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International Trade Law

von Holger Langer, LL.M.

Dokumente und Übersichten zum Internationalen Handelsrecht, u. a. Harmonisierung des Handelsrechts, ein Lösungsschema für typische UN-Kaufrechtsfälle, englische fob & cif etc.
SS 2000

Lex Mercatoria
Harmonisation of International Trade Law
Sources of International Trade Law
The Concept of Good Faith in International Trade Law
Solution Pattern for Typical Vienna Convention
FOB & CIF
Delivery by Instalments
Dematerialisation of Bill of Lading
International Trade Chart

Lex Mercatoria

A. Introduction

  • “international trade law” is frequently used as a term as if there was simply one cohesive community of international traders
  • however, there are many different communities, carrying on activities that frequently have as little in common as the transport of goods and the building of an infrastructure project
  • accordingly, the rules that are relevant to each activity are likely to be very different, sharing probably only certain basic legal concepts, such as pacta sunt servanda
  • especially in the context of arbitration the question arises whether the parties may choose transnational rules, such as general principles of law, lex mercatoria, codified terms and practices or trade usages as applicable law to their contract

B. General principles of law

  • examples for the use
    • “such rules of international law as may be applicable” – Washington Convention (on the settlement of international investment disputes)
    • “the relevant principles of international law” – Channel Tunnel case
  • general principles are to be distilled from the national laws by comparative analysis
  • they are expressly mentioned in Art. 38 (1) of the Statute of the International Court of Justice as forming part of the international law
    • intention is however that these general principles serve as a source of law, rather than an independent system of law in the strict sense
  • nevertheless, arbitral tribunals have made awards on the basis of general principles of law, the most significant probably the award in Petroleum Development
  • question arises as to whether a national court would enforce such awards based on such an agreement

C. History of lex mercatoria

  • the first traces of a lex mercatoria emerged in the 11th and 12th century, when Europe experienced a great growth of commerce
    • trade communities, such as the Hanse later, developed a new system of law that governed its commercial activities
    • since the merchants had started to trade increasingly across borders they carried local customs and laws with them and gradually spread them across the region
    • special characteristics of the ancient lex mercatoria
      • transnational character
      • based on common origin, i.e. reflection of mercantile customs
      • not administered by professional judges, but by the merchants themselves in special merchant courts
      • procedures were speedy and informal
      • it emphasized freedom of contract and decision of cases ex aequo et bono as overriding principles
    • thus, lex mercatoria reflected well the commercial need to promote trade based upon freedom and recognized the capacity of merchants to regulate their own affairs through their customs, usages and practices
  • at the beginning of the 17th century, the autonomous lex mercatoria was driven back and curtailed by the development of the common law
    • merchant courts were abolished or lost large parts of their jurisdiction
    • commercial disputes were solved according to common law, with the rules of lex mercatoria not abolished, but treated as simple commercial customs and practices that had to be proved in each case to the satisfaction of the court
  • in the 18th century Lord Mansfield re-introduced the rules of lex mercatoria as questions of law to be decided by the courts rather than questions of customs to be proved by the parties, thus implementing the lex mercatoria into the common law and making it an integral part of it
  • in the 19th century, the most important parts of the commercial law – on the basis of common law decisions – were embodied into statutes
    • the idea of lex mercatoria was absorbed and replaced by the national statutes and, thus, lost its universality
    • however, it added an international dimension to these legal systems, but could not prevent that national statutory law became divorced from mercantile experience, even coupled with hostility towards mercantile customs
  • the 20th century was characterised by
    • a trend of dissociation from the national approaches, since their unsuitability to a large extent for international commerce resulted in dissatisfaction of the trading community
    • accordingly, a trend of rediscovering the international character of commercial law and revitalising the idea of a universal lex mercatoria leading to what is now known as the “modern” or “new” lex mercatoria

D. The different approaches taken towards a new lex mercatoria

  • problems associated with lex mercatoria
    • no clear consensus on its sources
    • unclear where lex mercatoria will be applied
    • lex mercatoria is lacking in content
    • when parties to an international contract have agreed that any dispute between them shall be governed by the lex mercatoria
  • will a national court enforce such an agreement?
  • will a national court enforce any award issued on that basis?
  • two different approaches on the sources of lex mercatoria
    • wide view
      • equates lex mercatoria with transnational commercial law
      • not only international standard form contracts, general commercial practises, trade usages, customary law, codes of conduct, rules of international organisations and generally principles of law are constituent elements of lex mercatoria, but also international conventions and uniform laws
    • narrow view
      • customary and spontaneous and thus non-statutory nature of lex mercatoria is emphasized
      • accordingly, international conventions, uniform laws and other statutory law as a primary source of lex mercatoria is excluded
  1. Arguments against lex mercatoria

  • lex mercatoria is not a “law” and can accordingly as such not govern a contract
    • it lacks a methodological base and a legal system to support it
    • therefore, it is dependent on national legal systems to work efficiently
    • it does not have any state authority from which it can derive its binding force
    • hence, a contract subject to lex mercatoria would be a stateless contract floating in a legal vacuum
    • problematic in respect of standard form contracts and trade usages
      • standard form contracts only facilitate negotiations between the parties and therefore do not fulfil the function of a law
      • trade usages merely acquire the character of law to the extent that they are incorporated into a national legal system
      • just because they are available as a source for interpretation of contractual clauses does not make them law
  • lex mercatoria is incomplete, vague and incoherent
    • indicated by the open questions as to
      • what constitutes the sources of lex mercatoria?
      • where is it to be found?
        • general principles that form the core of the lex mercatoria are to be distilled from the national laws by comparative analysis
      • which rules and principles are common to a generality of nations?
    • incompleteness might lead to arbitrary results with a high degree of flexibility, but without any certainty and predictability
  1. Arguments in favour of lex mercatoria

  • lex mercatoria as a law
    • fundamental idea is that law can emerge independently from whether there is an organ which can formalize it
    • binding force of lex mercatoria does not depend on the fact that it is made and promulgated by State authorities but that it is recognised as an autonomous norm system by the business community
    • it is regarded as a product of the adaptability, creativity and inventiveness of the merchants and concentrates on the norms that can be enforced in practice
    • thus, it forms an independent legal system beside the national, so that a contract governed by lex mercatoria is not left in a legal vacuum
  • incompleteness
    • the fact that lex mercatoria is not complete, precise and exhaustive does not distinguish it from national legal systems which are frequently themselves incomplete and not exhaustive
    • in some specialised areas of law there are highly sophisticated rules
    • the increasing number of awards will refine the general principles more and more so that a current incompleteness and lack of precision will only be of a temporary nature

Harmonisation of International Trade Law

A. Development

  • The results of legal development and work, such as legislation, methods, principles and also the idea of harmonisation of laws, are to a certain extent subject to some sort of export that is spreading them geographically
  • Historically, such spread was accomplished by colonisation or by the adoption by a state of statutes of others (as e.g. in the case of Japan)
  • However, this extension of laws has merely other than internal effects in the countries concerned and does not have broader impacts on the development of common markets or the simplification of international trade

B. Objectives of Harmonisation – why is it done?

  • with this background, modern harmonisation has some distinctive objectives
  • the overall objective is to reduce the impact of national boundaries
  • this encompasses two rather distinct approaches
    • the creation of special regimes for international transactions while preserving national laws for domestic transactions (e.g. Vienna Convention)
    • the harmonisation of national laws (e.g. the creation of a common market) governing domestic transactions (e.g. EC directives and regulations)
  • However, both approaches are not completely separated, but affect each other, so that e.g. the harmonisation of domestic laws has an international effect in such way that it obviates the need for conflict-of-laws rules

C. Key issues – what has to be kept in mind?

  • the selection of aspects that are suitable for harmonisation
  • the level and scope of the harmonisation measure and the extent to which it displaces conflict-of-laws rules
  • the method of harmonisation and the likelihood of its success (implementation in national law necessary? etc.)
  • language problems
  • probably hostility towards harmonisation, since national laws are being replaced

D. The object of harmonisation – which field is being harmonised?

  • testing process (e.g. questionnaires to people involved in this field) to answer crucial questions and to exactly identify the matter of harmonisation
    • is there a substantial problem in the difference of national laws that has to be resolved? (exact definition of the problem crucial)
    • would harmonisation in this field bring benefits?

E. Instruments of Harmonisation – how is it done?

  • Main instruments (among others)
    • Multilateral Conventions
    • Bilateral Treaties
    • In the case of the EC, for example, Community legislation, i.e. Directives
    • Model Laws
    • Codification of customs, usages or trade terms by non-governmental organisations, e.g. UCP 500, Incoterms
    • Standard or model contracts, general conditions etc., e.g. FIDIC set of contracts for construction works
    • Restatements of law, e.g. UNCITRAL Legal Guides
  • Multilateral Conventions, bilateral Treaties and Community legislation has the force of law (subject to constitutional acts in the concerned national states that may be necessary to give them force in that country)
  • Model laws has no legal force as such, but can be adopted
  • Codification of customs, usages or trade terms, standard contracts and restatements gain significance by implementation and incorporation into contracts

The contract method

  • incorporation of standardised terms into commercial contracts leads to international uniformity in application of law
  • in practice usually developed by harmonising agencies, i.e. international governmental (Unidroit, UNCITRAL etc.) and non-governmental (ICC, FIDIC etc.) organisations
  • since governments are not (at least not directly) involved, the procedure of harmonisation is more flexible and informal, proposals can be implemented more rapidly and difficulties can be changed more readily
  • Example – UCP 500
    • since all relevant contracts involve a bank there is a ready mechanism for ensuring that all contracts are governed by the UCP
    • the result is to connect up a network of contracts by a uniform set of rules and thus give them multilateral force
  • Limits
    • since an organisation like the ICC is not a lawmaking body it cannot formulate rules of a mandatory character
    • the rules are intended to encapsulate proper practice rather than to distribute legal liability
    • since these rules largely depend upon adoption by contract their success depends in large measure on the existence of an institutional structure sufficiently homogenous and of contract terms sufficiently standardised to ensure the likelihood of such adoption

F. Scope of the harmonizing measure – what is being harmonised?

  • two approaches:
    • minimalist approach – the narrower the field the greater the likelihood that the project will be successfully completed within a reasonable time
    • maximalist approach – the task is not worth undertaking unless all significant aspects of the field are covered
  1. Coverage of substantive law issues
    • the scope of a harmonising measure is determined by
      • the nature and extent of the problem to be tackled
      • the function of the particular body undertaking the measure
      • the feasibility of the project in terms of ability to reach an agreement within a reasonable time
    • CISG
      • deals not with the passing of property, questions of validity etc.
      • would have made the project too large
      • differences in legal policy
    • UCP 500
      • deals not with forgery or other fraud
      • essential function of UCP is not to provide a comprehensive legal text, but to codify best banking practice
    • ICC Projects can usually be completed much more quickly
      • because the procedure is far less formal
      • but mainly, because the projects are not legal instruments themselves, but rules or trade terms incorporated by contract
    • legal issues become de-emphasized
    • product is primarily work of non-lawyers
  2. Internationality
    • most harmonisation instruments dealing with contracts are confined to international transactions, because national laws regulating domestic transactions are either considered adequate or are thought to be best changed by domestic legislation rather than a harmonising instrument
    • apart from that, states feel usually more relaxed about harmonising measures which do not threaten long-established concepts and traditions of their own legal system governing domestic transactions
    • test to determine internationality – four possibilities
      • transaction itself is cross-border (contractual activity in two or more states)
      • parties carry on business in different states
      • transaction, even if internal and between parties carrying on business in the same state, produces effects in another state (prime concern of the EC)
      • combination of two or more of the above
    • considerations relevant to the internationality test
      • simplicity
      • maximisation of the scope
      • transparency (each party to a prospective transaction should be able to ascertain readily whether or not its contract will be governed by the Convention
    • CISG
      • simplicity – sole criterion of internationality (parties carry on business in different states)
      • maximisation of scope – single criterion also enlarges the scope of the Convention
      • transparency – Art. 1 (2)
  3. Restrictions on business transactions
    • Conventions regulating transactions are concerned almost exclusively with business transactions
    • Conventions are seen primarily as facilitators of international trade rather than as instruments of social policy (consumer protection etc.)
    • consequently, Conventions dealing with commercial contracts are almost entirely dispositive in nature, the parties being left free to exclude the relevant Convention entirely or to vary or to derogate from its effects
    • this permissive attitude is generally acceptable to states in relation to business transactions, but is likely to meet strong objection if applied to consumer transactions
  4. Connection to a Contracting State
    • in addition to internationality, Conventions often  require as a condition of their applicability  a connection with a Contracting State
    • CISG – two alternatives
      • both parties carry on business in a Contracting State, Art. 1 (1) (a)
      • the rules of private international law lead to the application of the law of a Contracting State, Art. 1 (1) (b)
    • second point problematic, since, on one hand, it expands the scope of application, but, on the other hand, runs counter to transparency and the objective to remove the advantages of forum shopping

G. The role of conflict of laws

  • to the extent that an issue is expressly covered by the Convention it displaces rules of national law that might otherwise apply (and thereby renders otiose conflict-of-laws rules which lead to the selection of the applicable national law)
  • the Convention may itself prescribe a conflicts rule (and thus displace the normal conflicts rules of the forum)
    • in the scope provisions of the Convention
    • in the substantive provisions of the Convention
  • the Convention may be silent both as to the substance of a particular matter and as to the law by which it is to be determined
  • it is then a question of construction whether
    • the Convention covers the point
    • the Convention merely leaves it to be dealt with under the law applicable under the conflicts rules of the forum
  1. Prescription of a conflicts rule instead of a substantive rule
    • three situations in which it is appropriate to prescribe a conflicts rule in relation to an issue rather than settling it directly by a substantive rule
      • where agreement cannot be reached on the substantive rule, but can be reached on the conflicts rule
      • where a particular state has such a strong policy interest in the particular issue that it would be reluctant to give away control directly to the Convention, though willing to submit to a conflicts rule
      • where the issue is tangential and raises considerations going beyond the intended scope of the Convention or too complex to be covered in it
    • the prescription of a conflicts rule, though more readily agreed than a substantive rule, is only the second best solution
      • it fails to produce uniformity
      • it leads to the application of a particular national law which is likely to have been devised for domestic transactions may not be suitable to transactions of an international character
  2. Silence of the Convention on a particular issue
    • coverage of a particular issue in the Convention displaces the need for resort to the conflicts rules of the forum
    • non-coverage of an issue necessitates recourse to the applicable law as determined by the conflicts rules of the forum
    • in case of silence it is necessary to determine whether such issue is covered by implication, applying any rules of interpretation laid down by the Convention itself
    • if implication is not possible, it has then to be determines whether recourse is to be had to general conflict-of-laws rules or to any particular conflicts rule laid down by the Convention

Summary – Advantages of Harmonisation

- the harmonising measure

  1. may fill a legal vacuum by providing rules in a field where national law was previously non-existent or obscure
  2. substitutes national laws and thus dispenses the need to resort to conflict-of-laws rules and the opportunity these give to forum shopping
  3. is usually available in several languages and is therefore more readily accessible to the (international) parties than a national law
  4. creates uniformity in the application of laws in a particular field and, thus, saves time and expenses for the parties involved
  5. provides a neutral law for parties to a contract neither of whom is willing to accept the law of the other’s country
  6. offers a legal regime more attuned to international transactions than domestic law
  7. in the case of Conventions and the like, operates as part of the law of each ratifying state, so that courts of such state take judicial notice of it, thus rendering expensive and time consuming expert evidence on foreign rules unnecessary
  8. facilitates the creation of a common market

 Sources of International Trade Law

International Law

  1. Treaties
    • bilateral treaties
    • multilateral treaties
      • purpose e.g.: unification of law, liberalisation of trade, economic integration (customs union, free trade zone, economic union)
    • international standards
      • minimum standard, most-favoured nation, equal treatment, preferential treatment
  2. Customary Law
    • two prerequisites
      • practice followed by more than two parties (state practice)
      • practice accepted by law (opinio iuris)
  3. Other Sources
    • resolutions of international organisations
    • soft law
    • state contracts
  4. Economic sanctions and boycott

National Law

  1. Public Law
    • regulation of economic activity
      • e.g. currency regulations, export regulations, customs
    • territorial application of national law
      • exception: extra-territorial application
  2. Private Law
    • Private International Law
    • Uniform Substantive Law
    • Classical Domestic "Private" Law

Lex Mercatoria

  • created by the participants of international trade
  • founded on
    • usages
    • standard clauses (standard contracts)
      • e.g. FIDIC, IATA etc
    • general principles of law
      • e.g. pacta sunt servanda, good faith, effet utile, onus of proof of plaintiff, mitigation of damages
    • contracts negotiated between parties

The Concept of Good Faith

A.    The concept of good faith in English Law

  • general concept of good faith in old law merchant (= accumulation of mercantile customary law administered by the merchant courts where the merchants themselves were judges)
  • when common law courts took over jurisdiction of the merchant courts concept disappeared
  • modern English law has, again, a concept of good faith, though a limited one
    • s. 61 (3)
      • person is acting in good faith if he acts honestly, even if he is negligent or unreasonable
      • no general principle, but one that applies only in particular situations
      • general duty of good faith in particular types of relationship, eg. agent, company director, trustee
      • furthermore, good faith required in Equity (for the grant of equitable remedies)
      • no good faith, when the situation is not considered to create any duty at all (no culpa in contrahendo, i.e. the opening of negotiations does not create any sort of duty relationship)
  • reason for this rigorous approach: predictability of the legal outcome of a case is more important than absolute justice (especially in a commercial setting and aware of the importance of London for the litigation of international commercial disputes)
    • vague concepts of good faith which make judicial decisions unpredictable might drive business away from England
    • the fact that the outcome of a case might be hard on a party is regarded as an acceptable price in the interest of the great majority of business litigants who look for certainty
    • ratification nevertheless desirable, since especially common law trained in developing a case-law based structure of the underlying concepts ’ chance of English courts in shaping the concept of good faith as they want to

B. The concept of good faith in international uniform laws

  • concept of good faith found in three major international laws
    1. Art. 7(1) CISG (covers, however, according to the text, only the application of the Convention rather than the parties’ rights and obligations – contentious!!!)
    2. Art. 1.7 UNIDROIT Principles (considered to be a fundamental ideas underlying the Principles)
    3. Art. 1.106 Principles of European Contract Law (likewise considered to be a basic principle running throughout the Principles)

Solution pattern for typical Vienna Convention cases

A. Introduction of Issues (as the case may be)

  • justification of specific remedies expressly mentioned in the case (party wants to terminate etc.) under CISG
  • justification of replacement purchase
  • damages
  • subordinated questions
    • applicability of CISG
    • delivery
    • Nachfrist / modification of contract
    • foreseeability
    • force majeure
    • conformity of goods etc.
    • limitation of liability

B. Applicability of CISG

  1. Dispute
    • Art. 1 (1) (a) – two CS
      • England has not ratified (only state in EU)
    • Art. 1 (1) (b) – rules of Private International Law
      • Rome Convention (subject to lex fori)
      • USA have ratified, but Art. 95 - Art. 1 (1) (b) only if expressly opted in, otherwise UCC
    • Art. 10 (a) – subsidiaries
  2. Goods
    • software (+), if in tangible form, e.g. on disk, CD-ROM etc.
    • Art. 3 (2) - if contract comprises not only delivery, but also manufacturing of goods, application of CISG only if manufacturing is not the preponderant part (regard to remuneration for the respective services, e.g. advance payment of more than 50% of the price for delivery indicates that other services are not preponderant)

C. Breach of Contract by the seller

  • breach is presupposition for any remedy available
  • concept of CISG distinguishes between fundamental breach and non-fundamental breach (simple breach of obligation)
  • breach = failure to perform any of the obligations under the contract, Art. 45 (1)
  • obligations of the seller = delivery of the goods, handing over of documents and transfer of property in the goods, Art. 30
    • Art. 31 – place of delivery
    • Art. 32 – transport provisions
    • Art. 33 – time of delivery
    • Art. 34 – delivery of documents
  • took delivery place?
    • No - case of non-delivery
    • Yes - were the goods conforming (was the seller obliged to deliver goods other than the ones actually delivered)?
      • seller obliged to deliver goods which are of the quantity, quality and description required by the contract, Art. 35 (1)
      • Art. 35 (2) (a) – fit for ordinary purpose
      • Art. 35 (2) (b) – fit for specially contemplated purpose
        • expressly made known
        • impliedly made known
          • Interpretation of the parties’ declarations
            • Art. 8 (1), (3) – subjective test – what was the intention?
              • knowledge
              • ought to have known - no clear distinction to objective approach in Art. 8 (2)
            • Art. 8 (2), (3) – objective test – reasonable person
          • problem: mistake of the seller as to required quality of goods
            • seller “assumes” s.th. different
            • not covered by CISG, Art. 4 (a)
            • but “uniform interpretation of CISG” - as wide as possible; mistake as to quality of goods should be covered

D. Remedies

  • Art. 45 (1) – remedies available = Art. 46 – 52 + damages under Art. 74 – 77
  • which remedies are sought or are possible in the case? – typically avoidance (Art. 49) and damages for substitute transactions (replacement purchase) (Artt. 75, 76, 74)
  1. Avoidance, Art. 49
    • regard to declaration, reason and time-limit
    • declaration of avoidance, Art. 26 – if not already done, advice to party that it is necessary
    • reason for avoidance
      • Art. 49 (1) (a) – fundamental breach
        • Fundamental breach, Art. 25
          • substantial detriment
            •  starting point is “what he is entitled to expect under the contract”
            • substantiality is open to various interpretations, but should e.g. be determined in the light of the right to cure, Art. 48, i.e. substantiality is implied where a repairs is not possible or causes unreasonable inconvenience to the buyer
            • Interpretation of parties’ declarations with regard to Art. 48 according to Artt. 8 (1), (3) or 8 (2), (3) and Art. 7 (good faith)
            • however, Art. 48 subject to Art. 49 - if a right to cure would prevent a fundamental breach, the provisions would be twisted
          •  foreseeability
            • subjective foreseeability
            • objective foreseeability
            • time of foreseeability unclear (contract conclusion? after contract conclusion sufficient?)
          • conclusion of fundamental breach
            • Art. 25 drastic remedy, therefore last resort / ultima ration
            • “nevertheless, …”
        • Limitations in Art. 49 (2) as to time – reasonable time
      • Art. 49 (1) (b) – Non-delivery
        • mandatory Nachfrist, Art. 49 (1) (b), 47
        • problem: agreement between the parties to extend the date for performance can be seen either as Nachfrist (unilateral) or contract modification (bilateral) according to Art. 29
        • however, Nachfrist more likely unless there are clear indications that the buyer intended to waive his rights
  2. Bar on the exercise of avoidance, Art. 48 – right to cure
    • basis in Art. 48 (2), last sentence: the buyer may not resort to any remedy inconsistent with the performance of the seller under the right to cure
    • Art. 48 (3) – notice of seller to perform in a specified period of time
      • includes request under Art. 48 (2)
      • duty of buyer to notify seller about his decision
    • problem: “specified period of time”
      • unclear statement (e.g. “few weeks”) is the burden of the party who has given it
      • interpretation according to Art. 8 (1), (3) or 8 (2), (3) and Art. 7 (good faith)
  3. Effect of avoidance
    • Art. 81 (1) – both parties released from their obligations
      • buyer released from paying the price and taking delivery (therefore only if contract is avoided, replacement purchase possible !!!)
    • Art. 81 (2) – restitution of obligations already performed
    • Art. 82 (1) – loss of the right to declare contract avoided
  4. Damages
    • Art. 45 (2) – buyer is not deprived to claim damages by exercising his right to other remedies
    • prerequisites
      • breach of contract (see supra)
      • damage
      • causal link between breach and damage
    • in case of avoidance
      • Art. 75 – substitute transaction
        • problem: true replacement purchase or s.th. different? (price much higher, product characteristics different etc.)
      • Art. 76 – difference in price where no substitute transaction took place
      • Art. 74 – all other damages
        • Art. 75 and 76 do not preclude claim of further damages that are not covered by these articles (e.g. costs of substitute transaction, delay damages, consequential damages)
        • foreseeability (subjective or objective)
      • Art. 77 – duty to mitigate (testing / examination of goods, clear statements on contract conclusion etc.
  5. Exemptions
    • Art. 79 (1) – impediment beyond the parties’ control
    • Art. 79 (2) – failure by third parties
    • Art. 79 (3) – effect only for the period during which the impediment exists (e.g. Nachfrist?)
    • Art. 79 (5) – exemption only as to damages

FOB

Duties of the Seller

  1. to place the goods “free on board” the vessel nominated by the buyer
    • at this point the seller has fulfilled his obligation and the risk passes from the seller to the buyer
    • when are the goods “on board”?
      • traditionally, when the goods pass the ship’s rail
      • two views on the relevant point of time:
        • beginning of loading operation - Pyrene v Scindia Navigation
        • when loading is complete - Colley v Overseas Exporters, also INCOTERMS (when the goods are placed intact on board the vessel nominated by the buyer)
  2. to obtain any export licences
    • general rule that it is obligation of the seller to obtain export licence
    • parties can expressly or by implication agree otherwise
    • conversely, import licence is prima facie the responsibility of the buyer

Duties of the Buyer

  1. to examine the goods
    • not duty, but right to inspect the goods upon their delivery to him at the place of destination (- at this point right to reject goods)
    • place of delivery in fob contract is prima facie at the ship nominated by the buyer (obligation of seller fulfilled, risk passes), but for the purpose of inspection ultimate place of delivery decisive, which is the contemplated port of destination (Boks v Rayner) - important e.g. in cases of resale, where place of ultimate delivery and, thus, place of inspection may be the place of delivery to the ultimate purchaser
  2. to open a commercial credit in favour of the seller
    • prima facie the buyer is under a duty to open the letter of credit in favour of the seller by the beginning of the shipment period - since the parties contemplated this date as the time by which they were to be in a position to fulfil their contractual obligations
    • position is subject to parties - express or implied provision
  3. to nominate a ship
    • nomination of a ship is primary duty of the buyer, is of the essence of the contract
    • failure to nominate a vessel, or failure to do so within a reasonable time to enable performance of the contract entitles the seller to treat this as a repudiation of the contract, upon which the seller may rescind the contract and sue for damages
    • damages for the default of the buyer do normally not cover recovery of the price of the goods, since seller is still in possession of the goods and, as he is under a duty to mitigate the loss, is under a duty to resell the goods, as far as there is a market available
    • damages in this case would be the difference between the price of resale and the agreed price (if the goods cannot be sold due to e.g. perishability, seller may recover the full amount of loss, i.e. the price of the goods)
    • reasonable notice of buyer when the vessel will be ready for loading
    • if nominated ship is unsuitable or unavailable, buyer has the right to nominate substitute vessel

CIF

Duties of the seller

Five primary obligations (Biddell Bros v Clemens Horst Co, see also Johnson v Taylor Bros)

  1. to ship the goods according to the contract
    • risk passes with delivery on board the vessel (as in fob!!!)
    • according to s.34 SGA, delivery to the carrier is deemed to be delivery to the buyer (= seller has prima facie fulfilled his obligations) - see also infra
    • ultimate place of delivery is the place specified in the contract as the place of the goods’ destination
  2. to arrange for the carriage of the goods
  3. to arrange insurance (infra)
  4. to make out an invoice to the buyer (infra)
    1. to tender these documents to the buyer
      • Three principle documents
        • Bill of Lading
          • “clean” B/L = does not contain any qualifications to the effect that the goods were not shipped in apparent good order and condition
          • may be in the buyer’s or in the seller’s name
        • Insurance policy
          • must cover the goods from the loading on board the vessel to the time when the buyer receives them (“warehouse to warehouse”)
          • arranged by the seller, but in the favour of the buyer, because risk passes – as in fob – when the seller delivers the goods on board the vessel (!!!)
          • failure to insure is breach of contract and entitles buyer to reject the documents and the goods
        • Commercial invoice
          • invoice must enable the buyer to use the same for the purposes of finance (invoice is subject to strict compliance of L/C)

Passing of property

  1. Preliminary points
    • property in unascertained goods does not pass until the goods are ascertained
    • property in ascertained goods passes when the parties intend it to pass
    • goods are ascertained when they can be identified as the goods being sold
  2. fob / cif
    • once the seller has delivered the goods on board the ship / carrier the purchaser is deemed to have received the goods
    • according to s.34 SGA, delivery to the carrier is deemed to be delivery to the buyer (prima facie seller has fulfilled his duties)
    • however, s.30 SGA requires the tender of delivery of the goods to be a tender “in possession” - to be entitled to payment, seller has to tender the right to possession of the goods to the buyer
    • normally (both in fob and cif) done by Bill of Lading, since it gives legal right to possession of the goods
    • two consequences
      • goods are at the risk of the buyer (from this point)
      • property in the goods passes
        • unconditionally
          • B/L is made out in the buyer’s name
          • usually in fob since all obligations are fulfilled and seller is, thus, entitled to payment
        • conditionally
          • B/L is made out in the seller’s name (seller retains legal right of possession)
          • usually in cif, since seller’s obligations are not fulfilled until all other documents, which the seller agreed to produce, have been dispatched to the buyer
          • Hence, even if risk and property passed, seller is in a cif contract not entitled to payment until all the documents are furnished to the buyer
      • After all documents have been tendered to the buyer, the seller is entitled to payment regardless of the condition of the goods shipped
      • Buyer’s right to reject goods is independent of right to reject documents
        • if documents are correct, buyer is under an obligation to accept them and pay
        • however, buyer retains the right to reject the goods for non-conformity

Statutory variation – s.32(3) SGA

unless otherwise agreed, where goods are sent by the seller to the buyer by a route involving sea transit, under circumstances in which it is usual to insure them during their sea transit, and, if the seller fails to do so, the goods shall be deemed to be at his risk during such sea transit

  • effect is to put the goods at the risk of the seller, unless they have been insured
  • fob - failure to insure puts goods at seller’s risk
  • cif - failure to insure puts goods at seller’s risk & constitutes a breach of contract
  • provision can, like most of the SGA provisions, be excluded by agreement (advisable)

CIF & CISG

CIF

Vienna Convention

obligations

to ship the goods according to the contract

(to ship = to deliver)

  • Art. 30 – delivery / tender of documents
  • Art. 31 (a) – delivery to first carrier if contract involves carriage ’ seller’s own transport will not amount to delivery, but any land carriage by an independent carrier prior to shipment could amount to delivery
  • Art. 33 – time of delivery

to arrange for the carriage of goods

  • Art. 32 (2) – contract of carriage

to arrange for the insurance of the goods

  • no direct equivalent

to make out an invoice

  • no direct equivalent

to tender these documents to the buyer

  • Art. 30 ­– delivery / tender of documents
  • Art. 34 – time of tender, right to cure

remedies & special provisions

material defect in the documents gives buyer right to reject the documents

  • fundamental breach
  • right to cure (until the time for tender of documents, as set out in Art. 34, seller can cure any lack of conformity in the documents, if the exercise of this right does not cause the buyer unreasonable inconvenience or expense)

obligation to pay price against tender of documents

  • Art. 53 – general obligation to pay price
  • Art. 57 (1) (b) – place of payment against documents
  • Art. 58 (1) & (2) – time of payment against documents (consistent with common law)
  • Art. 58 (3) – proviso of examination before payment (consistent with cif & fob only when contract specifically so provides)

risk passes on or as from shipment

- “as from” recognises appropriation of goods subsequent to shipment (risk of damage and loss)

  • Art. 67 (1): inconsistent with common law (= passing of risk prior to shipment) when contract provides for land carriage by an independent carrier prior to sea carriage by a sea carrier
  • Art. 67 (2)
  • Art. 68 – passing of risk in respect of goods sold in transit

remedies

  • damages
  • specific performance (exceptional, only available in cases where damages would not do adequate justice ’ Re Wait)

remedies

  • Art. 46 (1) – specific performance (common law approach preserved under Art. 28 when litigation in common law courts, but unlikely in civil law courts)
  • Art. 46 (2) – delivery of substitute goods
  • Art. 46 (3) – repair
  • Art. 50 – price reduction (no equivalent in common law)

action for price

  • s 49 (1) SGA: when property has passed
  • s 49 (2) SGA: when price is payable on a day certain irrespective of delivery

- where under cif contract price is payable against documents and buyer, on tender of documents, repudiates, seller is unlikely to recover the price

action for price

  • Art. 62

damages

  • basically ss 50, 51 SGA
  • special damages for dual breach of cif contract (defective documents & non-conforming goods)

damages

  • Art. 74 – basic provision on damages (consistent with common law)
  • Art. 75 – damages in case of avoidance by reference to actual substitute transaction (not available under common law)
  • Art. 76 – damages in case of avoidance by reference to market price (comparable to ss 50, 51 SGA)

FOB & CISG

FOB

Vienna Convention

obligations

to ship the goods according to the contract

(to ship = to deliver)

  • Art. 30 – delivery / tender of documents
  • Art. 31 (a) – delivery to first carrier if contract involves carriage ’ questionable whether fob “involves carriage of the goods”
    • Nicholas: (-), must refer to an express or implied provision in the contract that seller has to arrange for carriage, which is not the case in fob
    • Feltham: probably (+), because wording does not necessitate that obligation to arrange for carriage lies on the seller
  • Art. 33 (b) – time of delivery within a contemplated period on any date “unless circumstances indicate that buyer is to choose a date” ’ proviso comparable to fob, where buyer is to nominate a ship

to arrange for the carriage of goods

- only in extended fob

  • Art. 32 (2) – contract of carriage

- only in extended fob

insurance of the goods

  • seller’s duty to give such notice to the buyer as may enable the buyer to insure the goods during transit
  • failure to comply puts goods at sellers risk, s 32 (3)

Art. 32 (3)

  • comparable duty, but needs request by buyer to be triggered
  • failure to comply does not influence risk, but is breach of a contractual obligation

to tender these documents to the buyer

  • Art. 30 ­– delivery / tender of documents
  • Art. 34 – time of tender, right to cure

obligation of buyer to nominate a ship so as to enable the seller to deliver goods on board the vessel

  • Art. 60 (a) – comparable, but considerable expansion by way of implication necessary to correspond with common law position

remedies & special provisions

material defect in the documents gives buyer right to reject the documents

  • fundamental breach
  • right to cure (until the time for tender of documents, as set out in Art. 34, seller can cure any lack of conformity in the documents, if the exercise of this right does not cause the buyer unreasonable inconvenience or expense)

obligation to pay price against tender of documents

  • Art. 53 – general obligation to pay price
  • Art. 57 (1) (b) – place of payment against documents
  • Art. 58 (1) & (2) – time of payment against documents (consistent with common law)
  • Art. 58 (3) – proviso of examination before payment (consistent with cif & fob only when contract specifically so provides)

risk passes on shipment

  • Art. 67 (1): inconsistent with common law (= passing of risk prior to shipment) when contract provides for land carriage by an independent carrier prior to sea carriage by a sea carrier
  • Art. 67 (1) sentence 2, however, describes situation of fob named port of shipment, consistent with common law
  • Art. 67 (2) ’ might prevent the passing of risk in an unascertained part of a specific bulk in circumstances in which risk might pass under common law

remedies

  • damages
  • specific performance (exceptional, only available in cases where damages would not do adequate justice ’ Re Wait)

remedies

  • Art. 46 (1) – specific performance Art. 46 (2) – delivery of substitute goods
  • Art. 46 (3) – repair
  • Art. 50 – price reduction (no equivalent in common law)

action for price

  • s 49 (1) SGA: when property has passed
  • s 49 (2) SGA: when price is payable on a day certain irrespective of delivery

action for price

  • Art. 62

damages

  • basically ss 50, 51 SGA
  • special damages for dual breach of cif contract (defective documents & non-conforming goods)

damages

  • Art. 74 – basic provision on damages (consistent with common law)
  • Art. 75 – damages in case of avoidance by reference to actual substitute transaction (not available under common law)
  • Art. 76 – damages in case of avoidance by reference to market price (comparable to ss 50, 51 SGA)

 

Delivery by Instalments

Delivery by instalments

Delivery obligation divisible (i.e. severable)

Delivery obligation indivisible (i.e. non-severable)

Seller

Seller not entitled to demand partial payment against partial delivery (cf s.31(1)), unless buyer elects to accept partial delivery (in which case he must pay the price for the accepted goods)

Seller is entitled to require the buy to accept and pay for each instalment (not affected by a seller’s breach in relation to other instalments, unless breach constitutes a repudiation of the entire contract)

Buyer

  • Buyer’s improper (- cf. s.30(2A), 35A(2)) rejection of an instalment constitutes a repudiation of the entire contract
  • Buyer’s non-payment of an instalment constitutes a repudiation of the entire contract (but only in cases where time of payment is of essence, cf. s.10(1)

Buyer’s improper rejection of an instalment does not ipso facto constitute a repudiation of the contract as a whole (cf. Warinco v Samor [1977] – delivery obligation divisible ???), unless an intention to repudiate as a whole or an inability to perform is shown

Tender of instalment too late / lawful rejection of defective instalment

  • Seller’s repudiatory breach of one  instalment constitutes a repudiation of the entire contract, when it is too late for the seller to make an effective retender
  • Buyer can in this case treat the contract as discharged, even if seller is willing and able to make a proper tender of the remaining instalments

Seller’s repudiatory breach of one instalment does not constitute a repudiation of the entire contract, unless an intention to repudiate as a whole or an inability to perform is shown

Seller’s lien rights / right to withhold delivery for non-payment

Seller’s lien right extends to the whole of the undelivered goods and secures the whole of the price (- buyer’s correlating payment obligation is also indivisible!!)

Since instalments are to be treated as separate contracts, buyer’s default in payment does not entitle seller to withhold delivery of future instalments

Accidental destruction of part of the goods

Buyer may frustrate the contract

No frustration of the contract unless commercial basis of the contract is destroyed

Acceptance of one instalment

Does not preclude rejection of future instalments except in so far as the instalment accepted forms part of the same commercial unit

 

 

Delivery by instalments

Delivery obligation divisible (i.e. severable)

Delivery obligation indivisible (i.e. non-severable)

Seller

Seller not entitled to demand partial payment against partial delivery (cf s.31(1)), unless buyer elects to accept partial delivery (in which case he must pay the price for the accepted goods)

Seller is entitled to require the buy to accept and pay for each instalment (not affected by a seller’s breach in relation to other instalments, unless breach constitutes a repudiation of the entire contract)

Buyer

  • Buyer’s improper (- cf. s.30(2A), 35A(2)) rejection of an instalment constitutes a repudiation of the entire contract
  • Buyer’s non-payment of an instalment constitutes a repudiation of the entire contract (but only in cases where time of payment is of essence, cf. s.10(1)

Buyer’s improper rejection of an instalment does not ipso facto constitute a repudiation of the contract as a whole (cf. Warinco v Samor [1977] – delivery obligation divisible ???), unless an intention to repudiate as a whole or an inability to perform is shown

Tender of instalment too late / lawful rejection of defective instalment

  • Seller’s repudiatory breach of one  instalment constitutes a repudiation of the entire contract, when it is too late for the seller to make an effective retender
  • Buyer can in this case treat the contract as discharged, even if seller is willing and able to make a proper tender of the remaining instalments

Seller’s repudiatory breach of one instalment does not constitute a repudiation of the entire contract, unless an intention to repudiate as a whole or an inability to perform is shown

Seller’s lien rights / right to withhold delivery for non-payment

Seller’s lien right extends to the whole of the undelivered goods and secures the whole of the price (- buyer’s correlating payment obligation is also indivisible!!)

Since instalments are to be treated as separate contracts, buyer’s default in payment does not entitle seller to withhold delivery of future instalments

Accidental destruction of part of the goods

Buyer may frustrate the contract

No frustration of the contract unless commercial basis of the contract is destroyed

Acceptance of one instalment

Does not preclude rejection of future instalments except in so far as the instalment accepted forms part of the same commercial unit

 

 

 

Dematerialisation of Bills of Lading

A. Difficulties with Electronic B/L

  • dematerialisation of non-negotiable waybills e.g. is rather simple since they only contain information
  • B/L however also
    1. connotes proof of entitlement to goods
    2. can be a document of title to goods
    3. transfers contractual rights and liabilities under the COGSA 1992
  • problem: electronic equivalent of a B/L must be capable of doing the same
  • difficulties
    • unlikely that common law would recognise as a document of title something which has no physical presence (unless it would be e.g. recorded electro-magnetically)
    • common law requires documents of title to be signed ’ unlikely that courts would accept electronic authentication as equivalent to signature (although it is almost certainly more difficult to forge)
  • However, recourse to the law would not be necessary, if an electronic equivalent of a B/L would provide its own means for the transfer of contractual rights and liabilities and security equivalent to title to goods along with the documentation itself
  • Minimum requirements
    1. most importantly, the carrier needs to be informed of the identity of the ultimate receiver of the cargo, to whom (and to whom alone) he would be under an obligation to deliver, without there being any requirement for a paper document to be presented, or even to exist at all
    2. Rights and liabilities must be transferred to successive owners of the cargo
    3. The electronic documentation must perform the same evidential functions as existing paper documentation
    4. The system must be secure against fraud (however, not an absolute requirement, since the present system is not secure against fraud and commercial traders are likely to be prepared to accept a certain level of fraud in order to effect speedier and less costly transactions)
    5. The electronic equivalent should be capable of transferring property in the goods
    6. It should be open to anyone to use
    7. It ought to be able not only to transfer, but also to check the documentation, in order to make the transaction speedier (needs some extent of standardisation)

B. The framework for electronic Bills of Lading

  • in order to create an effective system of electronic B/L, a functioning framework for the required data transfer is necessary which implements some form of standardisation
  • such framework was introduced by the concept of Electronic Data Interchange (EDI)
    • EDI is characterised by
      • the transfer of structured data
      • by agreed message standards
      • from one computer system to another
      • by electronic means
    • EDI is intended to increase the speed of business transactions
    • the agreed standard formats of EDI ensure that the messages are accurate, as they will not be accepted if inaccurate
    • access to and verification of the information by either a private key or electronic signature

C. The CMI Model

  • CMI published its Rules for Electronic Bills of Lading in 1990
  • CMI Rules do not have the force of law and shall only be incorporated by voluntary incorporation to relevant contracts
  • standardisation that is implemented in EDI is complemented by the CMI Rules
  • Art. 4 provides for an electronic document containing information similar to that on a paper B/L sent by the carrier to an electronic address specified by the shipper together with a secret code (“private key”) to be used for subsequent transactions (which is known only to the carrier and the shipper)

Transfer procedure under the CMI Model

  • under Art. 7 the shipper and any subsequent holder can transfer the “Right of Control and Transfer”
    1. by notification of the current holder to the carrier of its intention to transfer to a proposed new holder
    2. confirmation by the carrier of such notification
    3. the carrier will then transmit the information (except secret code (private key)) to the new holder
    4. the new holder will advise the carrier of its acceptance
    5. the carrier will then cancel the current secret code and will issue a new secret code to the new holder
  • Advantages
    • satisfies the most important requirement, i.e. that the carrier needs to be informed of the identity of the ultimate receiver of the goods
    • electronic document under Art. 4 fulfils the same evidential functions as a traditional B/L, i.e. stating the name of the shipper, description of the goods, date and place of receipt and/or shipment etc.
    • new holder gets the opportunity to inspect the electronic documentation before accepting it
    • theoretically open for anyone to use
  • Disadvantages
    • no provision for contractual rights and liabilities to be transferred along with the documentation
      • if the carrier would refuse to deliver to the eventual holder, he would be in breach of contract, but could only be sued by the original shipper
      • could, however, be overcome by appropriate express provision in the contract
    • no provision for the passing of property in the goods
      • however, even transfer of a conventional paper B/L will not necessarily pass property in the goods
      • could be overcome by appropriate express provision in the contract
    • relatively insecure against fraud
      • greatest difficulty
      • no problem about transmission of the secret code to the original shipper or receiving it from the ultimate receiver, since they can use secure channels
      • essential problem is that the CMI Model assumes transmission of the code between ship and shore when the original holder wants to transfer to a proposed new holder
        • transmission would have to be by some sort of radio communication to which anybody can in principle listen in and would thus obtain the secret code, i.e. the key to the goods
        • a fraudulent person could, hence, pretend to be the genuine holder and resell or pledge the goods to another third party
      • essential requirement, therefore, that the secret code is encrypted
        • the idea is that only someone who receives both the encrypted code and the encryption key can decrypt the message
      • problem with encryption
        • trader or carrier need to be able to decrypt the encrypted code, but not a fraudulent third person, which interrupts the transmission
        • if all trading parties were known in advance this would not cause problems, as they could agree the encryption algorithm between them privately
        • however, CMI Model is an open model, i.e. it assumes that the goods can be sold by anybody to anybody, so the general encryption algorithm would have to be public
        • the problem with any key system of this type is that the encryption key has to be notified to each recipient, and since this must itself be done over an principally insecure channel, this allows interruptions of fraudulent third persons
  • possible solutions to the encryption problem
    • notification of encryption keys sufficiently in advance of transmissions of the secret code - causes considerably delay in a system whose main purpose is to minimise delay
    • encryption of the encryption key itself - key for this second encryption would have to be transmitted and would raise the same security questions
    • best solution is the use of a public key/private key encryption system
      • four further assumptions
        1. each party has a unique public key which is known to everyone
        2. each party has a unique private key which is kept secret, and never disclosed or transmitted
        3. the encryption method (or algorithm) is publicly available and universally adopted in the trade (system works only if everybody uses the same encryption algorithm)
        4. any message sent from A to B encrypted with A’s private key and B’s public key can only be decrypted using A’s public key and B’s private key, without this process being reversible
          • only B would be able to decrypt the message
          • B could also tell that the message must come from A
      • this requires, however, a relationship between the private and the public key
        • it should be easy to calculate the public key from the private key, but not feasible to perform the reverse process
        • a commonly used technique in practice is to derive the private key from two very large prime numbers (>200 digits) and the public key from the product of these numbers
        • it is not impossible to reverse such algorithm (i.e. finding prime factors of very large numbers) but it would take even with the support of very fast computers a considerable number of years to solve such problem
      • in addition, the idea of using public keys suggests some sort of central authority at a minimum to keep such public keys for everyone available
      • for maximum security, the public and private keys should be changed from time to time, to prevent the discovery of the keys (by cryptanalysis of the algorithm, bribery of employees etc.)

D. Necessary modification of the CMI Model

  • on the basis of the aforesaid, the CMI Model would have to be modified in the following way
    1. each trader knows everybody else’s public key
    2. the carrier gives the shipper the secret code
      • encryption would not be needed since it is not a ship-to-shore transmission and they could use a secure channel of communication
    3. the shipper performs a transaction and transfers his Right of Control and Transfer to a proposed new holder by returning the secret code (including the identity of the new holder) to the carrier
      • the secret code would be encrypted using the shipper’s private key and the carrier’s public key
      • hence, the only the carrier could decrypt the message by using his private key and the shipper’s public key
    4. the carrier then sends the electronic B/L to the new holder together with a new secret code
      • the new secret code would be encrypted using the carrier’s private key and the new holder’s public key
      • hence, only the new holder could decrypt the message by using the carrier’s public key and his private key
    5. further transactions are performed in the same way
    6. the ultimate receiver uses the secret code as before to obtain the goods
      • no encryption necessary at this stage

International Trade Chart

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