LW 488

INTRODUCTION TO INTERNATIONAL TRADE AND FINANCE LAW (ITF)

ITF relates to the export of goods or services from one country to another. Export transaction is
the same as international trade. Export of goods normally concerns sells of goods across
nations. It basically refers to international supply of services.

Contracts for inter-sales of goods or services are peculiar in nature and this is because normally
these contracts do not stand alone like ordinary contracts in that ITF contracts are intertwined
with other contracts. For example, if you have a contract for the sale of goods as the principal
contract, in addition you will have a second contract of carriage of goods, a third contract of
insurance with respect to the same goods and you may even have a contract of bank
guarantee to cover for payment of goods (providing funds)—that‘s why we give international
trade a separate treatment.

REGIME OF INTERNATIONAL TRADE AND FINANCE LAW

ITF has two branches which are

1. Public International Trade Law and

2. Private International Trade Law.

But for the purpose of the present subject, we will be focusing on Private International Trade
Law.

PRIVATE INTERNATIONAL TRADE LAW (PITL)

This refers to a system of legal rules of international legislations which regulate trade relations
between states and international organizations. Its main sources consist of:

a. General Agreement on Trade and Tariffs (GATT). This is an international agreement

which was entered between various states with the purpose of promoting international
trade and reduction of trade restrictions among member states from the period of
1947—1994.

b. The World Trade Organization (WTO). This is the only global international
organization dealing with the rules of trade between nations. At its heart are the WTO
agreements, negotiated and signed by the bulk of the world‘s trading nations and
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 ratified in their parliaments. Its main goal is to help producers of goods and services,
exporters, and importers conduct their business.

c. Multilateral Agreements on Investments for example, North America Free Trade

Agreement (NAFTA) which is a trade agreement between the United States, Canada
and Mexico. The agreement entered into force on January 1, 1994. In terms of combined
purchasing power parity GDP of its members, as of 2013 the trade block is the largest in
the world.

d. International Trade Law and Customs.

PITL refers to a system of laws which regulate conflicts of laws in international trade. It consists
of proper law choice for example:

(a) Mercatoria or law of merchants,

(b) Contract law principles and rules and

(c) Conventions relating to international trade.

WHY DO NATIONS TRADE?

There are several theories which try to explain why nations trade and these include the
following theories:

(a) Mercantilism Theory: this theory was expounded by the major European Powers
during 1500-1800 years. It stipulated that a nation should export more than it imports
and accumulate bullions (gold or silver in bulk). The theory favoured the exportation
of finished goods over and above raw materials in order to accumulate bullions. The
theory was a reaction against the prevailing economic problems faced by states during
that period where every municipality or town imposed tariffs or taxes on goods passing
through their territories. Under this theory, it was stipulated that the wealth of the
country is finite—it has limited bounds which in turn meant that if one nation opts to
grow it has to do so at the expense of other states. The theory developed from the
desire to create powerful nation states having larger and superior military units
because by having this, a state was believed to be able to capture. Its mercantilism led
to colonialism in order to acquire raw materials and market.

(b) Comparative Advantage Theory: it was advanced by the British Economist David
Ricard (1772-1823). The theory refers to the ability of a state to produce goods and
services at a lower opportunity cost than other states. This gives a nation or state the
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ability to sell goods and services at lower price than its competitors and realize stronger
sales margins.

The amount of goods or service that is sacrificed in order to produce another good or
service more effectively and efficiently is called opportunity cost.

For example, assume that Switzerland can produce either one pound of cheese or two
pounds of chocolate in an hour. If it chooses to produce a pound of cheese in a given
hour, it forgoes the opportunity to produce two pounds of chocolate. The two pounds
of chocolate, therefore, are the opportunity cost of producing the pound of cheese.
They sacrificed two pounds of chocolate to make one pound of cheese.

A country is said to have a comparative advantage in whichever good it has the lowest
opportunity cost—it has comparative advantage in whichever good it sacrifices the
least to produce as Switzerland in our example—where Switzerland has a comparative
advantage in the production of chocolate.

Therefore, if given a choice between producing two goods or services, a country will
make the most efficient use of its resources by producing the good with the lowest
opportunity cost, the good for which it holds the comparative advantage.

The comparative theory has been criticized for making so many unrealistic
assumptions. For example,

i. Transport costs may outweigh any comparative advantage.

ii. Increased specialization may lead to diseconomies of scale.

iii. This theory assumes that trading countries have given productive resources,
which do not change over time; this is highly unrealistic as the availability of
productive resources (labour, capital, technology etc.) keep changing in every
modern economy. This is more so because, these days, all countries are
interested in economic development.

iv. This theory assumes that the economies of trading countries are fully
competitive. This is generally not so. Factually, most economies suffer varying
degrees of monopoly elements.

v. This theory assumes that trading countries allow freedom of trade. They do not
have a policy of protection or quantitative restrictions to safeguard their own
economic interests or gains at the cost of their trading partners.

vi. Trading costs have been ignored in this theory.

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 (c) Heckscher Ohlin Theory of Factor Endorsement (Factor Proportion Theory):
This theory was advanced forth by two Swedish Economist, Eli Heckscher and Bertil
Ohlin (his student).

The theory can be summarized in these words thus:

a. A country that is relatively labour abundant should specialize in the production of

relatively labour intensive goods. It should then export these labour intensive goods
in exchange for capital intensive goods.

b. A country that is relatively capital abundant should specialize in the production of

relatively capital intensive goods. It should then export these capital intensive goods
in exchange for labour intensive goods.

Capital labour ratio is the amount of capital per unit of work.

The price of the capital intensive goods will be relative lower in capital abundant
country due to over production and over supply. Therefore, the country will be
compelled to sell to the labour abundant country where the price of the goods will be
expected to be higher.

FREE ADVOCACY OR TRADE LIBERALIZATION (TL)

It requires that trade in goods, labour and services between states should flow without any
impediments imposed by the government. This concept is strongly opposed by developing
states as they consider that free trade has a massive risk to their weaker economies.

In essence Trade Liberalization policy demands the following things:

(a) International trade of goods without tariffs (taxes on import goods or any other trade
barriers like quota (sell on the maxima amount of goods which can be imported).

(b) International trade in services without tariffs or other trade barriers.

(c) Free movement of labour between countries.

(d) Absence of trade distorting policies such as taxes, subsidies, regulations and laws that
give domestic business entity an advantage over foreign entities.

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TRADE BARRIERS (PROTECTIONISM POLICY)

Protectionism is the economic policy of restricting trade between nations. This can be done
through the following ways:

(i) High tariffs on imported goods: the effect is to increase the price of goods supplied by
foreign entities to the advantage of domestic business entities.

(ii) Restricting quotas (quota is a limit to the quantity coming into a country) and anti-
dumping measures: these may be used to protect domestic industries from foreign
competition. Quotas are further used in protecting the dumping of cheaper foreign
goods that would override the market.

(iii) The use of government subsidies such as Kilimo Kwanza—government intervention.

(iv) The use of tax cut and tax holidays. The government can charge favourable tax to
some domestic industres in view of promoting internal trade.

(v) State intervention: the use of state power to promote economic entity activities like
TAZARA.

(vi) The use of trade restriction. For example restricting foreign nations from freely taking
up employment without restrictions.

SOURCES AND DEVELOPMENT OF INTERNATIONAL TRADE LAW

The sources of international trade law include the following:

a. English law relating to international sale and contracts: England has been developing
up rules governing conflicts of law in International Trade. The conflict of law rules
normally determines the jurisdiction of the court in a case and the law applicable to
the dispute. The law applicable may be domestic or foreign law and the court or
tribunal of competent jurisdiction may be a domestic or foreign tribunal.

b. Proliferation of rules governing sales contracts: most of the maritime and industrial
states developed their own systems of laws and rules to address conflicts of laws which
arise in international trade. These rules lacked uniformity and they need to harmonize
the system of laws governing international trade.

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At the private level, general consideration of sale and model contracts forms were formulated
and they normally contain the choice of law clause. At international level, inter-conventions
have been adopted in an effort to harmonize private international trade law.

HARMONIZATION OF INTERNATIONAL TRADE LAW

The European Community has passed a number of conventions and initiative with the view of
harmonizing private international law. These include the following:

i. The European Community Convention on the Law applicable to Contractual

Obligations of 1980 (famously referred to as Rome Convention) is a measure of
private international law or conflict of laws which creates a common choice of law
system in contracts within the European Union. The convention determines which
law should be used, but does not harmonize the substance (the actual law). It was
signed in Rome, Italy on 19th June, 1980 and entered into force in 1991.
ii. International Institute for Unification of Private International Law (UNIDROIT). Is an
independent intergovernmental organization with its seat in Rome. Its purpose is to
study needs and methods for modernizing, harmonizing and coordinating private
and in particular commercial law as between states and groups of states and to
formulate uniform law insturments, principles and rules to achieve those objectives.
It was set up in 1926 as an auxiliary organ of the League of Nations, the Institute
was, following the demise of the League of Nations, re—established in 1940 on the
basis of multilateral agreement which is UNIDROIT Statute. It has come up with
several conventions to harmonize international trade and one of them includes
Convention Relating to a Uniform Law on International Sale of goods of 1964.

iii. United Nations Commission on International Trade Law: Is a United Nations sponsored
commission that seeks to create a forum for countries to come together and set
international trade law standards. It was established by the United Nations General
Assembly in 1966. It has tried to come up with a number of conventions including
the following:

a. UN Convention on Contract for International Sale of Goods (VIENNA) of 1980.

b. The UN Convention on Recognition and Enforcement of Foreign Arbitral

Awards of 1958.

iv. International Chamber of Commerce: this is the largest, most representative business
international and non-governmental organization in the world. Its hundreds of
thousands member companies in over 180 countries have interests spanning every
sector of private enterprise. It has mainly three duties: rule setting, dispute and

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 policy resolution and advocacy. Its most important contribution to international
trade includes:

a. The establishment of ICC—International Court of Arbitration of 1923.

b. Uniform Customs and Practice for Documentary Credits of 1933.

INTERNATIONAL SALE CONTRACTS

These contracts carry out or show the duties, rights and obligations of the parties in so far as
international trade is concerned. And this is the same with regard to other types of contracts
also. When it comes to international sale contracts it is those standard term contracts in which
the rights and duties of the sellers and buyers are stipulated as a matter of practice in a
particular standard contract the parties chose. However, as far as these standard term
contracts are concerned, there is a possibility of having different interpretations in different
jurisdictions. This may be a source of disputes and this is because these standards term
contracts may differ from jurisdiction to jurisdiction. That being the case, for the purposes of
avoiding such conflicts, parties may do any of the following:

a. In the sale contract, the seller may stipulate or may explain his understanding of that
particular standard term contract for the buyer to understand.

b. The seller may stipulate that the law of his country shall apply. Here there cannot be a
dispute as the parties were at par at the beginning.

c. Parties may make references in their contract of sale to ―INCOTERMS.1‖ Then,

whatever kind of standard contract they enter will have a definition given in the
incoterms. It means international commercial terms which contain definition of every
international standard term contract. So one party needs not to inform another of the
rights as they are universally known from INCOTERMS.

These terms are the initiative of the ICC—International Chamber of Commerce and
the first incoterms were published in 1936 subject to revisions. The current are incoterms
of 2010. ICC standardized these terms in order to solve trade disputes among the
parties which have been in existence for a long time.

By choosing incoterms of particular years, then, the interpretation shall be of that year.
For example, CIF Nagawa (incoterms 1980) where Nagawa means a place of boarding
the goods to the ship and the year means that the incoterms of 1980 shall govern such
a contract whose type of that contract is CIF.

1
The other name being International Rules for the Interpretation of Trade Terms

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INCOTERMS can therefore be correctly defined as series of pre-defined commercial terms
published by the international Chamber of Commerce (ICC) that are widely used in
International Commercial transactions or procurement processes. They were first published in
1936. They provide internationally accepted definitions and rules of interpretation for most
common commercial terms. They only inform the sales contract by defining the respective
obligations, costs and risks involved in the delivery of goods from the Seller to the Buyer.
However, Incoterms do not constitute a contract, supersede the law governing the contract,
and define where title transfers or address the price payable, currency or credit terms.

There are varieties of international sale contracts such as FAS, FOB, CIF, Ex Warehouse but of
all these, FOB and CIF are the most common.

FAS -FREE ALONGSIDE SHIP

In this type of international sale contract, the seller‘s responsibilities and risks in respect of the
goods is discharged when they are carried alongside the ship so that they can be placed on
board either in the ship‘s tackle or by a shore crane or some other means. Thus, the actual
loading of the goods over the ship‘s rail is the responsibility of the buyer and not the seller‘s.
And the charges for it have to be borne by the buyer. We can in short say that the Seller
delivers the goods to the origin port. From that point, the Buyer bears all costs and risks of loss
or damage. The Incoterms 2000 requires the seller to clear the goods for export. FAS are
normally used for maritime transport.

Some of the duties of seller include:

a. supply the goods in conformity with the contract of sale together with such evidence
of conformity as may be required by the contract,

b. deliver the goods alongside the vessel at the loading berth named by the buyer at
the named port of shipment,

c. Render the buyer at the latter‘s request risk and expenses, and assistance in
obtaining any export license or other governmental authorizations for the export of
goods by the buyer.

d. Provides at his own expenses, the customary parking of the goods—every kinds of
goods have their own way of parking that‘s what it means.

The buyer must:

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 a. Give the seller due notice of the name, loading berth of and delivery date to the
vessel,

b. Bear all the charges and risks of the goods from the time when they shall have been
effectively delivered alongside the vessel at the named port of shipment,

c. Bear any additional costs incurred because the vessel named by him shall have
failed to arrive on time, should he fail to name the vessel on time or if he shall
reserve to himself a period within which to take delivery of the goods and or the
right to choose the port of shipment, should he fail to give detailed instructions in
time bear any additional costs incurred because of such failure.

FoB—FREE ON BOARD

Under this type of international sale contract, the buyer has incumbent duty to notify the seller
of the name of the ship and the date of arrival of such a ship. Once this is done, it is then, the
duty of the seller to load the goods on ship and all charges incurred up to and including the
delivery of the goods on board ship have to be borne by the seller while the buyer has to pay
all the subsequent charges such as the storage of the goods, freight and marine insurance as
well as unloading charges, import duties, consular fees and other charges due on arrival of the
consignment in the port of destination.

The seller carries all the duties and all the costs before the goods cross the ship’s rail. An FoB
contract has an impact in calculating purchasing price because some subsequent charges after
the consignment has crossed the ship‘s rail are to be borne by the buyer. A ship‘s rail means a
point of demarcation where goods are considered to be in the ship and so beyond the
responsibility of the seller. For example, in Japan a car can be 1000$ dollar but in Dar es
Salaam the same car is sold at a bit higher price because of the additional costs borne by the
buyer. That being the case, there are some liabilities or duties which fall on the seller like the
issue of freights—which means when goods are put on board in the ship it is because there is a
contract of carriage and the payment is required which is freight paid by the international
buyer. So it is the duty of the buyer to nominate a suitable ship. The ship nominated must
have two important conditions fulfilled namely that the ship must have:

a. Enough space for the consignment

b. The necessary facility to support the consignment

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When these two conditions are absent and the goods in a ship are destroyed, it is the mistake
of the buyer. Also marine insurance is the duty of the buyer himself and not the seller. The
rights and duties of the parties include,

The Seller must:

a. Supply the goods in conformity with the contract of sale together with evidence of
conformity.

b. Deliver the goods on board the vessel named by the buyer at the named port of
shipment in the manner customary at the port of shipment at the date, or within the
period stipulated.

c. Notify the buyer without delay that the goods have been delivered on board. If he has
not informed the buyer and the goods are damaged, the seller is liable because the
purpose of notifying the buyer is so that the buyer may insure the goods. This means
that if the seller does not inform the buyer about the goods, the buyer cannot insure
them as he has no information. The seller will be responsible for damage to the goods.

d. At his own expenses, obtain any license or governmental authorizations necessary for
the export of the goods by the buyer.

e. Bear all costs and risks of the goods until such time as they shall have effectively passed
the ship‘s rail at the named port of shipment including any taxes, fees or charges levied
because of exportation.

f. Provides at his own expenses the customary parking of the goods unless it is the custom
of the trade to ship the goods unpacked.

g. Pay the costs of any checking operations such as checking quality, measuring,
weighing, counting, which shall be necessary for the purposes of delivering the goods.

h. Provide the buyer at the latter‘s request and expense with the certificate of origin.

The buyer must:

a. At his own expenses, charter (hiring all the entire vessel for the consignment) a vessel or
reserve any necessary space on board a vessel and give the seller due notice of the
name, loading berth of and delivery dates to the vessel.

b. Bear all costs and risks of the goods from the time when they shall have effectively
passed the ship‘s rail at the named port of shipment and pay the price as provided in
the contracts.

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AS typed by FILBERT NICKSONI, DARUSO PRESIDENT 2014-2015 AND FOURTH YEAR LL.B STUDENT.

c. Bear any additional costs incurred because the vessel named by him shall have failed
to arrive on the stipulated dates or shall be unable to take the goods or shall close for
cargo earlier than the stipulated dates.

d. Should he fail to name the vessel in time or if he shall reserve to himself a period within
which to take delivery of the goods, and or the right to choose the port of shipment,
should he fail to give detailed instructions in time, bear any additional costs incurred
because of such failure.

Although these are standard terms contracts, the law allows these parties to twist the
standard term contract to suit their interests. Because of this flexibility we have three types
of FoB contracts namely:

STRICT OR CLASSIC FOB CONTRACT

Under this arrangement,

a. The buyer has to nominate a suitable ship.

b. When it arrives in the port of shipment, the seller places the goods on board under a
contract of carriage by sea which he has made with a carrier but this contract is made
for the account of the buyer.

c. The seller receives the bill of lading from the carrier which normally shows him as
consignor and to his orders he transfers it to the buyer who is a consignee. Marine
insurance is directly arranged by the buyer.

N.V Handel v. English Exporters (1957) 1 Llyod’s Report 81

It was held that ―it is the duty of the buyer to arrange for marine insurance on FoB
terms and that if the seller takes out insurance he does so as an agent of the buyer and the
buyer cannot then reject tender of his own agent.‖

FOB CONTRACTS WITH ADDITIONAL SERVICES

Under this arrangement,

a. The shipping and insurance arrangements are made by the seller but this is done for
the account of the buyer.

b. In these contracts, the buyer is not under obligation to nominate a suitable ship but the
nomination is done by the seller.
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 c. And again, the seller enters into a contract with a carrier by the sea,

d. The seller places the goods on board ship and

e. The seller transfers the bill of lading to the buyer.

BUYER CONTRACTING WITH THE CARRIER

Here,

a. The buyer himself enters into contract of carriage by the carrier directly or through an
agent. Naturally, the buyer has nominated the ship and when it calls on port of
shipment, the seller puts the goods on board and the bill of lading goes directly to the
buyer. Insurance is arranged by the buyer.

Pyrene v. Scindia Nativigation, [1954] 2 QB 402.,

The case explains the three types of FoB contract thus:

a. The seller makes the contract of carriage but the buyer nominates the vessel—classic
FoB.

b. Seller nominates vessel, and makes contact of carriage—and FoB contract with
additional duties or services.

c. Buyer nominates vessel, and makes contract of carriage.

In this case of Pyrene also, Lord Devlin while interpreting article III.-(2) of The Hague Visby
Rules, he said that, ―The carrier is practically bound to play some part in the loading
and discharging, so that both operations are naturally included in those covered by the
contract of carriage. But I see no reason why the rules should not leave the parties free to
determine by their own contract the part which each has to play. On this view the whole
contract of carriage is subject to the Rules, but the extent to which loading and discharging are
brought within the carrier‘s obligations is left to the parties themselves to decide.‖

This statement in the case of Pyrene was approved by the English Court of Appeal in the case
of The El Amria & El Minia, [1982]2 Lloyds Rep 28, 32. Where it was held that,

―In Pyrene, Mr. Justice Devlin instanced three types of FoB Contract.

In the first or classic type, the buyer nominates the ship and the seller puts the goods on board
for account of the buyer, procuring a Bill of Lading. The seller is then a party to the contract of
carriage and if he has taken the Bill of Lading to his order, the only contract of carriage to

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which the buyer can become a party is that contained in the Bill of Lading which is endorsed
to him by the seller.

The second is a variant of the first, in that the seller arranges for the ship to come on the berth,
but the legal incidents are the same.

The third is where the seller puts the goods on board, takes a mate‘s receipt and gives
this to the buyer or his agent who then takes the Bill of Lading. This latter type the buyer is a
party to the contract of carriage ab initio.‖

EX-WORKS, EX-STORE AND EX-WAREHOUSE CONTRACT

This is the most convenient mode of transportation for the seller. Under Ex works sale contract,
the seller undertakes to have the goods available for collection by the buyer at the seller‘s
premises-for instance, at the factory, warehouse or mine. Under Ex Works INCOTERMS 2000,
the seller is required to provide at his expense packaging required for the transport of the
goods. The buyer is obliged to arrange for carriage of the goods, marine insurance and to
obtain export and import licenses. Under INCORTERMS 2000, if the seller helps the buyer to
procure export licenses, he does so at the request and at the expenses of the buyer.

Is a kind of international sale contract whereby delivery of goods by the seller is done at the
place where the goods situate—at a store, warehouse etc. and thus it is the duty of the
international buyer to arrange for shipment of the said consignment. This is the most
convenient type of contract to the seller as it resembles a domestic sale contract.

It means that the overseas buyer or his agent has to collect the goods at the locality at which
the seller‘s works, warehouse or store are situate. And the terms used refers to the
places where the goods are stored in land.

Duties of the seller include:

a. Supply the goods in conformity with the contract of sale together with any evidence of
conformity as may be required by the contract.

b. Place the goods at the disposal of the buyer at the time as provided in the contract at
the point of delivery named or which is usual for the delivery.

c. Provide at this own expenses the packing if any that is necessary to enable the buyer to
take delivery of the goods.

d. Give the buyer reasonable notice as to when the goods will be at his disposal.

e. Bear the costs of checking operations such as checking quality, measuring, weighing,
and counting etc. which is necessary for the purpose of packing the goods.
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The duties of the buyer include:

a. Take delivery of the goods as soon as they are placed at his disposal at the place and
at the time as provided in the contract and pay the price as provided in the contract
(only if the goods conform to the contract).

b. Bear all charges and risks of the goods from the time when they have been so placed
at his disposal provided that the goods have been duly appropriated to the contract
(before and after the hands of the seller to the buyer for the risk and payment
purposes).

c. Bear any customs duties and taxes that may be levied by reason of exportation.

d. Pay all costs and charges incurred in obtaining the documents as provided for in the
contract.

CIF CONTRACTS

Is the most famous international sale contract standing for Cost, Insurance and Freight
Charges. An international contract with CIF terms its purpose is not a sale of goods themselves
but a sale of the documents relating to the goods. It is not a contract that goods shall arrive
but a contract to ship goods complying with a contract of sale, to obtain, unless the contract
otherwise provides, the ordinary contract of carriage to the place of destination and ordinary
contract of insurance of the goods on that voyage and to tender these documents against
payment of the contract price.

The price of the goods in a CIF contract is inclusive of freight2

Arnold Karberg & Co v. Blythe, Green Jourdain & Co, [1915]2 KB 379,

Scrutton J observed that, ―I am strongly of the opinion that the key to many difficulties
arising in CIF contracts is to keep firmly in mind the cardinal distinction that a CIF sale is not a
sale of goods but a sale of documents relating to goods. CIF is a contract for the sale of goods
to be performed by the delivery of documents.‖

Scrutton says futher that, ―CIF is not a contract that goods shall arrive, but a contract to
supply the goods that comply with the contract of sale, and to obtain a contract for carriage
and a contract of insurance.‖

22 Which is a consideration, reward payable in respect of the carriage of goods from loading point to the point
of discharge and insurance costs to the destination specified by the contract

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Johnson v. Tylor Bros, [1920] AC 144 at 145 [1920] AC 144 at 145,

Lord Atkinson gave a classical definition of the CIF contract in these words, ―The Vendor
is bound by his contract to do the following things:

a. First, to make out an invoice of the goods sold,

b. Secondly, to ship at the port of shipment goods of the contract description.

c. Third, to procure a contract of affreightment under which the goods will be delivered
at the destination contemplated by the contract.

d. Fourth, to arrange for insurance upon the terms current in the trade this will be
available for the benefit of the buyer.

e. Fifthly, with all reasonable dispatch to send forward and tender to the buyer three
‗shipping documents‘ namely, the invoice, the bill of lading and policy of insurance,
delivery of which to the buyer is symbolic delivery of the goods purchased, placing the
same at the buyer‘s risk and entitling the seller to payment of their price . . . if no place be
named in the CIF contract for the tender of the shipping documents they must prima facie
be tendered at the residence or the place of business of the buyer.‖

This is the judicially accepted standard definition of the standard CIF contract. And it must be
set to be clear that CIF contract is not a contract for the sale of documents relating to the
goods, but rather it is a contract of sale of goods to be performed by delivery of documents.
The decision by Scutton LJ that CIF is a contract for the sale of documents relating to the goods
was opposed by the other Lords in the Court of Appeal 3 who held that CIF contract is the
contract for the sale goods to be performed by the delivery of documents. This is the correct
position on what is CIF contract.

In this contract, the buyer‘s aim is to obtain as early as possible the right of disposal of
the goods in order to re-sell them or to secure a bank advance on them and to obtain either
the goods or if they are lost, the insurance money.

Biddel Brothers v. E. Clemence Horst Co, [1911]1 KB 214 at pg 220

The case provides for the duties of the parties to include the following:

Duties of the seller include the following:

3 Bankes and Warrington LLJ

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a. To ship at the port of shipment goods of the description contained in the contract.
The time of shipment of the goods is regarded as part of the description of the
goods. Time is important for both parties for payment arrangements as well as
fulfilling other obligations of the parties to other parties.

b. To procure a contract of carriage by sea under which the goods will be delivered at
the destination contemplated by the contract.

c. To arrange for insurance upon the terms currently in the trade this will be available
for the benefit of the buyer.

d. To make out an invoice which normally will debit the buyer with the agreed price
or the actual costs, commission charges, freight and insurance premiums.

e. To tender these documents to the buyer so that he may know what freight he has
to pay and obtain delivery of the goods if they arrive or recover for their loss if they
are lost on the voyage.

Duties of the buyer include the following:

a. Accept the documents when tendered by the seller if they are in conformity with
the contract of sale and pay the price as provided for in the contract.

b. Receive the goods at the agreed port of destination and bear with the exception of
freight and marine insurance, all costs and charges incurred in respect of the goods
in the course of their transit by sea until their arrival at the port of destination as
well as unloading charges or costs.

c. Bear all risks of the goods from the time when they shall have effectively passed the
ship‘s rail at the port of shipment.

d. Pay the costs and charges incurred in obtaining the certificates of origin and
consular documents.

e. Pay all custom duties as well as any other duties and taxes payable at the time of
or by reason of importation.

f. Procure and provide at his own risk and expense any import license or permit or
the like which may be required for the importation of the goods at the destination.

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DELIVERED EX-SHIP (DES)

This clause has been defined as denoting that the seller has to cause delivery to be made to
the buyer from a ship which has arrived at a port of delivery and has reached a place therein
which is usual for the delivery of goods of the kind in question. Under this clause, the seller has
to pay the freight or otherwise to release the carrier‘s lien and the buyer is only bound to pay
the purchase price if actual delivery of the goods is made to him at the stipulated port of
delivery. The difference between Ex-Ship Contracts and the CIF Contracts is that in the former
case, the documents do not stand in the place of the goods but that delivery has to be made
in species—the goods sold have to be delivered to the buyer at the named port of delivery and
if the goods are lost in transit the buyer is not obliged to pay the purchased price upon tender
of the documents.

In this contract, the seller has to ensure that the goods reach the factory or the place where the
buyer works. If this is not done, then, the buyer is under no obligation to pay. This is not so with
CIF contracts. Otherwise the obligations are just the same.

CARRIAGE OF GOODS

When the international buyer has purchased the goods, then, the next question is how should
the purchased goods be transported up to the buyer‘s place of business or port of destination?

It is the contract of sale that will stipulate the means of transportation of the goods and in that
regard, there are various ways that can be used to transport the goods up to the buyer‘s
country. These include:

a. Carriage by Sea: this is governed by The Hague Visby Rules, 1968 and The Hamburg
Rules, 1978.

b. Transport by Air: this is governed by Warsaw Convention of 1929 and The Protocol
thereto of 1955.

c. Carriage by Land: this is governed by UN Convention on Transportation of Goods by

Road (CMR), 1956.

d. Carriage by Rail: this is governed by the UN Convention on Transportation of Goods by

Rail (CIM).

NOTE: when goods are transported from the seller‘s country to the buyer‘s country, by using
only one means or mode of transportation, this is known as Uni-Modal Transportation. But if
transportation takes various modes, this is known as Multi-Modal Transportation. In as far as
the second model is concerned, there is no single international instrument which governs it and
instead, common law should apply—which refers to the Law of the Merchant—and not the
17
AS typed by FILBERT NICKSONI, DARUSO PRESIDENT 2014-2015 AND FOURTH YEAR LL.B STUDENT.

common law of England. This is because, the UN Convention on Multi-Modal Transportation

of Goods of 1980 has not been ratified by the required number of states—30.

The application of these conventions or rules is at the discretion of the parties to agree on
which rules they want to apply. It is dependent on their will as far as Multi-Modal
Transportation is concerned due to lack of a legal instrument which governs the Multi-Modal
Transportation.

TRANSPORTATION BY SEA

This can take two forms:

a. Where the shipper or seller of the goods and who enters into the contract of
carriage charters the whole ship and this may only happen where the goods are
bulky in nature. Like Oil and Coal and thus the documents which is used is the
Charter Party—It is governed by the Law of the Merchant—Common law should
apply.

b. Shipper only procures a space in a ship together with other shippers or consignors,
the governing document here is Bill of Lading—here Rules apply. Most of the
contracts are by the Bill of Lading.

TRANSPORTATION BY SEA THROUGH A BILL OF LADING

The nature of the Bill of Lading is that it is the most important document which aims at
vesting ownership of goods in the international buyer even when the goods are not yet
delivered to the buyer if he has these documents. So by having these, he is treated as having
the goods. It is the carrier who issues the Bill of Lading. The Bill of Lading is a clean Bill of
Lading if the goods placed in the ship have no any defect so that if later defects are found,
then, the carrier is liable.

Lickbarrow v. Mason, [1795]5 TR 683

The Nature of the Bill of Lading was stated as:

1. An acknowledgement of the receipt of goods by the carrier for transportation (a

receipt for the goods shipped). Article III.-(4) of the Hague Visby Rules provides that
―Such a Bill of Lading shall be a prima facie evidence of the receipt by the carrier
of the goods as therein described…‖

18
 2. It is a Prima Facie Evidence that the carrier received the goods in the stated species. A
Bill of Lading is a memorandum of the contract of carriage, it repeats some of the
terms of the contract of carriage which were included before the signing of the Bill of
Lading (evidence of the contact of carriage).

3. It is a document of title enabling the consignee or buyer to dispose of the goods by

endorsement and delivery of the Bill of Lading.

The main purpose of the Bill of Lading is to enable the owner of the goods to dispose of them
rapidly though the goods are not in his hands but in the custody of the carrier. Bill of Lading is
the creation of mercantile customs which is an important institution in International Trade.

INTERNATIONAL RULES RELATING TO THE BILL OF LADING

The Carrier issues the Bill of Lading after the goods have been placed on Board of a ship. The
Bill of Lading will contain contractual terms but it is not necessary a contract of carriage. The
contract of carriage is concluded between the carrier and the shipper before the Bill of Lading
is issued.

A bill of Lading is not a contract of carriage—but an evidence of the fact that there was a
contract of carriage—so that if there is a conflict of terms between the contract of carriage
and the Bill of Lading, the terms of the Contract of Carriage shall prevail.

Duties of the Carrier under the Hague Rules of 1924: under article III.

a. To exercise due diligence and provide a sea worthy ship—or else he will be
responsible— article III.-(1) (a). ―The Carrier shall be bound before and at the
beginning of the voyage to exercise due diligence to make the ship sea worthy and (b)
properly man, equip and supply the ship.‖

b. To Load, handle, store, carry keep, care for and discharge the goods according to the
contract of carriage or usage at the concerned port—article III.-(2), ―Subject to the
provisions of article IV, the carrier shall properly and carefully load, handle, stow, carry,
keep, care for, and discharge the goods carried.‖

c. Article 3.-(3) provides further that ―After receiving the goods into his charge the
carrier or the master or agent of the carrier shall, on demand of the shipper, issue to the
shipper a bill of lading showing among other things:

(i) The leading marks necessary for identification of the goods as the same are
furnished in writing by the shipper before the loading of such goods starts,
19
 provided such marks are stamped or otherwise shown clearly upon the
goods if uncovered, or on the cases or coverings in which such goods are
contained, in such a manner as should ordinarily remain legible until the
end of the voyage.

(ii) Either the number of packages or pieces, or the quantity, or weight, as the case
may be, as furnished in writing by the shipper.

(iii) The apparent order and condition of the goods.‖

d. To issue a Bill of Lading in a particular form. NB: these obligations were imposed by the
Hague Visby Rules, 1968 because originally the carriers used to limit their liabilities by
inserting in the Bill of Lading clauses which exempted them from liability at the
detriment of the shipper.

Article III. rule 4 provides in effect that ―Such a bill of lading shall be prima facie
evidence of the receipt by the carrier of the goods as therein described in accordance with
paragraph 3.-(a), (b) and (c), see point a supra.

e. In case the shipper gives wrong information to the carrier, he has to indemnify him.
Article III.-(5) provides that, ―The shipper shall be deemed to have guaranteed to
the carrier the accuracy at the time of shipment of the marks, number, quantity and
weight, as furnished by him, and the shipper shall indemnify the carrier against all loss,
damage and expenses arising or resulting from inaccuracies in such particulars. The
right of the carrier to such indemnity shall in no way limit his responsibility and liability
under the contract of carriage to any person other than the shipper.‖

f. The carrier can be sued only within one year from the delivery date or from the date
the goods were required to be delivered—article III.-(6) provides in its third proviso
that, ―In any event the carrier and the ship shall be discharged from all liability in
respect of loss or damage unless suit is brought within one year after delivery of the
goods or the date when the goods should have been delivered.‖

g. The carrier is strictly prohibited from limiting his liability contrary to the Rules. Article
III.-(8) provides that, ―Any clause, covenant, or agreement in a contract of
carriage relieving the carrier or the ship from liability for loss or damage to, or in
connection with, goods arising from negligence, fault, or failure in the duties and
obligations provided in this article or lessening such liability otherwise than as provided
in these Rules, shall be null and void and of no effect….‖

These rules were revised by 1968—which are like a protocol to 1924 Rules (which
are now called The Hague Visby Rules) which has these features in summary.
20
 a. It applies only when a Bill of Lading is issued or where the carriage of goods is from
a contracting state. It also applies where a term of a contract directly or impliedly
provides that the rules should guide the contract. If one of the parties is not
member of party to Hague Visby Rules then these rules cannot apply.

b. It does not apply to the transportation of live animals or land deck cargo—the floor
of the ship above the hull.

c. Article IV.-(6) provides that if inflammable, explosive or dangerous goods are

carried without the knowledge or consent of the carrier, then, the carrier can land
them at any place, destroy them or render them innocuous and be indemnified by
the shipper in case of loss or damage to the vessel.

d. The rules prohibit the carrier from inserting any clause in the contract of carriage
which limits his liability contrary to what is being provided for in these Rules. Article
III.-(8) provides that, ―Any clause, covenant, or agreement in a contract of
carriage relieving the carrier or the ship from liability for loss or damage to, or in
connection with, goods arising from negligence, fault, or failure in the duties and
obligations provided in this article or lessening such liability otherwise than as
provided in these rules, shall be null and void and of no effect…‖

e. It applies to coastal and international voyage—sea transport.

f. The rules apply only to the carriage of goods by the sea and this means that the
rules do not apply to the preceding or subsequent land or air transport.

g. The rules invalidate any contractual provision which restricts or exempts a carrier‘s
liability for any loss or damage to the goods arising out of negligence, fault or
failure by the carrier to perform any of the duties imposed by it by the rules.

The Hollandia, [1983] AC 565

In this case the House of Lords upheld the decision by the Court of Appeal that a choice of
jurisdiction clause in a bill of lading would not be given effect to by English Courts and
Tribunals if its enforcement would result in the Hague Visby Rules not being applied in
circumstances where those Rules had force of law under English Law.

Lord Diplock while rejecting a narrow interpretation of Article III.-(8) of the Hague Visby
Rules,

HELD:

―Only sensible meaning to be given to the description of provisions in contracts of carriage

which are ‗null and void and of no effect‘ by this rule is one which would embrace every

21
provision in a contract of carriage which, if it were applied, would have the effect of lessening
the carrier‘s liability otherwise than as provided in the Rules.‖

On this basis, their Lordships held that a choice of forum clause was in that case null and void
under Article III.-(8) on the basis that the forum chosen, namely the Netherlands, was at that
time a party to the Hague Rules and those Rules applied a lower level of liability than that
applied in the Hague Visby Rules that were in accordance with English law mandatorily
applicable to the shipment in question.

h. Article 4.-(5) (a) fixes the maximum limit of the carriers liability to the loss of goods
at 10,000 Francs per package or per unit and 30 Francs per kilogram or 666.67 of
units of account per package or per kilo.

i. The shipper is required to declare the nature and value of the goods before
shipment. Failure to do this entitles the carrier to limit his liability, entitles the
shipper to liability in case that causes damage to the carrier and lastly that
decreases the amount of money that would have been paid had the full money
had the shipper made full disclosure. Article III.-(5) says, ―The shipper shall be
deemed to have guaranteed to the carrier the accuracy at the time of shipment of
the marks, number, quantity and weight, as furnished by him, and the shipper shall
indemnify the carrier against all loss, damages and expenses arising or resulting
from inaccuracies in such particulars…‖

Further that article IV.-(6) (h) provides that ―neither the carrier nor the ship
shall be responsible in any even for loss or damage to, or in connection with, goods
if the nature or value thereof has been knowingly mis-stated by the shipper in the
bill of lading.‖

j. The Rules under article 4.-(1) relieve the carrier, his agents or owner of the ship from
being liable for loss or damage arising or resulting from unseaworthiness unless
caused by want of due diligence on the part of the carrier to make the ship
seaworthy, and to secure that the ship is properly manned, equipped and supplied,
and to make the holds, refrigerating and cool chambers and all other parts of the
ship in which goods are carried fit and safe for their reception, carriage and
preservation in accordance with the provisions of article III.-(1). Whenever loss or
damage has resulted from unseaworthiness the burden of proving the exercise of
due diligence shall be on the carrier or other person claiming exemption under this
article.‖

k. He is also further required to insert the declaration note in the Bill of Lading if no such
declaration was made and no declaration note is inserted in the Bill of Lading, then,
the Carrier‘s maximum liability to any loss or damage to goods is fixed at
666.67 SDR‘s—Special Drawing Rights—which is a measure of liability. So the

22
 shipper may end up getting less than what he wanted if he does not declare the
value as such. Article IV.-(5) (a) provides that ―Unless the nature and value of
such goods have been declared by the shipper before shipment and inserted in the
Bill of Lading, neither the carrier nor the ship shall in any event be or become liable
for any loss or damage to or in connection with the goods in an amount exceeding
the equivalent of 666.67 units of account per package or unit or units per kilo of
gross weight of the goods lost or damaged, whichever is the higher.‖

l. The carrier cannot rely on the statutory maximum limit if the damage or loss of
goods resulted from his own negligence or recklessness or omission. Read article 4.-
(5)(e) which states that ―Neither the carrier nor the ship shall be entitled to
the benefit of the limitation of liability provided for in this paragraph if it is proved
that the damage resulted from an act or omission of the carrier done with intent to
cause damage, or recklessly and with knowledge that damage would probably
result.‖

NB: However, the shipper has the right to claim damages in excess to the statutory
damages if he declared nature and value of the goods and further inserted the
declaration note in the Bill of Lading.

The Hague Visby Rules provides under article IV.-(2) that ―Neither the carrier nor the ship
shall be responsible for loss or damage arising or resulting from:

(a) Act, neglect or default of the master, mariner, pilot, or the servants of the carrier in the
navigation or in the management of the ship.

(b) Fire, unless caused by the actual fault or privity of the carrier.

(c) Perils, dangers and accidents of the sea or other navigable waters.

(d) Act of God.

(e) Act of War.

(f) Act of Public Enemies.

(g) Arrest or restraint of princes, rulers or people, or seizure under legal process.

(h) Quarantine restrictions.

(i) Act or omission of the shipper or owner of the goods, his agent or representative.

(j) Strikes or lockouts or stoppage or restraint of labour whatever cause, whether partial
or general.
23
 (k) Riots and civil commotions.

(l) Saving or attempting to save life or property at sea.

(m) Wastage in bulk of weight or any other loss or damage arising from inherent
defect, quality or vice of the goods.

(n) Insufficiency or inadequacy of marks.

(o) Latent defects not discoverable by due diligence.

(p) Any other cause arising without the actual fault or privity of the carrier, or without the
fault or neglect of the agents or servants of the carrier, but the burden of proof shall be
on the person claiming the benefit of this exception to show that neither the actual
fault or privity of the carrier nor the fault or neglect of the agents or servants of the
carrier contributed to the loss or damage.‖

Article IV.-(1) exempts the carrier, the ship or his agents from any loss or damage caused by
unseaworthness unless it is caused by want of due diligence on the part of carrier to make such
a ship seaworthy. The burden of proving the exercise of due diligence shall be on the carrier or
other person claiming exemption under this article.

Article X provides that, ―The provisions of these rules shall apply to every bill of lading
relating to the carriage of goods between ports in two different states if:

(a) The Bill of Lading is issued in a contracting state, or

(b) The carriage is from a port in a contracting state, or

(c) The contract contained in or evidenced by the Bill of Lading provides that these rules
or legislation of any state giving effect to them are to govern the contract; whatever be
the nationality of the ship, the carrier, the shipper, the consignee, or any other
interested person.

Shortcomings of the Hague Visby Rules

a. It applies only if the Bill of Lading is issued, article 1.-(b) which states that,
―Contract of Carriage applies only to contracts of carriage covered by a Bill
of Lading or any similar document of title, in so far as such document relates to
the carriage of goods by sea, including any Bill of Lading or any similar
document as aforesaid issued under or pursuant to a charter party from the
moment at which such a Bill of Lading or similar document of title regulates the
relations between a carrier and a holder of the same.‖ The same is forcefully
repeated by article X.
24
 b. They are silent on jurisdiction for arbitral or judicial proceedings.

c. They exceedingly limit the liability of the carrier in loss or damage to goods,
article 4.-(5) (a) which states that, ―Unless the nature and value of such
goods have been declared by the shipper before shipment and inserted in the
Bill of Lading, neither the carrier nor the ship shall in any event be or become
liable for any loss or damage to or in connection with the goods in an amount
exceeding the equivalent of 666.67 units of account per package or unit or units
of account per kilo of gross weight of the goods lost or damage, whichever is the
higher.‖

d. The rules only cover the period when the goods are loaded on the ship up to the
time when they are unloaded from the ship, article 1.-(e) which states that
―Carriage of Goods covers the period from the time when the goods are
loaded on to the time they are discharged from the ship‖. It does not cover
subsequent transportation or before transportation.

e. It does not cover deck cargo or live animals much to the prejudice of the shipper.
Article I.-(c) provides that ―Goods includes goods, wares, merchandise, and
articles of every kind whatsoever except live animals and cargo which by the
contract of carriage is stated as being carried on deck and is so carried.‖

f. They do not cover loss or damage of the goods due to late delivery—they cover
only loss or damage after loading and after delivery.

g. They exempt the carrier from liability for loss or damage to goods arising from
negligence or fault navigation of the ship or management of the ship. Read
article 4.-(2) (a) which states that, ―Neither the carrier nor the ship shall
be responsible for loss or damage arising or resulting from: (a) Act, neglect, or
default of the master, mariner, pilot, or the servants of the carrier in the
navigation or in the management of the ship.‖

The Hague Visby Rules therefore protect much the interest of the carrier rather
than the shipper.

Carriage by Sea as governed by The Hamburg Rules of 1978

(Also known as the UN Convention on Carriage of Goods by Sea of 1978) mostly

opted by third world countries as it includes compensation in case of liability by the carrier as
well as removing the exemption against liability by the carrier. The Rules therefore favour the
shipper and that is why Kenya, Tanzania and Uganda are members to these rules while
western nations are members to Visby Rules.
25
It was prepared by UNCITRAL and it was subsequently adopted by the UNGA in 1978. Some
of the features of these rules include but not limited to:

(a) These rules have a wider application and can apply even where a Bill of Lading is not
issued. Article 2.-(1) that the ―provisions of this Convention are applicable to all
contracts of carriage by sea between two different states, if: (d) the Bill of Lading or
other document evidencing the contract of carriage by sea is issued in a Contracting
State, (e) the Bill of Lading or other document evidencing the contract of carriage by
sea provides that the provisions of this Convention or the legislation of any state giving
effect to them are to govern the contract.‖

(b) They apply to the entire period when the carrier is in charge of the goods—at the point of
loading, during the carriage, and at the point of discharge. Refer article 4.-(1) which
provides that, ―The responsibility of the carrier for the goods under this Convention
covers the period during which the carrier is in charge of the goods at the port of loading,
during the carriage and at the port of discharge.‖ And article 4.-(2) provides further
that, ―For the purpose of paragraph 1 of this article, the carrier is deemed to be in
charge of the goods (a) From the time he has taken over the goods from;

(i) The shipper, or a person acting on his behalf; or

(ii) An authority or other third party to whom, pursuant to law or regulations

applicable at the port of loading, the goods must be handed over for shipment;

(b) until the time he has delivered the goods:

(i) By handing over the goods to the consignee; or

(ii) In cases where the consignee does not receive the goods from the carrier, by
placing them at the disposal of the consignee in accordance with the contract or with the law
or with the usage of the particular trade, applicable to the part of discharge; or

(iii) By handing over the goods to an authority or other third party to whom,
pursuant to the law or regulations applicable at the port of discharge, the
goods must be handed over.‖

(c) They effect a more equitable allocation of risks between carriers and shippers. Liability is
based on the principle of Presumed Fault or Neglect. This means the carrier is liable if
the occurrence that caused the loss, damage or delay of goods took place where the goods
where in his charge. However, the carrier can escape liability only when he proves that he
took all reasonable measures to avoid the occurrence or loss— article 5.-(1) which states
that ―The carrier is liable for loss resulting from loss of or damage to the goods, as
well as from delay in delivery, if the occurrence which caused the loss, damage or delay
took place while the goods were in his charge as defined in

26
 article 4, unless the carrier proves that he, his servants or agents took all measures that
could reasonably be required to avoid the occurrence and its consequences‖. This
rule eliminates the carrier‘s exemption from liability for loss or damage caused by
fault navigation or management of the ship as contained in The Hague Visby Rules.

(d) The Hamburg Rules permit the carrier to carry goods on the deck if the shipper so
agrees or if such carriage is permitted by custom or by law.

(e) The carrier loses the benefit of the limit of liability if it is proved that the loss, damage
or delay resulted from the negligence or neglect that was done maliciously or recklessly
made the omission which led to the loss—article 8.-(1) which states that, ―The
carrier is not entitled to the benefit of the limitation of liability provided for in article 6
if it is proved that the loss, damage or delay in delivery resulted from an act or omission
of the carrier done with the intent to cause such loss, damage or delay, or recklessly
and with knowledge that such loss, damage or delay would probably result.‖

(f) The shipper is liable for any loss sustained by the carrier or the damage sustained by
the ship if such loss or damage was caused by the fault or neglect of the shipper or his
agency. This balances the duties of the shipper and the carrier. Article 12 lays a general
rule thus, ―The shipper is not liable for loss sustained by the carrier or the actual
carrier, or for damage sustained by the ship, unless such loss or damage was caused by
the fault or neglect of the shipper, his servants or agents. Nor is any servant or agent of
the shipper liable for such loss or damage unless the loss or damage was caused by fault
or neglect on his part.‖

(g) And so, the rules impose on the shipper the duty to mark or label dangerous goods in a
suitable manner—for example goods such as explosives, fragile etc.—article 13.-(1)
provides special rules on dangerous goods thus, ―The shipper must mark or
label in a suitable manner dangerous goods as dangerous.‖ Article 13.-(2)
provides further that, ―Where the shipper hands over dangerous goods to the
carrier or an actual carrier, as the case may be, the shipper must inform him of the
dangerous character of the goods and, if necessary, of the precautions to be taken. If
the shipper fails to do so and such carrier or actual carrier does not otherwise have
knowledge of their dangerous character:

a. The shipper is liable to the carrier and any actual carrier for the loss resulting from
the shipment of such goods, and

b. The goods may at any time be unloaded, destroyed or rendered innocuous, as the
circumstances may require without payment of compensation.

Article 13.-(3) goes further to state that the provisions of paragraph 2 of this article may
not be invoked by any person if during the carriage he has taken the goods in his
charge with knowledge of their dangerous character. And article 13.-(4) ends up by
27
 saying that, ―If, in cases where the provisions of paragraph 2, subparagraph (b),
of this article do not apply or may not be invoked, dangerous goods become an actual
danger to life, or property, they may be unloaded, destroyed or rendered innocuous, as
the circumstances may require, without payment of compensation except where there
is an obligation to contribute in general average or where the carrier is liable in
accordance with the provisions of article 5.‖

NOTA ABENE: The Hamburg Rules are favoured by the 3rd World Countries and non-
maritime nations such as Kenya, Uganda and Tanzania are parties to this convention.

FUNCTIONS OF THE BILL OF LADING

a. As a document of title: the possession of the Bill of Lading amount to the possession of
the underling goods. Nevertheless, the transfer of the Bill of Lading acts as a symbolic
transfer of the possessions of the goods but not necessary the property in the goods
(depending on what the parties have agreed on the mode of payment). In principle,
the transfer of the Bill of Lading passes the rights in the goods as the parties intend to
pass.

The Kronprinsessan [1921] A.C. 486,

It was held that the goods belonged to Holsen and Co at the time of seizure because at
that material time they were in possession of the Bill of Lading. Only a person holding a
Bill of Lading is entitled to claim delivery of the goods from the carrier. Therefore, a
carrier who delivers goods to a person who is not a holder of the Bill of Lading is liable
to the true owner for conversion of the goods. Where the identity of the consignee is in
doubt, the carrier may at his own peril deliver the goods to the consignee against bank
letters of indemnity—it is the means of securing the interests of the carrier in case the
consignee is not the real.

b. It is a receipt: a bill of lading is a prima facie evidence of the receipt of the goods by the
carrier for shipment. The Bill of Lading indicates the contents, description and the condition
of the goods received by the carrier. Therefore, where a clean bill of lading is issued, the bill
is a prima facie evidence of the quantity, description and the condition of the underlining
goods. This applies only when a clean bill of lading is issued and not otherwise—that is
when the carrier received the goods, there was no any kind of defects in the goods. But if
there were defects then the shipper has to issue a close bill of lading which has some
impacts in so far as paying through the bill of lading is concerned.

AG of Cylon v. Scindia Steam Navigation Co of India, [1962] AC 60

28
 The carrier and the international shipper agreed on the transportation of rice bags.
From the case above, the carrier assumed to have received 10 bags from the shipper
who said to have given for shipment those 10 bags. At the point of discharge it was
found out that the bags was less than that. So the buyer sued the carrier for that. The
carrier said that is what he received. The court held that the clean bill of lading is a
prima facie evidence of the receipt.

c. As an evidence of the contract of carriage; normally a contract of carriage by sea is

concluded before the issue of the Bill of Lading. When the Bill of Lading subsequently
comes into being, it merely evidences the contract of carriage by sea. This means that a
special term of the contract of carriage even if agreed upon only orally may override
general clauses contained in the Bill of Lading. And in case of conflict of terms between
the contract and the Bill of Lading, then, those in the Bill of Lading even if they are
oral, shall prevail.

Articles 14 & 15 of the Hamburg Rules provide thus about the Bill of Lading: article 14.-(1)
provides that, ―When the carrier or the actual carrier takes the goods in his charge, the
carrier must, on demand of the shipper, issue to the shipper a bill of lading.‖

Article 15.-(1) goes further to provide the contents of the Bill of Lading to include:

a. The general nature of the goods, the leading marks necessary for identification of the
goods, an express statement, if applicable, as to the dangerous character of the goods,
the number of packages or pieces, and the weight of the goods or their quantity
otherwise expressed, all such particulars as furnished by the shipper;

b. The apparent condition of the goods;

c. The name and principal place of business of the carrier;

d. The name of the shipper;

e. The consignee if named by the shipper

f. The port of loading under the contract of carriage by sea and the date on which the
goods were taken over the carrier at the port of loading;

g. The port of discharge under the contract of carriage by sea;

h. The number of originals of the Bill of Lading, if more than one;

i. The place of issuance of the Bill of Lading;

j. The Signature of the carrier or a person acting on his behalf;

29
 k. The freight to the extent payable by the consignee or other indication that freight is
payable by him;

l. The statement referred to in paragraph 3 of article 23 which states that ‗where a

bill of lading or any other document evidencing the contract of carriage by sea is
issued, it must contain a statement that the carriage is subject to the provisions of this
Convention which nullify any stipulation derogating therefrom to the detriment of the
shipper or the consignee.‘

m. The statement, if applicable, that the goods shall or may be carried on deck;

n. The date or the period of delivery of the goods at the port of discharge if expressly
agreed upon between the parties; and

o. Any increased limit or limits of liability where in accordance with paragraph 4 of article
6 which states that ‗by agreement between the carrier and the shipper, limits of
liability exceeding those provided for in paragraph 1 may be fixed.‘

ALTERNATIVES TO THE BILL OF LADING

Refer to the rules we read in the Hamburg rules and other rules in relationship to the Bill of
lading which provide for the use of other documents other than the Bill of Lading. But it is only
the Bill of Lading which carries the title and these documents bellow are only an undertaking
by the carrier that he will deliver these goods to so and so. They are important but not to the
level of the Bill of Lading. These documents include the following:

(a) Delivery order.

(b) A sea way bill.

(c) Electronic alternatives

A Sea Way Bill: is a receipt depicting goods carried by ship on voyage. It merely evidences
an undertaking by the carrier to the shipper to deliver the goods to an identified person. It is
not a document of title. It allows the shipper to change the identity of the person to whom
delivery is to be made at any time before delivery is made. It is neither sent nor transferred to
the consignee for example, the buyer‘s agent or any person with the mandate to deliver
the goods. NB, the Consignee obtains delivery by producing an evidence of identity. It can be
used or pledged as security for loan advances.

30
A Delivery Order: is a document normally drawn by a shipper of bulky goods and it is
always addressed to the carrier or warehouse man. It orders the carrier who has custody over
the goods to deliver the goods to or hold them for the holder of the order. It is not a document
of title.

Electronic Alternatives: sea transport documents may be transmitted by fax, email, telefax
etc.

CARRIAGE OF GOODS BY AIR

Air carriage is normally used for small and light consignment where speed transportation is
desirable. There is no single system or rules for carriage of goods by air. It depends on the
position of the state in which the carriage begins and ends. The transportation may be
governed by the original Warsaw Convention of 1929 or Hague Protocol of 1955 or Montreal
Protocol of 1975. Since main states parties to the original Warsaw Convention did not accede
to the amending protocol either the original or the amended Convention may apply in certain
cases.

Non Conventions rules will apply in cases where neither the Warsaw convention of 1929 nor the
protocol of 1955 applies.

ORIGINAL WARSAW CONVENTION OF 1929

It is also known as Convention for the Unification of Certain Rules Relating to

International Carriage by Air, Signed at Warsaw on 12 October, 1929

Some of its key features include but not limited to the following:

(a) It applies where the places of departure and the place of destination is allocated in two
states parties to the original Warsaw Convention. So it will not apply if the place of
departure and destination are allocated within a single state party to the original
Warsaw Convention. It does not apply to trial flights which are made to establish
regular lines. Article 1.-(2) provides that ―For the purposes of this Convention the
expression ‗international carriage‘ means any carriage in which, according to the
contract made by the parties, the place of departure and the place of destination,
whether or not there be a break in the carriage or a transshipment, are situated either
within the territories of two High Contracting Parties, or within the territory of a single
High Contracting Party, if there is an agreed stopping place within a territory subject
to the sovereignty, suzerainty, mandate or authority of another power, even thought
that power is not a party to this Convention. a carriage without such an agreed
31
 stopping place between territories subject to the sovereignty, suzerainty, mandate or
authority of the same High Contracting Party is not deemed to be international for the
purposes of this convention.‖

(b) The document of carriage is called Air Consignment note (air way bill), article 5.-(1) of
the Original Warsaw Convention which states that, ―Every carrier of goods has
the right to require the consignor to make out and hand over to him a document
called an ‗Air Consignment Note‘; every consignor has the right to require the
carrier to accept this document.‖ It is not the document of title, however ―the loss or
absence of an air consignment note does not affect the validity of the contract of
carriage which shall be governed by this Convention‖—article 5.-(2).

Air consignments note ―is a prima facie evidence of the conclusion of the contract, of
the receipt of goods, and of the conditions of carriage‖—article 11.-(1). As the general
rule, the original Warsaw Convention holds the carrier liable for loss or damage or
delay of delivery of the goods to the customer but such liability may be extinguished if
the carrier proves that ―he and his agents have taken all necessary measures to avoid
the damage or that it was impossible for him or them to take such measures—article
20.-(1).

Again article 20.-(2) provides further that, ―in the carriage of goods and luggage the
carrier is not liable if he proves that the damage was occasioned by negligent pilotage or
negligence in the handling of the aircraft or in navigation and that, in all other respects, he
and his agents have taken all necessary measures to avoid the damage.‖

Grain v. Imperial Airways Ltd, [1935]1KB 50

In this case, Grain sued airline for the death of her lovely husband. The husband died
when he was carried by the defendant‘s airline where the plane collided with the
wireless line. She sued the carrier for negligence. Issue was whether the carrier is liable.
The court held that the carrier is liable for negligence as he failed to disapprove his
negligence and so under article 20 he was liable. The Convention also applies to the
carriage of people.

This means that the carrier is liable if he fails to disapprove negligence on his part. Most
controversial, the original Warsaw Convention does not hold the carrier liable if he
proves that the damages were caused by negligence pilotage or negligence on
handling of aircraft or in navigation on condition that he took all necessary measures
to avoid the damages—article 20.-(2). This infamous provision exonerates the carrier
from the hooks for loss or damage caused by poor piloting.

In the carriage of registered luggage and of goods, the liability of the carrier is limited
to a sum of 250 francs per kilogram, unless the consignor has made, at the time when
the package was handed over to the carrier, a special declaration of the value at
32
 delivery and has paid a supplementary sum if the case so requires. In that case the
carrier will be liable to pay sum not exceeding the declared sum, unless he proves that
that sum is greater than the actual value to the consignor at delivery—article 22.-(2).

d. Under article 25.-(1), ―the carrier is not entitled to avail himself of the provisions of this
Convention which exclude or limit his liability, if the damage is caused by his willful
misconduct or by such default on his part as, in accordance with the law of the court
seized of the case, is considered to be equivalent to willful misconduct.

Horabin v. British Oversea Airways Corporation, [1952] ALL ER 1016

Where it was stated that the Pilot by merely failing to follow safety rules instructions
given to him knowingly for the best interests of his plane thought can be misconduct, it
is not willful misconduct.

PROCEDURES ON HOW A SHIPPER EXERCISES HIS RIGHT TO COMPENSATION.

In case of damage, the person entitled to delivery must complain to the carrier forthwith after
the discovery of the damage, and at the latest, within three days from the date of receipt in
the case of luggage and seven days from the date of receipt in the case of goods. In the case of
delay the complaint must be made at the latest within fourteen days from the date on which
the luggage or goods have been placed at his disposal"—article 26.-(2).

Fothergill v. Monarch Airline Ltd, [1981] AC 251

In this case the plaintiff flew from Rome to Landon on an aircraft operated by the defendant
airline. The carriage was an international carriage within the meaning of article 1 of the Warsaw
Convention, as amended at The Hague in 1955 and as set out in Schedule 1 to the Carriage by Air
Act of 1961. The plaintiff‗s ticket incorporated a baggage check which as required by article
4.-(1) of the Convention, contained a provision stating: ‗ in case of damage to baggage…
complaint must be made in writing to carrier forthwith after discovery of damage and, at
latest, within 7 days from receipt.‘ When the plaintiff claimed his baggage he noticed that one
side seam of his suitcase had been completely torn away. He reported it to an official of the
airline and a ‗property irregularity report‘ was completed which described the suitcase and ,
under the heading ‗Nature of Damage‘, stated: ‗Side seam completely parted form the
case. Damage occurred on inbound flight.‘ More than seven days later, the plaintiff
discovered that some articles were missing from the suitcase. He claimed L 12 in respect of the
damage to the suitcase and L 16.50, contending that the loss of the articles constituted ‗damage‘
within article 26.-(2) of the Convention, and the plaintiff had failed to given notice in writing of
that damage within 7 days from the date of receipt of the suitcase, as required by
33
article 26.-(2) and (3). The airline supported that the word ‗damage‘ in article 26.-(2)
included loss of contents by reference to the published minutes of the negotiations of Hague
Protocol Rules in 1995. It was held that,

―Although on a literal interpretation in an English legal context ‗loss was to be

differentiated from ‗damage‘ that was not an appropriate method of interpretation of an
international convention, such as the Warsaw Convention which was incorporated by statute
into English Law. Instead, a purposive construction was to be adopted, and that was
reinforced by the fact that the English and French texts were inconclusive whether damage
included loss, and was supported by the consensus of international jurists. Having regard,
therefore, to the purpose of article 26 of the Convention, which was to ensure that airline
received prompt notice to enable it to take the necessary steps in regard to damage to
baggage or cargo including, recovery of contents and to loss of contents. The plaintiff was
therefore required to lodge a complaint for the lost articles within seven days of receiving his
baggage, and as the only complaint he had made did not refer to the loss of any articles but
only the damage of his suitcase his claimed failed. So the appeal by the Airline was allowed.

Article 29.-(1) provides that the right to damages shall be extinguished if an action is not
brought within two years, reckoned from the date of arrival at the destination, or from the
date on which the aircraft ought to have arrived, or from the date on which the carriage
stopped.‖

HAGUE PROTOCOL to the Warsaw Convention of 1955 (The amended Warsaw

Convention)

The document of carriage is called the Air way Bill—article 5.-(1) of the Convention. The carrier
cannot invoke the limit of liability to his advantage if the following conditions are not met:

 If the cargo is loaded in the aircraft without the air way bill. Article VII amends to the
extent that, ―If, with the consent of the carrier, cargo is loaded on board the
aircraft without an air way bill having been made out, or if the air waybill does not
include the notice required by article 8, (c) the carrier shall not be entitled to avail
himself of the provisions of article 22, paragraph 2.

 If the airway bill does not contain the notice that the amended Warsaw Convention
may apply to the effect of limiting the liability of the carrier in case of loss or damage
of the goods.

 Article IX deletes article 20.-(2) of the original Warsaw convention.

34
  Article XII amends article 23 of the Convention by renumbering paragraph 1 and
adding another paragraph which reads, (2) paragraph 1 of this article shall not apply
to provisions governing loss or damage resulting from the inherent defect, quality or
vice of the cargo carried.‖

  Article XIII amends article 25 by deleting paragraphs 1 & 2 and replacing them with
―The Limits of liability specified in article 22 shall not apply if it is proved that the
damage resulted from an act or omission of the carrier, his servants or agents, done
with intent to cause damage or recklessly and with knowledge that damage would
probably result; provided that, in the case of such act or omission or a servant or agent,
it is also proved that he was acting within the scope of his employment.‖

 Article XV amends article 26 by deleting paragraph 2 and replacing it with these
words, ―In the case of damage, the person entitled to delivery must complain to
the carrier forthwith after the discovery of the damage, and, at the latest, within seven
days from the date of receipt in the case of baggage and fourteen days from the date
of receipt in the case of cargo. In the case of delay the complaint must be made at the
latest within twenty-one days from the date on which the baggage or cargo have been
placed at his disposal.‖

 Article VIII amends article 10 paragraph 2 by replacing it with these words, ―The
consignor shall indemnify the carrier against all damage suffered by him, or by any
other person to whom the carrier is liable, by reason of the irregularity, incorrectness or
incompleteness of the particulars and statements furnished by the consignor.‖

The Airway Bill is not a document of title and the Hague Protocol eliminates the defense of
negligent pilotage—article 20.-(2) (the infamous provision is not there). The Protocol allows
the carrier to insert a contractual provision that relieves him from liability or reduces the
liability in respect of inherent defects, quality, or vice of the cargo that is carried—article 20.-
(2). The carrier not rely on the limitation of liability under the Warsaw Convention if he
intentionally or recklessly caused damage to the goods—article 22.-(b) 72 ASDRs.

NON-CONVENTION CARRIAGE RULES

These rules apply to international carriage where the Warsaw Convention and its protocol do not
apply. The rules do not provide for the document of carriage and the carrier‘s liability is
measured in SDRs and not in gold francs.

35
IATA CARRIAGE

International Air Transport Association: this is the association of the majority air carriers. It
produces a standard form contract for carriage by air. Their style of airway bill is used by its
members in their carriage of goods. Non-IATA members who wish to adopt the IATA
standards are allowed to use it.

NB: the IATA terms of contract do not apply where the Warsaw Convention or its Protocol
does apply. Under the IATA provision, the carrier‘s liability is fixed at 20$/Kg of the
goods unless the contract states otherwise. IATA provisions do not apply to purely internal
flights. IATA has its own standard term contract which is used by the members and those who
are not members.

CARRIAGE OF GOODS BY LAND

International carriage of goods over land is may be by road or rail. In rail transport, the CIM
Convention, 1961 applies. CIM means International Convention Concerning the Carriage of
Goods by Rail. With respect to international transport of goods by road, the CMR Convention
of 1956 is applicable. CMR means the Convention on the Contract for Carriage of Goods by
Road of 1956. Members of the CMR are all European states as it is not ratified by any African
states. The CMR applies if one of the parties to the contract is a member to the CMR. It can
also be used by state organizations as well as individuals in such states.

Convention on the Contract for International Carriage of Goods by Road, 1956

CMR

Some of its fundamental features include the following:

a. It applies to every contract of the carriage of goods by road in vehicles for reward that
is by payment—article 1.-(1) says that, ―This Convention shall apply to every
contract for the carriage of goods by road in vehicles for reward, when the place of
taking over the goods and the place designated for delivery, as specified in the
contract, are situated in two different countries, of which at least one is a Contracting
country, irrespective of the place of residence and nationality of the parties.‖

b. CMR also applies where the carriage of goods is undertaken by the states‘
governmental organizations or institutions—article 1.-(3) which states that, ―This

36
 Convention shall apply also where carriage coming within its scope is carried out by
States or by governmental institutions or organizations.‖

c. ―If the consignment note does not contain the statement specified in article 6,
paragraph (k) which provides that ‗a consignment note must contain a clause with a
statement that the carriage is subject, notwithstanding any clause to the contrary, to
the provisions of this Convention‘, the carrier shall be liable for all expenses, loss
and damages sustained through such omission by the person entitled to dispose of the
goods.‖ Article 7.-(3).

d. A contract of carriage by road is conferred to a consignment note. The absence or

irregularity in the consignment note does not affect the validity of the contract of
carriage by road—article 4 which provides that, ―The contract of carriage shall be
confirmed by the making out of a consignment note. The absence, irregularity or loss of
the consignment note shall not affect the existence or the validity of the contract of
carriage which shall remain subject to the provisions of this Convention.‖ The
consignment note is made out in three originals signed by the sender and by the carrier.
The first copy shall be handed to the sender, the second shall accompany the goods and
the third shall be retained by the carrier.‖—article 5.-(1).

e. ―The carrier shall be responsible for the acts and omissions of his agents and servants
and of any other persons of whose services he makes use for the performance of the
carriage, when such agents, servants or other persons are acting within the scope of
their employment, as if such acts or omissions were his own‖—article 3.

f. The CMR does not apply to funeral consignments or furniture—article 1.-(4) which says
that, ―This Convention shall not apply:

a. To carriage performed under the terms of any international postal convention;

b. To funeral consignments;

c. To furniture removal.

The consignment note is not a document of title. This note is ―a prima facie evidence of a
contract of carriage, the conditions of the contract and their receipt of the goods by the carrier‖
article 9.-(1). ―The sender has the right to dispose of goods, in particular by asking the carrier to
stop the goods in transit, to change the place at which delivery is to take place or to deliver the
goods to a consignee other than the consignee indicated in the consignment note‖— article 12.-(1).
But ―this right shall cease to exist when the second copy of the consignment note is handed
to the consignee or when the consignee exercises his right under article 13.-(1) which provides that,
‗after arrival of the goods at the place designated for delivery, the consignee shall be
entitled to require the carrier to delivery to him, against a receipt, the second copy of the
consignment note and the goods. If the loss of the goods is established or if the goods have
37
arrived after the expiry of the period provided for in article 19, the consignee shall be entitled to
enforce in his own name against the carrier any rights arising the contract of carriage‘ from
that time onwards the carrier shall obey the orders of the consignee‖ article 12.-(2).

As a condition, the sender must produce the copy of the consignment note to the carrier before
exercising the right to disposal. However, the sender is required to indemnify the carrier for any
incidental expenses pertaining to the right to disposal [That is CMR allows the sender (shipper
or seller) to change his mind with regard to place of disposal so that in case of additional
expenses, he has to reimburse the carrier].

Under normal circumstances, the carrier is liable if he does not comply with the instructions of the
sender (shipper or seller). Article 16.-(1) provides that, ―The carrier shall be entitled to recover
the cost of his request for instructions and any expenses entailed in carrying out such instructions,
unless such expenses were caused by the wrongful act or neglect of the carrier.‖

The carrier is a liable for the loss, damage, or delay in the delivery of goods while the goods are
in his charge—article 17.-(1) provides that ―The carrier shall be liable for the total or
partial loss of the goods and for damage thereto occurring between the time when he takes
over the goods and the time of delivery, as well as for any delay in delivery.‖

But the carrier, ―shall be relieved of his liability if the loss, damage or delay was caused by
the wrongful act or neglect of the claimant, by the instructions of the claimant given otherwise
than as the result of a wrongful act or neglect on the part of the carrier, by inherent vice of the
goods or through circumstances which the carrier could not avoid and the consequences of
which he was unable to prevent‖ as provided for under article 17.-(2). But the burden lies
on the carrier to discharge and it is the duty of the claimant to disapprove such claims.

In case of total or partial loss of the goods, the maximum liability of the carrier shall not exceed
25 francs per kilogram of gross weight short—article 23.-(3). And also the carrier has the
obligation to refund in full the carriage charges incurred—like customs duties, fees for survey
of the goods damages, etc. which the sender incurred.

The carrier is exempted from liability if the damage, loss or delay in delivery was caused by:

a. Wrongful act or neglect of the claimant who is the consignor.

b. The loss of damage to goods is caused by the inherent vice of the goods.

c. The loss or damage was caused by the instructions of the claimant which was given
otherwise and thereby caused the damage or loss to goods otherwise than as the result
of negligence on the part of the carrier.

d. If the damage or loss of goods occurred under circumstances which the carrier could not
avoid (vis major).

38
 Michael Galley Footwear Ltd v. Iaboni, [1982]2 ALL ER, 200

The case above was concerned with the consignment of shoes carried in a lorry. So the
driver and his assistant after a long journey decided to park and have their meal. The
lorry was parked in place which was unprotected. They were confident because they
have an alarm system. When they came out to drive, they found neither shoes nor the
lorry. The shipper sued the carrier for negligence. The court held them liable in that
they were 2 why did they not go to eat in return?

The carrier cannot rely on the exceptions above, if loss or damage was caused by defective
conditions of the vehicle—article 17.-(3) which states that, ―the carrier shall not be
relieved of liability by reason of the defective condition of the vehicle used by him in order to
perform the carriage, or by reason of the wrongful act or neglect of the person from whom he
may have hired the vehicle or of the agents or servants of the latter.‖

CONTAINER TRANSPORT

Containers are normally used in multi-modal transport—where there is a land leg, sea leg and
land leg again. In multi-modal transport, the goods normally are transported in the same
container from the place of loading to the place of discharge. Containers are normally loaded
and offloaded at the so called container freight stations—CFS. There are two types of
containers namely:

a. Door to door containers: it is the one used by an exporter who undertakes to deliver
the goods to the over sea‘s buyer place of business. It is preferable where the exporter
intends to fill a full container load—FCL.

b. Groupage containers: is used where the cargo is less than a full container load—LCL.
Where a groupage container is used, the exporter sends the cargo to container freight
station, where it will be consolidated with goods of other exporters in a groupage
container. Upon loading the goods into a container, the container transport operator—
the carrier—should issue a receipt which may be:

a. A container Bill of Lading for a shipping liner.

b. FIATA Combined Transport Bill of Lading.

c. A Combined Transport Document or a Start Finish Document.

d. Any other form of a receipt.

NB: there is no uniform document prescribed for the container transport because it is a multi-
modal transport so it may involve many legs.
39
LEGAL PROBLEMS OF CONTAINER TRANSPORT

a. The problem of liability on the container operator (the carrier). If the goods conveyed
in container are lost or damaged in transport or delay in delivery occurs, the difficulties
arise in proving the liability of container operator as follows:

1. The international conventions which apply to various models of transport

differ in respect with conditions of liability of the carrier and the maximum
limit of liability. For example The Hague Visby Rules do hold the carrier
liable if only he acted negligently. The Warsaw Conventions, CMR and CIM
provide strict liability but they differ on the defenses which the carrier may
plead. Under CMR and CIM a fused falsified defenses such as inherent vice
and force majeure are admitted.

2. It may be impossible to ascertain during which phase of multi-modal

transport the loss or damage occurred. It may be difficult to establish
whether the occurrence took place during the air land, or water leg. And
this is important in determining which conventions apply to the damage.

3. The monetary limits of the carrier‘s liability are not only set at different
levels but are calculated on different values for example gold franc value or
by use of SDR or USD etc.

b. Multi-modal transport including container transport may cause difficult in determining

the extent to which goods dispatched under a combined transport arrangement should
be ensured as there is air, water and land leg.

c. Certain conventions like the CMR are of mandatory character. This means that the
convention is expressed to apply to the entire transit including any incidental or air
transport—article 2.-(1) of the CMR which provides that ―where the vehicle containing
the goods is carried over part of the journey by sea, rail, inland waterways or air, and,
except where the provisions of article 14 are applicable, the goods are not unloaded from
the vehicle, this convention shall nevertheless apply to the whole of the carriage.

Provided that to the extent it is proved that any loss, damage or delay in delivery of
the goods which occurs during the carriage by other means of transport was not caused
by act or omission of the carrier by road but by some event which could only have
occurred in the course of and by reasons of the carriage by that other means of
transport, the liability of the carrier by road shall be determined not by his Convention
but in the manner in which the liability of the carrier by the other means of transport
would have been determined if a contract for the carriage of the goods alone has been
made by the sender with the carrier by the other means of transport in accordance
40
 with the conditions prescribed by law for the carriage of goods by that means of
transport.

If, however, there are not such prescribed conditions, the liability of the carrier by road
shall be determined by this Convention‖. This means that any clause applying other
conventions on the contract of carriage could be void under the CMR. In consequences
the conflict of two conventions dealing with the same transaction may arise. The only
remedy is the uniform system of liability to be adopted and the only convention is the
UN Convention on the Multi-Modal Transport of 1980 which is not in use to date.

MARINE INSURANCE

Terms in Marine Insurance

a. An Underwriter is an insurer in marine risks and under normal circumstances the

underwriters are organized in a form of a syndicate which we call ―Underwriters at
Lloyd‘s‖ whereby several underwriters insure a portion of risk for each
underwriter until the whole risk gets covered. In other kind of insurance business, the
company is called an insurer but here he is called an Underwriter. Because marine risks
are such huge risks, we talk of organized group of Underwriters who have formed the
syndicate under the Underwriters at Lloyd‘s.‖ Each one ensures just a portion in
order for all of them to able to cover the entire risks which normally is huge.

b. An Agency is a person who works under an Underwriter as the principal and insures
risks on behalf of the underwriter.

c. Insurance Broker is an independent dealer in marine risks who work hand in hand
with the underwriter. These are independent dealers in connection with the
underwriters. You pay your premium to them. The broker then approaches the
Underwriters for the premium. The broker becomes answerable and liable for the
premium to the underwriters. It is the agency and broker who issue the documents of
insurance.

In marine insurance it is the contract of sale that will say who should insure the goods. For
example, in a CIF contract, the duty to ensure is on the international seller. In FoB Contract
(strictly) the duty to insure is on the international buyer. In C & F contract the duty to ensure is
neither on the seller nor on the buyer but under normal circumstances it is the buyer who will
have to ensure because the goods will be transported at his risk. Therefore, it is important to
41
consider the Contract of Sale which will inform you about who has the right to ensure—from
the duties and rights of the parties.

DOCUMENTS USED IN MARINE INSURANCE CONTRACT

Memorandum of Insurance is a document which is issued by the broker when the whole
risks get covered. It may be in a form of open cover note or close cover note. An Open Cover
Note will be issued if the insured has not given full particulars of the value, marks of the
consignment, and the voyage. Closed Cover Note will be issued where the assured has given
full particulars of the value, leading marks of the consignment and voyage. It is information of
the broker to the insured. The Law which governs marine insurance is the Marine Insurance
Act 1906 which is a statute of general application in Tanzania.

Certificate of insurance is sets out the main terms of the open cover under which the goods
are insured. It normally gives particulars of the insured goods—the value insured, the voyage
covered, the leading marks of the goods and the value of the goods. It must be signed by the
broker or the insured. The certificate entitles the insured to demand to be issued with the
insurance policy. The certificate comes after the issuance of memorandum of insurance.

Letters of Insurance is a document that is issued and sent by the seller to the buyer in case
of CIF Contract informing the buyer that insurance in respect to the consignment has been
taken out. However, it has no any legal status although it can be used as evidence in
litigation.

Insurance Policy is an important document in marine insurance and it has legal status in
that it entitles the insured to claim for indemnity as a matter of right in case of loss or
damage—section 22 of the Marine Insurance Act, 1906. The section requires for the production
of insurance policy in order to be indemnified. It is an evidence of presence of the contract of
insurance. Section 22 provides that, ―Subject to the provisions of any statute, a contract
of marine insurance is inadmissible in evidence unless it is embodied in a marine policy in
accordance with this Act. The Policy may be executed and issued either at the time when the
contract is concluded, or afterwards.‖

SALIENT FEATURES OF MARINE INSURANCE

1. The duty to disclosure: the insurer has the duty to disclose to the insurer all material
information because marine insurance is a contract of uttermost good faith or
uberrimae fidei . In terms of Marine Insurance Act, 1906, the insured is under an
42
obligation to disclose to the insurer before the contract is concluded all the material facts
that are relevant and which are in his knowledge. Section 18.-(1) provides that ―subject to
the provisions of this section, the assured must disclose to the insurer, before the
contract is concluded, every material circumstance which is known to the assured, and the
assured is deemed to know every circumstance which, in the ordinary course of business,
ought to be known by him. If the assured fails to make such disclosure, the insurer may
avoid the contract.‖ The term all material circumstances or facts refer to that which will
enable the prudent insurer to decide the amount of premium to be paid and whether he
should insure the risk or not. Section 18.-(2) provides that, ―Every circumstance is
material which would influence the judgment of a prudent insurer in fixing the premium,
or determining whether he will take the risk.‖

Anglo African Merchants Ltd and Another v. Bailey and Others, [1970] 1
Q.B 311:

The plaintiff companies sought to insure a quantity of unused 20-year-old army

leather jerkins against ―all risks‖ at Lloyd‘s. The insurance was effected through the
intermediary of two firms of brokers. R., on behalf of the plaintiffs, informed the first
brokers, W. Ltd that the goods were leather jerkins, that they were governmental
surplus and that they were ―new‖ but all information about them that was
conveyed by W. Ltd. To the second brokers G. Ltd and thence on to the underwriters,
was that which subsequently appeared on the policy-―new men‘s clothes in bales
for export.‖ Part of the consignment having been lost from the warehouse storage, the
plaintiffs claimed under the policy and under the underwriters denied liability on the
ground of non-disclosure of material facts that he jerkins were 20 years old and army
surplus. By way of reply the plaintiffs asserted that the underwriters had waived
further information upon the precise nature of the goods. It was held that

―The use of the word ‗new‘ did not, on the evidence amount to mis-description of
the clothing, but the fact that it was 20 years old and was surplus were material facts and
since they had not been disclosed the underwriters were entitled to disclaim liability. That,
upon the whole of evidence, there was no special connotation of the word ‗new‘
whether with or without the addition of the words ‗in bales‘ to put the underwriters
upon inquiry so that their failure to make further inquiry as to precise nature of the goods
did not give the plaintiffs ground for a successful plea of waiver.‖

Non-disclosure of a material circumstance will entitle the insurer to avoid or affirm the
contract. So the contract becomes voidable at the option of the insurer. If he agrees,
then, he forfeits his right. The duty to disclose is not absolute in the sense that there are
some circumstances although within the assured‘s knowledge, but he has not had
to disclose to the insurer in the absence of inquiry. Section 18.-(3) provides that ―in
the absence of inquiry, the following circumstances need not be disclosed, namely:

43
 a. Any circumstance which diminishes the risk;

b. Any circumstance which is known or presumed to be known to the insurer. The

insurer is presumed to know matters of common notoriety or knowledge, and
matters which an insurer in the ordinary course of his business, as such, ought to
know;

c. Any circumstance as to which information is waived by the insurer;

d. Any circumstance which it is superfluous to disclose by reason of any express or

implied warranty.

Bolivia Republic v. Indemnity Montreal Marine Insurance, [1909]1 KB 785

In this case goods were shipped upon a vessel for carriage from a place at the mouth of the
Amazon to place far inland upon a tributary of a tributary of that river, situated in a remote
territory belonging to Bolivia on the boundary between that country and Brazil. These goods
were insured for the voyage by a policy in the form of marine policy against, among other
risks usually specified in such a policy, ―pirates‖ and ―all other perils‖ that should
come to the hurt, detriment, or damage of the subject-matter of insurance.

The policy contained the following clause, ―Warranted free of capture, seizure, and
detention, and the consequences thereof, or any attempt thereat, piracy excepted, and also
from all consequences of riots, civil commotions, hostilities, or warlike operations, whether
before or after declaration of war.‖

The goods insured consisted of provisions and stores which belonged to the Bolivian
Government, and were intended for Bolivian troops engaged in establishing the authority of
that government in the before-mentioned territory. Certain malcontents, mostly Brazilians,
who were desirous that the authority of the Bolivian Government should not be established
there, had fitted out an expedition which ascended the Amazon in armed vessels for the
purpose of resisting the Bolivian troops and establishing an independent republic in the
before-mentioned territory. Those on board one of these vessels stopped the vessel on which
the goods were shipped and seized those goods. In an action on the policy claiming loss
through pirates, it was held that:

Even assuming that the acts of those who seized the goods came within the legal definition of
piracy for some purposes, the word ―pirates‖, as used in the policy, must be construed
in its popular sense, and in that sense it meant persons who plunder indiscriminately for their
private gain, not persons who simply operate against the property of a particular state for a
public political end, and, therefore, there had not been a loss through ―pirates‖ within
the meaning of the policy and that this act came within civil commotion which was an
expressly excepted risk.

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 2. Representation: section 20.-(1) provides that every material representation made by
the assured or his agent to the insurer during the negotiations for the contract, and
before the contract is concluded, must be true. If it untrue the insurer may avoid the
contract.‖ If there is misrepresentation whether innocent, negligent or fraudulent,
it renders a contract voidable at the option of the insurer and this right to avoid
become exercisable from the time when the insurer is fully aware of the false
misrepresentation when the contract was concluded and he has to avoid such a
contract within reasonable time or he will be treated to have accepted it.

Green Hill v. Federal Insurance Co. Ltd [1927]1 KB 65:

A consignment was to be shipped from New York to Halifax then to the final destination. But
before the journey started, there was already pre-carriage but during the presentation state,
the assured only disclosed the nature of the subsequent voyage instead of mentioning the pre-
carriage. Later the goods were damaged. The issue was whether the assured had disclosed all
material circumstance. It was held that he has not disclosed all the material facts as the pre-
carriage information was a material fact to the contract of insurance. Here disclosure acted as
misrepresentation. Failure to disclose any information even impliedly (actual concealment)
amounts to misrepresentation.

3. Insurable Interest: it is said to exist when the assured stands either in legal or
equitable relationship with the subject matter of insurance in that his right will be
jeopardized in case of loss or damage of the subject matter of insurance or he will
benefit if the subject matter of insurance exists.

Insurable interest must exist at the time of loss because marine insurance is a contract of
indemnity which aims at placing the insured at the original position he was before loss or
damage. So a contract of insurance which is not backed up with insurable interest is void
for being a wager or gaming. Section 18 of the Gaming Act of 1845 provides that ―All
contracts or agreements, whether by parole or in writing, by way of gaming or wagering
shall be null and void; and no suit shall be brought or maintained in any court of law or
equity for recovering any sum of money or valuable thing alleged to be won upon any
wager…‖ Also section 30 of the Law of Contract Act of Tanzania provides further
that, ―an agreement by way of wager is void; and no suit shall be brought for recovering
anything alleged to be won on any wager, or entrusted to any person to abide the result
of any game or other uncertain event on which any wager is made.‖

However, to know who has insurable interests in a marine voyage depends on the terms of
the contract and the state of performance of the contract. Normally in whom the property in
the goods is vested, has an insurable interest in the goods. The party whom bears the risk is
believed to have insurable interest in the goods. The buyer is said to have insurable interest in
the profit which he would have made upon re-sell of the goods has arrived safely.

45
Likewise, the unpaid seller has a defeasible insurable interest in the goods until the buyer is
deemed to have accepted the goods, and lost his right to reject them.

Therefore in FoB and C & F, the seller who has not received the price of goods has a contingent
interest in the goods.

A carrier has an insurable interest in the goods entrusted to him since he will be liable to the
cargo owner in loss or damage to the goods.

But from the examples of parties with insurable interests above, it is important to note a
person ensures a cargo to the extent of his insurable interest in those goods. This is because; the
buyer, the carrier and the seller all have insurable interests of some extent in the goods.

4. Premium: this is an installment which is paid on the insurance policy ordinarily the
broker is responsible to the insurer for the payment of the premium.

KINDS OF MARINE INSURANCE

a. Valued Policy: This specifies the agreed value of the subject matter insured, as a general
rule, the value fixed by a valued policy in the absence of fraud, is conclusive of the
insurable value of the subject matter. Section 27.-(3) of the Marine Insurance Act. Section
27.-(1) provides that, ―A policy may be either valued or unvalued.‖ Subsection
(2) provides further that, ―A valued policy is a policy which specifies the agreed
value of the subject-matter insured.‖ Subsection (3) provides further that,
―Subject to the provisions of this Act, and in the absence of fraud, the value fixed by
the policy is, as between the insurer and assured, conclusive of the insurable value of
the subject intended to be insured, whether the loss be total or partial.‖

Unvalued Policy: it merely states the maximum limit of the value insured and it
leaves the insurable value to be ascertained subsequently. Normally the value of goods
insured under unvalued policy has to be proved by production of invoices, vouchers,
estimations and other evidences. Section 28 of the Marine Insurance Act states
that, ―An unvalued policy is a policy which does not specify the value of the subject-
matter insured, but subject to the limit of the sum insured, leaves the insurable value to
be subsequently ascertained, in the manner herein-before specified.‖

b. Voyage, time and mixed policies:

Voyage Policy: the subject matter is insured in transport from one port to another.
The duration of the insurance cover is governed by the transit clause. Insurance cover is
46
 provided from warehouse to warehouse. This means a transit clause extends the
marine insurance cover even to land risks that are incidental to sea voyage.

Time policy: The subject matter gets insured for a fixed time like for a period of 6
months. It may also have a continuation clause which allows the policy to continue
after the time specified in the policy expires.

Mixed Policy: The subject matter is insured for a particular journey and for a certain
period of time, thus, the insurer is only liable if loss or damage occurs within the
stipulated time and voyage.

c. Floating Policy, section 29 of the Marine Insurance Act. It is a single policy which
states the insurance in general terms and covers all consignments within its scope. It
states the overall value and each time the consignment is sent which comes within the
terms of the policy, the assured declares this consignment and its value to the insurer.
The declared value will be deducted by the banks from the original figure and when
the balance is exhausted, the policy shall be terminated or written off.

Dunlop Brothers and Co v. Town [1999]2 KB 129

There was an agreement under floating policy. The assured transported the goods
within the policy without notifying the insurer. Later on he transported another
consignment and reported and later on the consignment was lost. He wanted to be
indemnified by the insurer. The insurer refused on the ground of non-disclosure of the
consignment. The court held in favour of the insurer. Section 29 of the Marine Insurance
Act provides that,

“1. A floating policy is a policy which describes the insurance in general terms, and
leaves the name of the ship or ships and other particulars to be defined by subsequent
declaration.

2. The subsequent declaration or declarations may be made by indorsement on the

policy, or in other customary manner.

3. Unless the policy otherwise provides, the declarations must be made in the order of
dispatch or shipment. They must, in the case of goods, comprise all consignments within
the terms of the policy, and the value of the goods or other property must be honestly
stated, but an omission or erroneous declaration may be rectified even after loss or
arrival, provided the omission or declaration was made in good faith.”

d. Blanket Policy: it is a policy in the nature of a floating policy and open cover note is
used. A lump sum premium shall cover all the shipments. It does not require the insured
to declare to the insurer the individual shipments; this is what distinguishes blanket
policy from a floating policy.
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THE LAW OF GENERAL AVERAGE

In maritime transport, three interests are at risk, namely:

a. The ship,

b. The cargo and

c. The freight.

When these interests encounter a common peril, it may be necessary to voluntarily make an
extra-ordinary sacrifice or to incur extra-ordinary expenditure in preserving these interests. The
sacrifice is made for the benefit of the carrier, the buyer, seller and the insurer. The extra-
ordinary sacrifice and extra-ordinary expenditure are what in law referred to as a General
Average Act. For example, it may be necessary to jettisoned part of the cargo to the sea in
order to avoid a sea accident. This is a general average act. The sacrifice is made for the
benefit of all concerned in the adventure. Therefore, it is only fair and justice that all of them
should contribute proportionally to the loss.

The York-Antwerp Rules define general average in Rule A uniformity, thus, ―There is
general average act when, and only when, any extraordinary sacrifice or expenditure is
intentionally and reasonably made or incurred for the common safety for the purpose of
preserving from peril the property involved in a common maritime adventure.‖

Where there is general average there is insurance to cover the losses that have resulted from a
general average act. Section 66 of the Marine Insurance Act codifies this law by providing that,
―(1) A general average loss is a loss caused by or directly consequential on a general
average act. It includes a general average expenditure as well as a general average sacrifice.

(2) There is a general average act where any extraordinary sacrifice or expenditure is
voluntarily and reasonably made or incurred in time of peril for the purpose of preserving the
property imperiled in the common adventure.

(3) Where there is a general average loss, the party on whom it falls is entitled, subject to the
conditions imposed by maritime law, to a rateable contribution from the other parties
interested, and such contribution is called a general average contribution.

(4) Subject to any express provision in the policy, where the assured has incurred a general
average expenditure, he may recover from the insurer in respect of the proportion of the loss
which falls upon him; and, in the case of a general average sacrifice, he may recover from the
insurer in respect of the whole loss without having enforced his right of contribution from the
other parties liable to contribute.

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(5) Subject to any express provision in the policy, where the assured has paid, or is liable to
pay, a general average contribution in respect of the subject insured, he may recover therefore
from the insurer.

(6) In the absence of express stipulation, the insurer is not liable for any general average loss or
contribution where the loss was not incurred for the purpose of avoiding, or in connection with
the avoidance of, a peril insured against.

(7) Where ship, freight, and cargo, or any two of those interests, are owned by the same
assured, the liability of the insurer in respect of general average losses or contributions is to be
determined as if those subjects were owned by different persons.‖

The subject matter of general average includes all the interests of the common adventure
which are at risk. Such interests are physical, namely the ship, the cargo, the bunkers, stores,
personal effects; but there are also those interests which are dependent on the safety of the
physical property, such as the freight, time charter hire (which are earned upon the safe
carriage of the cargo), and any other property involved which is at risk during maritime
common adventure.

This definition means that for the general average to apply, four elements need to be
established namely:

a. Danger or peril to the common adventure

Under section 66.-(2) no recovery can be made in general average unless there exists a peril
against the common adventure. The danger or peril must affect the whole adventure and not
only one interest.

b. There should be extraordinary expenditure or sacrifice.

The Ship owner‘s obligation to perform the voyage under the contract of affreightment is to
deliver the cargo safely to the port of destination upon payment of the agreed freight. He
must have complied with his obligation to provide a seaworthy ship at the time of
commencement of the voyage or else he will not be able to recover a general average
contribution.

This is because contribution for general average, when incurred for the common safety, does
not absolve the parties from their contractual rights and obligations. Only when the sacrifice or
expenditure is beyond the contractual duties will it be allowed in general average.

Some of the extraordinary sacrifices are provided for under the York-Antwerp Rules, 1924 to
include:

(1) Jettisoning of part of the cargo

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 (2) Causing damage to the ship or cargo for the purpose of making a jettison

(3) Pouring into the holds to extinguish a fire on board a ship and thereby damaging the
cargo carried in such holds including damage by beaching or scuttling a burning ship,

(4) Voluntary stranding.

(5) Damage done to the machinery or boilers when the ship is aground.

(6) Ship‘s materials and stores burnt for fuel for the common safety rules.

Some of the extraordinary expenditures under the Rules include:

(1) Additional expenses which would not normally be allowed as general average, but
which replace expenses that would normally be classed as general average.

(2) Expenses incurred in saving the ship and cargo from loss or damage. Classic examples
being the engagement of salvage services following a stranding; the cost of employing
lighters to transfer cargo in order to lighten the vessel; and the employment of towage
services.

(3) Expenses incurred in lightening the ship when ashore.

(4) Expenses for wages etc. in port of refuge.

(5) Expenses for temporary repairs either at the port of loading or a port of refuge.

(6) Port of refuge expenses.

c. It must be voluntary, or intentionally and reasonably made

The act must be done voluntary, with a clear intention under reasonable justified reasons
which another reasonable man would have done.

(c) To preserve property imperiled

The property here means the ship and all the interests carried within or together with the ship.

NB: a general average act must be a sacrifice that has been purposely resorted to and is
reasonably made in times of peril in order to preserve the property facing a common danger—
it is done when a ship is at distress. A general average act should not be a result of any wrong
doing for which the claimant is responsible. As a general rule, in maritime transport, where
there is a general average loss, the party on whom it falls is entitled to a rateable contribution
(sometimes called the general average contribution) from the other parties interested in the
venture. For example, if a cargo owner suffers a general average loss, he is entitled to claim for
contribution from the ship owner and from other cargo owners.

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At common law, a ship owner has a lien on the cargo for general average provided he is still in
possession of the goods. Alternatively, the cargo owner may claim for insurance indemnity for
the average loss instead of being involved in the complications of the general average. On pay
of the indemnity, the insurer is subrogated to the rights of the assured and the insurer may
claim for the average contribution from the other parties.

INSURANCE CLAIMS

As a general rule, the insurer is liable for any loss proximately caused by a peril insured against—
section 55 of the Marine Insurance Act. The cause which is proximate is that which is proximate in
terms of efficiency and not necessarily to be the first. The maxim for this is ―Causa Proxima
Non Remota Spectatur.‖ Section 55 of the Marine Insurance Act provides that,

―(1) Subject to the provisions of this Act, and unless the policy otherwise provides, the
insurer is liable for any loss proximately caused by a peril insured against, but, subject as
aforesaid, he is not liable for any loss which is not proximately caused by a peril insured against.

(2) In particular-

(a) The insurer is not liable for any loss attributable to the willful misconduct of the assured,
but, unless the policy otherwise provides, he is liable for any loss proximately caused by a peril
insured against, even though the loss would not have happened but for the misconduct or
negligence of the master or crew;

(b)Unless the policy otherwise provides, the insurer on ship or goods is not liable for any loss
proximately caused by delay, although the delay may be caused by a peril insured against;

Unless the policy otherwise provides, the insurer is not liable for ordinary wear and tear,
ordinary leakage and breakage, inherent vice or nature of the subject-matter insured, or for
any loss proximately caused by rats or vermin, or for any injury to machinery not proximately
caused by maritime perils.‖

Reischer v. Borwick, [1894] 2 QB 548

The plaintiffs insured the paddle tug Rose with the defendants under a policy of marine
insurance which included cover for collision damage, but not for loss or damage caused by the
perils of the sea.

While proceeding along the river Danube, Rosa collided with a floating snag, which fouled the
port paddle wheel, causing considerable damage to the tug‘s machinery. This damage
included a hole in the cover of the condenser, which allowed water to enter the tug. The
captain anchored the tug and effected temporary repairs by plugging the condenser outlet
pipes before calling for assistance.
51
When another tug arrived and started towing Rosa towards the nearest dock, the plug in the
condenser outlet on the port side fell out and the crews were unable to prevent the rush of
water which then entered the tug through the hole in the condenser cover. In order to save
lives, Rosa was beached and abandoned.

The plaintiffs claimed damages for the total loss of the tug.

The defendants agreed only to indemnify the plaintiffs for the actual or immediate damage
caused by the collision, and not for the subsequent loss for which the plaintiffs claimed for.

The court under Lopes LJ: ruled in favour of the plaintiffs‘ owner of the tug. The collision
remained the efficient and predominant cause of the loss of Rosa.

HELD:

―….In cases of marine insurance, it is well settled law that it is only the proximate cause that is
to be regarded and all others rejected, although the loss would not have happened without them.
Damage received in collision must, therefore, in this case be the proximate cause of the loss to
entitle the plaintiff to recover. The damage received in the collision was the breaking of the
condenser, and it was the broken condenser which really caused the proximate loss…‖

This means that, the choice of which cause is proximate is made by applying common sense
standards. The insured has the burden of proof to show that his loss or damage was caused by
the risk insured, upon proof by the insured that the loss was covered, the evidential burden
shifts to the insurer to establish that the risk was actually excluded by the exclusion clause.

TOTAL AND PARTIAL LOSS

Total loss is either actual or constructive. Actual loss occurs where:

a. The subject insured is destroyed.

b. The insured has been irretrievably deprived thereof.

c. Where the subject matter has been so damaged that it has lost its commercial identity.

Section 56 of the Marine Insurance Act provides for partial and total loss in these words
thus,

―(1) A loss may be either total or partial. Any loss other than total loss, as hereinafter
defined, is a partial loss.

(2) A total loss may be either an actual total loss or a constructive total loss.

52
(3) Unless a different intention appears from the terms of the policy, an insurance against total
loss includes constructive, as well as an actual, total loss.

(4) Where the assured brings an action for a total loss and the evidence proves only a partial
loss, he may, unless the policy otherwise provides, recover for a partial loss.

(5) Where goods reach their destination in specie, but by reason of obliteration of marks, or
otherwise, they are incapable of identification, the loss, if any, is partial, and not total.‖

Section 57 provides further for the total loss when it states that,

―(1) Where the subject-matter insured is destroyed, or so damaged as to cease to be a thing

of the kind insured, or where the assured is irretrievably deprived thereof, there is an actual
total loss.

(2) In the case of an actual total loss no notice of abandonment need be given.‖

Section 60 goes further to define what constitute constructive total loss in these words:

―(1) Subject to any express provision in the policy, there is a constructive total loss where the
subject-matter insured is reasonably abandoned on account of its actual total loss appearing
to be unavoidable, or because it could not be preserved from actual total loss without an
expenditure which would exceed its value when the expenditure had been incurred.

(2) In particular, there is a constructive total loss--

(i) Where the assured is deprived of the possession of his ship or goods by a peril insured
against, and

(a) It is unlikely that he can recover the ship or goods, as the case may be, or

(b) The cost of recovering the ship or goods, as the case may be, would exceed their value
when recovered; or

(ii) In the case of damage to a ship, where she is so damaged by a peril insured against
that the cost of repairing the damage would exceed the value of the ship when repaired.
In estimating the cost of repairs, no deduction is to be made in respect of general average
contributions to those repairs payable by other interests, but account is to be taken of the
expense of future salvage operations and of any future general average contributions to
which the ship would be liable if repaired; or

(iii) In the case of damage to goods, where the cost of repairing the damage and
forwarding the goods to their destination would exceed the value on arrival.‖

53
Constructive total loss of goods occurs where the cost of repairing the damage and forward the
goods to their destination will exceed value of goods upon arrival. Where total loss is
constructive, the damage is reparable although at a considerable cost. This means that the
insured may elect either to treat the loss as partial and claim for indemnity or to treat the loss
as total loss and abandon the subject to the insurer. It is not always easy to say whether loss is
actual or constructive total loss because there are no well-defined principles.

Asfar & Co v. Blundel, [1896] 1 QB 123,

In this case dates were so much damaged that they lost their commercial or merchantable
value. The court held that the loss is total actual loss. Lord Esher MR was of the view that the
test as to whether a commodity had become a total loss should be based on its merchantable
condition and whether an honest businessman would buy or sell it.

In case of total loss, the insured is entitled to recover the sum fixed in the policy if the policy is
the valued one. If the policy is unvalued one, the insured will recover the insurable value of the
goods in case of total loss under section 16.-(3) of the Marine Insurance Act which subsection
defines the meaning of insurable value of the goods to mean, ―In insurance of goods
or merchandise, the insurable value is the amount at the risk of the assured when the policy
attaches, plus the charges of insurance.‖

Section 68 of the Marine Insurance Act provides on the remedies for total loss when it says,

―Subject to the provisions of this Act and to any express provision in the policy, where
there is a total loss of the subject-matter insured,--

(1) If the policy be a valued policy, the measure of indemnity is the sum fixed by the
policy:

(2) If the policy be an unvalued policy, the measure of indemnity is the insurable value of
the subject-matter insured.‖

In case of partial loss of goods, merchandise, etc. section 71 of the Marine Insurance Act
provides in detail that,

―Where there is a partial loss of goods, merchandise or other moveables, the measure of
indemnity, subject to any express provision in the policy, is as follows:

(l) Where part of the goods, merchandise or other moveables insured by a valued policy is
totally lost, the measure of indemnity is such proportion of the sum fixed by the policy as
the insurable value of the part lost bears to the insurable value of the whole, ascertained
as in the case of an unvalued policy:

54
(2) Where part of the goods, merchandise, or other moveables insured by an unvalued
policy is totally lost, the measure of indemnity is the insurable value of the part lost,
ascertained as in case of total loss:

(3) Where the whole or any part of the goods or merchandise insured has been delivered
damaged at its destination, the measure of indemnity is such proportion of the sum fixed
by the policy in the case of a valued policy, or of the insurable value in the case of an
unvalued policy, as the difference between the gross sound and damaged valued at the
place of arrival bears to the gross sound value:

(4) 'Gross value' means the wholesale price, or, if there be no such price, the estimated
value, with, in either case, freight, landing charges, and duty paid beforehand; provided
that, in the case of goods or merchandise customarily sold in bond, the bonded price is
deemed to be the gross value. 'Gross proceeds' means the actual price obtained at a sale
where all charges on sale are paid by the sellers.‖

RIGHT OF SUBROGATION

The insurer right of subrogation

Subrogation is the right for an insurer to pursue a third party that caused an insurance loss to
the insured. This is done as a means of recovering the amount of the claim paid to the insured.

Upon payment of the cost of insurance to the insured, the insurer has all the rights and
remedies of the subrogation of the insured in respect of the interests covered. The rationale is
to prevent the insured from recovering more than once from the same loss. The insurer gets
subrogated to all the rights of the insured arising from contracts, torts or otherwise. If the
insured had already recovered damages from a third party, the insurer can claim from the
insured the money received as damages.

AIR CARGO INSURANCE

Air cargo can be insured through two principal methods namely:

a. In the marine market via brokers

b. In the aviation market via the air way bill.

MARINE CLAUSES

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Normally air cargo insurance taken out in the marine market is obtained under special
institute air cargo clauses. The institute air cargo clauses are the standard form and they are
used with Lloyd‘s marine policy. They are modeled on the marine institute cargo clauses
subject to alterations. The institute air cargo clauses are of three types namely:

a. The institute cargo clauses (air). It covers all risks of loss or damage to the subject
matter insured. However, clauses 2, 3, and 4 contain 14 exceptions including exceptions
for war and strikes.

b. The institute war clauses (air cargo). It covers war risks which are excluded by the
institute cargo clauses (air). The war risks covered include loss caused by civil war,
torpedo bombs, capture and seizure of aircrafts. It does not provide for strikes—so it is
thought that strikes are not covered. It is subject to 9 exceptions.

c. The institute Strikes Clauses (air cargo). It covers strikes, lock-outs, labour disturbances
and any terrorist or any person acting from a political motive. It is subject to 11
exceptions.

NB: A comprehensive cover is only provided by a combination of all the three air cargo
policies.

AIR WAY BILL COVER NOTE

Air way Bill or Air Consignment Note, is a receipt issued by an international airline for goods
and an evidence of the contract of carriage but it is not a document of title to the goods.

Main Functions of an Air Way Bill

a. It is a Contract of carriage. Behind every original of air way bill are conditions of the
contract of carriage.

b. It is an evidence of receipt of goods.

NB: There is no uniform insurance cover which is offered via the air carrier‘s air way bill.

FINANCING INTERNATIONAL TRADE

Introduction

In every contract for an export transaction there must be a clause providing for payment of
the purchase price. That clause may provide for the following items namely:

56
 a. Time of payment

b. Place of payment

c. Mode of payment

d. The currency of payment

MODES OF PAYMENT

a. Where commercial banks are involved payment can be either through collection
arrangement or payment under letters of credit. In both methods, commercial bank is
interposed between the buyer and the seller. The bank would use a document of title
for the goods sold as collateral and as security for the payment.

b. Where commercial banks are not involved in payment to interpose between the seller
and the buyer, then, the buyer may transfer a purchase price to the seller on open
price.

c. Payment can also be by Bills of Exchange

METHODS OF PAYMENT

a. Payment on open account: the buyer makes direct payment to the export, for
example, cash with order arrangement (order with payment). Where the parties agree
on such payment, the buyer must remit the purchase price when he is presented with a
document of title for the goods sold. In practice, the exporter or the seller sends the
documents to the buyer who in turn remits the purchase price by telegraphic money
transfer, for example, Western Money Union. This remittance can be carried out
through the buyer‘s bank.

b. Payment by Bills of Exchange: section 3 of the English Bills of Exchange Act defines
a Bill of Exchange as ―An unconditional order in writing, addressed by one
person (the drawer or the seller) to another (the drawee or the buyer), signed by a
person giving it (the seller), requiring a person to whom it is addressed (the buyer) to
pay on demand (a sight bill) or at a fixed or determinable future time (a term bill) a
sum certain in money to or to the order of a specified person (payee), or to the
bearer.‖ Under this mode of payment the exporter draws a Bill of Exchange of the
Buyer when the person to whom the Bill is addressed accept the Bill by writing the
word accepted on its face and he thereby undertakes to pay the Bill in accordance
with its terms. This person therefore becomes liable as the acceptor of the Bill.
57
 The bill of exchange has three parties namely:

i) Drawer who is the seller

ii) Drawee who is the buyer and

iii) Payee who is the bank

CHARACTERISTICS OF THE BILL OF EXCHANGE

a. Every obligation arising out of the Bill must be expressed in writing on the bill and
signed by the party liable. Section 23 of the English Bills of Exchange Act of 1882
provides that, ―No person is liable as drawer, indorser, or acceptor of a bill who has
not signed it as such.‖

b. It can be transferred by indorsement and delivery. However, if it is a bearer Bill, it can

be transferred by a simple delivery. As a result a bill of exchange is said to a
negotiable instrument as it can be transferred to another person with an interest in
the Bill.

c. Only a holder of the Bill can claim for performance of the obligation stipulated in the
Bill of Exchange (No stranger can accrue the benefit). This person is called the holder of
the bill and is defined under section 2 as ―the payee or indorsee of a bill or note
who is in possession of it, or the bearer thereof.‖

d. The person to whom a bill is negotiated may acquire a better right under the bill than
predecessors. This is vital as it facilitates negotiation of bill especially to the discount of
the bill.

e. A holder of a bill in due cause may acquire a better right under it than his predecessors
possess. This is remarkable exception to the common law principle that no transferee
can acquire a better title than his transferor. The object of this rule is to facilitate the
negotiation of the bill.

Section 29.-(1) defines a holder in due course as ―a holder who has taken a bill,
complete and regular on the face of it, under the following conditions; namely,

(a) That he became the holder of it before it was overdue, and without notice that it had
been previously dishonoured, if such was the fact:

(b) That he took the bill in good faith and for value, and that at the time the bill was
negotiated to him he had no notice of any defect in the title of the person who
negotiated it.‖

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Subsection (2) goes further to define what amounts to being defective when it provides that,
―In particular the title of a person who negotiates a bill is defective within the meaning
of this Act when he obtained the bill, or the acceptable thereof, by fraud, duress, or force and
fear, or other unlawful means, or an illegal consideration, or when he negotiates it in breach of
faith, or under such circumstances as amount to a fraud.

Subsection (3) provides further that, ―A holder (whether for value or not), who derives
his title to a bill through a holder in due course, and who is not himself a party to any fraud or
illegality affecting it, has all the rights of that holder in due course as regards the acceptor and
all the parties to the bill prior to that holder.‖

TYPES OF BILLS OF EXCHANGE

Foreign Bills: is a bill which

1. Either is drawn by a person who is not resident in the British Islands or

2. Is drawn by a person resident in British Islands on a person resident abroad and is

payable abroad.

All the remaining bills are inland bills which are defined under section 4 of the Act to mean,
―(1) An inland bill is a bill which is or on the face of it purports to be (a) both drawn and
payable within the British Islands, or (b) drawn within the British Islands upon some person
resident therein.‖

Claused bill of exchange: as a general rule, the sum payable by the Bill of Exchange must be
the sum certain in money—the actual sum payable under the Bill must be specified. The only
exception is that the Bill may provide for payment of incidental charges which include interests,
bankers‘ charges and foreign stamp duties. A Claused Bill is one that has clauses that
provide for payment of incidental charges in addition to the purchase price. Examples of such
clauses include: Payable with banker‘s charges, Payable without loss in exchange, payable
with stamp duties. The point is that the clauses providing for payment of incidental charges, do not
vitiate the character of certainty of the sum payable under the Bill of Exchange.

Documentary bill of exchange: is a bill of exchange to which the bill of lading to the goods
sold is attached at the same time. Its significance is that it ensures that the buyer does not
receive the bill of lading and therefore the right to dispose of the goods before accepting or
paying under the attached bill of exchange. A buyer who fails to honour the bill of exchange is
required by law to return the bill of lading to the seller. The seller honours it by either
accepting the bill of exchange or by making the payment under the bill. If a buyer wrongful
retains a bill of lading, the law presumes that the property in the goods sold has not passed to

59
the buyer—the buyer has not legally acquired title of the goods—he is merely in possession of
the goods—so he cannot deal with the goods as the legal owner.

Leigh and Sillivan Ltd v. Aliakmon Shipping Co. Ltd, [1985] Q.B 350

This is an appeal case from the Commercial Court. In that court, the appellants, who were
c. and f. buyers of goods carried in respondents‘ ship, claim damages against the
respondents for damage done to such goods at a time when the risk, but not yet the legal
property in them, had passed to the appellants.

The main question to be determined is whether, in the circumstances just stated, the
respondents owed a duty of care in tort to the appellants in respect of the carriage of such
goods; and if so, whether and to what extent such duty was qualified by the terms of the
bill of lading under which the goods were carried.

This first instance court gave judgment in favour for the plaintiffs on their claim for
contract but not in tort of negligence against the defendants.

The respondents appealed to the Court of Appeal which reversed the judgment of the trial
court and held that the appellants are not entitled under tort on the ground that the
respondents did not at the material time owe any duty of care to the appellants and that
even if the respondents had that duty of care to the appellants, they have not breached
that duty.

There was a contract of sale between the buyer (appellants) and the sellers (Kinsho-
Mataichi Corporation). The contract was concluded in July, 1976. The contract of sale was
to buy the quantity of steel coils (the goods) to be shipped from Korea to Immingham on c
& f terms. The goods were transported in the respondents‘ vessel. The price of the goods
was to be paid by a 180 day bill of exchange to be endorsed by the buyers‘ bank in
return for a bill of lading relating to the goods. The buyers were traders in steel rather than
users of it. Their intention was to finance the transaction by making a contract for the re-sell of
the goods to sub-buyers before the bill of lading was tendered by the sellers.

The goods reached the destination a bit damaged due to poor stowage of steel and timber
in the same compartment which resulted in the rust of the steel. The House of Lords
dismissed the appeal on similar grounds as held by the Court of Appeal.

HELD:

―In order to enable a person to claim in negligence for loss caused to him by reason of
loss of or damage to property, he must have either the legal ownership of or a possessory title
to the property concerned at the time when the loss or damage occurred, and it is not

60
 enough for him to have only had a contractual rights in relation to such property which
have been adversely affected by the loss of or damage to it.‖

Avalised bill of exchange: an aval‘ is the signature on a bill of exchange by a person who
wants to guarantee its payment to the holder in due cause. So it is the signature of the third
person. A person who signs a bill, otherwise than the drawer or acceptor becomes a guarantor
of the liabilities of an immediate party to the bill. The guarantor may guarantee payment by
the acceptor endorsers all payment by all immediate parties namely: the acceptor and those
liable on recourse. Only a time bill and not a sight bill can be avalised. Time bill is the
bill payable at future date, while sight bill is the bill is payable at the presentation of
documents. It is the time bill which is capable of being avalised. Both the drawer and the
acceptor cannot avalise a bill because they are liable on the Bill in any event. Therefore, the
aval by its nature is an added liability of another person who was not an original party to the
bill of exchange. A bill is only avalised after it has been accepted by the drawee bank. In
practice, bills are avalised by banks by stamping across the bill the words, ―per aval.‖
The bank which accepts to pay under the bill assumes primary liability while the bank which
signs the aval, assumes secondary liability.

Bills drawn in a set: the seller normally presents the buyer with several sets of transport
documents—the bill of lading—in addition the seller draws the bill of exchange as part of a set
and attaches a part of the bill to every set of transport document which he dispatches. This
means a bill of lading are drawn in three or more sets and then three or more sets of the bills
of exchange for the set. Every part must indicate that the bill represent a part in a set and
must state a number of facts existing in all. For example, first of exchange, (second and third of
the same date and tenor unpaid), this indicates that a bill of exchange is drawn in triplicate.
All the parts as a whole constitute one bill. The parts of the set may be endorsed to different
persons but only one part is accepted by the drawee. The payment of the accepted part
discharges the whole bill and the acceptor is entitled to claim delivery of the accepted part.

Read Schmitthorf‘s Export Trade: The Law & Practice of International Trade—read on the
UN Convention on International Bills of Exchange and International Promissory Notes, 1998.

He says that the law relating to the Bills of Exchange is governed by the two systems namely,
The Geneva system which is founded under the Geneva Conventions which has been accepted
by 19 nations of Europe and some other three countries and the second system is The Anglo-
American System which applies in the United Kingdom, most Commonwealth countries,
United States and Other States which found their law out common law system.

He says further that UNCITRAL prepared a Convention on International Bills of Exchange and
Promissory Notes which was approved by the United Nations General Assembly in 1988. At the
time when he wrote, the Convention was not yet in force.

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 c. Collection Arrangements (The third mode of payment)

The method is used where the purchase price is payable in the buyer‘s country of residence
or business. A seller instructs his banker to arrange normally with a bank in the buyer‘s country,
for the collection of payment from the buyer on the strength of a bill of exchange drawn on the
buyer. The Seller‘s bank is called the Remitting bank while the buyer‘s bank is called the
collecting bank. The other name of the buyer‘s bank is the correspondent bank.

In practice, the seller would fill the document called, documentary bill lodgement form to
instruct his bank (the remitting bank) to send the bill of exchange and transport documents
relating to the goods sold, to the bank in the buyer‘s country, and in this case it is the
collecting bank. This instruction is sent through a document called the collection order.

Collection arrangements are standardized by international chamber of commerce which has

Uniform Rules for Collection—it means that these rules do not have mandatory obligation
or application, they must be adopted by the parties for them to be applicable. Under the URC
rules, the remitting bank must issue precise and complete instructions to the collecting bank
using a collection order document. The collecting bank will deliver the necessary documents to
the buyer upon acceptance of the bill of exchange or upon actual payment under the bill or in
accordance with special instructions as stated in the collection order.

The collecting bank is under obligation to advise the remitting bank using quicker mail about
the outcome of the collection process. A collecting bank that releases the documents to the
buyer contrary to the instructions shall be liable in damages to the seller for breach of contract
and for the tort of conversion of documents.

Calico Printers Association Ltd v. Barclays Bank, [1930] 36 Com. Cas. 197.

HELD:

―Privity of contract exists between the seller (or the Principal) and the collecting bank,
because, when, on the collection order the remitting bank passes on the seller‘s
instructions it acts as an authorized agent of the seller.‖

Here the seller engaged Barclays Bank (remitting Bank) to collect payment of a sight draft
from a Syrian merchant (the drawee) against delivery of a bill of lading and other documents.
The remitting bank had engaged the Anglo Palestine Bank at Beirut (the collecting or
presenting or correspondent bank) to present the sight draft and to deliver the documents
against payment of the sight draft. The collecting bank delayed in presenting the sight draft,
the marine insurance ran out and the goods were retained in the custom warehouse at Beirut
without further insurance.

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The goods were destroyed by fire. The seller sued both the remitting bank and the collecting
bank for damages. So far as the seller‘s action against the collecting bank was based
on the alleged breach of contract (failure to carry out an instruction to insure) the trial court
held that there was no privity of contract between the seller and the collecting bank had been
established. That decision was not questioned in the Court of Appeal.

Therefore, the argument that there is privity of contract is only established by Schmitthof but
not the case. However, the current commercial regime regards the presence of the privity of
contract between the parties above as an exception to the general rule. So the presence of the
privity of contract as between the seller and the collecting bank because the remitting bank is
an agent of the seller.

d. Letters of Credit or Documentary Credits

Article 1 of the UCP provides that, ―These articles apply to all documentary credits,
including, to the extent to which they are applicable, standby letters of credit and are binding
on all parties thereto unless otherwise expressly agreed. They shall be incorporated into each
documentary credit by wording in the credit indicating that such credit is issued subject to
UCP.‖

The Rules go further to define what amounts to letters of credit when it says,

―For the purposes of these articles, the expression ‗documentary credits or standby
letters of credit‘ mean any of following arrangement, however named or described, whereby
a bank (the issuing bank), acting at the request and on the instructions of a customer (the
applicant for the credit),

I. Is to make a payment to or to the order of a third party (the beneficiary), or is to pay

or accept bills of exchange (drafts) drawn by the beneficiary.

II. Authorizes another bank to effect such payment, or to pay, accept or negotiate such
bills of exchange (drafts),

Against stipulated documents, provided that the terms and conditions of the credit are
complied with.‖

The banking practice relating to letters of credits is standardized by the uniform customs
and practices for documentary credits (UCP) of 1983—this is sponsored by the
International Chamber of Commerce. Payment under a letter of credit, the buyer arranges for
payment of a purchase price to be made by a bank in the seller‘s country. Such payment is

63
made only after the seller has presented to the bank specified documents. These documents
may either be the bill of exchange, the bill of lading, invoices and insurance policies.

The seller has performed other conditions as stated in the credit and advised by the bank to
the seller. The buyer‘s bank is the issuing bank and the seller‘s bank is the paying
correspondent bank. In paying the purchase price, the correspondent bank must comply with
the terms of the credit. In practice normally, the first stage of creating letters of credit, the
exporter and the overseas buyer would agree in the contract of sale that payment shall be
made under a letter of credit.

The buyer, then, instructs the bank at his place of business to open a letter of credit for the
exporter on the terms specified by the buyer. Such terms and conditions are normally
contained in the instructions to the issuing bank.

The issuing bank arranges with a bank at the locality of the seller to negotiate, accept, or pay
the exporter‘s bill upon delivery of the transport documents by the seller.

The paying bank informs the seller that it will negotiate, accept or pay his bill upon delivery of
specified transport documents. Provided the seller tenders correct documents before the expiry
of the credits, the paying bank is legally bound to pay the purchase price.

Hamzah Malas & Sons v. Brtish Imex Industires Ltd, [1958]2 Q.B 129, Jenkins L.J.

In this case, Hamzeh Malas & Bochil Malas are the plaintiffs. They are a firm from Jordan
trading as Hamzeh Malas & Sons. The defendants are the British firm by the name of British
Imex Industries Ltd.

The plaintiffs contracted to purchase from defendants a large quantity of reinforced steel rods.
The goods were to be delivered in two installments and payment was to be effected by means
of two confirmed letters of credit with the midland bank in London-one in respect for
each installment. The letters of credit were duly opened and the defendants realized the first
one and would shortly be in a position to realize the second payment.

On December 9, 1957, the plaintiffs, alleging that the goods of the first installment were
defective, applied ex parte to Donovan J. asking for injunction to restrain the defendants, their
servants, agents or assigns or anyone deriving title under them, from drawing on the second
letter of credit or receiving the Bank any money under the contract. Donovan J granted the
injunction to run until 2.30 p.m on the following day, December 10. The defendants had until 3
p.m. on that day present the letter of credit to the Bank and to receive the payment. The
plaintiffs again, on the morning of December 10, applied to Donovan J to extend the
injunction until the rights of the parties under the contract for the sale of the goods could be

64
ascertained. The judge refused to do so on the ground that he had no jurisdiction. The plaintiffs
immediately appealed to the Court of Appeal at 12.30 p.m. against that refusal.

At the Court of Appeal, the plaintiffs argued that the Court had immense powers to listen to
their case. They argued that they are not removing the liability of the bank to pay but that
they want injunction to stop the defendants from realizing the second installment until their
rights are determined by the court. This is because the money they paid for the first installment
was worthless goods which entitled them to repudiate the contract.

The defendants argued that, they only have a contract with the bank that when they present
the letters of credit to the bank, they are paid, just that. They did not argue about the court
having jurisdiction or not. They argued that the bank cannot refuse payment on presentation
of the proper documents.

HELD:

―It seems to be plain enough that the opening of a confirmed letter of credit constitutes
a bargain between the banker and the vendor of the goods, which imposes upon the banker
an absolute obligation to pay, irrespective of any dispute there may be between the parties as
to whether the goods are up to contract or not.‖

Article 3 of the UCP provides that, ―Credits, by their nature, are separate transactions
from the sales or other contracts on which they may be based and banks are in no way
concerned with or bound by such contracts, even if any reference whatsoever to such contracts
is included in the credit.‖

DOCUMENTARY CHARACTER OF THE LETTERS OF CREDIT

The distinctive feature of a letter of credit is its documentary character. Banks give out credit
against the security of documents of title for goods sold, like a bill of lading. The paying bank
pays the exporter because it holds the documents as collateral security. Where necessary, the
paying bank issues recourse to the issuing bank which in turn takes recourse to the buyer. The
paying bank is entitled to hold the documents as security pending the payment by the issuing
bank. The issuing bank will have the documents as security for payment by its own customer,
the buyer. The letter of credit is the documentary transaction.

Article 4 of UCP provides that, ―In credit operations all parties concerned deal in documents,
and not in goods, services and/ or other performances to which the documents relate.‖

FUNDAMENTAL PRINCIPLES OF LETTERS OF CREDIT

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 a. The principle of autonomy of letter of credit; it stipulates that, the credit is
separate from and independent of the underlying contract of sale or other transactions,
articles 3 of UCP for Documentary Credits provides that ―Credits, by their nature,
are separate transactions from the sales or other contracts on which they may be based
and banks are in no way concerned with or bound by such contracts, even if any
reference whatsoever to such contracts is included in the credit.‖4
It means that the paying bank‘s obligation is to ensure that the documents
tendered by the seller correspond to those specified in the instructions. For this reason, a
letter of credit transaction is said to be a paper transaction. It is irrelevant to the
banker whether the underlying contract concerning any goods or services or other
transactions provided that conforming documents are tendered, the paying bank is
obliged to pay the seller.

The only exception to this general rule is called Fraud Exception. The paying bank can
refuse to pay under the credit, if it is satisfied that the documents are fraudulent and
the beneficiary—the seller—was involved in the fraud. When the documents are
fraudulent or false and if the seller was involved in the fraud, then, the principle of
fraud applies.

United City Merchants (Investments) Ltd, v. The Royal Bank of Canada,

[1983] 1 AC 168

Shipment under the contract terms was to take place by 15 th December 1976. The
cargo was in fact shipped on 16th December 1976, and the bill of lading backdated by
the loading brokers. The sellers, however, were unaware of the loading brokers‘
fraud. The bank, having discovered fraud, refused to pay the seller, who brought an
action against the bank for non-payment against the documents that appeared to be
in order on their face, but where goods had not been shipped as stipulated in the sale
contract.

Lord Diplock held that,

―So this general rule statement of principle as to the contractual obligations of the
confirming bank and the seller, there is one established exception: that is, where the
seller for the purpose of drawing on the credit, fraudulently presents to the confirming
bank documents that contain, expressly or by implication, material representations of
fact that to his knowledge are untrue.‖

4 Which was adopted by the Council of the International Chamber of Commerce, November, 1962.

66
 He went further to quote the case of Sztejn v. Handry Schroder Banking
Corporation where after laying the autonomous nature of the letters of credit, Judge
Shientag in the Court of Appeal of New York, went further to provide for its exception,

―The exception for fraud on the part of the beneficiary seeking to avail himself of the
credit is a clear application of the maxim ex turp causa non oritur actio or, if plain
English is to be preferred, ‗fraud unravels all‘. The court will not allow their
process to be used by a dishonest person to carry out a fraud.‖

b. The doctrine of Strict compliance; it stipulates that the bank is entitled to reject
documents which do not strictly confirm with the documents of credits. The reason is
that the advising bank is the special agent of the issuing bank and the issuing bank in
turn is a special agent of the buyer who is the principal. The rule is that if such an agent
acts outside its legal mandate, the principal is entitled to disown the act of the agent.
Thus, a bank which acts outside its mandate is bound to bear the commercial risks of
the transaction. The bank whose act is disowned by the principal cannot recover funds
from the principal. Under this principle, the bank can refuse to accept the defective
documents from the seller. Where the bank refuses to accept documents, the exporter
has the option of requesting the overseas buyer to instruct the bank to accept the
documents as tendered.

Soproma v. Marine and Animal By Products Corporation, [1966] 1 Llyod’s

Rep. 376,

There was a contract for the sale of Chilean full fish meal from a New York Company
to Italy. A buyer opened a letter of credit with the advising bank in New York in
favour of the seller upon presentation by the seller of the bills of lading marked
―freight prepaid‖ and further an analysis certificate stating that the goods had a
minimum content of 70 percent protein.

The seller delivered the bills of lading which were written ―collect freight‖ and
with minimum protein of 67 percent. The buyer rejected the documents. In an action
before the Courts of law by the seller, the court held that the buyer was right in
rejecting the documents because the bill of lading was not in strict compliance with the
documents requested.

Article 15 of UCP provides that, ―Banks must examine all documents with
reasonable care to ascertain that they appear on their face to be in accordance with
the terms and conditions of the credit. Documents which appear on their face to be
inconsistent with one another will be considered as not appearing on their face to be in
accordance with the terms and conditions of the credit. ‖

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 Article 16.-(a) provides further that, ―if, upon receipt of the documents, the issuing
bank considers that they appear on their face not to be in accordance with the terms and
conditions of the credit, it must determine, on the basis of the documents alone, whether to
take up such documents, or to refuse them and claim that they appear on their face not
to be in accordance with the terms and conditions of the credit.‖

TYPES OF LETTERS OF CREDIT

a. Payment at sight credit and Deferred payment credit; under the former, the
advising bank is required to pay the monies due to the seller upon presentation of
documents. Under the latter, the advising bank is authorized to make payments to the
seller at some future date. The future date is determinable in accordance with the
terms of the credit, for example, payment within 180 days within the bill of lading.

Article 11.-(a) of UCP provides that, ―all credits must clearly indicate whether they
are available by sight payment, by deferred payment, by acceptance or negotiation.‖

b. Revocable and irrevocable credit; the former is the credit which the buyer has
established but which he may later cancel or modify it at any time before payment is
made. In the circumstances, it does not give satisfactory circumstances to the seller,
because the buyer has such power before the seller is paid. The irrevocable credit is a
credit which is expressly stated to be irrevocable. Its consequence is that it cannot be
cancelled or modified by the buyer unless, the seller fails to present correct documents
during the lifetime of the credit.

The buyer if foreclosed from cancelling the credit during its life unless the seller fails to
present to bank the required documents of credit within such stipulated time where it
will lapse. In the circumstances it gives satisfactory security of payment to the seller and
it further commits the buyer to the credit. Irrevocable credit may be revoked by a
court of law if the buyer proves fraud on the part of the seller even irrevocable credit
can be revoked by the court. If the credit does not state that it is irrevocable, then by
default it becomes revocable.

Article 7 provides that,

―Credits may be either

I. Revocable, or

II. Irrevocable

All credits, therefore, should clearly indicate whether they are revocable or irrevocable.

68
In the absence of such indication the credit shall be deemed to be revocable.‖

Discount Records Ltd, v. Barclays Bank Ltd, [1975] 1 ALL ER 1071

The plaintiffs were purchasers of a consignment of records and cassettes from French
Company. The goods were delivered but some were not as required under the contract of sale.
The contract of sale provided that payment is to be under confirmed irrevocable credit. The
buyers were unable to stop the bank from paying the seller as they were unable to prove the
fraud exception by the sellers.

The bank‘s obligation to pay on documents that appear to confirm on their face is
curtailed in the event of fraud. It was the English case above, which for the first time
considered fraud as an exception in the case of Discount Records.

In that case, buyers, alleging fraud, sought an injunction to stop the bank from paying the
sellers on the credit.

Mere allegation was held to be insufficient to issue an injunction and that information that
would lead a reasonable banker to infer fraud is insufficient. The fraud has to be proven.

It was in the subsequent case of United City Merchants (Investments) Ltd, v. Royal Bank of
Canada (The American Accord) which applied the fraud exception successfully.

c. Confirmed and Unconfirmed credit; a credit is confirmed when the corresponding

bank gives a direct undertaking that the seller will receive payments if he presents
correct documents within the stipulated or required time. In effect the bank cannot
withdraw from its liability to the seller even if instructed by the buyer to cancel the
credit. This is confirmed credit. A confirmed credit therefore, imposes a binding
obligation on the correspond bank to pay the seller irrespective of any dispute between
the buyer and the seller.

Hamzei Malas & Sons case (supra)

Unconfirmed credit, the correspondent bank only advises the seller of the opening of the
credit but it does not undertake any obligation under the credit. In terms of article 7 of
UCP, ―a credit which does not state otherwise is revocable and therefore
unconfirmed.‖ confirmed credit is advantageous to the seller because it localizes all
important payment incidents of an export transaction, for example, the payment,
acceptance and negotiation of bills.

d. Standby Letters of credit; it is an undertaking by the bank to make payment to

the third party—the beneficiary or an undertaking by the bank to accept the bill of
exchange drawn in favour of the beneficiary. Such payment is made provided the
beneficiary complies with the terms of the credit. The buyer opens a standby letter of

69
 credit for the third party provided that the third party tenders correct documents.
Standby letter of credit may also instruct the bank to authorize another bank to pay,
accept or negotiate bills of exchange against stipulated documents.

e. Revolving Letters of Credit; the buyer gives the bank standing instructions to
arrange for a credit in favour of an exporter (seller) and such credit shall not exceed a
fixed maximum. As the seller presents documents and draws on the credit, the buyer
replenishes the credit for the amount taken by the buyer.

f. Packing Credit; Red Clause Credit; packing credit is also called anticipatory
credit. Credit is payable prior to shipment of goods and against documents of
transport and this means that there will be no bill of lading. The bank may be
instructed to pay the purchase price against documents like warehouse receipts,
forwarders certificate of receipts or air dispatch registered post receipt—these are some
of the documents used in the absence of the bill of lading. Packing credit is more
convenient for smaller exporter who is not conversant with shipping practice. Red
clause is a clause which is inserted by the advising bank in the packing credit whose
effect is to tell the seller that he shall receive half payment and that he will be paid in
full upon presentation of correct transport documents. When the seller is paid a
purchase price, he no longer owns the goods.

g. Back to back and Overriding credit; back to back credits are used in string
contracts where the same goods are sold or re-sold by several middlemen before being
bought by the ultimate purchaser. The confirmed credit opened by the ultimate
purchaser in favour of his immediate seller, is used by the latter as security for the credit
that it opens for his own supplier. Therefore, if there are several middlemen, each will
use the credit in his favour as the security or the credit he opens for his predecessor. The
terms of the credit are identical save for the prices and invoices which are different. The
credit to be opened by the ultimate purchaser is called the overriding credit. The
overriding credit forms the foundations on which the whole financial structure of the
arrangement rests.

h. Transferrable credit; as the general rule a letter of credit is not negotiable or

transferrable in the sense in which a bill of exchange is. The advising bank is not
allowed to pay the credit to any person who satisfies the condition of the credit.
Payment must be made to the named beneficiary according to the instructions.
However, under article 54 of UCP, the parties have the right to state in the agreement
their intention that the credit is transferrable.

Article 54-(a) provides that, ―A transferable credit is a credit under which the
beneficiary has the right to request the bank called upon to effect payment or

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 acceptance or any bank entitled to effect negotiation to make the credit available in
whole or in part to one or more other parties (second beneficiaries).

They may do so by using phrases like, ―the credit is transferrable‖ or ―divisible‖ or the
credit is ―unrestricted for negotiation.‖ For credit to be payable to a person other than
the named beneficiary, there must be either (a) assignment of the benefits of credit or
(b) transfer of the rights and duties under the credit.

1. Assignment of the Benefits of the Credit; a letter of credit is ―a chose in action‖

or a thing in action. Where it is an irrevocable or confirmed credit, it is the conditional
debt of the bank; the reason is that the bank has undertaken an obligation to pay the
seller upon tendering of the stipulated documents timely. Therefore, the seller can
assign the conditional debt—the benefits accruing to him under the credit. The
assigned debt continues to be conditional and the condition can only be discharged by
the seller but not by the assignee this is because the seller as the primary rights while
the assignee has secondary rights.

2. The transfer of the credit; the seller can transfer some of the rights and duties under the
credit to another person normally his supplier. Such transfer assures the transferee of
payment out of funds made available by the ultimate buyer.

3. Transfer of credit requires the consent of the buyer and of the issuing bank.

W. J Alan & Co. Ltd v. El Nasr Export & Import Co Ltd, [1972] 2 QB 189, Denning
MR

W. J Allan who is also a respondent is the seller of coffee beans and El Nasr who is also an
appellant is the buyer of those coffee beans.

There was a contract for the sale of coffee beans under letters of credit. At the time of the
contract, Kenyan shillings and the sterling pound were equal in monetary value and the
contract of sale provided that the purchase price is to be paid in Kenyan Shillings. However,
the credit provided that payment shall be in sterling pounds. The contract had many
discrepancies but which were later on rectified. Still the credit provided that payment is to be
made on Pounds sterling.

The seller (J. W Allan) accepted the first payment under the letter of credit at the time when
the pound dropped dramatically in the world market and thereby suffering a huge loss. They
demanded for extra payment in Kenyan shillings. The buyers (El Nasr) raised a preliminary
objection on promissory estoppel in their defense that by accepting the first installment in
sterling pounds and by redrafting the contract of again but still retaining the same clause,
there was an implied promise that they would not revert to Kenyan shillings. W. J Allan argued
71
that El Nasr had not acted to their detriment in reliance of this promise as they had gained a
benefit.

The issue was whether detrimental reliance is an essential element of promissory estoppel.

The Court allowed the appeal on the ground that by agreeing to the change in the
agreement of which the currency of payment remained the same in the letters of credit, the
respondent (W. J Allan) has waived his right to revert back to the Kenyan currency under the
doctrine of promissory estoppel. Therefore, the detriment reliance is not required for
promissory estoppel to apply.

THE ROLE OF THE ADVISING BANK

The advising bank has the obligation to make the credit available to the beneficiary on
condition that the seller tenders the correct documents within time. This is the overriding
obligation of the advising bank. The advising bank is entitled to refuse to accept documents
tendered by the seller which do not conform to the terms of the credit. Nevertheless, where the
seller tenders non-conforming documents, the advising bank may ask the seller to supply an
indemnity instead of rejecting the documents. This enables the advising bank to make the
credit available to the seller on the strength of such indemnity. The advising bank will have
recourse against the seller and hold him liable on the indemnity.

If the buyer or the issuing bank repudiates the contract because of discrepancies in the
documents, the advising bank will have recourse against the seller on the basis of the contract
of indemnity—a contract in which one agrees to compensate another for the loss sustained
even though indemnity is different from compensation as indemnity has the purpose of
restoring a person to a status quo ante—to the position he was before the loss. Here there is no
gain unlike the contract of compensation where you can be paid over and above.

In the alternative to indemnity, where the documents have the discrepancies, the advising
may opt to make payment under reserve. This arrangement is useful where there are
discrepancies between the documents presented by the seller and instructions received by the
bank and the bank is of the view that the discrepancy is not important or inconsequential and
both the issuing bank and the buyer are likely to accept the documents in any event.

As a rule, the advising bank is entitled to recover the money paid under reserve from the seller
whenever the documents are ultimately rejected by the buyer or the issuing bank because of
the minor discrepancies in the documents which the advising bank overlooked.

72
Banque de Indochine et de Suez S. A v. J. H. Rayner (Mincing Lane) Ltd, [1983] Q. B
734

This was the first case which judicially considered the meaning of ―payment under reserve.‖

In this case, the confirming bank believed that the documents were non-conforming on a
variety of grounds. Following a telephone conversation, the bank arranged for payment
‗under reserve.‘ There was no indication in the documentation about the meaning
neither of the phrase nor in the Uniform Customs and Practice for Documentary Credits.

The bank contacted the issuing bank, notifying that it had made payment under reserve with
respect to a number of discrepancies. The issuing bank contacted the buyers who refused to
waive the discrepancies, and the issuing bank then rejected the documents.

It seemed to be common ground that the bank could recover the payment under reserve if
the discrepancies in the documentation justified the issuing bank in rejecting the documents.
However, the seller or beneficiary believed the presentation was a complying presentation,
and so refused to refund the payment.

Parker J offered two interpretations of the phrase payment under reserve.

 The bank should be entitled to repayment even if it was in law obliged to pay when it
did, that is, even if the bank was wrong about the non-conformity of the document;

 The bank should be entitled to repayment if one or more of the irregularities ware, in
law, a reason that the bank could have refused to pay.

Parker took the position of the second interpretation which meant that the beneficiary is
prevented from resisting a demand for repayment of money under a mistake of law. Though
the defendants appealed to the Court of Appeal, the court reversed a rule a bit but the fact is
the same in that rejection by the issuing bank upon the instruction of the buyer because of
some discrepancies in the documents, entitles the advising bank to be paid by the seller or the
beneficiary when the payment is payment under reserve.

FRAUD AFFECTING LETTERS OF CREDITS

As a general rule, the letter of credit system is autonomous of the underlining international
contract of sale. This means the banks engaged in a letter of credit transaction are not
involved in any disputes arising between the parties concerning the underlying contract of sale;
the only exception to this general rule the so called fraud exception.

The fraud exception is available in very limited circumstances. Where fraud is pleaded
successfully, both the issuing bank and the advising bank are under duty to refuse to honour
73
the credit. The banks may refuse to pay, accept or negotiate the credit as stipulated in the
terms of the credit. The letter of credit sets forth the obligations of the banks whether it is to
pay, to accept or to negotiate.

The fraud here we are talking here is with respect to the documents tendered by the seller. At
face value, the documents may appear correct although in fact they may be forged or untrue
in relation to the goods to which they refer. Fraud occurs at the point of documentation. For
example, where the seller ships rubbish and not the stipulated goods, or where there is a
forged bill of lading like where the bill of lading is antedate (a date which is prior to the event)
or a bill of lading is postdated (a date which is ahead of time)5.
Normally, it is the buyer who alleges fraud in order to prevent the advising bank from
honouring the credit or the seller from drawing on the credit. For the fraud exception to be
admissible, the bank must be satisfied that fraud has been committed and that the
beneficiary knew of this fraud. The fact which supports the fraud exception must be
established clearly and unambiguously. In point of fact, courts of law normally demands
evidences of contemporary documents from the buyer.

Where fraud is established, the bank must not honour its obligations under the credit. This
means that if there is fraud and the bank overlooks that, it does so at its own peril.

Bolivinter Oil S. A v. Chase Manhattan Bank, [1984] 1 WLR 392

Sir John Donaldson, M. R. and Lord Justice Griffiths

This was an appeal by the plaintiffs from the decision of Mr. Justice Staughton in which he
discharged the injunctions obtained by the plaintiffs against the first and second defendants,
Chase Manhattan Bank and Commercial Bank of Syria restraining them from paying under a
performance guarantee the claims by the third defendants, General Company of Homs
Refinery.

The plaintiffs who are freight contractors agreed with the third defendants, General Company
of Homs Refinery (Homs), that they would procure the carriage of 2.38 million tons of Iranian
crude oil from Iran to Syria in the summer of 1982. The plaintiffs also agreed to furnish Homs
with a performance guarantee (guarantee by the buyer) in the form of a bank guarantee of
1$ million.

The second defendants, Commercial Bank of Syria (CBS) provided a guarantee to Homs. A
letter of credit was provided for by the first defendants, Chase Manhattan Bank (Chase) in

5
United City Merchants (Investments) Ltd, v. Royal bank of Canada

74
favour of the CBS and a counter indemnity and cash deposit was provided by the plaintiffs in
favour of Chase.

The first contract was executed. In November, 1982, the plaintiffs entered into the similar
contract of freight with the third defendants. In the second contract, Homs withheld freight to
the large extent of money. The plaintiffs then alleged that negotiations followed and it was
agreed that Homs would pay the plaintiffs their money, would establish a letter of credit to
cover the freight, demurrage and insurance on the final shipment under the second contract
and would establish a further letter of credit to cover the disputed items and that guarantee
would be released upon the arrival of the last vessel carrying oil to Syria under the second
contract.

After the arrival of the vessel, plaintiffs notified the first defendants that that the guarantee
had been released by agreement with Homs. Later on the first defendants sought
confirmation from CBS that their letter of credit had been cancelled and that Chase was
released from all liability.

However, CBS informed Chase that Homs demanded one million under the CBS guarantee
due to the plaintiffs breaches of June agreement.

Plaintiffs decided to seek for injunction restraining Homs from claiming on the CBS guarantee
and restraining CBS from paying under the letter of credit. The trial court discharged the
injunctions.

On appeal

HELD:

―It was clearly debatable whether Homs had acted fraudulently in making their claim
on the CBS guarantee or whether they had merely acted in breach of their release agreement
with the plaintiffs; so far as appeared from the evidence this was all that CBS could know
when deciding whether or not to pay Homs and in claiming on Chase and CBS from
complying with their contractual obligations if they so wished.‖

In reaching this decision, the Court was of the strong view that in order to prove fraud
exception6, their (Chase) knowledge at the time of the demand was relevant. However, the
6
Including the case on bonds performance guarantee of Edward Owen in which Lord Denning laid the most
important rule in matters relating to bonds guarantees to the extent of equating them to bank letters of credits.
He said that, ―A bank which gives a performance guarantee must honour that guarantee according to its
terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the
question whether the supplier has performed his contracted obligation or not; nor with the question whether the
supplier is in default or not. The bank must pay according to its guarantee, on demand if so stipulated, without
proof or conditions. The only exception is when there is a clear fraud of which the bank has notice.‖ The court also
quoted the letter of credits case of United City Merchants.

75
plaintiffs failed to prove fraud on the part of the defendants and so they were unable to
succeed.

The appeal was dismissed. This case discussed in details the major cases on fraud exceptions.

BANK GUARANTEES AND OTHER CONTRACT GUARANTEES

In international trade, a bank guarantee is a primary and an independent undertaking by

the guarantor to pay the creditor if the conditions of the guarantee are satisfied. The meaning
is quite different from that of the common law guarantee.

In a common law guarantee or suretyship, there are three parties involved; the creditor who
has the claim against the principal debtor, and the third party who is the guarantor (surety)
who undertakes to be liable to the creditor if the principal debtor fails to discharge his
obligation under the credit. This arrangement between the creditor and the guarantor is the
contract of guarantee. It is a secondary obligation subsidiary to the contract between the
creditor and the principal debtor7.
If the principal contract is invalid, the guarantor has no obligation at all to pay to the creditor.
Again, the guarantor is discharged against the creditor if the creditor makes agreements or
changes the principal contract without the agreement of the guarantor. At common law, the
guarantor has secondary obligation whereas in international trade, the guarantor is primarily
liable to pay up the debt

In international trade, the Uniform Rules for Contract Guarantees sponsored by the
International Chambers of Commerce are used to regulate guarantees, bonds, indemnities
sureties or similar undertakings all collectively referred to as guarantees. These Rules (URCG)
deal with guarantees given by the seller (supplier) and not by the buyer. The Rules intend to
in case of guarantees given by the banks, insurance companies or third parties.

KINDS OF GUARANTEES

a. Demand Guarantee: it requires that the guarantor must pay on first demand by the
beneficiary.

b. Conditional guarantee: the obligation of the guarantor to pay the debt is activated
by the production of the documents. The documents may be a judgment or an arbitral

7 Make reference to Schmitthoff

 award in favour of the beneficiary or it may be a statement by the beneficiary that the
other party is in default.

c. Counter guarantee: the buyer asks the seller to provide a performance guarantee—
an undertaking by the seller to perform his obligations as provided in the contract—the
seller obtains such a guarantee from a bank in his own country (the seller‘s bank acts a
guarantor) but the bank gives the guarantee to a local bank in the buyer‘s country
and not to the buyer directly. The local bank then gives the buyer a counter
guarantee. The terms of the two guarantees must be the same for it to be valid.

d. Super guarantee: is a special kind of guarantee offered by a reputable bank to back

up an original guarantee. The beneficiary (seller) may insist on having a guarantee of
a well-known bank (CRDB) in addition to that of the debtor‘s bank (guarantor) which
is less known. It is the bank guarantor that requests and undertakes to reimburse a
super guarantor for any payment it may make under a super guarantee. It is
sometimes called the guarantee‘s guarantee. The terms of the two guarantees must be
the same.

e. Syndicated bond facilities: several banks, insurance companies or third parties are
contracted to guarantee a major international contract (jumbo contract is their legal
terminology like a contract for reconstruction of post-war Iraq). Syndication method is
useful in spreading the risk across many guarantors.

BANK GUARANTEES

Bank guarantees can be made by the buyer or the seller. It is normally an absolute
undertaking by the bank to pay if the conditions of the payment are met. In this sense, it is
similar to bank‘s letters of credit as most of the transactions are similar. The autonomy of the
bank‘s undertaking as well as the strict compliance with the instructions of the bank applies to
the bank guarantee also.

NOTE that all the guarantees either by the buyer or the seller are collectively known as the
performance guarantee.

BANK GUARANTEES PROCURED BY THE BUYER

If the buyer procures a bank guarantee for the benefit of the seller, the intention is to secure
the payment of the purchase price to the seller by substituting reliable paymaster for the
buyer. The guarantee may provide that the bank is liable to the seller for the guaranteed
amounts if:
77
 a. No letter of credit is opened in favour of the seller; or

b. No payment of the purchase price is made timely and in accordance with the
underlying contracts.

BANK GUARANTEES PROCURED BY THE SELLER

They are sometimes called on demand bonds. If a guarantee is procured by the seller, the
intention is to secure the buyer if he has a claim for damages against the seller for non-delivery
of the goods, their defective delivery or other cases of non-performance.

Normally, banks prefer to issue demand performance guarantees (demand bonds). As we

noted, a demand bonds may require a bank to pay on first demand by the buyer. In practice
before a bank issues a demand bond, it would require the seller to provide the bank with the
counter indemnity. The other option to the seller is to procure a repayment guarantee for
the benefit of the buyer. A repayment guarantee will secure a refund to the buyer of the
purchase price which has been paid in advance in the event of default in performance by the
seller.

OTHER FORMS OF FINANCING INTERNATIONAL TRADE

1. Factoring

A finance house is contracted and hired to collect a purchase price from an overseas buyer (or
the debtor for the price). The finance house is otherwise called a Factor. The seller is only
responsible for the dispatch of the goods, documentation, and transfer of transport documents.
The factor shall collect the purchase price and shall be required by the seller to manage the
credit.

TYPES OF FACTORS

a. Disclosed Factoring: the seller contracts a factor and this arrangement is conveyed to
the buyer. It constitutes a legal assignment by the seller of the purchase price to the
factor. It is a legal assignment because notice of the factor arrangement is given to the
buyer. The advantage of disclosing is to help the factor to take priority over the
creditors of the debtor. Again, the purchase price is paid to the factor directly as the
buyer has the notice of the existence of the factoring agreement.

b. Undisclosed Factoring: it is a confidential arrangement between the seller and the

finance house for the collection of the purchase price. No notice is given to the buyer as

78
 it is regarded as a mere equitable assignment of the seller‘s claim of payment to the
factor. It is an equitable assignment because of the lack of notice. The buyer pays the
purchase price to the seller who then remits it to the factor.

c. Direct Factoring: there is only one export Factor involved. The Factor enters into
direct contractual relations with both the seller and the buyer for the purpose of
collecting the purchase price.

d. Indirect Factoring: there are two Factors involved. At the seller‘s country there will
be the Export Factor and at the buyer‘s country there will be Import Factor. The buyer
makes payment to the Import Factor in his country. The Import Factor will pay the
Export Factor in the seller‘s country. The Export Factor in turn provides the arranged
finance to the seller. Factoring arrangements are standardized by the Ottawa
Convention on International Factoring, 1988. Standardized means the parties
may adopt these rules to apply to their contracts or not this is distinguished from
Regulations. The Ottawa Convention applies if the following conditions are met:

It applies whenever the receivables assigned pursuant to factoring contract arise from a
contract of sale of goods between a supplier or the seller and the debtor or the buyer whose
places of business are in different states and:

It applies where a contract of sale is embodied in an international contract which is a factoring

contract for the receivables.

The seller, the buyer and the Factor must be from the contracting states.

It applies where both contract for the sale of goods and Factoring are governed by the law of
the contracting state.

The Convention protects any assignments of receivables by the supplier to the Factor even if
the agreement between the supplier and the debtor prohibits such assignment.

It imposes a duty on the supplier to give retain notice to the buyer of an assignment of
receivables; this is conspicuous.

The notice must reasonably identify the Factor to whom payment should be made and
further identity of the receivables.

The debtor may claim for recovery against the Factor if:

The debtor has paid the Factor but the Factor has not paid the supplier of Receivables.

If the factor paid the supplier with knowledge that the supplier had defaulted on his
obligations to the debtor.

79
 2. Forfaiting

In simple words it is defined as

“The purchase of an exporter's trade receivables by a third party at a discount. This party then
collects payment from the importer with the shipped goods serving as collateral.‖

Microsoft® Encarta® 2009. © 1993-2008 Microsoft Corporation. All rights reserved.

Is the purchase of a debt expressed in a negotiable instrument such as a promissory note or bills
of exchange from a creditor on a non-recourse basis—the purchaser known as fortaiter,
undertakes to waive or to forteit—his right of recourse against the creditor if he cannot obtain
a satisfaction from the debtor. The purchaser will only buy the negotiable instrument if he gets
or is given security from a bank of good standing.

The essence of the transaction is that the debtor‘s obligation, which matures at some
future date, can be turned by the creditor at once into ready cash, by selling that obligation to
the forfeiter who, however, agrees to the purchase of the obligation on a non-recourse basis
only if it is secured by a third party.

The purchaser of the debt is called a forfeiter. The forfeiter waives his right of recourse if he
fails to obtain satisfaction of the debt. A forfaiter may be a bank or a finance house or a
discount company. The debt a subject of purchase must be secured by a third party before
forfeiture. The security may be in the form of an aval on the negotiable instrument or it may
be a bank guarantee. Forfaiting makes a long term financial facility liquid—in the sense that
a credit which did not mature after a long period of time it can be turned into a ready cash.
This enables the creditor to turn a deb that matures at a future debt into really cash. In
practice, the buyer‘s bank will give security for the debt while the exporter‘s bank will act
as the forfeiter. Forfeiting is appropriate in the export of capital goods like mining machinery,
commercial aircrafts and commercial ships.

3. International Financial Leasing

It may happen that banks and financial houses may be asked to provide financial assistance
to international leasing transactions. And these transactions are normally concerned with
capital goods such as aircrafts, ships, containers etc.

The owner of capital goods (sometimes called the supplier) sells the goods to finance house
(sometimes called the creditor or lessor) which would lease the goods to the user (known as the
lessee or the debtor). So the Finance House would be the lessor while the user will be a lessee.

The lessee is made to pay the lessor rental fee. The rental fee paid may include the
amortization element for wear and tear of the equipments. Amortization refers to the process
of gradually ending the debt by making regular payments into a special fund, for examples,
the aircraft leasing.
80
The Ottawa Convention on International Financial Leasing, 1988 governs
international financial leasing arrangement. The Convention applies where:

The lessor and the lessee have the place of their business in different states and where:

1. These states and the state in which the supplier has his business are all contracting
states; and

2. Both the supply and the leasing agreement are governed by the law of the contracting
state.

The supplier avails the equipment with knowledge that it is the subject of the leasing
agreement.

The Convention removes liability with respect to any defect in the equipment from the lessor
(finance house) to the supplier (manufacturer).

The lessee can reject the equipment or terminate the leasing agreement if the equipment is
not delivered or if it does not conform to the leasing agreement.

The lessor is liable for non-delivery or mis-delivery of equipment particularly where that occurs
due to an act or omission of the lessor.

The other point is that, where the lessee is in default, the lessor may recover accrued unpaid
rentals, interests and damages.

4. Non-recourse Finance

The finance house enters into the contract with the seller and into another contract with the
buyer separately. The finance house undertakes to pay the seller at once the purchase price is
full, less a deposit paid by the buyer to the seller. The payment is made upon delivery of
specified documents to the finance house. This is the first limb of the contract between the
finance house and the seller.

Ordinarily, the finance house will have a right of lien over the documents against the buyer. In
the contract with the buyer, the buyer undertakes to pay the finance house the purchase price
and other relative charges. Such payment is made less the deposit paid directly by the
exporter or the seller. It is paid directly to the seller. Some finance houses may insist on an
indemnity from the buyer. And finally, the finance house has no right of recourse to the buyer
or to the seller upon non-satisfaction of the credit except where fraud is established.

INTERNATIONAL COMMERCIAL DISPUTES SETTLEMENT

Refer to Schmitoff
SPECIAL REMEDIES PECULIAR TO INTERNATIONAL TRADE

a. The Mareva Injunction

Is a relief of an interlocutory injunction order against the defendant. The Order freezes the
defendant‘s assets and orders the defendant not to dispose or remove the assets form his
premises. This injunction is a discretionary remedy granted by the court. It is normally granted
on the scale of the balance of convenience. The purpose of Mareva Injunction is to prevent the
injustice of the defendant removing or dissipating his assets so as to prevent the plaintiff from
realizing the fruits of his claim. The idea came about in an effort to prevent a defendant from
dealing with assets for which the plaintiff has brought a case in the courts of law.

The plaintiff must satisfy the court that he has good and arguable case against the defendant
and that there is danger of removal or dissipation of the defendant‘s assets.

It is basically an interim conservation order meant to conserve the subject matter of the
dispute. The injunction is suitable like when it wants to prevent the defendant who is outside
England from making non-effective the judgment of the English Courts.

The plaintiff or applicant applies for the injunction ex parte, but if in support for his
application, he fails to give a full and fair disclosure of all relevant facts, the injunction will be
discharged or if limited in time, will not be continued. The injunction cannot be given in order
to invoke the English jurisdiction where it has no jurisdiction according to its rules of procedure.
However, the English Court will give the injunction in support of the proceedings pending,
contemplated in the court of another country who is a member of European Community.

There are orders given together with the Mareva Injunction. They include:

1. The disclosure Order in which the defendant or persons with knowledge or

whereabouts of the defendant‘s assets, shall give or disclose information about the
nature, location and value of the assets of the defendants. But in addition to that, the
court may order a little provision called Babanaft provision to be added whose
effect is to ensure that the rights of other third parties or other persons to whom the
order is directed other than the defendants are not affected at all by the Injunction.

For example, to protect a bank which wishes to claim a set-off against the frozen assets
or a solicitor who wishes to exercise his lien on documents which he has to surrender in
compliance with the Order of the Court.

2. The court may order the defendant to surrender his passport so that he will not be able
to leave from the jurisdiction until the case against him is concluded.

Mareva Compania Naviera S. A v. International Bulkcarriers S. A, [1980] 1 ALL ER

213

82
The plaintiffs are the owner of the ship called Mareva. They entered into time charter party
contract with the defendants. The charterers sub-hired it to the president of India. The
payment was through three installments to the bank in England.

They paid two installments and when the ship has reached South Africa, they failed and
refused to pay for the third installment. The plaintiffs treated that as repudiation of the
contract.

They brought an action for damages at the High Court and since the defendants had money
in the bank in England, the plaintiffs feared that the defendants may remove the money
outside the jurisdiction and consequently bring the decision of the court to nothing. So they
applied also for an injunction to restrain the defendants from taking outside of the jurisdiction
the money in the bank until the judgment is given.

As a general rule, the bank cannot issue such an injunction until the rights of the parties have
been decided. However, the plaintiffs were applying for the injunction as an exception to the
general rule.

The High Court under Donaldson J granted the injunction but for few hours as he was not sure
of the position of the law on that point. The defendants appealed. In the Court of Appeal,
Lord Denning MR, Roskill and Ermrod LL. J held concurrently while granting mareva injunction
that:

―In my opinion that principle applies to a creditor who has a right to be paid the debt owing
to him, even before he has established his right by getting judgment for it.

If it appears that the debt is due and owing, and there is a danger that the debtor may
dispose of his assets so as to defeat it before judgment, the court has jurisdiction in a proper
case to grant an interlocutory judgment so as to prevent him from disposing of those assets. It
seems to me that this is a proper case for the exercise of this jurisdiction.

There is money in the bank in London which stands in the name of these charterers. The
charterers have control of it. They may at any time dispose of it or remove it out of this
country. If they do so, the ship owners may not get their charter hire. The ship is now in the
high seas. It has passed Cape Town on its way to India. It will complete the voyage and the
cargo will be discharged. And the ship owners may not get their charter hire at all. In fact of
this danger, I think this court ought to grant an injunction to restrain the charterers from
disposing of these moneys now in the bank in London until the trial or judgment in this action.
If the charterers have any grievance about it when they hear of it, they can apply to discharge
it. But meanwhile the ship owners should be protected. It is only just and right that this court
should grant an injunction. I would therefore continue the injunction.‖

Babanaft International Co Ltd v. Bassatne, [1989] WLR 232

83
Kerr, Neill and Nicholiss LJJ

The plaintiffs obtained judgment of 15$m against the defendants, who were two brothers who
were Lebanese nationals, one of whom lived mainly in Switzerland while the other lived
mainly in Greece. They owned property in the United Kingdom and carried on shipping and
oil-trading transactions worldwide. They had a peripatetic lifestyle and carried out their
business transactions in a secretive manner through a network of family companies.

When the defendants failed to satisfy the judgment the judge made an order for the
examination of the defendants to determine what assets were available to meet the
judgment debt. The judge also ordered the defendants to file an affidavit disclosing their assets
wherever situated and, because he considered that they would be likely to take any step open
to them to frustrate the execution of the judgment, he granted an injunction (mareva
injunction) restraining the defendants from dealing with their assets outside the jurisdiction
without giving the plaintiffs notice of their intention to do so. The defendants appealed
against the injunction.

HELD

―Although the Court had jurisdiction to grant a mareva injunction over a defendants‘
foreign assets after judgment, had been given the court would not make an unqualified
mareva injunction covering assets abroad because it would involve an exorbitant and extra-
territorial assertion of jurisdiction on an in rem nature over third parties outside the jurisdiction.

Instead, such an injunction, if made, should be qualified by an express proviso making it clear
that the injunction was directed to the defendant himself and did not affect the rights of third
parties or seek to control their activities. Accordingly, the unconditional injunction made by the
judge would be replaced by an injunction directed specifically to the defendants and to the
extent the appeal would be allowed.‖

b. The Anton Piller Order

It is a court order that authorizes the applicant to enter and search the premises of the
respondent without prior warning. The applicant has the right to inspect and take away
specified documents or property. It is normally used to prevent distraction of incriminating
evidence particularly in cases of alleged trade mark or copyright or patent infringements. It
was issued by the Court for the first time by virtue of its own jurisdiction.

For the Order to issue, the applicant must satisfy the court that:

1. There is a strong prima facie case against the respondent;

2. The potential or actual damage to the applicant is very serious;

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 3. Clear evidence that the respondent has in his possession incriminating documents or
property and that there is possibility that he may destroy the material before an inter
partes (an ex parte) application is heard.

Anton Piller KG v. Manufacturing Process ltd, [1976] Ch. D 55

Lord Denning M R., Ormrod and Shaw L. JJ

The defendants, an English company and their two directors, were the United Kingdom agents
of the plaintiffs, German manufacturers of frequency converters for computers. The plaintiffs
claimed that the defendants were in secret communication with other German manufacturers
and were giving them confidential information about the plaintiffs‘ power units and
details of a new converter, the disclosure of which could be most damaging to the plaintiffs.

In order to prevent the disposal by the defendants, before discovery in an action, of documents
in their possessions relating to the plaintiffs‘ machines or designs, the plaintiffs applied
ex parte for an interim injunction to restrain the defendants from infringing their copyrights
and disclosing confidential information and for an order for permission to enter the
defendants‘ premises to inspect all such documents and to remove them into the plaintiffs
solicitors‘ custody. On the plaintiffs undertaking to issue a writ forthwith, Brightman J granted
the interim injunction but refused to order inspection or removal of documents.

On the plaintiffs‘ ex parte appeal which was heard in chambers with judgments later in open
court:

HELD

―Allowing the appeal, that in most exceptional circumstances, where the plaintiffs had
a very strong prim facie case actual or potential damage to them was very serious and there
was clear evidence that defendants possessed vital material which they might destroy or
dispose of so as to defeat the ends of justice before any application inter partes could be
made, the court had inherent jurisdiction to order defendants to permit plaintiffs‘
representatives to enter defendants‘ premises to inspect and remove such material; and
that in the very exceptional circumstances the court was justified in making the order
sought on the plaintiffs‘ ex parte application. ‖

ENFORCEMENT OF FOREIGN JUDGMENTS

In Tanzania, Foreign judgments are enforceable under the Reciprocal Enforcement of Foreign
Judgments Act, [CAP 8 RE: 2002]

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Its enforcement in Tanzania is based on the principal of reciprocity and favourable treatment.
Depending on whether a foreign country recognizes and gives favourable treatment and
enforcement of judgments from Tanzanian Courts, the president may extend the Act to that
foreign Country in the reciprocity of favourable treatment.

For the foreign judgment to be enforceable in Tanzania, there are necessary conditions which
need to be complied with, section 3 of the Act provides that:

―3. Power to extend this Part to foreign countries giving reciprocal treatment

(1) The President, if he is satisfied that, in the event of the benefits conferred by this
Part being extended to judgments given in the superior courts of any foreign country,
substantial reciprocity of treatment will be assured as respects the enforcement in that foreign
country of judgments given in the superior courts may, by order direct–

(a) That this Part shall extend to that foreign country; and

(b) That such courts of that foreign country as are specified in the order shall be
deemed to be superior courts of that country for the purposes of this Part.

(2) Any judgment of a superior court of a foreign country to which this Part extends,
other than a judgment of such a court given on appeal from a court which is not a superior
court, shall be a judgment to which this Part applies, if–

(a) It is final and conclusive as between the parties thereto; and

(b) There is payable thereunder a sum of money, not being a sum payable in
respect of taxes or other charges of a like nature or in respect of a fine or other penalty; and

(c) It is given after the coming into operation of the order directing that this Part
shall extend to that foreign country.

(3) For the purposes of this section, a judgment shall be deemed to be final and
conclusive notwithstanding that an appeal may be pending against it, or that it may still be
subject to appeal, in the courts of the country of the original court.‖

The judgment must be registered by the High Court of Tanzania or the High Court of Zanzibar
after an application by the judgment creditor. In fact section 4 of the Act provides the rules
when it says that:

―4. Application for, and effect of, registration of foreign judgments

(1) A person, being a judgment creditor under a judgment to which this Part applies,
may apply to the High Court at any time within six years after the date of the judgment or,
where there have been proceedings by way of appeal against the judgment, within six years
after the date of the last judgment given in those proceedings, to have the judgment
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registered in the High Court, and on any such application the court shall, subject to proof of
the prescribed matters and to the other provisions of this Act, order the judgment to be
registered:

Provided that a judgment shall not be registered if at the date of the application–

(a) It has been wholly satisfied; or

(b) It could not be enforced by execution in the country of the original court.

(2) Subject to the provisions of this Act with respect to the setting aside of registration–

(a) A registered judgment shall, for the purposes of its execution, be of the same
force and effect;

(b) Proceedings may be taken on a registered judgment;

(c) The sum for which a judgment is registered shall carry interest; and

(d) The registering court shall have the same control over the execution of a
registered judgment, as if the judgment had been a judgment originally given in the
registering court and entered on the date of registration:

Provided that execution shall not issue on the judgment so long as, under this Part and
the rules of court made thereunder, it is competent for any party to make an application to
have the registration of the judgment set aside or, where such application is made, until after
the application has been finally determined.

(3) Where the sum payable under a judgment which is to be registered is expressed in a
currency other than the currency of the United Republic, the judgment shall be registered as if
it were a judgment for such sum in the currency of the United Republic as, on the basis of the
rate of exchange prevailing at the date of the judgment of the original court, is equivalent to
the sum so payable.

(4) If at the date of the application for registration the judgment of the original court
has been partly satisfied, the judgment shall not be registered in respect of the whole sum
payable under the judgment of the original court but only in respect of the balance remaining
payable at that date.

(5) If, on an application for the registration of a judgment, it appears to the registering
court that the judgment is in respect of different matters and that some, but not all, of the
provisions of the judgment are such that, if those provisions had been contained in separate
judgments, those judgments could properly have been registered, the judgment may be
registered in respect of the relevant provisions of the judgment but not in respect of any other
provisions contained therein.

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 (6) In addition to the sum of money payable under the judgment of the original court,
including any interest which by the law of the country of the original court becomes due under
the judgment up to the time of registration, the judgment shall be registered for the
reasonable costs of and incidental to registration, including the costs of obtaining a certified
copy of the judgment from the original court.‖

And unless such a judgment is registered, it cannot be enforced in Tanzania. Section 8 provides
that, ―No proceedings for the recovery of a sum payable under a foreign judgment, being a
judgment to which this Part applies, other than proceedings by way of registration of the
judgment, shall be entertained by any court in the Mainland Tanzania.‖

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