A Ltds Obligation Under Cf Contract Law Commercial Essay

Published Date: 02 Nov 2017

Introduction

This coursework identifies and discusses the different types of contract of sale of goods and answer some questions. Firstly, according the contract between A Ltd and B Ltd, this paper will focus four different types of contract such as, C&I and FOB&I and the obligation of the parties will be discussed. Secondly, this paper explains the rules of passing property and risk in CIF and FOB contracts. Furthermore, as a part of the question this work evaluates the letters of credit and will discuss the steps, types and the parties of letter of credit and then compares with a bill of exchange. Finally, the conclusion of this coursework which will conclude all main points of the body.

C&I contract

One of the variants of the CIF contract is C&I (cost and insurance) contract. One of the types contract between A Ltd company and B Ltd company is C&I. In this kind the seller assumes no duty to freight the goods for the buyer. [1] It means that the buyer must carriage goods rather than the seller. [2] According to the contract, A Ltd company does not need to carriage the timber to B Ltd.

The obligations of the parties in C&I contract

A Ltd’s obligation under C&F contract

1- Procure and prepare shipment documents: according to the contract, A Ltd must procure and prepare shipment documents. Such as, he should prepare an invoice. If the contract between both parties requires documents, A Ltd must obtain the documents such as, certificate of quality. [3] 

2-Correspond the goods with the contract description: A Ltd must ship the timber that ‘meeting the contract description at the port of shipment.’ [4] According to s 13 of the Sale of Goods Act 1979 imposes that the goods must correspond to the contract. [5] Otherwise, A Ltd breaches the contract.

3- Invoice: In the term of C&I contract that A Ltd must tender an invoice to B Ltd. ‘The seller’s invoice to the price’. [6] However, A Ltd should not provide a credit to B Ltd for the amount of the freight. [7] Because a contract of freight is to be arranged by B Ltd.

4- Insurance: A Ltd is under a duty to obtain insurance cover and then tender the insurance documents to B Ltd. Otherwise, he commits a breach of contract. [8] If the seller fails to obtain insurance policy, he will responsible for the risk. [9] Because a contract of insure is to be arranged by A Ltd.

Buyer’s Duty Under C&I Contract

1- Payment against Document: Tender of documents plays a significant role in a C&I contract. B Ltd should confirm the good tender of documents, because they represent the goods. Against the documents, B Ltd must pay for the goods and also B Ltd is under a duty to pay to A Ltd in the same currency in the contract of sale. If any currency has fluctuations, A Ltd has right to protect himself against it. [10] Today in the most CIF contracts will establish a letter of credit as a method of payment. [11] 

2- Name of port of destination: There are a numerous number of destinations. B Ltd is under a duty to name port of destination. Before the shipment, the buyer should choose the name of the port and he must tell the seller. [12] 

3- Delivery: It is the B Ltd’s obligation. B Ltd must take delivery when the goods arrive. Also B Ltd has to pay all unloading costs. [13] 

4- Licence: The buyer is under an obligation to obtain any import licence ‘if required’. But the parties can agree otherwise in the contract. [14] But according the contract there is no point about the licence.

5- Bill of Lading: It is the seller’s duty, [15] but according to the contract this duty has passed to the buyer. It means B Ltd must insure bill of lading. Because in the contract between A Ltd and B Ltd, the carriage is to be arranged by B Ltd and bill of lading represents the carriage.

6- Policy of insurance: Also this is the seller’s obligation, [16] but it has passed to the B Ltd, according to the contract the seller has not a duty to freight the goods, because policy of insurance also represents to the carriage and B Ltd agreed to arrange for their carriage. As a result, an insurance policy is the B Ltd’s duty.

FOB&I contract

The parties in FOB contract can agree to add extra obligation to the seller. It means the seller must do another obligation instead of the buyer. FOB contract with additional service. For instance. FOB with insurance or freight. The seller must procure the additional service. If he fails, this means he breaches the FOB additional service. In the contract between A Ltd and B Ltd, A Ltd has an extra obligation which is the insurance. A Ltd must obtain insurance rather than B Ltd.

The seller’s duty under the FOB&I contract

1-‘Ship goods of contract description at port of shipment:’ [17] A Ltd has to ship goods that are conformity to the contract description. According to the s 13 Sale of Goods Act 1979 ‘where the contract is for the sale of goods by description, the goods will correspond with the description’. [18] It means A Ltd has to load the goods regards the contract. If A Ltd breaches it, B Ltd has right to reject the goods and obtain the damages. Also A Ltd is under a duty to deliver the goods as a condition of contract. In Manbre Saccharine Co. Ltd. v. Corn Products Co. Ltd, [19] it was held that the seller breached a condition and the buyer was entitled to reject the delivery.

2- Pay handling and transportation: A Ltd is also must pay all handling and transportation costs until the goods pass on ship’s tail. [20] . A Ltd must receive all relevant documents for export on behalf of B Ltd and he is responsible for any charge for getting the documents. For instance, ‘certificate of origin’. [21] 

3- Ship goods on time at the port of shipment: This is A Ltd’s duty, but this duty starts after obtaining shipment instrument by the buyer and he must ship the goods during the specific time. [22] Port name is a condition in FOB contract. In Wimble, Sons and Co v Rosenberg and Sons, it was held that the buyer must nominate the ship and the seller’s must put the goods on the board for the buyer’s account. [23] 

4- Delivery goods on specified date: A Ltd must deliver the goods to the port of lading. Delivery date and shipment date are linked together. If the goods pass the ship’s rail, A Ltd is considered to deliver the goods to B Ltd. [24] In Frebold & sturznickel (t/a panda OHG) v Circle product, [25] the judge held that the contract was breached by the plaintiff because the seller sent the goods to the buyer at an earlier time, because the condition of the contract was a date of shipment.

5- Notify the buyer: ‘The seller has to provide adequate notice to the buyer to enable him to insure the goods during their sea transit’. [26] Sale of Goods Act 1979 imposes the seller (A Ltd) has to notify the buyer (B Ltd ) when the goods are sent. The risk will not pass to B Ltd if A Ltd fails to notify B Ltd. [27] 

6- Insurance: General rule, insurance must obtain by the buyer to protect the goods during their sea transit, [28] but according to the contract between A Ltd and B Ltd, this obligation has passed to A Ltd (seller). It means insurance is to be arranged by A Ltd rather than B Ltd. If A Ltd fails to obtain insurance the goods still at seller’s (A Ltd) risk.

The buyer’s duty under the FOB&I contract

1-Under FOB&I contract B Ltd must arrange the shipment of the goods . The main duty of B Ltd is ‘secure shipping space’, also B Ltd must refer the port of loading. [29] In David T Boyd v Louis Louca, [30] if the buyer fails to identify the port of loading, the seller can choose it. The shipment space should be insured by B Ltd. B Ltd also must bear all extra costs for the warehouse if fail to get shipping space during the specific date. [31] 

2- B Ltd must bear all costs after shipment. Also must pay the price for the goods. [32] In general B Ltd can pay to A Ltd by cash against the documents or by the letter of credit. [33] â€˜Where there are no specific provisions to pay for the goods in accordance, the price will be due on delivery to the buyer’. If the goods pass on the ship’s rail B Ltd is under a duty to pay all costs for the goods. If A Ltd takes out a bill of lading in his own name, B Ltd must pay when it is tendered. [34] 

Passing of property in CIF contracts

Under the CIF contracts passing of property is a central event. [35] The CIF contracts depend on two things to passing of property. Firstly, the general law. Secondly, the intention or agreement between parties. For instance, implied in their contract. [36] According to Sale of Goods Act, the title cannot pass to the buyer until the goods are ascertained. [37] If the seller sold 3000 tons of a cargo of barley which totals 15000 tons, the property cannot pass if just bill of lading transfer for 3000. Because the goods must be ascertained before the property pass. [38] It is clear that under CIF contracts property passes when the seller transfer the documents and payment is made. [39] Before passing the property, the buyer must pay. Otherwise, the property will not pass. [40] In Rowlan v Divall, [41] the defendant sold a car to the plaintiff. After two months it was learned that the car was stolen property and also before it came to the defendant it was stolen. The defendant did not have property to pass on. The judge held that the buyer was entitled to recover his money already paid to buy a car and ‘there was a total failure of consideration’. [42] 

Passing of risk in CIF contracts

According to Sale of Goods Act, risk and property linked together, but this situation is different in a CIF contract. [43] Passing of property and risk under a CIF contract are not simultaneous. [44] In a CIF contracts risk passes when the goods are ‘on shipment or as from shipment’. [45] This means that if the seller sells the goods, the risk passes on shipment when the goods are shipped and the risk pass as from shipment if the goods are bought afloat. ‘Since risk pass upon shipment, this place buyer under obligation to pay for the goods against a valid tender of documents’. [46] Furthermore, the buyer under an obligation even if the goods before tender the document have been damaged or lost. Under Sale of Goods Act the contract is invalid if the goods have been lost or damaged during the contract without the knowledge of the seller. [47] The buyer often has a right to claim for damage from the carrier and also insure. Inversely, if the goods get damage or loss by the event such as war the buyer must bear the damage. [48] 

Passing of property in FOB contract

Passing of title in goods is determined by many factors. For instance, by general law, by the term of contract between parties. If the goods are placed on board the vessel in FOB contract, the buyer has a property of the goods. In FOB contract title in the goods passes at the same time because the buyer has a contractual relationship with the shipper of the goods after shipment. Title passes when the parties intend it to pass. [49] â€˜In FOB sales, property generally passes when the goods across the ship's rail’. [50] Title in goods will pass when the bill of lading is delivered and also when the full price is made. [51] If the seller taking a bill of lading in his own name, according to Sale of Goods Act 1979 title does not pass on shipment [52] . Particularly, in Wait v Baker, it was held that the property never passed because the seller took a bill of lading in his own name. [53] 

Passing of risk in FOB contract

Unlike CIF contracts, in FOB contract the risk often passes to the buyer upon shipment. [54] In FOB contract the seller is under an obligation to deliver goods to the buyer. In Cunningham v Munro, [55] also Pyrene Co Ltd v Scindia Navigation Co Ltd, [56] it was held that the risk passes when the goods across the ship's rail. The risk will not pass if the seller doesn't load the goods but the risk will pass to the buyer if the seller loaded the goods on board the vessel safely. [57] If the goods are not ascertained, the risk in goods still passes. In Inglis v Stock, [58] it was held that the risk passed at the time of shipment to the buyer.

Letters of Credit

Letter of credit is one of the financial methods of international trade. It is sometimes called documentary or commercial credit rather than letter of credit. The significant term in international sale is payment. [59] The seller prefers to receive this type because it is more secure than other types for him such as bill of lading. [60] 

The Parties to Letter of Credit Transaction

B Ltd. Buyer, referred to as applicant. [61] 

A Ltd. Seller, usually referred to as the beneficiary. [62] 

The issuing bank or opening bank. This is often the buyer’s bank in the buyer’s country. This bank gives credit and provides the application form and he must complete it. [63] This can be any bank in England

Correspondent or advising bank. This is the beneficiary bank and is usually in the beneficiary country. The advising bank is usually asked by the beneficiary to accept the documentary credit. [64] This can be any bank in England, but is usually Malaysia’s bank.

The System of Letter of Credit involves the Following stages

Stage 1: When the contract has been signed by the parties in the contract of sale they can confirm the letter of credit as a financing method. [65] The buyer (B Ltd) should ask his own bank to open a letter of credit in favour of the seller (A Ltd). If the issuing bank agrees to issue the documentary credit then the bank will provide the application form to the applicant and it is a contract between the applicant and the bank. [66] The application form must be completed by the applicant and this form must provide the information of the relevant document. However, if the buyer fails to open a confirming credit during the time period and if the seller has lost profit he is entitled to recover the profit. [67] 

Stage 2: The beneficiary needs to be advised of the documentary credit. Sometimes, the applicant’s bank does it, but generally the correspondent bank is instructed by the issuing bank. [68] If the bank confirms it, there is another contract between the beneficiary and the confirming bank.

Stage 3: The beneficiary should ship the goods and tender the contract documents or a document stipulated in the contract to the issuing or confirming bank. [69] The key documents are a bill of lading, policy of insurance and commercial invoice. [70] The issuing or correspondent bank must check all documents carefully during five working days and then the documents may be accepted or rejected. In Gian Singh and Co Ltd v Banque de I'Indochine, [71] it was held that the bank is under a duty to check all documents and send them to the buyer if all documents are same with the credit. If the documents are refused and the credit does not expire, the seller can re-tender the valid documents. [72] In Soproma SpA v Marine and Animal By-Products Corporation, [73] the judge held that the applicants have a right to refuse the document if they found a different point with the credit.

Stage 4: If the documents are confirmed, the advising bank will pay the contract price. [74] There are three ways for the beneficiary to be paid: ‘by cash, by electronic funds transfer and by the banks’s acceptance of a bill of exchange’. [75] The bank cannot refuse the documents if the seller presents them with the term of the credit. [76] 

Stage 5: Lastly, the issuing bank should tender all documents to the applicant and he should check the documents. If the document is accepted by the buyer, he can get the goods from the carrier or sell them. [77] 

There are several numbers of variants of the letter of credit

Revocable Credit: if the credit is revocable, it means the issuing bank is free to cancel or amend without earlier notice of the seller. [78] If the bank cancelled the credit, it must inform to the seller. [79] In Cape Asbestos Co v LIoyds Bank, [80] it was held that the bank is under a duty to give a notice to the seller, if the credit is revoked and the seller should confirm it.

Irrevocable Credit: this is impossible to amend or revoke without the consent of the parties. This type is more expensive than revocable credit but it is rarely used, [81] because it is a suitable payment method for international. [82] Irrevocable credit gives more security to the seller. Furthermore, ‘if the underlying contract of sale is silent as to whether the credit should be revocable or irrevocable, UCP 600, art 3 cannot be used to argue that the credit must be irrevocable’. [83] 

Confirmed credit: this type is always irrevocable. In this case the seller will be paid on showing the documents. It is a direct undertaken by the banker, [84] because when the seller shows the documents within the time limit, he will obtain payment. This kind of credit is more secure particularly if the bank is reputable, because it makes certain to the seller to obtain payment. [85] 

Revolving Credit: this type lets the beneficiary show the documents and get payment within a credit period. [86] This type is helpful especially when the contract of sale meditates ‘delivery by instalment’. [87] 

Back to back credit: in this type the seller becomes a ‘middleman’. For instance, when the seller buys the goods from X in France and sells to buyer B in Spain. ‘Seller will use the credit opened in his favour by buyer B (first credit) as a security for opening a credit in favour of X (second credit)’, [88] but the second credit often has reduction amount, showing the interest to be made by the seller but should be a similar term. [89] 

Transferable Credit: this kind operates in a similar way as the back to back credit. Such as, if the seller in the UK sells 3000 tons of oil to the buyer in Norway. But the seller must buy them because he is not manufacturer of oils. The seller (first beneficiary) can pay to a manufacture by transferable credit. [90] The second beneficiary will be paid by the buyer by present documents in his own name. [91] Transferable credit should not change the original term. The amount of this type could be modified and the time and date for presenting documents could be changed during the allowed time in original credit. [92] 

Advantages and disadvantages of letters of credit

Documentary credit has many advantages for the seller. The great advantages for him is a security as far as he is concerned. Also it is a fast method of payment. When the seller presents the documents which stipulate in the contract to the bank, he can receive the price of goods. On the other hand, letter of credit is more expensive way to pay than others. Because the buyer must pay for ‘opening of a letter, negotiation, amendment and and confirming commissions’. But also they may agree that the seller pay ‘defray’ for the buyer for some banking charges. [93] 

Bill of exchange

The Bill of Exchange Act 1882 s 3 (1) defines that a bill of exchange is ‘an unconditional order in writing, addressed by one person to another, signed by the … order of a specified person, or bearer.’ [94] It is clear that the significant point of the bill of exchange is paying. According to this definition, the obligation in the bill of exchange should be in writing. Also it should be easily to transferable. Only the person who holds the bill of exchange can performance the bill. The bill of exchange must be signed by the drawer. According to section (3) there are four main individuals who are involved in a bill of exchange.

The drawer, the seller. [95] 

The drawee, the buyer. [96] 

The payee, ‘this is the person to whom the amount the bill is to be paid’. [97] 

The acceptor. The buyer or any person who accepted the bill. [98] 

There are the main differences between the letter of credit and bill of exchange

In the case of letters of credit the seller has greater protection from the bank than the bill of exchange, because in the bill of exchange the bank is looking after the drawer’s interest. [99] 

In the letters of credit the seller will obtain the price of the goods when presenting the documents and it is accepted by the bank. But in the bill of exchange the drawer will obtain the price of the goods by particular time such as, ‘30 days after date pay our order the sum of one thousand pounds, value received’. [100] 

The letters of credit are a promise and it must be in writing and made by the bank to the seller that the goods will be paid for, against the documents. It is clear that the promise made on behalf of the buyer. It is necessary for the bank to know that the buyer has enough money to pay or not. [101] 

In Garcia v Page and Co Ltd, [102] the judge held that the applicant was under a duty to open the letter of credit in a reasonable time. Conversely, in the bill of exchange the drawer will draw it. [103] 

Unlike a bill of exchange, letter of credit is an official arrangement not a contract and not negotiable.

As already mentioned the buyer will ask the bank to open a letter of credit and generally the opening bank instruct the advising bank in the seller's country to advise the seller. But in the bill of exchange the drawer will send the time of bill and the drawee will accept it by signing and writing the word ‘accepted’. [104] 

Unlike the bill of exchange, letters of credit are the most expensive method because the buyer must bear the banking charge such as, confirmation commissions, but the letters of credit are more security and speed. Inversely, a bill of exchange does not need the security. [105] 

Conclusion

This coursework has identified the possible types in the contract between A Ltd and B Ltd. There are two possible types which are C&I and FOB&I contract. Also this coursework has focused on the main obligation of the parties in C&I and FOB&I contract. Each type has different obligation of the seller and the buyer. Furthermore,this paper has focused to the passing of property and risk in the CIF (cost, insurance and freight) and FOB (free on board). The main event in the CIF contracts is passing of property. Passing of property relies on two things, general law and the intention of the parties. Risk passes to the buyer in CIF contract if the goods are ‘on shipment or as from shipment’. [106] â€˜In FOB sales, property generally passes when the goods across the ship's rail’. [107] Under s (20) of he Sale of Goods Act 1979 states that on a FOB contract risk passes on shipment. Letter of credit is a part of this coursework. According to the contract between A Ltd and B Ltd this assignment has focused the letter of credit, such as, what are the letters of credit, the parties, types and advantages and disadvantages, also showed some relevant cases which related to this case. Finally, this paper has compared between letters of credit and bill of exchange.

Bibliography

Books

Carr, I Principles of International Trade Law (2nd edn, Cavendish Publishing Limited 1999)

Jason C. T Chuah, Law of International Trade (4th edn, Sweet & Maxwell 2009)

P S Atiyah, John N Adams, Hector MacQueen, Atiyah’s Sale of Goods(12th edn, Pearson Education Limited 2010)

Day & Griffin, The Law of International Trade (3rd edn, Reed Elsevier (UK) Ltd 2003)

Connolly, M, Brief Case Commercial Law (2nd edn, Cavendish Publishing Limited 1998)

Sealy, L.S. and Hooley, R. J. A, Commercial law: text, cases, and materials (4th edn, Oxford University Press 2009)

Furmston, F, Principles of Commercial Law ( 2nd edn, Cavendish Publishing Limited 2001)

Cases

Cape Asbestos Co v LIoyds Bank [1921] WN 274

Cunningham v Munro (1922) 28 Com Cas 42; 13 LI L Rep 62

Frebold & sturznickel (t/a panda OHG) v Circle product [1970] 1 Lloyd's Rep 499

Hickox v Adams [1876] 34 L.T 404

Inglis v Stock [1885] 10 App Cas 263

Comptoir d'Achat et de Vente du Boerenbond Belge SA v Luis de Ridder Limitada [1949] A.C. 293

Garcia v Page and Co Ltd (1936) 55 LIoyd's Rep. 931

Manbre Saccharine Co. Ltd. v. Corn Products Co. Ltd [1915] 1 KB 198

Mitsui and Co Ltd v Flota Mercante Grancolumbiana [1989]1 ALL ER 951

Pyrene Co Ltd v Scindia Navigation Co Ltd [1954] 2 QB 402

Smyth and Co Ltd v Baily Son and Co Ltd [1940]3 All ER 60. 67-68

Rowlan v Divall [1923] 2 KB 500

Wait v Baker (1848) 2 Exch 1 ; 154 ER 380

Wimble, Sons and Co v Rosenberg and Sons [1913] 3 K.B. 743

David T Boyd v Louis Louca [1973] 1 Lloyd's Rep. 209

Soproma SpA v Marine and Animal By-Products Corporation [1966] 1 Lloyd's Rep 367

Gian Singh and Co Ltd v Banque de I'Indochine [1974] 1 WLR 1234