Day's Notes: The Twin or Double Right of Rejection in CIF

In CIF transactions, a seller has two obligations:
1. To deliver conforming documents
2. To deliver contractual goods

Correspondingly, the buyer has separate rights arising from the breach of the seller’s dual obligations:
1. To reject non-conforming documents when they are tendered to the buyer which include:
a) A bill of lading evidencing a physical breach (non-conformity in the goods themselves) by the seller;
b) A bill of lading though correctly dated reveals shipment to have taken place outside the shipping period;
c) Document that states an untruth

Henry Dean & Sons v O’Day Pty Ltd (1927) 39 CLR 330
CIF sale on terms of quantity of “Liverpool wheat sacks”. Buyer refused to accept draft when presented with shipping documents on grounds the goods shipped were not “Liverpool wheat sacks”. The Court held inter alia the buyer was bound to take up proper shipping documents which were documents relating to goods of the description contained in the contract.

Shipping documents aren’t proper when on their face they aren’t irregular but contain false information e.g.:
1.Misdescription of goods;
2.State goods have been shipped in good condition when this is not the case;
3. When the bill of lading attests shipment date other than the correct date.

2. To reject non-conforming goods
This arises once the goods are discharged from the ship and the buyer has a reasonable opportunity to examine them.

LEADING CASES
1. KWEI TAK CHAO v BRITISH TRADERS & SHIPPERS LTD [1954] 2 QB 459

Where there was a CIF contract for shipment of goods by Oct 31, 1951. The bill of lading indicated that the goods were shipped on this date, though in actual fact, goods were shipped on Nov. 3rd.The sellers were unaware of the forgery. Owing to the late shipment, the plaintiff’s lost their resale contract and were unable to sell elsewhere because of a serious fall in the market.
They claimed for return of the price (which failed) and damages for breach of the contract (succeeded).

Their claim for return of price failed on the ground that the bill of lading was voidable not void. It still evidenced a contract of carriage, valid receipt of goods, and enabled holder to obtain goods from the ship. The claim for damages succeeded on the grounds that the seller had breached his obligation to deliver the correct documents and correct goods. The buyer was entitled to reject both the goods and the documents. However, they did not reject the goods or the documents because they were unaware of the right to do so because the incorrect date concealed from them their right. They were entitled to the difference between the contractual price and the market value at the delivery date.

2. GILL & DUFFUS V BERGER & CO. [1984] AC 382

A contract for the sale of 500 tonnes of Argentinian bolita beans CIF Le Havre. An inspector’s certificate was to be final. The Court held inter alia that a certificate of quality was incapable of being included among shipping documents which the CIF seller is required to tender to the buyer. If the parties had intended this, then they should have stated this in the contract. In this case, there was no such provision and the buyers committed a fundamental breach of contract by declining to take up the shipping documents.

Can a buyer reject conforming documents when he knows the cargo is physically defective?
Lord Diplock (obiter): The CIF buyer was bound to pay price against the documents.

3. PANCHAUD FRERES [1970] I Lloyd’s Rep 53
The dual rights of rejection of goods and documents are distinct. However, acceptance of documents covering defective goods affects the right to reject goods on the same grounds when the buyer is aware of defects in the goods because the documents clearly evidence so, or should have been aware of them.

CIF contract for quantity of Brazilian yellow maize, shipment June/July 1965. One of the bills of lading tendered was for 200 tonnes dated 31st July yet accompanying inspection certificate indicated shipment on 12th August. The buyer paid without objection when the documents were tendered. The Court held that the buyers were prevented from terminating the contract for late shipment as they had accepted the documents without protest thus surrendered their rights to terminate. It did not help that the buyers invoked late shipment as a reason for rejecting the goods 3 years into the proceedings.


4. FINLAY (JAMES) & CO. V NV KWIK HOO TONG [1929] 1 KB 400
Where sellers committed separate breaches of documents and goods by delivering goods out of time and issuing a pre-dated B/L wrongly stating the shipment date. The Buyer was entitled to claim damages for being deprived of the right to reject non-conforming documents.

Subject to waiver, acceptance of a falsely dated B/L will not prevent the buyer from rejecting the goods on discharge from the ship.

5. PROCTOR & GAMBLE PHILIPPINE V BECHER (KURT A ) GmBH [1988] 2 Lloyd’s Rep 21
Under a GAFTA 100 contract for sale of quantity of Copra on CIF terms originally in January was extended to the end of February. The documents presented to the buyer included a B/L dated 31st Jan. Having doubts about shipment date, buyers paid under all contractual reserves. Goods had been shipped on 10th Feb. Buyers declared their intention to reject goods and recover the price paid.

The Court held inter alia that the shipment of goods under the contract was a timely one under contract, so the only breach committed was a documentary breach. The buyers had a right to reject the bill of lading because it was inaccurately dated, which was not apparent on the face of the document itself.

Kerr J noted that it was an implied condition that the documents be true in all material aspects.

The buyer unaware of a documentary breach not apparent on the face of the document is in the same position as the buyer of goods who loses the right to reject them because time has tolled under S. 35 of the Sales of Goods Act. Each is treated as having affirmed the contract and neither can reverse the market risk by means of a damages award. An award of nominal damages is the appropriate award.

REFERENCES
1.Michael Bridge, The International Sale of Goods; Law and Practice (2nd Edn, 2007), Ch.8[1]

2. The Sale of Goods Act Ch.54 1979