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LAWS20062 International Commercial Law
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LAWS20062 International Commercial Law
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Course Code: LAWS20062
University: Central Queensland University
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Country: Australia
Question:
Beauty Bananas Ltd (BB), a Brisbane based company, entered into a contract with Fresh Fruit Inc (FF), a Chinese based company, to supply 100 tonnes of bananas in two shipments:
50 tonnes between 8-10 May 2018; and
50 tonnes between 8-10 June 2018.
The contract stated that: BB was responsible for the delivery to an ocean carrier (nominated by FF on or before 3rd February 2018) and export clearance; and FF was responsible for ocean freight. The contract also stated that the seller was responsible for marine insurance.
On the 8th February 2018, FF notified BB to deliver the first shipment to China Fruit Shipping (CFS), but withhold its second shipment until after the 17th June 2018 but before 20th June 2018.
Before the shipments arrived, BB sent FF documentary evidence of delivery to CFS. The first shipment arrived on the 8th June 2018, but the shipment that arrived was 100 kilograms less than contractually agreed. The second shipment arrived on the 8th July 2018 but 2 containers containing a total of 2 tonnes were missing, and 5 tonnes were spoiled.
Discuss whether BB has complied with their obligations under the Incoterms 2010, the CISG, and sale of goods legislation or other applicable domestic law.
2. Following on from question 1, CFS provided a bill of lading to BB after taking possession of each shipment of bananas. The bill of lading excluded CFS’s liability to damaged goods caused by a breakdown of the refrigeration system.
It now appears that in relation to the first shipment, the outstanding 100 kilograms of bananas were stolen by the carrier’s employees. In relation to the second shipment, 2 containers went overboard because the CFS was compromised due to an ocean earthquake, 3 tonnes were spoiled because of refrigeration problems, and 2 tonnes were spoiled because they were already over ripe at the time of delivery.
As a result of investigations, it was discovered that BB bribed CFS to provide a clean bill of lading to the advising bank, who then provided the documents to the issuing bank. The issuing bank then issued credit to the advising bank.
Further investigation revealed that the maintenance staff on the CFS noted that the refrigeration system on the CFS stopped working on the 9th May 2018 and were waiting on new parts from Germany to arrive on 18th June 2018.
Advise the CFS of its liability to BB and the issuing bank, making reference to the Carriage of Goods by Sea Act 1991 (Cth), amended Hague Visby Rules, and the UCP600.
Answer:
1. Issue
A contract for sale of goods was executed between Beauty Bananas Ltd (BB) and Fresh Fruit Inc. (FF) for the sale of 100 tonnes of Bananas in 2 respective shipments. The contract provided that Fresh Fruit Inc. (FF) would nominate a carrier who the goods would be delivered to by the suppler [Beauty Bananas Ltd (BB)] among other terms. On the designated date for the first shipment Fresh Fruit Inc. (FF) stated that the first shipment was to be sent to a designated carrier and that the second shipment was to be put on hold till the 17th of June. Beauty Bananas Ltd (BB) delivered the same to the carrier. On receiving the shipment Fresh Fruit Inc. (FF) found various discrepancies in the products however Beauty Bananas Ltd (BB) had furnished documentary evidence of the complete shipment when delivering the goods to the carrier. The issue here is to determine if all the obligations of the supplier have been met in the transaction that transpired between the parties.
Rule
A shipment of goods from Brisbane, Queensland would be governed by common law principles as Australia incorporates common law into its legal framework in addition to international conventions that define the law of the sea and domestic legislations. In this case the applicable legislations would be Carriage of Goods by Sea Act, 1991, Incoterms, 2010 (International Commercial Terms), the Hague-Visby Rules (as they stand amended) and the Convention on International Sale of Goods. In relation to these rules the concept and function of the Bill of Lading must be clarified.
A bill of lading maybe defined as documentary evidence of receipt of goods from the shipper given by the carrier or the master of a vessel that is being contracted to deliver the goods. This has been clarified by the judgment delivered in the landmark case Glyn Mills v East & West India Dock Co.. The functions of a Bill of Lading are three fold, as a receipt for goods sold, as evidence of a contract of carriage and as a document that establishes title. This was reiterated in the judgment in Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd (the “SS Glengarry”).
The obligations of the seller in an international contract of sale of goods are defined and regulated by Articles 30-37 of the Convention on International Sale of Goods. These include timely delivery and carriage and freight insurance obligations. These obligations must be observed by the seller in order to ensure that the contract of sale executed between the parties is performed considering all aspects incidental thereto.
Application
In the facts and circumstances stated above it can be inferred that Beauty Bananas Ltd (BB) was acting in the capacity of a seller and supplier while Fresh Fruit Inc. (FF) was acting in the capacity of a buyer. Thus the seller’s obligations embodied in the Convention on International Sale of Goods at Articles 30-37 would be binding on Beauty Bananas Ltd (BB). Thus in effect all responsibilities envisaged by the Convention on International Sale of Goods would determine liabilities based on the performance of the contract by the seller. In this case when the first shipment was delivered to Fresh Fruit Inc. (FF) there were various discrepancies in the order which were discovered. The discrepancies were that, of the contracted amount of the product, the final goods delivered were 100 Kilograms short of the agreed quantity. The second shipment which arrived was also found to be faulty as the quantity was short by 2 tonnes and 5 tonnes out of the received order turned out to be spoiled.
As seen from the agreement the sellers obligations were timely delivery, a delivery of goods to the agreed carrier and marine insurance (and other incidental obligations). However as far as the obligation of the seller in concerned, the quality and quantity of the goods delivered would cease to exist once possession has passed from the seller to the carrier. This is because when the goods are delivered to the carrier [designated by the buyer Fresh Fruit Inc. (FF)] the carrier would be charged with verifying the quality and quantity of the goods tendered and thus it would mean that the seller has tendered goods that adhered to the quality and quantity contracted. In this case when Beauty Bananas Ltd (BB) delivered the contracted goods to the designated carrier, China Fruit Shipping (CFS), the carrier in turn produced a specific kind of documentary evidence stating that the goods delivered adhered to the quality and quantity stipulated in the contract. This form of documentary evidence which acts as a receipt of goods sold, an evidence of a contract of carriage and as an evidence of title is known as a Bill of Lading following the judgment delivered in Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd (the “SS Glengarry”). In admiralty law this form of documentary evidence is conclusive proof of the good order and/or quantity as determined in the case of Glyn Mills v East & West India Dock Co.. This principle is also envisaged by the Hague-Visby Rules and embodied at Article 3. Article 3 of the Hague-Visby Rules embodies an obligation on a carrier or a master of a vessel to tender such documentary evidence to the shipper in case such a request is made. As envisaged in Article 3 (b) of the Hague-Visby Rules the quantity or number of packages or containers is endorsed in the Bill of Lading so provided on demand and it can be logically inferred that it would act as conclusive proof of the same. In addition to the quantity the Bill of Lading would also endorse the apparent good order or condition of the goods as prescribed in Article 3 (c) of the Hague-Visby Rules. As provided in Article 4 of the Hague-Visby Rules that this Bill of Lading is prima facie evidence that the goods as contracted (considering quality and quantity) and once tendered to a third-party cannot be disputed if any discrepancies arise from the same. Thus, in this case the Bill of Lading was demanded by the shipper and the same was tendered by the carrier stating the particulars endorsed in the transaction. Once such a Bill of Lading was tendered to a third-party (the buyer) it would stand as conclusive, indisputable proof of the same. In such a situation the Bill of Lading stands as conclusive proof that the obligations of the seller have been met under the laws governing the transaction. However as the seller was liable for marine insurance the costs of the spoilt goods would have to be borne by the seller.
Conclusion
To conclude the seller had observed all obligations under the various laws governing such a contract of sale by sea. However the seller would be liable to pay the costs for the insured goods which were spoilt. No liability would arise for the quantity of goods sold however as the Bill of Lading stands as documentary evidence of the same.
2. Issue
In the given set of facts and circumstances it is set out that the carrier that the goods had been delivered to, namely, China Fruit Shipping (CFS), was excluded from any liability arising from damage to goods caused by refrigeration problems. Out of the entire cargo, 3 tonnes were spoilt due to refrigeration problems however there was missing cargo and damaged cargo apart from the ones destroyed by refrigeration problems. A letter of credit was entered into as a part of the transaction to provide smooth flow of finances. However, on investigations it was discovered that Beauty Bananas Ltd (BB) had bribed the carrier China Fruit Shipping (CFS) in order to ensure that the issuing bank would sanction the letter of credit hence resulting in the nominated bank approving the same. Thus, in this scenario the issue is to determine the liabilities of the Carrier with respect to the suppler [Beauty Bananas Ltd (BB)] and the nominated bank in light of the statues governing the transaction and Uniform Customs and Procedures (UCP 600).
Rule
As established above it has been stated that a Bill of Lading is conclusive proof of a contract of carriage and the condition and quantity of the goods shipped as reiterated in the case of Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd (the “SS Glengarry”). This thus means that any Bill of Lading that is tendered is when a cargo of goods is delivered to a carrier by a shipper would be a valid form of evidence of the quality and quantity of goods.
In cases of international sale contracts an approval is often procured from a bank to forward payments based on an assurance of another bank to indemnify the bank making the payments for the total amount at the completion of the project. This approval is known as a letter of credit and the bank making the payments is known as the nominated bank. The bank indemnifying the nominated bank is known as the issuing bank and this bank ideally has an account with the entity obtaining an approval for a letter of credit. This allows the issuing bank to replenish the nominated bank the credit extended through the funds in the account of the entity seeking approval. In international law transactions that involve a letter of credit are administered, governed and regulated by Uniform Customs and Procedures the present form of the same is known as UCP 600. Uniform Customs and Procedures (UCP 600) helps nominated banks and other related parties in case of disputes arising from the transaction that warranted a letter of credit. In the same way, it also acts as an enforcing code that helps ensure international trade is facilitated devoid of frivolous disputes. UCP 600 however has fraud exceptions that would exclude liabilities from parties. In order to fully understand the implications of the fraud exception embodied in UCO 600 the independence principle.
The independence principle is a concept embodied to ensure that banks that issue letters of credit are protected against non-payment in cases where disputes arise from the original contract that warranted the letter of credit. In case the parties to the contract have a dispute and the same is brought for adjudication the nominated bank would not be receive payment for the credit extended till such time that the dispute has been successfully adjudicated by a competent authority. In many cases the payment would be contingent to a favorable order passed on behalf of one party and if the party fails to obtain the same it may lead to a complete loss for the nominated bank. Thus for the benefit of nominated banks in such situations Uniform Customs and Procedures (UCP 600) prescribes the independence principle. This principle states that the letter of credit is independent from the original contract of sale between the parties. Thus even in case of disputes arising out of the original contract between the parties the agreement regarding the letter of credit would stand and the nominated bank would be paid the amount of credit forwarded by them.
The independence principle thus acts as a protective rule that ensures repayment for the nominated bank however this principle can be excluded if there is an establishment of fraud. This is known as the fraud exception. The fraud exception states that in case fraud in established in the documents submitted to the issuing bank then the issuing bank would not be obligated to make payments to the nominated bank. Thus, in cases of fraud the party to the agreement would be directly liable to ensure that the nominated bank receives payment as the issuing bank would no longer be obligated to repay the nominated bank for the payments made in furtherance of the letter of credit.
Application
In the given set of facts and circumstances it is stated that the carrier would not be responsible for goods spoilt due to refrigeration. 3 tonnes were spoilt due to refrigeration problems. Thus for this loss China Fruit Shipping (CFS) would not be obligated to compensate Beauty Bananas Ltd (BB) who were the sellers. However there were other missing parts of the entire cargo and a Bill of Lading had been tendered stating that the cargo adhered to the quantity and quality stated in the sale agreement.
However, on further investigations it was issued that the seller had fraudulently obtained the Bill of Lading by bribing the carrier China Fruit Shipping (CFS). Thus the letter of credit that was obtained from the issuing bank was based on the documents procured through fraudulent activities. As per the rule established in Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd (the “SS Glengarry”) the documentary evidence which would act as conclusive proof has now been deemed void due to the fraud that has been established in the transaction. Thus as per the provisions of Uniform Customs and Procedures (UCP 600) the independence principle would not apply as fraud excludes the operation of the independence principle. Moreover, in this case the fraud exception would be crucial and would ideally determine the rights of the parties in this transaction. Thus, with respect to the obligation of the issuing bank towards the nominated bank the fraud exception would eliminate all obligations on part of the issuing bank to reimburse the nominated bank. Thus in effect the nominated bank would now not be able to recover the credit forwarded by it on the basis of the letter of credit from the issuing bank. Thus the carrier, China Fruit Shipping (CFS) would have to reimburse the nominated bank for the amount given by it.
The seller and the carrier had entered into contract where the carrier would not be held responsible for any damage to the goods due to refrigeration problems. However the missing cargo and the cargo that went overboard would not form a part of this. Thus the carrier would have to compensate the seller for these other incidental discrepancies in the cargo finally delivered to the buyer.
Conclusion
To conclude the carrier China Fruit Shipping (CFS) would have to compensate the nominating bank as well as the seller for the discrepancies in goods delivered.
Bibliography
Uniform Customs and Procedures (UCP 600)
Hague-Visby Rules
Convention on International Sale of Goods
Carriage of Goods by Sea Act, 1991
Incoterms, 2010
Case law
Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd (the “SS Glengarry”) [1959] AC 576
Glyn Mills v East & West India Dock Co. [1882] 7 App Cas 591
Articles
Bridge, Michael G. The international sale of goods. Oxford University Press, 2017.
Bundock, Michael. Shipping law handbook. Informa Law from Routledge, 2013.
Coetzee, Juana. “The Interplay between Incoterms and the CISG.” JL & Com. 32 (2013): 1.
Johnson, William P. “Analysis of Incoterms as Usage under Article 9 of the CISG.” U. Pa. J. Int’l L. 35 (2013): 379.
Laemmli, Thomas. Transfer of ownership in international sales of goods. Diss. University of Cape Town, 2014.
Lista, Andrea. International Commercial Sales: The Sale of Goods on Shipment Terms. Informa Law from Routledge, 2016.
Nair, Ashwin. “A note on Norden: Voyage Charterparties, the Hague/Visby Rules and Enforcing Foreign Arbitration Awards.” Austl. & NZ Mar. LJ 27 (2013): 90.
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