CHAPTER 18

CIF CONTRACTS

18.1 Definition

A cif (cost, insurance, freight) contract is an agreement to sell goods at an inclusive price covering the cost of the goods, insurance and freight. The essential feature of such a contract is that a seller, having shipped, or bought afloat, goods in accordance with the contract, fulfils his part of the bargain by tendering to the buyer the proper shipping documents. If he does this, he is not in breach even though the goods have been lost before such tender. In the event of such loss the buyer must nevertheless pay the price on tender of the documents, and his remedies, if any, will be against the carrier or against the underwriter, but not against the seller.

18.2 Duties of seller

The duties of a seller are:

(a)to ship goods or (where this duty is appropriate) buy goods afloat;

(b)which are conforming (strict duties, for example, as to title, description and quantity; date of shipment, which is part of the description; satisfactory quality, fitness for purpose and conformity with sample –

ss12–15 and 30 of the Sale of Goods Act);

(c)to appropriate contractually complying goods to the contract;

(d)to procure and tender documents which (though the contract may provide otherwise) are as follows:

• invoice (problems of extent to which goods must be described);

• bill of lading, which:

is transferable (‘or assigns’);

provides continuous documentary cover;

is ‘shipped’ not ‘received’;

provides for carriage to specified destination by;

specified or customary route;

is issued on shipment;

is genuine;

is valid and effective;

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is clean (The Galatia (1980));

covers the contract goods only;

•policy (not certificate) of insurance, which:

is assignable by indorsement;

is effective;

covers contract goods only;

is usual at time and place effected (problems of war risks);

problems as to delivery orders, mates receipts, non-negotiable waybills, which are not documents of title;

time of tender (Toepfer v Lenersan-Poortman NV (1980)).

18.3 Duties of buyer

The duties of the buyer are:

(a)to pay the price against documents (whether personally or through bank):

•‘blind’, without seeing the goods (Horst v Biddell Bros (1912));

•in many cases, even if goods known to have deteriorated or perished (Groom v Barber (1915); Manbre Saccharin v Corn Products (1919));

(b)to perform other contract duties, for example, specify destination.

18.4 Passing of property

Most cif contracts are for the sale of unascertained goods. It is an overriding rule that property cannot pass until the goods are ascertained. Subject to this, where the contract is for the sale of specific goods or for the sale of unascertained goods which have been ascertained, the rule is that property passes when it is intended to pass. On the whole, express provisions as to when property is to pass seem to be unusual so the court has to infer the party’s intention from the circumstances.

Undoubtedly, the most common inference is that property is intended to pass only on the taking up of the documents, that is, by the transfer of the documents from seller to buyer and of the price from buyer to seller. Payment need not in this sense mean payment in cash as, for example, where the buyer accepts a bill of exchange payable at 30 days. In such a situation, the seller would usually be treated as giving credit to the buyer so the property would pass on acceptance of the bill and not on its payment. The reason why the seller is not normally thought to intend to transfer property before he parts with the documents was explained by Lord Wright in Ross T Smyth v Bailey (1940). The seller, in modern conditions, is usually

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not content to rely on his rights of lien and stoppage in transit but wishes to reserve a right of disposal. This is so where the seller has taken a bill of lading to the order of the buyer but retained it in his possession. The situation is even clearer where the seller has taken a bill of lading to his own order or to the order of the bank which has financed the transaction.

18.5 Passing of risk

The general rule is that risk prima facie passes with property (s 20 of the Sale of Goods Act). This general rule will not normally apply, however, in a cif contract. In the absence of an express contrary provision, it will normally be inferred that risk in a cif contract passes ‘on shipment or as from shipment’, per Lord Porter in The Julia (1949). The reason for this is that it is the seller’s duty to insure as from shipment and the buyer will, therefore, enjoy the benefit of the policy of insurance as from this date. It should be noted that the rule has two branches. If the contract precedes shipment, then risk will pass on shipment. If shipment precedes the contract then the risk will pass as from shipment; the seller’s obligations as to quality will also operate as from shipment.

This statement probably requires some qualification in the case of total loss. In Couturier v Hastie (1856), there was a contract for the sale of a cargo of corn cif to be carried on a particular ship. In fact, unknown to the parties, the cargo had already been sold before the contract by the master because it was fermenting. It was held that the buyer was not bound to pay the price, so, if total loss precedes the contract, it would seem that risk will not pass, but this would not be true of partial loss or deterioration.

18.6 Remedies of the seller

The following may be classed as remedies for the seller: termination, action for the price and damages.

18.6.1 Termination

The seller may be able to terminate the contract because of the buyer’s repudiation or because of some serious breach by the buyer of his obligations. The most likely example would be a breach by the buyer of his obligations as to payment, for example, failure to open a conforming credit.

18.6.2 Action for the price

This is governed by s 49 of the Sale of Goods Act. The seller may bring an action for the price either ‘where the property in the goods has passed to the buyer, and the buyer wrongfully neglects or refuses to pay for the goods in

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accordance with the terms of the contract’ or ‘where the price is payable on a day certain irrespective of delivery’. In the most common case, where the payment provision is for cash against documents, neither limb of s 49 will apply. The first limb will not apply because, if the buyer does not pay, property will not have passed to the buyer and the second limb will not apply because the date of payment is not a day certain irrespective of delivery.

18.6.3 Damages

Under s 50 of the Sale of Goods Act, the seller is entitled to damages ‘where the buyer wrongfully neglects or refuses to accept and pay for the goods’. Prima facie the damages are measured by the difference between the contract price and the market price, though they may include consequential loss if this is not too remote. The relevant time would probably be that for the contractual date for delivery of the documents or, if there is no such date, the date on which the buyer refused to take up the documents.

18.7 Remedies of the buyer

The following may be classed as remedies of the buyer: rejection; damages; specific performance.

18.7.1 Rejection

The cif buyer receives two deliveries, one of goods and one of documents and he, therefore, has, in principle, two rights to reject. This gives rise to considerable complexities:

(a)He may reject the documents if they are defective (probably, even if the defect is slight, because exact documentary compliance is required).

They may be defective in two ways. First, they may not conform on their face with the contract requirements, for example: contract requires October shipment, bill of lading dated November; contract requires first grade carcasses, bill of lading shows second grade carcasses. But second, and less obviously, a bill of lading may be defective because false – for example, bill shows October shipment, goods actually loaded in November; bill of lading shows hard amber wheat, wheat actually soft white wheat.

But he may also lose the right to reject by waiver of it; and, sometimes, he may be estopped from saying that he has not waived it (Panchaud Frères (1970)).

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(b)He may reject the goods if they are defective.

He may not, however, do so if the defect in the goods was apparent on the face of the bill of lading and he accepted the bill; for, by doing so, he may be held to have waived his right to reject (but not his right to damages). As in the case of documents, he may lose the right to reject by waiver and sometimes other conduct or inactivity (see above).

If he has the right to reject, his motives in exercising it are irrelevant; it does not matter that his reason for doing so is that the market has fallen.

(c)He may not, however, reject good documents merely because he can prove that the goods shipped were defective: he must pay against documents and then (if he wishes) reject the goods and claim his money back (Gill & Duffus v Berger (1984)). Obviously, this involves risks.

False (for example, falsely dated) documents may deprive the buyer of the opportunity to reject them: had he known shipment was really in November and not (as stated) in October, he would have rejected them. In such a case, he may be entitled to damages for the loss caused to him by false documents – usually, that he was deprived of an opportunity to reject altogether on a falling market (Kwei Tek Chao v British Traders & Shippers (1954)). The damages are such as to put the buyer in the position in which he would have been had the statements been true. So if, had the statements been true, the buyer could not have rejected, he cannot calculate his damages on this basis (Proctor & Gamble v Becher (1988)).

18.7.2 Damages

The buyer may recover damages for non-delivery, s 51(3) of the Sale of Goods Act. The amount of recovery is prima facie ‘the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered or if no time was fixed then at the time of the refusal to delivery’ (see Sharpe v Nosawa (1917)). He may also recover damages for defective delivery (s 53 of the Sale of Goods Act).

Prima facie ‘in the case of a breach of warranty of quality the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered to the warranty’. He may also recover damages for the loss of the right to reject (see above).

18.7.3 Specific performance

Under s 52 of the Sale of Goods Act, the court has discretion to order specific performance ‘in any action for breach of a contract to deliver specific or ascertained goods’. The most important practical application for this in a cif context would be an attempt to assert priority over other creditors in the

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seller’s insolvency where property in the goods had not passed the buyer (see Re Wait (1927)).

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SUMMARY OF CHAPTER 18

CIF CONTRACTS

The c(ost) i(nsurer) f(reight) form of contract is the most popular form of international sale contract. This chapter considers the duties of seller and buyer under this form of contract; the rules as to passing of property and risk and as to the remedies of seller and buyer.

Duties of seller

The duties of the cif seller are:

(a)to ship goods;

(b)which are conforming under the terms of the contract;

(c)to appropriate contractually complying goods to the contract;

(d)to procure and tender proper shipping documents (usually, invoice, bill of lading and policy of insurance).

Duties of buyer

The duties of the buyer are to pay the price against documents and to perform other contract duties (for example, specify destination).

Passing of property and risk

Most cif contracts are for the sale of unascertained goods. It is an overriding rule that property cannot pass until the goods are ascertained. Subject to this, where the contract is for the sale of specific goods or for the sale of unascertained goods which have been ascertained, the rule is that property passes when it is intended to pass. On the whole, express provisions as to when property is to pass seem to be unusual, so the court has to infer the party’s intention from the circumstances.

Undoubtedly, the most common inference is that property is intended to pass only on the taking up of the documents, that is, by the transfer of the documents from seller to buyer and of the price from buyer to seller.

The general rule is that risk prima facie passes with property (s 20 of the Sale of Goods Act 1979). This general rule will not normally apply, however, in a cif contract. In the absence of an express contrary provision, it will

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normally be inferred that risk in a cif contract passes ‘on shipment or as from shipment’, per Lord Porter in The Julia (1949).

Remedies of the seller

The cif seller may:

(a)terminate the contract because of the buyer’s repudiation or because of some serious breach by the buyer of his obligations;

(b)bring an action for the price either ‘where the property in the goods has passed to the buyer, and the buyer wrongfully neglects or refuses to pay for the goods in accordance with the terms of the contract’ or ‘where the price is payable on a day certain irrespective of delivery’ (s 49 of the Sale of Goods Act);

(c)be entitled to damages ‘where the buyer wrongfully neglects or refuses to accept and pay for the goods’ (s 50 of the Sale of Goods Act).

Remedies of the buyer

The cif buyer may recover damages for non-delivery (s 51(3) of the Sale of Goods Act) or for defective delivery (s 53). Under s 52, the court has discretion to order specific performance ‘in any action for breach of a contract to deliver specific or ascertained goods’.

The cif buyer has, in principle, two rights to reject. This gives rise to considerable complexities:

(a)he may reject the documents if they are defective (either because they may not conform on their face with the contract requirements or because a bill of lading may be false);

(b)he may reject the goods if they are defective (but not if the defect in the goods was apparent on the face of the bill of lading and the buyer accepted the bill);

(c)he may not, however, reject good documents merely because he can prove that the goods shipped were defective (he must pay against documents and then reject the goods and claim his money back).

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