Essay: Payment and fulfillment of contractual obligations under International Sales law

The present matter at hand involves the fundamental issue under international sales which pertains to payment and fulfillment of contractual obligations by the concerned parties.
Also, the issue to the applicability of the United Nations Convention on Contracts for the International Sale of Goods (hereinafter referred to as the Convention) is equally crucial as the seller’s State is a signatory to the Convention but the buyer’s State is not. The issue which surfaces here is based on the complicated applicability of the Convention on party to contract based in a State which is the part of it.
Present case falls within the present legal framework regarding the International Sales i.e. the Convention, particularly under Article 1. In the present matter A & Co. a company in United Kingdom entered into a sales contract with S Co in China. Article 1 of the CISG requires that at least one party to the contract must have some connection with the CISG and in the present matter China is a contracting State and there should be sale of moveable goods. However, by virtue of Article 1(b), if the contracting party is from a non-signatory State, then the rules of Private International Law are to be taken into account to determine the applicability and jurisdiction of the Convention.
Under the present regulatory framework in this regards of United Kingdom with reliance to Article 1(b) of the Convention, it seems that the choice of law is dependent on contracting party and if not done so, on the adjudicating body such as a Court or Tribunal. The Private International Law Rules of the United Kingdom are relevant to the practice of choosing the governing law between the contracting parties. Apparently, this is a practice carried in the English Courts where they have the freedom to choose the applicable law. There have been instances when the courts have chosen to apply the Convention on matters pertaining to dispute between entity of a signatory State and an entity of the non – signatory State. Article 46(3) of the Arbitration Act 1996 of U.K., the choice of law is to be determined by conflict of laws if there is not such agreement as to choice of law. The Arbitrator is given wide powers to decide upon the governing law in such a case.
The UK Kingdom incorporated the Rome Convention by the act of 1990. Article 4(1) of the Rome Convention states that if the law has not been chosen according to Article 3 of the Convention then in case of sale of goods the governing law would be the law of the seller country i.e. which is more closely connected and where the conclusion of the contract takes place. In the present case China is the seller country and contract is concluded when the goods are transported from Shanghai to Liverpool. However, China is a contracting state so, CISG should be the governing law in the matter. An example given in the book ‘International Sale of Goods in the Conflict of Law, a Belgian Court is resolving a dispute between an English Buyer and a German Seller. Article 4(2) of the Rome Convention will be applied i.e. the law of the seller state will be the governing law. Furthermore, Germany is a contracting state so the CISG will be the governing law. Article 15 of the Rome Convention states that for determining the governing law the domestic law and the private international law should be taken into account.
In the case of Russian Federation where one of the parties to the contract was from a non-signatory State, yet the dispute between the contracting parties was adjudicated according to the Convention. The Tribunal took into account Article 1(1)(b) of the Convention. Further in the case of Vita Food Products Inc. v. Unus Shipping Co. Ltd. , Lord Wright mentioned that if there is neither express nor an implied choice then the governing law to be applied by the court should be the most closely connected law to the contract.
In the year 1995 at Hague, Convention on the international sales of goods, Article 3 provides that in case the governing law has not been agreed upon by the parties then the contract of sale shall be governed by the domestic law of the seller country. In this case China is a contacting state, so the contract shall be governed by CISG.
However, now the problem that arises is that China being a contracting state has taken reservation under Article 95 of the CISG which provides that the contracting state shall not be bound by Article 1(1)(b) of the CISG. However, the rules of private international law or the adjudicating body will determine which law shall be applicable either CISG or Chinese domestic law.
Moreover, Article 126 of the Contract Law 1999 and General Principles of Civil Law 1986 of People’s Republic of China states of foreign element in a contract. A foreign element in the contract can be evident if one party to the contract is a foreign national, one of the parties has it business aboard, one of the parties habitually resides abroad, the contract is concluded abroad etc. In the present case A & Co one of the party has its business in United Kingdom and the contract is also concluded abroad as when the goods are delivered then the contract is concluded in this case when the goods will reach Liverpool port then the contract would be concluded. So, this is evident that the present case contains foreign element. Also, for the Chinese Courts it is important to know whether a contract contains a foreign element of not, because if it does not contain then it is a domestic contract the there is no question of choice of law. The application of Article 1(1)(b) cannot be undermined as if place of business of both the parties to the contract are in non-contracting state and by the virtue of private international law which lead to the application of the law of the contracting state or the forum state is a contracting state then the Convention becomes applicable. In the present case the parties to the contract have their business in China and United Kingdom, there is no mention as to from where the parties belong to. ???check this statement
In accordance with Article 6 of the CISG, the application of CISG is not specifically excluded by the agreement. It also states that CISG is not applicable if the parties specifically exclude its application but in the present matter the parties have not mentioned anything in the contract. In the case of Singapore Da Guang Group v. Jiangsu Machines Import & Export Ltd. the buyer’s country was Indonesia and the seller’s country was China, Indonesia is not a contracting state to CISG but before the Court of First Instance during the trial both parties agreed to apply CISG. Moreover, in another case of Sino-Ass(Singapore) PTE.LTD. v. Karawasha Resources Ltd. the adjudicating body came to the conclusion through the theory of closest connection as the contract was concluded in the buyer’s country that CISG should apply. The buyer’s country being Singapore a contracting state and the seller’s country being Hong Kong a non contracting state. Another similar case between Lian Zhong v. Xiamen Trade in which the seller and the buyer were from Hong Kong and China and Hong Kong being a non-contracting state the court applied CISG as the governing law.
In the case of Penglai Trading Group Corp. v. Japan Universal Co.Ltd. both buyer and seller countries i.e. Japan and China are contracting states but the court disregarded CISG as the governing law under the theory of closest connection. Another case where United States and China were the contracting states and the court did not adhere to CISG was XM International Inc. v. Jiangsu Metals & Minerals Import & Export (Group) Corp.
Thereafter, it is clearly evident from the aforementioned mentioned cases that the courts have the power to apply an international convention such as CISG following the rules of private international law. Article 1(1)(b) of the CISG provides for a scope of including a non-signatory state by the operation of private international law. At last CISG can be relied upon as the governing law in the transaction if the adjudicating authority deems it fit to be applied.
Further, Article 30 of the Convention requires the seller to transfer the goods, deliver the documentation and transfer of the property in the goods as per the contract and the Convention. In the present matter the seller was required to deliver 10,000 metric tons of Sugar at £400 per MT, by December 2015. The goods were shipped and the credit was payable on production of commercial invoice, three in number, to be duly signed and description of the goods and price, bills of landing containing details of shipment including weight, insurance papers of the goods, origination certificate confirming the sugar was produced in China, sugar content inspection report. The contract is a on CIF terms i.e. Cost, Insurance and Freight in which the seller has to arrange for insurance for the goods, deliver the goods on board the vessel and must bear the costs of the freight.
However, the seller produced a commercial invoice not duly signed with just two copies, bill of lading of 9500 MT mentioning freight fee paid and the quality of sugar being referred as white sugar, the amount of insurance policy was less then the amount of credit, sugar certification specifying the sugar was produced in China and analysis certificate stated the sugar to be 2015 Chinese production duly signed by a inspector from the Agriculture Department of the University of Shanghai describing the sugar as sparkly white and finely granulated. On receiving the documents with the aforementioned documentation, the buyer communicated the UK Bank about the inaccurate figures and material misrepresentations of the specification as required by the contract, where apparently the seller has not fulfilled the terms of the contract, an act which is also in contravention with Article 30 of the Convention. On this the UK Bank conveyed this to the SA Bank in China.
Furthermore, the insurance is an essential part of the transfer of goods, where the amount stipulated by the contract is important which is stressed upon by the Convention under its Article 32(2) of which states that if the seller is bound to arrange for the carriage then it must take necessary and appropriate steps for the transportation of goods. In the present case the seller corporation did insure the good but did not do it for the amount stipulated in the contract between the parties. By the reason of this action of the seller corporation it is certain that they have not been consistent with the essential requirement of International Sales as put forward in the convention and is also fundamental to the practical operation of it. This is so because as Article 32(2) requires appropriate and necessary step which are determined by the terms of the contract which in case has been breached by not adhering to the amount of insurance.
The Article 34 of the CISG provides that the seller must deliver the required documents to the buyer as mentioned in the contract. In the present matter the contract is a CIF sales contract which requires the seller to hand over insurance policy, transport document and an invoice. However, in this case the invoice was not signed and two copies were given instead of three as mentioned in the terms of contract. Moreover, the document of origin did not mention the year. However, Article 18(a)(iv) of UCP 600 provides that the commercial invoice need not be signed.
The Article 35 of the CISG states that the goods must be delivered in conformity with the contract. The main emphasis is on the contractual proviso related to quantity, quality and description as required in the contract. The seller must deliver the goods in exact quantity as mentioned in the terms of the contract under Article 35(1) CISG. However, in the present matter the quantity shipped is 9500 MT, which is in accordance with the contract as the contract states either 10% more or 10% less. The quality of the goods is another important obligation of the seller under Article 35 of the convention, in the present scenario the seller has delivered the sugar accordingly with the certificate of analysis stating the sugar is of the same specification as per the contract Article 35
In the case of Russian Federation arbitration proceeding 97/2002 of 6 June 2003, a South Korean company bough claim against the seller (Russian company) for supplying defective quality of goods under a contract. The Tribunal established that the governing law should be CISG after analyzing the Russian civil laws and conflict of laws. The Tribunal ascertained that the dispute’s basis was the quality of goods under Article 35 of the CISG which requires the seller to deliver goods of the same quality and description as mentioned in the contract. The requirement of the quality of goods were mentioned in the document communicated by fax. The Tribunal under Article 34 of the CISG, stated that all the documents related to the goods sold should be given to the buyer and the seller failed to do so.
Furthermore, the buyer inspected goods as no information was provided by the seller. The buyer then sends this information to the seller about the report of the inspection and sent the samples of both usable and defective goods. However, the seller failed to object the above and to provide an alternative means of inspection. The Tribunal found that the method of inspection used by the buyer was accepted by the seller and the goods were defective. The Tribunal ordered in favor of the buyer that the legal expenses and the fee of the of the arbitration should be paid by the seller. The two third of the claim of the buyer in respect of defective goods to be paid by the seller.
If the seller has breached any of the obligation under Article 35 then the buyer has the right to claim remedies under Article 45 of the CISG.
As per Article 36 of the Convention the seller has the liability towards the fulfillment of the obligations of the contract relating to the goods and its logistics, where inconsistency is considered as a risk. It also emphasis on the principle that the liability of seller shall not be limited to dispatch of the goods but shall exist even after receipt of goods by the buyer at any point of time. Further, Article 38(1) and 38(2) requires the goods to be examined by the buyer and if the goods are in transit the inspection should be done after receiving the goods.
In the present case, the goods have not reached the buyer and are still in transit. But on receipt of the aforementioned documentations the buyer suspects that there has been certain amount of misrepresentation on the part of seller regarding the quality of the goods. As the the buyer has already informed the same of the UK Bank, which has forwarded the information to the SA Bank in China.
In the present case the seller has delivered the documents on 20th December. However, under Article 34 if the documents are handed over before time as in this case is 31st December and they lack conformity then seller may complete the full documentation within that time.
The seller in this case is in breach of its obligations under Article 30 and 34 of the CISG as the documents handed over to the bank are not complete. The commercial invoice lacks the signature, quality, quantity and price of the goods. In the case of U.S. Seller v. Chinese Buyer (Spare Parts Case) the tribunal held the seller liable for handing over the digital copy of the airway bill which was lacking carrier’s seal.
Hereafter the question arises is does failure to deliver the correct documents as mentioned in the contract amounts to fundamental breach under Article 25 of the CISG. The Opinion No. 5 of the Advisory Council of the CISG fundamental breach is to be determined by the convention mechanisms. However, in the present case the contract expressly mentions that if there are quality issues then they would be dealt by reduction in the prices not by termination of the contract by the buyer. Moreover, fundamental breach due to defective deliver of documents amounts only when the buyer is not able to use the goods as plan. In the present case the goods are not yet delivered and examined by the buyer they are still in transit but seeing the documents it cannot amount to fundamental breach of the contract. The Oberlandesgericht (Appellate Court) in Frankfurt held that a breach of contract amounts to fundamental breach when the sole purpose of the contract is not fulfilled and the party was aware about it. Moreover, letter of credit is a separate transaction from the sales contract, but the seller need to comply with the terms of the letter of credit because the bank will not pay unless the terms of credit are fulfilled. The Secretariat’s Commentary on the 1978 draft says that the buyer can avoid the contract in the case of fundamental breach but not in accordance with a CIF or a typical documentary sale. However, in this case the breach cannot be amounted to fundamental breach.
In the present case the seller has not fulfilled his obligation under the contract. The buyer may resort to remedies under Chapter II, Section III of the Convention. Article 46(1) provides the buyer with the claim of performance from the seller, Article 46(2) and (3) states for another delivery or repair of the goods. Article 47(1) and (2) the buyer may give additional time to the seller to fulfill his obligation as per the contract, if the buyer receives a notice from the seller that he cannot perform within the given time period then buyer may claim damages under breach of contract. Article 49(1) empowers the buyer to declare the contract void, however in the present matter it was already agreed that quality issues will not entitle the buyer to terminate the contract, so the buyer cannot terminate the contract. Article 50 states that if the good are not in conformity then the buyer may reduce the price, in the present matter this has been already agreed upon so the buyer should resort to this remedy under the convention.
In the present matter the S Co has not given all the documents as mentioned in the contract required by the SA bank fulfilling the conditions for the payment. The rules of letter of credit are governed by the UCP 600 (Uniform Customs and Practice for Documentary Credits, 2007). The letter of credit is an undertaking by the bank to give the payment on the exchange of documents as mentioned in the contract. The payment is proceeded only when there is 100% compliance and if there is any lack of conformity then there is a delay in settling the transaction. Article 14(a) of UCP 600 provides that it is the duty of the bank to examine the documents and to make the payment upon fulfillment of all the documents as per the contract. In the case of Angelica-Whitewear Ltd. v. Bank of Nova Scotia [1987] the issuing bank should agree on the presentation of documents not of goods. The Rule of Documentary Compliance is to be fulfilled i.e. not only the document but a careful examination should be done to make sure that it includes all the conditions required in the contract to make the payment against the letter of credit. Under Article 17 of UCP 600 the bank will treat the document to be original if it bears the stamp or signature of the issuer, apparently in the present matter the commercial invoice is not signed. The Article 20(a)(i) of UCP 600 provides that the bill of lading must contain the name of the carrier, a signature by the carrier or agent.
The date of shipment is the date of bill of lading however, in the present matter the bill of lading evident that the goods were on board on 2nd December and the bill of lading is date 10th December.
The S Co has not fulfilled Article 28(f)(ii) of UCP which states that the amount of insurance coverage should be similar to the invoice value and in the present matter the insurance coverage is for a lesser amount. The amount should be at least 110% of the CIF value of the goods.
Also, under Article 58(1) of the CISG the buyer has an obligation to pay only when the goods or the documents are placed at its disposal. In the present matter the documents are provided to the bank which do not comply with the contract and the goods are not available to the buyer. However, in the case German Federal Supreme Court 3rd April 1996 states that the documents of quality, survey and origin report does not require the buyer to withhold the payment under this article but they should be governed in accordance with Article 30 and 34 of the CISG.
The bank should refuse to comply under Article 16(a). However, under Article 16(c) of UCP 600 which provides that the nominated bank can convey a notice to the seller that bank is holding the documents presented and until further notice from the issuer bank. As in this case the issuer bank has notified the nominated bank about the buyer’s reason of doubt that the specification figures may be inaccurate and may contain material misrepresentations. So under Article 16(c) SA bank should issue a notice to S Co that the bank is holding the documents but the documents are not complied with the contract and issuer bank has communicated about the material misrepresentation for until further communication received from the UK bank (issuer bank) the payment cannot be processed through.
Henceforth as mentioned above the SA Bank should accept the documents and send a notice of refusal under Article 16 of UCP that the bank cannot comply with terms of letter of credit as the documents are not in conformity and the payment cannot be processed. However, if the bank accepts the documents and the goods are of inferior quality which would result in the reduction of price then SA bank would have problem in recovery of the money. If the bank rejects the documents then it has the chance to notify the issuer bank as the issuer bank notified SA bank about the misrepresentation and inaccurate specification figures which is the buyer’s reason and it can ask the seller to wait for a certain period as to when the good reach and buyer examines the goods and after instructions from the issuer bank can process the payment. The SA should ask the S Co to fulfill the necessary documents which are not in accordance with the letter of credit within the period of five working day as under UCP 600 and can process the payment as and when the documents are given in accordance with the contract. The above actions are suitable as the bank is an institution which is obliged to pay but only when the terms of the contract are fulfilled, any payment on non-fulfillment of the contract will make the bank at fault and the issuer bank can deny the payment. However, if the SA bank rejects the presentation and asks the S Co to fulfill the documents then it can process it payment or it can advice the S Co to wait until the goods are delivered and the buyer examines the goods, if there is no objection as to quality issues form the buyer side then it can process the payment.
BIBLIOGRAPHY
Table of Cases
UK Cases
• Products Inc. v. Unus Shipping Co. Ltd [1939] UKPC 7, [1939] AC 277
Cases: Other Jurisdictions
• Singapore Da Guang Group v. Jiangsu Machinery Import and Export Ltd. (1999) Jing Zhong Zi Di No. 448
• Sino-Add (Singapore) PTE. Ltd. v. Karawasha Resources Ltd. (2001) Haishangchuzi No. 119
• Lian Zhong v. Xiamen Trade (1992)
• Pengali Trading Group Copr. V. Japan Universal Co. Ltd. (2003)
• XM International Inc. v. Jiangsu Metals & Minerals Import & Export (Group) Corp. (2000) Su Jing Zhong Zi Di No. 380
• US Seller v. Chinese Buyer (2006) CISG/2006/14
• Angelica-Whitewear Ltd. v Bank of Nova Scotia [1987] 1 SCR 59
• Germany 3 April 1996 Supreme Court (Cobalt Sulfate Case) VIII ZR 51/95
Table of Legislation: UK
• Arbitration Act 1996
Table of Legislation: Other Jurisdictions
• Convention on the law applicable to International Sales of Goods (adopted on 15 June 1955, entered into force 1 September 1964) 7411 UNTS 149 art 3
• UCP 600 (Uniform Customs and Practice)
• CISG (Contracts for the International Sale of Goods 1980)
Books
• Huber P, and Mullis A, The CISG (European Law Publishers 2007).
• Fawcett J, Harris J and Bridge M, International Sale of Goods in the Conflict of Laws (Oxford University Press 2005)
• Butler E A, A Practical Guide to the CISG-Negotiations through Litigation (Aspen Publishers 2007)
Articles
• Convention on the Law Applicable to Contractual Obligations 1980 [1998] OJ 1 27/37
• International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation, ‘Arbitration Russian Federation Proceeding’ [2003] (19) Arb. Praktika 111-118
• Weizuo C, ‘The Conflict of Laws in the Context of the CISG: A Chinese Perspective’ [200] 20(1) Pace International Law Review 115-123
• ‘Documentation: CISG Advisory Council Opinion No. 11, Issues Raised by Documents under The CISG Focusing on The Buyer’s Payment Duty’ (2013) 13 International Handelsrecht
• Bijil M, ‘Fundamental Breach in Documentary Sales Contracts’ (2009) 1 European Journal of Commercial Contract Law.
• Bergami R, ‘UCP 600 Rules- Changing Letter of Credit Business for International traders?’ (2000) 1 International Journal of Economics and Business Research.