UK Commercial Law and International Trade

Through the course of this essay it will be shown that the above statement can be partially supported and disagreed with. On the one hand it is true to say that UK Commercial Law facilitates international trade by having straightforward rules that are strictly applied by the English courts in relation to “free on board” and “cost, insurance and fright” contracts. On the other hand such treatment did not follow as a response to the needs of the international business community. This hypothesis will be proved by outlining the needs of the international business community. Followed by an outline of the rules and duties applicable to the seller and buyer under both “free on board” and “cost, insurance and freight” contracts. The examination will include the relevant case law, Acts of Parliament and Conventions. Lastly, some criticisms and analysis of problems, if they exist, that arise with interpreting and consequently applying international trade terms in relation to FOB and CIF contracts under Convention of Contracts for the International Sale of Goods 1980, Hague-Visby Rules 1924, the Sale of Goods Act 1979 and the Carriage of Goods by Sea Act 1971 and 1992, will be presented.

First of all it is important to outline the needs of the international business community. The most important is the free exchange of goods which had been promoted by many countries for a long time. This is evident from the creation of such big organisations as the General Agreement on Tariffs and Trade 1947. GATT was “a multilateral treaty that set out the principles under which its contracting states, on the basis of reciprocity and mutual advantage, were to negotiate a substantial reduction in custom tariffs and other impediments to trade” [I]. The General Agreement on Tariffs and Trade was followed by the Uruguay Round concluded in 1994, and as a result of which the World Trade Organisation (WTO) had emerged, transforming the GATT into a membership agreement [II].

Leaving those big-world organisations aside, it is worth mentioning that the European Community is also known for working on the promotion of the free circulation of goods within the community. This is evident from Articles 23 to 31, of the Treaty Establishing the European Community (Consolidated version established after the Treaty of Nice) and Directive 70/50/EEC [III]. Although the European Community has a great impact on the English Commercial Law, “it has so far had little impact on the laws relating to the international trade transactions.”[IV] There are also other inter-governmental and international agencies that had been working on the process of harmonisation for a long time. For example the United Nations’ Commission on International Trade Law (UNCITRAL), the International Institute for Unification of Private Law (UNIDROIT) and most importantly the International Chamber of Commerce (ICC).

The UNCITRAL was established to remove obstacles of international trade and its role is to prepare and promote conventions and model laws. For example, the UNCITRAL is responsible for the 1980 Vienna Convention on Contracts for the International Sale of Goods (United Nations) and the 1978 Hamburg Rules. The UNIDROIT, which is responsible for the whole of the private law, is responsible for the Hague Convention 1967. Finally the ICC is the international commercial community that, although involved in the international trade on a number of levels, it cannot produce laws or conventions, but one of the many documents produced by the ICC and the most relevant for the purposes of this essay is the establishment of INCOTERMS (International Rules for the Interpretation of Trade terms) [V].

Despite all the efforts of the above outlined agencies and communities, it does not look like the common objective of uniform contract laws, especially those relating to the international sale and purchase of goods and services[VI], will be successfully achieved in the near future. Firstly because harmonisation, particularly by convention, is a very slow process [VII] and although the achievement of the uniform contract law at first seems to appear to have a lot of advantages, in reality such achievement will lead to a lot of problems. The main argument of all those who oppose the harmonisation is that, if achieved, it will lead to difficulties in agreeing on the interpretation of the terms in “these international rules and it would be even more difficult to ensure the international compliance and uniformity in application of these rules” [VIII].

The second reason, which also proves the first part of the hypothesis of the essay, is the reaction to the UK to all of the above mentioned rules, laws and conventions that had been passed by various institutions. The Vienna Convention on Contract for the International Sale of Goods 1980, is not only difficult to apply and interpret as it “leaves out the issues of contractual validity, formality and property rights to national rules”, but it also does not apply in England [IX]. To further illustrate the point, the Hague-Visby Rules, which were originally called Hague Rules established by the International Law Association’s Maritime Law Committee (CMI) in 1924, although introduced into the English law system the same year through the Carriage of Goods by Sea, were nevertheless considered inadequate. After some amendments in 1963, by the CIM, the Hague rules came to be known as the Hague-Visby Rules and were once again incorporated into English law through the Carriage of Goods by Sea Act 1971. In an event of further developments of the law in relation to trade, the Convention of Carriage of Goods 1972 was produced by the UN otherwise known as the Hamburg Rules. Just like the 1980 Convention, Hamburg Rules have no legally binding force in the UK.

Although on the one hand it could be argued that because UK Commercial law is not really a part to most [X] of the provisions, rules and Conventions that are set out above, aimed at the harmonisation of the international trade to simplify it, UK law cannot be said to “respond” to the needs of the international business communities as such. On the other hand, because of the straightforward rules that are applicable to both FOB and CIF contracts, sometimes referred to as “legal certainty and predictability” [XI], it could be argued that UK Commercial law facilitates international trade.

In order to be able to support the above-mentioned hypothesis, definitions and the duties of the seller and buyer applicable to both FOB and CIF contracts will be given a brief consideration. In addition, a relevant case law would be provided.

Before considering the “free on board” and “cost, insurance and fright” contracts there are two points that should be mentioned. The first is the general rule under international trade, whereby the parties to a contract will, in the majority of cases, outline the law that they would like to govern their contract in case the breach is to occur. For example if it was agreed by the contracting parties that the law governing their contract is to be English, in case of the breach, the Sales of Goods Act 1979 and where relevant the Carriage of Goods by Sea Act 1992 would be applicable.[XII]

The second point concerns “bill of landing”, which will be useful to define since this term will crop up a lot throughout the essay. “A bill of landing is a receipt for the goods issued by the shipmaster certifying the condition of the goods as received by him for shipment.”[XII]

The term “FOB” means free on board and it is used for sea and land waterway transport only. “It means that the seller fulfils his obligations to deliver when the goods have passed over the ship’s rails at the named port of shipment. This means that the buyer had to bear all the costs and risks of loss or damage to the goods from that point”.[XIV]

In the case of Cowasjee v Thompson,[XV] the court held that once the goods were over the rails of the ship the sale was completed, and the sellers who tried to stop the goods by arguing that they were in “transitu”, after the buyers went bankrupt during the time that the ship was sailing, were held not to be able to do so. The most important case in relation to FOB contracts is Pyrene Co. Ltd v Scindia Navigation Co. Ltd.[XVI] The holding of Devlin J established judicial recognition of the fact that the FOB contracts are “flexible instruments” which allow the parties to agree to different terms as they think fit. Such recognition is evident from the speech of Devlin J where he had identified three variations of the FOB. The first variation is known as a “classic type” of FOB contract emerged from the decision in the case of Wimble, Sons & Co. v Rosenberg & Sons [XVII], where it was held that the “buyer’s duty is to nominate the ship, and the seller’s to put the goods on board for account of the buyer and procure a bill of landing in terms usual in the trade”. The second variation is that sometimes the seller can be asked to make the “necessary arrangements; and the contract may then provide for his taking the bill of landing in his own name and obtaining payment against the transfer. The third variation is when the buyer engages his own forwarding agent at the port of loading to book space and to procure the bill of landing”.[XVIII]

The duties of the seller under the “classic” FOB contract are quite straightforward and applied in a strict manner by the courts. As was mentioned above, the seller must deliver the goods to the named port of shipment and although it has been held to be a condition,[XIX] the description of the port where the goods may be delivered could be either specific or involve several, but in any case such description must be certain and ascertainable. In the case of Boyd &Co. Ltd v Louca [XX] the court held that the priority of the law is to rescue rather that to dash the contract on the grounds of uncertainty, and held that the buyer was to make a selection of the port of shipment.[XXI] Such nomination or description has been held to be binding upon both the buyer and the seller. As can be seen from the decision in the case of Modern Transport Ltd v Ternstorm & Roos, [XXII] where the court held that the buyer had no right to demand that the seller deliver the goods to another place other than the agreed port, even if under the FOB contract it is the buyer who generally has the right to nominate the port. Another duty of the seller is to make sure that he gets the goods to the ship with sufficient time left for the completion of the loading. In the case of All Russian Co-operatives Society Ltd. v Benjamin Smith & Sons [XXIIII] where the seller got the goods to the ship fifteen minutes before the expiry of shipment period, the court held that the seller was in breach for failing to ensure the sufficient time period.

The duties of the buyer are also quite straightforward and can be broken into four general rules. The first is that the buyer is responsible for deciding the date within the agreed shipped period when the goods are to be loaded. For example in the case of Bunge Corporation v Tradax Export SA [XIV] Megaw L.J. stated “it is an accepted principle in the English law that in mercantile contract for the sale of goods prima facie a stipulated time of delivery if of the essence”.

The second duty is that the buyer must produce space on a vessel fit to carry the goods.[XXV] In the case of Richco International v Bunge and Co. (The New Propser) [XVI] the court held that the seller is entitled to reject a nominated vessel which does not comply with the port’s load restrictions. The third duty is to allow the seller enough time to get the goods to port by issuing a valid nomination of the vessel and the date the vessel will be ready to collect.[XXVII] The last duty to mention is that the buyer may, unless the contract provides that the first nomination is to be final and binding, make a second nomination substituting the earlier vessel provided there is sufficient time left for loading and the seller is given good and reasonable notice.[XXVIII]

Another widely used INCOTERM is the “cost, insurance and fright” (CIF) contract. Unlike the FOB contract, the CIF contract is a bit more complicated and will be considered in more detail, only in areas that are relevant for the purposes of this essay. The duties of the buyer and the seller are as straightforward as those under the FOB contract, which means that the hypothesis in support of the statement that UK commercial law facilitates international trade by having such simple rules is still sustained. However, the rules that apply to the different documents that are involved in the CIF contract, cause some problems, namely fraud within the bills of landing, this in turn undermines the hypothesis set out above. However, as will be seen through the course of discussion, there are methods and legislations that had been created and passed to ensure that fraud in relation to the bills of landing can be prevented.

To avoid confusion the duties of the buyer and seller under the CIF contracts will be considered first followed by the outline of the general rules in relation to the bills of landing, concluded with the analysis of fraud.

The CIF is a “contract by which the seller agrees not only to supply the goods but also to make a contract of carriage with the sea carrier under which the goods will be delivered at the contract port of the destination, and a contract of insurance with an insurer, to cover them while the goods are in transit. The seller performs his contract by delivering the relevant documents to the buyer: an invoice specifying the goods and their price, a bill of landing evidencing the contract of carriage, a policy of insurance, and any other document specified in the contract. The risk of accidental loss or damage normally passes to the buyer on or as from shipment”.[XXIX]

The buyer should “accept the documents tendered if they conform to the contract, take delivery of the goods when they arrive at the agreed port of discharge, settle all customs duties at port of entry and obtain any import licenses if required”.[XXX]

The bill of landing will constitute a conforming document if it will provide a continuous cover. In the case of Hansson v Hamel & Horley Ltd [XXXI] the House of Lords made it clear that the bill covering the entirety of the transit is the legal requirement and that any derogation can result in negation of the contract. Sometimes there are instances where the voyage is indirect and in that case it is possible to have subsequent bills of landing, one to destination A, and another from destination A to B. The situation was somewhere similar in the case of Meyer v Aune. The bill of landing must also be accurate; it must portray accurately the state of affairs at the time of shipment. In Finlay v Kwik Hoo Tong [XXXIII] the CIF contract provided for shipment to take place in September. When the bills of landing were offered there was nothing in them that suggested the fact that the shipment was outside September. The bill of landing was in fact inaccurate. The inaccuracy was discovered two years later by which time the buyers had entered into sub-contracts for the delivery of those goods. The sub-buyers refused to take delivery alleging that the goods had been shipped outside shipment period and that the bill of landing was not genuine. “The court held that the sellers were deemed to have promised to state truly in the bill the date of shipment. The fact that they had not done so meant that the buyers had lost their right to reject the documents for which the damages ought to be payable to compensate for this loss of right.”[XXXIV]

The bill of landing must also be unaltered [XXXV], effective as the document of title [XXXVI] and as a contract of carriage. Due to the fact that the bill of landing also performs the role of evidence of the contract, it has to be fully effective before the buyers accept it. It is also important to mention that such effectiveness can be affected by “considerations of public policy and illegality, it is not vitiated by the loss of goods or ship”.[XXXVII] This rule was supported in the case of Mandre Saccharine Co. Ltd. v Corn Products Co. Ltd, where McCardie stated “there may be cases in which the buyer must pay the full price for the delivery of the documents, though he can get nothing out of them, and though any intelligible sense no property in the goods can ever pass to him – i.e., if the goods have been lost by a peril excepted by the bill of landing, and by peril not insured by the policy, the bill of landing and the policy yet being in the proper commercial form called for by the contract.” [XXXVIII]

Further, the bill of landing must be clean on its face; this means that it must be clear from the face of the bill that the goods had been received and were shipped in good condition and order. In the case of The Galatia [XXXIX] it was originally indicated in the bill of landing that the goods were received and shipped in good order and condition. As a result of fire, however the goods were damaged and the shipmaster typed of (on?)the bill of landing that the goods had been destroyed and that consequently the bill of landing was discharged. The court held that such action did not render the bill unclean, neither did such clause add or detract anything, because the typed words were added after the goods had been shipped that is when the bill of landing was already in operation. The last rule to mention in passing, before addressing the issue of fraud, is that the bill of landing should be freely transferable.[XL]

It is quite straightforward that, if the bill of landing had been forged, it will not be considered as a bill of landing and from the very beginning will not have any legal force.

For example in the case of Motis Exports Ltd v Dampskibesselskabet AF 1912 Aktieselskab and Aktieselskabet Dampskibsselskabet Svendbourg [XLI] the court held that the exemption of a liability clause that was included in the bill of landing was a forgery. In the words of Mummery L.J. “the ship owners’ construction of the exemption clause would appear to go to the extreme of protecting against any misdelivery, however negligent”.

Another example of forgery is when the shipment date had been altered as happened in the case of Kwei Tek Chao v British Traders and Shippers.[XLII] The fraud in this case was not that of the master, who issued the bill, or of the immediate CIF seller, but of forwarding agents acting without the seller’s authority, on behalf of earlier sellers on a domestic supply contract, to enable them to claim payment under a documentary credit. The person defrauded was not the bank, but a CIF purchaser two further down the chain.

The criticisms that surround the problem of fraudulent bills of landing are largely based on the fact that although fraud in not a novelty in the law of international trade,[XLIII] the courts still regard as set in stone matters which should really be regarded as issues of fact capable of varying with circumstances, and over time. It has been argued that this is so partly because “in the twenty-first century, they still view bills of landing through nineteenth century eyes.”[XLIV]

Nevertheless the problem of fraudulent bills of landing is being tackled by introduction of such programmes as BOLERO [XLV] which was initiated by the International Chamber of Commerce. The main objectives of the BOLERO service that when on line for the first time on December 1, 1998, are to: a) provide a central registry for the electronic storage and associated maintenance of shipping and trade documentation, b) provide a central registry for all aspects of trade from pre-booking to invalid goods clearance, c) provide a central registry for the validation of documents which relate to the progress and movement of consignment, d) ensure that security and authorisation requirements are met so as to engender trust between participants, e) provide a global, electronic infra-structure for international traders and shipper, and lastly f) provide an open system with a simple interface using internationally recognised standards [XLVI].

The EU Directive 2003/31/EC on Electronic Commerce in the Internal Market and The Electronic Communications Act 2000 are further examples of legislative acts doing everything that is possible to prevent fraud within the bills of landing.

Apart from the legislative measures mentioned above, there are also some suggestions on how the avoid the rise of fraud, for example the wide use of independent inspectors who will determine the quality and quantity of goods as well as whether the goods have been loaded or not. Checking capacity and location of the contract vessel will also help. “A quick reference to standard Lloyd’s information will show whether the ship is capable of taking the contractual type and quantity of goods. Again, a reference to Lloyd’s Shipping Intelligence would determine the current location of the ship, and consequently, the possibility of this ship’s arrival to port of loading can be calculated. Sometimes, such a reference would even show that such a ship does not exist at all. There is no need to mention the benefits of such an easy precaution.”[XLVII] Another way that would possibly help to reduce fraud is by checking the credibility of the seller. In cases where the buyer is involved in the trade with the seller unknown to him, it cannot be difficult to learn about the current conduct and history of the seller’s business.

At this point however it should be concluded that from all of the above-mentioned the hypothesis of the essay is proven. (delete ‘The’)UK Commercial Law cannot be said to “respond” to the needs on the international business community as such simply because most of the rules and Conventions (in particular the Vienna Convention 1980) that had been adopted with the aim of creating uniform laws governing international trade, thereby supposedly making it easier, do not apply to the English legal system. In turn this can be looked at as a way of England remaining separate and applying the laws in relation to international trade in their own way. That, as is shown in the second part of the essay, can be seen as a much better way of treating the law on international trade. Instead of complicating the matter by creating the Conventions, Directives that will outline the uniform law “applicable” to all only to realise how difficult it is in reality to interpret and apply such “uniform laws” to different countries, with different cultures, customs and languages. The UK has two main Acts of Parliament that are addressed the most when dealing with the law on the sale of goods, namely the Sale of Goods Act 1979 and the Carriage of Goods by Sea Act 1971 and 1992. The former does not even provide any sections that deal directly with the international trade, yet have been interpreted by the courts to apply where relevant. By having mainly two Acts of Parliament as well as simple and straightforward rules with hardly any exceptions, that are applicable to international trade law by either FOB or CIF contracts, UK Commercial Law seems to be the one which in the long run facilitates international trade law.