Respective Rights and Duties Under Contracts

I am asked to advise the parties as to their respective rights and duties under each of the contracts and as to whether English court would accept jurisdiction.

Preliminary Issues

We are told that E, the buyer in Manchester, entered into a contract with SC, the seller in Sri Lanka, for the sale of 10,000 tonnes of “Arabica” coffee beans on INCOTERMS CIF (Liverpool).

A CIF contract is an agreement to sell goods at an inclusive price covering the cost of the goods, insurance and freight. It is often referred to as a documentary sales contract. Sassoon states that “the essential feature of a CIF contract is that delivery is satisfied by delivery of documents and not by actual physical delivery of the goods [1] . The same sentiment is expressed by Benjamin who points out that “the essential feature of such a contract is that a seller, having shipped, or bought afloat, goods in accordance with the contract, can (and must) fulfill his part of the bargain by tendering to the buyer the proper shipping documents” [2] . In Arnhold Karberg & Co v. Blythe Green Jourdain & Co [3] , the court held that a CIF contract “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”.

It is worth noting that, in the present case, the contract is an INCOTERMS CIF contract such that the latest edition of INCOTERMS 2000 shall govern the rights and duties of the buyer and the seller. As we are told that SC had bought goods afloat certain vessels, it is worth noting that a seller under a CIF contract is allowed to buy goods afloat to fulfill his part of the obligations [4] .

4,000 tonnes of coffee aboard “The Steamer”

Shipment Period:

We are told that the contract of sale between SC and E includes appropriation of the 4,000 tonnes of coffee aboard “The Steamer” to be part of the contractual goods. As per clause A4 of Incoterms 2000, it is the duty of the seller to deliver goods on board the vessel at the port of shipment within the agreed period. Section 13 Sale of Goods Act 1979 implies a condition that where goods are sold by description, they will correspond with the description. In Bowes v. Shand [5] , there was a contract for the sale of rice which provided for shipment “during the month of March and/or April”. Most of the rice was put in February and the rest in March. The Court held that the shipment amounted to a February shipment and that the shipment period formed part of the description of the goods such that there will be a breach of section 13 Sale of Goods Act 1979. As per information provided, the contract of sale between SC and E provided for shipment in January 2010 to Liverpool. As we are told that the 4,000 tonnes of coffee was shipped aboard “The Steamer” on 5 January, this would actually mean that SC complied with the shipment period.

Insurance:

We are told that it is a stipulation of the contract of sale that the cargo to be insured against all risks. On 13thth January, SC insured each consignment under a Lloyd’s Marine Policy on 2009 Institute Cargo Clauses B Terms. The issue is whether ICC B Terms covered all risks. As a matter of fact, it is the ICC A Terms which cover all risks.

In particular, we have to consider if ICC Terms B covered the risk of piracy as a result of which goods are lost and/or stolen. In fact, piracy and related risks are not covered under ICC Terms B such that the buyer, E, will not be able to bring an action against the Insurance on the grounds that the goods were stolen by pirates. On the other hand, piracy and related risks are covered by ICC Terms A [6] which usually covers all risks [7] .

As SC has not covered the cargo against all risks, E can bring an action against SC for not complying with an express term of the contract. As per clause A3(b) Incoterms 2000, the seller must obtain at his own expense cargo insurance as agreed in the contract. It is further stipulated that the insurance shall be with underwriters or an insurance company of good repute and, failing express agreement to the contrary, be in accordance with minimum cover if institute cargo clauses. Whilst SC may argue that it has acted in accordance with Incoterms by insuring the goods with a minimum cover under institute cargo clauses by insuring the goods under ICC B Terms, he will not be successful given there is an express provision in the contract which required insurance to cover “all risks”. Therefore, as SC ought to have taken insurance under ICC Terms (A), E may bring an action against SC claiming the cost of the goods and damages suffered.

Documentary Credit – WC’s refusal to reimburse BB:

We are told that E is to pay SC by letter of credit which shall be subject to UCP 600. The UCP defines a credit as “any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation” [8] . Goode states that “a documentary credit is, in essence, a banker’s assurance of payment against presentment of specified documents” [9] . Sassoon also states that the use of a documentary credit “resolves the problem of the seller’s security and thus the entire issue of his retaining any interest which has given cause to so much difficulty in the past” [10] .

The issue before us is whether it was correct for WC to refuse to reimburse BB on the ground that the goods do not exist anymore as all the goods on board “The Steamer” have been stolen after an attack by pirates on 8 January. It is to be pointed out that a fundamental principle associated with documentary credits is that of “the autonomy of documentary credit”. Given the fact that the nature of documentary credit is different from that of the contract of sale [th] , this means that, provided the documents are in order, the issuing bank must pay the beneficiary irrespective of any dispute under the contract for the sale of goods between the buyer and the seller. Such principle is paramount as Todd says that, for the seller to be protected, he must be able to rely on payment by the Bank as long as conforming documents are tendered notwithstanding any claims that the buyer may raise to the effect that the seller is in breach of contract [11] . Prima facie, therefore, as long as all the documents are in order, WC in England cannot reject the documents and refuse to reimburse BB in Sri Lanka.

However, a Bank may refuse to pay where there is a fraud, often referred to as the “fraud exception”. In United City Merchants (Investments) Ltd v. Royal Bank of Canada [12] , the House of Lord held that the bank was bound to pay unless fraud on the part of the seller was proved. In that case, machinery had been shipped aboard the American Accord after the contract date but the date on the bill of lading was falsified to make it appear that they were shipped according to contract. However, although it appeared that there was fraud, it was not shown that the seller actually committed the fraud. Hence, the bank was under an obligation to pay. Lord Diplock justified the fraud exception by stating that “fraud unravels all”. The American case of Sztejn v. J. Henry Schroeder Banking Corp [13] is a classic case of fraud where a fraudulent seller who filled a container with rubbish which he shipped to the buyer. The buyer came to know about the fraud and an injunction was sought from the court. The Applicant was successfully able to rely on the fraud exception upon which the bank in time refused to effect payment. As we are dealing with a CIF contract, it is worth noting that the buyer has two rights of rejection: (a) a right to reject non-conforming documents; and (b) a right to reject non-conforming goods [14] . If the documents are in order, the buyer should accept the documents and pay for the goods until he has examined the goods. In general, the seller of goods on CIF terms can effectively tender appropriate documents to the buyers in respect of goods shipped on a vessel, which at the time of tender, the sellers know to have been totally lost [15] . Hence, relying on the case of Manbre Saccharine Co Ltd v. Corn Products Co Ltd [16] , it would seem that SC has not acted fraudulently in tendering the relevant documents to the BB in Sri Lanka to obtain payment such that WC has wrongly refused to reimburse BB.

3,000 tonnes of coffee aboard “The Good Fortune”

Shipment Period:

We are told that SC bought the 3,000 tonnes of coffee afloat “The Good Fortune” on 11 January and that the consignment was shipped early January. This actually means that as long as SC has bought the coffee afloat which had been shipped within January, he would have complied with an express term of the contract and in compliance with section 13 Sale of Goods Act 1979 under which the shipment period may be said to form part of the description of the goods [th] .

Notice of Appropriation:

Clause A7 of Incoterms 2000 provides that the seller must give the buyer sufficient notice that the goods have been delivered in order to allow the buyer to take measures which are normally necessary for him to take the goods. It would seem that SC gave notice of appropriation of the 3,000 tonnes of coffee onboard “The Good Fortune” to E on the 14 January. In general, a notice of appropriation must be sent off within the time stipulated in the contract [th] .

The facts before us do not reveal if the contract provides for a certain time for notice of appropriation to be sent by SC. The issue which we need to determine is whether SC has provided E with sufficient notice as per Clause A7 Incoterms 2000. In Societe Italo-Belge pour le Commerce et l’Industrie v. Palm & Vegetable Oils (Malaysia) (The Post Chaser) [17] , the contract did not provided an exact time for notice of appropriation to be sent but merely indicated the need for promptness in general terms. It was held that the provision amounted to a condition which if breached allowed the seller to reject the documents and/or the goods. As SC bought the goods afloat “The Good Fortune” on 11 January and gave notice of appropriation on 14thth January, it would seem that the notice of appropriation provided by SC was sufficient.

Documentary Credit – WC’s refusal to reimburse BB in Sri Lanka

As discussed above, as long as all the documents are in order, WC will have to reimburse BB in Sri Lanka which tendered the documents. The ground of WC’s refusal is that the goods do not exist anymore and it would be fraudulent for E to tender such documents. Indeed, if the Bank can prove some fraud on the part of the seller such as the falsification of the Bill of Lading, then the Bank may refuse to effect payment on the ground of fraud [18] . We are told that the coffee had perished because of seawater entering the cargo holds as a result of a major weather encountered by “The Good Fortune” when it was en route to Liverpool. The bad weather cannot be said to be a voluntary act on the part of SC such that it amounts to fraud.

However, we are also told that the 3,000 tonnes of coffee onboard “The Good Fortune” appropriated by SC to E was of the type “Robusta” which is different from the contractual requirement of “Arabica” coffee. Article 14 UCP 600 provides in detail the standard of examination of documents. If the seller tenders valid documents, then the issuing bank should effect payment notwithstanding any attempt by the buyer in instructing the bank to withhold payment on the ground that there is a breach of contract on the part of the seller. If the documents such as the bill of lading reveal that it was “Robusta” coffee which was shipped, the WC can right reject the documents and refuse payment to BB. This is due to the doctrine of strict compliance of documents where payment is to be made by letter of credit. In Equitable Trust Co of New York v. Dawson Partners Ltd [19] , it was held that “there is no room for documents which are almost the same, or which will do just as well”. As we are told that SC obtained clean bills of lading [20] for each consignment, WC will have to reimburse BB. Nonetheless, as Goode points out, this does not preclude the buyer to reject the goods ultimately where the goods do not match contractual description or where the goods are of unsatisfactory quality [21] .

Action against the Carrier:

As we are told that “The Good Fortune” encountered a major weather during which seawater entered the cargo holds and damaged the coffee, we have to determine if E can have any action against the carrier “C”. It would be unlikely for E to sue the carrier for the damaged goods as the carrier will be able to rely on the “Perils of the Sea” exception which is a common law exception and is also to be found as an exception in the Hague/Visby Rules [22] . C will be able to rely on such exception as the weather conditions need not be extreme or unexpected [23] .

E, however, wants C to return the outstanding freight which it has paid to E. Prima facie, it was not the responsibility of E to pay the freight as the contract was a CIF contract with SC. As per clause A3(a) Incoterms 2000, the seller must contract on usual terms at his own expense for the carriage of the goods to the named port of destination. As such, it was SC who ought to have paid the full freight to C. Thus, E can bring an action against SC to be reimbursed the sum of outstanding balance which it has had to pay to C to obtain delivery of the coffee.

With regards to whether E can sue C under COGSA [24] , he would be able to do so under section 2(1) which gives the lawful holder of a bill of lading the rights of suit under the contract of carriage. There are exceptions under Sections 2(2) and 2(4) but nonetheless the general rule under section 4(4) provides that the holder of a bill of lading will have his rights notwithstanding that the goods cease to exist after the issue of the documents.

Action against SC:

Clearly, E will have an action against SC and may claim the cost of the 3,000 tonnes of coffee onboard “The Good Fortune” as the buyer under a CIF contract has two rights of rejection: (a) the right to reject non-complying documents; and (b) the right to reject the goods [25] .

As the coffee were not of the “Arabica” type such that there will be a breach of section 13 Sale of Goods Act 1979, E may reject the goods on the ground that they did not match contractual description [26] and may also claim damages for any prejudice or loss suffered.

Insurance:

In the alternative, E may also bring an action against the Insurance on the grounds that the goods were damaged during voyage. Insurance on ICC B Terms covers the risk of seawater entering the ship and damaging goods.

3,000 tonnes of coffee aboard “The Oliviera”

The discussion with regards to Shipment Period and Notice of Appropriation as discussed above with regards the goods aboard “The Good Fortune” are equally applicable to the 3,000 tonnes of coffee aboard “The Oliviera”.

Documentary Credit:

WC cannot refuse to reimburse BB if all the documents are in conformity on their face value. WC will not be able to rely on the fraud exception despite the fact that the goods onboard The Oliviera had to be jettisoned and it will not be a fraud on the part of SC to tender documents in respect of goods which have already been lost [27] .

Carrier:

It would seem that all the goods had to be jettisoned as a result of a mistake of the master of the vessel in navigation when the ship ran aground. Furthermore, E has also learnt that the Master was lacking up-to-date training to sail the type of ship. It is an implied obligation of the carrier to provide a seaworthy ship which bears three facets:

seaworthiness of hull and machinery

cargoworthiness

properly manned and equipped

In our case, it would seem that the issue is that “The Oliviera” was not properly manned and equipped if it turns out to be true that the Master of the ship did not have sufficient and up to date training to sail that kind of vessel. The test to determine if C was prudent is an objective one in that “the vessel must have the degree of fitness which an ordinary careful and prudent owner would require his vessel to have at the commencement of the voyage having regard to all possible circumstances of it” [28] . Thus, this obligation would be breached if C had put in control a Master who did not have the requisite training to sail the type of ship as “The Oliviera”. However, if E cannot prove that the Master did not have sufficient training, then it would be most likely that C would not have committed any breach and that the ship provided would have been seaworthy.

We also have to determine if E can sue C for the mistake of the master of the vessel which caused the ship to run aground following which all the cargo had to be jettisoned. If the contract of carriage is subject to the Hague/Visby Rules, then C can rely on the exception of “Act, neglect or default of the master, mariner, pilot or the servants of the carrier in the navigation or the management of the ship” [29] . This in fact covers the situation of the present circumstances where the ship ran aground due to negligence of the master as was held in Complaint of Grace Line [30] . If C is successful to rely on this exception, then E will not be able to sue C.

Insurance:

In the alternative, E can bring an action against the Insurance as ICC Terms (B) covers the situation of jettison. As the insured, E will have the benefit of the Insurance Cover and can bring a claim against the Insurance in appropriate circumstances. Indeed, as per clause A3(b) Incoterms 2000, SC is under a duty to provide E with the insurance policy or any other evidence of insurance cover.

Jurisdiction

As we are specifically told that English law is to govern the contract of sale between SC and E, this seems to be an agreement between the parties as to the choice of law such that English courts will have jurisdiction to hear the each of the individual claims. Sassoon points out that the general policy of English courts is to hold the parties to their bargain [31] .

On the other hand, English courts will accept jurisdiction to hear a dispute as long as there is some English connection. The main grounds under which English Courts will accept jurisdiction for breach of contract under the Civil Procedure Rules and which will be relevant for E to bring an action against either SC, the Insurance, and the carrier are as follows:

E will have to show that the contract was made within jurisdiction [32] ; or

E will have to show that a contract was made by an agent trading or residing within jurisdiction on behalf of a principal trading out of jurisdiction – this will be relevant for insurance purposes as Lloyds presumably has its principal place of business in England; or

The terms of the contract are such that or by implication make it that English law is to govern the contract – which actually seems to be the case here.

In light of the above analysis, there seems to be an English connection such that English courts will accept jurisdiction under each of the contracts.