Critically Evaluate Whether a CIF Contract Is a Contract for the Sale of Documents or a Sale of Goods Related in International Trade Law.

This thesis will consider whether or not CIF contracts can be considered to be contracts for the sale of goods of for the sale of documents. The thesis will consider the importance of the documents in relation to CIF contracts then consider some of the particular features of these transactions such as when the right to reject arises and when property and risk pass. These aspects of the contract will be compared to standard sales of goods contracts and it will be concluded that the difference between CIF’s and standard contracts is suggestive of the fact that CIF contracts are in fact contracts for the sale of documents. A CIF contract whilst it may be deemed by some to be a contract for the sale of goods, from a business point of view, it can be said that the purpose of a CIF contract is not a sale of the goods themselves, but a sale of the documents relating to the goods. As the effectiveness of the CIF contract depends on the transfer of the documents which give the buyer control, and a right of disposal of the goods, and rights to recover compensation if they are damaged due to the default of the carrier or due to some insured peril it is concluded that this is fact a sale of documents.

Introduction

The CIF contract has been in use since at least the middle of the nineteenth century. As Lord Wright observed in 1940: “It is a type of contract which is more widely and more frequently in use than any other contract used for the purposes of sea-borne commerce. ” Despite the frequency of its use there continues to be debates as to whether or not this contract is in fact a contract for the sale of goods or one for the sale of documents. It is difficult to conclude on the information presented by the courts and legislative bodies. As soon as it is pinpointed to one type of contract competing evidence appears to suggest the contrary.

Under a CIF contract, the seller is responsible for supplying the goods, insuring them and shipping them: hence “cost, insurance and freight”. A CIF contract therefore involves the seller entering into not only a sale contract but also, at a later date, insurance and carriage contract. The seller, therefore, fixes a price to cover all these costs and it is he who carries the risk of fluctuations in insurance and freight costs

Under a CIF contract, the seller undertakes to be responsible for transportation and insurance cover to a named port of destination, while the buyer agrees to pay, not against delivery of the goods but against the tender of the shipping documents. This is perhaps the first indication that such a contract may in fact be a contract for the sale of documents. The seller fulfils his part of the bargain by tendering the correct documents; he does not have to ensure the arrival of the goods, but is under a negative duty not to prevent them being delivered. He can therefore demand payment on tender of the documents.

2. The Importance of the Documents

Documents play a central role in the CIF contract and it is this that gives the contract its special characteristics or alternatively it is that that makes this a contract for the sale of documents. The seller performs the contract by tendering to the buyer the bill of lading, insurance policy and invoice (together with any other documents required by the contract, such as a certificate of quality or origin). These documents represent the goods, and protect the buyer against most risks of loss during transit. They enable him to deal with the goods before they arrive at the port of destination. Transfer of the bill of lading operates as constructive delivery of the goods and may pass to the buyer title to the goods, the right to obtain possession, and rights of action against the carrier in the event of loss, delay etc; the policy of insurance gives protection against the perils of the sea. The importance of the documents is illustrated by the rule that allows the seller to tender documents even after the goods they represent have been damages or lost . Similarly, if the documents conform to the contract, the buyer must accept them; if he rejects them he is in breach of contract even if the goods themselves do not comply with the contract when they arrive , although if the documents have been accepted, the buyer may reject the goods themselves if they prove defective .

“All that the buyer can call for is delivery of the customary documents. This represents the measure of the buyer’s rights and the extent of the vendor’s duty. The buyer cannot refuse the documents and ask for the actual goods, nor can the vendor withhold the documents and tender the goods they represent “

The emphasis on documents led Scrutton J to describe the CIF contract as “a sale of documents relating to goods “. Bradgate argues that “however, whilst this description offers a clear indication of the importance of the documents it is misleading: the contract is still for the sale of the goods, to which the Sale of Goods Act applies “. This is not entirely accurate as we will see later as certain elements of the Sales of Goods Act, relating to the passing of risk does not relate to CIF contracts, this it is submitted is important in the distinction of CIF contracts as sales of documents. This is further emphasised by the very fact that the buyer does not have rights in relation to the goods themselves, and as Bankes and Warrington LJ in the Court of rightly concluded in the same case the contract might more properly be called “a contract for the sale of goods to be performed by the delivery of documents”

3. Features of a C I F Contract

The duties of the parties have perhaps been expressed best judicially:

“A seller under a [CIF] contract… has firstly to ship at the port of shipment goods of the description contained in the contract; secondly to procure a contract of affreightment, under which the goods will be delivered to the destination contemplated in the contract; thirdly to arrange for an insurance upon the terms current in the trade which will be available for the benefit of the buyer; fourthly to make out an invoice…; and finally to tender these documents to the buyer so that he may know, what freight he has to pay and obtain delivery of the goods if they arrive, or recover for their loss if they are lost on the voyage. It follows that against tender of these documents, the bill of lading , invoice and policy of insurance….. the buyer must be ready and willing to pay the price “

It must be remembered that a seller can fulfil a CIF contract by tendering goods already afloat, which he has either shipped himself, or brought from some other person. All that is required therefore is that the seller should appropriate to the contract goods which:

(a) have been shipped
(b) comply with the terms of the contract; and
(c) are covered by a contract of carriage to the port of destination and by a policy of insurance

Some goods must have been shipped: the contract is not satisfied if the seller tenders documents relating to goods to be shipped, or which have never been shipped ; but there is no need for the shipper personally to have shipped the goods or to do so after making the contract. Equally, there is no need for the seller to make the contracts of carriage or insurance personally: where goods are carried under a bill of lading, the transfer of the bill operates to transfer the contract of carriage to the transferee and a policy of marine insurance may be assigned .

Since the tender of documents is the seller’s principle duty under a CIF contract, where the contract stipulates a time for tender, that stipulation is a condition and the buyer is entitled to terminate for a late tender .

3.2 Right to Reject

A buyer can reject documents which do not comply with the contract for instance, if the bill is claused, showing that the goods were not in good condition when loaded, dated outside the shipment period or discloses deficiencies in quantity; or if an insurance certificate is tendered instead of a policy. It is difficult to think of other sales contracts of any description which are akin to this procedure.

The right to reject the documents is lost if the buyer takes up the documents, even though inaccurate and pays the price without objection. A good example of this principle in practice can be seen in the case of Panchaud Freres SA.

In this case the contract of sale was for a quantity of Brazilian maize, CIF Antwerp, Shipment June /July 1965 The maize was actually loaded during August but the seller tendered a bill of lading falsely dated 31 July and a certificate of quality from loading supervisors stating that they had drawn samples on 10 and 12 August. This certificate formed part of the shipping documents which were taken up and paid for by the buyer, so the fact of late shipment was apparent. The buyer nevertheless accepted the documents. The buyer was therefore precluded from complaining of the late shipment

Moreover, if a defect in the goods is apparent on the face of the documents, the buyer who accepts the documents will also be unable to reject the goods themselves on arrival for that defect. It is therefore vital that the buyer checks the documents carefully to ensure that they conform to the contract before accepting them. This principle is much like the principle in property law of exchange and completion. A buyer can not reject his property on completion if on exchange of contracts the defect was obviously contained in the contract, so for example if the price was incorrect, this should have been raised at exchange of contracts as opposed to completion. There is of course no argument for saying that a sale of a property is a sale of documents, and this would support the notion that CIF’s are contracts for the sale of goods.

If the documents do correspond to the contract the buyer cannot reject them on the grounds of defects in the goods, and if the buyer does reject documents in such a case he will be in breach of contract. In the case of Berger & Co. Inc v Gill & Dufus SA the buyers rejected a tender of documents and tried to justify their rejection on the grounds that the goods, when delivered, did not correspond to the contract description. The House of Lords held that they could not do so and were in breach of contract; however, the fact that the goods would not have conformed to the contract could be taken into account by the court when assessing damages.

Unsurprisingly the rights of the buyer to reject goods in a CIF are a lot less meaningful than those relating to the documents. The right to reject in CIF really is a right to reject documents and not goods. A buyer who has accepted documents may only reject the goods if, on arrival, they do not comply with the terms of the contract. However, he may only do so for defects not apparent from the documents, so if the buyer accepts documents which show that the goods were damage on loading he cannot then reject the goods when they arrive on that ground .

The buyer will accept the documents if he deals with them before the goods arrive, for instance, by using them to resell or pledge the goods. A buyer who deals with the documents in this way therefore loses the right to reject the goods themselves for defects apparent from the documents.
Of course the buyer may still be entitled to damages if he has lost his right to reject the goods, for instance where he accepted documents that indicated that the goods were defective.

In practice, the buyer will generally not reject the goods after acceptance of the documents. He will have paid the price on presentation of the documents and rejection of the goods will therefore leave him in the position of having to pursue the seller to recover the price.

Damages will be assessed in accordance with the general rules for buyer’s claims for breach of warranty so that the basic measure will be the difference between the value which goods corresponding with the contract would have had, and the actual value of the goods delivered. Where the market value of the contract goods falls between the date of tender of the documents and the date of delivery of the goods, the buyer may find that a claim in damages leaves him worse off than if he had rejected the documents.

3.3 Passage of Property of Property & Risk

As with all other sales of goods the basic rule is that property passes when the parties intend it to pass and no property can pass in unascertained goods . Under a CIF contract property usually passes when the buyer receives the bill and pays the price and the buyer thus acquires the right of disposal. However this is only a presumption, so that if, for example, the contract is for specific goods, property can pass when the contract is made; or on shipment if the goods are then ascertained; or when the notice of appropriation is given. Where the bill of lading is made to the seller’s order, he is presumed to have reserved title . Express provisions dealing with passing of property will generally avoid disputes and uncertainty.

Risk of loss of, or damage to, the goods usually passes when the goods pass over the ship’s rail and the goods travel at the buyer’s risk, although the seller is responsible for the payment of the freight and insurance premium.

If the seller sells goods already afloat , risk passes when the seller tenders documents, but does so retrospectively as from shipment, so that the buyer bears the risk even of loss which had already occurred prior to tender of the documents. He is protected by the availability of actions against either the carrier of the insurers.

Sale of Goods Act 1979, s32(2) applies to CIF contracts so that risk of loss may fall on the sellers unless he makes a reasonable contract of carriage.

CIF contracts are an exception to the general rule in s20 of the Sale of Goods Act which links the passing of risk to the passing of property. Whereas property passes under a CIF contract at the time the buyer pays and takes up the documents, the goods are deemed to be at the buyers risk from the time of shipment.

4. Conclusion

It appears to the writer difficult to reach any other conclusion than that CIF contracts are in fact sales of documents. The most important statutory provisions that relate to the sale of goods in international contracts relate not to the sale of goods in CIF contracts but to the sale of contract. If sellers and buyers did not intend it to be this way then the question is asked as to why such a contract is chosen. There are alternatives available to both sellers and buyers in international contracts.

In reaching the conclusion that the CIF’s relate to sales of documents and not goods the rational for this conclusion should be considered. Firstly it is important to consider the situation where there is a defect in the goods and this is apparent on the face of the documents, the buyer who accepts the documents will also be unable to reject the goods themselves on arrival for that defect. It is therefore vital that the buyer checks the documents carefully to ensure that they conform to the contract before accepting them. It is hard to think of a similar situation where this may arise within the sale of goods, although attention is automatically drawn to the concept of sale by sample. The buyer could not automatically reject the consignment if they were of the same quality and specification as the sample, this to some end is a common sense principle. If any goods were to match contract specifications it would be difficult to see any good reason why such goods could be rejected. However it is not specific examples that set CIF’s out from normal sale of goods contracts, it is the entirety of the rules.

The importance of the documents in CIF contracts is illustrated by the rule that allows the seller to tender documents even after the goods they represent have been damages or lost . It seems incredulous that such a rule could exist and even if it did exist that the sale was for the goods and not the documents. If the goods were of utmost importance and were to all intents and purpose the subject matter of the contract then this rule would not exist.

The documents run to the very core of the contract and the CIF contract depends on the transfer of the documents which give the buyer control, and a right of disposal of the goods, and rights to recover compensation if they are damaged due to the default of the carrier or due to some insured peril it is concluded that this is fact a sale of documents. It seems impossible to argue otherwise than that a CIF is a sale of documents when we consider that the documents are key to all elements of the contract and they are central to shaping the parties duties, defining when risk passes, and determining the condition of the goods. It is these documents on which the entire contract is based.

Bibliography

Books

• Bridge, M. The International Sale of Goods: Law and Practice. (Oxford: Oxford
  University Press, 1999)
• Bradgate R Commercial Law (London: Butterworths Lexis-Nexis 2003)
• Chuah, J. Law of International Trade. (London: Sweet & Maxwell, 2001) second
  edition
• Dr Ademuni Odeke Law of International Trade. (London: Blackstone Press, 1999)
• Sealey, L.S. and R.J.A. Hooley Commercial Law – Text, Cases and Materials.
  (London: Butterworths, 2003) third edition

Journal Articles

• Professor Treitel, “Rights of rejection under c.i.f. sales” [1984] LMCLQ 565
• Professor Treitel, “Damages for breach of a c.i.f. contract” [1988] LMCLQ 457