A CONTRACT OF SALE OF GOODS

Transcription

1 A CONTRACT OF SALE OF GOODS A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration called the price. From the definition, the following are some of the characteristics of a contract of sale of goods; 1. Parties; There must be two distinct parties to a contract of sale of goods, that is, a buyer and a seller. 2. Transfer of property; In this context, property means ownership. A mere transfer of possession of the goods will not suffice; the seller must either transfer or agree to transfer the property in the goods to the buyer in order to constitute a contract of sale of goods. 3. Goods; The subject matter of the contract must be goods which include all chattels personal other than things in action and money, and all emblements, industrial growing crops, and things attached to or forming part of the land, which are agreed to be severed before sale or under the contract of sale. Chattels movable property Emblements - cultivated growing crops which are produced annually. Things in action - actionable claims e.g. a bill of exchange; these, together with money are excluded from the definition of goods. 4. The price; Consideration for a contract of sale of goods must be money and its called the price 5. Involves either a sale or an agreement to sell ; Where the property in the goods is immediately transferred from the seller to the buyer at the time of making the contract, the contract is a sale. E.g. a sale over a counter in a shop. It s an executed contract. On the other hand, where the transfer of property in goods is to take place at a future time or subject to a condition to be fulfilled thereafter, then the contract is an agreement to sell. It s an executory contract. An agreement to sell becomes a sale when the time lapses or upon fulfillment of the condition subject to which the property in the goods was to be transferred. The following are the consequences which flow from a sale and an agreement to sell; (a) Transfer of property (ownership: In a sale, property in the goods passes to the buyer at the time of making the contract, with the result that the seller ceases to be the owner of the goods while the buyer becomes the owner thereof and the buyer acquires a right to enjoy the goods against the whole world. Whereas in an agreement to sell, the property in the goods is not transferred to the buyer at the time of the contract, with the result that the parties acquire only a right to sue either the buyer or the seller against the other for any default in fulfilling his part of the agreement. (b) Passing of Risk of Loss: The general rule is that unless otherwise agreed, the risk of loss prima facie passes with property; i.e. goods remain at the seller s risk until the property therein is transferred, 1

2 whereupon the goods are held at the buyer s risk. Thus, in case of a sale, if the goods are destroyed, the loss falls on the buyer, even though he may never have taken possession of them. On the other hand, in the case of an agreement to sale, the loss will be borne by the seller even though the goods are in possession of the buyer. (c) Effect/Consequences of Breach; In case of a sale, if the buyer wrongfully neglects or refuses to pay the price of the goods, the seller can sue for the price, even though the goods are still in his (seller s) possession. Whereas in the case of an agreement to sell, if the buyer fails to accept and pay for the goods, the seller can only sue for damages and not for the price, even though the goods are in the buyer s possession. (d) Right of Resale; In case of a sale, the property passes to the buyer and as such, the seller in possession of the goods after sale cannot resell them. If he does so, the subsequent buyer who has knowledge of the previous sale does not acquire a title to the goods and the original buyer can sue as owner of the goods and recover them from the third person/subsequent buyer. The original buyer can also sue the seller for breach of contract or in tort for conversion. However, the right to recover the goods from the third person is lost if the subsequent buyer had bought the goods bonafide [in good faith] and without notice of the previous sale. In an agreement to sell, the property in the goods remains with the seller with the result that the seller can dispose of the goods as he wishes and the original buyer can only sue the seller for breach of contract. Under the circumstances, the subsequent buyer acquires a good title to the goods, (irrespective) whether or not he had knowledge of the previous sale. TERMS OF A CONTRACT OF SALE OF GOODS A sale of goods contract contains several terms regarding the description and quality of goods, the price and mode of payment, the time and place of delivery etc. Examples of terms of a contract are the Incoterms. Terms of a contract are divided into conditions and warranties. A condition is a stipulation which is essential to the main purpose of the contract, the breach of which gives the aggrieved party a right to repudiate (cancel) the contract. In addition, the aggrieved party may maintain an action for damages for loss suffered due to non-performance of the other party s obligation. All the Incoterms are conditions in a contract. A warranty on the other hand is a stipulation which is collateral to the main purpose of the contract and breach of which gives the aggrieved party a right to sue for damages only, and not to repudiate the contract. Note that there are no hard and fast rules in determining whether a stipulation is a condition or a warranty. Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the 2

3 construction of the contract. It should also be noted that a buyer has a right to waive a condition or to treat a breach of condition as breach of warranty, as a result of which the buyer loses his right to rescind the contract. BILL OF LADING This is a shipping document. It acknowledges shipment of the goods. It is a receipt that goods have been put on board the ship. Its evidence of the contract of carriage. It s a document of title to the goods. Port officials can only release goods to the bearer of the Bill of Lading. The BOL is also a formal receipt by the ship owner acknowledging that the goods alleged to be of the specific species, quality and specification are shipped to a place X in ship Y or have been received by the ship owner for purposes of shipment. METHODS OF PAYMENT FOR EXPORT SALES 1. LETTERS OF CREDIT/ DOCUMENTARY CREDIT The buyer agrees to pay the seller using a pay master who is usually a bank in the seller s country and pays against presentation of stipulated documents. Essentially, the Letter of Credit gives the seller guarantee of the creditworthiness of the buyer in that a cash payment against tender of the usual shipping documents protects the seller against the risk of the buyer s bankruptcy, the seller can bring an action in his own country in case of breach and the seller can use the security of the letter of credit to raise cash from his own bank. The foregoing are the stages of payment in documentary credit transactions. 1. Parties to the contract of sale agree to payment by letter of credit. 2. The buyer then instructs his bank (the issuing bank) to open a credit in favor of the seller (beneficiary) with a bank in the seller s country, (the advising bank). 3. The buyer (applicant) gives details of the documents required, (eg transport documents, invoice, insurance policies, certificate of quality, certificate of origin etc) in order to receive finance, as well as the date of expiry of the credit. The buyer therefore instructs the issuing bank that the seller shall only be allowed to draw on the credit on presentation to the advising bank of documents showing that the goods have been shipped and are on their way to the buyer. 4.The issuing bank (opening bank) instructs a correspondent bank (advising bank / confirming bank) in the beneficiaries country to advise the seller of the opening of a documentary credit. 3

4 5. The advising bank informs the beneficiary/ seller of the opening of the credit in his favor and the precise terms on which the seller will be allowed to avail himself with the credit. 6. Upon shipment of the goods and receipt of the necessary documents from the various persons concerned (eg insurers, carriers etc), the seller presents these documents together with his invoice to the advising bank. 7. The advising bank checks the documents with the terms of the credit to ensure that the goods shipped so far as can be ascertained from the documents, are the contract goods and that everything appears to be in order. If so satisfied, the advising bank will permit the seller to draw against the credit. 8. The advising bank transports or forwards the documents to the issuing bank which likewise checks the documents against the terms of the credit and pays the advising bank if satisfied that all is in order. 9. The issuing bank informs the buyer of receipt of the documents to be transferred to the buyer against payment. The buyer also satisfies himself that the documents are in order, and effects payment to the issuing bank. The payment should be an amount corresponding to the price paid to the seller as well as the bank charges. The setting up of a documentary credit between two foreign banks in two foreign countries to finance export sales as illustrated above has been described as the life blood of international commerce. Further, the above documentary credit arrangement is largely governed by the Uniform Customs and Practice for Documentary Credits (UCP Rules 1983). These rules are often incorporated in the contract of sale by express reference. TYPES OF LETTERS OF CREDIT There are various types of LOCs depending on the agreement of the parties to the contract of sale. 1. The Revocable and Unconfirmed Letter of Credit This type of credit affords little security to the seller that he will receive the purchase price through a bank, because neither the issuing nor the advising bank enters into a commitment to the seller. The credit may be revoked anytime without prior notice to the beneficiary. 2. The Irrevocable and Unconfirmed Letter of Credit This is the type of credit whereby the authority which the buyer gives to the issuing bank cannot be revoked and the issuing bank enters into an irrevocable obligation to the seller to pay. The bank must honor the credit. This type of credit is more valuable to the seller since he can demand that the issuing bank honors the credit, provided the seller has tendered the correct documents before the expiry date of the credit. The seller has a right to sue the issuing bank for refusal to honor the credit. The suit may be taken out in the country where the issuing bank is situated or in the seller s home country if the issuing bank has a branch therein. 3. The Irrevocable and Confirmed Letter of Credit 4

5 This type arises where in addition to the irrevocable undertaking by the issuing bank to honor the credit, the advising bank gives further confirmation of the credit, to the seller. The seller will then have certainty that a Bank in his own local country will provide him with finance if he delivers the correct documents within the stipulated time. A confirmed credit which has been notified to the seller cannot be cancelled by the bank on instructions of the buyer. In Hamzeh Malas & Sons V British Imex Industries Ltd (1958)2 QB 127, British sellers sold a quantity of steel rods to Jordanian Buyers. The goods were to be shipped in 2 installments and payment was to be made under 2 confirmed credits opened with the Midland Bank London, with one credit for each installment. Upon receipt of the first installment, the buyers who had already opened the 2 nd credit applied for an injunction to restrain the sellers from receiving any money under the 2 nd credit. It was held that the injunction had to be refused because the bank was under an absolute obligation to pay, upon tender of the stipulated documents, irrespective of any dispute between the buyer and seller. 4. The Transferable Letter of Credit The parties to the contract of sale may agree that the credit shall be transferable in which case the seller can use such credit to finance the supply transaction. Under such an arrangement, the buyer opens the credit in favor of the seller and the seller transfers the same credit to his suppliers. The credit is transferred on the same terms on which the buyer has opened it, except that the amount payable to the suppler is made smaller considering that the seller ought to retain his profit from the export transaction. FUNDAMENTAL PRINCIPLES OF LETTERS OF CREDIT The law relating to Letters of credit is founded on two cardinal principles. 1. Doctrine of Autonomy of LOCs This principle stipulates that the credit is separate and independent of the underlying contract of sale. The LOC is thus a paper transaction in the sense that a bank concerned with a documentary credit is only concerned with whether the documents tendered conform to the contract. The condition and nature of the goods shipped is irrelevant. The bank is under a strict duty to pay upon production of the stipulated documents within the stipulated time. The exception to this principle is where the seller has engaged in some form of fraud, in which case the bank may withhold payment. The principle of autonomy has the following consequences: a) The buyer is not entitled to give instructions to the bank to refuse to effect payment under the credit or vary its terms without the seller s consent. b) The concern of the bank is with the documents and not the facts. If the documents appear to be in order, then the bank is under obligation to pay. If the documents deviate from the language of the 5

6 LOC, then the bank may withhold payment even if the deviation is purely based on terminology but lacks materiality in fact. In Rayner V Hambros Bank Ltd (1943) The LOC called for documents covering the shipment of groundnuts but the bill of lading which the seller tendered referred to machine shell groundnut kernels. It was customarily known in the trade that the description of machine shell groundnut kernels which appeared on the bill of lading was synonymous to the description of groundnuts as required in the LOC. The bank refused to pay and their refusal was upheld by the Court of Appeal stating that the bank must only exercise reasonable care and skill to ensure that the documents are in order but is not responsible for ensuring that the documents are accurate, genuine and authentic. 2. The Doctrine of Strict Compliance This doctrine arose from the strict duty imposed on the banks to follow the buyer s instructions on the nature of documents to be accepted. The banks which operate the documentary credit act as agents of the buyer who is the principal. If the banks exceed the buyer s instructions, by accepting documents which do not conform to the terms of credit, they run the risk of acting outside their mandate and thus take liability for any resulting commercial risk in the transaction. In Sopnoma S.P.A V Marine & Animal By- Products Corporation (1966)1 LLR 367 a confirming bank had received instructions from a buyer of Chillian fish to pay upon presentation by the seller of documents including a bill of lading issued to order and marked freight prepaid, and an analysis certificate showing that the fish had a content of at least 70% protein. The documents which the seller tendered were incorrect. That is, the bill of lading were not to order and bore the mark freight collect instead of freight prepaid. Similarly, the certificate showed only a minimum protein content of 67%. The bank rejected the incorrect documents only for the seller to tender correct documents upon expiry of the credit. It was held that the 2 nd tender was irrelevant and the bank had rightly rejected the 1 st tender of documents. On the other hand, if the documents are correct and the bank refuses to pay, it may be held liable to the seller in damages. In Ozalid Group Export Ltd V African Continental Bank (1979), payment was to be effected on 5 th October but was not made until 12 th December even though the correct shipping documents had been presented. The seller was held to be entitled to damages for unjustifiable delay in making the payments. Fraud in Letters of Credit Fraud is the established exception to the duty of a bank to pay under a documentary credit. Fraud may occur if the shipment of goods is fraudulent or if the bills of lading or other documents tendered under the credit are falsified or forged. In either case, its not sufficient if the bank is merely suspicious that a fraud has occurred. The bank must have compelling evidence that fraud was committed and that the seller was a party of it or knew about it. 6

7 a) Cases of mere suspicion In Discount Records Ltd V Barclays Bank Ltd (1975)1 WLR 315 Discount records, an English company, ordered records and cassettes from Promidsic, a French company. Discount instructed Barclays Bank to open an irrevocable credit in favor of Promodisc and Barclays passed on these instructions to Barclays Bank International. Discount alleged that on arrival of the goods, they found them to be a fraudulent shipment and moved court for an interim injunction restraining the banks from paying until final judgment or further order. It was held that no fraud was established and no sufficiently grave cause disclosed for interfering with the credit. The injunction was refused. b) Cases of fraud without involvement or knowledge of the seller. Where it is proved to the satisfaction of the bank that the documents tendered are fraudulent but it cannot be established that the seller was a party to the fraud or knew of it, the bank should honor the credit. In United City Merchant (Investment) Ltd V Royal Bank of Canada (1983)1 AAC 168, glass fibres and equipment ltd, a british co, sold a glass fibre forming plant to a Peruvian Co. Payment was arranged under an irrevocable LOC issued by the Royal Bank of Canada at its London branch. Shipment was to be made London on or before Dec 15 th, 1976, while the credit was open until Dec 31t Shipment of the installation was made on Dec 16 th, one day outside the shipping time. The bill of lading was altered and backdated to yer Dec 15 th. According to the trial judge, the backdating of the bill of lading was carried out fraudulently by an employee of the loading brokers without the knowledge of the seller or the assignees of the credit. It was held that the confirming bank (Royal Bank of Canada) should have honored the credit on presentation of the documents. c) Cases of fraud to which the seller is party or has knowledge. Where it is proved to the bank that the documents are fraudulent and in addition that the seller was a party to the fraud, or knew of it, then the bank should refuse to honor the credit. PAYMENT OTHER THAN BY LETTERS OF CREDIT Although the LOC is the most secure way for the seller to receive the price of goods, there are other modes of payment, under international trade transactions. 2. PAYMENT BY A BILL OF EXCHANGE A bill of exchange is an unconditional order in writing addressed by one person to another to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person or to bearer. A BOE is a negotiable instrument. That is, it is transferable by endorsement and or delivery, and the holder of it may sue on it in his own name. 7

8 The use of a BOE may enable a seller of goods to obtain payment and the buyer to have credit at the same time, as follows; 1. Where a seller in one country sells goods to a buyer in another, the buyer may require credit of say 20 days. The seller draws a BOE on the buyer, (ie addressed to the buyer) ordering the buyer to pay in 20 days time. If the buyer agrees to the terms of the bill, he expresses his agreement by signing or accepting the bill and returning it to the seller. 2. The seller may then transfer the bill to his bank in his home country, at its face value less a deduction of commission or charges for the bank. 3. Under this arrangement, the seller would have obtained payment for the goods while the buyer would have obtained credit for 20 days. 4. The bill is said to mature when the time for payment lapses and the bank or any other person to whom the bill is transferred seeks to enforce payment from the buyer who may have obtained the goods and resold them. 3. PAYMENT BY CHEQUE The seller s price may also be paid by cheque which is also a bill of exchange. Unlike other bills however, a cheque is always addressed to a bank and payable on demand. Most cheques are also not transferable or negotiable because they usually restrict negotiation for fear of fraud to which they are susceptible. 4. PAYMENT BY DRAFT A draft is yet another bill of exchange. Payment by draft is effected by the buyer obtaining from his bank an order drawn on a bank in the seller s country and naming the seller as payee. 5. PAYMENT BY TELEGRAPHIC TRANSFER This is effected by the buyer s bank making a communication with a bank in the seller s country, (the corresponding bank) directing the remitting bank to pay to the seller. Background INCOTERMS 2000 Incoterms are basically a set of international terms used to describe types of contracts of sale of goods between buyers and sellers internationally. Usually, parties to a contract are unaware of the different 8

9 trading practices in their respective countries. This can give rise to misunderstandings, disputes and going to court, which is a waste of time and money. In order to remedy these problems, the International Chamber of Commerce first published in 1936 a set of international rules for the interpretation of trade terms. These rules were known as Incoterms Amendments and additions have been made to these rules in 1953, 1967, 1976, 1980, 1990 and presently in 2000, so as to bring the rules in line with current international practices. The purpose of Incoterms therefore is to provide a set of international rules for the interpretation of the most commonly used trade terms in foreign trade. Hence the uncertainties of different interpretations of such terms in different countries is avoided or at least reduced to a considerable degree. STRUCTURE OF INCOTERMS Where parties intend to incorporate Incoterms into their contract of sale, an express reference of the type of incoterm to be used must be made, and it should be stated that the incoterms used are those of GROUP C INCOTERMS For these Incoterms, the main carriage is paid. These include: CIF Cost Insurance and Freight to a named port of destination. CPT Carriage Paid To a named place of destination CIP Carriage and Insurance Paid To a named place of destination. CFR Cost and Freight to a named port of destination. These require the seller to contract for carriage on usual terms at his own expense. Therefore a point up to which he would have to pay transport costs must necessarily be identified after the respective C term. Eg, CIF Mombasa, CIP Kampala etc. While the seller is bound to pay the normal transport cost for the carriage of the goods by a usual route and in a customary manner to the agreed place, the risk of loss of or damage to the goods as well as additional costs resulting from events occurring after the goods have been appropriately delivered for carriage fall upon the buyer. As such, in these contracts, the seller fulfills the contract in the country of shipment or dispatch. The C terms are different from other terms in that they contain two key points; one indicating the point to which the seller is bound to arrange and bear the costs of a contract of carriage and another one for the allocation of risk. 9

10 It is very critical in C contracts that the seller is relieved of any further risk and cost after he has duly fulfilled his contract by contracting for carriage and handing over the goods to the carrier and by providing for insurance under the CIF and CIP terms. 2. GROUP F INCOTERMS These require the seller to deliver the goods for carriage as instructed by the buyer. For these Incoterms, the main carriage is unpaid. These include: FOB Free on Board a named port of shipment. FCA Free Carrier to named place. It means that the seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the named place. The chosen place of delivery has an impact on the obligations of loading and unloading the goods at that place. If delivery occurs at the seller s premises, the seller is responsible for loading. If at any other place, the seller is not responsible for unloading. Carrier means any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport by rail, road, air, sea, inland waterway or by a combination of such modes. If a buyer nominates a person other than a carrier to receive the goods, the seller is deemed to have fulfilled his obligation to deliver the goods when they are delivered to that person. When the place named in the contract as the place of delivery is the seller s premises, delivery is complete when the goods are loaded on the buyer s collecting vehicle and in other cases, delivery is complete when the goods are placed at the disposal of the buyer not unloaded from the seller s vehicle. FAS Free Alongside Ship of a named port of shipment. The obligation to clear goods for export is on the seller 3. GROUP E INCOTERMS EXW Ex Works to a named place. This is the term where the seller s obligation is at its minimum. The seller has to do no more than place the goods at the disposal of the buyer at the agreed place usually at the seller s own premises, though in practice, the seller helps the buyer in loading the goods on to the buyer s collecting vehicle. If the buyer wants the seller to do more, this should be reflected in the contract for sale. 4. GROUP D TERMS Under the D terms, the seller is responsible for the arrival of the goods at the agreed place or point of destination at the border or within the country of import. The seller bears all the risk and cost of bringing 10

11 the goods thereto. Under the D terms, except for DDP, the seller does not have to deliver the goods cleared for import in the country of destination. These include: DAF Delivered Al Frontier at named place. Parties use this where they intend that the seller should bear the risk during the transport. DES Delivered Ex Ship at named port of destination. DEQ Delivered Ex Quary at named port of destination. Traditionally, the seller had the obligation to bear the gods for import under DEQ, since the goods had to be landed on the quay and thus were brought into the country of import. But owing to changes in customs clearance procedures in most countries, it is now more appropriate that the party domiciled in the country concerned undertakes the clearance and pays the duties and other charges. DDU Delivered Duty Unpaid at named place of destination. Here, the seller delivers the goods in the country of destination without clearing the goods for import and paying the duty. In countries where import clearance may be difficult and time consuming, it may be risky for the seller to undertake n obligation to deliver the goods beyond the customs clearance point. DDP Delivered Duty Paid at named place of destination. THE SELLER S DELIVERY OBLIGATIONS Incoterms focus on the seller s delivery obligation. The precise distribution of functions and costs in connection with the seller s delivery of the goods would normally not cause problems where the parties have a continuing commercial relationship. They would then establish a practice between themselves (Course of dealing) which they would follow in subsequent dealings in the same manner as they have done earlier. However, if a new commercial relationship is established or if a contract is made through the medium of brokers, (as is common in the sale of commodities) one would have to apply the stipulations of the contract of sale and whenever Incoterms have been incorporated into that contract, apply the division of functions, costs and risks following there from. PASSING OF RISKS AND COSTS RELATING TO THE GOODS The risk of loss of or damage to the goods, as well as the obligation to bear the costs relating to the goods passes from the seller to the buyer when the seller has fulfilled his obligation to deliver the goods. Since the buyer should not be given the possibility to delay the passing of the risk and costs, all terms stipulate that the passing of risk and costs may occur even before delivery, if the buyer does not take delivery as agreed or fails to give such instructions as the seller may require in order to fulfill his obligation to 11

12 deliver the goods. It is a requirement for such premature passing of risk and costs that the goods have been identified as intended for the buyer or as stipulated in the terms set aside for him. TERMINOLOGY Ports, Places, Points and Premises - So far as concerns the place at which the goods are to e delivered, different expressions are used in Incoterms. In the terms intended to be used exclusively for carriage of goods by sea, (such as FAS, FOB, CFR, CIF, DES and DEQ) the expressions port of shipment and port of destination have been used. In all other cases, the word place has been used. In some cases, it has been necessary also to indicate a point within the port or place as time may be important for the seller to know not only that the goods should be delivered in a particular area like a city but also where within that area, the goods should be placed at the disposal of the buyer. If no specific point has been agreed within the named place and if there are several pints available, the seller may select the point which best suits his purpose. Where the delivery point is the seller s place the expression the seller s premises is used. Ship and Vessel - In terms intended to be used for carriage of goods by sea, the expressions ship and vessel are used as synonyms. Checking and Inspection - Although the words checking and inspection are synonyms, it has been deemed appropriate to use the former word with respect to the seller s delivery obligation and to reserve the latter for the particular case when a pre-shipment inspection is performed, since such inspection normally is only required when the buyer or authorities of the export or import country want to ensure that the goods conform with contractual or official stipulations before they are shipped. Charges - The charges which must be paid only concern such charges as are a necessary consequence of the imports as such and which thus have to be paid according to the applicable import regulations. Any additional charges levied by private parties in connection with the import are not to be included in these charges, as such charges for storage unrelated to the clearance obligation. Shipper - The term signifies both the person handing over the goods for carriage and the person who makes the contract with the carrier, however these two shippers may be different persons, for example under a FOB contract where the seller would hand over the goods for carriage and the buyer would make the contract wit the carrier. 12

13 Delivery - Delivery is used in two different senses in Incoterms. First, to determine when the seller has fulfilled his deliver obligation and second, in the context of the buyer s obligation to take or accept deliver of the goods. The Bill of Lading - a bill of lading fulfills three important functions namely; - Proof of delivery of the goods on board the vessel, - Evidence of the contract of carriage - A means of transferring rights to the goods in transit to another party by the transfer of the paper document to him. The possession of the bill of lading is required in order to obtain the goods from the carrier at destination. It is evidence not only of delivery of the goods to the carrier but also that the goods, as far as could be ascertained by the carrier, were received in food order and condition. It also enables a buyer to sell the goods in transit by surrendering the bill to the buyer. INSPECTION OF GOODS IN most cases, the buyer is advised to arrange for inspection of the goods before are at the time they are handed over by the seller for carriage (what is called pre-shipment inspection or PSI). Unless the contract stipulates otherwise, the buyer would himself have to pay the cost for such inspection that is arranged in is own interest. however if the inspection has been made in order to enable the seller to comply with any mandatory rules applicable to the export of the goods in his own country, the seller would have to pay for that inspection. CUSTOMS CLEARANCE whenever reference is made to an obligation for the seller or buyer to undertake obligations in connection with passing the goods through customs of the country of export or import, the obligation does not only include the payment of duty and other charges but also the performance and payment of whatever administrative maters are connected with the passing of the goods through customs and the information to the authorities in this connection. It is normally desirable that customs clearance is arranged by the party domiciled in the country where such clearance should take place or at least by somebody acting there on his behalf. Thus the exporter should normally clear the goods for export, while the importer should clear the goods for import. PACKAGING 13

14 In most cases, parties know before hand which packaging is required for the safe carriage of the goods to destination. However since the seller s obligation to pack the goods may vary according to the type and duration of the transport envisaged, its is the seller s obligation to pack the goods in such a manners as is required for the transport but only to the extent that the circumstances relating to the transport are made known to him before the contract of sale is concluded. MODEL CONTRACTS CONTAINING THE DIFFERENT INCOTERMS The foregoing are model contracts that would be used in the different types of Incoterms. CARRIAGE AND STORAGE CARRIAGE Carriage is a contract in which one person, (the carrier, eg Transami) agrees with another to convey goods from one place to another for a reward known as freight. The carriage of goods may be effected by air, rail, motor transport and sea. Each of these forms of carriage is subject to particular laws as will be seen subsequently. DUTIES OF THE CARRIER 1. TO EFFECT CONVEYANCE (TO TRANSPORT THE GOODS) a. Liability at Common Law At common law, a carrier is liable for the loss or damage to goods if it was due to his fault, eg through negligence or intentional conduct. The carrier bears the onus (burden) of proving that the damage or loss in question was not due to his fault. This burden however only exists once the other party has successfully proved that the harm complained of did in fact occur during the carriage. (eg between the time when the carrier received the goods and when he delivered them at their destination) In the case of Alex Carriers (Pty) Ltd V Kempston Investments (Pty) Ltd and Another, a carrier (A) received an order to deliver 60 reels of newsprint to a newspaper concern called GE. As A did not have any vehicles available at the time, it contracted KI (Pty) Ltd to deliver the reels to GE. KP (Pty) Ltd in turn subcontracted another carrier B to do the job. B s truck arrived with the reels on time at GE s premises, but GE refused to accept delivery, alleging that the whole load was wet and damaged. A then sued KI (Pty) Ltd and B for damages claiming that KI (Pty) Ltd had breached the contract of carriage by delivering the reels in a damaged condition. The defendants produced evidence that showed that the reels were wet because A s employees had loaded them onto B s truck in the rain. Court dismissed A s claim. It held that before a carrier of goods can be required to discharge the burden of proving that damage to the goods 14

15 occurred without fault on his part, the other party must have proved that the goods have been damaged (that is, that their value on delivery at the destination is either non existent or less than it was when they were received by the carrier.) In this case, A had failed to prove so, and in fact, evidence pointed the other way, viz, that B had delivered the reels at their destination in the same order and condition as he had received them. Exclusion of Liability by the Carrier at Common Law It is usual for a carrier to limit or exclude his liability at common law by including in the contract of carriage (eg by means of a ticket issued at the time of contracting) a clause to the effect that carriage is made at the owner s risk or that the carrier is not liable for loss or injury incurred as a result of certain perils. Clauses however like Goods are transported at the owner s risk) do not absolve the carrier from liability for loss or injury caused by the willful misconduct of the carrier or his servants. In Citrus Board V SAR & H, the Board sued SAR & H for damages resulting from the destruction in transit of a consignment of lemons and oranges. The contract stipulated that the consignment was transported at the owner s risk. It appeared that SAR & H s mover, while engaging in moving operations, had disregarded certain safety regulations relating to braking, although he was well aware of them. As a result of his actions, a number of loaded trucks had run away on a steep gradient and collided with a stationary engine. Court held that the mover s persistent disregard of the regulations in question amounted to willful misconduct, which rendered SAR& H liable for the destruction of the consignment arising out of the collision. b. For international carriage by air the carrier is liable for: Loss or damage for goods if the occurrence causing such loss or damage occurred during the carriage by air, viz, during the period for which the goods were in the charge of the carrier. Delay in the carriage of goods. Exclusion of the carrier by air s liability at common law The Warsaw Convention provides that the carrier s liability is excluded: Wholly, if he proves that he and his agents took all necessary measures to avoid the loss or that it was impossible to take such measures. Wholly or partly, if he proves that the loss was caused or contributed to by the negligence of the owner of the goods. 15

16 c. A carrier at Sea is liable absolutely (i.e liable without fault on his part) for loss or damage unless he can prove that the loss or damage was due to: The negligence of the owner of the goods, eg in bad packing. Some event which could not have been foreseen, avoided or withstood, eg a violent storm, a fire or an earthquake. Inherent vice. That is, the deterioration of the goods carried as a result of their natural behavior in the ordinary course of carriage without the intervention of any unexpected external accident or casualty. Eg the rotting of a cargo of fruit from the internal decomposition or defective packing. In Blackshaws (Pty) Ltd V British Engine Insurance Co of SA Ltd, Blackshaws had insured with British Engine a second hand printing machine during its carriage from Norway to Cape Town. In terms of policy, Blackshaws were covered in respect of all risks of loss of or damage to the machine excluding loss or damage caused by inherent vice. On arrival, the machine was found to be damaged. In suing on the insurance policy, Blackshaws alleged that the damage was caused by the movement of the various parts of the machine in its container by reason of defective packing. The insurance company (British Engine) refused the claim on the grounds that defective packing constituted an inherent vice, for which they were not liable in terms of the policy, as it had been expressly excluded from the policy. Court accepted this argument. Points to note: A precondition to the carrier s liability is the giving of written notice to the carrier of loss or damage at the time of delivery or, if such loss or damage is not apparent, within 3 days thereafter. Further, the carrier is discharged from all liability if he is not sued within 1 year after delivery or the date when the goods should have been delivered. Exclusion of the Carrier by Sea s liability The carrier s liability is excluded where: 1. The loss or damage arises from the unseaworthiness of the ship and the carrier has exercised due diligence at the beginning of the voyage in making the ship seaworthy, in manning, equipping and supplying the ship properly, and in ensuring that the holds, etc are fit and safe for the conveyance of the goods. 2. Where loss or damage arises from a number of specified causes (eg fire, unless caused by the fault of the carrier acts of God, acts of war, perils, dangers and accidents of the sea, riots and civil commotions, saving or attempting to save life or property at sea, latent defects not discoverable by due diligence) or any other cause arising without the actual fault of the carrier. 16

17 The amount of the carrier s liability is also limited unless the nature and value of the goods has been declared by the shipper before shipment and inserted in the bill of lading. A clause in the contract of carriage relieving the carrier of liability or lessening the carrier s liability is null and void. 2. TO EFFECT CONVEYANCE WITHIN THE AGREED TIME The carrier must transport the goods within the agreed time. If no time is agreed, he must complete the conveyance within a reasonable time or in the case of carriage by sea, without unreasonable delay. The carrier is liable for any loss occasioned by undue delay. For carriage by air, the carrier s liability is limited as to amount, according to the Warsaw Convention. 3. TO EFFECT CONVEYANCE AT THE CONTRACTUAL DESTINATION The carrier must transport the goods to the agreed destination. If the carrier delivers them to the wrong destination, the owner may claim specific delivery or damages for non delivery. Where there is no body present to take delivery at the contractual destination, the carrier s liability does not terminate forthwith. It ceases only upon expiry of a reasonable period after: The agreed time for delivery If no time has been specified, notice to the owners of the goods of the availability of the goods for delivery. Thereafter, the carrier is liable for the loss or damage to the goods caused by his negligence. 1. DUTY TO PAY THE FREIGHT DUTIES OF THE OWNER OF THE GOODS Unless otherwise agreed, the obligation to pay the freight falls due on delivery of the goods at the agreed destination. If no charge or rate is agreed upon, the carrier s usual charge or rate must be paid. The carrier is entitled to retain the goods until freight is paid. He may hire premises for the purpose of storing the goods. 17

18 STORAGE NATURE OF THE CONTRACT Storage of goods is a contract whereby one party (the depositor) undertakes, in return for remuneration, to keep a movable thing for the other party (the depositary) until he requires its return. Carriage of goods usually involves warehousing at some point, without there being a separate contract of storage included. Where goods are so warehoused in the process of their carriage and the carrier s liability at common law is not excluded, then the liability of the carrier for loss or damage to the goods warehoused is that of the carrier not the depositary. A contract of storage may be express or implied. For it to be implied, there must at least be delivery of the goods to the depositary. EFFECT OF THE CONTRACT The depositary is bound t take the same care of the property entrusted to him as a reasonably prudent and careful person may fairly be expected to take of his won property of similar description. LAW OF INSURANCE Insurance is thus a device by which an insured person can protect themselves from the heavy loss likely to be caused by an uncertain event in exchange for paying a much smaller sum of money called the premium. The advantage of insurance is that the person insured is protected from any loss that may or is likely to be occasioned in the sense that once he pays a premium and is insured, in case of damage to eg his goods, the risk is transferred from that individual to the insurer. Contract of Insurance DEFINITION OF KEY TERMS A contract of insurance is a contract where by one party undertakes, on return of a payment called a premium, to pay to the other a certain sum of money on the happening of a certain event (eg death or attaining a particular age) or to indemnify the other party against a loss arising from the risk insured in case of property. Insurer (Assurer) 18

19 This is the party who or which promises to pay a certain sum of money to or to indemnify the other party. An insurer is called an assurer in case of life insurance or an underwriter in case of marine insurance. Insured (Assured) This is the party who is given protection of his life or property in the exchange of a premium. Policy This is the document which contains the terms and conditions of the contract of insurance between the insurers and the insured. The insured is thus called the policy holder. Premium Premium can be defined as the amount of money paid by an individual to obtain insurance in case of accident or destruction of goods. It s the money the insured person pays to the insurer for the protection given to him. Subject Matter of Insurance This refers to the thing or property insured under the contract of insurance. Insurable Interest This refers to the proprietary or pecuniary interest of the insured in the subject matter which is insured. The insurance business is divided into 2 main branches: a) Life Insurance b) General Insurance TYPES OF INSURANCE Life insurance the insurer undertakes to pay the assured or their nominee or the legal successor in case of death a stated sum of money or annuity in monthly or quarterly installments on the death of the assured. 19

20 General Insurance This means fire insurance, marine insurance, employer s liability insurance, burglary insurance, motor vehicle insurance, theft and burglary insurance, crop insurance etc. 1. Fire Insurance Refers to insurance against any loss of or damage to property by fire. The insurer undertakes to indemnify the insured against financial loss which may be sustained by reason of goods being destroyed by fire during a specified period, subject to the condition that the actual amount of the indemnity will never exceed the amount stated in the policy. 2. MARINE INSURANCE In this type of insurance, the insurer (underwriter) undertakes to indemnify the insured in the way or to the extent thereby agreed, against marine losses, i.e. losses incidental to marine ventures. Depending on the express terms of the contract, a marine insurance contract can also be extended so as to protect the insured against losses inland waters or any land risk which may be incidental to any sea voyage. There are various types of marine insurance: a) Hull Insurance This is where the owner of a ship may take out an insurance cover for the vessel and its equipments, i.e. furniture and fittings, machinery tools, engine stones etc. b) Cargo Insurance The insurance of cargo includes goods and merchandise and not the personal belongings of the crew and passengers. c) Freight Insurance This is where the shipping company undertakes freight insurance to guard itself against loss in the event that the company is not paid freight for the transportation of the cargo. (E.g. where the cargo is not transported safely or the ship is lost on the way or the cargo is destroyed. In such a case, the shipping company will not be paid for its services). So to guard against such eventuality, the shipping company may effect freight insurance. d) Liability Insurance This includes liability to a 3 rd party due to hazards e.g. collision. 20

21 It should be noted that under marine insurance, it is necessary to specify with certainty the subject matter that the marine policy may cover; i.e., the ship, cargo freight or liability. There are various types of Marine Policy. These include: I. Voyage Policy This is where the subject matter of the contract of insurance, (e.g. the ship or the cargo) is insured for a specified voyage, (particular journey). II. Time Policy Here, the subject matter e.g. the ship is insured for a specified period of time. III. Mixed Policy (Voyage and Time) This policy covers both voyage and time policies and is also known as the Voyage and Time policy. Here, the subject matter, e.g. the cargo is insured during a particular voyage for a specified period of time. IV. Port Policy This policy covers a vessel for a period of time while it s at the port. 3. THEFT AND BURGLARY Covers losses caused by thieves and robbers. 1. Utmost Good Faith MAJOR PRINCIPLES OF INSURANCE CONTRACTS Both parties to an insurance contract must make a fully and fair disclosure of all material facts relating to the subject matter of the proposed insurance. This is important to enable the insurer determine whether or not to enter into a contract of insurance at a particular premium. This duty mainly rests on the insured because he knows or is expected to know more about the subject matter to be insured than the insurer. In such disclosure, there should not be any false statement or half truths or any silence on a material fact. This duty continues until the proposal of the insured is accepted by the insurer. Thus any material fact coming to the knowledge after the contract is concluded need not be disclosed. This duty however is revived every time the old insurance policy is renewed or altered. 21

22 2. Indemnity The insurer undertakes to insure the insured for loss or damage resulting from specified perils. Where the loss occurs the insured has a right to recover from the insurer the actual amount of loss not exceeding the amount of the policy. The object of indemnity is to place the insured after a loss in the same position as he was immediately before the event occasioning the loss or damage. The insurer is not entitled to benefit more than the loss suffered by him. 3. Insurable Interest Insurable interest refers to the proprietary or pecuniary interest in the subject matter being insured. This is an essential prerequisite for obtaining compensation under a contract of insurance. The insured must possess an insurable interest in the subject matter of the insurance at the time of the contract. A person is said to have an insurable interest if the person will derive pecuniary benefit from its existence or will suffer pecuniary loss from its destruction. (Insurable interest is therefore a financial interest). 4. Causa Proxima This means that the insurer is only liable to compensate the insured for only those losses which have been caused by the risk/ peril insured against. Therefore to make the insurer liable, the cause of the loss or damage must be looked into and it must be one which is insured against. When a result has been brought about by 2 causes, insurance law looks at the nearest cause. Insurers are not liable for remote causes and remote consequences even if they belong to the category of the insured risks/perils. In Punk V Flemming (1899)2 JQ 13 D 396 in a marine policy, the cargo was a shipment of oranges. The peril insured against was collision with another ship. During the course of the voyage the ship actually collided with another resulting in delay and mishandling of shipment which made the oranges unfit for human consumption. It was held that the loss was due to mishandling and delay and not due to collision, which was a remote cause, though without it, no mishandling or delay was necessary. As such, the insurer was not held liable. In Hamilton V Pandrof (1889) 12 AC 518 in a marine policy, the goods were insured against damage by sea water. Some rats on board bored a hole in a zinc pipe in the berth which caused sea water to pour out and damage the goods. The underwriters contended that as they had not insured against the damage by rates, they were not bound to pay. Court held that the proximate cause of damage being sea water, the insured was entitled to damages, the rats being a remote cause. 22