called “symbolic delivery”.

The documents of the c.i.f. contract

A bill of lading is a type of document that is used to acknowledge the receipt of a shipment of goods.The bill of lading must be clean without an empty promise which is not real in the goods.Sometimes the seller will include some conditions of sale an express clause to the effect that a “received for shipment bill of lading,if tendered,shall be accepted by the buyer.”It also contains the name of the shipping company ,flag of nationality,shipper’s name,description of goods,order and notify party.So in the sales of transactions,the bill of lading play important role.

The value of the insurance cover should be obtained by the seller.The marine insurance certificate should provide cover against the risks which it is customary in the particular trade to cover with respect to the cargo and voyage in question.An effective insurance policy has to be obtained to cover the goods when in transit is an essential condition entitled to refuse the acceptance of uncertain goods even when they arrived sound at the destination. [9]

And the invoice must be completed in strict agreement with the terms of the contract.Attention should be paid to the proper linkage of the invoice with the other documents tendered.It must be clear that they all identify the goods sole although some latitude is admitted with respect to their description in the other documents. [10]

In addition to the three main documents,the shipping documents should include the other documents,just like certificates of origin,or quality,or of inspection.Failure to tender these documents in the proper form can be considered as the non-conforming documents.Therefore,the documents can be considered as the symbol of the real goods,the warranty of the title to goods,the certification supported the transport protocol between the seller and buyer and the main evidence to solve the disputes in the future.For the reasons given above,the documents should be payed more attention under the c.i.f. contracts.

In a c.i.f. Contract,unless the parties have agreed otherwise,the payment of the price becomes due when documents conforming to contract are tendered.In practice,if the goods are shipped and lost during the ocean transit,the seller is still entitled to tender proper shopping documents to the buyer and to claim the purchase price.Donaldson J. said:

“the fact that the ship and goods have been lost after shipment or that a liability to contribute in general average or salvage has arisen is no reason for refusing to take up and pay for the documents.”

If the goods,having been shipped sound,are lost or damaged in transit,the buyer’s remedy is not against the seller but against the carrier and/or insurer.In that case,the documents will play important roles in the dispute settlement.The buyer purchases the documents rather than the goods themselves. For this reason,the c.i.f. contract sometimes has been described as being not a sale of goods but a sale of documents relating to goods.The delivery under the c.i.f is the typical documentary delivery and indirect delivery.

Furthermore,three issues must be considered;the delivery of the goods.the passing of the property in the goods and the passing of the risk.

Delivery of goods

According to s.61 of the 1979 Act “delivery” means the “voluntary transfer of possession from one person to another”. The place and time of delivery are,in export sales,usually defined by the special trade terms,which contained mainly in ss.27 to 37 of the Sale of Goods Act 1979.In the c.i.f. Contracts,the goods are deemed to be delivered when the bill of lading is delivered to the buyer. [11]

Passing of the property

Under a c.i.f contract,if the bill of lading has been taken out by the seller,and delivered to the buyer of his agent,the inference is that the property which is intended to pass to the buyer is only conditional.The condition is the goods are in accordance with the contract,if not,the property in the goods shall revert to the seller.Moreover,if the guarantee can be given in another way ,such as by the provision of a standby letter of credit by a reputable bank,the intention of the parties may well be that property in the goods shall pass when the bank issues the credit. [12]

Passing of the risk

The risk of accidental loss of the goods sold passes prima facie when the property passes(s.20(1)).This is an antiquated rule of the Sale of Goodes Act 1979 derived from its predecessor,the Act of 1893.In modern texts,such as the Vienna Convention on Contracts for the International Sale of Goods,provided that,as a rule,the risk shall pass on delivery of the goods. [13] In a c.i.f. Contract,when the goods are delivered over the ship’s rail,the risk has passed from the seller.Relating to perishable goods which contain an implied condition that the goods shall be of satisfactory quality,just as Diplock J. Stated this rule [14] :

“It is the extraordinary deterioration of the goods due to abnormal conditions experienced during transit for which the buyer takes the risk.A necessary and inevitable deterioration during transit which will render them unmerchantable on arrival is normally one for which the seller is liable.”

As analysis above,the risk of the buyer passed by the seller may cause some baneful influence on the buyer.

(a)the buyer lost the payment of goods and do not receive the goods

(b)the buyer do not receive the goods

(c)the buyer do not receive the goods on time

(d)the buyer receive the goods whose quality,quantity or package are not conform to the rules of the contracts,e.g. shoddy products,adulterated goods

(e)the buyer receive the documents not accordance to the rules of the contracts

The Operating Mechanism of the Dual Rights of the Rejection of the Buyer under the c.i.f.

4.1 The defects only exist in the documents

The defects only exist in the documents have two types of performance.One is that the goods are in the conformity with the contract,but something wrong with the documents unexpectedly.The other one is that during the time of shipment,the date of the bill of lading is wrong.In summary,the buyer can exercise the rights of rejection in the conditions of these performance.Meanwhile the rejection to the documents will lead to the rejection of the goods.

Some may feel it is unfair to the seller. On the surface,it is unfair to the seller,but we have neglected three points:

The obligation that the seller is bound to tender to the buyer three conforming documents is compellent not voluntary,the seller do not have other choices

The buyer cannot resell the goods without the conforming documents

In most instances the seller have the chance to tender to the buyer documents again.If the defective documents are cured by a fresh and conforming tender within the time allowed by the contract,the seller will not be guilty of repudiatory breach on the documents.

This does not mean the buyer can use the rights of rejection randomly.The buyer should follow some rules when exercising the rights.If the buyer renounce the rights of the rejection in the examination of the documents,after that,he can not reject the goods for the documents any longer.Because the dual rights of the rejection to the documents and goods are separate,accordingly,the dual rights of the examination of the documents and goods are also separate.To give up the rights of the rejection to the documents during the examination means admission of the defective documents.

However,if he cannot find the defects of the documents during the examination,he can ask for compensation for the lost the opportunity to reject the documents.

4.2 The Defects only Exist in Goods

In many cases,the documents are conformity with the contracts on the surface,while the goods are not conforming with defects.It is very common in the practice.The buyer cannot reject the documents but reject to the goods.Because the buyer’s rights to reject nonconforming documents and nonconforming goods are separate to each other.

To keep the stability of the trade ,the buyer cannot check the goods before accept the documents.In addition,banks cannot reject the proper documents for the nonconforming goods.If he rejects the proper documents,he breaches the contract obligation.So the buyer should accept the conforming documents and reject the nonconforming goods.

4.3 The Defects Exist both in the Documents and Goods

There are two situations that the defects exist both in the documents and goods.Firstly,the documents are faked,hiding the goods’ defects.In this case,the seller do not provide the real documents or deliver the nonconforming goods.

Secondly,although the documents reveal the defects of the goods.The seller deliver the nonconforming documents and nonconforming goods,it is different from the first institution.To the former,the buyer cannot find the documents faked,so he can exercise the rights of the rejection to the goods.On the other hand,for the latter,the buyer accept the wrong documents,meanwhile,he has lost the rights to reject the nonconforming goods.

4.4 The Lost of the Rejections

The lost of the rejections under the c.i.f. contract should meet two requirements.In the first place,the buyer should know the defects of the documents or the goods.Further,the buyer has the acts to give up or he intimates he will not exercise the rights of the rejections.

4.5 Is there some relationships between the rejection of the documents and goods?

In my opinion,the buyer’s rejection of documents is separate from the rejection of the goods.Besides,the buyer’s rejection of documents relates to the rejection of the goods.For one thing,the dispose of the buyer to the goods have no influence on the rejection of the documents.For another,after acceptance the nonconforming documents means the lost of the rejection of goods.Therefore,at some extent,the two rejections of the buyer are not separate to each other.

Conclusion

With the development of the international sales of transaction,the c.i.f. Contract has become the most popular type of the contracts.The c.i.f. Contract must be fulfilled by two ways: the delivery of the goods and the delivery of the documents.The goods are delivered by the carrier by ocean transport.On the other hand,the documents are delivered by the system of the banks.These two types of performance are very important in the c.i.f. Sales.

As Donaldson J. Observed in one case [15] :

“The contract called for Chinese rabbits,c.i.f. Their obligation was,therefore,to tender documents not to ship the rabbits themselves.If there were any Chinese rabbits afloat,they could have bought them.”

The buyer and seller realize the trade according to the documents,the buyer realized profits by the delivery of the goods while the seller will breach neither the failure of delivery of the documents nor the goods.The most important obligation of the seller is to delivery of goods in conformity with the contract on board vessel or at least duty to furnish to the buyer the requisit shipping documents within the stipulated time.They are separate to each other,in the case law,it is considered as a principle to be governed that the separateness of the seller’s documentary and physical obligations.Therefore the buyer have two chances to check do the examination,documents and goos.When the documents arrive,he has the rights to exam the documents before the payment.When the goods arrive,he has the rights to exam the goods.As a result,the have dual rejection under the c.i.f. contract.That is why the c.i.f. Contract is quite different from the other types of contracts.

Just because the particularity of the c.i.f. Itself,the rights of the buyer are different from the other types of the contracts.Simultaneously,this part is out of common and causes disputes,thereinto,the case law on the buyer’s right to reject non conforming documents in c.i.f. Sales is aimed at preventing the buyer from engaging in sharp pracitces,so someone think that he principle governing the separateness of the seller’s documentary and physical obligation have been lost.To some extent,I do not agree with this argument.

For one thing,In the case law,especially in the UK,it tends to give more protect to the buyer.That is different under the United Nations Convention on Contracts for the International Sale of Goods(CISG),the CISG entitle many types of remedies to the buyer.But in the UK case law,the rejection of the goods and documents are the most effective and radical protection.The dual rejection is the characteristic remedy of the buyer in the c.i.f. contract.

For anther,the obligation that the seller is bound to tender to the buyer three conforming documents is compellent not voluntary,the seller do not have other choices.And the buyer cannot resell the goods without the conforming documents.In most instances the seller have the chance to tender to the buyer documents again.If the defective documents are cured by a fresh and conforming tender within the time allowed by the contract,the seller will not be guilty of repudiatory breach on the documents.

Finally,to keep the stability of the trade,the buyer cannot check the goods before accept the documents.Therefore,we cannot illustrate the rights of the rejection have made the separateness of the seller’s documentary and physical obligations lost.The rejection of the buyer are relative and the c.i.f. Contract is a symbol delivery based on the goods.

Table of authorities

Cases

United Kindom

Arnold Karberg and Co v Blythe,Green Jourdain and Co[1915] 2 K.B.

Biddell Brothers v E. Clemens Horst Co [1911]1 K.B. 214

Banque de L’Indochine et de Suez SA v JH Rayner Ltd [1927] 32 Com. Cas

Biddell Bros v E Clemens Horst Co [1912] A.C. 18

Johnson v Taylor Bros & CO Ltd [1920] AC 144

Kwei Tek Chao v British Traders and Shippers Ltd [1954] 2 Q.B.

Mash&Murrell Ltd v Joseph I Emanuel Ltd [1961] 1 W.L.R.

PJ van der Zijden Wildhandel NV v Tucker & Cross Ltd[1975] 2 Lloyd’s Rep. 240

Ross T Smyth & Co Ltd v T D Bailey Son & Co [1940]67 L1.L.Rep.147(HL)

International treaties

United Nations Convention on Contracts for the International Sale of Goods

Legislation

United Kingdom

Sale of goods act 1979