In one of the litigations on CIF contracts many issues arose and gave rise to divergent propositions raised by the contesting parties. The main problem revolved around the buyer's right to reject the documents or the goods in a cost insurance and freight (CIF) contract. In order to move forward and to settle the raised propositions, the first question would be to determine the nature of a CIF contract?
The fact is that when a vender and purchaser of goods, enter into a CIF contract, the vender in absence of any special provision to the contract is bound by his contract to do the following:
a) To make and issue an invoice of the goods sold;
b) To ship, at the port of shipment, goods of a description contained in the contract;
c) To procure a contract of affreightment under which the goods are to be delivered at the destination contemplated by the contract;
d) To arrange for an insurance upon the terms current in trade which will be available for the benefit of buyer;
e) With all reasonable dispatch to send forward and tender to the buyer the shipping documents, namely, invoice, the bill of lading and policy of insurance, delivery of which to the buyer as symbolic delivery of the goods purchased, placing the same at buyer's risk and entitling the seller to payment of their price.
The essential features of the C.I.F contract thus embody a seller who fulfils his part of the bargain by tendering to the buyer the proper shipping documents, not by the actual physical delivery of goods. On presentation of regular and complete shipping documents the buyer is bound to pay the price, irrespective of arrival of the goods. The buyer cannot refuse the documents and ask for the actual goods, nor can the vender withhold the documents and tender the goods they represent.
Obviously in the case of a C.I.F contract the question would be what rights the buyer acquires once the contract is made? The emerging legal position is that in such type of contracts the buyer has right to:
I. Reject the documents if they are not in order; and
II. Reject the goods if they do not conform to the contract of sale.
For example, where the seller agreed to sell to the buyer a quantity of bleaching chemical under a CIF contract, where the goods were to be shipped not later than 31st October. The goods arrived at quay on 31st October, but they were tendered to the buyer's bank after the words "Received for shipment and since" had been erased, and the date of shipment therefore, appeared to be 31st October. The bills of lading were accepted by the bank on the buyer's behalf, but when the goods arrived buyers discovered that the true date of shipment was 3rd November, so the buyer maintained that he was entitled to reject the goods. The matter went before the court and the court held that, the buyer was entitled to reject the goods because in a C.I.F contract he had the right to either reject the documents or to reject the goods.
A CIF contract puts a number of obligations on the seller relating to goods and documents. As regards the goods the same must conform to the description given in the contract. Furthermore, the documents which he is under an obligation to send are required to conform to the contract. And where any breach is made, the same constitutes violation of the contract. Where the goods had been shipped on a date which does not correspond to the contract, the required obligations have been broken.
A seller knows that he cannot send forward a bill of lading which conforms with the contract and, at the same time, describes accurately the date of shipment, and, therefore, in that sense, it is true to say that the same act necessarily causes the two breaches of two independent obligations. There may, however, be cases where the two breaches of two independent obligations are not necessarily reflected both in the documents and in the goods. However that may be, there are distinct obligations, and the right to reject the documents arises when the documents are tendered, and the right to reject, or the moment for rejecting, the goods arises when they are landed and when, after examination, they are found not to be in conformity with the contract.
The two breaches are distinct, not merely in law, but also as a matter of business and of ordinary common sense. There being a right to reject the documents separately from a right to reject the goods, it is obvious that, as a matter of business, very different considerations will govern the buyer's mind as he applies himself to one or other of those questions. When he has to make up his mind whether he accepts the documents or not, because at that stage he has not parted with the money. If he parts with his money, then his consideration may be whether or not to reject the goods, and for that wholly different considerations will operate. In the interval he may have had dealings with the goods. He may have pledged them to his bank, he may have agreed to resell the specific goods, and the positions may have been entirely altered.
The breach of the contract may be called a breach to deliver correct documents (a) and the failure to ship goods in conformity with the contract, ie, on the contract date, (b), it seems that the right to damages for breach vests when (a) the breach is committed, that the measure is then determined as being the proper measure to put the buyer in a good position as he would have been, in if the breach had not been committed; and that, when a separate breach, (b), is committed, the buyer has a separate and independent right to elect on that breach and that how he is going to deal with it, whether he treats it as a condition or as a warranty, and that he cannot be fettered in the exercise of that right by his election altering the measure of damages which he could have recovered from the earlier breach.
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates Karachi)
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