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Topic Objec/ves Interna/onal Trade Law

Week Five Interna/onal Sale of Goods

Understand the framework of obliga/ons on the B and S in the CISG Understand the framework of remedies under the CISG Understand the concept of fundamental breach

Readings Ar/cles 25 88 CISG Prepara/on GePng to know Incoterms exercise GePng to know contractual terms exercise Problem Ques/ons Three scenarios from the ppt slides on when the CISG applies 2 (Sterling Industries) 3 (Williams and Nguyen)

Nicola Charwat 2013

Nicola Charwat 2013

Schedule for Today

1. Recap last week
A. When does the CISG apply? B. Incoterms C. Contractual Terms
Exercise Ques/on 2 (Sterling Industries) Exercise Ques/on 3 (Williams and Nguyen)

2. When does property pass under an interna/onal contract for sale of goods? 3. What are the B and S obliga/ons under the CISG? 4. Remedies under the CISG 5. When is there a fundamental breach of contract? 6. Ar/cle 79 and Force Majeure 7. What if the CISG doesnt apply?
Australian provisions of law (FYI)
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1. Recap

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A. Recap CISG: When does it apply?

Remember that the CISG is a gap-filler: its provisions can not override the parties express promises made in the contract The provisions of the CISG apply to define the obligations of the parties and remedies where their contract is silent/inadequate CISG application depends on whether the criteria in Part 1, especially Article 1, are satisfied
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Class Exercise: Does the CISG Apply?

1. An Australian trader with a branch oce in Shanghai purchases goods from a Chinese company based in Beijing for shipment of vases from Beijing to Australia. 2. A contract governed by the law of England between a company based in London and a company based in Australia for the sale of electricity generated in Victoria to be supplied to Tasmania. 3. A contract governed by the law of USA between a US company and Vietnamese company for the sale of computer parts.
Nicola Charwat, Monash University 2012


B. Recap: Incoterms
Standard delivery terms Express delivery terms: ie. Par/es must expressly include an incoterm in their contract otherwise they have no applica/on Under each incoterm the delivery process is divided into ten subparts. Each part makes clear the responsibili/es of the B and S Commonly used in intnl trade: especially F-terms and C- terms We are especially interested in the point of delivery/risk passing Risk passing is not a ques/on of fault (ie who is to blame for loss/damage to goods), but fact (ie. Have the goods passed the point where the risk passes to B?)
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The 11 Incoterms

11 dierent Incoterms which detail dierent delivery obliga/ons of the buyer (B) and seller (S)

EXW ExWorks FCA Free Carrier FAS Free Alongside Ship * FOB Free on Board *

Most favourable to seller

CFR Cost and Freight * CIF Cost, Insurance and Freight * CPT Carriage paid to CIP Carriage and Insurance Paid to

DAT Delivered at Terminal DAP Delivered at Place DDP Delivered Duty Paid Most favourable to buyer [* indicates incoterm is appropriate for waterway only]
Nicola Charwat, Monash University 2012

Incoterms: Class Exercises

Class Exercise: to know the Incoterms

Class Exercise
Back to scenario from slide 3, week 4: Victorian Fruit Exporters and Fiji General Stores

Incoterms: Problem Ques/on 2

(a) In February 2011, Sterling Industries PLC, an English company, agreed to sell to True Blue Pty Ltd, an Australian company, two aireld re trucks each valued at $AUS 150,000 each, FOB (London). However, when the trucks were being loaded onto the cargo ship something went wrong. The trucks were loaded onto a barge in the Port of London for transport to the cargo ship, but as the barge came alongside the cargo ship, a mighty wave tossed it, throwing the re trucks into the water. Sterling argues that it has performed its obliga/on and should be paid. Advise True Blue. (b) Would your advice be dierent if the ship had been berthed alongside the wharf and just as the truck was driven onto the ship, the ship suddenly lurched away from the wharf on an angle /pping the truck from the ship into the water? (c) Would your answer to (b) be dierent if the contract was FAS (London)
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You should have completed the Incoterms 2010 Quick Reference Table For each Incoterm you should have iden/ed
When delivery is complete Where the risk passes Who must organise and pay for main carriage

If the par/es used the FOB Incoterm, how would you resolve the issues raised in: Scenario A
Who is responsible for obtaining export clearances for carriage from Australia to Fiji?

Scenario B
Who carries the risk for the goods en route? Does the arrival of damaged apples cons/tute a breach of K by the Seller? Does the B have to pay the S for the apples even though they have arrived damaged?
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C. Recap: Australian Contract Laws Oer } Is there an agreement? Acceptance

What is an oer? When is it eec/ve?

CISG Provisions on Contract Forma/on

Inten/on to create legal rela/ons/to be legally bound Considera/on Capacity/ Legality Does a contract have to be in wri/ng? Can a contract be modied? Things that should not be present: undue inuence, fraud, misrepresenta/on, duress
Nicola Charwat, Monash University 2012

What is acceptance? When is it eec/ve? Are there any restric/ons as to form? Can silence be acceptance?

CISG provisions on contract forma/on are not iden/cal to those found in Australian common law Class Exercise Four: to Know Sales of Goods Contracts under the CISG

In the right hand column iden/fy the relevant ar/cle number in the CISG and, where necessary make a brief note of how the CISG provision diers from the rules of common law Most of the provisions relevant to contract forma/on are found in Ar/cles 14-24, but you will have to look further aeld for the last two This exercise should help you prepare Problem QuesDon 3 (Williams and Nugyen)
Nicola Charwat, Monash University 2012


Problem Ques/on 3 (Williams v Li)

Li in China and Williams in Melbourne exchanged faxes discussing Williams purchase of goods of all kinds from Li. In his most recent fax to Williams, Li oered to sell him 300 vases (described as the Ming Dynasty Special) at $500 each, FOB (Shanghai) Incoterms 2010. Williams replied by fax that he would accept the oer, but subject to the contract being DDP (Williams Imports, Warehouse, Melbourne) at $500 per vase. Williams reply included his standard purchaser terms, which specify Australian law as the governing law. At the same /me as sending the fax, he also arranged for his bank to pay Li a 50% deposit as a sign of his good faith. Williams heard nothing further un/l two months later when he received a telephone call from Australian Customs saying that his consignment of vases had arrived. However, the customs agent informed Williams that $15,000 import tax was payable before the goods could be released. The customs ocer also said although the vases looked quite nice, half of them seemed to have been smashed in transit. This news concerned Williams as he discovered that no insurance had been arranged for the vases.

2. When does property pass from the seller to the buyer?

What is the governing law of the contract of sale between Williams and Li? Is there a contract? If so, what are the terms of their contract? Does the CISG apply to their contract? Under the terms of the contract, is Williams responsible for payment of the tax? Is this a breach of contract by Li?
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Issue: When does property pass from seller to buyer?

The many meanings of property
Goods, more often land (a property in the country) Ownership or title (Get off my property)

In law the passing of property (ownership) does not necessarily pass with physical possession
Eg. I lend you my stereo. Do you own it once you have it?

When does ownership pass in an international contract for the sale of goods?
On delivery? On possession? On payment?

1. Look to the contract? Is there an express term?

Ie. A reservation of title clause: Property does not pass until goods are paid for in full

2. Default provisions in the CISG? NO 3. Default provisions in domestic law? Goods Act (Vic)
The law will deem the property to pass when the parties intend it to Ss. 22-23 Goods Act. Usually in international contracts, the parties are deemed to intend the property to pass when the goods are delivered (ie. Most often, when they are handed over to a carrier at the port of departure or even before).
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3. Obliga/ons of buyers and sellers under the CISG

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Sellers Main Obliga/ons In Brief

Ar/cle 30 Art 33 To deliver goods and hand over any documents of /tle To deliver goods on or by the date xed or determinable in contract or within a reasonable period aver the conclusion of the contract

Ar/cles 35 & 36: S Obliga/on to Deliver Conforming Goods

Goods of the quan/ty, quality, descrip/on and packaged in the manner required by the contract are conforming goods Unless otherwise agreed the goods do not conform unless they are: Fit for ordinary purpose Fit for the purpose made expressly or impliedly known to the S at /me of the conclusion of the contract, unless Posses the quali/es of the goods in sample Packaged in a manner adequate to preserve and protect the goods If B was aware or could not have been unaware of non-conformity when contract made (ie. Buying seconds) S is not liable. Seller is liable for non-conformity that exists at the /me the risk passes, even if the n-c is not apparent. AND, S is liable for any n-c that arises aver the risk passes if its due to a breach of S obliga/ons.
Copper wire, exposed to water by carrier before risk passed. Aver B takes receipt, wire corrodes. Copper wire, lev out in rain during carriage aver risk passed. But, poor packaging of goods by seller meant wire got wet. Wire corrodes.
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Arts 41 & 42 Art 35

Deliver goods free from any third party rights To deliver goods in conformity with the contract
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Buyers Main Obliga/ons In Brief

Ar/cle Must pay for goods and take delivery as agreed in the 53 contract and under provisions of CISG Art 55 To pay the price and at the /me agreed If no price agreed, then to pay a price which the goods would normally be sold at under comparable trading terms. If no /me agreed, to pay when goods or documents controlling goods are placed at Bs disposal. B does not have to pay un/l they have inspected the goods, unless otherwise agreed or procedures for payment indicate otherwise. B must inspect the goods in a short a period as prac/cable and where goods are n-c, B must give no/ce of n-c to S in reasonable /me Nicola Charwat 2013

Buyers Obliga/on: Arts 38 & 39 Examina/on & No/ce

Bs duty to examine goods and provide no/ce in case of non-conformity of goods B loses right of ac/on for breach of K if it does not inspect goods and no/fy S of any non-conformity within a reasonable period of /me (Art 39) No/ce must clearly specify the nature of non- conformity
What is a reasonable period of /me?

Art 58

Art 38

S can not rely on Bs breach of Arts 38 or 39 if it knew of the non-conformity when delivered the goods (Art 40) If B can show reasonable excuse as to why the goods were not inspected/no/ce not provided in reasonable /me, then may s/ll be able to claim damages
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Meat Packers Case Chicago Prime v Northam

C sold pork ribs to N. When N picked ribs up (24 April) said ribs were in good order. When N delivered (25 April) to its own customer, noted that 21 boxes were gouged and contents showed signs of freezer burn. 4 May Ns customer realised meat was o. Expert condemned meat. Said: obviously rozen, foul odour, concluded it was rozen on delivery. Ques/ons: Did N make /mely examina/on/provide /me no/ce of the defect?
No contractual provisions for inspec/on or no/ce so Ar/cles 38 & 39

4. Framework of remedies under the CISG

Teiling, Annabel, Case Note. http://

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Framework of Remedies Under the CISG

What remedies are available in the event of breach?
The CISG provides a comprehensive set of remedies



Availability of remedies reect an aim of the CISG, which is to preserve the contract Consider the costs and inconvenience of terminated contracts and returns of goods Therefore, the remedies available depend on the nature and seriousness of the breach

Avoid the Contract (Arts 49 and 64) Avoiding the contract is also available for anticipatory fundamental breach (72-73) Demand replacement goods (Art 46(2)

Two /ers of remedies

1. Avoiding the contract/Demanding subs/tute goods available only where serious breach mainly fundamental breach
Avoiding the contract is a remedy of last resort and releases the par/es from their obliga/ons under the contract

2. Correc/ve remedies and damages are available for ANY breach (ie. Fundamental or non-fundamental)
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Corrective remedies (as for NF breach) Damages (74-77)

Corrective Remedies: include Replacement goods (46(3) B can reduce price (50) More time (47 & 63) Require performance (46 (1)) S has right to make up shortcomings of an early delivery (37) S can complete specs of an order (65) S may make up/remedy/ repair order (48) S or B can suspend the contract in some circs (71)
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Damages (74 and 77)


Note: If B Avoids Contract or Demands Replacement Goods where there is FB, B must make res/tu/on of non- conforming goods (Art 82)

Damages under ArDcle 74 are always available for a fundamental or non-fundamental breach
Ar/cle 74 An injured party is en/tled to damages for the amount equal to a partys loss and can include loss of prots Damages are limited to what is foreseen or foreseeable

B loses the right to avoid the contract or demand subs/tute goods if it is impossible to make res/tu/on (return) of the goods substan/ally in the condi/on the goods were received.
Ie. excess or damaged goods must be preserved/returned unless impossible to do so and caused not by Bs act or omission eg. perished due to examina/on or used/sold before non-conformity becomes apparent.

Damages under ArDcles 75 and 76 specically provide for damages associated with addi/onal costs of purchasing replacement/reselling goods where the contract has been avoided Regardless of which ar/cle a party is claiming damages under, ArDcle 77 requires the injured party to take measures to mi/gate loss (ie. where appropriate sell on or preserve goods)
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Duty to Mi/gate Loss/Preserve Goods

Both par/es under a duty to preserve goods, regardless of who is in breach

B must preserve goods rejected for non-conformity: Art 86 S also has obliga/on to preserve goods, eg in cases where B delays in collec/ng goods: Art 85

Both par/es can claim reasonable expenses for preserva/on from the party in breach: Art 87 If goods are perishable, the party in possession must take reasonable steps to sell them Art 88
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5. What is fundamental breach?

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Article 25: What is a Fundamental Breach (FB)?

A breach is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.

What is a fundamental breach?

Delivery of non-conforming goods will always be a breach of contract, but when is it a fundamental breach?

To prove FB, need to focus on two tests: 1. Substantial deprivation of what a party is entitled to expect under the contract
FB is defined in reference to the consequences of the breach: substantial deprivation focuses on the degree of detriment suffered by the injured party measured against what was agreed in the contract. Considera/ons include: What is the purpose and nature of the goods? Can the buyer s/ll sell or use the goods? Were there any express s/pula/ons in the contract? Is there acute economic loss?

B (Aus) contracts to supply petrol with a sulphur content of not more than .60%. B purchases petrol from S (Kuwait) and species not more than .50% sulphur content. Petrol delivered has sulphur content of .55%. Is there a FB?
Has the buyer been substan/ally deprived of what they were en/tled to expect? If so, can the seller claim that it did not foresee (nor would a reasonable seller) that the consequences of sending petrol with a .55% sulphur content would have caused substan/al depriva/on?

2. The sellers defence: A test of foreseeability

If the seller can show that they did not and a reasonable person would not have foreseen the consequences of their breach, then no FB. Foreseeability of the result (substantial deprivation) not the breach
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When is a shor{all in delivery a fundamental breach?

Are the goods all of a piece?
Machinery sold in disassembled state, packaged in 10 crates and seller fails to send all 10? Sale of tents. Tent poles delivered, but not tent canvasses? Sale of 2000 bicycles. Only 1000 delivered?

When is late delivery a fundamental breach?

Late delivery is not usually a fundamental breach
Especially when no precise date agreed Ie. staggered deliveries

If timely delivery is a special interest of B and it was foreseeable that late delivery would substantially deprive B of benefit entitled to expect under the K, then late delivery may constitute a FB
Is time of the essence and expressed in K? Purpose of goods/nature of goods? Did B have obligation to provide the goods to a third party Eg. Order for Xmas themed pyjamas, ties, socks with last delivery date of December 5. Goods arrive December 31.

Only part of the shipment does not conform?

B can only avoid the contract in respect of the portion of goods missing/non-conforming (See Art 51)
Eg. B ordered 2000 bicycles from B. Half of the bicycles are damaged beyond repair due to S poor packaging. B may avoid contract in respect of the non-conforming goods, the rest of the contract will continue.

Article 49 provides B with a right to avoid the contract where S fails to deliver within additional reasonable time provided by B, and B has declared will not accept goods thereafter.
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The Shoe Sellers Case, Germany, Court of Appeals, Frankfurt (1995)

At a trade fair, an Italian S contracted to sell shoes to a German B. S delivered shoes later than agreed, and B alleged that not all shoes conformed to sample. B claimed they were defective in all makings, some were stitched others folded and made from material causing heavy wrinkles. B relied on fundamental breach of contract as a basis for avoiding the contract.

Cathys Wine
In Sept. 2010, Cathy Burgundy, a ne wine merchant in Melbourne, responded to a brochure sent by a French champagne supplier, Jacques de Jacques, by ordering a large quan/ty of high quality French champagne. Cathy requested that the champagne should be delivered not later than the end of Nov. and agreed to pay for the goods by telegraphic transfer of the funds on proof of delivery. The contract of sale was made on CIF (Melbourne) Incoterms 2010. Cathy made the order in an/cipa/on of the high demand for high quality champagne from her customers for New Years Eve celebra/ons on 31 Dec. The French supplier shipped the champagne on the 1 Dec. and sent the bill of lading to Cathy. On receipt of the bill of lading Cathy paid for the goods. However, when she collected the champagne from the Melbourne port 2 weeks later on its arrival she discovered that the cargo consisted of an inferior quality sparkling wine, which, not coming from the Champagne region and not made by the approved mthode champenoise did not bear the exclusive appella/on contrle label. Cathy was very disappointed. She knew that she would not be able to sell this wine to her exis/ng client base and would be unlikely to secure another delivery of high quality champagne from France to full her NYE orders. Like all wine-merchants, prots made over the New Year Season make up a signicant part of Cathys yearly prots. Advise Cathy of her rights against the French supplier.
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Court decided for the S: The late delivery did not constitute a fundamental breach
Time not of the essence/no special notice (art 49)

While delivery of defective goods constitutes a breach of contract, it may or may not constitute a fundamental breach
B must clearly show how goods are defective and must show how important the defect is to Bs interest that the Bs intended use of the goods is now not possible In this case, B needed to show that the shoes could not be sold in order to establish fundamental breach
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Avoiding the Contract: Force Majeure Clauses

A Force Majeure clause is an express term oven included in wrizen interna/onal contracts for sales of goods A FM clause species what types of events will bring the contract to an end and free the par/es of their obliga/ons under the contract
Natural disasters, strikes, war, riots, governmental ac/on

7. Another way to avoid the contract? Force Majeure Clauses and Ar/cle 79 CISG

FM bears some similarity to the doctrine of frustra/on in common law, although oven seek to extend it. BEWARE: Usually inserted by and operate to the advantage of seller However,
Courts are wary of permiPng powerful par/es to abuse their posi/on and will construe them narrowly Will not permit a seller to avoid obliga/ons under a contract due to own negligence or wilful default
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Another way to Avoid the Contract? Ar/cle 79

Ar/cle 79: If a party can show that its failure (or a third party engaged to perform contract) to perform was due to an impediment beyond its own control and that it could not reasonably have been expected to take the impediment into account at /me of conclusion of contract or to overcome the impediment, then the party is not liable for the failure to perform for the period during which the impediment exists.

Whats an impediment?
War, strike, re, legal change, vola/lity in interna/onal markets, shortage of supply, sore nger?

8. If the CISG does not apply and the governing law is Australian law? Goods Act Provisions and Remedies under common law (FYI).

for the period during which the impediment exists!

Suspends obliga/ons. Then what? Thirty year war would be an impediment aver the war..

Courts usually interpret Ar/cle 79 narrowly.

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If the CISG does not apply, the provisions of the Goods Act 1958 (Vic) may apply

FYI: Goods Act Provisions/ Remedies in Australian Law

Sec/on 19 (b): Goods will be of merchantable quality and s. 19(a) t for their intended purpose Ss. 18 & 20: Goods will match the descrip/on or sample provided before sale Ss. 22 & 23: Ownership passes as intended by par/es. In interna/onal contracts: delivery to carrier. S.25: Risk of loss of or damage passes with ownership S.39: Delivery to buyers carrier is delivery to buyer

9. Summary

If the CISG does not apply, the common law remedies are available
Breach of condi/on? Avoid the contract & damages Breach of warranty? Damages
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Sale of Goods Problems: General Approach/Tips

Preliminary Ques/ons: What is the governing law of the contract? Does the CISG apply? Problems? Iden/fy the legal problems (poten/al breaches) Take each problem in turn Discussion of breach Is it a breach of the contract? If the CISG applies, is the breach fundamental? Discussion of remedies Iden/fy remedies available (ie. Is anyone en/tled to avoid the contract or correc/ve remedies only?) Also, consider which remedies are appropriate to the circumstances?

Read the provisions of the CISG - especially provisions men/oned Remember

FB is central to the opera/on of the CISG the range of remedies available the aim of the CISG is to keep the K alive where it would not result in unfairness and substan/al detriment to one of the par/es contractual rights


NEW TOPIC: Carriage of Goods by Sea

Cathys Wine Ques/on

Cover both sides of the arguments Clearly iden9fy and explain the law you are applying (ie, FOB incoterm, CISG ar/cle, provision of the contract) Apply the law to the facts show how the facts t/dont t Ensure sucient discussion of fundamental breach (where relevant) Write with a clear logical structure; use headings; underline Ar/cle numbers and Nicola Charwat 2013 case names

Topic Two Essen/al Materials Readings include: Ar/cles 1-3, 6A and 10 Modied Hague Visby Rules (Schedule 1A of the Carriage of Goods by Sea Act) (Topic Two Essen/al Materials) Problem Ques/on 1 (Drake and Mallard Exports) Problem Ques/on 2 (Sisco)
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