COD AND CAD 43

4 PAYMENT MODALITIES 4.2 Payrnent in advance

In some cases, particularly where the seller enjoys a good bargaining position,
4.1 Simultaneous exchange of goods for money he may succeed in requiring the buyer to pay wholly or partly for the goods in
Quite naturally, the rules relating to sale of goods express a "neutral" stand- advance. Payment in advance occurs frequently in situations where the sup-
poin~ to the effect that none of the parties, unless otherwise agreed, may be plier incurs costs during a protracted time for the manufacture, such as in
reqmred to perform before the other party (the principle of simultaneous ex- contracts for building of ships or aircraft. This, however, is hardly acceptable
change). A different principIe would require one of the parties to bear the risk to the buyer unless he stands in some commercial relationship to the seller or
of non-performance by the other party even ifhe had not agreed to it. Never- nevertheless is prepared to trust him. When the sale concerns commodities,
~heless, the principIe of simultaneous exchange cannot always be effectively contracts are frequently arranged through the medium ofbrokers, so that the
implemenred. Such difficulties arise particularly when the parties do not meet element of trust becomes somewhat diluted. In such cases, the parties are well
themselves or ~hrough representatives in order to effect the exchange. When- advised to take precautions in order to avoid or modify risks occurring when
ever the seller 1Sto perform the contract by handing over the goods to a third one of them is required to perform before the other.
party, such as a carrier, and the buyer thus would have to wait until he can ac-
tually lay his hands on the goods, the question arises whether he should still
be obliged to pay for them. In such cases, the documents controlling the dis- 4.3 Documentary credit
position of the goods (cf CISG Art. 58.1) may be used as a substitute for the Whenever the seller fails to obtain an agreement for payrnent in advance he
goods. Particularly when the sale concerns such commodities as the buyer may use the alternative to agree with the buyer that he should instruct a bank
woul~ have the possibility to sell to another party before arrival at destination to issue an irrevocable documentary credit with the seller as beneficiary. This
(sale m transit), it is appropriate to regard the transaction as a sale of docu- will be dealt with in more detaillater but it should be mentioned already at
ments rather th~n a sale of goods. What happens then is really that the buyer this stage that the seller would not then be forced to assume any risk for non-
so to say steps mto the shoes of the seller and through the medium of the performance by the buyer, provided he could ensure his ability to present to
do.cum.ents, e. g. under a CIF -sale, enters into a direct contractual relation- the bank exactly the documents required for payment according to the agreed
Shl~ with t~e carrier and the insurer so that he can claim the goods from the terms of the documentary credit.
carner or, m ~ase the goods have become lost or damaged, compensation
from the carrrer or the insurer. This would explain the particular rule in
CISG Art. 68 to the effect that the risk with respecr to goods sold in transit 4.4 COD and CAD
passes to the buyer, not at the time when the buyer himself takes over the While for a seller a documentary credit in a sense could be said to be the next
goods (CISG Art. 69.1), but at the time of the conclusion of the contract. best solution compared with payment in advance, there is also a further possi-
!f0~ever, there is an exception from this principIe when the circumstances bility for him to protect himself by requiring the carrier or the freight for-
md1cate that the risk is assumed by the buyer from the time the goods were warder not to release the goods at destination until the buyer pays, so-called
hande~ over to the carrier who issued the document embodying the contract cash on delivery-instructions (COD). Another possibility would be to in-
of. carnage. When the goods are sold in transit the risk would according to struct a bank, usually at the buyer's. place of business, to retain documents
~h1Sexc~ption pass to the buyer already before the contract has been entered controlling the disposition of the goods until payment, so-called cash against
mto. Th1S rule is difficult to understand if the sale is not regarded as a sale of documents-instructions (CAD). But in these cases, as compared with docu-
documents rather than a sale of the goods themselves. Nevertheless the seller mentary credits, the seller is exposed to the risk that the buyer does not ap-
has two distinct1y different obligations, one to present the required docu- pear at destination to pay for the goods or the documents. The seller would
mentes) and the other to provide the goods according to agreed specifications then incur the problem of arranging a cover sale or, at worst, re-dispatching
(conforming goods).
the goods to his own country. This might be particularly harmful for the
 44 PAYMENT MODALITIES THE RIGHT OF STO'PPAGE IN TRANSIT 45

seller if there is no market for a cover sale and he cannot himselfbenefit from A certain protection for the seller or the buyer as the case may be is pro-
the goods. True, the buyer would in these cases have committed a serious vided by CISG Art. 71 stipulating that a party may suspend the performance
breach of the contract for which he would be liable to pay compensation to of his obligations - the seller to hand over the goods or the documents con-
the seller. But this is often cold comfort for the seller when the buyer fails to trolling their disposition to the buyer and the buyer to defer payment -
show up at destination to get the goods. Payment in advance or payment whenever it becomes apparent that the other party will not perform a sub-
through the medium of documentary credit or instructions to carriers or stantial part of his obligations. The word "apparent" should not be taken
banks to collect cash before delivery of the goods or documents controlling lightly as it is a further requirement that the suspicion of non-performance
their disposition provide some security for the seller. But a disadvantage oc- should result from a serious deficiency in the ability to perform or in the
curs for the buyer who may then lose rus right according to CISG Art. 58.3 creditworthiness or the conduct in preparing to perform or in performing the
to examine the goods before payment as the procedures for delivery now contract. If this could have been discovered already at the time of the conclu-
mentioned would normally be inconsistent with the buyer's right to examine sion of the contract it is considered that the party concerned has assumed the
the goods. Normally, carriers or freight forwarders would not allow some- risk and, if so, he may not later change his mind. Further, it may be a practi-
body with whom they do not yet stand in any contractual relationship to ex- cal difficulty for the unpaid seller to use his right to stop the goods in transit
amine goods in their custody. where he has parted with the document controlling disposition of the goods
in relation to the carrier or, alternatively, has given the carrier irrevocable in-
structions to deliver the goods to the buyer. In these cases, it may well be that
4.5 The right of stoppage in transit
the carrier refuses to act as a kind of arbitrator in the dispute between the
When the sale concerns manufactured goods it is particularly common that seller and the buyer and simply advises the seller that he would have to hon-
the buyer does not have to pay until he has taken over the goods and had the our the buyer's right to obtain the goods according to the document or in-
opportunity to examine them. It is normal procedure that the seller would in- structions given. The position of the carrier resembles that of a bank which
voice the buyer and require payment within a certain period of time from the would also be reluctant to depart from irrevocable instructions under docu-
date of the invoice. The seller would then normally incur a credit risk since, mentary credits or guarantees. CISG, in Art. 71.2, contains a reminder of
in most jurisdictions, the buyer's possession of the goods would bar the un- this problem by stipulating that the seller's right to prevent the handing over
paid seller from the possibility to claim restitution of the goods in case of the of the goods to the buyer, even though the buyer holds a document which en-
buyer's bankruptcy. In other words, the unpaid seller would normally lose the titles him to obtain them, only relates to the right in the goods as between the
battle between himself and the buyer's other creditors. In these situations, the buyer and the seller. The duties of the carrier in these situations are thus
rules relating to the seller's right to stop delivery to the buyer might become wholly outside the scope of CISG and must be resolved primarily according
usefuL Conversely, a buyer having paid for the goods in advance would not to the rules relating to the contract of carriage. In the same manner as a buyer
have a secured right to get the goods in case the seller goes bankrupt, at least may seek to prevent payment to the seller by an injunction obtained by a
not unless the goods have been duly identified as the buyer's goods which, court of law or other competent authority, the seller may by a similar injunc-
whenever the goods are unascertained at the time of the conclusion of the tion succeed in preventing the carrier from handing over the goods to the
contract, would require that they are clearly appropriated to the contract of buyer by invoking the right of stoppage in transit according to CISG Art. 71
sale with the buyer so that, as it is expressed in English law, property in the or any similar stipulation under the applicable law. A party exercising his
goods has passed to him. In other jurisdictions, e.g. according to Swedish right of suspending performance must imrnediately notify the other party and
law, not even such identification of the goods would suffice, since 'it is re- continue with performance if the other party provides adequate assurance of
quired that the goods or documents controlling their disposition are handed his performance. The value of such assurance might be easy to assess when it
over to the buyer in order for him to enjoy a protected right against the relates to the buyer's performance to paya sum of money, while an adequate
seller's other creditors. assurance of the seller's performance may be difficult to assess, particularly
46 PAYMENT MODALlTlES

when the buyer has no duty to accept damages for non-performance as a sub- PROTECTION AGAINST BREACHES OF
stitute for specific performance.
5
CONTRACT AND CHANGED
CIRCUMSTANCES
4.6 Retention of title
A further possibility for the unpaid seller to protect himself would be to re-
tain the title to the goods until payment. This, however, requires a retention
5.1 Bid bonds, performance bonds, first
clause in the contract of sale which is effective and recognised in the jurisdic-
demand -guarantees
tion where the goods have been delivered to the buyer. Retention of title othing can replace the protection achieved by an excellent commercial rela-
clauses are more readily accepted in jurisdictions which use passing of prop- tionship. It is a truism that a contract, however well written, never becomes
erty as the decisive criterion. If so, it would be accepted that, although the any better than the contracting parties themselves. In some situations, as
goods have been placed in the possession of the buyer, the seller has never when the parties wish to establish a new commercial relation or trade with
parted with his property rights in the goods and thus that the sale has not yet commodities on the spot market, they may be well advised not to place too
been fu11yimplemented. In some jurisdictions, however, the decisive criterio n much reliance on the ability and commercial standing of the counter-party. It
is not the somewhat metaphysic concept of passing of property but rather an may then be necessary to use the various forms of contract guarantees availa-
independent assessment of the desirability to protect the unpaid vendor to ble on the finance markets. Contracts for the supply of goods and services to
the detriment of the buyer's other creditors. This being so, one will find that authorities and governmental bodies are usually entered into by a formalised
retention of title clauses may or may not become valid in various jurisdictions. contracting technique purporting to ensure that impartiality and good com-
In some jurisdictions, such as in Sweden, it is considered that retention of ti- mercial practice are observed. Invitations are therefore made to prospective
tle clauses should not be accepted when the buyer has a free right to dispose suppliers (so-called "tenders") in order to secure the best offer. The risk that
of the goods by resale to other parties or to alter the identity of the goods by the offeror commits a breach by revoking the offer is then sometimes coun-
using them in his own manufacturing process. Research has been done tered by a guarantee of the obligation to enter into a contract according to the
within the ICC not only with respect to retention of title clauses - which has offer (a so-called "bid bond"). Mter the contract has been entered into each
resulted in a practical guide to legislation in 35 countries (ICC Publ. No. party may wish security for the performance of the other, but in these cases
501) - but also transfer of ownership in different jurisdictions (ICC Publ. the guarantee concerns the performance of the contract (performance bond).
No. 556). In situations where it is impossible to ascertain whether the seller has duly
performed his obligation to deliver conforrning goods, the buyer may protect
himself by withholding part of the price according to an agreement to defer
payment of a part of the price or, alternatively, by invoking a guarantee for
correct performance. In cases where the parties dispute whether the perform-
ance is correct the buyer may wish to call upon the guarantee without first
having to obtain a resolution by a court of law or an arbitral tribunal. The
guarantee may then take the form of a so-called first demand-guarantee to
the effect that the demand as such suffices to trigger payment under the guar-
antee. eedless to say, such types of guarantees may be abused, since no
proof of breach of contract is required. The problem of unfair callings under
demand guarantees has been much debated. The ICC Uniform Rules for
Demand Guarantees (ICC Publ. No. 458) contain a particular rule in Art. 20
(a) requiring the party calling under the guarantee to make a statement that a
48 PROTECTION AGAINST BREACHES OF CONTRACT AND ... CHANGED CONDITIONS AND THE PRINCIPLE OF BINDING CONTRACTS ... 49

breach of contract has been committed and also to specify in what respecto In would be fatal to international trade if promises were deemed to be made on
the absence of such a statement no payrnent will be made. However, accord- the basis ofthe situation at the time of the conclusion of the contract and if it
ing to Art. 20 (e), the parties have the possibility to contract out of the special were to be accepted as an implied term that the promise be defeated or mod-
requirement to make a statement according to Art. 20 (a). The problem is ified in case of changed circumstances (an implied so-cal1ed clausula rebus sic
also addressed in the 1996 UN Convention on Independent Guarantees and stantibus). But this is not to say that commerce requires a rigid rule to the ef-
Stand-by Letters of Credit. In the Convention another method is adopted, fect that every contractual undertaking is absolute. In mosr jurisdictions, it
namely to consider that the party demanding payment under the guarantee is would be possible to escape from contractual obligations if they have been af-
thereby deemed to have certified that no such circumstances exist which fected by unforeseeable circumstances severely preventing performance or
would invalidate the guarantee, such as falsification or that the guarantee eroding the benefits expected from the contract. Nevertheless, these parame-
lacks a "conceivable basis" (Art. 15.3). The lack of"conceivable basis" is fur- ters - unforeseeability and serious effect - have been understood differently
ther specified in Art. 19.2. in different jurisdictions and engaged a number of different legal concepts
In order to function properly guarantees by their nature ought to be inde- and doctrines, such as relief due to impediments beyond control or force ma-
pendent from the underlying transaction (the doctrine of separability). jeure (in German: Hohere Gewalt), Act of God, impossibility, frustration,
Otherwise, banks and other guarantors would be faced with the difficult task disappearance of basis of contract, imprvision and impracticability. Gener-
of analysing the underlying transaction and, in this sense, of acting as some ally, it might be stated that the possibility of attaining such relief under the
kind of arbitrators to resolve disputes between the party having instructed the applicable nationallaw is quite limited and rightly so, as a generous applica-
bank to pay under the guarantee and the beneficiary. True, the 1996 UN tion of relief from contractual undertakings would reduce foreseeability in
Convention, in Art. 19.1, requires that the circumstances where the bank is commercial relations to a degree unacceptable to international commerce.
not obliged to pay should be manifest and clear but nevertheless the Conven- The UNIDROIT Principles, in Art. 6.2.1, state the general principle that
tion, in some important respects, is not compatible with the main idea that the mere fact that a contract becomes more onerous for one of the parties
guarantees are separate transactions from the underlying transaction causing does not relieve him from his obligations. However, according to the fol1ow-
them to be issued. The Convention has (2004) only been ratified by 6 States. ing Art. 6.2.2, relief should be available in case of"hardship" as there defined.
A hardship is deemed to exist where the occurrence of events fundamentally
alters the equilibrium of the contract. This may happen either because per-
5.2 Changed conditions and the principlc ofbinding formance has become more costly or because the value of the performance has
contracts (pacta sunt servanda) diminished. But there are no less than four important restrictions, namely
Since the very purpose of a contract is to determine rights and obligations of that
the contracting parties it is in their common interest, at least at the time of a) the events occur or become known to the disadvantaged party after the
the conclusion of the contract, that they both keep their bargain. However, conclusion of the contract;
their position may easily change during the time for the implementation of b) the events could not reasonably have been taken into account by the dis-
the contract, particularly if this requires a protracted period of time. In some advantaged party at the time of the conclusion of the contract;
cases, there may be no change of circumstances but a party nevertheless fails e) the events are beyond the control of the disadvantaged party; and
to reach his objective by his failure to correctly assess the situation at the time d) the risk of the events was not assumed by the disadvantaged party.
when the contract was made. Normally, this could not be used as a ground If according to the rather stringent requirements of Art. 6.2.2 hardship
for escaping his obligation unless there has been some kind of cornmon mis- should be available as a relief, Art. 6.2.3 determines that the disadvantaged
take or a mistake of which the other party could not have been unaware. party is entitled to request re-negotiations but that the request for re-negoti-
Even if, according to the main principle, contract obligations remain unal- ation does not in itself entitle the disadvantaged party to withhold perform-
tered in spite of changed circumstances it would not be a reasonable interpre- ance. In case the re-negotiations fail, the contract may either be terminated at
tation to hold that promises are binding no matter what happens. But it a date and on terms to be decided or adapted so as to restore its equilibrium.
50 PROTECTION AGAINST BREACHES OF CONTRACT AND ... . EXEMPTlON, FORCE MA]EURE AND RELIEF CLAUSES 51

The aforementioned principie that hardship could constitute a relief from been structured to give more effect to the list of typical force majeure events
contractual undertakings is certainly an innovation insofar that it does not and avoid the effect of the general requirements of force majeure to deprive
rely on the traditional concepts used in various jurisdictions for such purpose. the list of any effect.
But the results from applying the UNIDROIT Principles may well become The ICC 2003 clause, in paragraph 1 (a), starts with the requirement that
the same as would have resulted from the application of various legal con- the impediment must be beyond the affected ,Party's reasonable control. The
cepts and theories used in the different jurisdictions. However, usually courts word "reasonable", which is missing in Art. 79 CISG, signifies that the im-
oflaw adhere to the "all or nothing"-principle so that the contractual obliga- pediment does not have to be absolute. The second requirement , in para-
tion would either stand unamended or disappear altogether. Modification of graph 1 (b), relates to the possibility to foresee the impedimento lf this is rea-
contractual obligations usually requires specific contract terms as a support. sonably possible at the time of the conc1usion of the contract the impediment
Nevertheless, in exceptional cases, contract modification would in some juris- cannot be invoked. The third requirement gives effect to the word "reasona-
dictions be possible at law. As an example could be mentioned the German ble" in 1 (a) so that the impediment may not be invoked if it or its effects
BGB section 242 and section 36 of the Scandinavian Contract Acts which could reasonably have been avoided or overcome.
purport to make a remedy available for setting aside or modifying unreasona- Paragraph 2 (a) and (b) is more or less a reminder of the well established
ble contract clauses but which are sufficiently wide to make it possible to con- principie that a contracting party is liable for the acts or omissions of third
sider subsequent events as well. parties engaged to perform the whole or part of the contract. Thus, an excuse
from the contractual obligations is only possible to the extent it can be proven
that they also have met the requirements of paragraph 1 of the clause.
5.3 Exemption, force majeure and relief clauses The list in paragraph 3 relates to typical force majeure events and is corn-
paratively short. Onl events of a e to be generally difficult to foresee and
Quite naturally, contracting parties are in some cases not prepared to take the
overcome have been included, the reason being that a party succeeding to
risk that unexpected difficulties to reach their objectives would be solved by
prove the occurrence of a listed event is presumed to have met the require-
the application of legal concepts and doctrines. Standard forms therefore
ments of "impediment beyond reasonable control" and "reasonable unfore-
usually contain particular exemption, force majeure or relief clauses.
seeability" of paragraph 1 (a) and (b). It_should b! underlined that the re-
quirement of paragraph 1 (e) that the party must...erove that it could not rea-
Force majeure clauses
sonably have avoided or overcome the effects of the impediment is unaffected
Force majeure clauses could be structured differently. Usually they would by the occurrence of one or several of the listed events. So, even the unpre-
only address the position of the performing party, while frustrated objectives dictable outbreak of war do es not release a party from its obligations unless it
are not regulated at all. This means that the clauses in fact only work to the is proven that the war affects the possibilities to perform as set forth in para-
benefit of the seller, since a buyer's main obligation to pay money would sel- graph 1 (e).
dom be impeded. Sometimes the clauses even explicitly provide that they Paragraphs 4-9 relate to the effect of a relevant force majeure event and
only work unilaterally to the benefit of the seller. It is an advantage of such the duty to give notice ( paragraphs 4-6) and to take all reasonable means to
clauses that they add specificity to the abstract principies related to contract limit the effect of the event (paragraph 7). Notice must be given without de-
adjustment. Usually they contain long lists of circumstances preventing or lay. lf that is not done the relief from the duty to perform does not take effect
hindering performance. Contract drafters are aware of the fact that their upon the occurrenceof the event but only f;om the time the notice reaches
source of supply of previous similar contract clauses and their own imagina- the other party ( paragraph 4 ).
tion would not suffice to enumerate everything. The clauses therefore contain The event does not only relieve the affected party from any liability in
abstract formulas, such as "circumstances beyond control", in order to provide damages but also from any other contractual remedy for breach of contract
for matters not dealt with by enumeration. As an example could be men- (paragraph 5).
tioned the ICC force majeure (exernption) clause 2003 which, however, has
 52 PROTECTION AGAINST BREACHES OF CONTRACT AND ... EXEMPTION, FORCE MAJEURE AND RELIEF CLAUSES 53

The event is only effective as a relief as long as it lasts and a party affected 3. In the absence of proof to the contrary and unless otherwise agreed in the contract
by the event has to give notice to the other party as soon as the event ceases to between the parties expressly or implied1y, a party invoking this Clause shall be pre-
impede performance (paragraph 6). sumed to have established the conditions described in paragraph lea) and (b) ofthis
Clause in case of the occurrence of one or more of the following impediments:
Impediments lasting for a longer period of time may have serious effects
(a) war, (whether dec1ared or not), armed conflict or the serious threat of same (in-
for a party or both parties. The efforts and costs to perform the contract as
c1uding but not limited to hostile attack, blockade, military embargo), hostilities, in-
agreed at a later time, and the value of the contract at such time, may be to- vasion, act of a foreign enemy, extensive military mobilisation;
tally different compared with the expectations of the parties at the time the (b) civil war, riot rebellion and revolution, military or usurped power, insurrection,
contract was concluded. In some force majeure clauses, either Partr. has the civil commotion or disorder, mob violence, act of civil disobedience:
right to terminate the contract when the event has lasted for a~~Lp-eriod of (e) act of terrorism, sabotage or piracy;
(d) act of authority whether lawful or unlawful, compliance with any law or gov-
time ( see e.g. the ICe International Sale ontract clause 13.4, six months).
ernmental order, rule, regulation or direction, curfew restriction, expropriation, com-
As it is intended that the ICe force majeure clause should be possible to use pulsory acquisition, seizure of works, requisition, nationalisation;
for a number of different contract types, it ha not been deemed appropriate (e) act of God, plaque, epidemic, natural disaster such as but not limited to violent
to insert a set periodo Instead, the same technique as appears from the for- storm, cyc1one, typhoon, hurricane, tornado, blizzard, earthquake, volcanic activity,
mula of Art. 25 CISG with respect to avoidance of the contract in case of landslide, tidal wave, tsunami, flood, damage or destruction by lightning, drought;
breach has been used. So, if the duration of the impediment has the effect of (f) explosion, fire, destruction of machines, equipment, factories and of any kind of
installation, prolonged break-down of transport, telecommunication or electric cur-
substantially depriving either or both of the contracting parties of what they
rent;
were reasonably entitled to expect under the contract , either party has the (g) generallabour disturbance such as but not limited to boycott, strike and lock-
right to terminate the contract upon notice to the other party (paragraph 8). out, go-slow, occupation of factories and premises.
Upon termination, any benefit derived before termination should be taken
4. A party successfully invoking this c1ause is, subject to paragraph 6 below, relieved
into account in order to avoid any unjust enrichment. Thus, according to par- from its duty to perform its obligations under the contract from the time at which the
agraph 9, a sum of money equivalent to the value of the benefit should be impediment causes the failure to perform if notice thereof is given without delay or, if
paid to the other party. notice thereof is not given without delay, from the time at which notice thereof
reaches the other party.
1. Unless otherwise agreed in the contract between the parties expressly or implied1y,
where a party to a contract fails to perform one or more of its contractual duties, the 5. A party successfully invoking this Clause is, subject to paragraph 6 below, relieved
consequences set out in paragraphs 4 to 9 of this Clause will follow if and to the ex- from any liability in damages or any other contractual remedy for breach of contract
tent that that party proves: from the time indicated in paragraph 4.
(a) that its failure to perform was caused by an impediment beyond its reasonable 6. Where the effect of the impediment or event invoked is temporary, the conse-
control; and
quences set out under paragraphs 4 and 5 above shall apply only insofar, to the extent
(b) that it could not reasonably have been expected to have taken the occurrence of
that and as long as the impediment or the listed event invoked impedes performance
the impediment into account at the time of the conc1usion of the contract; and
by the party invoking this Clause of its contractual duties. Where this paragraph ap-
(e) that it could not reasonably have avoided or overcome the effects of the imped-
plies, the party invoking this Clause is under an obligation to notify the other party as
iment.
soon as the impediment or listed event ceases to impede performance of its contrac-
2. Where a contracting party fails to perform one or more ofits contractual duties be- tual duties.
cause of default by a third party whom it has engaged to perform the whole or part of
7. A party invoking this Clause is under an obligation to take all reasonable means to
the contract, the consequences set out in paragraphs 4 to 9 of this Clause will only
limit the effect of the impediment or eve!1tinvoked upon performance of its contrac-
apply to the contracting party: tual duties. .
(a) if and to the extent that the contracting party established the requirements set
out in paragraph 1of this Clause; and 8. Where the duration of the impediment invoked under paragraph 1 of this Clause
(b) if and to the extent that the contracting party proves that the same require- or of the listed event invoked under paragraph 3 of this Clause has the effect of sub-
ments apply to the third party. stantially depriving either or both of the contracting parties of what they were rea-
 54 PROTECTIO AGAINST BREACHES OF CONTRACT ANO ... . EXEMPTION, FORCE MAjEURE ANO RELIEF CLAUSES 55

sonably entitled to expect under the contract, either party has the right to terminate hardship clause the right to terminate the contract. This alternative was pre-
the contract by notifieation within a reasonable period to the other party.
ferred as an encouragement for the parties to work out their own solution.
9. Where paragraph 8 above applies and where either contracting party has, by reason
1. A party to a contract is bound to perform its contractual duties even if events have
of anything done by another contracting party in the performance of the contract, de-
rendered performance more onerous than could reasonably have been anticipated at
rived a benefit before the termination of the contract, the party deriving such a bene-
the time of the conclusionof the contract.
fit shall be under a duty to pay to the other party a sum of money equivalent to the
value of such benefit. 2. Notwithstanding paragraph 1 of this Clause, where a party to a contract proves
that:
Aecording to the main principie, performance should only be suspended
(a) the continued performance of its contractual duties has become excessively on-
while the hindering event subsists but it may well be contrary to the interest erous due to an event beyond its reasonable control which it could not reasonably
of one or both contracting parties that the contract remains in effect when have been expected to have taken into account at the time of the conclusion of the
performance is suspended during a longer period of time. Particularly in con- contraet; and that
tracts intended to last for a longer period of time, such as building contracts, (b) it could not reasonably have avoided or overcome the event or its consequences,
the parties are bound,within a reasonable time of the invocation of this Clause, to ne-
it is therefore useful to determine and specify how long the contract would
gotiate alternative contractual terms which reasonably allow for the consequences of
remain in effect in the event of a long-Iasting impedimento
the evento

Hardship clauses 3. Where paragraph 2 of this Clause applies, but where alternative contractual terms
which reasonably allow for the consequences of the event are not agreed by the other
Commerce would not function well without adherence to the principle that party to the contract as provided in that paragraph, the party invoking this Clause is
contracts must be performed even if a party would meet unforeseen difficul- entitled to termination of the contract.
ties or disadvantages. But the burden may at times be excessive and beyond
Price adjustment and currency clauses
what is reasonable to leave without any remedy. As has been mentioned, the
UNIDROIT Principles, in Art. 6.2.1. , stipulate a relief in the event of The world economy is affected by constant inflation but money is used ac-
"hardship" which is deemed to exist when the occurrence of even s funda- cording to its nominal value and not as a real value by reference to some kind
mentallyalters the equilibrium of the contract. But such events must be rea- of indexation. This means that the buyer's obligation to pay the price might
sonably unforeseeable and beyond control. And more importantly, the risk of be eroded when the value ofhis performance is diminished by inflation. This,
the events must not have been assumed by the disadvantaged party. While of course, is a well known phenomenon in international trade and it is for
the 1985 ICC provisions on hardship only contained some alternative draft- sellers to take the risk ofinflation into account. However, the rate ofinflation
ing suggestions, the 2003 clause is structured in compliance with the UNI- differs considerably in different countries. In some countries, the situation is
DROIT PrincipIes. However, it should be noted that the requirement that instable to such a degree that the seller would insist on payment in one of the
the relief is unavailable when the risk of the events have been assumed by the major convertible currencies. When the seller has to buy goods or services
other party is missing. Therefore, the parties are well advised to abstain from needed for his performance in a foreign currency the cost of his performance
using the ICC Clause whenever the contract is intended to allocate risks for may in case of unexpected currency fluctuations increase considerably. He
unfortunate events to either party. could guard against this by setting the contract price in the currency in which
The hardship stipulation of the UNIDROIT Principies, in Art. 6.2.3. (4) he would have the major part of his costs .or, alternatively, he may prefer to
(b), allows the court, if reasonable, to adapt the contract with a view to restor- insert price adjustment or currency clauses in the contract. Such clauses may
ing its equilibrium. This principIe has not been followed in the ICC Clause. become rather elaborate, particularly when more than one currency should be
I~, relevant hardship triggers a duty to negotiate alternative contractual taken into account (so-called multicurrency clauses). In any event it is neces-
terms ( paragraph 2 ). Failure to negotiate and agree to such terms which re a- sary to specify exactly how the contraet price should be affected by a ehange
sonable allow for the consequences of the event gives the party invoking the of the relation between the price and the foreign currency(ies) during the
time for the implementation of the seller's performance.
--"----
56 PROTECTION AGAINST BREACHES OF CONTRACT AND ...

Price adjustment clauses are even more difficult to designo In some cases it 6 TRADE TERMS AND THE CONTRACT OF
may be possible to refer to indices for labour and material and then to set
forth the escalation and - if the clause is reciprocal - reduction of the price CARRIAGE
which would follow from an application of the indices. This, however, may
result in a rather rough approximation which sometimes could work to the 6.1 The variants (from EXW to DDP)
detriment of one of the parties to such a degree that the price adjustment
clause would be considered unreasonable. Another method would be, as in CISG, in art 1.1, determines that it applies between parties whose places of
the case ofhardship, to let price changes above a certain level trigger re-nego- business are in different States. This means that CISG could also apply to a
tiation of the price. contract of sale where the goods should be collected by a foreign buyer in the
seller's country under the trade term Ex works (EXW) or when it should
move between places solely in the seller's country. In these cases, the only in-
ternational element of the contract is the fact that the parties have their
places of business in different countries. Usually, however, an international
sale of goods covered by CISG would make it necessary to move the goods
across at least one frontier. It is then necessary to decide as precisely as possi-
ble how the functions, costs and risks incurred in moving the goods shall be
distributed between seller and buyer. The main question then becomes which
of the parties shall be charged with the task of procuring the carriage and en-
tering into a contract of carriage with a suitable carrier. But even if the parties
have agreed on this a number of other important problems remain to be
solved such as the following:
- Which of the parties should bear the risk if it is not possible to obtain
carriage at the time determined in the contract?
- Who should bear the risk in case the goods are lost or damaged in tran-
sit?
- On what terms should a contract of carriage be concluded?
- Who should pay for carriage and related costs?
- Which notices should be given by a party to the other party?
- What documents are required and, in particular, does the seller owe a
duty to the buyer to give him a document controlling the disposition of the
goods while in transit?
- What characteristics should a document have in order to give the buyer
such a right of control?
- How is it possible for the buyer to claim delivery of the goods from a car-
rier or, in case they have been lost or damaged, compensation therefore when
there is no contractual relationship between him and the carrier?
- Is it possible for the buyer to seU the goods to somebody else while the
goods are in transit?
 THE VARIANTS (FROM EXW TO DDP) 58 59 TRADE TERMS AND THE CONTRACT OF CARRIAGE

- Who should, if this becomes necessary, clear the goods for export or im- the goods in the country of destination. These different variants will be dealt
port and pay duty or other official charges which are levied upon import of with at some length below.
the goods?
- How should the goods be packed when the seller does not arrange for the
6.2 Changed routines for the performance of the contract
carriage and may be unaware of the buyer's intention with respect to carriage?
of carriage
Incoterms In contemporary international trade it is particular1y important to observe the
need to use the modern variant ofFOB, namely the FCA-term whereby the
Since times past, merchants use various trade terms which purport to give ap-
seller fulfils his obligation upon handing over the goods to the carrier and
propriate answers to the above-rnentioned questions but, unfortunately, the
not, as with FOB, when the goods pass the ship's ral in the port of shipment.
terms do not themselves tell us very mucho The short-hand expressions, such
The FOB-point is now, in most cases, anachronistic because of different
as FOB and CIF, would not by themselves be sufficient although one could,
handling techniques which render the ship's ral meaningless for the purpose
perhaps, figure out that FOB litera1ly means "Free On Board". But this may
of division of functions, costs and risks between sellers and buyers. Also, it is
well be a fa1se assumption since, according to the 1941 American Foreign
important to note the particular nature of the C-terms since they are based
Trade Definitions, the expression FOB does not mean Free On Board unless
on two critica1 points, one for the division of risks and another for the divi-
it has been used in conjunction with the word "vessel". ICC, in the 1920s,
sion of costs. Merchants, quite understandably, may focus their attention on
performed a study to ascertain how trade terms were understood in different
the point for the division of costs so that they would know how to quote and
countries. The result of the study was depressing in view of the finding of
assess offers. If a buyer is offered the goods CFR named port in his country
many different opinions as to the interpretation of trade terms. In order to
he would know that it is for the seller to procure and pay the carriage to such
solve this prob1em which, indeed, constitutes a serious impediment to world
port. But since the other relevant point, where the seller actua1ly fulfils his
trade, the ICC elaborated rules of interpretation which first appeared in the
delivery obligation, is usua1ly not mentioned at a1lit may be somewhat diffi-
1936 version ofIncoterms. Incoterms has since been revised in 1953 , 1967 ,
cult for the buyer to understand that the risk of loss of or damage to the
1976, 1980, 1990 and 2000. The 1980 revision was mainly triggered by the
goods in transit is his from the moment the goods pass the ship's ral in the
s.o-ca1ledcontainer revolution shifting the important delivery point from de-
country of shipment. This risk of misunderstanding is aggravated by CFR
livery over the ship's side to delivery of the goods for stowage in containers
since the seller under this term has no obligation to insure such risk in transit
a~d the 1990 version dealt with the important change of contracting tech-
to the benefit of the buyer which would be the case if CIF had been used in-
~lques .as a resu1t of the computer revolution, where contracting parties to an
stead. Both CFR and CIF would however become inappropriate where the
mcreasmg extent would agree to communicate electronical1y by Electronic
goods move in container traffic, since then the ship's ral, as is the case with
Data Interchange (EDI). The 2000 revision reversed the obligations to c1ear
FOB, would be an unnatural division point. Instead, Incoterms 2000 offer
the goods for export and import under FAS and DEQrespectively and added
the parties the possibility to use CPT or CIP which, in the same manner as
some specificity to the loading and unloading obligations under FCA, DDU
FeA, fix the delivery point to the handing over of the goods to the carrier for
ochDDP.
carriage.
I.ncoterms deal with no less than 13 trade terms frequently used in inter-
~atlOnal trade and covering a wide range from the seller's minimum obliga-
non ~omake the goods available ex works to the buyer at the seller's premises,
handmg over the goods for carriage without or with the obligation to procure
and pay for the carriage under the F - and C-terms respectively and, fina1ly,
no less than five variants of D-terms whereby the seller undertakes to deliver
 TRANSPORTINSURANCE 61

7. THE RISK OF LOSS, DAMAGE OR DELAY venture, whereby, according to old customs, risks are shared in so-called gen-
eral average situations, i. e. when both ship and cargo are exposed to a com-
DURING CARRIAGE OF THE GOODS mon peril and extraordinary measures are taken for salvage, such as throwing
the cargo over board in order to lighten the ship so that it could come off
7.1 General principies of risk distribution ground. The cargo owner's possibilities to recover compensation for the loss
Unfortunately, the risk ofloss of or damage to the goods in transit cannot be of his cargo would then be diminished as the loss has to be distributed be-
ignored. Such loss or damage may result from dramatic events, e.g. the sink- tween the salved interests, i. e. the ship, freight and the cargo. Conversely, if
ing or the stranding of the ship used for the transport, or through rough damage is done to the ship by extraordinary measures to come off ground,
cargo handling, improper stowage, insufficient custody of the cargo or theft. e.g. by forcing the engine and accepting considerable damage to the hull, also
Such risks are particularly apparent for mari time carriage but they may also this loss will require the cargo owner to pay his share. Such contributions in
occur when the goods are carried over land or by air. The first matter to be general average are determined by general average adjusters. It may be pru-
resolved concerns the risk distribution between seller and buyer. Unless the dent for the cargo owner to obtain at least protection for the liability of hav-
parties have concluded a so-called arrival or destination contract, the risk ing to pay contribution in general average to the carrier. This particular risk
must be borne by the buyer from the moment the goods are handed over to also explains the rather complicated structure of cargo insurance which is
the carrier for transmission to the buyer (CISG Art. 67.1 or as explicitly de- made available in different types of cover extending from the limited cover C
fined in the F- and C-terms ofIncoterms 2000). The party who has to bear over the somewhat extended cover B to the most extended cover A according
the risk of loss of or damage to the goods in transit may then turn to the car- to the so-called Institute Cargo Clauses of the London Underwriters.
rier to obtain compensation. It would then be necessary to examine to what
extent the carrier in relation to his customer has accepted to bear such risks.
7.2 Transport insurance
Such an examination would invariably disclose that the carrier has only ac-
cepted the risks to a limited extent. The basis of liability would, as compared Transport insurance may be arranged ad hoc and related to each separate
with the strict liability under CISG with the exception only for impediments shipment. If so, it is particularly important to know which of the parties to
beyond control, be reduced to a liability to exercise due care (a liability for the contract of sale must bear the risk and also the exact point for the risk di-
presumed fault or neglect). In addition, the sea carrier enjoys the privilege of vision. It is comparatively simple when either the seller or the buyer would
particular exceptions from liability according to the so-called Hague Rules, bear the risk during the whole transport, which is the case when the contract
whereby he could invoke the exceptions for errors in the navigation and man- has been concluded on the basis of an EXW- or DDP-term indicating the
agement of the vessel and for fire (see further below p. 175 et seq.). Unless seller's or the buyer's premises as delivery point. If so, the buyer or the seller
the customer has made particular declarations of value all carriers limit their respectively could arrange for an insurance on so-called "warehouse to ware-
liability to a maximum monetary amount, nowadays usually expressed in so- house"-terms (the so-called transit clause). In other cases, the situation be-
called Special Drawing Rights (SDR). Here again, the monetary limit availa- comes more complicated since then the division of the risk between seller and
ble to sea carriers under the Hague and HagueNisby Rules as amended by buyer will occur at some intermediate point. Since the buyer has no insurable
the 1979 Protocol is as low as 2 SDR per kilo, while the limits for road car- interest before that point has been reached, and the seller has no insurable in-
riage amounts to 8.33 SDR and for rail- and air transport to 17 SDR. The terest after that point, ad hoc insurance must be arranged accordingly. It is
factors now mentioned would make transport insurance particularly necessary particularly important for the FOB-seller to observe that he may not be able
when the goods are to be carried by sea. to rely on a warehouse to warehouse-insurance taken out by the FOB-buyer,
Presumably, the growth of the marine insurance market is to a considera- since the FOB-buyer has no insurable interest until the FOB point, that is
ble extent explained by the difficulty for sellers and buyers, as the case may the passing of the ship's rail in the port of shipment. Thus, if the seller has
be, to recover compensation for their losses fram the sea carrier. A further not arranged for his own insurance to cover himself against the "land risk", he
reason for cargo insurance stems frorn the notion of the so-called marine ad- may find it difficult to get the benefit of the FOB-buyer's insurance unless,
62 THE RISK OF LOSS, DAMAGE OR DELAY DURING CARRIAGE OF THE GOODS THE INSURER'S RECOURSE ACTIONS 63

which frequently happens in practice, the warehouse to warehouse-insurer delay, even though the delay has been caused by a risk insured against, as well
does not bother to look into the risk distribution between seller and buyer or as 10s5, damage or expense arising from insolvency or financial default of the
simply refrains from invoking the defence of insurable interest. Except in the owners, managers, charterers or operators of the vessel. War risks require ad-
commodity trades, where sale of goods may occur in transit by the transfer of ditional cover.
the bill of lading and cargo insurance policy to the buyer, transport insurance
is normally arranged by contracts on a yearly basis, so-called general policies.
7.3 The insurer's recourse actions .
The shipments are reported to the insurer and the premiums assessed on the
basis of such information. Almost every carrier covers his liability through liability insurance. This
In the case of ad hoc transport insurance it would seem more appropriate means that, in practice, the ultimate risk distribution will mainly become a
that the party at risk arranges his own insurance. evertheless, the two terms battle between insurers. When the payrnent is made to the Assured his right
defined by Incoterms 2000 which deal with insurance puts the obligation to of action against carriers, bailees or other third parties will usually be assigned
insure on the seller although the transport is performed at the buyer's risk to the insurer by a so-called letter of subrogation. Thereafter, actions against
(the terms CIF and CIP). Further, according to Incoterms, the CIF- and such parties could be made by the transport insurer and, if so, those parties
CIP- sellers are, unless otherwise agreed, only obliged to take out minimum would usually be able to obtain protection from their liability insurers with
insurance, that is according to the Institute Cargo Clauses variant C, the rea- any agreed deductible (self-insurance). The Institute Cargo Clauses also se-
son being that the seller would not necessarily know the buyer's wishes for an cure the insurer's right to seek recourse from carriers or other third parties by
extended cover unless he is informed thereof. This means that the buyer stipulating that the insurance shall not inure to their benefit (the so-called
would either himself have to take out additional insurance if he so wishes or "Not to Inure Clause"). Also, it is the duty of the Assured to take such meas-
agree with the seller on extended terms for the insurance to be taken out by ures as may be reasonable to secure the rights to obtain compensation from
the seller according to CIF or CIPo Except for the desirability of enabling the carriers and other third parties. In addition to this, the international conven-
buyer to sell the goods while in transit it is difficult to see why he should not tions relating to carriage of goods contain explicit prohibitions against con-
always himself procure insurance according to his particular needs. everthe- tract terms allowing the carrier to benefit from his customer's insurance, since
less, the CIF -term is one of the most frequently used trade terms in interna- this is deemed to be an unacceptable deviation from mandatory law.
tional trade. The above-mentioned recourse practice may result in considerable transac-
When choosing the extent of insurance cover it is important to observe tion costs, since every transfer of a cost for a risk incurred will necessitate a
that statistically the most common cases of loss or damage occur through claims handling procedure. The costs increase considerably when the claims
theft, pilferage, exposure to water or condensation, breakage or contamina- are disputed and, at worst, are referred to litigation. While in a contract of
tion. Such risks are only covered according to the Institute Cargo Clause A, sale the parties may distribute the risk between themselves as they consider
although clause B allows compensation for loss or damage through entry of appropriate, this is not possible for parties to a contract of carriage. Manda-
sea, lake or river water into the vessel as well as totalloss of any package lost tory transport law constitutes a rigid system considerably reducing the pos si-
over board or dropped whilst loading onto, or unloading from, vessel or craft. bilities to rationalize the risk distribution so as to reach an optimal economic
The cover under the Institute Cargo Clause C is limited to cases where loss resulto Ir is, as we have seen, not possible to place the risk entirely upon the
or damage happens to both ship and cargo as well as to loss of or damage to cargo owner or to let the carrier benefit from his cargo insurance. The other
the cargo by general average sacrifice or jettison of the cargo including dis- option - with the exception of road carriage subject to CMR (the 1956 Con-
charge of the cargo at a port of distress. Ir should also be noted that cover will vention for carriage of goods by road) which prohibits every departure from
not be obtained at all according to the Institute Cargo Clauses for loss, dam- the rules even if it would work to the benefit of the customer (Art. 41) -
age or expense attributable to wilful misconduct of the Assured or the inher- would be to place the risk entirely upon the carrier. But efforts to do this have
ent vice of the goods such as improper packing or preparation of the cargo for so far been unsuccessful. Particularly major trading companies prefer to ar-
carriage. Also excluded are loss, damage or expense proximately caused by range their own insurance and refuse to have a part absorbed by the carriers'
64 THE RISK OF LOSS, DAMAGE OR DELAY DURING CARRIAGE OF THE GOODS

liability. Thus, offers to customers with such extended liability (e.g, the so-
8. THE CO-ORDINATION OF THE
called "insured bill of lading") have not been favourably received.
Guarantees equalling the protection under transport insurance, and fre- CONTRACTS OF SALE, CARRIAGE,
quently with added protection for the risk of delay which is not available by INSURANCE AND FINANCE
the ordinary cargo insurance, are sometimes offered but they have so far been
used to a rather limited degree. Possibly, the development of so-called trans- 8.1 The interre1ation between the various contracts
port logistics, whereby the parties seek to rationalise transportation of goods
As we have already seen, an efficient synchronization of the various contracts
and the distribution to the end-users by extending the scope of the carrier's
involved in international trade - the contracts of sale, carr.iage and insurance
services, may increase the willingness of the customers to leave also the mat-
- is essential with respect to the distribution of the risks of loss of or damage
ter of transport insurance in the hands of carriers. If so, the present rather un-
to the goods in transito But a further synchronization is needed with respect
economic and confusing reshuffing of risks in the transport sector may be
to the buyer's obligation to pay the price and the services extended by banks,
eliminated or modified, at least with respect to manufactured goods and par-
carriers and freight forwarders in this respecto In some cases, it may be suffi-
cel cargo.
cient to engage the services ofbanks in connection with the payment as such
or perhaps for the different types of guarantees mentioned above. However,
in other cases, particularly when the carriage would concern commodities,
banks may when giving credit to the buyer wish to have security in the goods
during the transito Then it becomes of vital importance to establish how a
right of control of the goods could be exercised as well as the requirements
for getting delivery at destination. The same need arises for a buyer when he
has agreed to pay for the goods in advance or to open a documentary credit
with the seller as beneficiary. In these cases, the buyer may wish to estop the
seller from abusing any right of control over the goods in transit by selling
them to somebody else or, alternatively, obtain a performance guarantee so
that the money paid could be recovered from the guarantor in case the seller
fails to perform the contract.

8.2 The traditional importance of the onboard bill of

lading
The bill oflading holds a unique position in international trade law. It is usu-
ally described as having at least three important functions, namely
- to evidence that the goods, as described in the bill of lading, have been
handed over for carriage or, in other words, that the seller has fulfilled his ob-
ligation under F- and C-terms (the so-called receipt function);
- to evidence the terms of the contract of carriage either by printed condi-
tions in the billof lading itself or by reference to the carrier's general condi-
tions at the time of the conclusion of the contract (the "evidence of contract
terrns"-function) and, last but not the least,
- to give the holder of the document the right of control and transfer, so
66 THE CO-ORDINATION OF THE CONTRACTS OF SALE, CARRIAGE, INSURANCE ... THE RISKS INHERENT IN THE BILL OF LADING SYSTEM 67

that the holder of the bili of lading is the only one entitled to give instructions right of control to the buyer. For this purpose, however, it would have been
to the carrier while the goods are in transit and to receive the goods at desti- sufficient with two originals. It is more difficult to explain why more than
nation (the so-called "document of title" - or "transferability" -function). two .originals are usually issued in practice. lt has been suggest~d that t.his
Particularly the last of the three functions makes the bili of lading different stems from older trading patterns, whereby originals could be sent to tradmg
from other documents of transport - such as waybilis for carriage of goods over houses in different ports whereupon the vessel could proceed to one of these
land or by air - which simply name the person entitled to receive the goods at as soon as it had been ascertained that there was a buyer for the goods in the
destination (cf the same method for so-called "straight bilis oflading" used in port. With several originals of the bill of lading. one could ~nsur~ that one be
the United States). The reason why a particular document as the bili oflading available for the buyer before, or at the same time, the ship arnved. Nowa-
has been needed for carriage of goods by sea is explained by the fact that it is days, however, such a system seems wholly anachronistic.
only during such carriage that the goods are actually sold in transito It is there- Banks are usually aware of the risks connected with the issuance of several
fore necessary to have a document which does not only entitle the original original bilis of lading. They would invariably insist on being giv~n a full set
buyer to receive the goods but also makes it possible for him to transfer his which is also required under UCP 500 setting forth the rules relatmg to doc-
right to subsequent buyers. Without a document o title, such as the bill oflad- umentary credits (Art. 23 iv.). So, in banking practice, the system of sever~
ing, this would not have been possible. In a sense, when goods are sold in tran- originals has in a sense defeated itself. The po sitio n of the unwary buyer is
sit, such sale usually takes the form of an assignment by the first buyer to the less fortunate as he may tend to forget that, unless otherwise agreed, he has
subsequent buyer through an assignment of the first buyer's rights under con- no obligation whatsoever to pay the price until either the goods or documents
tracts of carriage and insurance as the case may be. As has already been said, controlling their disposition are at his disposal (cf CISG Art. 58.1). Clearly,
this also explains the rather strange phenomenon that the risk of loss of or one original bili of lading, when several have been issued, would not be
damage to the goods could pass to the buyer already at the moment when they enough for the buyer to control the disposition of the goods, si~ce he would
are handed over to the carrier, although in the case of sale of goods in transit risk having as many competitors as there are originals in circulation.
this wili occur before the contract of sale is made. In essence, it is not then a The buyer should take care not to place too much reliance on the evid~nce
sale of the goods themselves but rather of documents representing the goods. function of the bili of lading when it sta te s that the goods have been received
(received for shipment-bili of lading) or shipped (shipped on board~bili of
lading) "in apparent good order and condition". Bilis of lading also stipulate
8.3 The risks inherent in the bill oflading system that everything mentioned therein has been furnished by the merchant and
In practice, several original bilis of lading are usually issued. This practice, or that the "condition, weight, measure, marks, numbers, quality, contents ~nd
rather malpractice, is necessarily risky since the right of control and transfer value" of the goods are unknown to the issuer of the bili. Although, accordmg
may be vested in different persons at the same time. This risk is modified to to particular provisions and principies in most jurisdictions, the c~r:ier would
the benefit of the issuer by the customary wording in the lower righthand owe a duty to the holder of the bili of lading to check the cond1t10n of the
comer of the front page of the bill oflading reading: goods and insert reservations in the bili of lading if something a~pea:s to be
"One original Bili of Lading must be surrendered duly endorsed in ex- wrong, it should be carefully noted that reference in the bill of lading ~s made
change for the goods or delivery order. to the apparent good order and condition which is something quit~ d1ffere~t
IN WITNESS whereof the Master of the said Vessel has signed the from the actual condition. Particularly in container trade the practical POSS1-
number of original Bilis of Lading stated below, all of this tenor and date, bilities for the issuer of the bill of lading to check the goods would be non-ex-
one of each being accomplished the other to stand void". istent, unless he himself has been charged with the task to stow them into ~he
The cited text means that the issuer need not bother if there are originals container. Norrnally, therefore, the evidence function of the bili of ladmg
of the bilis of lading held by other parties once he has rightfully delivered the with respect to the goods has more or les s disappeared in contain~r. trade.
cargo to a person presenting one original. The system of several originals is A further difficulty arises because of the arrangement of maritrme tran~-
explained by the fact that the unpaid seller would hesitate to surrender the portaton services. Usually, the bili oflading clauses purport to channel the li-
68 THE CO-ORDINATION OF THE CONTRACTS OF SALE, CARRIAGE, INSURANCE ... SEA WAYBILLS 69

abi1ity to the owner of the carrying ship which may or may not be identical bilis of 1ading may become delayed when they are processed by ship's agents,
with the person with whom the contract of carriage has been made. The ves- forwarders and banks. This has given rise to yet another malpractice, namely
sel might have been engaged by the contracting carrier under a time- or voy- to issue bilI of lading guarantees to protect the carrier from claims when he
age charter-party and it is frequently difficult to see whether an action in case intentionally departs from his main ob1igation to deliver the cargo only in re-
of loss of or damage to the goods shou1d be directed towards the contracting turn for an original bilI oflading. Here again, a distinction could be made be-
carrier, the charterer or the owner of the ship. The practice of issuing bilis of tween fraudulent and rather innocent situations. In most cases, the carrier
1ading "for the master" or "as agent" without disclosing the principal of the would know that the non-availability of the bilI of lading is simply due to the
"agent", whose signature in some cases might be ilIegible, is not very helpful. sad fact that the trading partners have been fettered by old traditions and
The problem is addressed in several articles of UCP 500 (Arts. 23, 25, 26) simply used the wrong documento It may be more or less evident that the car-
but it is doubtful whether these efforts wili help, since old customs and prac- rier should in fact not expect anyone else as entitled to receive the goods than
tices, even malpractices, die hard. the party named under "notify address" in a copy of the bilI of lading. But in
Under a documentary credit a bill of lading, according to UCP 500, Art. order to avoid any risk whatsoever a bill oflading guarantee could still be use-
32, wili be rejected if it contains reservations with respect to the goods mak- ful. Nevertheless, issuers of such bill oflading guarantees should be aware of
ing the bilI oflading "unclean" (see further below p. 150). This has given rise the risk that the carrier has committed such a serious breach ofhis main obli-
to another malpractice, namely to issue clean bilis of lading in return for let- gation that he would be exposed to unlimited liability which at worst could
ters of indemnity, whereby the shipperlselIer promises to hold the carrier extend to include compensation for even remote and unforeseeable losses
harmless if he is exposed to claims at destination. In some cases, issuance of such as factory standstilIs when important components do not arrive in time.
clean bilis of lading in return for such letters of indemnity ("back-Ietters") In some jurisdictions, as is also reflected in the European Principles Art.
could amount to fraud, since the issuer in colIusion with the selIer might have 9:503, the benefit of avoiding to pay for such unforeseeable losses is unavaila-
intended to defraud the buyer by inserting incorrect information in the bili of ble when they have been caused intentionalIy or by gross negligence. When-
lading. In most cases, however, the system is explained by the fact that the is- ever the carrier has any reason to suspect such risks he should take care to get
suer of the bill oflading may welI have some suspicions but that to ascertain if a bili of lading guarantee without any monetary limito Whether the banks
such suspicions are welI-founded would require disproportionate costs for would be prepared to issue such unlimited bili oflading guarantees is another
checking the goods if this is at all possible. In such cases, it is said that the matter. NormalIy they have every reason not to do so, or for that matter issue
system of"back-Ietters" functions as "a drop of oil in the machinery". The in- any bili oflading guarantee at all, as this would only support a practice which
validation of letters of indemnity according to the Hamburg Rules Art. 17.3 has ceased to function properly. At any rate, if in a particular trade goods are
has required a distinction between fraudulent and non-fraudulent cases in fact frequently delivered to persons claiming to be consignees but unable to
which may be understood as some sort of legislative blessing of the latter. present an original bilI oflading, the whole system has colIapsed. The conse-
Thus, such invalidation of letters of indemnity seems at best rather desperate quences are serious since - in the event of the seller's bankruptcy - it could be
and at worst counter-productive. At any rate, buyers should be aware of the disputed that the possession of an original bilI of lading is sufficient for the
obvious risk that the information in the bili of lading does not reflect the ac- right of control and transfer of the goods needed for property rights to pass
tual condition of the goods. from the selIer to the buyer or for giving the buyer a secured right to the
Bilis of lading are not only used in commodity trade - where they are goods with priority before the seller's other creditors.
needed in order to enab1e the first buyer to assign his rights under the bill of
1ading to a subsequent buyer while the goods are in transit - but a1so in liner
trade where there is no intention at all to perform such sales. Particu1arly in
8.4 Sea waybills
liner trade, prob1ems frequent1y occur when the vessel arrives before the orig- As we have seen, the bilI of 1ading system entails a number of difficult prob-
inal bill of 1ading needed to claim the goods. Liner vesse1s nowadays fre- lems and, quite apart from this, the management of the system is quite cost1y.
quent1y travel faster than mail and, quite apart from this, the transmission of In the 1970s, efforts were therefore made by shipping lines to rationalise the