International Sale Contract
Convention on the International Sale of Goods
The Vienna Convention on the International Sale of Goods provides default rules, similar to those in the Sale of Goods Act, for international sales. If the parties are in different countries, there is an international sale, and they can stipulate that the international rules apply.
The Convention has been ratified by many countries although it has not been ratified by Ireland or the United Kingdom. However, the parties in an international sale can stipulate that their agreement will be covered by the Convention, notwithstanding that it does not have the force of law domestically.
Form of Sale Contract
There are many standard forms of sale contracts, which are published and updated by trade associations.
The international rules on the interpretation of trade terms, the Incoterms, are published by the International Chamber of Commerce. The Incoterms are used to express responsibility for carriage, delivery, insurance and transport in international sales.
There are a number of international Conventions that seek to simplify the legal rules in export trade. They may be incorporated into international sale contracts so as to provide common and well understood rules.
Key Commercial Terms
The following are key issues on the sale of goods
- the passing of the ownership;
- the passing of risks;
- the delivery of the goods;
- acceptance of the goods
- terms of payment.
The issues are especially important in an international sale contract. Where the sale is international, the issues are more complex than in a domestic sale, because the default laws of the home and/or other jurisdictions may apply.
There are various possibilities in relation to these key terms under the sale contract. Written terms will usually avoid the application of domestic and foreign default laws, that might otherwise apply.
Title and Risk Possibilities
The passage of title and passage of risk may or may not coincide, depending upon the applicable law and the desires of the parties. If Irish law applies then the Sale of Goods Act presumptions are applicable. The UK Sale of Goods Act is in almost identical terms. Different presumptions apply to a consumer sale under EU law.
The time of delivery determines the passing of risk in the German and Scandinavian laws of sale, and in the American UCC. It does not have the same critical significance in French law or in the English or Irish Sale of Goods Act
In Spanish law and the laws of some South American countries risk passes on delivery in a mercantile sale, but generally as early as the formation of the contract in a private transaction.
Passing of Title
There are a number of presumptions laid down in the Sale of Goods Act which may not be appropriate to export sales. Unless modified, the Sale of Goods Act provides presumptively, that the property in unascertained goods (ownership/title) passes to the buyer when the goods are ascertained.
In the case of a contract for the sale of ascertained goods, the property passes at the time the parties intend it to pass. The intent of the parties may not be clear. In many cases, the applicable default presumption under the Irish and UK Sale of Goods Act is that title passes when the contract is made.
The seller may transfer the title conditionally. Where a condition applies, the property does not pass until the condition has been satisfied.
There are some cases where there is a presumption in favour of a conditional transfer. When goods are shipped and a bill of lading to them is given to the seller by the carrier it is presumed the seller reserves the property until the bill is delivered to the buyer or his agent.
Where the seller has drawn a bill of exchange on the buyer for the purchase price for acceptance or payment, it is presumed that the property does not pass if the buyer does not honour the Bill of Exchange. In this case, the buyer must return the bill of lading if the bill of exchange is dishonoured. Where this presumption does not apply there is a strong inference that the seller intended to transfer the title to the goods when the bill is delivered to the buyer.
Under the “delivered” incoterms contracts, the time when the goods are physically delivered to the buyer is usually the point at which the property is intended to pass. Under a CIF and FCA Incoterm contract where the seller has taken out a bill of lading, the property is presumed to pass on its delivery to the buyer, conditionally upon them being found to be in accordance with the contract upon examination.
Risk
The general presumption is that the risk of loss of the goods passes when the title/ property passes. The presumption is that risk passes with physical delivery. However, the transferred property and the transfer of risk are often separated.
In a FAS (free alongside ship) Incoterm contract, the risk is presumed to pass when the goods are placed alongside the ship. In FOB and CIF Incoterm contracts, the risk is presumed to pass when the goods are passed over the ship’s rail.
In DDP (delivered duty paid) and DDU (delivered duty unpaid) Incoterm contracts, the risk of loss will usually pass where the seller delivers the goods to a named port/place cleared for unloading (DDP) or where they are made available at the named port/place ready for unloading.
The passing of property and risk may be determined in accordance with the payment and insurance arrangements. Under several of the Incoterms, the seller is responsible for organising an insurance policy for the benefit of the buyer, or which is initially for the benefit of the seller, where the benefit passes to the buyer on the transfer of title to the goods.
Delivery
The place and time of delivery are often defined by special trade terms, the Incoterms, which are considered separately. They displace the presumptions in the Sale of Goods Act.
The Convention for the International Sale of Goods provides rules on delivery and passage of risk. The rules can be varied by the agreement of the parties.
A bill of lading is commonly used in carriage by sea. It usually represents title to the goods. Where there is a Bill of lading under a “CIF” (cost insurance freight) or “FCA” (free carrier) contract the goods are deemed to be delivered when the Bill of lading is delivered.
Acceptance
Goods are deemed to be accepted when
- the buyer communicates or intimates acceptance to the seller,
- where they have been delivered and the buyer acts as if they were his or
- the buyer after the lapse of a reasonable time retains them without intimating that he has rejected them.
If a buyer wishes to reject goods he must intimate this to the seller within a reasonable time. In order to be clear, the intimation should not be contradicted by any act of the buyer relating to the goods.
The buyer who rejects goods is not bound to return them unless this is agreed. However, he must take reasonable care of them. When goods are rejected ownership of them revests in the seller.
A buyer may waive his right to inspect by refraining from doing so within a reasonable time. Where goods have hidden defects, which are not discoverable by reasonable care at the time of the examination the right of rejection is postponed.
Certificates
A certificate of quality (pursuant to pre-shipment inspection) or a certificate of origin may be required in international trade. The contract may make it a condition that there is furnished a certificate of quality or conformity by a qualified entity, a designated expert, by a governmental body or on behalf of a trade association.
Pre-shipment inspection is of growing importance and is usually carried out by an independent organisation. There are numerous inspection organisations overseeing particular types of merchandise and products. There is usually a separate contract for inspection between the inspection organisation and the client.
Pre-shipment inspection can avoid disputes between the parties. Certain countries insist on pre-shipment inspections. Croner’s Reference Book for Exporters states whether a pre-shipment certificate is required for imports into a particular country.
Inspection I
Goods may be inspected, usually in a superficial way, when they are delivered to the carrier. This relates principally to their quantity and apparent condition. The nature of the inspection will depend on the particular goods. The seller will usually want the carrier to issue a clean bill of lading, stating that the goods are in apparent good condition
When a seller delivers goods, the buyer is entitled to a reasonable opportunity to examine them for the purpose of ascertaining whether they conform with the contract. The buyer may reject non-conforming goods under the default Sale of Goods Act provisions.
When a non-consumer buyer has accepted or is deemed to have accepted the goods, he loses his right to reject them. Although the right of rejection may be lost, he may be able to claim damages if the goods delivered do not conform to the contract requirements.
Inspection II
There is a presumption, in the absence of a contrary agreement, that where goods are transported that the final place of examination is the point of delivery. This can be displaced by implication or by trade custom. In an export contract, the time and place of delivery is usually defined by the special trade clause, which commonly refers to the relevant Incoterm
Where a bill of lading is to be tendered as is commonly the case with FOB contracts and CIF contracts, the delivery of the goods coincides with the delivery of the documents. Consequently, unless the parties otherwise arrange a pre-shipment inspection or a trade custom provides otherwise, it is presumed that the parties intended that examination is postponed until they arrive at the destination. Where the place of destination is inland the place of examination will normally be presumed to be the ultimate destination.
Price and Payment
In international sale contracts, the seller usually parts with possession before receiving the price. During this time the buyer may become insolvent or he may transfer title to the goods as security to a third party.
A seller who parts with goods before receiving the price may incorporate a reservation of title clause into the sale contract. The seller may reserve the title to the goods until certain conditions are fulfilled, in particular payment.
Registration is not required for this quasi-security. The unpaid seller who has reserved the property in the goods may withhold delivery if the buyer defaults before the price is paid.
If the goods are in transit and have not yet been delivered into the possession of the buyer the seller may exercise the right of stoppage in transit. The right of stoppage in transit can only be claimed if the buyer is insolvent. His rights may still be exercised even if the bill of lading has been delivered.
Sale and Carriage
Commonly, contracts for the international sale of goods incorporate “free on board” or “carriage insurance freight” terms. In a free on board contract, the buyer arranges carriage, and the seller loads the goods onto the vessel nominated by the buyer. In a carriage insurance freights contract, the seller pays for and arranges carriage. He also insures the goods and assigned the benefit of the insurance policy to the buyer.
Under “free on board” or “carriage insurance freight” terms, the seller’s obligations are fulfilled when goods are loaded onto the relevant vessel. The risk then passes to the buyer, although the goods will remain in the constructive possession of the seller until payment. The risk of loss of the goods during transportation rests with the buyer. Provided that the goods loaded or tendered conform with the contract description, the seller has performed its obligations and is entitled to payment.
Letter of Credit
The buyer will commonly instruct his bank to open a letter of credit in favour of the seller. This is usually on the terms of International Convention UCP 600. This provides a set of widely recognised international rules, on letters of credit.
The seller tenders the documents specified by the letter of credit to the buyer. The buyer will pay the price in exchange for the documents, provided they conform to the description in the letter of credit.
An alternative is that the buyer’s bank arranges for payment by another bank, usually its correspondent bank, in the seller’s country. The seller presents the documents to the correspondent bank, which passes the documents to the issuing or buyer’s bank. The buyer’s bank may be entitled to retain the documents as security for the monies that it has advanced to the buyer. It may enforce the security by taking possession of the goods and selling them.
The financing bank will require evidence that the seller has met its obligations. It will require insurance to cover loss and damage during transit by the carrier.
Applicable Law I
A key issue is that of the law by which the sale contract is governed. The Irish and the UK Sale of Goods Acts are in broadly similar terms. Where a third country’s laws are involved, the presumptions and rules in the Sale of Goods Act may be displaced. The default buyer protection rights may be varied in the case of an international sale of goods to a business buyer.
The laws of third countries may have different presumptions in relation to the buyer’s statutory rights if any, the passing of property and risk and the respective rights and obligations of the parties. If this is the case, then expert evidence may be required in the event of a dispute as to the content of the laws that govern the contract.
It is usually possible for parties to a business to business contract, to select the law that governs the contract. Parties to an international commercial contract may choose whatever governing law they may deem appropriate.
Applicable Law II
If no specific law is chosen, the circumstances of the contract may imply that a particular law applies. If no choice is implied, then the courts apply the law with the closest connection to the contract. If the contract is between Irish businesses and is to be performed in Ireland, then Irish law is very likely to apply.
In the case of trade within the EU, the European Union Judgments Convention will govern the position. In the case of business to business contracts, the parties are usually free to choose which state’s law applies.
Mandatory terms apply to contracts with consumers. Consumers must generally be sued in their own state, with very limited exceptions. The Convention does not apply to arbitration.
It is not possible to choose a foreign law in order to do that which is illegal or contrary to public policy. The mandatory provisions of the Irish Sale of Goods Act apply to domestic sales but may be disapplied in an international sale.
Forum for Dispute
The parties may select a particular court to have jurisdiction to hear disputes under the contract. This is a distinct issue to the choice of law. It is desirable, although not essential that the choice of law and choice of courts coincide.
International sales contracts commonly contain terms which require that disputes be referred to arbitration. The International Chamber of Commerce or another body may be nominated to appoint the arbitrator in default of agreement as to appointment. The body’s rules may be applicable to the conduct of the arbitration.
Even if a particular court has authority to hear a dispute, it may still be necessary to take steps to enforce any award made in a country where the respondent is located or where it has assets and can be compelled to perform.
Frustration
Frustration at law may occur where subsequent to the conclusion of a contract some supervening fundamentally different circumstances arise which could not have been anticipated in advance. The circumstances must not be contributed to or caused by either party.
Something must occur which makes the performance of the contract impossible or pointless for reasons outside the control of the parties. Examples may include the outbreak of war, a change in law or the imposition of quotas. In these limited extreme cases, the contract may be discharged and unwound.