Who Bears The Risk Of Deterioration Of Perishable Commodities In FOB, CFR And CIF Sale Contracts
The oilseeds are perishable commodities and have been subject to claims for deterioration during the sea carriage due to their condition at the time of shipment1.
In the sea carriage of perishable commodities such as soya beans the risk of deterioration and the risk of damage refer to different things. The deterioration is caused by the inherent vice of the goods, whilst the damage is caused by external factors such as insufficient ventilation or sea water in case of bad weather if the ship`s hatch covers are not watertight.
When a perishable commodity such as soya beans is found damaged at the port of discharge, the cargo insurers will appoint surveyors to assess the damage and determine the proximate cause in order to recover the amount paid to the buyers from the carriers. However, whilst the risk of damage is covered by the insurers, the risk of deterioration due to an inherent vice of the goods is not covered by the insurers2. If the deterioration of goods was caused by their inherent vice, the buyers cannot recover the financial loss from the insurers and carriers and the question is whether they can recover instead from the sellers and who should bear the risk of deterioration of goods due to an inherent vice.
In the English law case Mash & Murrell Limited v. Joseph I. Emanuel Limited3, Diplock J. said that:
"It is extraordinary deterioration of the goods due to abnormal conditions experienced during the transit for which the buyer takes the risk. A necessary and inevitable deterioration during transit which will render them unmerchantable on arrival is normally one for which the seller is liable."
"when goods are sold under a contract such as a CIF contract, or FOB contract, which involves transit before use, there is an implied warranty not merely that they shall be merchantable at the time they are put on the vessel, but that they shall be in such a state that they can endure the normal journey and be in a merchantable condition upon arrival."
"[M]erchantability in the case of goods sold CIF or C&F means that the goods must remain merchantable for a reasonable time and that in the case of such contracts a reasonable time means time for arrival and disposal upon arrival."
In the following cases, the English Courts sought to make a difference between the sellers` position in CIF and CFR contracts and the sellers` position in FOB contracts.
In Navigas Ltd. of Gibraltar v. Enron Liquid Fuels Inc.4, the English Commercial Court held that the rule adopted in Mash & Murrell Limited v. Joseph I. Emanuel Limited apply to a FOB contract only if the contract involves a specific transit before the goods are to be used. If the contract does not mention where the goods are to be transported, the implication of a term as to suitability of the goods to withstand a voyage should not be made. The English Commercial Court held that:
"whatever may be the position under a CIF or C&F contract the implication of such a term under a FOB contract is a very different matter. In the case of a classic FOB contract the seller may well not know the destination of the goods or therefore the duration of the voyage. It may be days or it may be weeks. Unless something in the contract tells him, it is of no concern whatever to him. It is not his duty to know. What the buyer does with the goods after loading on the vessel at the delivery port is entirely a matter for the buyer. He can change his mind about the destination. In these circumstances, I would consider it extremely difficult to imply into such a contract any term as to suitability of the goods to withstand a voyage. In any event, whether such implication should be made might depend on the nature of the goods."
In KG Bominflot Bunkergesellschaft Für Mineralöle mbh & Co Kg v. Petroplus Marketing AG5, the English Commercial Court held that:
"In CIF and C&F contracts, where the seller knows the destination of the goods, Mash & Murrell is accordingly authority for the proposition that the time taken to complete a normal voyage will be the basic measure of what is a reasonable time. However, where the seller does not know the destination of the goods, it is not appropriate in my opinion to adopt the concept of a "normal voyage" as the measure of what is a reasonable time."
Therefore, the question of the sellers` potential liability in case of deterioration of goods due to an inherent vice is more relevant in CFR and CIF contracts rather than in FOB contracts notwithstanding that the section 33 of the Sale of Goods Act provides that:
"Where the seller of goods agrees to deliver them at his own risk at a place other than that where they are when sold, the buyer must nevertheless (unless otherwise agreed) take any risk of deterioration in the goods necessarily incident to the course of transit."
In KG Bominflot Bunkergesellschaft Für Mineralöle mbh & Co Kg v. Petroplus Marketing AG6 the English Court of Appeal held that the rule adopted in Mash & Murrell Limited v. Joseph I. Emanuel Limited does not apply to contracts providing that the quality specifications have to be met at the time of delivery and that the quality determined at the time and place of delivery shall be conclusive evidence. The English Court of Appeal held that in a sale contract providing that the quality specifications have to be met at the time of delivery and that the quality determined at the time and place of delivery shall be conclusive evidence, the statutory implied condition of satisfactory quality stated in section 14(2) of the Sale of Goods Act of the United Kingdom applies only at the time of delivery. If the goods are of satisfactory quality at the time of delivery, the implied condition of satisfactory quality is fulfilled. The relevant passage of the Court decision is quoted below:
"After delivery the buyer "assumes all risks pertaining thereto". All risks are all risks. They include the risk of transport, and they include the risk of cargo instability – unless that risk has already been taken by the seller under a term of the contract which relates to the condition of the cargo pre-delivery."
The problem with the risk of cargo instability is that it is not covered by the insurers under the All Risks insurance cover because the International Conventions for the transport of goods by sea exempt the carriers from liability in case of loss or damage to the goods caused by their inherent vice. As the buyers of perishable commodities cannot recover from the insurers and carriers, the question is whether they could have a remedy against the sellers.
In KG Bominflot Bunkergesellschaft Für Mineralöle mbh & Co Kg v. Petroplus Marketing AG the English Court of Appeal held that if an alleged vice of the commodity is something for which the contract quality specifications and conclusive determination clauses provide, then the buyers cannot claim a breach of the statutory implied term as to satisfactory quality. But if an inherent vice of the commodity could not have been picked up by the cargo surveyors with the tests required in the contract quality specifications, then the surveyors` determination of the condition of cargo is not conclusive (i.e. final and binding) and the buyers may claim in this case a breach of an implied term of satisfactory quality in case of cargo deterioration due to such inherent vice.
By analogy to KG Bominflot Bunkergesellschaft Für Mineralöle mbh & Co Kg v. Petroplus Marketing AG, in CFR and CIF contracts for the sale of soya beans a clause for the conclusive inspection and determination of cargo`s quality and condition at loading port would make the determination of the amount of heat damaged beans at the time of loading conclusive (i.e. final and binding) and exclude a statutory implied term as to satisfactory quality, unless the buyers can provide evidence that the subsequent deterioration of soya beans during the sea carriage occurred due to their condition at the time of shipment – the cargo temperature and moisture content at the time of shipment – and their inherent vice – the propensity to self-heat at high temperatures.
The cargo temperature and moisture content at the time of shipment can provide an indication as to the likelihood of deterioration of a soyabean cargo during the sea carriage due to self-heating. The ventilation of cargo holds cannot prevent the heat damage to the lower layers of the cargo if the cargo was self-heating at the time of shipment. Given that the cargo surveyors are not required to check the cargo temperature in the contract quality specifications and that the soya beans propensity to self-heat at high temperatures is an inherent vice which the quality specification tests required in the sale contracts would leave undiscovered, in case of deterioration of goods during the sea carriage due to self-heating, the buyers, particularly CFR and CIF buyers, could claim damages from the sellers for the financial loss incurred thereby on the basis that the condition of soya bean cargo at the time of shipment made it a cargo of unsatisfactory quality.
In order to protect the US and Canadian sellers of soya beans against such claims, the Clause 7 of the NAEGA FOB Export Contract No.2 contains an exclusion clause with the following provisions:
"The commodity is not warranted free from defect, rendering same unmerchantable, which would not be apparent on reasonable examination, any statute or rule of law to the contrary notwithstanding."
If the purpose of this clause is to protect the sellers of soyabeans against claims for subsequent deterioration, then these provisions are inapropriate.
This clause is an old-fashioned clause originally included in the Edition 1938 of the London Corn Trade Association contracts and the London Cattle Food Trade Association Contract Form No.6 and currently is still used in the FOSFA Contract No. 23 (Contract For South American Soyabeans In Bulk – CIFFO terms), FOSFA Contract No. 24 (Contract For Canadian/USA Soyabeans – CIF terms), FOSFA Contract No. 25 (Contract For Soyabeans In Bulk – CIF Delivered Weight) and FOSFA Contract No. 36 (Contract For Canadian Rapeseed – CIF/C&F terms).
In the English law case Henry Kendall Ltd. v. William Lillico Ltd.7, Lord Pearce held that this clause does not protect the sellers in case of a breach of the implied condition as to merchantability of goods, because the exclusions of warranty are not sufficient to exclude conditions of contract. In the same case, Lord Morris said that the words used in the clause "are wholly inapt to exclude a condition of the contract. They do not refer to a condition. You do not exclude a condition by excluding or purporting to exclude a warranty." This rule was upheld by the English Court of Appeal in KG Bominflot Bunkergesellschaft Für Mineralöle mbh & Co Kg v. Petroplus Marketing AG8, where Lord Justice Rix said that the statutory implied conditions cannot be excluded by reference to warranties but only by provisions which expressly refer to conditions.
Even though the NAEGA FOB Export Contract No.2 is subject to New York law, that Court decision would still be applicable. Therefore, the grain traders using NAEGA FOB Export Contract No. 2 and FOSFA Contract forms No. 23, 24 and 25 for CFR and CIF sales of soya beans should consider the necessity of including in their sale contracts a clause excluding the seller`s liability for breach of conditions implied by statute and/or common law9.
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Grain Trade Review Edition No. 4.
Endnotes:
1. See Priminds Shipping (HK) Co Ltd v. Noble Chartering Inc, [2020] EWHC 127 (Comm)
2. See Institute Cargo Clauses, Institute Commodity Trades Clauses, Institute FOSFA Trades Clauses.
3. [1961] 1 Lloyd`s Rep. 46
4. [1997] 2 Lloyd`s Rep. 759
5. [2009] EWHC 1088 (Comm), [2009] 2 Lloyd`s Rep 679
6. [2010] EWCA Civ 1145
7. [1968] UKHL 3, [1969] 2 AC 31
8. [2010] EWCA Civ 1145
9. For an example of such provisions see the Sub-Clause 28.1.2 of Shell`s General Terms and Conditions for Sales and Purchases of Crude Oil, 2010 Edition, and the Sub-Clause 59.1.1 of BP Oil International Limited General Terms & Conditions for Sales and Purchases of Crude Oil and Petroleum Products – 2015 Edition which stipulate that: "[S]ave to the extent that exclusion thereof is not permitted or is ineffective by operation of law, all statutory or other conditions or warranties, express or implied, with respect to the description or satisfactory quality of the Crude Oil or Product or its fitness for any particular purpose or otherwise are hereby excluded."