"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well."

-Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Tuesday, October 25, 2011

CIF Contracts in India

CIF and FOB contracts are perhaps the most used of all INCOTERMS in the shipping industry. Hence, one would expect most jurisdictions involved in substantial trade to have recognised the effectiveness of the same. Indian legal system has also recognised CIFcontracts for a long time. In a recent case, the Supreme Court  discussed  the law pertaining to CIF contracts. We thought this case to be an apt starting point in our discusssions in this blog on the law of sale of goods. In this post, we'd be discussing the case in detail and in the coming posts under the label "Sale of Goods", we would be dealing with different aspects pertaining to sale of goods such as INCOTERMS, insurance in sale of goods etc.
Case No.: Civil Appeal No. 3343/ 2005
Decided on: 12.10.2011
Bench: RM Lodha & JS Kehar, JJ.

November 1997: Phulchand Exports (Phulchand) and OO Patriot (OOO) entered into a contract wherein Phulchand was to supply 1000 Metric Tons (MT) of a particular variety of polished rice to OOO, a Russian company at Rs. 12,450 per MT. Some of the terms were:
  • "Goods on CIF Novorossiysk Port, Russia"
  • "The Price is fixed on the terms of "CIF (liner out) Novorossiysk, Russia according to Incoterms-90"
  • "Payment for the Goods, delivered under the present contract is to be effected by irrevocable documentary Letter of Credit opened in favour of the sellers for the total value of the contract for the period of 45 days"
  • "The L/C should be opened within 10 working days from the date of signing of the contract."
  • "The L/C is executed by the beneficiary's bank against presentation by the sellers of the following documents..."
  • "The Goods sold under the present contract should be shipped within 40 days from the date of opening the L/C.The date of shipment is the date of loading of the Goods to the board of  vessel... Shipment should be done by a vessel that is on the way to Novorossiysk as the first port of discharge."
03.12.97: OOO opened Letter of Credit (L/C) with the last date of shipment as 12.01.98. On presentation of the required documents by the L/C, the banker paid the amount to Phulchand.

29.01.98: The goods were shipped  from Port Kandla, Gujarat fifty six days after the opening of L/C instead of the 40 days time period allowed under the contract. The vessel left Kandla only on 20.02.98. Under the bill of lading given by the seller, the carrier had the right to determine the order of destination of sea ports for unloading of cargoes in contradiction to the contractual terms.

The vessel did not reach Novorossiysk because of its engine failure. It had to be salvaged but the owners could not pay for the salvage. Therefore, the vessel and its cargo were sold and the proceeds were used to compensate the rescue vessel.

24.08.98: Claim was made by OOO with the insurers for non-delivery of goods to the desginated port. The claim was denied on the ground that the policy did not cover risk of detention.

27.11.98: OOO invoked arbitration in the International Court of Commercial Arbitration of the Chamber of Commerce and Industry of the Russian Federation. The arbitral tribunal held in favour of OOO on the ground that the sellers had breached the terms of the contract because:
  • The shipment was made after 16 days from the last due date under the contract
  • vessel departed after 38 days from the said due date
  • As per the bill of lading, Novorossiysk was not the first port of discharge, though the same was mandatory under the contract
  • As per Clause 4 of the contract, Phulchand had to reimburse the consideration if the goods were not delivered.  (the contract provided: "In case the Goods do not arrive to the customs are of Russian Federation within 180 days from the date of payment  the transferred amount is to be reimbursed to the buyer's account."
  • Phulchand's act of going to the Turkish port where the ship was arrested and sold to assess the situation conveyed that Phulchand never considered it to be exempt from the commitment due to the alleged fprce majeure circumstance.
The tribunal also found OOO in default because:
  • OOO did not pass the insurance certificate and the cargo documents to Phulchand in time.
  • OOO did not ask for reimbursement immediately after the expiry of the 180 days period within which goods were to arrive at the deginated port as per contract.
Since both the parties committed contractual breaches, the tribunal split the losses between the parties.

OOO filed an application under Ss 47 and 48 of the Arbitration and Conciliation Act, 1996 to enforce the arbitral award. Phulchand resisted enforcement on the ground that the award was contrary to the public policy of India. Both the Single Bench and the Division Bench held against Phulchand. Phulchand appealed to the Supreme Court.

Mr. Venugopal, Sr. Counsel for Phulchand contended:
  • The Division Bench wrongly applied the test of public policy as propounded in Renusagar v GE while the definition was subsequently expanded in the case of ONGC v SAW Pipes.
  • The contract was a CIF contract and the risk in the goods passed once the shipment was made.
  • In any case, the property passed when the shipping documents were handed over to them through banking channels on negotiation of L/C on 19.02.98 and therefore the liability of Phulchand ceased to exist on the said date.
  • Clause 4 of the Contract which provided for retransfer of the consideration in case of failure to deliver the goods within 180 days amounted to a penalty and was prohibited under Section 74 of the Contract Act. The said provision also amounted to an unconscionable bargain and was void as per Section 23 of the Contract Act.
The decision is summarized below
  • The decision of the Divison Bench (dated 03.05.02) was based on Renusagar v GE. In ONGC v SAW Pipes, "public policy" was given a wider meaning.
  • "13. There is merit in the submission of learned senior counsel that in view of the decision of this Court in Saw Pipes Ltd., the expression 'public policy of India' used in Section 48 (2)(b) has to be given wider meaning and the award could be set aside, 'if it is patently illegal'. At the first blush we thought of remanding the matter to the High Court, but on a deeper thought, we decided to hear the objections relating to patent illegality in the award ourselves as the award by the Arbitral Tribunal was given as far back as on October 18, 1999 and about 12 years have elapsed since then. We thought that the issue relating to enforceability of the subject award must be brought to an end finally one way or the other."
  •  CIF contracts are well recongised in commerce as well as in law. Standard works (Kennedy's CIF Contracts) and decisions [Johnson v Taylor Bros (1920) AC 144, 155] recognise the following as features of CIF contracts
    • CIF contracts relate to carriage of goods by sea. They form the most common form of shipping contracts.
    • The seller is obligated to ship the goods at the appointed time in a vessel which would go to the destination port provided in the contract.
    • Tendering the shipping documents as soon as the goods are despatched, mainly the bill of lading for carriage of the goods, reasonable insurance cover for the goods and invoice for the amount due from the buyer.
    • The delivery of documents to the buyer is the symbolic delivery of the goods. Once the documents are delivered, the goods are at the buyer's risk and the seller is entitled to the price.
  •  Under S 26 of the Sale of Goods Act (which reads as below), is subject to an agreement between the parties to the contrary, considering the usage of the expression "unless otherwise agreed".

    "Risk prima facie passes with property.-- Unless otherwise agreed, the goods remain at the seller's risk until the property therein is transferred to the buyer, but when the property therein is transferred to the buyer, the goods are at the buyer's risk whether delivery has been made or not: Provided that, where delivery has been delayed through the fault of either buyer or seller, the goods are at the risk of the party in fault as regards any loss which might not have occurred but for such fault: Provided also that nothing in this section shall affect the duties or liabilities of either seller or buyer as bailee of the goods of the other party."
     If the shipment is delayed or if the seller puts the goods on a ship not destined for the contractually appointed port, the seller has breached the contract. In the instant case, both have happened. The seller has breached these fundamental terms of the contract "at the very threshold". Therefore, it cannot be said that property and risk passed to the buyer once the shipping documents were handed over.
  • "In such a case as this one [where the seller had breached the 'primary' contractual obligations], the seller's failure [] can be held to have resulted in postponement of transfer of title in goods to the buyers." 
  • Even if the property is deemed to have been transferred to the buyer, the risk therein has not been as there was no delivery at at all owing to the contractual breaches by the buyer. In such a case, the first proviso is attracted. Therefore, Phulchand's argument that its liability ceased on shipment is rejected.
  • The contractual stipulation in the form of Clause 4 (which provided for retransfer of the consideration in case of failure to deliver the goods within 180 days) is not in the nature of a penalty as it is neither punitive nor is it vindictive. It merely provided for repayment of price. Even in the absence of such a clause, the seller was liable under law to return the consideration. For the same reason, the clause is also not violative of Section 23. These terms are in conformity with international trade and between parties with equal bargaining powers.
Consequently, the court dismissed the appeal but without imposing costs as the buyer did not appear before the Supreme Court in the matter. Thus, even if it is contractually agreed that risk passes on shipment of goods, if the seller had breached the terms relating to performance prior to or at the time of shipment, risk does not pass and the seller would be liable for the loss/ damage of the goods in transit.

We will have a detailed post explaining the contract, CIF terms and the relevant provisions of the Sale of Goods Act and the judgement in another post. For now, there are two points worth mentioning in the context of arbitration and civil procedure:

1) "Public policy" in ONGC v SAW pipes was decided in the context of Section 34(2)(b)(ii) of the Act which deals with setting aside arbitral awards under Part I. Regular readers may recollect a post in this blog on the much-appreciated judgement of the Delhi High Court in Penn Racquet Sports v. Mayor International Ltd. where it was held:
"As held by the Supreme Court, the recognition and enforcement of a foreign award cannot be denied merely because the award is in contravention of the law of India. The award should be contrary to the fundamental policy of Indian law, for the Courts in India to deny recognition and enforcement of a foreign award. The other grounds recognized by the Supreme Court to refuse recognition and enforcement of a foreign award are that the award is contrary to the interests of India, or justice or morality."
A perusal of Para 13 of the judgement (quoted) conveys the meaning that according to the Supreme Court, "public policy" in S 48 has the same meaning as it has in Section 34 (after SAW Pipes). This is in contradiction to the judgement of the Delhi High Court.

2) The second point that we wish to make is a short but important one. Allocation of costs by courts in India lacks rational basis. In this case, now costs were awarded in favour of the Buyer, OOO Patriot because it did not appear before the Supreme Court. But what about costs expended before the Single and the Division Benches? A comprehensive costs-awarding policy for the courts is of utmost necessity.

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