Sales of Goods

History

About the middle of the nineteenth century, it was found that English traders engaged in transoceanic commerce quoting prices “c.i.f.” the buyer’s place of business-blanket figures covering invoice cost of the goods, freight charges to their destination, and the expense of insurance for the buyer’s benefit while the goods were in transit. Mails travel faster than freight; and upon receipt of the shipping documents, the buyer acquired control over the goods, with the consequent ability to resell immediately, possibly months before their arrival. Payment against documents, the essential feature of a c.i.f. transaction, substan-tially reduced the credit risk of the seller; and risks of transportation, though not of fluctuation in the cost of freight and insurance, were avoided on the ground that the “property” passed to the buyer on ship-ment. Such a contract came before a court for the first time in 1861 ; and by 1872 its legal implications were well understood in England, where it has been litigated with much thoroughness.On the other hand, legal recognition of the contract dates from the late war, and the cases have been very few.

INTRODUCTION

THE c.i.f. contract is a comparative newcomer among the institutions’ of the law merchant. Firmly established today as “an indispensable instrument of overseas trade,” its use in trans-actions involving the sale and shipment of goods from one country to another is the rule rather than the exception. Few customs of merchants have had more far-reaching consequences on the con-duct of international commerce, or have played a more important part in the shaping of mercantile practice. The achievement how-ever has been largely one of the present century; for although the broad outlines of the contract have been familiar to merchants and to commercial lawyers for a much longer period, In Couturier v. Hastie, 8 Ex. 40 (I852), a contract for the sale of corn provided that it was to be shipped ” free on board, and including freight and insurance to a safe port in the United Kingdom.” In Ireland v. Livingston, L. R. 5 H. L. 395, 406 (1872), Blackburn, J., observed that ” The terms at a price, ‘to cover cost, freight, and insurance, payment by acceptance on receiving shipping documents,’ are very usual, and are perfectly well understood in practice.” One of the earliest French cases involving a c.i.f. contract appears to have been Ouvry c. England et Cie., 1862 Havre 2.255 (Imperial Court of Rouen). it remained for the tremendous world developments of the last thirty years to bring out its latent possibilities. Only since the first world war have problems arising from the use of such contracts engaged the attention of legal writers in the great commercial countries.

The words ‘C.I.F.’ stand for cost, insurance and freight. A CIF contract is a type of contract wherein the price includes cost, insurance and freight charges. Under a CIF contract the seller is required to insure the goods, deliver them to the shipping company, arrange for their affreightment and send the bill of lading and insurance policy together with the invoice and a certificate of origin to a bank. The documents are usually delivered by the bank against payment of seller since he continues to be the owner of goods until the buyer pays for them and obtains the documents. The property in the goods passes to the buyer on the delivery of documents. The buyer is equally protected as he is called upon to pay only against the documents and the moment he pays, he obtains the documents, which enable him to get delivery of the goods. If in the meantime the goods are lost neither the buyer nor the seller is put to loss, whoever is the owner at the time of the loss can recover it from the insurer.

Under the CIF contact, the seller is required to deliver the goods on board of the vessel at the agreed port of delivery

According to the CIF contract, the seller has to bear all costs relating to the goods until

delivery of the goods on board the vessel. However, under the CIF contract, the seller’s

duty to provide a contract of carriage and has to insure the goods under the insurance

contract. Moreover, the insurance policy has to protect to the buyer. Otherwise, the seller

commits to breach of the contract(2Hickox v Adams [1876] 34 L.T.404.)

. Under the English Law, there is no general rule to obtain an export licence. It depends

on the contract, which the party, who has the best position to obtain it. According to

Brandt &co. case is that, “….. both seller and buyer were British traders albeit that the

buyer was securing goods from an overseas merchant so he has to apply for the export

licence, because he alone knows full facts regarding the destination of the goods.”(33 Brandt & co. v Morris &co. Ltd. [1917] 2 K.B. 784)

On the other hand, if the seller is in a better position than the buyer, he is responsible to provide a licence. Under the CIF contract, it is also seller’s responsibility to provide an export licence.

CIF contracts are generally attractive to both the seller and the buyer.As far as the seller is concerned, he can charge a higher price taking into account the extra services that is obtaining shipping space and insurance he provides.His margin of profit in a CIF contract could be substationally higher than in an FoB contracts since he may be able to obtainreasonable rates for freight and insurance depending on the prevailing economic conditions. The seller usually gets paid for the goods before their arrival at the destination, since payment for the goodsbefore their arrival at the destinationsince payment for the goods in

CIF contracts often takes place when the documents are tendered to the buyer or to the bank in the event of a documentary credit arrangement between the seller and the buyer. However, it must be noted that payment does not always take place against tender of documents. The parties may have agreed to deferred payment credit.

The attractiveness of CIF contract as far as the buyer is concerned, is that he does not have to undertake the task of finding shipping space or insurance, which may be all the more difficult in a foreign country due to unfamiliarity with local business practices. The buyer could appoint an agent in the country of export to undertake the tasks of obtaining shipping space and insurance cover, but this assumes that the costsof an agent can be covered, or reliable and trustworthy agent can be found for a reasonable remuneration. The risk of any increases in transportation an insurance costs also remains with the seller. Further, the goods do not have to be paid for until the relevant documents are tendered. Once the necessary documents are acquired he is able to sell the goods to a third party on the strength of the documents. The buyer also acquires the right to sue the carrier, under the Carriage of Goods by sea act 1992, with the transfer of the bill of lading.

CIF contracts are undoubtedly the most important of the contracts based on the carriage of goods by sea.

• The classical judicial definition of a CIF contract was given by Lord Atkinson in Johnson v Taylor Bros. [1920] AC 144 at 145 [1920] AC 144 at 145 [Lord Atkinson]

• The vendor …is bound by his contract to do six things. First, to make out an invoice of the

goods sold. Secondly, to ship at the port of shipment goods of the contract description. Third, to procure a contract of affreightment under which the goods will be delivered at the

destination contemplated by the contract. Fourth, to arrange for an insurance upon the terms current in the trade which will be available for the benefit of the buyer. Fifthly, with all reasonable despatch to send forward and tender to the buyer three ‘shipping documents’, namely, the invoice, bill of lading and policy of insurance, delivery of which to the buyer is symbolical of delivery of the goods purchased.

In Smyth & Co. Ltd v Bailey, Son [1940] 3 All ER 60 [Per Lord Wright]

“The initials [CIF] indicates 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 than any other contracts used for the purposes of seaborne commerce.”

The Julia [1949] AC 293 [Lord Porter]

The obligations imposed on a seller under a CIF contract include the tender of a BL covering the goods contracted to be sold, coupled with an insurance policy in the normal form and accompanied by an invoice which shows the price. Against tender of these documents the purchaser must pay the price. … The buyer, after receipt of the documents, can claim against the ship for breach of the contract of carriage and against the underwriter for any loss covered by the policy. Although the parties to the contract may state that it is on CIF terms, it is not conclusive. In The Julia, Lord Porter said:“The true effect of all its terms must be taken into account, though, of course, the description CIF must not be ignored entirely”.(foot note)

In Arnold Karberg & Co. v Blythe Green Jourdain & Co. [1915] 2 KB 379 at , Scrutton J stated: “A CIF sale is not a sale of goods, but a sale of documents relating to goods.” There are, however, factors that militate against this rule One important objection is the fact that even if the CIF seller has tendered valid documents, the buyer will still have the right to reject the actual goods if they do not conform to the requirements of the contract.Moreover, the dictum of Scrutton J was expressly dissented from by the Court of Appeal in the same case.

In Arnold g Karberg v Blythe [1916] 1 KB 495 at 510(CA) Bankes L J “I am not able to agree with that view of the contract, that it is a sale of documents relating to goods. I prefer to look upon it as “a contract for the sale of goods to be performed by the delivery of documents”.

In Arnold Karberg [1916] 1 KB 495 at 514 [Warrington L J]

The contracts are contracts for the sale and purchase of goods, but they are contracts which may be performed in a particular manner… that the delivery of the goods my be effected first by placing them on board ship, and secondly by transferring to the purchaser the shipping documents. Documents play a central role Documents play a central role In any case, we have to admit that documents play a central role in the CIF contract (that is why some writers call it as a ‘documentary sale’) and goods are in one sense secondary. The seller does not undertake that the goods will arrive, but merely that the buyer will have possession of documents, conferring on him:

(a) The right to immediate possession of the goods from the carrier on arrival at the port of destination and the benefit of a contractual claim against the carrier; and (b) The benefit of a contractual claim against the insurers.

Duties of the seller under C.I.F contract

(1) To make a contract of carriage for the goods to the named port of destination.

(2) To insure the goods for the contractual voyage.

(3) To provide the buyer with a commercial invoice, a clean bill of lading and an insurance policy

(4) To ship the goods conforming to the contract

• The seller is not himself obliged to ship the goods unless the contract requires. He may instead purchase the goods afloat and appropriate them to the contract.

• Subject to the terms of the contract, a CIF sellerhas the following duties in respect of shipment:

(i) The seller must ship or appropriate goods on a ship which departed from the port of shipment on the date or within the period of shipping specified in the contract. Failure to do so is a repudiatory breach. In Ashmore v Cox [1899] 1 QB 436.

(ii) The ship must be bound for the agreed port of destination and following the contractual or if

none the usual or reasonable route.

(iii) Unless there is provision for ‘deviation’, the seller is in breach if the ship in fact deviates. The buyer could reject the goods on this basis, and the seller’s recourse would be against the carrier provided that the contract of carriage had provided deviation.

The seller is under an obligation to deliver the goods in accordance with the terms of the contract of sale under section 27 of sales of goods act 1979, he should deliver the goods to the right place on right time Section 32(1)and section 29(3) sale of goods act 1979 respectively.

Where the seller is bound to send the goods to the buyer but no time is fixed in such situation the seller is required to send the goods in reasonable time period.(section 29 (3)). Furthermore there is a general duty owed by the seller to the buyer that is to deliver the goods of the description mentioned by the buyer under Section 13(1) sale of goods act 1979, moreover there is an implied term that the goods will correspond with the decription. In Ashington Piggeries v hill [1972] AC 441, HL manufacturer of animal feed bought one of the ingridiants from a Norwegian supplier. The contract was for “Norwegian herring meal, fair average quality of the season”. The goods sipplied were contaminated .

The HOL held that “fair average quality of the season” was not part of the contract description for the purposes of section 13. In international sales, stipulation as to the time and place of shipment are considered part of the description (Bowes v Shand) (1877) 2 App

There is also an express term when it come to the description of the goods, In Cehave v Bremer [1976] QB 44 here the issue was of the not good condition of the citrus pulp pellets. Moreover the sale of goods act 1979 also provides implied terms. Under section 14(2) there is a basic obligation that the goods must be fit for common purpose or of satisfactory quality (14(2A)) in other words goods are of satisfactory quality if they meet the standerd that a reasonable person would regard as satisfactory, tacking account of any description of the goods, the price and all the other relevant circumstances. (Jones v Just) (1868) LR 3QB 197,— Mash & Murrell v Emanuel [1961] 1 ALL ER 485.

There is an implied term that the goods must be of more specific condition mentioned by the buyer that is fitness for the buyers actual purpose (section 14(3) Sales of goods act 1979 ) (Ashington Piggeries v hill [1972] AC 441)

Documents in CIF contracts

The term CIF indicates the three documents central to such a sale and these are: (i) A commercial invoice, representing the cost element (sales contract); (ii) An insurance policy, representing the insurance element (insurance contract); and (iii) A bill of lading, representing the freight element (contract of carriage).

A bill of lading is a document issued by or on behalf of the actual sea-carrier of goods to the

person (usually called the shipper) with whom he has contracted to transport the goods.

• A bill of lading has three functions:

(i) A receipt for the goods shipped;

(ii) Evidence of the contract of carriage; and

(iii) A document of title.

The bill must be a shipped bill of lading

• In the absence of agreement to the contrary, the bill of lading to be tendered under a CIF contract must be a ‘shipped bill of lading

(B) The bill must be clean on its face

• The bill of lading must be clean and not claused or fouled. A clean bill of lading is one which bears no superimposed clauses declaring a defective condition of the goods or packaging.

(c) The bill must cover the entire voyage

• The CIF buyer is entitled to continuous documentary cover throughout the voyage. The BL must cover the entirety of the transit of goods; any break in cover might mean that the buyer may be left without a right of suit against an errant carrier.

In Landauer & Co. v Craven [1912] 2 KB 94.

• A CIF London sale of hemp involved shipment at Manila. It was the trade practice to transship at Hong Kong. The bill of lading tendered, however, did not cover the Manila to Hong Kong leg of the journey and was therefore held to be defective. The Landauer case was followed in Hansson case where it was held that in such a case the buyer may repudiate the contract.

In Hansson v Hamel & Horley Ltd [1922] 2 AC 36

• The cargo of cod guano was to be shipped CIF Kobe or Yokohama from Norway. There were however no ships sailing directly from Norway to Japan. Transshipment had to be made and the goods were placed on a local ship to be carried to Hamburg before transshipped to Japan. The bill of lading issued at the port of Hamburg made no reference to the leg between Norway and Hamburg. Held: The bill of lading in this case afforded the buyer no protection in regard to the first voyage. Although labeled a ‘through bill of lading’, it was not really so. The buyer was left with a considerable lacuna in the documentary cover to which the contract entitled him. Therefore, he was entitled to repudiate the contract.

(D) The bill must be freely Transferable (negotiable)

• Subjects to the terms of the contract, the bill must be made “to order” (negotiable), so as to entitle the consignor to transfer the rights to a sub-buyer or any other person. • However, it is possible for the sale agreement to envisage the production of “straight consigned bill” (non-negotiable). This happens where the consignee of the goods has no intention to transfer his rights to any third party.

(E) The bill must be valid and effective

• The bill would not be effective if it is not transferable on its face as, when e.g. it is marked “Not transferable”.

• A bill is also not effective if the contract it represents is for any reason void.

Arnold Karberg v Blyth [1916] 1 KB 495

Goods were sold CIF Naples and shipped on a German ship. Though both seller and buyer were British the contract of carriage became void for illegality on the outbreak of war in 1914. The tender of the bill of lading was therefore not valid and effective.

(F) Other substitutes

• The parties to CIF contract may agree that some other documents, such as sea waybill or delivery order shall replace the bill of lading.

• (1) A Sea waybill – is a document which contains an undertaking by ‘the carrier’ to the shipper to deliver to the person who is for the time being identified as being entitled to delivery. A sea waybill is a receipt for the goods but is non-transferable and is not a document of title.

• (2) A ship’s delivery order – Sometimes it is not possible for the seller to procure bill of lading, especially when he has shipped a large consignment of goods. Normally, there will be just one bill of lading for the bulk cargo. It cannot be divided up. The seller must use delivery order as an alternative.

• A delivery order is an order in writing given by an owner of goods (seller) to a person in possession of them, e.g. as carrier or warehouseman directing the latter to deliver the goods to the person named in the order.

Tender of the documents

• The shipping documents are extremely important to the seller who relies on them to be paid; and for the buyer they allow him to claim the goods and to have property in the goods.

• Where the buyer relies on his bank to settle the invoice, the documents are equally important for the bank to serve as security for money advanced.

• It is therefore imperative that the seller ensures that the documents as tendered conform to the contractual requirements in order to be paid.

Must be tendered within time limit or as soon as possible

If the contract expresses or implies any time limit for tender, the buyer is entitled to reject the documents if they are not tendered within this limit. If there is no time limit in the contract, the seller must tender the shipping documents to the buyer ‘as soon as possible’

TWO RIGHTS OF REJECTION REJECTION

• Since documents are central to a CIF sale, the buyer has two rights of rejection for non-conformity:

(1) The right to reject the documents;

And

(2) The right to reject the goods

In Kwei Tek Tek Chao v British Traders & Shippers Ltd. [1954] 2 QB 459 Lord Devlin

“There is a right to reject the documents and a right to reject the goods and the two things are

quite distinct. …So far as the goods are concerned a CIF seller must put on board at the port of shipment goods in conformity with the contract description. He must also forward documents and those documents must comply with the contract…. A right to reject is merely a particular form of the right to rescind.”

• Held: The two rights of rejection being distinct in a CIF contract, the disposal of the goods by the buyer did not result in the loss of their right to reject the documents as not being in accordance with the contract and they were entitled to claim damages for being prevented from rejecting the documents.

Rejection of goods

– If the goods are not in conformity with the contract the buyer may reject the goods. – It does not mean that the buyer must always reject the non-conforming goods. He has the option. He may accept them and sue for damages as in the case of breach of warranty. The normal measure of damages will apply, namely, the difference between the contractual value of the goods and their actual value as at the date of delivery.

Rejection of documents

The seller must tender to the buyer documents stipulated by the contract. If the documents do not conform to the contract then the buyer is entitled to reject those documents and the seller will be in repudiatory breach of contract, subject to the seller’s ability to re-tender conforming documents within the time allowed by the contract. (Borrowman, Phillips & Co. v Free & Hollis (1878) 4 QBD 500.)

The relevant documents must be tendered by the seller within the time stipulated by the contract or, if no time is stipulated, within a reasonable time. (Toepfer v Lenersan- Poortman [1980] 1 Lloyd’s L.R. 143.)

A CIF contract stipulated, “Documents to be tendered not later than 20 days after issuance of the BL”. BLs were issued on 11 December 1974. The documents were tendered in February 1975 but were rejected by the buyers as being out of time.

Held: they were entitled to do so in view of the express clause. The buyer must be aware that the right to reject the documents is lost when he or the bank takes up the documents, even if inaccurate, and pays against them without objection.