INTERNATIONAL BUSINESS TRANSACTION S

TOPICS FOR REVISION – PART

II

1. Methods of Payment for Export Sales

.

2. International Carriage and Storage of Goods

.

3. International Insurance Contracts

.

METHODS OF PAYMENT FOR EXPORT SALES

1. LETTERS OF CREDIT/ DOCUMENTARY CREDIT

The buyer agrees to pay the seller using a pay master who is usually a bank in the seller’s country and pays
against presentation of stipulated documents. Essentially, the Letter of Credit gives the seller guarantee of
the creditworthiness of the buyer in that a cash payment against tender of the usual shipping documents
protects the seller against the risk of the buyer’s bankruptcy, the seller can bring an action in his own country
in case of breach and the seller can use the security of the l etter of credit to raise cash from his own bank.

The foregoing are the stages of payment in documentary credit transactions.

1. Parties to the contract of sale agree to payment by letter of

credit.

2. The buyer then instructs his bank (the issuing bank) to open a credit in favor of the seller (beneficiary)
with
a bank in the seller’s country, (the advising bank)
.

3. The buyer (applicant) gives details of the documents required, (eg transport documents, invoice,
insurance policies, certificate of quality, certificate of origin etc) in order to receive finance, as well as the
date of expiry of the credit.

The buyer therefore instructs the issuing bank that the seller shall only be allowed to draw on the credit on
presentation to the advising bank of documents showing that the goods have been shipped and are on
their way to the buyer.

4.The issuing bank (opening bank) instructs a correspondent bank (advising bank / confirming bank) in
the
beneficiaries’ country to advise the seller of the opening of a documenta ry
credit.
Esther Katende - 1
Magezi
5. The advising bank informs the beneficiary/ sell er of the opening of the credit in his favor and the
precise terms on which the seller will be allowed to avail himself with the credit.

6. Upon shipment of the goods and receipt of the necessary documents from the various persons
concerned
(eg insurers, carriers etc), the seller presents these documents together with his invoice to the advising
bank.

Esther Katende - 2
Magezi
7. The advising bank checks the documents with the terms of the credit to ensure that the goods s hipped
so far as can be ascertained from the documents, are the contract goods and that everything appears to
be in order. If so satisfied, the advising bank will permit the seller to draw against the credit.

8. The advising bank transports or forwards the documents to the issuing bank which likewise checks
the documents against the terms of the credit and pays the advising bank if satisfied that all is in order.

9. The issuing bank informs the buyer of receipt of the documents to be transferred to the buye r
against payment. The buyer also satisfies himself that the documents are in order, and effects payment to
the issuing bank. The payment should be an amount corresponding to the price paid to the seller as well as
the bank charges.

The setting up of a documentary credit between two foreign banks in two foreign countries to finance export
sales as illustrated above has been described as the life blood of international commerce. Further, the
above documentary credit arrangement is largely governed by the Uni form Customs and Practice for
Documentary Credits (UCP Rules 1983). These rules are often incorporated in the contract of sale by express
reference.

TYPES OF LETTERS OF CREDIT

There are various types of LOCs depending on the agreement of the parties to the contract of
sale.

1. The Revocable and Unconfirmed Letter of Credit

This type of credit affords little security to the seller that he will receive the purchase price through a bank,
because neither the issuing nor the advising bank enters into a commitment to the seller. The credit may be
revoked anytime without prior notice to the beneficiary.

2. The Irrevocable and Unconfirmed Letter of Credit

This is the type of credit whereby the authority which the buyer gives to the issuing bank cannot be
revoked and the issuing bank enters into an irrevocable obligation to the seller to pay. The bank must honor
the credit. This type of credit is more valuable to the seller since he can demand that the issuing bank
honors the credit, provided the seller has tendered the correct documents before the expiry date of the
credit. The seller has a right to sue the issuing bank for refusal to honor the credit. The suit may be taken
out in the country where the issuing bank is situated or in the seller’s home country if the issuing bank has a
branch therein.

3. The Irrevocable and Confirmed Letter of Credit

This type arises where in addition to the irrevocable undertaking by the issuing bank to honor the credit, the
advising bank gives further confirmation of the credit, to the seller. The seller will then have certainty that a
Bank in his own local country will provide him with finance if he delivers the correct documents within
the
stipulated time. A confirmed credit which has been notified to the seller cannot be cancelled by the bank on
instructions of the buyer.

In Hamzeh Malas & Sons V British Imex Industries Ltd (1958)2 QB 127, British sellers sold a quantity of
steel rods to Jordanian Buyers. The goods were to be shipped in 2 installments and payment was to be
made und er
2 confirmed credits opened with the Midland Bank London, with one credit for each installment. Upon
receipt
of the first installment, the buyers who had already opened the 2 nd credit applied for an injunction to
restrain the sellers from receiving any money under the 2nd credit. It was held that the injunction had to be
refused because the bank was under an absolute obligation to pay, upon tender of the stipulated
documents, irrespective of any dispute between the buyer and seller.

4. The Transferable Letter of Credit

The parties to the contract of sale may agree that the credit shall be transferable in which case the seller
can use such credit to finance the supply transaction. Under such an arrangement, the buyer opens the
credit in favor of the seller and the seller transfers the same credit to his suppliers. The credit is
transferred on the same terms on which the buyer has opened it, except that the amount payable to the
suppler is made smaller considering that the seller ought to retain his profit from the export transaction.

FUNDAMENTAL PRINCIPLES OF LETTERS OF

CREDIT

The law relating to Letters of credit is founded on two cardinal

principles.

1. Doctrine of Autonomy of LOCs

This principle stipulates that the credit is separate and independent of the underlying contract of sale. The
LOC is thus a paper transaction in the sense that a bank concerned with a documentary credit is only
concerned with whether the documents tendered conform to the contract. The condition and nature
of the goods shipped is irrelevant. The bank is under a strict duty to pay upon production of the
stipulated documents within the stipulated time.

The exception to this principle is where the seller has engaged in some form of fraud, in which case the
bank may withhold payment. The principle of autonomy has the following consequences:

a) The buyer is not entitled to give instructions to the bank to refuse to effect payment under the
credit
or vary its terms without the seller’s consent.

b) The concern of the bank is with the documents a nd not the facts. If the documents appear to be
in order, then the bank is under obligation to pay. If the documents deviate from the language of
the LOC, then the bank may withhold payment even if the deviation is purely based on
terminology but lacks materiality in fact.
 In Rayner V Hambros Bank Ltd (1943) The LOC called for documents covering the shipment
of groundnuts but the bill of lading which the seller tendered referred to machine shell
groundnut kernels. It was customarily known in the trade tha t the description of “machine
shell groundnut kernels” which appeared on the bill of lading was synonymous to the description
of groundnuts as required in the LOC. The bank refused to pay and their refusal was upheld by
the Court of Appeal stating that the bank must only exercise reasonable care and skill to ensure
that the documents are in order but is not responsible for ensuring that the documents are accurate,
genuine and authentic.

2. The Doctrine of Strict Compliance

This doctrine arose from the strict duty imposed on the banks to follow the buyer’s instructions on the
nature of documents to be accepted. The banks which operate the documentary credit act as agents of
the buyer who is the principal. If the banks exceed the buyer’s instructions, by accep ting documents
which do not conform to the terms of credit, they run the risk of acting outside their mandate and thus
take liability for any resulting commercial risk in the transaction.

In Sopnoma S.P.A V Marine & Animal By- Products Corporation (1966)1 LLR 367 a confirming bank
had received instructions from a buyer of Chillian fish to pay upon presentation by the seller of
documents including a bill “of lading issued to order and marked “freight prepaid”, and” an analysis
certificate showing that the fish had a content of at least 70% protein. The documents which the seller
tendered were incorrect. That is, the bill of lading were not to order and bore the mark “freight collect”
instead of “freight prepaid”. Similarly, the certificate showed only a mini mum protein content of 67%.
The bank rejected the incorrect documents only for the seller to tender correct documents upon expiry of
the credit. It was held that the 2 nd tender was irrelevant and the bank had rightly rejected the 1 st tender of
documents.

On the other hand, if the documents are correct and the bank refuses to pay, it may be held liable to the
seller in damages. In Ozalid Group Export Ltd V African Continental Bank (1979), payment was to be
th
effected on 5 October but was not made until 12 th December even though the correct shipping
documents had been presented. The seller was held to be entitled to damages for unjustifiable delay in
making the payments.

PAYMENT OTHER THAN BY LETTERS OF CREDIT

Although the LOC is the most secure way for the s eller to receive the price of goods, there are other modes
of payment, under international trade transactions.

2. PAYMENT BY A BILL OF EXCHANGE

A bill of exchange is an unconditional order in writing addressed by one person to another to whom it
is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to
the order of a specified person or to bearer. A BOE is a negotiable instrument. That is, it is
transferable by endorsement and or delivery, and the holder of it may sue on it in his own name.
The use of a BOE may enable a seller of goods to obtain payment and the buyer to have credit at the
same time, as follows;

1. Where a seller in one country sells goods to a buyer in another, the buyer may require credit of say 20
days. The seller draws a BOE on the buyer, (ie addressed to the buyer) ordering the buyer to pay in 20 days’
time. If the buyer agrees to the terms of the bill, he expresses his agreement by signing or accepting the
bill and returning it to the seller.

2. The seller may then transfer the bill to his bank in his home country, at its face value less a deduction of
commission or charges for the bank.

3. Under this arrangement, the seller would have obtained payment for the goods while the buyer would
have obtained credit for 20 days.

4. The bill is said to mature when the time for payment lapses and the bank or any other person to whom
the bill is transferred seeks to enforce payment from the buyer who may have obtained the goods and
resold them.

3. PAYMENT BY CHEQUE

The seller’s price may also be paid by cheque which is also a bill of exchange. Unlike other bills however, a
cheque is always addressed to a bank and payable on demand. Most cheques are also not transferable or
negotiable because they usually restrict negotiation for fear of fraud to which they are susceptible.

4. PAYMENT BY DRAFT

A draft is yet another bill of exchange. Payment by draft is effected by the buyer obtaining from his bank
an
order drawn on a bank in the seller’s country and naming the seller as
payee.

5. PAYMENT BY TELEGRAPHIC TRANSFER

This is effected by the buyer’s bank making a communication with a bank in the seller’s country,
(the
corresponding bank) directing the remitting bank to pay to the
seller.

CARRI AGE AND STORAGE

CARR IAGE

Carriage is a contract in which one person, (the carrier, eg Transami) agrees with another to
convey goods from one place to another for a reward known as freight. The carriage of goods may be
effected by air, rail, motor transport and sea. Each of th ese forms of carriage is subject to particular
laws as will be seen subsequently.
 DUTIES OF THE CARRIER

1. TO EFFECT CONVEYANCE (TO TRANSPORT THE

GOODS) Liability at Common Law

At common law, a carrier is liable for the loss or damage to goods if it was d ue to his fault, eg
through negligence or intentional conduct. The carrier bears the onus (burden) of proving that the
damage or loss in question was not due to his fault. This burden however only exists once the
other party has successfully proved that the harm complained of did in fact occur during the carriage.
(eg between the time when the carrier received the goods and when he delivered them at their
destination)

In the case of Alex Carriers (Pty) Ltd V Kempston Investments (Pty) Ltd and Another, a carrier (A)
received an order to deliver 60 reels of newsprint to a newspaper concern called GE. As A did not
have any vehicles available at the time, it contracted KI (Pty) Ltd to deliver the reels to GE. KP (Pty) Ltd
in turn subcontracted another carrier B to do the job. B’s truck arrived with the reels on time at GE’s
premises, but GE refused to accept delivery, alleging that the whole load was wet and damaged. A then
sued KI (Pty) Ltd and B for damages claiming that KI (Pty) Ltd had breached the contract o f carriage by
delivering the reels in a damaged condition. The defendants produced evidence that showed that the
reels were wet because A’s employees had loaded them onto B’s truck in the rain. Court dismissed A’s
claim. It held that before a carrier of go ods can be required to discharge the burden of proving that
damage to the goods occurred without fault on his part, the other party must have proved that the
goods have been damaged (that is, that their value on delivery at the destination is either non ex istent
or less than it was when they were received by the carrier.) In this case, A had failed to prove so, and in
fact, evidence pointed the other way, viz, that B had delivered the reels at their destination in the same
order and condition as he had received them.

Exclusion of Liability by the Carrier at Common

Law

It is usual for a carrier to limit or exclude his liability at common law by including in the contract of
carriage (eg by means of a ticket issued at the time of contracting) a clause to the ef fect that carriage
is made at the owner’s risk or that the carrier is not liable for loss or injury incurred as a result of
certain perils.

Clauses however like “Goods are transported at the owner’s risk) do not absolve the carrier from
liability for loss or injury caused by the willful misconduct of the carrier or his servants. In Citrus Board
V SAR & H, the Board sued SAR & H for damages resulting from the destruction in transit of a
consignment of lemons and oranges. The contract stipulated that the cons ignment was
transported at the owner’s risk. It appeared that SAR & H’s mover, while engaging in moving
operations, had disregarded certain safety regulations relating to braking, although he was well aware
of them. As a result of his actions, a number of loaded trucks had run away on a steep gradient and
collided with a stat ionary engine. Court held that
the mover’s persistent disregard of the regulations in question amounted to willful misconduct, which
rendered SAR& H liable for the destruction of the co nsignment arising out of the collision.

For international carriage by air the carrier is liable for:

 Loss or damage for goods if the occurrence causing such loss or damage occurred during
the carriage by air, viz, during the period for which the goods wer e in the charge of the carrier.
 Delay in the carriage of goods.

Exclusion of the carrier by air’s liability

The Warsaw Convention provides that the carrier’s liability is excluded:

 Wholly, if he proves that he and his agents took all necessary measures to avoid the loss or that
it was impossible to take such measures.
 Wholly or partly, if he proves that the loss was caused or contributed to by the negligence of
the owner of the goods.

A carrier at Sea is liable absolutely (i.e liable without fault on his part) for loss or damage unless he
can prove that the loss or damage was due to:

 The negligence of the owner of the goods, eg in bad packing.

 Some event which could not have been foreseen, avoided or withstood, eg a violent storm, a fire
or an earthquake.
 Inherent vice. That is, the deterioration of the goods carried as a result of their natural behavior in
the ordinary course of carriage without the intervention of any unexpected external accident
or casualty. Eg the rotting of a cargo of fruit from the in ternal decomposition or defective
packing.

In Blackshaws (Pty) Ltd V British Engine Insurance Co of SA Ltd, Blackshaws had insured
with British Engine a second hand printing machine during its carriage from Norway to Cape
Town. In terms of policy, Blackshaws were covered in respect of all risks of loss of or
damage to the machine excluding loss or damage caused by inherent vice. On arrival, the
machine was found to be damaged. In suing on the insurance policy, Blackshaws alleged that the
damage was caused by the movement of the various parts of the machine in its container by
reason of defective packing. The insurance company (British Engine) refused the claim on the
grounds that defective packing constituted an inherent vice, for which they were not liable in
terms of the policy, as it had been expressly excluded from the policy. Court accepted this
argument.

Points to note:

A precondition to the carrier’s liability is the giving of written notice to the carrier of loss or damage at
the time of delivery or, if such loss or damage is not apparent, within 3 days thereafter.
Further, the carrier is discharged from all liability if he is not sued within 1 year after delivery or the
date when the goods should have been delivered.

Exclusion of the Carrier by Sea’s

liability

The carrier’s liability is excluded

where:

1. The loss or damage arises from the unseaworthiness of the ship and the carrier has exercised
due diligence at the beginning of the voyage in making the ship seaworthy, in manning,
equipping and supplying the ship properly, and in ensuring that the holds, etc are fit and safe for
the conveyance of the goods.
2. Where loss or damage arises from a number of specified causes (eg fire, unless caused by the
fault of the carrier acts of God, acts of war, perils, dangers and accidents of the sea, riots
and civil commotions, saving or attempting to save life or property at sea, latent defects not
discoverable by due diligence) or any other cause arising without the actual fault of the carrier.

The amount of the carrier’s liability is also limited unless the nature and value of the goods has been
declared by the shipper before shipment and inserted in the bill of lading. A clause in the contract of
carriage relieving the carrier of liability or lessening the carrier’ s liability is null and void.

2. TO EFFECT CONVEYANCE WITHIN THE AGREED

TIME
The carrier must transport the goods within the agreed time. If no time is agreed, he must complete
the conveyance within a reasonable time or in the case of carriage by sea, wit hout unreasonable
delay. The carrier is liable for any loss occasioned by undue delay. For carriage by air, the carrier’s
liability is limited as to amount, according to the Warsaw Convention.

3. TO EFFECT CONVEYANCE AT THE CONTRACTUAL

DESTINATION
The carrier must transport the goods to the agreed destination. If the carrier delivers them to the
wrong destination, the owner may claim specific delivery or damages for non delivery. Where there is
no body present to take delivery at the contractual destinatio n, the carrier’s liability does not terminate
forthwith. It ceases only upon expiry of a reasonable period after:
 The agreed time for delivery
 If no time has been specified, notice to the owners of the goods of the availability of the goods
for delivery.

Thereafter, the carrier is liable for the loss or damage to the goods caused by his
negligence.
 DUTIES OF THE OWNER OF THE GOODS

1. DUTY TO PAY THE FREIGHT

Unless otherwise agreed, the obligation to pay the freight falls due on delivery of the goods at t he agreed
destination. If no charge or rate is agreed upon, the carrier’s usual charge or rate must be paid.

The carrier is entitled to retain the goods until freight is paid. He may hire premises for the purpose
of storing the goods.

STOR AGE

NATURE OF THE CONTRACT

Storage of goods is a contract whereby one party (the depositary) undertakes, in return for
remuneration, to keep a movable thing for the other party (the deposit or) until he requires its return.

Carriage of goods usually involves warehousing a t some point, without there being a separate contract
of storage included. Where goods are so warehoused in the process of their carriage and the
carrier’s liability at common law is not excluded, then the liability of the carrier for loss or damage to
the goods warehoused is that of the carrier not the depositary.

A contract of storage may be express or implied. For it to be implied, there must at least be delivery of
the goods to the depositary.

EFFECT OF THE
CONTRACT

The depositary is bound to take the same care of the property entrusted to him as a reasonably
prudent and careful person may fairly be expected to take of his own property of similar description.

LAW OF IN SURANCE

Insurance is a device by which an insured person can protect themselves from t he heavy loss likely to
be caused by an uncertain event in exchange for paying a much smaller sum of money called the premium.
The advantage of insurance is that the person insured is protected from any loss that may or is likely
to be occasioned in the sense that once he pays a premium and is insured, in case of damage to eg his
goods, the risk is transferred from that individual to the insurer.

DEFINITION OF KEY TERMS

Contract of Insurance

A contract of insurance is a contract where by one party undertakes, on return of a payment called
a premium, to pay to the other a certain sum of money on the happening of a certain event (eg
death or
attaining a particular age) or to indemnify the other party against a loss arising from the risk insured in case
of property.

Insurer (Assurer)

This is the party who or which promises to pay a certain sum of money to or to indemnify the other party.
An insurer is called an assurer in case of life insurance or an underwriter in case of marine insurance.

Insured (Assured)

This is the party who is given protection of his life or property in the exchange of a premium.

Policy

This is the document which contains the terms and conditions of the contract of insurance between
the insurers and the insured. The insured is thus called the policy holder.

Premium

Premium can be defined as the amount of money paid by an individual to obtain insurance in case of
accident or destruction of goods. It’s the money the insured person pays to the insurer for the protection
given to him.

Subject Matter of Insurance

This refers to the thing or property insured under the contract of insurance.

Insurable Interest

This refers to the proprietary or pecuniary interest of the insured in the subject matter which is insured.

TYP ES OF INSURAN CE

The insurance business is divided into 2 main branches:

a) Life Insurance

b) General Insurance

Life insurance – the insurer undertakes to pay the assured or their nominee or the legal successor in case
of death a stated sum of money or annuity in monthly or quarterly install ments on the death of the assured.

General Insurance

This means fire insurance, marine insurance, employer’s liability insurance, burglary insurance, motor
vehicle
insurance, theft and burglary insurance, crop insurance etc.
1. Fire Insurance
Refers to insurance against any loss of or damage to property by fire. The insurer undertakes to indemnify
the insured against financial loss which may be sustained by reason of goods being destroyed by fire during
a specified period, subject to the condition that the actual amount of the indemnity will never exceed
the amount stated in the policy.

2. MARINE INSURANCE

In this type of insurance, the insurer (underwriter) undertakes to indemnify the insured in the way or to the
extent thereby agreed, against marine losses, i.e. losses incidental to marine ventures. Depending on
the express terms of the contract, a marine insurance contract can also be extended so as to protect the
insured against losses inland waters or any land risk which may be incidental to any sea voy age. There
are various types of marine insurance:

a) Hull Insurance

This is where the owner of a ship may take out an insurance cover for the vessel and its equipments, i.e.
furniture and fittings, machinery tools, engine stones etc.

b) Cargo Insurance

The insurance of cargo includes goods and merchandise and not the personal belongings of the crew
and passengers.

c) Freight Insurance

This is where the shipping company undertakes freight insurance to guard itself against loss in the event
that the company is not paid freight for the transportation of the cargo. (E.g. where the cargo is not
transported safely or the ship is lost on the way or the cargo is destroyed. In such a case, the shipping
company will not be paid for its services). So to guard against such eventuality, the shipping company may
effect freight insurance.

d) Liability Insurance

This includes liability to a 3rd party due to hazards e.g.

collision.

It should be noted that under marine insurance, it is necessary to specify with certainty the subject matt
er that the marine policy may cover; i.e., the ship, cargo freight or liability.

There are various types of Marine Policy. These include:

I. Voyage Policy

This is where the subject matter of the contract of insurance, (e.g. the ship or the cargo) is insured for
a specified voyage, (particular journey).
II. Time Policy
Here, the subject matter e.g. the ship is insured for a specified period of time.

III. Mixed Policy (Voyage and Time)

This policy covers both voyage and time policies and is also known as the “Voyage an d Time” policy. Here,
the
subject matter, e.g. the cargo is insured during a particular voyage for a specified period of time.

IV. Port Policy

This policy covers a vessel for a period of time while it’s at the port.

3. THEFT AND BURGLARY

Covers losses caused by thieves and robbers.

MAJOR P RIN CIP LES OF IN SURANCE CON TRACTS

1. Utmost Good Faith

Both parties to an ins urance contract must make a full and fair disclosure of all material facts relating to
the subject matter of the proposed insurance. This is important to enable the insurer determine whether or
not to enter into a contract of insurance at a particular premium. This duty mainly rests on the insured
because he knows or is expected to know more about the subject matter to be insured than the
insurer. In s uch disclosure, there should not be any false statement or half truths or any silence on a
material fact.

This duty continues until the proposal of the insured is accepted by the insurer. Thus any material fact
coming to the knowledge after the contract is concluded need not be disclosed. This duty however is
revived every time the old insurance policy is renewed or altered.

2. Indemnity

The insurer undertakes to insure the insured for loss or damage resulting from specified perils. Where the
loss occurs the insured has a right to recover from the insurer the actual amount of loss not exceeding the
amount of the policy. The object of indemnity is to place the insured after a loss in the same position as he
was immediately before the event occasioning the los s or damage. The insurer is not entitled to benefit
more than the loss suffered by him.

3. Insurable Interest

Insurable interest refers to the proprietary or pecuniary interest in the subject matter being insured. This is
an essential prerequisite for obtaining compensation under a contract of insurance. The insured must
possess an insurable interest in the subject matter of the insurance at the time of the contract. A person is
said to have an
insurable interest if the person will derive pecuniary benefit from its existence or will suffer pecuniary
loss from its destruction. (Insurable interest is therefore a financial interest).

4. Causa Proxima

This means that the insurer is only liable to compensate the insured for only those losses which have been
caused by the risk/ peril insured against. Therefore to make the insurer liable, the cause of the loss or
damage must be looked into and it must be one which is insured against.

When a result has been brought about by 2 causes, insurance law looks at the neare st cause. Insurers are
not liable for remote causes and remote consequences even if they belong to the category of the
insured risks/perils.

In Punk V Flemming (1899)2 JQ 13 D 396 in a marine policy, the cargo was a shipment of oranges. The peril
insured against was collision with another ship. During the course of the voyage the ship actually collided
with another resulting in delay and mishandling of shipment which made the oranges unfit for
human consumption. It was held that the loss was due to mishandl ing and delay and not due to collision,
which was a remote cause, though without it, no mishandling or delay was necessary. As such, the insurer
was not held liable.

In Hamilton V Pandrof (1889) 12 AC 518 in a marine policy, the goods were insured against damage by sea
water. Some rats on board bored a hole in a zinc pipe in the berth which caused sea water to pour out and
damage the goods. The underwriters contended that as they had not insured against the damage by rats,
they were not bound to pay. Court held that the proximate cause of damage being sea water, the
insured was entitled to damages, the rats being a remote cause.

5. Risk Must Attach

This means that the risk must occur. If e.g. the insured goods arrive safely inspite of the peril, the risk doe s
not attach. Therefore the premium paid cannot be recovered from the insurers because the consideration
for the premium has totally failed.

6. Mitigation of Loss

Where the event insured against occurs, it’s the duty of the insured to take all reasonable s teps to
minimize the loss as if he was not insured and he must do his best to safeguard the remaining property
otherwise where it is found that he was negligent and didn’t do anything to minimize the loss, the insurer
can avoid payment for the loss if it is attributed or was occasioned by such negligence.

The insurer is however entitled to claim compensation for the loss suffered by him in taking such steps to
minimize loss from the insurer.

7. Doctrine of Subrogation.
Where the loss to the property has occurred by chance without any fault of any party, the insured can
proceed and claim against the insurer only. However, where the loss has arisen out of mischief by another
person (a third party) the insured can sue both his insurer and the 3rd party. However since the insured is
not allowed to be compensated by both so that he makes a profit, he can only claim either against the
insurer or the wrong doer. If the insured elects to be compensated by the insurer, the doctrine of
subrogation arises where by the insurer can be subrogated (compensated) all the rights and remedies of
the insured against the 3 rd party in respect of the property destroyed or damaged. This means eg once the
insurer is sued by the insured, the insurer can also sue the 3rd party who contributed to the loss to
compensate the insurer.

Subrogation was defined by Lord Cairns in Simpson V Thomson (1877)3 AC as “ a right founded on the well
known principle of law that where one person has agreed to indemnify another, he will on making good the
indemnity (on paying the person) be entitled to succeed in all the ways and means by which the
person indemnified might have protected himself against or reimbursed himself for the loss”.

This means that under the contract of insurance, where the insurer has paid or indemnified the insured for
the loss suffered, he takes over the rights of the insured and can proceed against all persons the insured
was entitled to proceed against for the amount he paid to the insurer under the policy.