In What Cases The Buyers Of Agricultural Commodities Are Entitled To Reject The Goods
The Cargo Delivered By The Sellers Does Not Correspond With The Contractual Description
In the English contract law, it is an implied condition of contract that the goods must correspond with their description in the sale contract1. In case of misdescription, when the commodity supplied is materially different from the description of goods in the sale contract, the buyers would be entitled to reject the commodity2.
In Ashington Piggeries v. Christopher Hill Ltd.3, Lord Diplock sought to define the notion of "description" as follows:
"The "description" by which unascertained goods are sold is, in my view, confined to those words in the contract which were intended by the parties to identify the kind of goods which were to be supplied … Ultimately the test is whether the buyer could fairly and reasonably refuse to accept the physical goods proffered to him on the ground that their failure to correspond with that part of what was said about them in the contract makes them goods of a different kind from those he had agreed to buy. The key to s.13 is identification."
In the commodity trading contracts, the distinction between the description of goods and quality specifications will depend on the contract terms and the commodity sold. In the English law case Proton Energy Group S.A. v. Lietuva4, Mackie QC J. said that:
"[I]n principle, description and quality are different notions. The key to description is identity [...] The cases show that the distinction between the concepts is sometimes blurred and that they may overlap where, for example, a word of description identifies the quality of the product."
If a quality specification is part of the description of goods in a sale by description, the goods` compliance with that specification is an express condition of contract5. The case which established this rule in the English contract law is Tradax Export S.A. v. European Grain & Shipping Ltd.6.
The case was a quality dispute under a contract for the sale of 9,500 metric tonnes of soya bean meal. The contract clause describing the goods had the following provisions:
"Goods in bulk U.S.A. solvent extracted toasted soya bean meal – maximum 7.5% fibre."
The laboratory analysis of cargo sample revealed that the fibre content was 9.28%. The buyers rejected the shipping documents and the goods.
The question in dispute in that case was whether the fibre content provision was a quality specification or was part of the description of goods.
The English Commercial Court (Bingham J) held that the maximum fibre content provision was not stated amongst the quality specifications but in the clause containing the description of contract goods. Accordingly, the maximum fibre content provision was part of the description of goods and a condition of contract.
By delivering goods not conforming with the contract description, the sellers were in breach of a condition of contract. Therefore, the buyers were entitled to reject the goods.
The distinction between the description of goods and quality specifications would be relevant in a case where the sellers deliver durum wheat instead of common wheat. The durum wheat has better quality characteristics than common wheat in respect of specific weight and protein content but it is suitable for making pasta products or macaroni rather than bread. The durum wheat would not be fit for the purpose that it is required the common wheat: i.e. milling into flour for making bread.
The distinction between the description of goods and quality specifications would not however be relevant in a case involving delivery of the same commodity but with inferior quality characteristics.
In Toepfer v. Continental Grain Co.7, the commodity sold was described in the sale contract as "No.3 Hard Amber Durum Wheat". The quality characteristics of the durum wheat shipped, as stated in the inspection certificate, revealed that the durum wheat cargo was in fact "Amber Durum Wheat", an inferior class of durum wheat, but the inspector who issued the certificate mistakenly described the cargo as "No.3 Hard Amber Durum Wheat" instead of "No.3 Amber Durum Wheat".
The buyers contended that the commodity delivered was not in accordance with the contract description and that the inspection certificate was final and binding only as to the quality and not as to the description of the goods.
The English Court of Appeal (Lord Denning) held that the distinction between the contract description of goods and contract quality specifications was not relevant in that case. The relevant paragraph of the judgment is quoted below:
"The "description" of goods often includes a statement of their quality. Thus "new laid eggs" contains both quality and description all in one. "Quality" is often part of the description. In this very case the word "hard" is a word both of quality and of description. If a certificate is final as to the quality "hard", it is final as to that description also. The quality and description cannot be separated. Finality as to one means finality as to the other."
In Gill & Duffus S.A. v. Berger & Co. Inc.8, Lord Diplock said that:
"The principle established by Toepfer v. Continental Grain Co. Ltd. is that description and quality may overlap. Where they do, then a certificate which is final as to quality is pro tanto final as to description."
"The words used in a contract of sale that refer to the goods agreed to be sold often include words that describe a characteristic as to quality or condition that they possess which distinguishes them from other goods of the same general kind. What Toepfer v. Continental Grain decided was that where the description of the goods agreed to be sold included a statement as to their quality and provided that a certificate as to quality was to be final, the certificate was final as to the correspondence of the goods with that part of the description of them in the contract that referred to their quality (in casu "No.3 hard amber") notwithstanding that the certificate was proved to have been inaccurate."
Gill & Duffus S.A. v. Berger & Co. Inc.9 was a dispute under a contract for the sale of 500 tonnes of White Argentine Bolitas Beans on CIF terms. The quality determination was to be final at the port of discharge as per SGS certificate indicating that the quality of goods shall conform to the quality of the sealed samples submitted to buyers.
Of the 500 tonnes, 55 tonnes were delivered later so that SGS analysed only the samples drawn from the 445 tonnes initially delivered. The SGS certificate stated that the results of the laboratory analysis indicated that the quality of the parcel of beans discharged from the vessel was equal to the quality of the sealed samples. However, the balance of 55 tonnes subsequently delivered was found to contain 1.8% of coloured beans. The buyers rejected the shipping documents and the goods contending that the goods did not comply with the contract description of goods.
The House of Lords held that the buyers were not entitled to reject the goods. Lord Diplock said that:
"[I]f the admixture of coloured beans was as high as 50 per cent, as it was in The Bow Cedar, or higher, the certificate would not bind. […] In such a case there would be no overlap between quality and description. But here there is; for the presence of a mere 1.8 per cent of coloured beans is plainly something which goes to quality, even if it also goes to description. […] [N]on-compliance with description does not prevent the certificate being final as to quality and description in so far as there was, as here, an overlap between the two."
Another relevant case was Tradax Internacional S.A. v. Goldschmidt S.A.10. The case was a dispute under a contract for the sale of a cargo of 8,000 metric tonnes of barley on FOB terms. The contract quality specifications provided that the barley cargo should contain maximum 4% foreign matters. The buyers rejected the shipping documents on the ground that the quality certificate showed that the barley cargo contained 4.1% foreign matters.
The question in dispute was whether the buyers were entitled to reject the shipping documents on the ground that the quality certificate showed a percentage of foreign matters a little greater than that specified in the sale contract.
The contract provision that the barley cargo had to contain maximum 4% foreign matters was just a quality specification and not part of the description of goods. The English Commercial Court held that if the contract quality specification not complied with by the seller is not part of the description of goods and is not stated as a warranty either, then it will be deemed to be an innominate term. In such case, the buyers have the right to reject the goods only if there is a serious and substantial deviation from the contract quality specifications. "Where the discrepancy is a minor discrepancy the buyer is bound to accept the goods." In such case, the buyers would only be entitled to a price allowance.
The fact that the barley cargo contained 0.1% more than the maximum of 4% specified in the sale contract for foreign matters was not deemed to be significant. It was a minor breach which would have entitled the buyers to a price allowance only.
Based on the aforementioned cases, it can be said that the buyers of agricultural commodities are entitled to reject the goods in the following cases:
- if the sellers deliver a different commodity than that described in the sale contract;
- if the goods do not comply with a quality specification that is part of the description of goods;
- if there is a serious and substantial deviation from the contract quality specifications. If there is a significant difference between the cargo quality characteristics and cargo quality specifications that amounts to a non-compliance with the contract description of goods, the buyers would be entitled to reject the goods. If there is only a minor breach of contract quality specifications, the buyer would only be entitled to a price allowance.
The only contract form that makes a distinction between the situation when the goods supplied do not correspond with the description of goods in the sale contract and the situation when there is only a difference in quality is INCOGRAIN Contract No.13. The Clause IX(b) of INCOGRAIN Contract No.13 provides that:
"Unless the actual nature of the supplied goods does not correspond to the contractual description, [...] a difference in quality shall not give Buyers the right to reject but only that of fixing by arbitration the allowance they may be entitled to."
The Cargo Delivered By The Sellers Is Unfit For The Purpose For Which It Was Bought By The Buyers
The grain cargoes must comply with the maximum acceptable levels of contaminants stipulated in CODEX Alimentarius to be considered safe for human consumption.
For the certification of milling wheat as "fit for human consumption", IFIA11 require the inspection companies to determine by laboratory analysis the sample content of pesticides (Organochlorine, Organophosphorus, Pyrethroids), heavy metals (Lead, Cadmium), mycotoxins (Ochratoxin A, Deoxynivalenol), poisonous seeds and Ergot fungus12. There is a similar procedure for the certification of feed grains and oilseed meals as "fit for animal consumption".
The GIPSA`s Federal Grain Inspection Service does not even provide statements indicating that the grain is fit for human/animal consumption, leaving the sellers and buyers to determine themselves the suitability of grain for human/animal consumption based on the test results of the laboratory analysis of cargo sample.
If a wheat or corn cargo has an excessive content of mycotoxins, poisonous seeds and/or Ergot fungus, it is not safe for human consumption and the buyers can reject the cargo.
If the requirement to be fit for purpose is part of the contractual description of goods, e.g. "Milling Wheat, Fit For Human Consumption", then it is an express condition of contract in English law that the goods supplied must be suitable for that purpose.
If the requirement to be fit for purpose is not part of the contractual description of goods, there is an implied condition of contract in English law that the goods supplied must be suitable for that purpose. The Section 14 (3) of the Sale of Goods Act 1979 stipulates that:
"Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known –
(a)to the seller ...
any particular purpose for which the goods are being bought, there is an implied term that the goods supplied under the contract are reasonably fit for that purpose …"
To avoid disputes with buyers, the FOB sellers should stipulate in the contract that the health certificate issued by the inspection company at the port of loading shall be final as to the fitness for human/animal consumption13.
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Grain Trade Review Edition No. 3.
Endnotes:
1. See the Section 13(1) of the Sale of Goods Act 1979.
2. See the English law case Proton Energy Group SA v. Lietuva, [2013] EWHC 2872 (Comm), [2014] 1 Lloyd`s Rep 100
3. [1968] 1 Lloyd`s Rep. 457, [1972] AC 441
4. [2013] EWHC 2872 (Comm), [2014] 1 Lloyd`s Rep. 100
5. See the English law case Proton Energy Group SA v. Lietuva, [2013] EWHC 2872 (Comm), [2014] 1 Lloyd`s Rep. 100
6. [1983] 2 Lloyd`s Rep. 100
7. [1974] 1 Lloyd`s Rep. 11
8. [1984] 1 Lloyd`s Rep. 227
9. [1984] 1 Lloyd`s Rep. 227
10. [1977] 2 Lloyd`s Rep. 604
11. International Federation of Inspection Agencies
12. See IFIA Agricultural Committee Bulletin 11-01
13. The clause commonly used in the FOB contracts for sale of milling wheat has the following provisions: "Weight, quality and fitness for human consumption to be final at loading port as per certificates issued by the independent surveyors appointed by the sellers."