International Sale of Goods

The issue to be determined in this assignment is the merits of the claims that Santes or Xis may bring against one another under the sales contract. In considering the merits of these claims it is of essence to consider the applicable law and contract terms, and the obligations of the parties under the sale contract.

Firstly, in order to discuss the claims that may be brought by the relevant parties under the sale contract, it is of importance to determine whether English jurisdiction can be asserted for any claim by Xis against Santes (or vice versa). From the facts of the case it can be seen that Xis is an English chemical company and Santes a Spanish construction company based in Bilbao Spain. By way of Council Regulation EC 44/2001 Article 2 (1): ‘as a general rule, persons domiciled in a member state must, whatever their nationality, be sued in the courts of that member state’. If Xis were to start proceedings against Santes (or vice versa), such proceedings must be started in the state in which the defendant is domiciled.

However, the general rule in article 2(1) Regulation EC 44/2001 is qualified by a special rule in article 5(1) of the Regulation, which provides that a ‘person domiciled in a Member State may, in another Member State, be sued’ if one or other conditions under the article is satisfied. Sub-paragraph (b) therefore makes specific provision in sale of goods cases, namely that the place of the ‘performance of an obligation shall be either the place where the goods were delivered or the place where the goods should have been delivered’ (Case 12/76 Industrie Tessili Italiana Como v Dunlop AG [1976]). [1] Accordingly, Xis performance of delivery of consignment to the port at Liverpool can be argued to be such performance of obligation.

This can be further elaborated by Scottish & Newcastle International Limited (Respondents) v Othon Ghalanos Limited [2008] [2] , where the Court held that it was clear that the intention of the parties was that property in the goods passed to the buyer on shipment, thereby giving the court the jurisdiction to jurisdiction to entertain the claim by virtue of article 5(1)(b) of the Regulation. The sale of goods contract made between Santes and Xis is thus governed by English law.

To determine the applicable law and contract terms it is necessary to look into the terms of the express contract to ascertain what the parties have agreed to.

It is trite law that there is no contract where the terms of the acceptance varies with the terms of the offer and where this occurs, it amounts to a rejection of the offer as well as a counter offer which is not binding unless accepted by the other party (Butler Machine Tool Co v Ex-cell-Corp (England)). [3]

In this case since the terms of the Xis acceptance varied the terms of Santes order by including ‘subject to usual force majeure protections’, it can be said this constituted a counter offer and not an acceptance. However, the submitting of credit documents by Xis to its London bankers may be argued to imply the opening of a credit letter by Santes, thus constituting acceptance by conduct.

Though there is nothing in the facts of the case to indicate an express acceptance of Xis terms, it is a settled principle of law that an offer can be accepted by conduct (Wettern Electric Ltd v Welsh Development Agency [1988]). [4] In the instant case though Santes did not communicate that it had accepted Xis terms, however, if Santes were to open the letter of credit in favour of Xis after it had become aware of Xis terms , it can be argued thus to construe as acceptance by conduct.

By s 2 (1) of the Contracts (Applicable Law) Act 1990, the Rome Convention 1980 [5] has the force of law in the U.K in determining the law applicable to contractual obligations. Article 3(1) of the Rome Convention provides that a contract is governed by the law chosen by the parties. It can be seen that the parties to the contract have not expressly chose the law to govern the contract. However, where there is no such express choice Article 4(2) provides then the contract will be governed ‘by the law of the country with which it is most closely connected’. [6] In determining the law of the country with which the contract is most closely connected, the court will take into account of matters after the conclusion of the contract. [7] Matters such as the performance for which payment is due, i.e. delivery of goods, insurance and also banking operations are characteristics’ in determining the applicable law to the contact. Thus the presentation of credit documents by Xis to its London bankers can be said to provide for English law as the governing law of the contract. [8]

Letters of credit (documentary credits) are the most frequent method of payment for goods in the export trade. They have been described by Kerr LJ in RD Hardbottle (Mercantile) Ltd v National Westminster Bank Ltd [1978] [9] as ‘the life blood of international commerce’. As Lord Diplock put it in United City Merchants (Investments) Ltd v Royal Bank of Canada: ‘the whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give the seller an assured right to be paid before he parts with control of the goods’. [10]

The documentary credit is autonomous and constitutes a contract between the banker and the beneficiary which is independent of the other contractual relationships between buyer and seller. The issuing bank can not refuse to perform its obligations under an irrevocable credit on the grounds that the seller has shipped defective goods, and any dispute between the buyer and seller has to be resolved independently of the letter of credit transaction, Hamzeh Malas v British Imex Industries [1958] 2 QB 127.

However, there is an established exception to the above rule whereby the documents tendered are forged or fraudulent. The bank is entitled to and is under duty to refuse payment, even if the fraud is not apparent from the documents themselves: this also was accepted as settled law in the United City Merchants case. [11] Furthermore, the fraud must be clearly proved and a bank which has actually paid under the letter of credit against conforming documents cannot be refused reimbursement unless it is also shown that the bank had clear knowledge of the fraud. [12] Where fraud can be established, the buyer may be able to obtain an injunction to restrain his own bank from paying under the letter of credit, or to restrain the seller from drawing under it (Szeijn v J Henry Schroder Banking Corp 31 NYS 2d 631, 634 (1941)).

In applying this to the instant case, there is nothing to suggest that the credit documents have been forged by Xis or are of a fraudulent nature with the knowledge of the bank. From the facts of the case it can be seen Santes has stipulated ‘within 5 days of shipment’ of the credit documents, a confirmed irrevocable letter under UCP will be opened. Once Xis has submitted the credit documents the bank is under duty to examine all the documents with reasonable care to ascertain whether they appear on their face to be in accordance with the credit, and in accordance with the doctrine of ‘strict compliance’. [13]

The obligation of Xis under the express terms it can be seen is to firstly arrange the contract of carriage and the presentation of the credit documents. While the implied terms will be determined by the English law by virtue of which the implied terms under the Sale of Goods Act 1979 (SGA) would apply to the contract. As it relates to the interpretation of these terms since Santes has incorporated ‘FOB delivery’ into the contract. A FOB contract has its own standardised rules of interpretation developed by the ICC, [14] and thus operates to interpret the contract terms between the parties.

In an FOB contract, the seller’s duty is to place the goods free on board a ship to be named by the buyer during the contractual shipment period. The seller’s onligations extend to all charges incurred before shipment, including loading charges, but not freight or insurance. The primary duty of a buyer under a FOB contract, is to nominate an ‘effective ship’ to carry the goods, [15] to notify the seller of such nomination in time for him to load the goods and to pay the agreed price (Pyrene & Co v Scindia Navigation Co Ltd (1954). Thus any claims by Santes against Xis in relation to the delay of the shipment as a result of equipment malfunction of the vessel, may be mitigated as it was the right of Santes to nominate a vessel as a buyer under a FOB contract and not Xis.

Furthermore, according to the House of Lords in Bowes v Shand (1877) [16] , stipulations as to the time of shipment form the part of the description of the goods and breach of such stipulations entitles the buyer to reject. Although Bowes v Shand was decided before the Sale of Goods Act 1983, subsequent cases have acknowledged that the time of shipment is part of the description of the goods and is within s 13 of the Sale of Goods Act (Aron & Co v Comptoir Wegimont (1921)). Thus since the goods were not in fact shipped within the contract period Santes are entitled to reject the goods

This is not cured by backdating the time of shipment on the bill of lading to the time agreed upon in the contract between the parties, where in fact the goods were shipped on a date later than that agreed in the contract. In the case of Protor & Gambia Philipine Manufacturing Corp v Berker [17] , in this case Wright J. observed that there is an implied condition that a bill of lading should be a true and accurate document and correctly state the date of shipment the breach of which could enable the buyer to reject the document. Thus the backdating of the bill of lading gives Santes sufficient ground to reject the goods.

However, it is arguable whether Santes can reject the goods, since s 15 A of the Sale of Goods Act 1979 provides that where the breach is slight that it would be unreasonable for the buyer to reject the goods and the buyer does not deal as a consumer, the breach is to be treated as a breach of warranty and not a breach of condition. Since time is of the essence in commercial contracts, it is submitted that the breach will not be perceived as so slight for it to be treated as breach of warranty.

Finally, under the FOB contract, Santes duty to pay the price is determined by the contract. Whereby, Santes fails to pay the price on delivery of the goods within the time as stipulated in the contract, Xis will thus have a claim against Santes for the price of the goods (s 49(1) SGA).