Documentary Sales PDF

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This lecture explores Documentary Sales....

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Documentary Sales Introduction Standard trade terms are products of mercantile custom. A trade usage or custom is recognised where it can be shown to be: • universally recognised in the particular trade as binding; • consistent with the express terms of the contract; and • reasonable. This handout contains information on our lectures on trade terms. We shall examine the description of documentary sales (1); apply this description in analysing sales contracts on FoB (2) and CIF terms (3) and their interpretation under English law and comparatively, the International rules for the interpretation of trade terms (Incoterms) 2010 produced by the International Chamber of Commerce (ICC). Trade terms define the obligations of the seller and buyer regarding delivery point, payment, and procurement of transport documents, contract of insurance and other documents, for example import and export licenses. Note that in most of the Common law world (so also under English law) for the Incoterms to apply, parties need to incorporate them into their contract and where it is not incorporated, the common law interpretations will apply. In some civil law jurisdictions, the Incoterms apply as part of the national law.

1. Documentary Sales What comprises documentary sales? According to Goode on Commercial Law: Special characteristics are possessed by documentary sales, in which 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, eg of marine insurance, and make over to the buyer the contract documents or other documents embodying their 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 – to enable the buyer to sell or pledge the goods while they are still in transit or in an independent warehouse. Elements of documentary sales from Goode’s description: • Dispatch of goods instead of physical delivery by seller at destination. • Involves seller entering into a contract of carriage for benefit of buyer. • Presence of other contracts, eg contract of insurance. • Transfer to buyer the contract documents.

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The sale itself is the transfer of documents of title to the goods from seller to buyer.

Therefore in documentary sales, there are two independent obligations and rights which also imply independent remedies relating to documents and goods: • Delivery of documents and acceptance of documents. • Delivery of goods and acceptance of goods. Focus of documentary sales: It focuses on the economic interest in the goods represented by the documents since the buyer can deal in the goods by transfer of documents (by selling on the documents). Its focus is not the goods themselves per se but the documents that represent the goods. The usual documents: • Bill of Lading: establishes receipt of the goods by the carrier or that the goods have been loaded on board, the existence of a contract of carriage to named destination and the terms of the contract, and as the document of title to the goods covered in it. • Insurance document: the policy of insurance or certificate of insurance. • Commercial Invoice: produced by the seller to identify the goods shipped, clearly state the price of the goods, freight (cost of carriage) and insurance, for payment by the buyer and also in calculating other duties/levies payable to various government agencies such as customs, port charges, etc. Seller must therefore tender conforming documents as stipulated under the contract of sale to the buyer. Where the documents are not conforming the buyer will be entitled to reject them and the seller will be in repudiatory breach of contract, subject to his ability to retender conforming documents within the time allowed by the contract – Borrowman, Phillips & Co v Free & Hollis (1878) 4 QBD 500. Some relevant principles: 1. Party autonomy This is a cardinal principle of international trade law embodying the freedom of the parties to contract on their own terms. Therefore parties can always agree on the standard trade terms by varying, adding to or delimiting them. We shall examine CIF (named port of destination) – Cost, insurance and freight terms; and FOB (named port of shipment) – Free on board terms. 2. Intention of the parties Another cardinal principle of international trade law is precedence given to the intention of the parties which is what the courts and arbitral tribunals usually try to objectively find or identify, interpret and give effect. The intention of the parties can be express or implied (by law, custom, course of dealing between the par-

ties, conduct and trade usage) and it is determined from the terms of the contract itself, the rules it incorporates, the provisions of the proper law of the contract, and the conduct of the parties. 3. Passing of property Property in the goods denotes the legal ownership of the goods so that whoever has property in the goods owns the goods. So in selling the goods, the seller transfers property in the goods for consideration of the price paid by the buyer. Remember that possession of the goods does not necessarily mean legal ownership of the goods (see eg s.17 SGA and arts.30 & 67(2) CISG). To pass property in the goods, such goods must be identified to the specific contract. This is identified through a process of analysis known as classification of goods. Goods can be either specific or ascertained. Classification of goods Specific goods: section 61 SGA 1979 defines specific goods as ‘goods identified and agreed on at the time a contract of sale is made...’ From businessdictionary.com: Specific goods mean goods that are ‘individually and specifically identified and agreed to, items bought and sold under a contract for sale’ Unascertained goods are, ‘items in a seller’s inventory from which a buyer’s order will be picked (as and when it is received) but which are not yet identified and selected for sale’ For rules for ascertaining goods, see s.18 rules 1-5, SGA. Presumption under cif sales: property will only pass with the delivery and acceptance of the shipping documents. The cif seller need not ship goods but can buy goods afloat (this explains why the term does not state port of shipment but port of destination). The effect of this is that the parties would not have intended property to pass on shipment as shipment would not necessarily be an act of appropriation. The bill of lading will normally be to the order of the seller so that there is a presumption that the seller has reserved the right of disposal (see eg s. 19(3) SGA). When the goods are unascertained, the seller must make an effective and unconditional appropriation of the goods to the contract. This is usually performed by the seller issuing a Notice of Appropriation to the buyer (see eg line of GAFTA 100). The Notice gives the buyer advance information of the shipment so the buyer then knows the exact contract goods. The Notice enables the buyer resell and gives information on the arrival of the ship so the buyer can arrange collection of the goods. The buyer has to actually receive the Notice for it to be effective. If the seller complies with the requirements regarding the Notice, then the Notice is deemed irrevocable. Note that the Notice identifies the cargo but not the condition of the goods so the buyer can still reject the documents and goods for breach of quality and description even after accepting the Notice of Appropria-

tion. Breach of the contractual Notice is a condition and therefore repudiatory entitling the buyer to repudiate the contract (see The Post Chaser [1981] 2 Lloyd’s Rep 695). Question: Where a bill of lading evidencing shipment of all the goods bought by the buyer is sent to the buyer, does this amount to effective appropriation of the goods to the buyer’s contract of sale? 4. Passing of Risk In international sale of goods, it is very important to identify at what point in time risk passed and from whom to whom. It enables us determine which of the parties should bear the risk of loss or damage to the goods or delay in arrival/delivery. This also has a correlation with claims under the contract of carriage and marine cargo insurance. Risk passes at different times under different trade terms. The general rule is that risk and property pass at the same time but remember this is a general rule so there are exceptions! (See eg s.20 (1) SGA, and arts.6769 CISG). Under CIF term, the presumption under the common law is that risk passes from shipment of the goods that is, when the goods pass the ship’s rail. Thus risk passes before property (which passes with the documents) in the goods. Under Incoterms 2010, risk passes when the goods are placed on board the vessel (see Incoterms A5 of CIF clauses). Under fob term, the presumption under English law and incoterms is that risk passes with property at shipment. 5. Retention of title The seller may decide to retain title to the goods until payment is made – s. 19 SGA. This effectively ensures that property in the goods does not pass to the buyer even where he takes delivery (and possession) of the goods. If he deals with the goods then he will be liable for their conversion. Summary: you now know: ➢ That there are two independent rights and obligations arising under documentary sales: in relation to the documents and in relation to the goods. ➢ The central role of documents in international sales transaction. ➢ How to classify goods for purposes of transfer of property in them. ➢ The presumptive rules on passing of risk and property under CIF and FOB terms. 2. FOB Term Pls read the following cases for discussion in class: ➢ Carlos Federspiel & Co SA v Charles Twigg & co Ltd [1957] 1 Lloyd’s Rep 240. ➢ Pyrene v Scindia Navigation [1954] 2 QB 402.

FOB is the acronym for “Free on board (named port of shipment)”. Fob is a delivery term whereby the seller discharges its delivery obligation when it takes conforming goods to the port of shipment and puts them on board the buyer’s nominated vessel. It is also a price term since the Fob seller’s invoice will cover all costs up to this point of delivery. The basic concepts as to delivery, passing of property and risk are common to all variants of the Fob contract. The seller bears all charges incurred on the goods up to and including their delivery on board the ship. The buyer nominates the vessel and pays for stowage of the goods on board the vessel, freight, insurance and unloading charges at the port of destination. Risk passes to the buyer from shipment of the goods. This means the goods must have been identified to the contract. This is the general nature of the obligations of the parties under Fob term which the parties can vary. A. Variants of Fob – Devlin J in Pyrene v Scindia Navigation [1954] p.424: 1. Classic Fob: seller puts the goods on board a ship nominated by the buyer and takes out the bill of lading in his name or to his order. He then endorses and transfers the bill of lading to the buyer. This makes the seller a party directly to the contract of carriage until he transfers the bill of lading to the buyer. The seller can enter into the contract of carriage in his own name (as principal) or as agent of the buyer. The seller must tender a transferable bill of lading that is genuine, valid, clean and effective, indicating the goods have been shipped, covering only the sale goods and the whole transit. The contract of carriage must be with the agreed nominated or designated ship (see Bowes v Shand (1877). The goods must be stowed according to the contract and failing which it should be in accordance with the customary manner of stowing such goods (see Messers v Morrison Export [1939]). The contract of carriage must be for the ship to sail within the agreed shipping period (see Bowes v Shand (1877). Transit in the carriage contract must comply with stipulations as to route in the sale contract or if none is specified, with the customary route or reasonable route (see Colin & Shields v Weddell & Co Ltd [1952]). The carriage contract must be for direct transit except deviation is permitted under the sale contract (see Bergerco v Vegoil [1984]), and the buyer must pay for the goods on receipt of conforming documents. 2. Extended Fob or Fob with additional services: where the seller is requested to make the necessary shipping or carriage arrangements in which case he will take the bill of lading in his own name (as principal) and obtain payment on transfer just like in cif contracts. Here the seller concludes the contract of carriage as principal and it is therefore the seller who nominates the ship. The seller’s duties are extended and may also include the purchase of insurance (on behalf of the buyer). The difference with cif is that the invoice (price) will however not include the cost of insurance and freight (carriage) which the seller will make for the buyer’s account and invoice the buyer separately for costs and expenses (incurred in procuring these services).

3. Strict Fob: Where the buyer or his forwarding agent arranges shipping by booking space on a particular ship and notifying the seller of this nomination. The seller discharges his duty by putting the goods on board the nominated ship within the shipment period. The seller collects a mate’s receipt (receipt of the goods by the carrier) and hands it over to the buyer or his forwarding agent to procure the bill of lading (in the buyer/agent own name) from the carrier. Here the seller is not involved in the contract of carriage whether as principal or agent and it is the buyer who nominates the ship. Note that in Pyrene, the judge said “The present case belongs to this third type; and it is only in this type, I think, that any doubt can arise about the seller being a party to the contract” (p. 424). Question: what is the difference between the classic, strict, and extended Fob? Structure: i. Identify if contract is on Fob terms. ii. If yes, identify the type of Fob. iii. Check the terms of the contract and facts given. iv. Apply these to identify the obligations of the parties. B. Passing of Property in Fob As already mentioned this depends on the intention of the parties (see eg s.20 SGA) and remember that the goods must first be identified to the contract. For specific and ascertained goods, the presumption is that property passes after the goods have been put on board the vessel (or in common law, crossed the ship’s rail). See for example: • Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] • The Cuidad de Pasto [1988] • The El Amria and The El Minia [1982] Remember the seller may wish to reserve his right of disposal until after payment (see s. 19 SGA). However, where the seller obtains the bill of lading in his name, property may be presumed to pass when the seller makes the bill of lading available to the buyer or his forwarding agent (see s. 19(2) SGA). Where property passes on shipment seller can exercise the rights of an unpaid seller (lien on the goods, and right of stoppage in transit) for example under sections 41 & 44 SGA. On when parties intend property to pass see: Evergreen Marine Corp v Aldgate Warehouse (Wholesale) Ltd [2003] 2 Lloyd’s Rep 597. Carlos Federspiel & Co SA v Charles Twigg & Co Ltd & Another [1957] 1 Lloyd’s Rep 240 – CF purchased bicycles from CT fob British port and paid the price. CT went into liquidation and receiver refused to allow shipment of the goods. CF claimed property in the goods had passed to them since the bicycles had been appropriated to the contract. The receiver argued that the intention of the parties was that property in the bicycles will pass on shipment. Pearson J held that prop-

erty in the bicycles had not passed, that the parties intended that property will pass on shipment on five grounds: • The emphasis was on the seller’s shipment as the decisive act of performance by the seller; • The correspondence between the parties showed an agreement to change of ownership at shipment; • There was no actual or constructive delivery such as to make the seller bailee for the buyer; • There was nothing to suggest buyer bore any risk before shipment; • The seller had not performed the last two acts of sending the goods to Liverpool and shipping them on board the vessel. Thus the agreement between the parties was that property would not pass at any time before shipment and this was not displaced by the subsequent correspondence between the parties on which CF relied. Therefore the goods had not been appropriated to the contract and so title to the goods had not passed onto CF. Note! section 20A SGA 1979 now provides that a buyer who pays the price for a specific quantity from an identifiable bulk gets common ownership with other buyers. Mitsui & Co Ltd v Flota Mercante Grancolombiana SA ‘The Ciudad de Pasto’ and ‘Cuidad de Neiva’ [1989] 1 All ER 951; [1988] 2 Lloyd’s Rep 208 - a consignment of frozen prawns were loaded onboard The Ciudad de Pasto. Five bills of Lading were issued with Vikingos named as shipper and Mitsui Japan named as notified party. V sold the goods fob to Columbia Fisheries. CF sold the goods to Mitsui Japan on arrival terms. Mitsui (USA) had paid 80% of the value of the prawns when they were ready for shipment. Mitsui (USA) was a subsidiary of MJ. On arrival in Japan the prawns were found to be damaged. The court had to decide whether the plaintiffs had title to sue. CA held that there was no evidence to suggest that the buyers were intended to acquire property before presentation of the bills of lading under the letter of credit even though the sale was on fob terms. On the facts of the case, the seller reserved its right of disposal under s.19 SGA 1979 and that presumption was not displaced. Thus the parties’ intention displaced the time when title is presumed to pass under fob terms. C. Passing of Risk in Fob Risk of loss, damage to the goods or delay in delivery will normally pass on shipment of the goods. Note that this does not include legal risks such as change in the law of one of the countries. See: • Pyrene v Scindia Navigation [1954] - for where goods are damaged during the process of loading: either as goods pass the ship’s rail or when goods are loaded on board. • See also Midland Silicones Ltd v Scruttons Ltd [1962] AC 446 (HL) affirming Pyrene v Scindia.

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For multimodal transport with an Fob element see: Thermo Engineers Ltd v Ferrymasters Ltd [1981] 1 Lloyd’s Rep 200 – huge exchanger carried by trailer to the ship for loading, had crossed the outward ramp of the vessel when the superstructure of the exchanger struck the bulkhead of the lower deck of the ship causing damage. Held the damage came under the Hague Rules and not the CMR.

D. Obligations of the Parties under Fob. Those common to all Fob variants: • Seller must deliver conforming goods to the port of shipment. • Seller must deliver within time agreed or reasonable time (if no time was agreed). • Buyer must accept conforming goods at the port of delivery. • Buyer must pay the price as and at the time agreed. Obligations under Strict Fob: • Identified port of shipment: buyer nominates the ship, procures shipping space and is the shipper. In Gill & Duffus v Societe pour I’Exportation des Sucres [1985] it was held that the Buyer’s failure to nominate and notify Seller within the agreed date may amount to a breach of a condition precedent to the seller’s obligation to supply the goods. • Place of delivery of goods is a condition of the contract. • Where port of shipment is ambiguous or omitted there are 3 possible interpretations: o Seller to nominate. o Buyer to nominate. In David Boyd v Louis Louca [1973] the contract provided for ‘fob stowed good Danish port’. Held this entitled Buyer to elect any good Danish port as port of discharge because this was a strict Fob contract. o Contract void for uncertainty - example is where the contract stipulates Fob without any port of shipment. See, Cumming v Hassell (1920). • Date of shipment: a date for shipment will be agreed or fixed by buyer. Until the buyer notifies the seller of the shipment period, the seller’s obligati...