1. Introduction to International Sales - logobook.ru · Extension clauses and carrying costs 3.27...

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CONTENTS

Table of Cases xxiTable of Legislation lvInternational Rules and Conventions lixList of Abbreviations lxv

PART I: INTERNATIONAL SALES GOVERNED BY ENGLISH LAW

1. Introduction to International Sales

A. Subject Matter 1.01Introduction 1.01Shipping terms 1.05A common transaction 1.09

B. Organizations 1.17

C. Choice of Law 1.22

D. Speculation, Hedging, and String Trading 1.38

2. The Performance Obligations of Seller and Buyer in English Law

A. Interpretation of the Contract 2.03

B. Implied Terms of Quality, Fitness, and Description in International Commodity Sales 2.18

C. Quantity: Entire and Severable Contracts 2.38Introduction 2.38Distinguishing entire and severable contracts 2.41

D. Privity of Contract 2.48

3. FOB Contracts

A. Nature of FOB Contracts 3.02Loading and delivery 3.02Cost of loading 3.05

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Involvement of the carrier 3.08Responsibility for selecting the carrier 3.10Types of FOB contract 3.13FOB delivery and waiver 3.20

B. Readiness to Load 3.22Nominating the ship 3.22Extension clauses and carrying costs 3.27Substituting the named ship 3.34Physical characteristics of ship 3.40Buyer’s nomination and seller’s approval 3.46Destination of goods 3.50Port congestion 3.52

C. Port of Shipment 3.57No port identified in contract 3.57Range of ports 3.58Importance of shipment port 3.61

D. Shipment 3.62Timely arrival of ship 3.62Due date of arrival 3.67Seller’s loading responsibilities 3.70Loading rate 3.78Charter parties 3.81

E. Documentary Tender 3.86General 3.86Bills of lading 3.87Other documents 3.93

4. CIF Contracts

A. The Nature of a CIF Transaction 4.01Duties of the seller 4.01String selling 4.05CIF seller and carrier 4.07Documents and examination of the goods 4.12Contracts similar to CIF 4.17

B. Notice of Appropriation/Declaration of Shipment 4.22Purpose of notices of appropriation 4.22Features of notices of appropriation 4.26Withdrawing notices 4.28Time and notices of appropriation 4.34Waiver of defective notices 4.42Contents of notice of appropriation 4.44

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C. Timely Performance 4.51Shipment 4.51Force majeure and prohibition of export 4.56Choice of discharge port 4.62

D. Bills of Lading 4.67Types of bill of lading 4.67Letters of indemnity 4.78Bills of lading and timely shipment 4.82Contents of bill of lading 4.90Bills of lading and other documents 4.95Correcting defects in the bill of lading 4.97Bill of lading and contract of carriage 4.101

E. Continuous Documentary Coverage 4.112

F. Bill of Lading Supplemented by Charter Party 4.117

G. Delivery Orders and Bulk Shipments 4.122

H. Insurance Documents 4.124Type of document required 4.124The terms of cover 4.127Other insurance matters 4.129

I. Lawful and Effective Documents 4.131Contracts of carriage and insurance 4.131Trading with the enemy 4.135

J. Other Documents 4.136

K. Documentary Tender and Exchange 4.138

L. Arrival of the Ship 4.143Discharge not integral to CIF contract 4.143CIF oil and discharge 4.144Details of the ship 4.153Demurrage 4.154Incorporating charter party terms 4.163Unloading the goods 4.164

5. Import and Export Licences

A. Applying for Export and Import Licences 5.01Introduction 5.01Identifying the applicant: general 5.04Identifying the applicant: FOB 5.06Identifying the applicant: CIF 5.12

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B. Guaranteed Procurement or Due Diligence to Procure? 5.14Strictness of duty 5.14Due diligence in fact 5.22Due diligence, force majeure, and prohibition of export 5.27Refusal of licence 5.31Government intervention 5.33CIF contracts and import controls 5.37

6. Payment

A. Introduction 6.01Payment methods and systems 6.01Payment rules 6.03

B. Negotiable Instruments 6.10

C. Bank Collections and Letters of Credit 6.17Bank collections 6.17Letters of credit: introduction 6.21Opening the letter of credit 6.30Timely opening of credit by buyer 6.36No stated date: CIF contracts 6.39No stated date: FOB contracts 6.43Waiving delay in opening a letter of credit 6.47Presentation and documentary compliance 6.49Examination and rejection 6.60Payment 6.62Letter of credit and sale contract 6.69Autonomy, fraud, and related matters 6.76

7. Impossibility of Performance

A. Initial Impossibility (Mistake) 7.01

B. Subsequent Impossibility (Frustration) 7.06General 7.06Frustration and governmental intervention 7.12The Mississippi disaster 7.16Force majeure 7.20Prohibition of export 7.23Frustration and payment 7.28Illegality by the law of the place of performance 7.30The Rome Convention 7.36

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8. Passing of Property and Risk

A. Passing of Property 8.01Introduction 8.01Passing of property rules 8.05FOB contracts 8.07CIF contracts 8.10Ascertainment 8.11Bulk goods 8.15The Sale of Goods (Amendment) Act 1995 8.23Standard form contract provisions 8.30Passing of property and the carrier 8.32

B. Reserving the Right of Disposal 8.34General 8.34Proprietary effect of reservation 8.37Occurrence of reservation 8.39Draft bill of exchange and bill of lading 8.41

C. Transfer of Risk 8.43Meaning of risk 8.43Risk and FOB contracts 8.45Reasonable contract of carriage 8.51Risk and CIF contracts 8.53Quality and fitness and damage in transit 8.59

D. Retrospective Appropriation of Lost Cargoes 8.61

9. Bills of Lading and Documents of Title

A. The Buyer and the Carrier 9.01Privity of contract 9.01Problems with the Bills of Lading Act 1855 9.04Implied contracts 9.09Other devices 9.13The Carriage of Goods by Sea Act 1992: documents 9.16The Carriage of Goods by Sea Act 1992: the shipper 9.24The Carriage of Goods by Sea Act 1992: the carrier’s rights 9.29

B. Bill of Lading as Document of Title 9.40Documents of title 9.40Bills of lading in sets 9.45Exhaustion of the bill of lading 9.48Unilateral contracts and documents of title 9.50

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C. Evidentiary Function of Bills of Lading 9.52General 9.52Statements about quantity in the bill of lading 9.54Statements about condition in the bill of lading 9.59Statements about leading marks in the bill of lading 9.62Other statements in the bill of lading 9.65Bill of lading as evidence of the contract of carriage 9.66

D. Bills of Lading: Other Matters 9.69Negotiation of the bill 9.69Received for shipment bills of lading 9.72

E. Other Shipping Documents 9.75Mate’s receipts 9.75Warrants and orders 9.77

F. Non-Negotiable Documents and the Power to Transfer Title 9.79Unpaid seller’s real rights 9.87

G. Alternatives to the Negotiable Bill of Lading 9.90

10. Remedies: Termination and Damages

A. Termination of the Contract 10.01Termination 10.02Loss of the right of termination 10.06Rejection and acceptance 10.11Waiving the right to reject the goods 10.17

B. The Integrity of the Documentary Exchange 10.22Dual rights of rejection 10.22Conforming documents and future physical breaches 10.26Discounting the seller’s damages 10.35

C. Damages 10.40Common law damages rules 10.40Damages rules germane to international sales 10.45Sub-sales and resales 10.49Anticipatory repudiation 10.58Pre-delivery obligations 10.64Difficulties with the market rule in commodities cases 10.70

D. Excluding the Sale of Goods Act Rules 10.76Default clauses: general 10.76Date of default 10.79Calculating amounts due under default clauses 10.85Non-breach settlements 10.92

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E. The Twin Rights of Rejection and the Seller’s Damages Liability 10.100Damages and termination 10.100Damages and the twin rejection rights 10.104

PART II: INTERNATIONAL SALES GOVERNED BY THE UNSALES CONVENTION 1980 (CISG)

11. The CISG: General Issues

A. Introduction 11.01

B. Background to the CISG 11.06

C. Sphere of Application 11.10

D. Field of Operation 11.16

E. Exclusions 11.22

F. Role of Unidroit Principles 11.27

G. Interpretation and Good Faith 11.31

H. Filling Gaps in the Coverage of the CISG 11.35

I. Excluding the CISG 11.42

J. Reservations 11.44

K. Usages and Practices 11.48

12. The CISG and English Law Compared

A. Formation of the Contract 12.01

B. Conformity of the Goods 12.14

C. Avoidance 12.24

D. Anticipatory Breach 12.31

E. Cure and Notice of Defect 12.35

F. Rejection of the Goods 12.44

G. Requiring Performance 12.49

H. Money Claims 12.51

I. Frustration of Contract 12.61

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Appendix 1: GAFTA Contract No 100 601

Appendix 2: GAFTA Contract No 119 611

Appendix 3: FOSFA Contract No 24 617

Appendix 4: FOSFA Contract No 53 626

Appendix 5: United Nations Convention on Contracts for the International Sale of Goods 1980 633

Appendix 6: ICC Uniform Customs and Practice for Documentary Credits (UCP 500) 652

Appendix 7: ICC Uniform Customs and Practice for Documentary Credits (UCP 600) 676

Appendix 8: Incoterms 2000 (FOB) 696

Appendix 9: Incoterms 2000 (CIF) 699

Appendix 10: Sale of Goods Act 1979 703

Appendix 11: Carriage of Goods by Sea Act 1992 723

Glossary 727Index 733

Contents

Part I

INTERNATIONAL SALES GOVERNED BY ENGLISH LAW

A. Subject Matter

Introduction

Scope The province of this book is the law of international sale of goods asadministered in the English courts and arbitral tribunals, where English law is theapplicable law of the contract. It consists of two unequal parts. The significantlylarger part is devoted to those aspects of the English law of sale that are particularlyrelevant to contracts with an international dimension. No rigorous definition ofsuch contracts is possible because the size of the category is a matter of relativejudgment and not of the interpretation of a statute. When it comes to the appli-cation of English law, contracts of sale that are performed exclusively in England,such as an ex works sale where delivery takes place at the factory gate, will notcome under consideration in this book, even though they might take placebetween parties resident in different countries. The international dimension ofsuch contracts does not bulk sufficiently large for them to be included in a bookof this kind. Instead, the internationality of a contract will be judged according tothe place of performance of the contract. A striking feature of reported cases oninternational sale before the English courts is that they are invariably bound upwith marine transportation. There is a noticeably close connection between thecontract of sale itself and contextually related, even integrated, contracts, such as

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INTRODUCTION TO INTERNATIONAL SALES

A. Subject Matter 1.01Introduction 1.01Shipping terms 1.05A common transaction 1.09

B. Organizations 1.17

C. Choice of Law 1.22

D. Speculation, Hedging, and String Trading 1.38

those of carriage, marine insurance, and bankers’ letters of credit.1 A concreteillustration of this will be given below after an outline discussion of the variousdelivery terms used in international sales. It will be seen that the delivery termsconcerning the English courts are predominantly those with a maritime element,as opposed to delivery terms common in Europe that call for the carriage of goodsby road or rail. In this book, the duplication of material that is more properly dealtwith in a book on the domestic sale of goods2 will be avoided in order to allowgreater concentration on material unique to international transactions. In conse-quence, for example, not all aspects of remedies will be considered, but some willbe subjected to extended treatment. Again, detailed applications of the rules concerning the description, quality, and fitness of goods will be left to works dealing with the domestic law of sale.

Commodities The existing body of international sale contracts featuring in thereported decisions of the English courts has an homogeneous character, consist-ing as it does more or less exclusively of commodity agreements concluded on theterms of London-based commodity associations by major grain dealers or by oilcompanies on the standard terms of the multinational oil companies. A standardfeature of such contracts is the selection of English law as the applicable (orproper) law.3 Taking the marine, cross-border element of the contractual adven-ture as the badge of an international sale, sales between an English seller and buyercould qualify as international sales.4 As it happens, the great majority of interna-tional sales litigated in England concern contracts between parties neither ofwhom is English, which are to be performed by physical or documentary meansoutside England. The long-settled practice of choosing English law as the applica-ble law in international commodities contracts in such cases is sanctioned by theContracts (Applicable Law) Act 1990.5

UN Sale Convention It was stated above that this book consists of two unequalparts. The smaller part deals with the United Nations Convention on the InternationalSale of Goods 1980 (the CISG),6 sometimes known as the Vienna Convention,compares it to English law, and considers the impact it would have on the law ofinternational sale in the event of its being applied in lieu of the existing English

Part I: International Sales Governed by English Law

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1 For a useful survey article, see H Berman and C Kaufman, ‘The Law of International CommercialTransactions (Lex Mercatoria)’ (1978) 19 Harv Int Law J 221. See also J Ramberg, ‘Synchronizationof Contracts of Sale, Carriage, Insurance and Financing in International Trade’ in P Sarcevic (ed),International Contracts and Conflicts of Laws (1990); R Goode, Commercial Law (3rd edn,Harmondsworth: Penguin, 2004), ch 32.

2 See MG Bridge, The Sale of Goods (Oxford: Clarendon, 1997).3 See below para 1.22.4 cf Vienna Convention on the International Sale of Goods (CISG) 1980.5 See Sch 1 (Art 3 of the Rome Convention).6 Discussed in detail in chs 11 and 12.

law. When the CISG is examined, it will be seen that the definition of an interna-tional sale used in connection with English law will no longer serve, since theCISG primarily defines internationality according to the place of residence of thecontracting parties and not according to the place or type of performance. Aninternational sale contact under the CISG may perfectly well be an ex works contract. Even though the CISG has not been brought into force in England, ithas long been the practice explicitly to exclude the operation of the CISG, alongwith a number of other international conventions, in the standard contract formspromulgated by commodity associations, such as the Grain and Feed TradeAssociation (GAFTA) and the Federation of Oils, Seeds and Fats Associations(FOSFA), which provide for arbitration in England and for the application ofEnglish law as the applicable law. The CISG is also excluded from trading formssponsored by the major oil companies, such as BP and Shell. The CISG has almostnothing to say about the detailed problems that one sees in reported cases inEngland. It does not, for example, define delivery terms such as FOB and CIF, nordoes it make mention of bills of lading,7 nor does it deal with payment through aletter of credit. It is also less free in conferring rights of contractual termination onbuyers where the seller supplies non-conforming or late documents or goods.8

Its application would alter or cast doubt over established rules on the allocation ofrisk in both FOB and CIF contracts.9 One may therefore expect the practice ofexclusion to continue, for reasons that will emerge from the ensuing text.10 Thepractice accords with Article 6 of the CISG, which expressly permits the parties to exclude the Convention as well as to vary the effect of or derogate from its provisions.

Comparison with English law So far, the United Kingdom has not adopted theCISG, but in the long run it is unlikely that the United Kingdom will remain out-side a community of nearly seventy nations, including most of its major tradingpartners, that have adopted it. There is noticeably, however, a lack of enthusiasmfor its adoption, and indeed a measure of opposition due to the belief that theinternational prominence of English law is under threat from uniform legislationof this kind. Parliamentary time, moreover, is itself a commodity in short supply,which suggests that some momentum in favour of the CISG will have to build up

Chapter 1: Introduction to International Sales

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7 See ch 9.8 See chs 4 and 10.9 See ch 8.

10 See further M Bridge, ‘Uniformity and Diversity in the Law of International Sale’ (2003) 15 Pace International Law Review 55. For the view that the CISG is apt to deal with internationalcommodity sales, see P Schlechtriem, ‘Interpretation, Gap-Filling and Further Development of theUN Sales Convention’ (2004) 16 Pace International Law Review 279; I Schwenzer, ‘The Danger of Pre-Conceived Views with Respect to the Uniform Interpretation of the CISG etc’ (2005) 36Victoria University of Wellington Law Review 795, 799.

before it is adopted in the United Kingdom. The CISG, apart from its importanceas positive law, is also a profoundly influential instrument in the development ofinternational and regional (especially within the European Community) uniformlaw. Even though the CISG has not been adopted, English traders may find them-selves adopting it by way of arbitral references and through the selection of a foreign applicable law whose state has adopted the CISG. It is therefore prudentto examine the CISG with particular reference to its points of departure from current English law. In the process, it will be necessary also to consider the territo-rial field of application of the CISG. The law to be applied to sales passing the testof internationality in the CISG will be the uniform law laid out therein, and notsome national system of law selected as the applicable law by virtue of party choiceor the distribution of connecting factors. Once the CISG applies in its own terms,no particular account need therefore be taken of the connection between any specific contract and England. There is an exception to this. The CISG does notcover all types of international sale contract11 or all aspects of sales law pertinentto international as well as domestic sales contracts.12 English law, if it passes thetest of the applicable law under the Contracts (Applicable Law) Act 1990,13 wouldcontinue to apply to sale contracts and aspects of sales law excluded from theCISG in the event of the United Kingdom adopting the CISG.14 English lawmight also have a continuing role to play in filling gaps in the coverage of theCISG.15 Finally, it might also be the law applicable to general contract issues notlocated in sales law.

Shipping terms

Defining delivery A feature of contracts involving delivery across national fron-tiers is the range of different shipment terms available to the parties. These definevariously the way in which the seller, with appropriate assistance from the buyer,is expected to prepare the goods for carriage or arrange for their carriage whenplacing the goods at the buyer’s disposal. They therefore define the nature, extent,and cost of the seller’s delivery responsibilities and, in so doing, depart more or lessfrom the standard presumption in the Sale of Goods Act 1979 that delivery takesthe form of (somewhat passively) placing the goods at the disposal of the buyer atthe seller’s premises.16 Without attempting to be exhaustive, it is useful to considera broad range of physical delivery responsibilities of ascending onerousness from


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11 See Art 2.12 See Arts 4 (validity and passing of property excluded) and 5 (personal injuries excluded).13 See Arts 3–4 of the Rome Convention on the Law Applicable to Contractual Obligations.14 Discussed further below at para 1.22.15 See Art 7(2): discussed in ch 11.16 Ex works delivery: s 29(2) of the Sale of Goods Act.

the seller’s point of view. When an independent carrier is employed to transportthe goods, the place of delivery may be anywhere between the seller’s premises and the buyer’s. It may occur at the seller’s factory, at some inland collection point,at some point in the harbour where shipment occurs, alongside the ship, or onboard the ship. If delivery is postponed to the port of discharge, it may take placeon a lighter barge or over the ship’s side, or it may be postponed to some inland collection point in the buyer’s country or at the buyer’s factory.

Excluding domestic sales As stated above, the prima facie rule in the Sale ofGoods Act17 is that delivery occurs at the seller’s premises, but, since this mayoccur between parties of different nationalities, there is nothing to distinguish itfrom a conventional domestic sale. All arrangements for the export of the goodsare left in the hands of the buyer. This book deals with those commodity saleswhere the seller assumes responsibility for at least some of the export arrange-ments.18 It may therefore include contracts between parties, both of whom areEnglish.19 As stated above, it therefore excludes ex works contracts.20 The parties’departure from the rule in s 29(2) is expressed by means of special expressions andabbreviations, such as ‘FAS (free alongside ship)’, ‘FOB’, and ‘ex ship’21 (at theport of discharge). These are economical statements of various instances of theseller’s contractual duty to deliver.

Documents instead of goods It is quite possible not just to vary the place ofdelivery, but to commute the delivery obligation so that the subject of the seller’sdelivery obligation is not the goods themselves but rather documents representingthe goods. The expression ‘CIF Rotterdam’, for example, does not connote a placeof delivery (since the expression alone does not inform us where, or to whom, thedocuments are to be delivered). Rather, it tells us that the seller’s delivery duty has been substituted by a duty to deliver to the buyer a number of documents,22

principally (for present purposes) the following. First, there will be a bill of lading,which establishes at the very least that the carrier is in receipt of the goods.23

It may also have to show that the goods have actually been shipped, that is, loadedon board and not merely received for shipment by a carrier taking them in hand.The bill of lading is also supposed to evidence that the seller has entered into aproper contract of carriage to the agreed destination of Rotterdam. The buyer


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17 S 29(2).18 The definition of an international sale for the purposes of the CISG is broader than this:

see ch 11.19 eg Re Anglo-Russian Merchant Traders Ltd [1917] 2 KB 79.20 These are capable of being international sales pursuant to Art 1(1)(a) of the CISG.21 Or DES according to Incoterms 2000, which are discussed below para 1.17.22 See ch 4.23 For alternatives to the bill of lading under a CIF contract, see ch 4.

should be able to tell from the face of the bill of lading whether the CIF seller hasperformed its physical duties under the contract. Secondly, the seller will have totender an insurance document (classically, the policy itself but more often a certifi-cate of insurance nowadays). Thirdly, there will be a commercial invoice identifyingthe goods shipped and separating the elements of basic price, freight, and insur-ance in the overall CIF price. The due performance of a CIF sale does not normallydepend upon the date or fact of arrival of the goods, though the date of arrival is acommon feature nowadays of bulk oil contracts. Instead, the buyer gets docu-ments that, as will be seen, give the buyer rights against the carrier and against theinsurance company.

CIF and FOB It would be impracticable to discuss each and every delivery termin a book of this length. The bulk of decided cases on commodity sales deal withCIF and FOB contracts, though there is a modern trend outside the commoditiestrade to move away from these types of sale in their pure form.24 An understand-ing of these delivery terms will create a solid foundation for an understanding ofthe others. Besides the FOB sale, references will be made from time to time and byway of contrast to the similar FAS (free alongside ship) term. In addition to theCIF sale, mention will often be made of the very similar ‘C&F’ sale,25 which is likea CIF sale except that the buyer takes care of the insurance. It is of course up to theparties to designate the delivery term of their choice. From time to time, however,when construing the whole of, for example, a ‘CIF contract’, it will become appar-ent that the contract is something else, such as an on-shore delivery contract,where the buyer pays not against documents but against the goods themselveswhen they are discharged from the ship. The use of the letters CIF is indicative ofthe nature of the seller’s responsibilities and not a magic formula that fixes despiteall else the character of the contract concluded by the parties. A contract for deliv-ery on shore may be ex ship or it may call for physical delivery at some other pointin the country of destination.

A common transaction

General It is useful to put the shipment terms that are the focus of this book in context by taking a hypothetical transaction.26 Suppose a contract of sale is concluded between a New York seller and an English buyer for the sale of a colour


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24 See the proliferation of other terms in Incoterms 2000, most of which have had a negligibleimpact on the reported case law in England.

25 C&F is known as CFR in Incoterms.26 Because the focus of this book is on commodities contracts, the examples chosen are FOB and

CIF delivery terms. This is not meant to assert that, in intra-European trade for example, these arecommonly employed shipping terms.

printing press. The machine is not yet in a deliverable state but will be ready fordelivery in New York in three months’ time. The buyer has the responsibilityunder the contract for finding a carrier to transport the press to England andengages a freight forwarding agent to book shipping space on a boat calling inNew York at the relevant time. This is but one way in which a carrier’s services maybe employed. With large cargoes of oil or dry commodities, such as wheat, thebuyer may charter an entire ship and will not make use of the services of a freightforwarder but instead employ the services of a ship’s broker to fix the charter.27 Inthe above example involving manufactured goods, the buyer’s agent has bookedliner space by consulting shipping timetables and selecting a ship due to visit NewYork at the relevant time. In other cases, the services of a tramp may be employed,a tramp being a ship that puts into port in no particular rotation in the speculativehope of finding a cargo.

New York shipment Building on this example, suppose the parties have agreedthat it is up to the New York seller to get the press to the harbour in New York.Where precisely the seller’s responsibilities end will depend on the precise ship-ping term used. It may be that delivery is required FAS, or free alongside, so thatthe seller’s duty is done when the goods are brought to the ship. Suppose, however,that the seller is bound to do more and that delivery is to take place on FOB terms.This means that the seller is responsible for seeing to it that the press is not merelyreceived by the carrier but that it is actually loaded on board ship. The FOB buyeris usually responsible for selecting the carrier, and there is nothing in the presentcontract to indicate a contrary intention. Indeed, the contract might explicitlystate that this is the buyer’s duty. It is unlikely that New York or US federal law willrequire an export licence in the case of non-military manufactured goods (or thatan import licence will be demanded by English law), but there will be customsclearance requirements to be adhered to at both ends. On the above facts, thesewill be down to the seller in New York and to the buyer in England.28

Variety of contracts It should be stressed that the ways in which an overseas salemay be conducted are almost infinitely variable and that the applicable rules arealmost always drawn from a construction of the contract. Consequently, it is nec-essary to avoid dogmatism in dealing with overseas sales law. One cannot, forexample, say that it is always the FOB buyer’s responsibility to select and engagethe carrier: sometimes the seller is explicitly, perhaps even implicitly, obligedunder the contract to do this.29 Examples of this sort can be multiplied.


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27 For a valuable discussion of the background to the bulk shipping markets, and to shippingmarkets in general, see M Stopford, Maritime Economics (London: Routledge, 1997).

28 See ch 5.29 See ch 3.

Other contracts International sale contracts do not exist in a vacuum. As statedabove, they are frequently associated with other contracts. For example, it wouldbe most unwise not to insure the press whilst it is in transit. The press might bedamaged or lost through an act of God, common in the case of marine transit.Even if the carrier is at fault, the carrier is likely to be, and will be in the aboveexample, subject only to limited liability. In FOB cases, it is the buyer whoarranges insurance, though this may be done by the seller, acting as the buyer’sagent, on account of the buyer. The buyer may need certain information from theseller in order to be able to effect insurance. There is also the contract of carriageto consider. If the carrier is liable for breach of contract, a question that has causedgreat difficulty in the past is, ‘Liable to whom?’ In the present example, the carrier’scontract will be concluded with the buyer, but this is not invariably the case inFOB transactions. This issue of the carrier’s contractual liability, together with anypossible liability in tort, has proved much more troublesome in the case of CIFcontracts, where the buyer is not originally privy to the contract of carriage andwill not usually have a proprietary interest in the goods at the time they are damagedby a negligent carrier.30 Again, the significance of charter party contracts needs tobe considered. Where goods are sold as bulk commodities, it is commonly thehead seller (in string CIF contracts) and end buyer (in string FOB contracts) whowill fix a charter party to carry the goods. Charter parties have a number of clausesin common with sale contracts and the interaction of the two types of contract isan important matter.

Payment There is also the issue of payment to consider. Where the buyer andseller have a well-established business relationship, delivery will probably be madeon terms giving the buyer thirty days’ (or some other period of ) credit. In theabove example of a one-off contract, this is unlikely. The seller may reserve theright of disposal31 until payment is made but this may not be sufficient security inthe event of the buyer’s default or insolvency: the seller may have to dispose of thepress (perhaps customized for the buyer) in England if the buyer fails to pay. So itis not just the risk of the buyer’s insolvency that needs to be taken into account. Ifthe buyer is not willing to pay cash and the seller not willing to extend credit, thena reliable paymaster must be sought. This will inevitably be a bank. The way inwhich the bank’s services are likely to be engaged is through the letter of credit sys-tem.32 Briefly, the buyer’s bank in England will undertake directly to the seller topay when the seller ships the press and tenders the stipulated shipping documents.Since the promise of an English bank alone is unlikely to satisfy the New Yorkseller (what if the bank defaults?), this undertaking will usually be confirmed by a


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30 See ch 9.31 See ch 8.32 See ch 6.

New York bank which will handle the shipping documents (for transmission tothe buyer’s bank) and make payment to the seller. Commonly, the buyer’s bankwill extend credit to the buyer and will take a security interest in the shipping documents until the loan is repaid or some other security provided or extended tothe press. An interest in the shipping documents might also be taken earlier in theprocess by the seller’s bank, as security for a short-term loan to the seller pendingthe receipt of payment though the banks involved in the letter of credit.

After discharge Once the press is discharged at the docks in England, it is ofcourse up to the buyer to arrange for carriage to the buyer’s premises or onward tosome other destination of the buyer’s choice. An FOB seller’s involvement andcontinuing interest in the contract is usually exhausted once the goods have beenloaded on board and payment has been made.

CIF In the above example, the delivery term employed was FOB. It would notbe at all unusual in such a case for the seller to ship the press on CIF terms. Briefly,this involves a greater share of the responsibility by the seller. The seller will chargethe buyer a price that includes the cost of insurance as well as the cost of carriage.The seller will also see to the transport and insurance arrangements. The issuesconcerning payment, as well as the way the parties deal with those issues, will bejust as relevant to CIF cases. Most of the reported cases on international sales governed by English law concern transactions in the commodities trade. Theserarely involve payment difficulties and will not involve the letter of credit systemunless they are oil contracts. The cases tend to be preoccupied with difficult issuesof contractual construction as these bear on the contractual rights and duties ofbuyer and seller. As stated above, the buyer’s rights against the carrier have longbeen a subject of difficulty in CIF sales. The contract of carriage could not with itsrights and duties have been assigned by seller to buyer at common law. Legislationwas passed to permit the transfer of rights and duties under the contract of carriage33 but it depended upon the passage of the property in the goods fromseller to buyer in narrowly defined circumstances and worked poorly in the case of modern bulk cargo shipments.34 It took more recent legislation35 to facilitatethe transfer of rights and duties under the carriage contract to the buyer before satisfactory results were achieved to fit modern conditions of traffic in cargoes.Meanwhile, the CIF buyer could not turn to tort for comfort in proceedingsagainst a negligent carrier. If the buyer lacked a property interest in the cargo at thetime of the negligence, which he would not acquire before payment and, in thecase of goods constituting an unascertained part of a larger bulk, would not


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33 Bills of Lading Act 1855.34 See ch 9.35 Carriage of Goods by Sea Act 1992.

acquire even upon payment,36 this meant that the buyer’s action was seen as anattempt to impose upon the carrier liability for pure economic loss, against whichthe English courts have set their face in recent years.

The above example atypical The example of a common transaction involving aNew York seller represents one distinctive type of overseas contract. The great bulkof the decided English cases deal with very different contracts, namely, the sale oflarge amounts of commodities, such as oil in bulk, and large amounts of agricul-tural commodities like grain or soya beans. These sales take place against a back-ground of speculative trading. A consignment of wheat can be the subject of alarge number of paper transactions before delivery is taken by the eventual buyer.Everyone else in the chain is dealing only with paper, namely the various shippingdocuments, such as the bill of lading. This speculative dimension has a profoundeffect upon the way in which the parties’ responsibilities are defined and enforcedand upon the character of English law as applied to such contracts.

B. Organizations

International Chamber of Commerce This is a book on the private law ofinternational sale of goods. It is therefore not its concern to review all of the organ-izations, governmental and non-governmental, whose work bears upon interna-tional sales. It is nevertheless useful to review a few international organizationsthat play a particular role in introducing uniform substantive law to internationaltrade. The International Chamber of Commerce is a private Paris-based body,bringing together the various national chambers of commerce, whose variedactivities include the issue of Incoterms37 and of the Uniform Customs andPractice for Documentary Credits.38 Incoterms are a collection of rules setting outthe various contractual responsibilities of buyer and seller for the different types ofoverseas sale (such as CIF and FOB). They are written in plain language for laypeople and therefore lack the complexity one expects in detailed statutory rules orcommercial contracts. To a significant extent, they work as a sort of checklist forbusiness parties, identifying which of them has to take each of the necessary stepsrequired to effectuate the contract. Incoterms apply to a contract of sale only if the


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36 Until the Sale of Goods (Amendment) Act 1995. The buyer of goods forming part of an agreedbulk who has made partial or full payment will now acquire to the extent of any payment made anundivided share in the bulk. The characteristics of this right, as it might affect the buyer’s rights intort against a negligent third party, have not yet been tested, but in principle this reform should over-come the long-standing objection to a buyer without a property interest pursuing the carrier in tort.

37 2000 edition.38 The UCP 600 Rules, 2007.

contracting parties incorporate it into their agreement.39 They are practicallynever incorporated in dry commodities transactions 40 but may well be encoun-tered in transactions like the one involving the press in the above example. TheUniform Customs and Practice for Documentary Credits 41 are a more detailedcollection of rules relating to letters of credit. Reference to them in the case law isvery common indeed. Again, they apply to a contract created by a letter of creditonly if they are incorporated therein, as they almost always expressly are. Whetherthey may be incorporated impliedly, and if so when, is an uncertain matter.42

Trade associations Particular trade associations include the Grain and FeedTrade Association (GAFTA), the Refined Sugar Association, and the Federationof Oils, Seeds and Fats Associations (FOSFA). These bodies are all located inLondon. Besides providing an arbitration service, they issue standard contractsfor particular adventures. FOSFA 24, for example, is an FOB contract for the saleof South American yellow soya beans to be shipped from a South American port.GAFTA 100 is a general feeding stuffs contract entered into on CIF terms: it datesfrom an early form issued more than a hundred years ago. The forms are verydetailed and respond to problems arising in the case law. They therefore bear theencrustations of decades of case law. Problems can arise if the standard form ismodified in the instant case. Over a hundred years ago, Grove J warned that it was ‘always dangerous to alter established printed forms, for these had been the subject of legal decisions and had had interpretations put upon them’.43 Theissue by trade associations in the dry commodities trade of standard form con-tracts assists in the creation of trading strings,44 in which the various pairs of participants contract on terms that are equal save as to price. In the oil trade, stan-dard forms are put out, not by independent trading associations, but by major oilcompanies whose terms are adopted in contracts concluded between other oilcompanies.45


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39 But note that a US court, applying the CISG, held that the use of the letters CIF without morewas sufficient to incorporate also Incoterms pursuant to usage and in accordance with Art 9(2): St Paul Guardian Assurance Co v Neuromed Medical Systems & Support SDNY District Court 26 March 2002, available at <http://cisgw3.law.pace.edu/cases/020326u1.html>.

40 Though they are usually incorporated in oil transactions: see, eg Erg Petroli SpA v Vitol SA (The Ballenita and BP Energy) [1992] 2 Lloyd’s Rep 455; ERG Raffinerie Mediterranée v ChevronUSA Inc [2006] EWHC 1322 (Comm), where however they are of little value in resolving the complex performance issues that arise in such contracts.

41 UCP 600 were preceded by UCP 500, which came into force in 1993.42 See Benjamin’s Sale of Goods, AG Guest (ed) (7th edn, London: Sweet & Maxwell, 2006),

§23–027; cf Harlow and Jones Ltd v American Express Bank Ltd [1990] 2 Lloyd’s Rep 343 (setting anundemanding test for incorporating the Uniform Rules for Collections).

43 Cederburg v Borries Craig and Co (1885) 2 TLR 201.44 See ch 5.45 See, eg Sohio Supply Co v Gatoil (USA) Inc [1989] 1 Lloyd’s Rep 588 (BP terms).

Standard form contracts It is common in the commodities trade for bulk con-tracts to be entered into very informally, by telephone, fax, or telex, with a briefreference to ‘GAFTA 100 terms’ or something similar. The traders will be fullyfamiliar with GAFTA 100 and will not exchange the form between themselves.Frequently, however, special clauses are appended to the standard form. Thereported decisions on commodity sales usually involve appeals from arbitrators’decisions. In this connection, it should be noted that the construction of a con-tract is a matter of law. While deference will be paid by courts to arbitrators’knowledge of the trade, courts do insist on retaining control over the constructionof contract terms.46 This allows for certainty and continuity in the use of standardform contracts, with the decisions of courts amounting to authoritative interpre-tations of what really constitute private legislation. Recent changes in the arbitralprocess, in particular the abolition of the case stated procedure, have limited thenumber of appeals from arbitrators’ decisions and have restricted the powers ofthe courts to deal with errors of law committed by the arbitrator.47

UNCITRAL The United Nations Commission on International Trade Law(UNCITRAL) is a branch of the United Nations that performs its work throughdiplomatic conferences, as well as through the formulation of model laws. In1980, for example, a diplomatic conference in Vienna adopted the CISG. It is ablend of common law and civil law principles arranged to take account of the varied interests of manufacturing, producing, and consumer countries. Althoughthere are other areas of concern, such as the rules on risk, it is probably because theCISG lacks the hard certainty that one finds in certain areas of English sales lawthat, as stated above, it is routinely excluded in the standard forms of trading associations. The primary purpose behind the CISG is the removal of barriers tofree trade: legal pluralism is seen as a barrier and various methods have beenadopted over the decades to tackle this problem of which the CISG is the latest.UNCITRAL is or has been heavily involved in other areas of international com-mercial transactions, such as secured transactions, the assignment of receivables,arbitration, standard form contracts, and electronic commerce.

Unidroit Unidroit, or the International Institute for the Unification of PrivateLaw, is an intergovernmental organization based in Rome. Originally an organ ofthe League of Nations, it was reconstituted in 1940 by a multilateral agreement(the ‘Unidroit statute’) in its present form. At present, it has nearly sixty members,including the United Kingdom, and is maintained by contributions of the ItalianGovernment and the other Member States. Its work consists of the preparation of


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46 See, eg Bunge Corp v Tradax Export SA [1981] 2 All ER 513; Cargill Inc v Mapro Ltd (The AegisProgress) [1983] 2 Lloyd’s Rep 570.

47 See now the Arbitration Act 1996, especially s 69.

conventions and model laws addressed to States. It was involved in the work thatculminated in the 1964 Hague Conventions relating to the international sale of goods 48 and it prepared the 1983 Geneva Convention on Agency in theInternational Sale of Goods and the 1988 Ottawa Conventions on InternationalFinancial Leasing and on International Factoring. It is currently at work on leas-ing and international capital markets transactions and has successfully concludeda convention, the Cape Town Convention 2001, dealing with international secu-rity interests in certain types of mobile equipment. The work of Unidroit is notjust addressed to States. The Unidroit Principles of International CommercialContracts are proffered for adoption by private contracting parties as well as foruse by arbitrators. The role that they might play in conjunction with the CISGcould prove to be considerable.49

C. Choice of Law

Choice of law Apart from the CISG, this book is confined to international salecontracts governed by English law.50 So far as English law is the applicable law, itbecomes so by virtue of the choice of law rules of an English court, a foreign court,or an arbitral tribunal. In all cases appearing before the English courts, the relevantchoice of rules are to be found in the Contracts (Applicable Law) Act 1990, giv-ing effect to the Rome Convention on the Law Applicable to ContractualObligations 1980, the English language version of which is scheduled to it. Withthe enactment of the 1990 Act, which brought into force the Rome Convention51

(subject to certain reservations), the English choice of law rules for contractunderwent a major revision. Unlike the case of jurisdiction and enforcement ofjudgments, the terms of the Rome Convention are not confined to intra-EC contractual disputes but instead extend to all contract cases involving a foreignelement. Pursuant to its rules, the applicable law may turn out to be the law of anon-Contracting State.52 The Convention applies ‘to contractual obligations inany situation involving a choice of law between different countries’.53 It is an unre-solved question what effect this has on the notion that foreign law is a fact that theparties are free to introduce or exclude from the litigation. It has been stated that


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48 See ch 11.49 See ibid.50 If and when the CISG is adopted by the UK, it will of course be applied by our courts as part

of English law.51 See generally JJ Fawcett, JM Harris, and MG Bridge, International Sale of Goods in the Conflict

of Laws (Oxford, 2005), ch 13.52 Art 2.53 Art 1(1).

the parties are not free to exclude the Rome Convention as such since s 2(1) of the 1990 Act provides that it ‘shall have the force of law’.54 On one view, theConvention directs the application of a particular law in the relevant circum-stances, but this does not assist an English judge if the parties choose to root their dispute in English law. It may well be that in such a case English courts willcontinue to apply English law under their own procedural rules relating to theproof of foreign law as a fact. It is well known that courts regularly make mistakeswhen applying foreign law, so it may be that there will be no great support formandating the application of the applicable law. In any case, it might be arguedthat, if the parties conduct their proceedings without reference to the applicablelaw as designated by the Rome Convention, then they are availing themselves oftheir entitlement to change the applicable law after the contract date.55

Reform A few years ago, the European Commission started the process of revis-ing the rules contained in the Rome Convention by issuing a Green Paper 56 (oftenreferred to as Rome I to differentiate it from a further project, Rome II, on tort).A regulation is expected in the near future that will succeed the Convention. Thefinal draft of a proposal has now been issued.57 A regulation has an advantage overan international convention in so far as it will avoid the need for a new treatysecuring the adherence of accession States, permit amendments to be made with-out convening a diplomatic conference, and enable the European Court of Justiceto give authoritative interpretations of the instrument without there being anyneed to secure the agreement of Member States. The UK Government, as a resultof its Maastricht opt-out, will not be bound by this regulation when it comes intoforce but is currently58 reserving its position on a decision to opt in to the regula-tion at a future date and is closely involved in the negotiation process followingthe Commission’s draft.

Arbitration The Rome Convention does not apply to arbitration agreements.59

This exclusion applies also to arbitration and jurisdiction clauses in contracts thatotherwise are governed by the Rome Convention. The law applied by the arbitra-tor to that contract is a different matter. Under English law, an arbitrator may, butis not bound to, apply the Rome Convention to that contract. In the case of anarbitration with an English seat, the arbitrator is required under English law to act


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54 See Halpern v Halpern [2006] EWHC 603 (Comm) at [49].55 Art 3(2): ‘The parties may at any time agree to subject the contract to a law other than that

which previously governed it, whether as a result of an earlier choice under this Article or of otherprovisions of this Convention.’

56 COM(2002) 654.57 COM(2005) 650.58 As of 1 May 2007.59 Art 1(2)(d): see Halpern v Halpern [2006] EWHC 603 (Comm).

in accordance with s 46 of the Arbitration Act (since the notion of a delocalizedarbitration is not accepted by English law).60 Section 46(1) requires the arbitratorto respect the parties’ choice of applicable law. If there is no choice, the arbitratorapplies ‘the law determined by the conflict of laws rules that [he] considers appli-cable’.61 The arbitrator is therefore not bound by Rome but, though at liberty toselect his own choice of law rules, should be open to the argument that the RomeConvention is a respected and widely accepted statement of applicable choice oflaw rules. This freedom given to arbitrators has implications for the application ofthe CISG under its Article 1(1)(b), which directs the application of the CISGwhen the choice of law rules of the forum point to the law of a Contracting State.An arbitrator, unlike the courts of a Contracting State, is not bound to apply theCISG but is likely nevertheless to be influenced by the provisions defining itsscope and applicability.

Interpretation As an aid to interpreting the Convention, there is the Giuliano-Lagarde Report62 whose use is permitted by s 3(3)(a) of the 1990 Act in the interpretation of the Rome Convention. Article 18 of the Convention alsoexhorts courts to interpret the provisions of the Convention in an internationalistspirit63—a similar provision is to be found in many international conventions—which thus encourages attention to be paid to the views of foreign courts, andthere is a protocol providing for the European Court of Justice to give binding rulings on the meaning of the provisions of the Convention.64 This has now comeinto force in England,65 though its duration in the broader European Communitywill be limited in view of the forthcoming regulation which, as directly applicablecommunity law, has the European Court of Justice as the court of final resort. In effect, Article 18 encourages a purposive rather than a literal approach to theConvention.66

Party autonomy The Rome Convention supports the principle of party auton-omy by stating the applicable law to be the law chosen by the parties.67 The choicemay be an express one or it may be implied, ‘demonstrated with reasonable


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60 See L Collins (ed), Dicey and Morris on the Conflict of Laws (14th edn, Sweet & Maxwell,2006), Vol 1, pp 723–4.

61 S 46(3) — a formula identical to Art 28(2) of the UNCITRAL Model Law on Arbitration andArt 33(2) of the UNCITRAL Arbitration Rules.

62 [1980] OJ C282/1.63 See Samcrete Egypt v Land Rover Exports Ltd [2002] CLC 353, CA; Iran Continental Shelf Oil

Co v IRI International Corp [2002] 2 CLC 696, CA.64 The Brussels Protocol, Sch 3 to the Contracts (Applicable Law) Act 1990.65 As of 1 April 2005.66 Samcrete Egypt v Land Rover Exports Ltd [2002] CLC 353, CA; Egon Oldendorff v Libera Corp

[1996] 1 Lloyd’s Rep 380, 387.67 Art 3(1).

certainty by the terms of the contract or the circumstances of the case’. An impliedchoice of a country’s law may be found in a clause providing for arbitration in thatcountry, particularly where the contract contains standard clauses with well-known meanings according to the law of that country.68 The implied agreement,however, must be a real implied choice and not an imputed choice.69 An Englishjurisdiction clause has been held to demonstrate, to the level of a good arguablecase for jurisdiction purposes, an implied choice of English law as the applicablelaw in a guarantee case.70 The parties may after the contract date vary the choiceof applicable law, but this will not lightly be inferred from conduct. In AeolianShipping SA v ISS Machinery Services Ltd,71 a contract for the sale of a turbocharger,governed by Japanese law, was followed by a later contract between the same parties for the supply of replacement parts, which latter contract was made subjectto English law. The buyer argued that this had the effect of rendering its counter-claim under the first contract subject to English law but the Court of Appeal ruledotherwise. Such a change had not been expressed and would also have severelyprejudiced the supplier under its own contract with the Japanese manufacturer,also governed by Japanese law.

Split choice The parties’ choice may extend to a part of the contract or thewhole.72 There is no reason why they may not choose more than one law to gov-ern their relations. Nevertheless, care must be taken when applying the dépeçageprinciple. Suppose the contract provides that matters of breach and matters offrustration are governed by different laws. That raises the possibility of one lawholding that the defendant has committed a breach while the other holds that thecontract is discharged for frustration. Judicial concern has been expressed aboutthe possibility of an inconsistency of this sort,73 though it is not so easy to see thesolution. One possibility is that a court would identify one of the choices as the dominant one and decline to recognize the other to the extent that it wouldotherwise produce an incoherent resolution of the problem.


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68 Egon Oldendorff v Libera Corp (NYPE time charter); see also Gan Insurance Co Ltd v Tai PingInsurance Co Ltd [1999] 2 All ER (Comm) 54 (English non-marine insurance form); Giuliano–Lagarde Report, comment 3 to Art 3.

69 Aeolian Shipping SA v ISS Machinery Services Ltd [2001] 2 Lloyd’s Rep 641, CA; Giuliano–Lagarde Report (comment 3 to Art 3 ‘a real choice’—but cf American Motorists Insurance Co vCellstar Corp [2002] 2 Lloyd’s Rep 216, affd [2003] 2 CLC 599, CA, where the court relied upon aseries of strong connecting factors to conclude that Texas law was the law of implied choice and notjust the most closely connected law (though it reached the same conclusion that Texan law appliedunder the characteristic performance rule (see below)).

70 Marubeni Hong Kong and South China Ltd v Ministry of Finance of Mongolia [2002] All ER(Comm) 873.

71 [2001] 2 Lloyd’s Rep 641, CA.72 Art 3(1): dépeçage.73 See Ward LJ in Centrax Ltd v Citibank NA [1999] 1 All ER (Comm) 557, CA.

Applicable law and stateless contracts Once the parties have chosen the appli-cable law, they are nevertheless free to change it at a later date.74 This gives somesupport for the notion that a contract may be subject to a ‘floating’ applicable law,that law to be selected by one of the parties at a later date, possibly even on thecommencement of legal proceedings. A ‘floating’ law clause is supported by theGiuliano-Lagarde Report.75 This type of clause is not uncommon in bills of lading. Until the law in question is chosen, the contract would be subject to thelaw applicable in accordance with Article 4 of the Rome Convention, which laysdown the applicable law for those cases where the parties have not made a choice.Hence, it would be this law selected further to Article 4 that were changed by the parties in accordance with Article 3(2). Nevertheless, the notion of a contractsubject to a floating applicable law has attracted adverse comment in an Englishcase.76 Yet, if Article 4 is invoked at the outset, there is no need for the contract tobe without an applicable law before the later choice is made by the parties. Thecourt in the same case77 also rejected the idea of a ‘harlequin proper law’, wherebyunder a global liability policy the insuring clause of the policy and the definitionof the insured were to be subject to whatever was the law of the country of the person from time to time claiming under the policy.

Stateless applicable law Although the contrary would appear to be the case underthe Arbitration Act 1996, under the Rome Convention the choice of applicablelaw has to be the choice of a system of state law.78 An English court, therefore, shouldnot recognize the choice of the Unidroit Principles of International Contracts oreven of the CISG as a free-standing instrument (as opposed to the choice of thelaw of a State whose courts would apply the CISG).79 This rejection of statelesslaw is widely regarded as the correct position under the Rome Convention,80

though the draft regulation would allow the choice of non-territorial law.81


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74 Art 3(2).75 Comment 5 to Art 3.76 See Toulson J in CGU International Insurance plc v Szabo [2002] 1 All ER (Com) 83 who is

critical of attempts to give the contract no governing law until a later date (‘an impossible concept’,since parties’ rights and obligations crystallize at the contract date—see also EI DuPont de Nemoursand Co v Agnew [1987] 2 Lloyd’s Rep 585, 592, CA (Bingham LJ).

77 CGU International Insurance plc v Szabo [2002] 1 All ER (Comm) 83.78 See Amin Rasheed Shipping Corp v Kuwait Insurance Co [1984] AC 50, 60, 65, HL (Lord

Diplock); Shamil Bank of Bahrain EC v Beximco Pharmaceuticals [2004] 1 WLR 1784, CA; Halpern vHalpern [2006] EWHC 603 (Comm); Art 1(1)—‘a choice between the laws of different countries’.

79 For a more extensive discussion of the CISG chosen as a free-standing instrument, see ch 11.80 See the Rome I Green Paper (COM(2002) 654 final), para 3.2.3.81 Art 3(2)—‘the principles and rules of the substantive law of contract recognized internation-

ally or in the Community’, an expression that is calculated to embrace instruments like the LandoPrinciples of European Contract Law and the Unidroit Principles, though not something as vagueand formless as the ‘lex mercatoria’.

Mandatory law The old pre-Rome restriction in English law, more apparentthan real, that the choice had to be ‘bona fide and legal’,82 did not in fact hamperthe parties’ choice. The relevant provision now is Article 3(3), which prevents theparties to a contract of a domestic character from evading mandatory rules of thecountry to which the contract is connected ‘where all the other elements [apartfrom choice] relevant to the situation at the time of the choice are connected withone country only’ by selecting an artificial applicable law. This means that the lawthey have chosen will still be applied but it will pro tanto be overridden by themandatory provisions of the connected law.83 The concept of mandatory rules isunknown to English law eo nomine: they seem to exist in the case of individualswho merit special treatment by the law, notably employees and consumers. At least some issues that would be classified in English domestic law as pertainingto illegality would appear to fall within the scope of ‘mandatory rules’. TheConvention also has a provision on the application of other countries’ mandatoryrules with which ‘the situation has a close connection’,84 but the United Kingdomentered a reservation to this article. No reservation, however, was entered toArticle 7(2), which permits the forum to apply its own mandatory rules regardlessof the law applicable to the contract (though English law in the Unfair ContractTerms Act 1977, ss 26–27, dispenses with mandatory rules when dealing withtransnational and international contracts).85 One of the major impediments tothe adoption by the United Kingdom of the Rome I Regulation is this notion ofmandatory rules, which are not defined in the draft and which render unattractiveto international litigants any forum applying such an uncertain notion.

Presumptive applicable law If the parties have not chosen an applicable law, theConvention lays down rules for determining it. First of all, that law is the law ofthe country with which the contract is most closely connected.86 Secondly, thereis a presumption that the country most closely connected to the contract is thecountry where the party effecting characteristic performance under the contracthas his habitual residence or central administration.87 The country of habitual residence or central administration gives way, where a contract is entered into inthe course of a party’s trade or profession, to the country of that party’s place ofbusiness.88 Where a company enters into a contract through a place of busi-ness other than its principal place of business, it is the former that supplies the


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82 Vita Food Products Inc v Unus Shipping Co Ltd [1939] AC 277, PC.83 See Caterpillar Financial Services Corp v SNC Passion [2004] 2 Lloyd’s Rep 99 (Comm).84 Art 7(1).85 The concept of mandatory law or rules is used in a number of places and in different ways in

the Rome Convention.86 Art 4(1).87 Art 4(2).88 ibid.

applicable law.89 In one case, an Iranian company had very good reasons indeed (a US boycott) for doing business through its London office.90

Characteristic performance The notion of characteristic performance seems tohave been developed in Swiss law.91 The Convention gives no assistance on itsmeaning but there is an extensive discussion of it, expressed as an idea that looksfor the ‘essence of the obligation’, by Lord Brodie in the Scots case of Re AtlanticTelecom Group GmbH 92 and that does not confine the court to the terms of theparticular contract before it.93 It would be uncontroversial to say that the charac-teristic performer under a contract of sale of goods is the seller.94 A more difficultcase is where goods are sold to a distributor, where it has been held that the char-acteristic performance is that of the seller to supply and not of the buyer to use bestendeavours to expand sales in its territory.95 Under a currency swaps contract, onthe other hand, each party would appear to effect characteristic performance, sothe rule in Article 4(2) would provide no assistance. A similar difficulty arises withtrade mark agreements where both parties assume matching negative obliga-tions.96 The characteristic performance of a reinsurance contract is the reinsurer’sduty to indemnify.97 The characteristic performance of a guarantee is the guaran-tor’s payment.98 In the case of a bank account, the characteristic performer is thebank.99 More cautiously, Lord Brodie has stated that a contract between a bankerand customer in which the bank advances money to the customer will normallyhave the bank as the characteristic performer.100 In a contract to provide consul-tancy services in connection with the staining of a building, the characteristic performance is the giving of advice.101 The question of what is characteristic per-formance under various letter of credit contracts will be dealt with in Chapter 6.


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89 ibid.90 Iran Continental Shelf Oil Co v IRI International Corp [2004] 2 CLC 696, CA. The existence

of multiple ‘principal’ places of business of a reinsurer has been used as a ground for displacing thecharacteristic performance rule altogether (Lincoln National Life Insurance Co v Employers ReinsuranceCorp [2002] Lloyd’s Rep IR 253), but this was a jurisdiction case and the only choice of law issue waswhether there was an arguable case that the contract was governed by English law.

91 H D’Oliviera, ‘“Characteristic Obligation” in the Draft EEC Obligation Convention’ (1977)25 American Journal of Comparative Law 303, cited by CGJ Morse in Current Law Statutes 1990.

92 [2004] ScotCS 152 (25 June 2004).93 Apple Corps Ltd v Apple Computer Ltd [2004] 2 CLC 720 at [51].94 See Iran Continental Shelf Oil Co v IRI International Corp [2004] 2 CLC 696, CA.95 Print Concept GmbH v GEW (EC) Ltd [2002] CLC 352, CA.96 See Apple Corps Ltd v Apple Computer Ltd [2004] 2 CLC 720.97 Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd [1998] CLC 1072; Dornoch Ltd v Mauritius

Union Assurance Co Ltd [2005] EWHC 1887 (Comm).98 Samcrete Egypt v Land Rover Exports Ltd [2002] CLC 353, CA.99 Sierra Leone Telecommunications Co Ltd v Barclays Bank Plc [1998] CLC 501.

100 Re Atlantic Telecom Group GmbH [2004] ScotCS 152 (25 June 2004).101 Ennstone Building Products Ltd v Stanger Ltd [2002] 1 WLR 3059, CA.

The characteristic performance rule is displaced if it appears from all the circum-stances that the contract is more closely connected with some other country.102

Finally, there are special presumptive rules for carriage of goods contracts and contracts for the sale of land.103 The Rome I Regulation would greatly simplifythis structure by dispensing with this second reference104 to the rule of closest con-nection and by introducing hard rules of characteristic performance in the case ofa list of the most prominent types of contract (such as sale). This reduction of flex-ibility in the application of a dogmatic characteristic performance rule will notcommend itself to everyone.

Displacing characteristic performance A displacement of the characteristicperformance rule, pursuant to Article 4(5), occurred in Definitely Maybe (Touring)Ltd v Marek Lieberberg Konzertagentur GmbH.105 It concerned a contract betweenpromoters of a pop group (Oasis) and German concert organizers and a claim forpayment in full by the promoters though one of the members of the groupdeclined to participate. The ‘only’ connection with England was the ‘location’ ofthe claimant and of the group and the place of payment. Germany, on the otherhand, was the place of characteristic performance as well as the place where thedefendants performed their organizational obligations in full. The governing law,given the strength of the connection between the contract and Germany, wastherefore German law pursuant to Article 4(5). The court was insistent that thecharacteristic performance presumption in Article 4(2) flowed out of the closestconnection rule in Article 4(1): the latter was not an exception to the former. In reaching its decision the court was conscious that the characteristic perform-ance rule had to be seen as the ‘normal’ rule to apply, given its ease of application,and that simply to focus on Article 4(5) would be to reproduce the pre-RomeEnglish choice of law rule. It tried to steer a path between the Dutch approach,which was to treat the rule in Article 4(2) as a hard rule of law, and the dictum ofHobhouse LJ in Crédit Lyonnais v New Hampshire Insurance Co,106 that Article4(2) creates a ‘very weak’ presumption. Morison J would displace the characteris-tic performance rule only if the circumstances of the case ‘clearly demonstrate’that this is justified.107 Even so, it may be argued, perhaps provocatively, that the


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102 Art 4(5).103 Art 4(3), (4).104 In Art 4(5).105 [2001] 2 Lloyd’s Rep 455 (Morison J).106 [1997] 2 Lloyd’s Rep 1, 5.107 An approach supported by Keene LJ in Ennstone Building Products Ltd v Stanger Ltd [2002]

1 WLR 3059, by Potter LJ in Samcrete Egypt v Land Rover Exports Ltd [2002] CLC 353 and by Clarke LJ in Iran Continental Shelf Oil Co v IRI International Corp [2004] 2 CLC 696—which however seem to show that the stricter Dutch approach is gaining ground with the aid of Art 18.

court in Definitely Maybe rewrote the characteristic performance residence rule in terms of a characteristic performance place rule. A more clearly justified depar-ture from the characteristic performance rule came where a German defendantbreached its contractual undertaking not to communicate with persons in theUnited Kingdom to complain of a patent infringement.108

Scope of the applicable law Under the Convention, the applicable law deals withmatters of interpretation, performance, damages and the consequences of breach,extinction of obligations and limitations, and the consequences of nullity.109

The consequences of breach test has been held to have quite deep roots in the lawgoverning remedies: the applicable law has been said to apply to the currency ofthe award, the award of interest and the recovery of interest as damages.110 It isimportant to note, however, that the United Kingdom entered a reservation tothis last item, the consequences of nullity.111 This has important implications forrestitution. Where the country of performance is not the country of the applica-ble law, Article 10(2) delegates to the former issues concerning the manner of performance and the steps to be taken in the event of defective performance.These items should include, for example, what constitutes a working day andwhat is the currency of payment. They may also include notices of default if therelevant law requires these before a contract is terminated. The applicable law (‘thelaw that would govern [the contract] under this Convention if the contract orterm were valid’) also deals with matters concerning the ‘existence and validity ofa contract, or any term of a contract’.112 The reference to ‘existence’ shows that thisprovision certainly applies to matters of consent. Article 8(2), however, applies the law of a party’s habitual residence to determine that party’s lack of consent if it would ‘not be reasonable’ to apply the law stipulated in Article 8(1).113 The burden of establishing unreasonableness rests upon the party in question.114 It isnot clear what constitutes validity. It should include rules dealing with one-sided


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108 Kenburn Waste Management Ltd v Bergmann [2002] CLC 644.109 Art 10(1).110 See Re Lesotho Highlands Development Authority [2003] 1 All ER (Comm) 232, applying

Art 10(1)(c) of the Rome Convention; Service Europe Atlantique Sud v Stockholms RederiaktiebolagSVEA (The Folias) [1979] AC 685, 700, HL (Lord Wilberforce). The starting point is whether theparties by contract have made provision for these matters: ibid 700–1 (Lord Wilberforce); ReLesotho Highlands Development Authority [2003] 2 Lloyd’s Rep 497, CA at [34]). The Lesotho litiga-tion concerned a challenge to the arbitrators’ award, and the House of Lords (at [2006] 1 AC 221)reversed the Court of Appeal which had affirmed the trial judgment that the award was open to challenge.

111 Art 10(1)(e).112 Art 8(1).113 See Welex AG v Rosa Maritime Ltd (The Epsilon Rosa) (No 1) [2002] EWHC 2033 (Comm)

(incorporation clause in bill of lading referring to charter party that in turn contained arbitrationclause).

114 See Welex AG v Rosa Maritime Ltd (The Epsilon Rosa) (No 2) [2003] 2 Lloyd’s Rep 509.

bargains, mistake and duress, for example. It ought to include the question ofwhether consideration is required for a contract to be duly concluded. It includesalso illegality (though this subject raises additional questions). Penalty clauses aredifficult to classify, but it hardly matters whether any special rules in this area fallto the applicable law under Article 10 or Article 8. The applicable law also appliesto formal invalidity.115 Alternatively, a contract is formally valid if it compliesinstead with either the law of the country in which it is concluded, where bothparties are in the same country, or, where the parties are in different countries, thelaw of the country where either party happens to be. Finally, the legal capacity ofcompanies falls outside the Convention,116 so too that of natural persons except inso far as Article 11 states that, where contracts are concluded between parties inthe same country, a party’s incapacity under the law of another country may beinvoked only if the other party knew, or was negligent in not knowing, of thatincapacity. Otherwise, English law, which has no clear rules on the matter, applies.It is likely to be a matter for the proper law objectively ascertained.117

Illegality A contract may be affected by illegality from the outset; alternatively,it may be struck down for supervening illegality. Although the Convention doesnot use the concept of illegality, it falls under the heading of ‘material validity’ sothat it is subject to the applicable law pursuant to Article 8(1). Because the UKGovernment entered a reservation to Article 7(1) of the Convention, the Englishcourts are in no position to accept the invitation to take account of ‘the manda-tory rules of the law of another country with which the situation has a close con-nection’ within the limits stated in Article 7(1). Article 7(1) pro tanto frees courtsfrom the obligation to apply the applicable law under Articles 3–4. On the face ofit, this reservation threatens the recognition of illegality under laws of other coun-tries that are closely connected to the contract. The reason is that the RomeConvention supersedes prior common law conflict rules in the area of contract,and not just those rules that correspond to the provisions of the Convention thatapply in a Member State. Now, prior to the Rome Convention, there were well-established rules dealing with the recognition of illegality under a law other thanthe proper law of a contract. Might the English courts turn to these in appropri-ate cases? On the face of it, the answer is no for the reason given above. Accordingto one of these rules (the Regazzoni rule), English courts will not enforce a contractthat would ‘involve the doing of an act in a foreign and friendly State which violates the law of that State’.118 According to a similar rule (the Ralli Bros rule), itis an implied term of the contract that performance will not be illegal under the


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115 Art 9.116 Art 1(2)(e).117 See Bodley Head Ltd v Flegan [1972] 1 WLR 680.118 Regazzoni v KC Sethia (1944) Ltd [1958] AC 301, HL.

law of the place where performance is to be rendered.119 If these rules are regardedas rules of domestic English contract law, they should survive the Rome Convention.If so, where the forum is an English court and English law is the applicable law, thesame result as in these cases will be reached pursuant to Article 8(1). It is particu-larly debatable, however, that the Regazzoni rule can be regarded as a rule of Englishdomestic law. That said, the court in a recent letter of credit case applied Regazzoniwithout displaying any concerns about its continuing validity.120 Where theforum is English but English law is not the applicable law, the courts may stillreach the same result to the extent that they apply domestic public policy, whichthey are entitled to do under Article 16, or the mandatory rules of the forum,which they are entitled to do under Article 7(2) (to which the UK Governmentdid not enter a reservation). If the forum is English and the illegality is recognizedunder a foreign applicable law, then that law deals with the matter of illegality pursuant to Article 8(1) in the usual way. It may be that that law contains rulessimilar to those laid down in the Regazzoni 121 and Ralli Bros122 cases.

The CISG In the event of the CISG being adopted by the United Kingdom andapplying on its own terms, the applicable law arrived at according to the rules laiddown in the Rome Convention will give way to the uniform law contained in theCISG. Since, however, the range of contract rules covered by the RomeConvention will be broader than the range of the sale of goods rules contained inthe CISG, a court will in many cases be called upon to apply the CISG togetherwith the provisions of the applicable contract law. This is consistent with the tol-erance afforded by the Rome Convention to a split applicable law (or dépeçage).123

In so far as the contracting parties seek to exclude the application of the CISG anddo so successfully,124 it is useful to consider how such exclusion would intersectwith the Rome Convention. If they exclude the CISG by stipulating for an appli-cable national law, then the exclusion must pass the test of an exclusion underArticle 6 of the CISG. A simple stipulation in favour of the law of a country thathappens to be a CISG State may or may not pass that test.125 To the extent that acourt is satisfied that the parties have excluded the CISG, then the next questionis to define the applicable law, which will be done pursuant to the terms of theRome Convention.126 If such a law already applies to the general aspects of the


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119 Ralli Bros v Cia Naviera Sota y Aznar [1920] 2 KB 287, CA.120 See Mahonia Ltd v JP Morgan Chase Bank [2003] 2 Lloyd’s Rep 911.121 Regazzoni v KC Sethia (1944) Ltd [1958] AC 301, HL.122 Ralli Bros v Cia Naviera Sota y Aznar [1920] 2 KB 287, CA.123 Art 3(1).124 Under Art 6.125 See ch 2.126 Under the Contracts (Applicable Law) Act 1990, the rules in the Rome Convention super-

sede all equivalent English conflict rules, and not merely their application to intra-EC contracts. SeeArt 1(1) of the Convention.

contract, it should to the extent of the exclusion of the CISG simply carry overinto the sale aspects of the contract.127 Finally, the exclusion of the CISG may bepartial, which again is consistent with the principle of dépeçage.

Contractual foreign elements As stated above, commodity trading organiza-tions based in London state that English law governs the contract of sale. AllGAFTA contracts, for example, contain a choice of law clause selecting Englishlaw as the governing law. Reported cases contain many examples of contractsentered into by companies, neither of which is English, involving the shipment ofgoods in a country overseas and their discharge in a country that is not England,with payment being made abroad in a currency that is not sterling. Despite doubts expressed in the past as to whether English law may be chosen despite the absence of any real and substantial connection between the contract andEngland,128 the Rome Convention places no identical restriction on the partieschoosing whichever applicable law they want129 and therefore underwrites thepractice in GAFTA and similar contracts. This facilitates the management ofstring contracts130 since it permits all contracts in the string to be governed by thesame law, regardless of matters such as the residence of the parties and the currencyof the contract. Where the contract is governed by English law and incorporatesthe UCP rules131 or Incoterms, it is still English law that governs the contract.Indeed, it is by virtue of the English law of contract that these supplementaryterms are incorporated.

D. Speculation, Hedging, and String Trading

Market liquidity A striking feature of many of the reported cases on interna-tional sale of goods is that the contracts in question function as speculative instru-ments. Speculation is an activity that attracts a measure of opprobrium but iscommonly justified by the way that it introduces liquidity into the market andhence stabilizes it, and permits those with a practical interest in the future pricesof commodities to plan their operations.


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127 The contract of sale aspects, not the proprietary ones, which will be subject to the appropri-ate law selected by the conflict rules of the forum.

128 See Vita Food Products Inc v Unus Shipping Co Ltd [1939] AC 277 (‘bona fide and legal’).129 But there are provisions relating to the application of the forum’s public policy and manda-

tory rules (Arts 7(2) and 16). Furthermore, where all the other relevant ‘elements’, apart from thechoice of applicable law clause, point to the law of a country which has mandatory rules that have tobe observed, that country’s mandatory rules must be obeyed by the forum (Art 3(3)), though other-wise the choice of applicable law remains unaffected. These various restrictions do not add up tostriking down a choice of applicable law on the ground only that the contract has no material connection with the country whose law is chosen.

130 Discussed below at para 1.42.131 See above para 1.17.

Forward delivery The nineteenth century saw the development of forwarddelivery contracts, which are to be distinguished from spot transactions, namely,physical contracts performed immediately or nearly so. In a forward delivery con-tract, the parties may agree a price and other terms concerning agricultural com-modities even before the crop is grown and reaped. They do not know what thespot market price will be when the rice, for example, is ready for shipment. Thebuyer and seller both take a chance as to the state of the market and the volume ofthe contract commodity in circulation at that time. If the spot price is lower thanthe contract price, the seller has gained and, if higher, the buyer has gained. Thisexcessively simple statement suggests a zero sum game but the reality is that bothparties gain from the forward delivery contract in so far as they receive the assur-ance they need to plan their future activities.

Wagers Cases in the early part of the nineteenth century had treated forwarddelivery contracts as illegal wagers on commodity prices since buyer and sellerwere treated as taking a bet on what the future market price would be.132 Whenthe Sale of Goods Act was first passed in 1893, it was made clear in s 5(1) that acontract of sale could be entered into for future goods.133 Where contracting par-ties enter into a contract for the sale of goods on forward delivery terms with nointention that any delivery should occur, there is a possibility that the contract willbe characterized as an unlawful wagering contract. For this conclusion to bereached, however, neither party must have an interest in the transaction goingbeyond the sum of money that is at risk and each party must be capable of win-ning or losing depending upon the outcome of future events.134

Need to plan ahead Rice, wheat, and other crops are seasonal and dependentupon the hazards of nature. That means that they are subject to price fluctuationsas well as to famine and glut. If prices can be settled in advance under forwarddelivery contracts, prices are thus stabilized. Those participants in the trade witha physical interest in the commodity, such as millers, brewers, and pasta manufac-turers, therefore welcome the interest of outside speculators since this increasesthe volume of trading. The farmer gets the assurance that his grain will have a mar-ket; the miller grinding wheat into flour ensures there will be supplies of wheat tobe called forward from an importer’s warehouse as and when these are needed.This does not mean that opportunistic behaviour will not occur on the part of


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132 See Bryan v Lewis (1826) Ry & Moo 386. See also invoicing back cases like Lancaster v Turner(JF) & Co Ltd [1924] 2 KB 222 (Scrutton LJ) and Adair (JF) and Co Ltd v Birnbaum [1939] 2 KB149 (MacKinnon LJ) for the view that the transaction amounts to a wager.

133 For a purely domestic example of a forward delivery contract, see Sainsbury (HR & S) Ltd vStreet [1972] 1 WLR 834 (sale by farmer to supermarket chain of future barley crop of stated ton-nage within a margin of tolerance).

134 See Kloeckner & Co AG v Gatoil Overseas Inc [1999] 1 Lloyd’s Rep 177 (where these condi-tions were not fulfilled).

those with a physical interest in the trade. In Sainsbury (HR & S) Ltd v Street,135

the crop was low because of poor harvesting conditions. The farmer, wishing toescape from the price clause in order to take advantage of the rise in the marketthat accompanies poor harvests, argued unsuccessfully that his inability to deliverthe agreed amount in full because of the weather meant that the contract was frus-trated. In international markets involving intermediate traders, it is even moredifficult to run the frustration argument because of poor harvests and similarsupervening events affecting market price. Rises in commodity prices are invari-ably seen in English law as not giving rise to frustration. Traders, moreover, cannottrace back their sale obligations to a particular affected farm because the descriptionof the goods in the sale contract is never so precise.

Sales strings It will be shown in ensuing chapters that a number of CIF andFOB cases involve sales strings stretching to many parties dealing with the sameappropriated cargo. Only the first seller physically delivers; only the last buyertakes physical delivery.136 The intermediate parties dealing in the same goods aretrading paper and will be brokers or speculators with no physical interest in thecommodity at all, looking for a profitable opportunity.137 Speculators will wish totake market risks by taking a ‘long’ or ‘short’ position138 on a particular commod-ity; physical producers and consumers typically do not. The risks that are takenand avoided will be demonstrated below.

Closing out Forward delivery contracts as vehicles for speculation can be closedout in a way that shows this feature of the markets more prominently. ‘[T]here isnothing at all unusual in commodity dealers using contracts of sale and resale as ameans of arriving at a position in which the true nature of the transaction is thesettlement of a price difference.’139 But forward delivery contracts do not lose theirphysical quality. According to Sellers LJ in Garnac Grain Co Inc v Faure (HMF) &Fairclough Ltd:140 ‘There may be many cases where the parties do not expect tocomplete the transaction but to trade on differences in the hope that the result willbe a profit, but if there is an obligation to fulfil the contract according to its tenorif circumstances require it, then the contract is enforceable.’ This case involved the


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135 [1972] 1 WLR 834.136 It is possible to have string arbitrations between the first seller and the last buyer in the string,

eg Combined Edible Nut Trading Association Terms and Conditions (May 1993), ArbitrationRules cl 7.

137 For a discussion whether the specification of jet fuel (containing an additive to inhibit electrical discharge which could be introduced into the fuel at any time) as a matter of contractualconstruction applied to intermediate buyers in the same way as it applied to the end buyer, seeTrasimex Holding SA of Panama v Addax BV of Geneva (Rix J, 3 Mar 1996).

138 See below para 1.55.139 Kerr J in Pagnan (R) & Fratelli v Schouten (NGJ) NV (The Filipinas I) [1973] 1 Lloyd’s Rep

349, 356.140 [1966] 1 QB 650, 674.

deliberate creation of a circle by the head seller, which bought in the goods at theend of the string.141

Futures contracts From a paper-based forward delivery market it is a short stepto organizing dealings in futures on an exchange and to treating these futures likeany other financial instrument, such as gilts. Next September’s Pacific Coastwheat can be dealt with by investors, professional or amateur, just like the sharesin a major corporation. The investor’s contracting partner, or counterparty, will bea broker on the exchange or the exchange itself.142 Investors’ dealings operateaccording to the rules of an organized exchange, apart from those cases whereover-the-counter derivatives are traded, often in response to the particular needsof a player in the market, seeking hedges that are responsive to its particular busi-ness requirements. The rules of an organized market will include, for example,rules dealing with margin calls and market manipulation. A margin call is thedeposit by way of security with the exchange in cash or its equivalent of a statedpercentage of an investor’s market exposure (the gross amount of this will fluctu-ate with the state of the market). Variations in the margin will be required as themarket moves, the amount to be paid or reimbursed depending upon a mark-to-market calculation conducted commonly at daily intervals. The degree of finan-cial risk associated with the very large body of unregulated over-the-countertransactions is cause for some concern when the stability of the world’s capitalmarkets comes into consideration. The forward delivery market also does notoperate according to the rules of an exchange.143 There are various ways in whicha futures contract can be settled. Occasionally, in the event of settlement notoccurring, there will occur a physical performance. For example, the physicaldelivery of metals under London Metal Exchange (LME) contracts can be accom-plished by means of the transfer of warehouse warrants.144 These warrants havethemselves become the subject of a secondary market.

Financial services legislation Besides the operation of the rules of a commodityexchange, there is the question of the extent to which financial services legislationimposes a regulatory structure on futures or even forward delivery contracts. TheFinancial Services Act 1986 has been superseded by the Financial Services andMarkets Act 2000, though the regulatory impact of the latter Act is essentially thesame as the former in the area under consideration. For that reason, and because


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141 See also the ‘dry’ circle in Voest Alpine Intertrading GmbH v Chevron International Oil Co Ltd[1987] 2 Lloyd’s Rep 547, 552; Kloeckner & Co AG v Gatoil Overseas Inc [1999] 1 Lloyd’s Rep 177.

142 In contracts cleared through the London Clearing House, the LCH, as the buyer for everyseller and the seller for every buyer, acts as the sole intermediary on some of the world’s leading tradeexchanges and over-the-counter market places.

143 See D Morgan, Merchants of Grain (Penguin, 1980), ch 9: ‘Catch-22’.144 See also Nissho Iwai Petroleum Co Inc v Cargill International SA [1993] 1 Lloyd’s Rep 80,

discussed below.

of case law under the Financial Services Act 1986, it is convenient to start with the1986 Act before proceeding to the 2000 Act. The Financial Services Act regulatesinvestment business,145 the pivotal question being whether forward delivery andfutures contracts are investments as defined in Pt I of Sch I to the Act. Listed inpara 8 of Pt I, entitled ‘FUTURES’, is: ‘Rights under a contract for the sale of acommodity or property of any other description under which delivery is to bemade at a future date and at a price agreed when the contract is made.’ The lan-guage is certainly wide, which gives rise to some concern to those dealing in theforward delivery markets or engaging in hedging activity in complementaryfutures markets. By s 3 of the Act, a person engaging in regulated activity has to beauthorized under the Act, or be an exempted person. Any investment contractentered into in breach of s 3 is unenforceable against the other party to the transaction, who is entitled to recover property or money transferred under theinvestment contract.146 A discretion allows the benefit of a contract unlawfullyconcluded to be retained if the person in question reasonably believed that, inentering into the contract, he did not breach s 3, where it is just and equitable thathe retain the benefit of the contract.

Exceptions The notes accompanying para 8,147 which have authoritative status,however, go some way towards allaying the concern of commodities traders. Firstof all, the paragraph does not apply if the contract is made for commercial ratherthan investment purposes.148 A contract is indicatively made for commercial pur-poses when at least one party is a producer of the commodity or uses it in his busi-ness. Alternatively, it is indicatively commercial if either the seller intends to ordoes deliver the commodity, or the buyer intends to or does take delivery of it.149

These cases would cover cases of futures dealings where either party has a generalphysical interest in the commodity. That interest does not have to be in the verysubject matter of the particular contract, which means that a compounder of ani-mal feeds using a futures contract as a hedging mechanism has no need to envis-age the taking of physical delivery under the particular futures contract in orderfor regulation to be avoided. It may be, however, that an intermediate contractinvolves traders, neither of whom has a physical interest at all, in which case the


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145 S 1.146 S 5(1). There is no reason why one unauthorized, etc person might not take advantage of this

provision as against another unauthorized person.147 In Sch 1 to the 1986 Act.148 Note 1.149 Note 4. This indicative note can pull in a contrary direction to indicative notes 5 and 6.

According to the former, a contract is indicatively commercial when it is traded ad hoc and not byreference to standard lots, terms, or delivery dates. According to note 6, the contract is indicativelyone of investment if it is traded on an exchange or its performance is ensured by an exchange or clear-ing house or there is provision made for margin.

contract could be a regulated investment.150 In addition, the language of para 8 isjust as apt to embrace a forward delivery as a futures contract. If delivery of thecommodity is equated with delivery of documents representing the commodity,which it is submitted should be the case, the risk of regulation is greatly reduced.This exit from the regulatory scheme would apply to those contracts settled pursuant to circle and book-out clauses only because of the intention of the parties, prior to the invocation of the book-out or circle clauses, was that there bea delivery of the property. Nevertheless, the use of English contract forms wouldnot of itself subject overseas parties doing business overseas to regulation underthe Financial Services Act.

CR Sugar Trading The application of the Financial Services Act 1986 to futurescontracts in sugar was considered in CR Sugar Trading Ltd v China National Sugar& Alcohol Group Corp,151 where David Steel J upheld the decision of an arbitral tribunal below that the parties were carrying on an investment business. The caseconcerned a business relationship between an English sugar trader, CR, and aChinese company, CNS. Neither was an authorized or exempt person under the1986 Act. CNS granted to CR, in return for premiums, certain put options, theeffect of which was that CR could at a future date require CNS to take delivery ofphysical sugar. A New York affiliate of CR was then able to use these options toopen hedging positions on the New York futures market. While the market priceof sugar continued to rise, both CR and CNS made money from the transaction,CR in the form of margin gains on futures trading made by its New York affiliate,and CNS, in the form of premiums paid by CR. CR never contemplated deliver-ing sugar to CNS: the price of the physical sugar in the options was deliberatelypitched below the market price. The trouble emerged when the optimistic expec-tations entertained by the parties in a state of ‘myopic euphoria’ were defeated bya downward plunge in the sugar market, the consequence of which was that CRdecided to exercise its options under two contracts. These were for large quanti-ties of raw sugar on C&F free out, one main safe South China port, terms. At thetime the put options were granted, the parties’ expectation that they would not beexercised was explicitly recognized in the option agreements, as sellers and buyersagreed to work towards the postponement of the exercise of the options at no costto the buyer. At all relevant times, moreover, CNS did not conduct the physicalbusiness of importing raw sugar into China and refining it. The reasons given bythe arbitral tribunal and the court for the conclusion that the parties were carry-ing on an investment business were as follows. Neither party was a person using


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150 The chances of regulation are therefore greater where the exchange is a necessary counter-party to each trade.

151 [2003] 1 Lloyd’s Rep 179.

the sugar in its business:152 mere traders like CR did not use sugar and CNS wasno longer active in the physical importing and refining business in China. Theparties were buying and selling sugar in a speculative way. Moreover, there was nointention for delivery to be made,153 intention having to be judged at the date theput options were granted and not the date when they were exercised.

The Financial Services and Markets Act 2000 The Act lays down the need forauthorization or exemption in the carrying on of a regulated activity.154 A regu-lated activity is one that relates to an investment of a specified kind,155 investmentbeing defined in the widest terms as ‘any asset, right or interest’.156 Regulatedactivities specifically include options157 and futures, the latter being defined, so asto include also forward delivery contracts, as ‘[r]ights under a contract for the saleof a commodity or property of any other description under which delivery is to bemade at a future date’.158 The sanction of unenforceability for acting in an unau-thorized way is the same as under the 1986 Act159 and there is a very similar discretion to permit an unauthorized benefit to be retained.160

Oil trade The oil trade presents an interesting case study of the way that marketin commodities operate.161 In the world of stable oil prices that existed prior to1973, it was common for oil to be bought in spot sales on the international oilmarket and for it to be the subject of long-term fixed price domestic contracts.One of the problems of spot markets is their inflexibility and the risks they pose tosellers, taking a speculative position in the market, who are faced with a range ofpossible products on the market and a consequent difficulty in covering any shortposition they have taken.162 The world of stable oil prices changed after theArab–Israeli war of 1973 when the oil producers’ cartel, OPEC, introduced hugeprice increases. A number of cases have illustrated the development of forwardtrading in oil to produce commercial activity that in its informality and lack ofregulation resembles forward delivery sales in the GAFTA and FOSFA systems.


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152 See note 4(a).153 See note 4(b).154 S 19. See also Financial Investments and Markets Act 2000 (Regulated Activities) Order

2001, SI 2001/544, especially reg 68.155 S 22.156 Sch 2 to the Act.157 Para 17 of Sch 2.158 Para 18 of Sch 2.159 S 26(1).160 S 28(3)–(6).161 For a useful description of the oil trade and its various futures markets, see S Mankabady, Oil

Trading Law (London: Petroleum Economist, 1997), ch 1. See also EJ Swan, ‘Derivatives and theControl of Oil’, in EJ Swan (ed), Derivative Instruments Law (Cavendish Publishing, 1995).

162 Voest Alpine Intertrading GmbH v Chevron International Oil Co Ltd [1987] 2 Lloyd’s Rep 547, 550.

It would seem that this type of activity filled a gap not yet filled by a still-developingfutures market in oil products.163 Certainly, the development of forward tradingin oil is a relatively recent one.164 Activity of this kind needs a standard productthat can be used to create strings (or daisy chains) of activity on identical termssave as to price. This prevents market activity from being spread across too wide a range of products: concentrated activity promotes the efficient and reliablehedging of risks. Standardized forward trading gives, at one end of the distribu-tion chain, oil producers an incentive to maximize production and, at the other,refiners the assurance that their future feedstock requirements will be met.

Standard oil contracts Commonly traded products are Brent crude oil FOBSullom Voe and fuel oil CIF basis Littlebrook. The latter product was the subjectof forward delivery activity in the Vitol case.165 Trading in the former product isthe subject of a most helpful expert’s report incorporated in the judgment of Hirst J in Voest Alpine Intertrading GmbH v Chevron International Oil Co Ltd .166

The problem in that case concerned a circle settlement (or ‘book-out’) procedurethat was not as fully developed as those in the GAFTA and FOSFA contractual systems.167 This produced problems of contractual uncertainty that need not bedealt with here except to say that the court was satisfied with a loose arrangementwhose purport was the payment of financial differences.

Daisy chains It appears from the Voest Alpine case168 that the standard quantityof FOB Sullom Voe Brent crude was 600,000 bbls (barrels) +/− 5 per cent.Approximately 400 contracts were struck each month in respect of 45 physicalcargoes. The delivery requirement was that the seller would give fifteen days’notice of a three-day lifting range.169 Nevertheless, the limited number of partici-pants in this market ensured that their involvement would be confined to a settle-ment of financial differences as circles (or ‘daisy chains’) were taken out of thephysical delivery chain by the book-out procedure. This reduced costs, sparing theparties thus taken out the expense of opening letters of credit for multimillion dollar figures.

Converting to physical delivery The FOB Sullom Voe contract for Brent crudewas again the subject matter of the contract in Nissho Iwai Petroleum Co Inc v


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163 ibid.164 Transpetrol Ltd v Transol Olieprodukten Nederland BV [1989] 1 Lloyd’s Rep 309, 310 (‘a relatively

new and highly sophisticated trade’).165 Vitol SA v Phibro Energy AG (The Mathraki) [1990] 2 Lloyd’s Rep 84.166 [1987] 2 Lloyd’s Rep 547.167 For the workings of circle clauses, see ch 9.168 [1987] 2 Lloyd’s Rep 547.169 Note that in this trade it is the FOB seller who controls the timetable, a departure from the

position in sales of dry commodities.

Cargill International SA.170 Again, fifteen days’ notice of readiness had to be givenby the seller with a three-day lifting range. But a feature of this market, seeminglynot present in Voest Alpine,171 where the contract in question had been concludedmore than five years earlier, was that a discernible difference existed between thosepaper contracts that retained their paper character to be closed out in the way offutures contracts, and those that were converted into wet contracts with a physi-cal delivery. The problem in this case concerned differentials between the two setsof price movements in these futures and forward markets. A buyer chosen by aseller to receive a nomination converting a paper into a wet contract would suffera substantial loss if the wet market price fell below the paper price. As the physicaldelivery date approached, one would normally expect a convergence of the twomarket prices since the earlier, and higher, physical price would include (dimin-ishing) holding costs not associated with the abstract futures market. A buyerreceiving a nomination where the physical market price had slipped would wishto pass on, in the same way, that same nomination to a sub-buyer, and so on. It amounted to a game of passing the parcel that had to be stopped at the above fifteen-day deadline. More precisely, the game came to an end at ‘17 00 hoursLondon time on the 15th day prior to the first day of the laydays [the three-daylifting range]’. . . . The unlucky buyer at the end of the line was said in the jargonof the trade to be ‘5 o’clocked’.

Availability for nominations It was therefore necessary in these paper contractsto establish a protocol for the giving and receiving of these nominations. Thepractice was for this nomination process to be started a day before the expiry of thefifteen-day deadline, with a chain of forty or fifty contracts developing over atwenty-four hour period. Each nomination took about ten seconds to deliver andall participants in the trade were required to declare a telephone number andappoint a named person to receive nominations in this way. The dispute centredon the last nomination in the chain. After meticulously reviewing the facts, whichincluded counting the number of rings (timed at two seconds each followed by afour-second interval), Hobhouse J in the Nissho Iwai case172 found that the seller,from its New York office, had placed a call to the Boston office of the buyer so thatthe buyer’s telephone began to ring at least twenty seconds before the deadline. If the buyer’s nominee had picked up the instrument promptly, there would havebeen ample time for the seller to complete (as it had to) its ten-second nominationwithin the deadline. But the buyer’s nominee was unwilling to trust the Bostonspeaking clock and took her cue from a Geneva colleague, in whose offices the


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170 [1993] 1 Lloyd’s Rep 80.171 [1987] 2 Lloyd’s Rep 547.172 [1993] 1 Lloyd’s Rep 80.

Geneva speaking clock was relayed by tannoy. The ensuing delay resulted in herpicking up the telephone receiver outside the 17.00 hours deadline. She theninformed the seller that it was out of time.

Seller’s option? The buyer in the Nissho Iwai case173 contended that it had nottimeously been ‘5 o’clocked’. Since the seller was exercising an option to converta paper contract into a wet contract, there was no room for any generosity at allwhen time is in issue in the exercise of an option. But Hobhouse J held that, in fail-ing to respond promptly to the seller’s call, the buyer had acted in breach of animplied contractual obligation not to impede the seller in its attempts to performthe contract (more accurately, to exercise an option under the paper contract).Consequently, the buyer was left holding the parcel, which involved a loss of a little more than $1 million.

Balancing commitments On futures and forward delivery markets, investorsand traders can equalize their buying and selling commitments. Alternatively, ifthey anticipate a fall in the market they can go ‘short’, which means that their salecommitments exceed their purchase commitments. If they anticipate a rise in themarket, they can go ‘long’ by entering into purchase commitments that exceedtheir sale commitments. On a futures market, depending upon its rules, these‘open’ positions can be closed either by a physical delivery or by a cash settle-ment.174 It is important to realize that there is a close correlation between thephysical market price of a commodity and its futures market price.175 A discussionof the relation between the physical and futures (or terminal) markets for sugar isto be found in Gebruder Metelmann GmbH & Co KG v NBR (London) Ltd .176 Thetwo sets of prices generally track each other but the sugar futures market can beextremely volatile within the course of a single day.

Example S, who has taken a short position, has agreed to sell September futures to B at $240 per tonne. When September arrives, the market price hasfallen to $220. On a cash settlement, S will receive from B $20 ($240–$220) pertonne. On a delivery basis, S will make up the shortfall by acquiring a cargo at$220 from another seller and tendering it to B under the contract at $240. Eitherway, S captures a profit of $20 per tonne. This example can be reversed to the benefit of B if the market is a rising one. Investors have been known to misread themarket.


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173 ibid.174 For a case involving futures contracts where the buyer of physical cereals paid by surrender-

ing an equivalent quantity of futures contracts, see Soules CAF v ADM Agri-Industries Ltd 2001 WL 676681.

175 See the examples in A Slabotsky, Grain Contracts and Arbitration (Lloyd’s of London, 1984),pp 49–54.

176 [1984] 1 Lloyd’s Rep 614 (Mustill J at 623, Donaldson MR at 630).

Hedging Dealers on the physical, forward delivery market can ‘hedge’ againstfuture market movement by parallel and opposite dealings on a futures market.177

Those who both buy and sell—middlemen—are engaged in a double hedgingoperation. If they sell forward, they go short and have to buy an equivalentamount in the futures market if they wish, which they may not want to do in fullor at all, to lay off the risk. As and when they eventually enter into a forward pur-chase178 to ‘close down’ their ‘open’ position and balance their books, they sell anequivalent amount in the futures market. Hedging operations—and they cancome in different forms—are especially vital in the oil trade. Oil has been knownto move by $7 per barrel in the space of 10 minutes.179 End sellers (farmers) andend buyers (millers) do not need to go through this double hedging. A farmerhedging against the risk arising from the future sale of his crop when it is reapedcan hedge now by selling the equivalent (estimated crop yield) amount on afutures market. This is an alternative to making a forward sale of his crop to a par-ticular buyer, such as a supermarket chain. Unlike the intermediate trader, thefarmer at no time needs to buy in either market. Similarly, the end user, a feed millfor example, can enter into a hedge purchase on the futures market and buy on thespot market when the crop is ready for delivery.

State monopolies In some countries, the export of grain is a state monopoly.This is the case for western Canadian wheat and barley where the export trade iscontrolled by the Canadian Wheat Board. The Board operates so as to give thefarmer the security of knowing his future price without his having to sell his cropforward or make an offsetting sale on the futures market. Crop prices are announcedby the Board before the growing season; the farmer may therefore adjust his seed-ing plans. Farmers receive the same price whenever they sell their crops to theBoard in the growing season but are subject to individual production quotas. TheBoard itself does not trade on the futures market.180 It also sells mainly on an FOBbasis leaving to private traders the risks associated with the charter, insurance, andcurrency markets.181

Standard products Just as the activities of string traders are assisted by the waythat government-controlled and other inspection agencies standardize a com-modity by quality classification—for example, the Canada Grain Commission


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177 See A Slabotsky, Grain Contracts and Arbitration (Lloyd’s of London, 1984); Socomex Ltd vBanque Bruxelles Lambert SA [1996] 1 Lloyd’s Rep 156.

178 Any delay in so doing is a speculative activity in itself since the market will be moving in themeantime.

179 See J Gray, Shipping Futures (2nd edn, Lloyd’s of London, 1990), ch 2.180 cf the Australian Wheat Board. See CC Carter, ‘Canada’ in D Blandford, CA Carter, and

R Piggott (eds), North-South Grain Policies and Trade Policies (Westview Press, 1993).181 See A Schmitz and others, Grain Export Cartels (Cambridge MA: Bollinger, 1981), p 27

(Ch 2: ‘The Nature of Grain Markets and Trade’).

and its classification of wheat according to the season’s overall quality and takinginto account origin, type, and protein content—so the fluidity of futures marketsis assisted by the standard commodity contracts invented by the exchanges. Forexample, the standard unit on the sugar terminal markets of London and Paris is‘50 tonne lots of a standard grade of sugar on standard terms as to delivery at various standardised future periods’.182 Another example is the Gas Oil contractused on the London-based International Petroleum Exchange.183 The use in oilcontracts of basis clauses,184 which provisionally standardize the destination of theoil, is a useful tool in the manufacture of a standard product to suit string trading.It should not much matter if the gas oil or other oil product so specified is highlyindividualized with few buyers and sellers. Nevertheless, when there is hedgingbetween the physical and futures markets, and the commodities dealt with in thetwo markets are not quite identical, there is a ‘basis risk’ that the two price trendswill not be identical. Traders ‘aim off ’ the physical (or forward) commodity for itsnearest futures equivalent. The two price trends may be sympathetic, since thetwo commodities are very similar, but the risk of differential movement can pro-duce significant losses. For example, soya bean meal in the physical market maydiverge from soya beans in the futures market, though the two price trends shouldremain close.

Physical production The very considerable expansion of futures trading incommodities is matched by increases in physical production. Apart from theincreasing appetite for oil, growing world prosperity and technological improve-ments have been responsible for substantial increases in the volume of dry commodities such as rice and wheat. The world production of wheat increased by150 per cent in the period between the 1960s and 1980s.185 By far the largestexporter of wheat is the United States, accounting for 45 per cent of the whole inthe late 1980s. The United States at that same time also took about 20 per cent ofthe export market in rice, while Thailand was responsible for 40 per cent.186

Studies in the 1980s showed that the five or six largest companies accounted for60–90 per cent of American grain exports.187


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182 Gebruder Metelmann GmbH & Co KG v NBR (London) Ltd [1984] 1 Lloyd’s Rep 614, 630.183 Known as ICE Futures since 2005. See Gray, n 179 above, p 20.184 See ch 5.185 See D Blandford, ‘An Overview of the World Grain Economy’ in Blandford et al (n 180

above).186 ibid.187 ibid.

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