The essence of the cif contract law contract essay

The CIF[1], as well FOB, is one of the most common sale contract forms in nowadays trade, probably more” than any other contract used for the purpose of sea-borne commerce”[2]. It is relatively a recent type of contract in the lex mercatoria, which appears in the middle of the 1800[3]and it has increasingly spread in the mercantile practice in the last century. This was due mainly to the reform of the Bill of Lading Act 1855 which overturned the English law[4]position on the endorsement of the bills of lading preventing the transferee from the possibility to bring an action in his own name on the carriage contract. Thus, it can be said that the CIF contract developed from FOB[5]: ” Roughly speaking, therefore, the contract is the same as a sale F. 0. B. the point of shipment, cash against documents, with the added incidents that the price includes the freight and insurance and the seller undertakes to arrange for these matters”[6]This is the main reason because CIF still retains some FOB characteristics: in particular the seller remains obliged to deliver at the vessel which is still intended to be the buyer’s floating warehouse and the risk is usually transferred at the moment goods are passing the ” ship’s rail”. Under a CIF contract the seller is traditionally deemed[7]to agree a contract of affreightment in order to carry the goods, (meeting the contract description[8]), at the destination[9]at the time specified in the contract or, when the time is not expressly provided, within a reasonable time[10]: The seller is to arrange the shipment[11]on the date or within the period agreed (” the bill of lading must be correctly dated”[12]): a failure to this regards would be considered a repudiatory breach[13]; he has also to provide insurance[14]for the ” amount representing the reasonable value of the goods”[15]while they are in transit: the cost of those arrangements is included in the contract price paid by the buyer. When a contract of sale is modelled on the CIF terms ” the conventional duty under the Sale of Goods Act 1979 (‘SGA’) s. 27 of a seller to deliver, is commuted under the cif contract into duties to ship, or procure or adopt the shipment of, conforming goods and to transfer documents that give the buyer direct rights against the insurer and the carrier”[16]. In a nutshell, the main performance of the seller under the contract is fulfilled by the tender[17]of the three main documents: A (” clean”) bill of lading covering the entire voyage (as a proof that goods were loaded[18]in good order and condition); An insurance policy (which would prove that the seller has provided an adequate[19]policy); A commercial invoice for the goods (representing the cost element; and all other relevant documents as provided for in the contract, i. e. certificate of origin, of quality etc.); The buyer, on the other side, has to accept the aforementioned documents, which give to him constructive possession[20]of the goods, and perform the payment if they conform with the contract of sale, even before the goods arrive to destination. Therefore, he is entitled to reject the documents in case they do not comply with the terms of the contract of sale. Moreover, it has to be noted that buyer has a second opportunity to reject, (but this time the goods), when, after inspection, he discovers that goods do not comply with the contract of sale and the non-compliance was not evidenced in the documents previously accepted[21]. Hence, the buyer has a double right of rejection, (as noted by Lord Devlin[22]). Indeed, ” The CIF contract gives rise to two distinct rights: the right to call for conforming documents and the right to conforming goods”[23]. Moreover, In The Hansa Nord[24]it was firmly underlined that any incongruence in the document is to be considered a breach of a condition allowing the innocent party, not only to claim damages, but also to repudiate the contract. We must point out that this type of sale has the main advantage to permit to the buyer (and any subsequent buyer),(by the endorsement/transferring to a third party of the relevant documents), to sell on the goods while they are afloat, without having to wait for their delivery to complete the following transaction. In practice documents are also very important in relation to possible other commercial subjects who might be involved in the transaction, such as a bank which may treat the documents as a security, (e. g. when the price of the sale is to be paid through a letter of credit). In brief, once the goods are shipped (and documents handed over), and if they comply with the contract, they are durable and are capable to remain in good condition and of satisfactory quality at the moment of delivery,[25]it can be generally affirmed that the seller has no further obligation. In general, if the goods, after shipment, are lost or damaged during the transit, the buyer’s remedy, (if any), would be addressed towards the carrier and/or the insurer, respectively under the bill of lading or under the policy tendered. For all these reasons the sale CIF has customary been considered a documentary sale ” rather than one for the sale of goods”[26]In Arnold Karbeg & Co v Blythe & Co.[27]Scrutton affirmed, quite in an absolute way, that: “” I am strongly of the opinion that […]a c. i. f. sale is not a sale of goods, but a sale of documents relating to goods…he buys the documents, not the goods, and it may be that under the terms of the contracts of insurance and affreightment he buys no indemnity for the damage that has happened to the goods.”[28]Also Judge McCardie J. in Manbre Saccharin Co Ltd v. Corn Products Co. Ltd[29]:” I conceive that the essential feature of an ordinary c. i. f. contract as compared with an ordinary contract for the sale of goods rests in the fact that the performance of the bargain is to be fulfilled by delivery of documents and not by the actual physical delivery of goods by the vendor” This opinion can also been found in Van der Zijden Widlandel (PJ) NV v Trucker and Cross Ltd[30]in which was stated by Donaldson J that ” The contract called for Chinese rabbits, c. i. f. Their obligation was therefore, to tender documents, to ship the rabbits themselves. If there were any Chinese rabbits afloat, they could have bought them” The radical view mentioned draws a CIF contract as a contract for the sale of documents, in which the goods are not considered as a relevant element of the agreement and the centrality of documents in CIF in taken to the extreme. The sever Scrutton’s idea of a contract for the sale of documents was later firmly criticised. An important dissention was made, ironically, in the appeal[31][…]in Karber (Arnhold) v Blythe”[32]in which Warrington LJ said: ” The contracts are contracts for the sale and purchase of goods, but they are contract which may be performed…by first placing (the goods)on board ship, and secondly by transferring to the purchaser the shipping documents”.[33]and later in the same case Bankes LJ : ” I prefer to look upon it as a contract for the sale of goods to be performed by the delivery of documents”[34]. And also per Lord Wright in Ross T Smith v t D bailey Son & Co[35]:” the sale can been completed after the loss of the goods […] That does not mean that a CIF contract is a sale of documents […] It contemplates the transfer of actual goods in the normal course, but, if the goods are lost, the insurance policy and bill of lading contract – that is, the right under them- are taken to be, in a business sense, the equivalent of the goods”. The thought of Lord Wright is still keeping the documents as an element of crucial importance, suggesting although that the contract is not for the sale of documents and ” the goods are quite plainly the underlying subject of the contract”[36]A similar approach was observed also in Hindley & Co. v East India Produce Co Ltd[37]in where, although (complying) documents were accepted by buyers, the sellers were found to be in breach of the contract for having delivered goods not in compliance with the terms of the contract. Of course we should note that the goods must exist at the moment that the contract is concluded. It can be equally argued that the same principles applies, whether not otherwise agreed, at the moment that tender of documents is finalised, considering that the usual aim of the contract of sale is to allow the buyer to take possession of the goods[38]. As highlighted by McCardie J., in Manbre Saccharine Co. Ltd. v. Corn Products Co. Ltd, the documents are to be compared to a key to the warehouse where the goods are kept, even it is a floating one. The same point was taken later. in Sanders Brothers v. Maclean by Bowen L. J: ” It (the bill of lading) is a key which in the hands of a rightful owner is intended to unlock the door of the warehouse, floating or fixed, in which the goods may chance to be.” Of course that ” chance” it must be considered related to events which may happen during transit, for which seller cannot be deemed to have any liability. It is, in fact, to be reminded that ” If […]the non- conformity results from the seller’s breach of the contract of sale, […], the buyer’s remedy will be against the seller”.[39]For completion with regards of the right to reject of the documents, it has to be said that the buyer cannot be entitled to refuse the documents even when he is aware that the forthcoming goods will not be not answering[40]to the description into the contract or, like in The Manila[41], they might arrive late. (constructive knowledge, on the part of the buyer, was deemed to be insufficient to justify a rejection of the documents before actual arrival of the goods). It is true that it cannot be totally denied that, from a mere business point of view, as stated by Prof. Clive Schmitthoff[42], the essence of the c. i. f. contract is not a sale of the goods themselves but a sale of the documents relating to the goods. Although, in the light of all considerations made, some objections can be raised to the previous statement. In practice it has to be considered that the documents assume a vital importance and they are representing the interests to the parties before the actual arrival of goods to destination and, as already underlined, these can be relevantly used for other purposes related to the contract of sale which involves other intermediaries. (such as bankers, insurers, etc.)Moving from the already underlined principle that goods are the underlying subject of the contract, we might consider that, even if documents are essential, they are the means throughout the sale is accomplished. The right of rejection of the goods clearly suggests that goods have to be considered an essential element of the contract while the emphasis put on the documents is due to reasons of convenience and which stem from the contractual structure of a CIF contract. In effect, we have also to consider that sometimes the documents and the goods might not have the same value for the buyer: for example in case the goods should be introduced in the producing process of the buyer’s firm. Moreover is also to consider that not always the proceeds which can be recovered from an insurer, under the policy handed over to the buyer, can compensate entirely, or even partially, the loss suffered by the buyer[43]. It can be argued that this discrepancy has to be considered within the contingencies of the CIF contract and it can been brought under the ” freedom of contract” principle, since ” business men” ought to be aware of the conditions upon which they negotiate. As already said the documentary feature of the CIF contract has been overstated by the current trade practice, which seems to have dismissed the important role of the goods. We can conclude that there is not a definite answer to the question whether the CIF contract is a sale of documents. It is a partially true statement, which it should not lead us to think the documents are the sole essence of CIF. Words 2103