LPC: COMMERCIAL LAW & INTELLECTUAL PROPERTY CHAPTER 6

COMMERCIAL LAW & INTELLECTUAL

PROPERTY CHAPTER 6:

SALE OF GOODS
Legal Practice Course

Introduction

This Chapter comprises all the reading material relevant to the topic of Sale of
Goods within the CLIP module. Its contents are relevant to SGSs 7, 8 and 9.
You are not expected to read the whole of Chapter 6 before you attend SGS
7. Look at the Description for each of the SGSs carefully to identify which
parts and/or paragraphs of Chapter 6 you need to read in advance.

Chapter 6 is divided into three parts, as follows:

 Part A: Fundamental Principles of Sale of Goods in English law

The material covered in Part A is applicable to any sale of goods

contract governed by English law;

 Part B: International Sale of Goods

This part of the chapter introduces principles applicable in particular to

contracts with an ‘international element’, for example between a party
based in England and a party based abroad and/or where goods travel
across international borders. Note that the paragraphs relating to
jurisdiction and governing law are applicable to all contracts, not just
sale of goods; and

 Part C: E-commerce

The material covered in Part C is relevant to any commercial activity

carried out online, with particular emphasis on sale of goods via the
World Wide Web.

The learning outcomes for this chapter as a whole are allocated

amongst its parts – effectively, each part specifies its own learning
outcomes.

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PART A: FUNDAMENTAL PRINCIPLES OF SALE OF GOODS IN

ENGLISH LAW

Part A Learning Outcomes

After this part of Chapter 6 you should be able to:

1. understand important issues in the law relating to the sale of goods;
2. have an understanding of some of the key terms which frequently
appear within a sale of goods contract made between businesses; and
3. analyse and apply some of the key provisions of the Sale of Goods Act
1979 and of the Unfair Contract Terms Act 1977 and be able to apply
the provisions of these two Acts to advise a client on the remedies
available to them in a sale of goods case study.

1. Scope of Part A: UK legislation and other sources of law

A contract for the sale of goods is governed under English law by the Sale of
Goods Act 1979 (’SGA’), as amended. It may also be subject to the Unfair
Contact Terms Act 1977 (’UCTA’).

In addition to statute, the law relating to the sale of goods has been
substantially developed by common law (contract law in particular) and by
trade usage and custom. Section 62(2) SGA provides that the rules of
common law apply to contracts for the sale of goods, except if inconsistent
with the SGA.

PLEASE NOTE:

In this chapter we shall be looking only at English law relating to the sale of
goods by a seller in the course of a business to a non-consumer, i.e.
business to business sales only. The Consumer Rights Act 2015 removed
the protections for consumers previously found in UCTA - equivalent
provisions are now are found in the Consumer Rights Act 2015. You will not
study consumer rights on the CLIP module.

All statutory references in Part A of this chapter refer to the SGA, unless
otherwise indicated. Please ensure you refer to your CLIP Handbook as you
work through this chapter.

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2. Sale of goods

Section 2(1) defines a contract for the sale of goods as:

‘a contract by which the seller transfers or agrees to transfer the property in

goods to the buyer for a money consideration, called the price’.

The specific terms which govern that contract between the parties can be
negotiated between the parties and vary from contract to contract. In this Part
of the chapter we will be focusing on the main terms which appear in a
contract for the sale of goods, the remedies for breach of those terms and the
ways in which those remedies can be limited or excluded (see the Summary at
paragraph 11.8 which you will apply in SGS 7).

3. Terms of a contract

When drafting and/or advising on contractual terms in any commercial

agreement, you will come across several different types of terms. It is
important to be able to distinguish between these, as the rights and remedies
attached to each type of term can vary.

3.1 Express terms

These are terms expressly agreed between the parties. They can be written
express terms (for example, contained in written standard terms of business)
or oral express terms, expressly agreed between the parties but not reduced
to writing (for example, where a car salesman tells a potential purchaser
during negotiations that a vehicle has had a new radiator fitted in the last 6
months). Even if they have not been reduced to writing, any oral express
terms may still form part of the contract between the parties as an express
term.

3.2 Implied terms

In addition to, or in the absence of, express terms agreed between the parties,
there will also be certain terms which are implied into the contract.

Terms can be implied into a contract in a number of ways, for example:

1. Custom or practice in a particular profession/trade;
2. Conduct of the parties or the imputed intention of the parties, e.g. if
necessary to make the contract workable/give it business efficacy;

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3. Previous course of dealing between the parties; and

4. Statute.

For the purposes of this module, we do not expect you to have an

understanding of the custom or practice of any particular profession or trade
(item (1) above) or to analyse in detail the conduct of the parties and their
previous course of dealing (item 3).

You will, however, need an awareness of the broad principles by which the
courts will imply terms (item 2), as confirmed by case law. As a general rule,
the courts may imply a term if it is necessary (and not merely desirable or
convenient) to do so. The express terms of a contract and the circumstances
of its formation are relevant factors in a court’s decision, so it is not
appropriate to apply hindsight. You will find a refresher of these principles in
the BLP pre-module reading (chapter 3, paragraph 3).

You will also need to become more familiar with terms which are commonly
implied by statute (item 4) into contracts for the sale of goods, particularly
under the SGA. The SGA sets out a number of important terms which are
implied in contracts for the sale of goods, including terms in relation to the
description of the goods, the quality of the goods and the fitness of goods for a
particular purpose. These implied terms are effectively presumptions or
‘default provisions’, and they will apply, irrespective of the intention of the
parties, unless they are contracted out of/modified by the parties by express
agreement. The detail of these provisions of the SGA is set out below at
paragraphs 5.2 and 10. (Note that such terms cannot be contracted out of in
business to consumer contracts.)

3.3 Conditions or warranties

Traditionally, every term in a contract, express or implied, is classified either
as a condition or a warranty. Whether a term is a condition or a warranty has
an important bearing on the rights and obligations of the parties to a
commercial contract and is particularly important in cases of breach of
contract.

A condition is a term which is fundamental to the performance of the contract

and is considered to ‘go to the root of the contract’. Breach of a condition will
generally be classed as a repudiatory breach of contract, giving the innocent
party the right to accept the breach and treat the contract as at an end.

Generally, contracts will expressly indicate whether a particular failure to

perform is to be treated as a breach of condition of the contract, by, for
example, stipulating that the term is a ‘fundamental term’ or in relation to
which ‘time is of the essence’ or by stating that a breach of that term will
‘entitle the other party to terminate the contract’. This will usually result in
those terms being classed as conditions but this is subject to construction by
the courts.

A warranty is a contractual promise that the goods provided will meet a certain
specification. It is a less important term which does not go to the root of the

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contract and breach of a warranty will not change or fundamentally affect the
principal purpose of the contract. Breach of a warranty will normally only give
the innocent party the right to claim damages (s. 11(3)).

A more modern approach is that the above distinction between conditions and
warranties is no longer exhaustive: there are many terms which, at the outset,
are not conditions or warranties but are of an innominate or intermediate
nature. The court’s view is that breach of such a term which has only a minor
effect will be treated as breach of a warranty but if it has a more serious effect
it will be treated as breach of a condition and allow for termination of the
contract.

Since there is a stronger remedy available for breach of a condition than

breach of a warranty, it is not unusual for the parties to be in dispute as to
whether a term is a condition or a warranty.

4. Key provisions of a sale of goods contract

Every contract for the sale of goods should contain certain key provisions set
out below:
1. Detail of the goods which are being transferred from the seller to the
buyer.
2. When and how delivery will be effected (i.e. when possession of the
goods passes to the buyer).
3. When title and risk in the goods pass to the buyer.
4. The contractual price.
5. When and how payment of the contractual price is to be made.
6. What condition/quality is appropriate to the goods.

For the sake of certainty, it is usually preferable for the parties to set out
written express terms dealing with all of the above points and the
consequences of any breach of those terms rather than relying on any oral
express terms (which can lack certainty) or any implied terms.

You will also find that in most commercial contracts there will be additional
‘boilerplate’ clauses such as entire agreement, severance, governing law and
jurisdiction and exclusion of third party rights (see your Drafting Workbook,
paragraph 4.13). For the purposes of Part A of this chapter, we will
concentrate on the key provisions set out above.

If the parties have not agreed express provisions, the following analysis sets
out the basic legal position in default of agreement, mainly by reference to the
SGA and UCTA.

Note that in consumer cases, the consumer has additional rights and
remedies at its option requiring the seller to repair or to replace goods and/or

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reduce the price payable. As this chapter addresses ‘business to business’

contracts only, we shall not consider this further.

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5. The goods

5.1 Categories of goods

Goods are defined in s.61 and are essentially tangible items (with the
exception of land and currency). They can be:

Existing goods – owned or in the possession of the seller.

Future goods – still to be manufactured or acquired by the seller.

Goods can also be specific or unascertained.

Specific – goods which are identified and agreed on at the time the contract is
formed.

Unascertained – all goods which are not specific goods (i.e. goods of a
general description or type). They become ‘ascertained’ when they are in a
deliverable state.

In practice the distinction between the different types of goods can be

important as it determines whether the SGA or the Supply of Goods and
Services Act 1982 is applicable and it can also have a bearing on questions of
title (see paragraph 7 below) and frustration.

5.2 Sale by description

If the contract is for ‘unascertained goods’, they will need to be identified by a
description.

Even if the contract is for ‘specific goods’, they should preferably be identified
by a description. Where specific goods are sold (without any written
agreement) they are often sold by description, e.g. on the packaging of the
product, in a sales display or advertisement etc.

Necessarily, unascertained or future goods can only be sold by description but

specific goods may or may not be.

The description (specification) is clearly important. It should be sufficient to

exactly identify the goods in question, including (where relevant) weight and
other measurements. The more detailed the contract description, the more
the buyer is likely to need to rely on it and the greater the obligation of the
seller to adhere to it.

The parties can expressly stipulate if the goods on delivery cannot be

guaranteed to correspond with a proposed description, e.g. a tolerance level.

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5.3 When does s. 13 apply?

If the sale is by description and buyer relies on the description, s. 13 implies a
contractual term that the goods will correspond with that description on
delivery. In other words, that goods conforming to the contract description will
be delivered to the buyer.

Section 13(1A) provides that this implied term is a condition. This is very
important when it comes to considering the buyer’s choice of remedies for any
breach of this term (see paragraph 11 below).

For the implied condition to arise under s. 13(1), the buyer must rely on the
seller’s description rather than his own skill or judgment. The element of
reliance shows the need for the description to influence the sale.

6. Delivery

6.1 Time and place of delivery

Under s. 27, the seller is under a duty to deliver the goods and the buyer is
under a duty to accept conforming goods and take delivery at the agreed time
or be liable to the seller for damages for non-acceptance.

Unless otherwise agreed, delivery of the goods and payment of the price are
concurrent conditions, that is to say, the seller must be ready and willing to
give possession of the goods to the buyer in exchange for the price and the
buyer must be ready and willing to pay the price in exchange for possession of
the goods.

Note that in this context, ‘delivery’ means only that the right to possession of
the goods has passed. So in a sale of goods contract, it is as well to think of
‘delivery’ of the goods and their transport to the buyer’s place of business (or
other destination) as separate matters. In the absence of agreement, s. 29
sets out the default provision which provides that delivery will take place at the
seller’s premises (so that it is up to the buyer to collect them).

In terms of the time for delivery, the default provision in s. 29 applies only
where the seller has an obligation to transport the goods, and provides that
such delivery must take place within a reasonable time. This is not particularly
helpful as what constitutes a reasonable time is clearly a matter of
interpretation, case-by-case. As matters relating to delivery are usually of
fundamental importance to the parties, there would usually be an express term
stipulating a specific time and place for delivery.

For more detail on the meaning of delivery in international transactions, see

paragraph 14 of Part B.

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6.2 Is the time for delivery of the essence?

If time for delivery is ‘of the essence’, the date for delivery will be a condition of
the contract and any delay, however minor, will be grounds for termination for
breach of condition.

Under s. 10(2) time for performance of any contractual obligation other than
payment may or not be ‘of the essence’ depending on the terms of the
contract. The parties are can make time for delivery ‘of the essence’ by
expressly providing so. In the absence of an express term the court may imply
that time is of the essence, based on the imputed intentions of the parties at
the time the contract was made: case law suggests that time may be of the
essence in commercial contracts where a time for delivery has been
expressed - but this is not a rule or even a presumption.

Where time for delivery is not of the essence, a delay may nevertheless
become long enough that the buyer may treat it as a repudiatory breach on
the part of the seller. To assist the courts in determining the point in time at
which this happens in a given case, a buyer aggrieved by late delivery may
serve notice to the seller, as soon as a delay has occurred, to set a
reasonable deadline for performance and state that failure to meet the new
deadline will be grounds for termination of the contract. The effect of such
notice can be described as making time of the essence.

It is open to the parties to a contract to agree expressly that Liquidated

Damages will be paid in the event of late delivery (see 11.4 below, boxed text
entitled ‘Damages’),

6.3 Force majeure

It should be remembered that delivery might be delayed for reasons/by events
that are not within the reasonable control of the seller – often known as
‘events of Force Majeure’ or ‘Acts of God’. It is usually the seller who is most
affected by events of force majeure so it is the seller who usually requests a
force majeure clause be included in a contract.

A force majeure clause provides that where, for example, delivery is delayed
by a tsunami or catastrophic power cut, the seller’s delay may be expressly
‘excused’ under the contract. A cautious seller will usually wish to ensure that
the clause is broadly drafted whereas a cautious buyer will wish to ensure the
opposite.

The seller’s time for performance (e.g. delivery) is usually suspended without
penalty during the event of force majeure (either for a specified period or for
an unlimited period) and the contract should set out the rights and obligations
of the parties with regard to termination of the contract if the force majeure
continues or when it comes to an end.

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Practice point:

The seller’s solicitors may seek to take advantage of the force majeure
clause by including a very broad definition of force majeure (thus giving
the seller a broad right to terminate the contract with limited or no
consequences). The buyer’s solicitor should watch out for this!

For example, the buyer’s solicitor would usually think it unreasonable for
the seller to avoid liability where the seller’s sub-contractors are in
default.

7. Title and risk

For the purpose of this module we will assume that the seller has the right to
sell the goods to the buyer. You should note, however, that under s. 12 a
condition that the seller has that right is implied.

7.1 Title
Title, or legal ownership, in the goods may be transferred to the buyer at any
time agreed between the parties.

A seller will usually want to retain title in the goods for as long as possible, at
the very least until payment for those goods has been received. A buyer will
normally want title to be transferred to it as soon as possible so that it is free to
sell those goods on to a third party or use or modify them in some way.

The SGA provides that title to ‘specific goods’ passes when the parties intend
it to pass (s. 17(1)) and the intention of the parties is to be ascertained by
reference to the express provisions of the contract, the conduct of the parties
and the circumstances (s. 17(2)).

It is usually possible to elicit intention but if not, s. 18 sets out rules for
ascertaining it. By way of example, these rules provide that title to specific or
ascertained goods in a deliverable state will pass when the contract is made.
This would rarely be a desirable situation for an unpaid seller.

Title to unascertained goods cannot pass until they have been ascertained,
i.e. have been appropriated to the contract, are in a deliverable state and can
be identified (s. 16) but also see s. 20A.

When advising any commercial client in relation to when title should pass, you
may wish to consider the following critical points:

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1. If the buyer has not yet paid the price but has taken delivery of the
goods and goes into liquidation, the seller may only be a creditor for the
contract price unless the seller has retained legal title.
2. If the seller goes into liquidation after the buyer has paid the contract
price but before delivery, the buyer may be entitled to the goods if title
has passed but will otherwise only be an unsecured creditor and cannot
reclaim the contract price.

3. Does the buyer wish to have the right to sell on title to the goods before
obtaining possession?

In view of the above, it is clearly in the best interests of both parties to

stipulate expressly when title in the goods should pass from the seller to the
buyer.

7.2 Retention of title

In view of the potential risks to the seller in delivering the goods without having
been paid, the seller may wish to retain ownership of the goods pending
payment. Section 19 anticipates this possibility and clauses known as
retention of title (‘ROT’) clauses or Romalpa clauses (named after the first
leading case) are frequently required by sellers in those circumstances.

Under a ROT clause, the seller should:

1. Reserve legal title to the goods (this is essential) and not merely
equitable or beneficial title.
2. Reserve a right of entry onto the buyer’s premises in order to inspect
and/or recover the goods (this avoids the risk of trespass).
3. Reserve legal title to any other goods the seller has supplied to the
buyer until such time as the price has been paid for all goods supplied
by the seller to the buyer (known as an ‘all monies clause’).
4. Require the buyer to keep and store the goods separately from any
other goods (the seller should additionally label or mark the goods for
identification).
5. Require the buyer to insure the goods adequately against loss or
damage in joint names with the seller or with the seller’s interest noted
on the policy.
6. Restrict the buyer’s ability to attach the goods to any other goods, e.g. a
component or sub-assembly or to mix them with any other goods or
materials.

For a ROT clause to be effective, it is important that the goods remain

identifiable. Where the goods have become attached to something else, the
seller may only be entitled to recover them if no material damage is caused.
Where the goods have become ‘mixed’ with other goods, e.g. materials used
in the manufacturing process, it is not easy to maintain title. There is some
case law to support claims to a quantitative share (usually where the mixing is
with like material).

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A ROT claim is likely to be effective only whilst the goods remain in the
possession of the buyer. Even if the seller retains title, a third party who
acquires the goods from the buyer may be protected since good title may be
acquired under s. 25 from a ‘buyer in possession’.

Where buyers have sold on the goods attempts by sellers to enforce a ROT
provision, by claiming the proceeds of sale, have generally failed.

Generally, as the law now stands, a clause giving the seller a right to trace title
into the sale proceeds if the goods are sold on by the buyer would be
considered to be void and unenforceable. For this reason, on matters such as
ROT clauses, commercial contracts should be drafted for severance – with
appropriate sub-clauses, each tabulated. In this way, if any sub-clause is
considered unenforceable, the remainder of the contract and clause may be
saved if it makes grammatical sense (i.e. passes the ‘blue pencil test’) and
does not fail for any other reason.

It should also be remembered that ROT clauses are not a substitute for the
seller taking adequate precautions to ensure payment (see paragraph 9
below).

7.3 Risk
‘Risk’, in this context, is referring to who bears the responsibility if the goods
are damaged or lost.

In the absence of agreement, s. 20 provides that the risk of loss or damage to

goods passes prima facie to the buyer when title passes, irrespective of
delivery. However, in practice, as the seller loses possession and control of
the goods on delivery to the buyer, the seller will usually wish the contract to
expressly stipulate that risk passes to the buyer on delivery.

In most cases, loss or damage to the goods is an insurable risk so

commercially this often becomes a question of which party will bear the cost of
any insurance. This will normally be expressly stipulated in the contract. If the
buyer is responsible for obtaining insurance, the seller may also insist that the
buyer insures the goods against usual or prescribed risks in joint names with
the seller or with the seller’s interest noted on the policy.

8. Price

The price will usually be specified in the contract or implied by a course of

dealing between the parties. Otherwise - and very rarely in practice - a
reasonable price is payable (s. 8), which will depend on the circumstances.

Under agreed express terms, the price may be fixed, or calculated subject to:

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1. a mechanism to determine the amount by reference to a specific

document, formula, procedure or person e.g. manufacturer’s list price,
third party valuer etc.;
2. price escalation or indexation (if the price is quoted at current rates but
in circumstances where delivery and/or payment is to be much later),
typically in a ‘Basic Ordering Agreement’ or ‘Roof Agreement’ where
goods are intended to be ordered by the buyer and supplied by the seller
from time to time over a number of years;
3. currency or exchange rate stipulations e.g. ‘to be paid in US Dollars at
the representative rate of exchange for Pounds Sterling/ US Dollars’;
4. additional charges e.g. transportation (or does the price include this?);
5. VAT being payable in addition to the price, e.g. ‘£10,000 [exclusive of /
[plus] VAT’; and/or
6. prompt payment discount.

Practice point:

In straightforward business to business contracts pricing is generally a

commercial issue (for the business rather than for lawyers to decide).

However a commercial lawyer will need to advise his/her client on the

implications of the chosen pricing method and of course to carefully
review/draft pricing terms to protect their client’s best interests.

In more complex contracts the business will look to lawyers to

recommend the best price mechanism (likely to comprise a schedule to
the contract).

9. Payment

In practice, payment of the price is usually a fundamental term and expressly

agreed upon. However, (as stated in paragraph 6.1 above) the buyer must be
ready and willing to pay the price in exchange for delivery.

Time for payment is not considered to be of the essence (s. 10) unless the
contract expressly so provides.

Typical clauses may be on the basis of payment being due:

1. by cash on delivery;
2. [30] days after delivery or invoice (whichever is the later);
3. by way of an advance payment being either:
a) a deposit (a part payment in advance which is in the nature of a
guarantee of due performance and usually forfeitable); or
b) payment (in part or in full) in advance on account of the price; or

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4. under a documentary letter of credit issued by the buyer’s bank (see

Part B below). This amounts to an undertaking by the bank to pay the
seller on production of certain documents.

If the time for payment is, or has become, a condition, the seller may be
entitled to terminate the contract for non-payment.
Alternatively, interest for late payment may be stipulated. This would be
treated as liquidated damages and could potentially be scrutinised for being in
the nature of a penalty (see ‘Damages’ box at paragraph 11.4), Alternatively,
in some circumstances, the seller might have a statutory right to interest under
the Late Payment of Commercial Debts (Interest) Act 1998 and ancillary
regulations. The detail of these provisions is outside the scope of this module.

10. Quality

The goods may be new or used. Their condition may have been specified to
meet the expectation of the parties. This is clearly more appropriate for used
goods but may be significant to goods manufactured to the order or
specification of the buyer for the purpose, for example, of function or
performance.

Certain conditions are implied in ss. 14(2) and 14(3) as to the quality and
fitness for purpose of goods sold by a seller in the course of a business.
Contrast the position in a private sale, where the buyer would need to rely on
express terms/representations to obtain any guarantee of quality.

A sale is ‘in the course of a business’ if it is an integral part of the business or

of the type of goods sold fairly regularly (R & B Customs Brokers Co. Ltd. v
United Dominions Trust Co 1988). But even a single transaction concerning
a business asset can be sufficient (Stevenson v Rogers 1999, CA). The sale
of an article owned and used by a business will be a sale in the course of a
business even if the article is not normally sold by the business.

10.1 Satisfactory quality

There is an implied term in every contract for the sale of goods that the goods
supplied will be of satisfactory quality (s. 14(2)). This means that the goods
must, under s. 14(2A), ‘meet the standard that a reasonable person would
regard as satisfactory taking account of any description of the goods, the price
(if relevant) and all the other relevant circumstances’. This is an objective test.

Under s.14(2B), quality includes fitness for all usual purposes for which the
particular goods are supplied, appearance and finish, freedom from minor
defects, safety and durability. However, these factors are non-exhaustive.
Even minor defects may render goods unsatisfactory if a reasonable person
would regard them as such.

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Price may be relevant, since a particularly low price may be indicative of a

lower quality expectation.

Section 14(2C) makes it clear that there are exceptions to s. 14(2) which apply
where any aspect affecting the quality of the goods is:
(a) drawn to the buyer’s attention before the contract is made; or
(b) revealed by an examination of the goods by the buyer before the
contract is made (the buyer has no implied duty, however, to examine
the goods).

Example

A buyer buys some complex equipment and decides to test the

equipment before signing a purchase contract for it.

The testing indicates a functional defect but the buyer proceeds with the
purchase in spite of this.

After delivery and installation of the equipment, the buyer complains to

the seller that the equipment is not of satisfactory quality.

Comment

The buyer will have no remedy if the complaint relates to the defect
discovered on the inspection – s. 14(2C).

10.2 Fitness for purpose

Section 14(3) implies a term into every contract for the sale of goods that the
goods are to be reasonably fit for the buyer’s purpose if that purpose had been
made known (expressly or by implication) to the seller before the contract was
entered into, ‘whether or not that is a purpose for which such goods are
commonly supplied, except…where the buyer does not rely, or that it is
unreasonable for him to rely, on the skill or judgment of the seller…’.

In most cases a seller, in the course of a business, will be assumed to have

some knowledge of the purpose/use of the goods (sometimes having
specialist knowledge) but it is a matter of degree. Each case must be decided
on its own facts.

Reliance on the seller’s skill or judgment may be implied and therefore

defective goods can often give rise to a claim by the buyer for breach, in the
alternative, of both s. 14(2) and s. 14(3).

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10.3 Conditions
The terms implied by s. 14 are conditions (s. 14(6)), a breach of which by the
seller will entitle the buyer to the remedies for breach of a condition (see
paragraph 11.3 below).

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11. Exclusions and limitation of liability

When reviewing a contract which contains either an exclusion or a limitation of

liability, you should use the following structure on this module (summarised at
paragraph 11.8 below):

11.1 Identify the claim

What wrong has been done? Consider whether a breach of a contract / breach
of oral term / breach of duty of care is relevant.

11.2 Identify the terms breached

Has there been a breach of an express term of the contract? If so, which?

Has there been a breach of an implied term of the SGA? If so, which?

11.3 Is the term breached a condition?

If the term is express, is it a condition?

If the term is implied, is it a condition? S.13(1A) provides that s.13 is a

condition and s.14(6) provides that ss.14(2) and 14(3) are conditions.

11.4 Which remedies are available?

If the seller is in breach of a condition, the buyer has the following choice of
remedies:
1. To reject the goods, terminate the contract and/or claim damages; or
2. To reject the goods, affirm the contract and require contractual
performance, reserving the right to claim damages; or
3. To accept and keep the goods but still claim damages, by treating the
breach as a breach of warranty only.

Liquidated Damages

The usual remedy for breach of contract is damages to compensate the

innocent party for loss it has suffered as a result of the breach - that is,
to put it in the position it would have been in had the contract been
properly performed. Parties to a commercial contract may seek to avoid

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any difficulty in assessing that loss by agreeing, in advance, a fixed sum

payable in the event that a given term is breached. This is known as a
liquidated damages clause.

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Such clauses are commonly found in connection with stipulations as to

time of performance. In sale of goods contracts, it is not unusual to find
provision for the buyer to claim liquidated damages in the event of late
delivery. For example, the seller may be required to pay a fixed sum per
week of delay (or part thereof).

In practice, such clauses must be negotiated and drafted with care,

because:
 if expressed as the buyer’s ‘sole remedy’ for late delivery, such a
clause may operate as a limitation of the seller’s liability
(especially where the fixed sum is low) and may therefore be subject
to the test of reasonableness (see paragraph 11.6 below); and
 the validity of such a clause may be called into question (especially
where the fixed sum is high) on the basis that it amounts to a
penalty (punishment) for non-performance. To state the test in
simplified form, the Court will, firstly, identify the ‘legitimate interest’
that the clause is designed to protect. Then it will look at the remedy
provided for. If the remedy, in the Court’s view, is disproportionate to
that legitimate interest it will be unenforceable as a penalty.

11.5 Modification of available remedies: has the right to reject been

lost?
The right to reject goods for breach of an implied condition under s.13 and
s.14 (and also s.15, sale by sample, not covered in this Chapter) is not
available to a buyer in a business to business contract:
1. if the breach is so slight that it would be unreasonable to do so (see
s.15A); or
2. if the buyer has expressly, or by implication, waived the breach; or
3. if the buyer has accepted the goods (see s.35 and s. 11(4)).

In these instances the buyer could only accept and keep the goods but still
claim damages.

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11.6 Exclusion/limitation of liability clause and UCTA

11.6.1 Is there a limitation or exclusion of liability clause?

It is common to include exclusion or limitation of liability provisions for various

types of default or liability. Section 55 SGA expressly permits such terms to
limit the effects of implied terms, subject to the application of UCTA. Such
provisions are typically amongst the most heavily negotiated clauses in
commercial contracts.

Any such provision in a contract made by a seller excluding or limiting the

party’s liability or its obligation to perform the contract or the rights or remedies
of the other party may only be effective if it satisfies the requirement of
‘reasonableness’ under UCTA. Otherwise such a provision will be void.

Practice point: exclusion of ‘indirect’ losses

Liability clauses will frequently be expressed to exclude liability for

'indirect' losses or 'consequential' losses.

These losses are usually construed to refer to losses falling within the
second limb of the rule in Hadley v Baxendale (1854) 156 ER 145, i.e.
losses as 'may reasonably be supposed to have been in the
contemplation of both parties, at the time they made the contract'

By contrast, 'direct' losses are those which arise naturally, 'in the
ordinary course of events', from the breach without imputing to the
parties any particular knowledge about the specific facts and
circumstances of the transaction (see Watford Electronics Ltd v
Sanderson CFL Ltd [2001] EWCA Civ 317, per Chadwick LJ at [36]).

In practice, there can be considerable difficulties in trying to determine

whether a particular loss is 'direct' (typically not excluded) or 'indirect'
(typically excluded), unless the kind of loss that is under scrutiny is
expressly cited by the clause.

Therefore it is good practice to specify within the exclusion clause the

precise categories of loss which are intended to be excluded. In
particular liability for loss of profit, anticipated savings, contracts and
revenue should be expressly excluded (rather than assume that they all
fall within the category of ‘indirect’ or ‘consequential’ losses). There is a
risk that losses such as these can be construed as direct losses.

For example, in British Sugar plc v NEI Power Projects Limited &
Another [1998] 87 BLR 42, loss of profits was held to be direct loss and
therefore outside the ambit of the exclusion clause that excluded liability
for ‘consequential’ loss. The court considered that no special knowledge
was required to foresee that the buyer would lose profit if the contract
were breached.

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11.6.2 Which provisions of UCTA apply to the limitation or exclusion clause?

UCTA deals with different types of exclusion or limitation of liability in different

ways. The main provisions of UCTA which you need to familiarise yourself
with for the purpose of this module are set out below.

Section 2 UCTA: This section deals with any term that restricts or excludes
liability for negligence. Section 2 provides that:
(a) liability for death or personal injury resulting from negligence cannot be
excluded or restricted (s. 2(1)); and
(b) liability for any other loss or damage resulting from negligence can be
excluded or restricted, but only to the extent that the clause satisfies the
test of reason or ‘reasonableness test’ (s. 2(2)).

For s. 2(2) UCTA to ‘bite’, a clause intended to exclude or limit liability for
negligence must use clear words to indicate this to be the case, in order for
the clause to be effective.

Section 3 UCTA: This section is relevant where one contracting party deals
‘on the other’s written standard terms of business’. Under s.3 a term that:
(a) purports to exclude or restrict any liability for breach of contract - s. 3(2)
(a); or
(b) has the effect of entitling that other party not to perform an obligation
contractually agreed upon or to render a performance substantially
different from what was reasonably expected - s. 3(2)(b);
is subject to the ‘reasonableness test’.

The expression ‘written standard terms of business’ is not defined and the
courts have considered its meaning in a number of cases. According to a line
of cases, applied by the Court of Appeal 1, ‘written standard terms’ are those
which the company in question uses as a matter of course for contracts of a
particular type, without alteration apart from blank spaces for such matters as
price, dates and so on. The expectation is that such terms already exist
before the parties ever consider doing business with one another (classically,
though not necessarily, in the form of a stock of pre-printed pro-formas). The
fact that a contract is based on a first draft provided by one of the parties is not
enough.

Negotiations of matters such as price, delivery terms and other commercial

issues so as to ‘fill in the blanks’ referred to above (i.e. the terms often set out
in a Purchase Order and Confirmation) still allow the other party to rely on s. 3.

The key question is whether such negotiation has left the written standard
terms ‘effectively untouched’. Generally speaking, any amendment of the
terms themselves will overstep this line, unless it is insubstantial.

1
in African Export-Import Bank et al v Shebah Exploration & Production Company Limited [2017]
EWCA Civ 845

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Section 6(1A) UCTA: This section deals with any term that restricts or
excludes liability in respect of the implied conditions under the SGA relating
to description, satisfactory quality, fitness for purpose and sample (ss.13, 14
and 15).
Any term excluding or limiting liability in relation to these implied conditions is
only valid if it satisfies the requirement of reasonableness - s. 6(1A).

Section 13 UCTA: This section exists to assist in identifying clauses to which

ss. 2, 3 and/or 6 apply. In essence, it is an ‘anti avoidance’ provision
preventing parties from ‘drafting their way out’ of the scope of UCTA.

So, for example, UCTA applies not only to a clause expressly excluding or
limiting liability but also to one excluding or limiting a right or remedy of the
innocent party. For example, the following clause would be subject to the
requirement of reasonableness: ‘If the seller is in breach of this clause 3, the
buyer shall not be entitled to damages’.

The lesson of s. 13 is that you must pay attention to the effect of a clause, not
just its wording, when deciding if it falls within one or more of ss. 2, 3 or 6.

11.6.3 If relevant, apply the test of reasonableness

The test for reasonableness is given statutory guidelines in UCTA but as a

general guide, clauses limiting, rather than excluding liability entirely, are more
likely to be upheld by the courts as being reasonable.

The onus on proving that a clause is reasonable generally rests with the party
seeking to rely on it (see s. 11(5) UCTA).

Section 11(1) UCTA requires ‘that the term shall have been a fair and
reasonable one to be included having regard to the circumstances which
were, or ought reasonably to have been, known to or in the contemplation of
the parties when the contract was made’ (i.e. the reasonableness of any
exclusion or limitation of liability is not assessed with the benefit of hindsight
after the breach).

Section 11(2) and Schedule 2 UCTA indicate a non-exhaustive list of factors

which the court should take into account when assessing whether a particular
clause satisfies the test of reasonableness. These factors include strength of
bargaining position of parties, knowledge, alternative sources, availability of
insurance and contract inducements.

Section 11(4) UCTA requires the resources to meet the liability of the party
purporting to limit its liability, and the availability of insurance against relevant
risks, to be considered when testing for ‘reasonableness’. For example,
where the seller limits its liability to the contract price. This is an important test
where one party is only purporting to limit, rather than exclude entirely, its
liability.

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Case law on reasonableness where terms are negotiated.

Two cases highlight differing approaches: court interventionism where

agreed terms are held to be ‘unfair’, versus the parties’ freedom to agree
what terms they may.

St. Albans City and District Council v International Computers

Limited [1996] 4 All ER 481
ICL supplied faulty software to the council, causing substantial damage.
ICL’s ‘written standard terms of business’ had proved at the negotiation
stage to be effectively non-negotiable and contained a clause limiting
ICL’s liability to £100,000. CA held it to be unreasonable under s. 3
UCTA, as ICL was a large company with strong assets and resources,
had insurance cover for £50m, was in a relatively strong bargaining
position and had not reduced the price to allow for the limitation. The
council had no alternative source of supply that would not have imposed a
similar cap on liability. The case illustrates the ‘interventionist’ approach
of the courts at that time.

Watford Electronics Ltd v Sanderson CFL Ltd [2001] 1 All ER (Comm)

696 EWCA Civ. 317
In this later decision, the Court of Appeal decided that a clause in the
supplier’s written standard terms that excluded the supplier’s liability for
indirect and consequential losses and limited its liability for direct losses to
the price of the contract, was reasonable in all the circumstances. The
court considered that no unfair advantage was taken of either party.

This case suggests that courts are less likely to interfere where the parties
are experienced, of equal bargaining power and - having both taken
professional legal advice - are aware of the nature and effect of the
clauses in question.

A case from 2018 acknowledges it is a modern trend for courts to decline

to intervene in commercial decisions about risk-allocation between
parties:

Goodlife Foods Limited v Fire Hall Protection Limited [2018] EWCA

Civ. 1371.
The Court of Appeal upheld the exclusion of a seller’s liability for a
defective fire sprinkler system, on the basis that it amounted to a sensible
allocation of risk. The role of insurance as a factor was emphasised,
particularly where the contract price was low and the potential losses to
the buyer large: the buyer was best placed to assess and insure (and
indeed was insured) against the risk of a fire breaking out at its premises.
The court was invited to distinguish Watford Electronics because the
exclusion clause had not been thoroughly negotiated - but declined to do
so, holding that a commercial party who does not negotiate should not be

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in a better position to claim the protection of UCTA than is a party who

does negotiate.

11.7 Conclusion: which remedies remain?

The parties will need to know the extent (if any) to which the remedies
identified at paragraph 11.4 remain available to the injured buyer, once due
account has been taken of any issues arising in respect of any modification of
remedies, any exclusion/limitation clause and UCTA (i.e. after paras. 11.5 and
11.6 have been applied).

(a) If the buyer has lost the right to reject the goods for some reason, and/or
a there is a reasonable exclusion/limitation of liability, some or all of the
remedies identified at paragraph 11.4 will not be available (or may be
available in a modified form); or

(b) If the buyer has not lost the right to reject the goods and any
exclusion/limitation clause is unreasonable (consequently unenforceable
under UCTA), the remedies identified at paragraph 11.4 will remain
available to the injured buyer.

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11.8 Summary Flow Chart: how to apply SGA and UCTA within a case
study

Identify claim

Identify specific terms breached

(express or implied)

Is the term breached a condition?

Identify remedies available

Has the right to reject been lost?

1. Breach so slight it would be

unreasonable to reject
2. Buyer has expressly / by
implication waived breach
3. Buyer has accepted goods

Is there an exclusion or limitation of

liability, howsoever expressed?

If so apply UCTA and ‘reasonableness

test’

What remedies remain?

You will use this structure in SGS 7.

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Part B: INTERNATIONAL SALE OF GOODS

Part B Learning Outcomes

After this part of Chapter 6, you should be able to:

1. appreciate the importance of jurisdiction and governing law clauses;
2. understand how to apply English law to establish governing law of a sale
of goods contract between a party domiciled in either England or Wales
and a party domiciled abroad;
3. appreciate the particular significance of delivery and payment terms in
an international sale of goods transaction;
4. recognise certain trade terms (including Incoterms) commonly used in
international delivery contracts, and the rights and duties those terms
imply; and
5. understand the purpose of bankers’ documentary credits (letters of
credit) and performance guarantees in international commercial sales.

The Impact of Brexit

The UK exited the EU on 31st January 2020 (‘exit day’) followed by a time-
limited transition period which ended on 31 December 2020 (‘IP Completion
Day’). This chapter reflects UK law which includes assimilated law (i.e.
domestic law derived from EU law and EU law with direct effect in the UK as
at IP Completion Day), as amended post-Brexit.

Any references in this chapter to decisions of the Court of Justice of the

European Union (‘CJEU’) are to decisions of the CJEU made prior to Brexit
Completion Date (‘assimilated EU case law’).

Should any major changes be made to the law while you are studying this
module then the CLIP teaching team will draw these to your attention (along
with their impact, if any, on coverage of topics in the assessment), either in
class or via an Announcement on the CLIP Hub.

12. What is different about international sale of goods

contracts?

12.1 ‘International’: some terminology

‘International sale of goods contract’

In English law, it is the places of business of the parties which indicates that a
contract may be an international sales contract, namely when the contract is

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made between two or more parties whose places of business or residence are
in different countries.

Such a contract may be made between persons or companies having a place

of business in different countries and involving the sale and movement of
goods between those or entirely different countries, or even within the same
country. In this chapter, we shall be primarily concerned with situations where
the goods are intended to move from the seller’s country to the buyer’s.

‘International commercial law’

This part of Chapter 6 is concerned with the law of England and Wales as
applied to international sale of goods contracts. It does not cover
‘international law’, in the sense of international conventions. Attempts have
been made to unify the law relating to international sales contracts. For
example, the Vienna Convention (which came into effect in 1988, founded on
the earlier Hague Conventions) deals with issues such as the formation of
contracts, the rights and obligations of the parties, as well as risk and
remedies for breach of contract. It has been ratified by a number of countries
(including the USA), but not by the UK, and is therefore not part of English
law.

For this reason, further details of the Vienna Convention are beyond the scope
of this course. However, there is nothing in English law preventing parties to a
contract from expressly adopting its provisions which would take effect as if
they had been set out as terms of the contract.

12.2 Matters of particular importance to be addressed in the terms

Where goods are being supplied by a seller in Country A to a buyer in Country
B, certain legal questions become particularly pertinent. In particular:

1. applicable law: the parties are in different territories so what if a given

clause is interpreted differently under the laws of Country A and Country
B? What if the contract is validly formed under the law of Country A but
not of Country B?

2. jurisdiction: what if one party needs to sue the other – should they issue
proceedings in Country A or Country B?

These matters are addressed in paragraph 13 below, headed ‘Law and

jurisdiction’.
Other practical/commercial issues are magnified in importance or complexity
because of the physical distance between parties and the journey that goods
have to make (usually by sea). For instance:

3. transport: how? Who pays for the goods to travel from seller to buyer?;

4. delivery: how, when and where will this happen?;

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5. passing of risk in the goods: what if the goods have a long and
dangerous journey? Who bears the risk of their damage or loss on the
way and pays for insurance?;

6. passing of title: at which point on the journey from seller to buyer do the
goods become the buyer’s property? What if the buyer wants to sell the
goods on, while they are still at sea?; and

7. licences and duties: who is responsible for official paperwork, such as

obtaining and paying the cost of any import/export licence or customs
clearance?

All the above points are normally addressed in negotiations and should be
dealt with in the terms of the contract. If the parties do not make express
provisions then certain terms may be implied by statute or common law. In
paragraph 14 below, we will also look at examples of how the parties can
choose to address the above matters by incorporating complex terms (known
as ‘Incoterms’) by reference.

8. payment: How can the seller be assured of receiving payment?

Payment is advance is risky for the buyer, so how can that risk be
borne?

These matters are addressed in paragraph 15 below, headed ‘Payment of the

price’.

12.3 Exclusions and limitations of liability in an ‘international supply

contract’
The expression ‘international supply contract’ is defined in ss. 26(3) and
26(4) of UCTA. This overlaps with, but is not the same as the expression
‘international sale of goods contract’ discussed above in paragraph 12.1.
There are two elements to the statutory definition of an international supply
contract:

1. It involves a sale of goods between parties whose places of business

are in different countries; and

2. one (or more) of the following applies:

 the goods are to be carried from one country to another;
 the contractual offer and acceptance have taken place in different
countries; and/or
 the goods are to be contractually delivered to a country other than
that in which offer or acceptance took place.

The significance of this definition is that, under s. 26 UCTA, the limitations

under UCTA (discussed above, Part A paragraph 11) on a party seeking to
exclude or limit its liability (including the requirement of reasonableness), will
not apply to a contract which amounts to an international supply contract.

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So a party to an international supply contract is able, by agreement, to exclude

or limit its liability and to restrict rights of rejection (or other rights or remedies),
even if it is unreasonable to do so.

13. Law and jurisdiction

13.1 Introduction
When a client based in England enters into an international sale of goods
contract, an immediate area of legal uncertainty arises: which country’s law
should apply to and govern the interpretation and application of the contract?
Another way to express this question is: ‘what is governing law (also known
as the applicable law) of the contract?’

To approach this question it is necessary first to resolve a preliminary issue: if

there were a contractual dispute between the parties, in which jurisdiction(s)
would such dispute be determined and judgment enforced? The question of
jurisdiction must be resolved first because a contract’s governing law is
determined according to the law of the country that has jurisdiction to hear a
dispute arising from that contract. The implications of this for English-qualified
solicitors are as follows.

 If English courts have jurisdiction over a dispute arising from a contract,

then the governing law of the contract will be determined in accordance
with the rules of English law.

English-qualified solicitors can advise clients (i) as to whether or not the

courts of England and Wales have jurisdiction over a matter; and (ii) as
to the governing law of a contract if (and only if) the courts of England
and Wales have jurisdiction.

 If another country’s courts have jurisdiction over a dispute arising from a

contract, the contract’s governing law must be determined on the basis
of local advice in that jurisdiction.

English qualified solicitors cannot (unless dual-qualified in the relevant

jurisdiction) advise clients (i) as to whether or not courts other than those
of England and Wales have jurisdiction over a matter; or (ii) as to the
governing law of a contract, if a court other than those of England and
Wales has jurisdiction.

The inter-related issues of jurisdiction and governing law give rise to a

complex and specialist area of law known as ‘conflicts of laws’. On the CLIP
module, we encounter these issues only in the following practice-based
contexts:

 in matters relating to international commercial contracts for the sale

of goods between businesses where (at least) one of the parties is

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domiciled within England and Wales and (at least) one other party is
located in an EU member state; and

 from the point of view of a general commercial lawyer in non-

contentious practice. Such a lawyer is most likely to advise clients on
such matters at the negotiation stage - i.e. before a contract between
their client and the other party/ies has been formed (and long before an
actual dispute has arisen between them). It is important to exercise
foresight at this stage to avoid problems for the client in the event that a
dispute may arise under the contract in future. That is is why the topics
of jurisdiction and governing law are included in the CLIP module.

In practice, when a dispute actually arises between parties to a contract, a

general commercial lawyer will normally refer the matter to a specialist
litigator. The field of ‘conflicts of laws’ is very complex contains many potential
pitfalls, and advising in respect of an actual dispute is specialist work. That is
why the topics of jurisdiction and governing law are included in the CLIP
module in part, and in outline, only.

Example: non-contentious advice on conflicts of laws

An English construction company is negotiating a contract to buy materials

from a Polish supplier, for delivery to a site in Italy. Should the terms of the
contract (once it is made) be interpreted and applied according to English
contract law, or Polish law or, perhaps, Italian law? If the buyer wishes to sue
the seller, will they be able to do so in the English courts? What if the seller
wishes to sue the buyer? What if something goes wrong with performing the
contract in Italy?

When negotiating, the parties are likely to benefit from legal advice -
potentially from laywers in more than one jurisdiction - to determine the extent
to which their preferred answers to the above questions can be given effect in
law and, if so, what (if anything) the express terms of the agreement should
provide so as to achieve that end.

13.2 Which courts have jurisdiction?

13.2.1 Background and sources

If a party unilaterally commences proceedings in England, an English court will

apply English law to determine whether it can (and will) accept jurisdiction
over a dispute which has arisen. You have encountered and applied some of
the relevant law in the Civil Litigation CPA module. This chapter does not
purport to provide a comprehensive view of the question because the field is
narrowed by the contexts in which we study the topic (see above).

To determine whether or not the courts of England and Wales have jurisdiction
over a claim brought after 1 January 2021 and arising out of a contract, we
apply one or other of the following:

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 the Hague Convention on Choice of Courts Agreements 2005 (the

‘Hague Convention’); or
 the rules of English common law (as covered in the Civil Litigation CPA
module).

To determine which of these sources to apply, the key factor for our purposes
is whether or not the agreement contains an ‘exclusive choice of court
agreement’.

13.2.2 Jurisdiction Clauses

Jurisdiction clauses (also known as ‘choice of court’ clauses) are typically

included in contracts where the parties are located in different countries to
avoid often long and costly disputes over where any dispute should be heard.
There may be commercial reasons why the parties wish a certain country’s
courts to hear any dispute, for example: language used in the courts; or the
availability of witnesses to give evidence; or the enforceability of a judgment
(the judgments of courts in jurisdictions which respect the rule of law being
potentially more widely enforceable abroad).

The terms of any given commercial contract may contain:

a) An exclusive jurisdiction clause; or
b) A non-exclusive jurisdiction clause; or
c) no jurisdiction clause at all – such a contract being said to be ‘silent
as to jurisdiction’
To clarify this terminology:

□ An exclusive jurisdiction clause is one that designates the courts of

one particular jurisdiction, to the exclusion of all others, to hear any
disputes under the contract.

The wording of an effective exclusive jurisdiction clause need not use

the word ‘exclusive’. It is the substance of the clause that will be taken
into account. For instance a clause that states: ‘The courts of England
and Wales shall have jurisdiction over all disputes in connection with this
contract’ would be deemed by the English courts to be exclusive. The
chosen court need not have any connection to the parties or the subject
matter of the contract.

□ A non-exclusive jurisdiction clause may designate two or more

jurisdictions to hear any dispute under the contract according to a
number of factors. For example: the claimant party may be given a
choice; or the jurisdiction may depend on the type of dispute or on which
party is bringing the claim.

Such clauses are not uncommon in commercial transactions, particularly

where one or both of the parties wish(es) to retain a degree of flexibility
as to where they can bring proceedings. A non-exclusive jurisdiction
clause can take account of the parties’ circumstances and objectives,

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and a well-drafted clause will do so. For instance, the clause may
provide that, after one party has brought proceedings in the named
jurisdiction, another party retains the option of bringing proceedings in a
different country, or of bringing concurrent proceedings in a number of
jurisdictions (possibly to facilitate enforcement of any judgment).

Such flexibility can, however, prove a disadvantage as much as an

advantage: for example it may result in a party defending proceedings in
an unfavourable jurisdiction, or parallel proceedings taking place.

13.2.3 Exclusive Jurisdiction Clause: The Hague Convention

The English courts will apply the rules of the Hague Convention on Choice of
Court Agreements 2005 (the ‘Hague Convention’) where there is an
exclusive jurisdiction clause in a contract concluded after 1 October 2015.

Articles cited in this paragraph 13.2.3 are articles of the Hague Convention,
extracts from which are provided in the CLIP Handbook.

Does the Hague Convention apply?

The Hague Convention applies:

a) subject to certain exclusions, which are outside the scope of the CLIP
module;

b) in international cases (article 1). ‘International’ relates to the residency

of the parties. For the purposes of the CLIP module, you can assume
that where the parties to a contract for the sale of goods include (i) an
English company and (ii) a party resident in an EU member state (which
would apply to a company registered in an EU member state) is an
‘international case’ under the Hague Convention; and

c) where there is an exclusive choice of court agreement (article 3),

which designates a court or courts of one Contracting State, to the
exclusion of the jurisdiction of any other court and is contained in a
written agreement.

We will take the elements of this sub-paragraph (c) in turn:

 A choice of court agreement2 designating court(s) in one

Contracting State is deemed to be exclusive unless the parties
expressly provide otherwise (article 3(b)).

 Contracting States to the Hague Convention include the UK and

each Member State of the EU. (The other Contracting States to
which the Hague Convention applies are: the EU; Ukraine; Mexico;

2
A note on terminology: the text of the Hague Convention does not use the expression ‘exclusive
jurisdiction clause’, but instead it refers to ‘exclusive choice of court agreements’. For the purposes of the
CLIP module, the expression ‘exclusive choice of court agreement’ can be taken to be synonymous with
the expression ‘exclusive jurisdiction clause’ explained above.

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Singapore; and Montenegro. The USA and China have signed the
Hague Convention but have yet to ratify it).

 Note also that the Hague Convention rules apply to written

agreements.

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What are the Hague Convention Rules?

Where the Hague Convention applies to an exclusive choice of court

agreement:
 the court designated in the exclusive choice of court clause must
accept jurisdiction to decide a dispute to which the agreement applies
(article 5); and
 if proceedings are brought in a court other than that designated in the
clause, then that court must suspend or dismiss the proceedings
(effectively, decline to accept jurisdiction) (article 6).

Put simply in other words, the Hague Convention rules require courts to give
effect to the parties’ choice of court if that choice gives exclusive jurisdiction.

Example- Hague Convention rules

A dispute arises between parties to a contract, which provides as follows:

‘The courts of [Country N] shall have exclusive jurisdiction to hear disputes
arising out of this Agreement’. Assuming the Hague Convention applies:

If ‘Country N’ is (or includes) England & Wales, then an English court will have
jurisdiction.

If ‘Country N’ is Germany, then an English court will not have jurisdiction.

13.2.4 Non-exclusive jurisdiction clause: Common Law rules

This paragraph applies where the parties have agreed a non-exclusive

jurisdiction clause. It also applies where the parties have agreed an exclusive
jurisdiction clause but the Hague Convention rules are not applicable (for
example, because the clause is not in writing or because the designated court
is not in a Contracting State).

This chapter does not purport to provide comprehensive coverage of the

English common law rules. Further details can be found amongst the Civil
Litigation CPA module materials (in that context, the question of whether or
not the English courts accept jurisdiction over a matter is expressed as
whether or not the claimant may ‘serve proceedings outside the jurisdiction’).

CPR 6.33 allows a claimant to serve proceedings outside the jurisdiction,

without permission of the court, where the claimant relies on a contractual
jurisdiction clause in favour of the courts of England and Wales and the Hague
Convention does not apply (CPR 6.33(2B)(b)).

Hence the English courts can normally be expected to give effect to a non-
exclusive jurisdiction clause.

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Example: non-exclusive jurisdiction clause

The parties to a contract have agreed that the both English courts and the
Greek courts have non-exclusive jurisdiction (concurrent with that of the Greek
courts) to hear disputes arising out of the contract. It is likely that the English
courts will accept jurisdiction to hear a claim arising out of the contract.

13.2.5 Contract silent as to jurisdiction: Common Law rules

In some cases, an international sale of goods contract may say nothing at all
about jurisdiction. The English courts will then decide whether or not to accept
jurisdiction by applying the common law.

This chapter does not purport to provide comprehensive coverage of the

English common law rules. Further details can be found amongst the Civil
Litigation CPA module materials. You may recall that, at common law, the
three circumstances pointing to the jurisdiction of the English courts are
Presence, Submission and Permission.

The rules are complex - and in any event it is not possible to predict in
advance whether or not the English courts will accept jurisdiction over
disputes arising from a particular contract in the absence of a jurisdiction
clause. The point in time at which the relevant rules are applicable is at the
start of proceedings when a claim has arisen - that is, after the contract has
been formed and (allegedly) breached. A general commercial lawyer in non-
contentious practice, exercising foresight at the time of negotiation of a
contract, can - at best - consider whether or not English courts might accept
jurisdiction over a future dispute.

In general terms (and for the purposes of the CLIP module) the English courts
apply the principles of ‘forum conveniens’ to consider whether or not a court in
England & Wales is the most appropriate forum. The courts will take into
account all the factors (such as where the parties and witnesses are located
and where the facts leading up to the dispute happened) to decide if the
English courts are the most appropriate court to hear the dispute. It should be
noted that at common law the English courts always have a discretion as to
whether to accept jurisdiction or not, and also whether to stay proceedings in
favour of another more appropriate forum.

In conclusion, from the point of view of an English-qualified lawyer negotiating

terms of a contract, to omit provision for jurisdiction is to leave the parties in a
state of uncertainty. Applying the common law rules in the event a dispute
does arise is not straightforward and may lead to additional costs and delay in
progressing proceedings. It is therefore strongly advisable that the parties
agree an express jurisdiction clause.

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13.3 Which law governs the contract?

13.3.1 Background and sources

The applicable (or governing) law of a contract is the law in accordance with
which its provisions must be interpreted. It is not correct to assume that
English law will govern a contract if the English courts have jurisdiction.

Example: Governing Law

An English court has accepted jurisdiction over a dispute arising from a

commercial contract. The contract, expressed to be governed by New
York law, is between a Nigerian person who is resident in Nigeria and a
Japanese person who is resident in Japan, making provision for goods
to be supplied from a mine in Nigeria to a delivery location in the UK.
The first matter for the court to settle is whether to interpret the contract
in accordance with New York law, or some other law (perhaps Nigerian
or Japanese).

Regulation 953/2008/EC on the law applicable to contractual obligations

(known as ‘Rome I’) addresses this question3. Rome I applies to contracts
concluded after 17 December 2009. Rome I is an EU Regulation which,
following Brexit, was retained in UK domestic law as assimilated law, subject
to certain amendments made by secondary legislation4. For the purposes of
this module the relevant law as amended will continue to be referred to as
‘Rome I’.

Students who are studying the Advanced Commercial Litigation module will be
familiar with the detailed provisions of Rome I. For the purposes of the CLIP
module, we shall be examining certain of its key provisions in abridged form.

If a court outside England and Wales assumes jurisdiction, the question of

what is the applicable law will be determined according to that country’s
conflict of laws rules, on which local advice must be sought. They may differ
significantly from English law (for example, not all jurisdictions in the world can
be relied upon to respect the parties’ own choice of governing law).

13.3.2 Outline of Rome I

Article references here in paragraph 13.3 are to Rome I, and those cited in
bold refer to provisions which can be found in the CLIP handbook.

1. Scope

3
Rome I does not address (and neither does this chapter) the entirely separate question of law applicable
to non-contractual - principally tortious - obligations (i.e. where the parties to a dispute in tort are located in
different jurisdictions, which country's law will apply?).
4
see the Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.)
(EU Exit) Regulations 2019/834

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Rome I has direct effect in English law. It is irrelevant whether or not the
territories of the parties are in the European Union. Under Article 1,
Rome I applies (i) in all cases involving a ‘conflict of laws’, (ii) to
contractual obligations (iii) in civil and commercial matters. (Exclusions
from (iii) ‘civil and commercial matters’ include such things as revenue,
customs, administrative matters, arbitration agreements.)

2. General rule: freedom of choice

Article 3 sets out the general rule applicable to governing law: ‘a

contract shall be governed by the law chosen by the parties’. The
choice may be the law of any country and may relate to the whole or
part of a contract (and parties may generally choose to vary this choice
at any time).

Not every contract contains an express choice of law provision. If there

is no express term, the court will consider any agreement which may be
implied from the facts and circumstances, including the contract’s
express terms, if any. If the matter cannot be determined by implication,
other provisions of Rome I become relevant.

3. Rules where there is no (express or implied) choice

If the parties have not chosen an applicable law, Rome I sets out the
rules for determining it. The key rules of application in the context of
CLIP are set out in Article 4 and are summarised in the following table:

Article Type of Applicable Law

contract
4(1)(a) Sale of goods Law of the country where the seller
has its habitual residence.
4(1)(b) Provision of Law of the country where the
services service provider has its habitual
residence.
4(1)(f) Distribution Law of the place where the
contract distributor has its habitual residence.

The meaning of the expression ‘habitual residence’ is addressed in

Article 19.

Rome I makes further special provisions as to the governing law of

contracts relating to immovable property, franchise agreements, sale of
goods by auction and multilateral agreements. These are not
reproduced in your CLIP Handbook.

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Example: the Rome I rules

An Italian supplier agrees to supply goods to an English buyer and

deliver those goods in England. The parties have expressly agreed that
the English courts have jurisdiction, but the contract is silent as to
governing law.

We cannot apply Article 3 because the contract is silent as to governing

law. The country where the seller has its habitual residence is Italy
(Article 4(1)(a)) so the English courts will apply Italian law to the
contract.

The position would have been very much simpler had there been an
express choice of law.

13.3.3 Mandatory rules

Rome I contains a series of ‘anti-avoidance’ measures in order to ensure that

the parties to a contract are not able to contravene certain key principles of
domestic law. In particular:

Articles 3(3) and 3(4) provide that where all circumstances other than the
parties’ choice point to a particular country, the courts may apply certain rules
of that country’s national law (including EU law if that country is an EU
member state) if they are of the kind ‘which cannot be derogated from by
agreement’ (i.e. rules from which parties cannot validly ‘contract out’).

Example: Mandatory rules

An English manufacturer, with premises located in England, contracts to

sell English-made goods to an English buyer located in England.
Delivery and payment are both to take place in England. But the parties
have expressly agreed that the contract shall be governed by German
law. The English courts will respect this choice and apply German law
when interpreting the contract, and:

 The SGA would not imply terms into the contract (as the SGA can
be derogated from by agreement); but

 The English courts would be permitted to apply UCTA (since parties

cannot ‘contract out’ of UCTA, which is capable in some
circumstances of rendering an agreed term unenforceable).

Article 9 deals with ‘Overriding Mandatory Provisions’, defined in Article 9(1)

(examples might include provisions of criminal law or competition law). Article
9(2) provides that ‘nothing in this Regulation shall restrict the application of the
overriding mandatory provisions of the law of the forum’ (the ‘forum’ is the
court hearing the dispute). Articles 9(1) and 9(2) accordingly provide a
system for ensuring that a country can continue to apply laws which protect its

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‘public interests’ even if, as a result of a choice by the parties or the

application of any other provisions under Rome I, the contract is governed by
the laws of another country. Nevertheless, the CJEU has held that Article 9
should be interpreted strictly.

In addition, under Article 21 of Rome I the application of a provision of the law

of any country specified under Rome I (whether express, implied or otherwise)
can be refused if such application ‘is manifestly incompatible with the public
policy of the forum’. There is no single set of rules relating to the
circumstances in which a foreign law can be set aside on the grounds of public
policy. It might be done, for example, where the foreign contract relates to
bribery, slavery or prostitution.

When selecting a jurisdiction to hear any dispute, it is therefore important to

think carefully about any overriding or mandatory provisions of law in the
jurisdiction selected.

14. Price and Delivery terms

From a commercial perspective, the terms of a sale of goods contract should

reflect the following, which are of particular importance to an international sale
of goods contract’:
1. the agreed price - and whether the costs of delivery and insurance have
been factored into the price;
2. who is assuming the risk of loss or damage to the goods until actual
receipt by the buyer; and
3. who is bearing all the associated obligations for and costs of transport,
insurance, customs clearance and import duties.

Although only the first of these is explicitly about price, they are all ‘price’
terms, in the sense that they specify how much effort on the part of the seller
is included in in the contract price. They are also all delivery terms in that (in
the absence of express provision to the contrary) they can be relied on to
identify the exact time and place at which ‘delivery’ takes place.

14.1 Meaning of ‘delivery’

You were introduced to the seller’s duty to deliver goods under the SGA at
paragraph 6 above.

In everyday usage, we think of ‘delivery’ in contrast to ‘collection’: so if we

hear of a seller ‘delivering’ goods, we expect the seller will transport them to
the buyer’s premises (rather than wait for the buyer to come and get them).
This is not necessarily the meaning of ‘delivery’ as a seller’s obligation under a
sale of goods contract.

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s. 61(1) SGA defines delivery as: ‘voluntary transfer of possession from one
person to another...’ Commentators have noted that this definition is not
universal and does not always apply (for instance, even this statutory
definition goes on to carve out a different meaning for the term for the
purposes of specified sections of the SGA). The key point to note here is that
this definition does not address where delivery happens or who is responsible
for transporting the goods to the place of delivery.

For the purposes of Part B of Chapter 6, the transfer of possession of the

goods (or at least of the right to possession) will be taken as the hallmark of
‘delivery’. Delivery in this sense may be effected in person or via agents, and
physically (by handing over the goods themselves) or symbolically (by handing
over documents representing the goods, which confer a right of possession).
The physical location at which this occurs is often immaterial.

14.2 Customary trade terms at common law

Over the years, traders developed standard practices as to how they allocated
the attendant risks and costs between the parties in connection with delivery
of goods. It became customary to refer to certain of these standard practices
using labels such as ‘cost, insurance and freight’ or ‘free on board’
(abbreviated to ‘c.i.f.’ and ‘f.o.b.’ respectively), as a kind of shorthand.
Because the common law can imply terms into contracts by custom and
practice of the trade, over time these abbreviations came to have quite
specific legal meanings. ‘Strict’ forms of such contracts evolved so that
nowadays, at common law, the use in contracts of the expressions ‘c.i.f.’ and
‘f.o.b.’ will imply two different ‘packages’ of price and payment terms.

Historically, the development of strict forms of such customary trade terms at

common law has been convenient for traders. Rather than spell out in detail
exactly who was responsible for which step of the goods’ journey, parties
could simply agree, for example, that delivery under a particular sale of goods
contract would be ‘f.o.b. Rotterdam’ or ‘c.i.f. Southampton’. The common law
would imply what price and delivery terms the parties had thereby agreed to.

Nowadays the customary trade terms implied under common law have, in
practice, largely been superseded and widely replaced by use of so-called
‘Incoterms’.

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14.3 International Chamber of Commerce (‘ICC’) – Incoterms 2020

14.3.1 What are Incoterms?

Incoterms are not a creature of common law. Incoterms are a standardised

set of international trade terms drafted and published by the ICC. They provide
a common set of rules that traders based in different countries can choose to
incorporate into contracts for the sale of goods. They are intended to assist the
international trading community to adopt a common language. Periodically,
the ICC amends the published text of the Incoterms to bring them up-to-date,
in line with contemporary market practice. The latest version is the Incoterms
2020. In this module, we do not study the actual text of the Incoterms. A
summary of their key provisions is set out in the CLIP Handbook.

Incoterms are widely recognised by the courts in the international community.

They can be incorporated by reference, with or without amendment, into a
contract. This defines certain obligations of the parties without the need to set
them all out in detail (much as, you will recall from BLP, in the context of
company law the Model Articles can be incorporated into a company’s articles
of association with or without amendment, without the need to reproduce them
verbatim).

Once incorporated into a contract, an Incoterm will be subject to other terms of

the contract and the applicable governing law. Use of Incoterms is voluntary -
they do not have the force of law and the parties to a contract which
incorporates an Incoterm may agree to vary it, provided the meaning is clear.

The Incoterms fall into the following broad categories.

1. ‘F’ terms, which provide that the buyer is responsible for paying the cost
of the main carriage after loading (i.e. the ship that will transport the
goods to the agreed port, also known as ‘freight’). Under the ‘F’ terms
the risk of loss or damage passes to the buyer on delivery of the goods
at the port of shipment (loading).
 ‘Free on board’ (FOB) is a typical ‘F’ term which requires the seller
to load the goods on board a ship nominated by the buyer within
an agreed period of time and to pay all relevant charges and costs
prior to loading (such as export duty).
2. ‘C’ terms, which are like the ‘F’ terms in that they require the seller to
load the goods on board, but under which the contracts for the main
carriage and insurance to the port of destination are taken out and paid
for by the seller.
 ‘Cost insurance and freight’ (CIF) is a typical ‘C’ term which is
considered in more detail in paragraph 14.4 below.
3. ‘D’ terms, where the seller assumes both the risk and cost of transport
all the way to an agreed place of destination of the goods.
 ‘Delivery duty paid’ (DDP) is one of the ‘D’ terms which represents
the maximum obligation for a seller of all the Incoterms. DDP
requires the seller to bear all the costs and risks of delivering the

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goods to the agreed destination including, for example, paying any

import duties and delivering the goods from the port by lorry to the
buyer’s premises.

The seller’s obligations become increasingly onerous as you move down this
list. Indeed, you will notice when you look at the Incoterms summary in your
CLIP Handbook that the first Incoterm (before the ‘F’ terms), called ‘Ex-Works’
(EXW), represents the minimum obligation for a seller of all the Incoterms. The
seller merely has to make the goods available at its own works or other
agreed place, for collection by the buyer.

14.3.2 Using Incoterms and their relationship to customary trade terms

In this chapter, and in your SGS materials, Incoterms are referred to by

abbreviation in capitals (e.g. CIF). Common law customary trade terms
(giving rise to implied terms and presumptions) are indicated by abbreviation
in lower case (e.g. c.i.f.).

On the CLIP module, we focus on the CIF Incoterm, because it is one of the
more commonly encountered terms used in certain trades in conjunction with
letters of credit (a type of payment mechanism which is discussed in
paragraph 15.2). CIF is, more or less, an express statement of the same
terms as common law would imply into a c.i.f. contract.

How to use an Incoterm

When the parties to a contract agree to rely on an Incoterm, there is no need

to include the text of that Incoterm in the contract. However, it is necessary
expressly to refer to ‘Incoterms 2020’ (e.g. ‘CIF Liverpool Incoterms 2020’) 5.
The effect of so doing is to incorporate an express term into the contract. (By
contrast, if the parties agree to rely on the English common law strict form of
c.i.f., equivalent terms will be implied into the contract, by custom and practice
of the trade).

Relationship of Incoterms to the common law

As a reminder, the following are some general principles of English contract

law:
 where the parties to a contract have omitted to address a matter
expressly, the courts may imply a term from statute or common law;
 at common law, terms may be implied by making presumptions as to the
parties’ intentions, on the basis of custom or practice of the trade6; and
 where a contract contains express terms, these will prevail over any
contrary terms that might otherwise have been implied (except where an
express term is unenforceable for some reason).

5
If reference the word ‘Incoterms’ is omitted (e.g. the contract provides it is to be ‘CIF Liverpool’), the
parties will be taken to have agreed to rely on the common law version of c.i.f..

6
in addition, terms may be implied by statute or at common law to give business efficacy to a contract - but
these principles are not relevant in this particular context.

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Therefore in principle (and subject to any variation agreed between the

parties), an (express) CIF Incoterm, once incorporated into a contract, will
prevail over an (implied) c.i.f. customary trade term.

In practice, no conflict arises between the CIF Incoterm and common law c.i.f.,
because, broadly speaking, the CIF Incoterm states (expressly) the same
provisions as would be implied by the common law into a strict form of c.i.f.
However there are significant differences between Incoterms and customary
trade terms, in terms of their scope.

For instance, the customary trade term c.i.f. carries presumed intentions of the
parties as to when title in the goods should pass from seller to buyer. The CIF
Incoterm is silent as to when title passes.

If a contract governed by English law incorporates the CIF Incoterm and

parties have omitted to state expressly elsewhere in the contract when title
will pass, English law will ‘plug the gap’ by presuming the parties’ intentions
are the same as those implied by the common law strict form of c.i.f.

14.4 CIF (Cost, insurance, and freight): a closer look

This paragraph summarises the CIF Incoterm. It also addresses terms and
presumptions implied at common law into a strict c.i.f. contract, in respect of
matters not addressed expressly and conclusively in the CIF Incoterm.

It is appropriate to use CIF where goods are transported by sea. In practice

the CIF Incoterm is also frequently used where (a) transportation is not by sea,
or (b) the goods loaded are containerised, or (c) the goods are delivered to the
buyer’s freight forwarder (and not delivered by the seller using stevedores to
load them on board)7.

7
Technically (and beyond the scope of the CLIP module) in these situations Incoterms other than CIF are
more appropriate. For example, where goods are containerised CIP is the correct Incoterm.

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The notes below on CIF apply on the assumption that goods have been
appropriated to the contract when shipped (loaded) on board.

14.4.1 Duties of the seller and the buyer under CIF

The duties of the parties under CIF Incoterms 2020 are as follows. The seller
must:
• load conforming goods on board the vessel;
The goods must conform with the terms of the contract. The obligation
may be to load at a specified port of shipment (or even on to a specified
vessel), but only if expressly agreed in the contract;
• procure (at the seller’s own cost) a contract of carriage/shipping
contract, for shipment to the buyer at a named port of destination;
The contract should be of the usual type in relation to the goods and
voyage involved and reasonable in its terms (s. 32(2) SGA applies,
requiring the seller to effect a reasonable contract of carriage);
• procure marine insurance;
This must be in the name of the buyer, or note the buyer’s interest, so
that the buyer can claim directly against the insurer. It need only be on
usual terms – not, for example, including war risks, unless these risks
are added by agreement; and
• tender documents to the buyer, as explained in paragraph 14.4.2 below.

Tender of the documents to the buyer discharges the seller’s delivery

obligation. The documents fulfil a number of functions, principally
ensuring that the buyer can claim the goods at the port of destination.

The buyer must:

• accept (‘take up’) conforming documents;
The documents (discussed below in paragraph 14.4.2) must conform
with the terms of the contract. Provided they do, failure to accept them
is a repudiatory breach by the buyer.
• pay for the goods as provided in the contract (whether such provision is
made expressly or by implication);
• take responsibility for the goods, with the benefit of the contracts of
carriage and insurance, from the point of loading.
It is for the buyer to arrange for importation of the goods at the port of
arrival and onward delivery in the country of destination.

14.4.2 The shipping documents

There are three key documents for tender by the seller to the buyer under a
CIF contract:
1. the bill of lading (explained below), or alternative;
2. marine insurance policy (for the benefit of the buyer); and

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3. commercial invoice (evidencing the contract of sale between seller and

buyer, including a description of the goods and their price).

The parties can expressly require other agreed documents (e.g. certificate of
origin of the goods, pre-shipment certificate of inspection or quality, export
licence).

The bill of lading is a document issued by the carrier to the seller when the
gods are shipped. It has three functions: as a receipt for the goods, as a
contract of carriage and as a document of title. Each of these functions is now
examined in turn.

 receipt

The bill of lading provides proof of loading of the goods by the seller. It
describes, so far as apparent to the carrier, the nature, quantity and
condition of the goods. The carrier does not have a duty proactively to
inspect the goods, merely to note their appearance. If the goods are not
in apparent good order and condition (e.g. the packaging appears to be
damaged), the carrier will note this on the bill of lading. Such a bill is
said to be ‘claused’.

The buyer will normally require the seller to deliver a clean, shipped bill
of lading, signifying that the goods have been:
i) received in apparent good order and condition (clean); and
ii) loaded as such on board (shipped).

 transport contract

The bill of lading provides evidence of a contract of carriage (effected by

the seller) with the carrier to the agreed port of destination. The benefit
of this contract is transferable to the buyer. Thus a buyer in possession
of the bill of lading can sue the carrier for breach of the contract of
carriage.

 document of title

The buyer will need to have possession of the original bill of lading in
order to collect the goods from the carrier at the port of destination. The
bill of lading entitles its holder to obtain possession of the goods from the
carrier when the ship reaches its port of destination. It follows that only
the original bill will do – the seller cannot tender a copy (for example, by
email).

The simple, ‘bearer’ form of bill of lading entitles the bearer of the bill to
claim title to the goods, regardless of how he came by it. This is the
form of bill of lading you will encounter in SGS 8.

However in practice, the bill commonly names a consignee (a so-called

‘order’ bill), in which case it usually provides for endorsement to a third
party so as to transfer the right to claim possession of the goods. An

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endorsable bill of lading is useful if the buyer wishes to sell the goods to
a third party whilst they are still in transit.

Practice point: alternatives to a bill of lading

The parties can agree (varying CIF) for the seller to deliver a document
other than a bill of lading. A number of alternative documents are used
in practice. Examples are given below, (but you are not required to
understand the different nature and functions of these documents for the
purpose of the CLIP module).

One common alternative to a bill of lading is a waybill. Waybills are not

documents of title but do have the advantage that (a) they can be used
for air shipment and (b) they do not require a holder to physically
produce the original document to the carrier: the buyer can collect the
goods simply on proof of identification.

When road and/or rail transport is applicable, a Combined Transport

Document (also called a Multimodal Transport Document) is frequently
used.

14.4.3 Effects of CIF

When does delivery occur?

In a CIF contract, performance by the seller is by delivery to the buyer of the

relevant shipping documents representing the goods (see above), treated
as a symbolic delivery of the goods themselves. This presupposes loading
(given that a clean, shipped bill of lading can only be issued after the goods
are on board), and is likely to occur before the goods arrive at the port of
destination, at which point the buyer can claim physical possession.

Where payment is made by means of the commercial payment mechanism

know as a letter of credit (explained below in paragraph 15), the seller will
deliver the documents to a bank, acting as agent of the buyer.

When does risk in the goods pass to the buyer?

The CIF Incoterm specifies expressly that risk passes to the buyer on loading
the goods on board. This varies s. 20 SGA.

Thus a CIF contract does not guarantee to the buyer the final arrival of the
goods themselves (delivery being of documents, not goods).

If there is any loss or damage to the goods after the loading on board, the
buyer must rely on (and has the benefit of) (i) the shipping contract with the

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carrier (the benefit of which passes with the bill of lading) 8 and (ii) the marine
insurance policy (covering insured risks).

When does title in the goods pass to the buyer?

The CIF Incoterm is silent as to passing of title.

In practice, any commercial contract for the sale of goods is likely to include
an express provision as to when title will pass - for example, under a retention
of title clause (see paragraph 7.2 above). If a contract is silent on the matter,
and the parties have agreed for delivery to be ‘CIF Incoterms 2020’, then
English law applies as follows.

Under s. 17(1) SGA, title passes when the parties intend. s. 18 SGA provides
default rules for ascertaining intention ‘unless a contrary intention appears’.

Such contrary intention (displacing the statutory rules) is most apparent from
the fact that the parties have incorporated the CIF Incoterm. This can be
taken to indicate that their intentions match the presumptions (i.e. implied
intentions) that arise under common law c.i.f., as follows:
 in situations where the bill of lading is in ‘bearer’ form, or made out to the
order of the buyer, there is a presumption that the buyer acquires title to
the goods on acceptance of (‘taking up’) conforming documents
(including the bill of lading). The buyer can therefore sell the goods
during the voyage or pledge them as security for a loan, even before
actually receiving them;
 however, in practice the bill of lading is often made out to the order of
the seller (with the intention of transferring it (by endorsement) to the
buyer only against payment). Such a scenario gives rise to the
presumption that the seller has retained the right of disposal until
payment (see s. 19(2) SGA), i.e. an implied retention of title clause.

Note that such passing of title is conditional, and in some scenarios (involving
a breach of contract by the seller) may not be permanent - see paragraph
14.4.4.

When is payment due?

The CIF Incoterm provides that the buyer must pay ‘as provided in the
contract’. It is usual for the buyer’s payment obligations to be stated
expressly.

In the unusual event of the contract being silent as to time for payment, then
the parties will be taken by implication to have intended the same as is implied
into a strict c.i.f. contract: the buyer’s duty to pay the price against delivery
arises upon delivery of conforming documents (representing the goods).
Therefore the buyer cannot defer payment until after arrival or inspection of
the goods. This varies s. 28 SGA since payment is not due against delivery of
the goods themselves.
8
Even if buyer was not an original party to the bill of lading, it will have a statutory right of action against
the carrier under the Carriage of Goods by Sea Act 1992 for breach of contract as well as rights in tort if
the carrier is negligent.

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In practice, payment under a CIF contract is commonly effected by means of a

commercial payment mechanism known as a letter of credit (described in
paragraph 15 below - a letter of credit can be used to ensure that the moment
of payment is conditional upon, and simultaneous with, tender of the
documents by the seller).

14.4.4 What if goods do not conform with the contract? Buyer’s remedies.

As we have seen, the carrier has no duty to inspect the goods on loading.
The bill of lading may therefore not accurately reflect the condition of the
goods. The carrier may issue a clean bill of lading because no defect or
damage was immediately apparent - but in fact, the goods do not conform with
the contract.

To load non-confirming goods is a breach of contract on the part of the seller.

However, title passes to the buyer with the documents, before the buyer has
had an opportunity to inspect the goods themselves. This creates something
of a paradox: how is a buyer able to ‘reject’ non-conforming goods of which it
is already the legal owner?

The common law addresses this problem by rendering the passing of title
under a c.i.f. (and thus also, by implication, a CIF) contract conditional,
subject to the re-vesting of title in the seller if the goods are subsequently
rejected.

As a result, the buyer under a CIF contract has two, separate, potential rights
of rejection:
1. the buyer can reject non-conforming documents. For instance, if the
contract stipulates a clean, shipped bill of lading and the seller tenders a
claused bill (perhaps noting obvious damage), the buyer is not obliged to
take it up or pay.
2. If the documents are in good order, the buyer must take them up and
pay. However the buyer can still reject non-conforming goods on arrival
and inspection - provided it can prove the non-conformity as at the date
of loading (ss. 34/35 SGA). This is because the seller’s obligation is to
load conforming goods on board (not to procure arrival of conforming
goods at the port of destination).

The buyer loses the right to reject non-conforming goods if:

 the non-conformity was apparent on the face of the bill of lading
accepted by the buyer – if so, this creates an estoppel and the buyer is
taken to have waived the right to reject the goods for that reason; or
 (unless contractually excluded), as provided under SGA, for example if
the non-conformity is so slight that it would be unreasonable to do so (s.
15A SGA).

If the buyer has lost the right to reject, e.g. by accepting documents showing
an apparent non-conformity in the loaded goods, it can claim damages from
the seller.

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In practice, a buyer who has already paid the price may not, from a
commercial point of view, wish to risk rejecting the goods even where it retains
a right to do so. It may prefer to keep the goods ‘as-is’ and just claim damages
as compensation for the difference in value between what it has received and
what it contracted to buy. Practical factors in such a decision may include
delay (given that transport of replacement goods will take time) and risk of loss
or damage to unwanted the goods on their return journey.

Bear in mind that this paragraph 14.4.4 is not concerned with scenarios where
goods are damaged in transit: that risk passes to the buyer on loading.

15. Payment of the price

15.1 The dilemma

In international sales of goods, the parties are invariably located in different
jurisdictions and commonly at a great physical distance from one another.

So, on the one hand, if the buyer pays in advance, how will the buyer make
sure that the seller delivers?

And on the other hand, if the seller delivers the goods before payment, how
will the seller ensure that the buyer pays the price? There will often be a risk
of non-payment, e.g. if the buyer defaults or becomes insolvent or is
prevented from paying for other reasons e.g. political. To minimise the risk of
delivering the goods and not being paid by the buyer, the seller may consider
the following possibilities:

1. inserting a retention of title clause in the contract.

In theory, this allows the seller to reclaim its goods if the buyer does not
pay for them, particularly if the buyer becomes insolvent. However,
even if valid and effective, it may be of little practical help in recovering
the goods from abroad or in ensuring payment of the contract price.

2. requiring full payment in advance for the goods.

Most buyers would resist: why should they pay in advance and risk non-
delivery of the goods? A seller who insists on advance payment may
find itself losing sales.

3. requiring payment by means of a particular type of commercial payment

mechanism.

This is common in commercial transactions. Payment mechanisms

include letters of credit, negotiable instruments such as bills of
exchange, cheques and promissory notes that confer property rights and
can be transferred by delivery or specifically endorsed to the transferee.

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In paragraph 15.2, we look in general terms at an example of a commercial

payment mechanism which protects a seller against non-payment, the letter
of credit (‘L/C’) (in the form of a ‘Banker’s Documentary Credit’).
In paragraph 15.3 we look at performance bonds / guarantees, which
protect a buyer against non-delivery.

These are generally the preferred methods of ‘securing’ financial obligations in

international sales contracts.

15.2 Bankers’ Documentary Credits – ‘Letters of Credit’

15.2.1 Overview

L/Cs are very commonly used in connection with CIF contracts. In the
remainder of this paragraph, we discuss how a L/C mechanism can be used in
connection with payment under a CIF contract.

This paragraph 15.2 describes how L/Cs work from a commercial perspective,
without discussing the underlying law.

A L/C is a commercial credit arrangement in the nature of an undertaking,

typically given by the buyer’s bank, to pay a specified sum (typically the
purchase price under an underlying CIF contract) to a named beneficiary
(typically the seller).

Such undertaking will be subject to certain conditions – typically, presentation

by the seller to the bank of certain documents (hence the expression
‘documentary credit’). These will be the very same documents as are
required to be delivered by the seller to the buyer under an underlying CIF
contract. By this means, the use of L/Cs helps to resolve the issue as to
which comes first – delivery or payment.

Practice point

Other types of L/C, not addressed in this module, are used in practice, for
example:

- Standby L/C - this is a type of undertaking by which the buyer’s bank

agrees to pay if the buyer does not pay.

- Revolving L/C - This is a type of credit for repeated/continuing trading

between seller and buyer by which the buyer’s bank gives credit up to
an agreed credit limit, until the credit expiry date.

15.2.2 How a L/C is set up

1. The seller and buyer agree payment terms for the goods in the
underlying sale contract. These will detail the L/C requirements and
conditions relating to it.

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2. The agreed payment terms must be approved by the buyer’s bank.

3. The underlying sale contract will then be entered into.
4. The buyer (the ‘applicant’) asks its bank (the ‘issuing bank’) to issue
the credit. The buyer will have to pay a fee to the issuing bank for this.
5. The issuing bank then issues the credit in favour of the seller (the
‘beneficiary’) and advises/notifies the credit to the seller. At this point,
credit is said to be ‘opened’.

Once the credit is opened, the seller can be confident of receiving payment in
due course and can now begin to perform the contract (by procuring or
manufacturing the contract goods).

Simple example of a Letter of Credit:

To: [SELLER]

We, XYZ Bank plc, at the request of our customer [BUYER], irrevocably
agree to pay you the amount of £1 million on production to us between
(date) and (date) of the documents listed below:

Documents to be produced:

[detailed list, to include (i) bill of lading, (ii) marine insurance and (iii)
commercial invoice]

If the issuing bank is located, or has a branch, in the jurisdiction of the seller,
then it will commonly open the credit directly to the seller itself (so that only
one bank is involved). This is the scenario with which you will work in SGS 8.

Even at its simplest, a letter of credit opened for the purpose of paying for
goods gives rise to a network of separate contractual relationships:

(a) underlying sale of goods contract between seller and buyer;

(b) contract between buyer and issuing bank; and
(c) contract between issuing bank and seller (see paragraph 15.2.4 below).

In practice, L/C arrangements with the bank(s) are quite expensive (typically
based on a percentage of the credit value). This increases the overall
purchasing cost to the buyer but (if the buyer has sufficient bargaining
strength) the cost of procuring a L/C can be factored (i.e. priced) into the sale
contract.

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Practice point: L/Cs involving more than one bank

In practice, the issuing bank may not be located, or have no branch, in

the jurisdiction of the seller.

In such a case it will often appoint a local bank (the ‘advising bank’ or
‘correspondent bank’) to act as its agent, to advise/notify the seller of the
credit and, later on, to take up the documents and make the payment.

In some cases, the seller may require the buyer to procure that the credit
be not only ‘advised’ but also ‘confirmed’ by a bank which is local to or
otherwise acceptable to the seller (often the seller’s own bank). Such a
bank is known as a ‘confirming bank’ because it gives a payment
undertaking on its own account, separate and in addition to that given by
the issuing bank. This type of L/C is known as a ‘confirmed (irrevocable)
letter of credit’.

In practice, a confirmed L/C is the most common type of documentary

credit arrangement in an international sales transaction. It is particularly
expensive because the confirming bank will normally charge a fee to the
issuing bank, which will be passed on to the buyer in addition to the
issuing bank’s own fee.

15.2.3 Usual payment conditions for a L/C

In paragraph 15.2.2 we saw that the buyer’s bank should have an opportunity
to approve the payment provisions in the sale of goods contract between
buyer and seller. This is because those provisions will include an agreed form
of L/C which must be acceptable to the bank. It will in due course be up to the
bank to determine conclusively whether or not its conditions have been met -
therefore the bank must be satisfied with its provisions.

Documents to be presented

The L/C will stipulate an agreed set of identifiable documents. In order to

‘dovetail’ with the underlying CIF contract, the stipulations of the L/C must
include the documents which the seller is obliged to deliver to the buyer under
the sale of goods contract (consistent with paragraph 14.4.2), namely:
 a bill of lading – as evidence that the seller has shipped the goods as
required;
 a commercial invoice – as evidence of the goods described and the
amount claimed;
 an insurance policy or certificate – for transit insurance risks; and
 any other documents contractually required to be delivered by the seller
to the buyer e.g. packing lists, certificates of origin, certificates of
inspection from a third party, certificates of conformity from the seller,
export licences etc.

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Other conditions

Other conditions for payment may be stipulated in the L/C. For example:
 dates for commencement and expiry of the credit, between which the
seller must produce the documents;
 specific named signatories for one or more of the documents (along with
sample signatures;
 currency for payment; and/or
 time for payment (immediately on presentation of the documents or
deferred, i.e. after a stated period following presentation).

15.2.4 How payment is made under a L/C

To continue the narrative begun in paragraph 15.2.2, in order to claim

payment the seller will in due course present itself at the issuing bank (e.g. at
the bank’s counters at named local branch address) to request payment of the
contract price.

The issuing (or confirming) bank’s obligation to pay is conditional on the

seller’s fulfilment of the payment conditions set out in the L/C, including
presentation of specified documents. If the documents conform to the terms of
the L/C, they will also ‘conform’ to the terms of the underlying CIF contract.

Thus, in the act of accepting documents from the seller in accordance with the
L/C, the bank will, in its capacity as agent for the buyer, take up (i.e. accept)
those same documents so as to discharge the buyer’s obligations under the
underlying CIF contract. (The bank will then take steps to pass the original
documents to the buyer, or to its order - possession of the bill of lading, in
particular, being required to permit collection of the goods from the port of
arrival).

If the seller is to be certain that presentation of the documents will trigger

payment, the bank’s obligations to the seller under a L/C must be both
autonomous and irrevocable.

Autonomous

Under a L/C, a contract arises between the bank and the seller (as
beneficiary).

This contract is of a special type - there is no consideration passing between

the parties and notification of the credit need not be accepted by the seller.
Nevertheless (under the principle of the Autonomy of Credit) English law (as
well the law of other jurisdictions) recognises, by custom and practice, that the
bank’s obligation to pay is enforceable by the seller against the bank, as an
independent contract.

The bank’s contractual obligation to pay the seller is autonomous in that it is,
independent of the performance obligations of the seller and buyer in the
underlying sale contract. Unless there is fraud by the seller (or other
beneficiary of the letter of credit) or illegality in paying under the letter of credit,

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the bank cannot refuse to pay under the letter of credit if it is presented with
conforming documents.

Irrevocable

The L/C needs to be expressed irrevocable, since it will serve little purpose if
the bank can revoke its obligation to pay the seller.

Thus typically, under a L/C, if all conditions are satisfied, it is not open to the
bank to refuse payment even at the request of the buyer (its customer).

What happens if non-conforming documents are presented?

In essence, the L/C mechanism works to deprive the bank of any discretion as
to whether or not to pay the seller/Beneficiary. If the seller presents
conforming documents, the bank is bound to pay.

By the same token, the seller must ensure that the documents ‘conform’ to the
L/C - i.e. that they match exactly to the specifications of the L/C. This is called
the Doctrine of Strict Compliance. If there is any discrepancy between the
documents presented and the specifications of the L/C, the bank must reject
them and decline to pay. Otherwise, if the conditions for payment provided in
the L/C are not strictly satisfied but the bank nevertheless pays the seller, the
bank may be in breach of its contract with the buyer (its own customer).

Normally the bank will be required to inform the seller of its reasons for any
such refusal so that the seller has an opportunity to cure any curable defects
and re-present the documents.

15.3 Performance Bonds/Guarantees

In a sale of goods contract, the seller will generally have the main
performance obligations. Performance bonds or guarantees may typically be
required by the buyer (as the beneficiary) to secure the seller’s contractual
performance obligations, particularly when the buyer must make an advance
payment such as a deposit.

In practice, the effect of a performance bond (normally issued by the seller’s

bank) is to ‘refund’ any such advance payment to the buyer in the event that
the seller does not perform its obligations. The buyer’s right to payment under
a performance bond is autonomous from the underlying contract.

One of the most important terms to agree in a performance bond is whether or

not it is to be on demand, i.e. payable on the buyer’s simple demand.

An on-demand bond clearly favours the buyer, who may be reluctant to agree
conditions which are difficult, time-consuming and costly to satisfy. The
seller’s bank may also prefer an on-demand bond as its trigger for payment is
clearly apparent and easy to administer.

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Conversely the seller may be reluctant to risk giving the buyer a simple on-
demand bond autonomous from the underlying sale contract - and may insist
on a conditional bond, requiring the buyer to support its demand for payment
with evidence. At the very least, such conditions would include the production
to bank of the buyer’s certificate setting out the seller’s alleged default.

Examples of more stringent conditions include: a named third party’s

certificate as to the seller’s default; the decision of an agreed arbitrator; or
judgment of a named court of law. Where such conditions are agreed, the
seller normally procures a performance guarantee from an insurance
company rather than a performance bond issued by a bank).

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PART C: E-COMMERCE

Part C Learning Outcomes

After this part of Chapter 6 you should be able to:

1. understand and use terminology relevant to commercial activity online;
2. identify certain duties imposed on the providers of information society
services, particularly when contracts are formed online; and
3. appreciate the extent to which regulations and the common law protect
intermediary service providers from liability arising from acts of third
parties.

16. The Internet and the Web: a very basic introduction

16.1 Terminology used in this chapter and SGS 9

Electronic media transmit information in digital form. Such information is not

legible by a human being without the use of electronic equipment to ‘decode’
it. In effect, digital information sent between electronic devices can be thought
of as a set of instructions for creating a legible (or audible) message, sent by
one piece of equipment to another, which then carries out those instructions.

The communications medium on which we are going to concentrate during

SGS 9 is the world-wide web (a.k.a. the Web). Many of us refer to the Web as
‘the internet’ but they are not strictly the same thing (when you send and
receive email, for example, you are communicating via the internet but not via
the Web). The internet is infrastructure, a ‘network of networks’ comprising
computer hardware, cables and wireless connections. The Web is simply one
way of accessing and exchanging information using the internet.

To access the internet, your device uses a connection service provided by an

internet service provider (or ISP). To access the Web, your computer or
mobile device uses browser software (e.g. Internet Explorer, Safari, Firefox or
Chrome).

To visit a given website means to communicate with the server (i.e. computer)
on which the website’s content, in the form of electronic data, is hosted (i.e.
stored). One way to initiate such communication is to type a uniform resource
locator (or URL) into the browser. (A URL is very similar to, but not the same
thing as a domain name: ‘https://www.bpp.com/about-bpp/bpp-university’ is a
URL; ‘bpp.com’ is a domain name.) The URL instructs your browser to send a
message via the internet to the relevant server (which may belong to the

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operator of the website, or may belong to an ISP which has contracted to

provide hosting services to the operator). On receipt of such message, the
server sends instructions, which your device then follows so as to display a
copy of the website page which corresponds to the URL typed in to your
browser. In order to achieve this, your device has to store those instructions
as a cache file in its temporary memory. Therefore, in response to your
request to view a web page your device must, as a technical necessity, make
a copy of it.

The information, comprising the messages exchanged between your device

and the server, travels via the internet ‘network of networks’ and such journey
may take in a number of intermediary servers. So as a by-product of your visit
to the website, copies of the page you have chosen to view may be stored in
the caches of other servers ‘en route’. (This does not apply if you have a
direct connection to the server, in which case the communication takes place
by way of a closed network).

In practice, a certain amount of technical understanding of how the internet

works, as a matter of fact, is necessary in order to apply the law to the facts as
they really are. However no such technical understanding is needed for the
purposes of the CLIP module.

16.2 What is different about e-commerce

From a lawyer’s perspective, the internet is in essence just a communications
medium. However, it is a particularly sophisticated and complex medium,
which we tend to make sense of by analogy to other kinds of communication.
This can create pitfalls, particularly when applying the common law.

The interfaces we are accustomed to using have been designed for ease of
use and for this reason they often resemble, and we are accustomed to
treating them in the same way as, analogue models. For example, a
streaming service might present videos grouped as ‘channels’ as if it were a
broadcaster, which it is not. So it is essential, in practice, not to take analogies
literally. If you practice in this area, you will analyse the technical facts
underlying internet communications in a more rigorous way.

For the purposes of the CLIP module, you do not need such technical
understanding. But you need to appreciate that common law principles
must be applied with care when commerce is transacted over the internet. For
example, it is often said that an email is like a postcard but, as a matter of fact,
they are not at all the same thing. Just because an email fulfils the same
functions as a postcard does not mean that the law will regard it as such. We
consider common law issues below in paragraph 19.

In addition, a certain amount of regulation specific to e-commerce has also

been introduced, and it is to these which we turn first, in paragraph 17.

On this module, we only consider ‘business-to-business’ e-commerce activity

(‘B2B’). Business to consumer (‘B2C’) contracts are beyond the scope of this

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module but consumer law is of particular importance in the online environment

in practice as B2C contracts are subject to more layers of regulation.

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17. E-Commerce Law in the UK Following the UK’s

Withdrawal from the EU

The Electronic Commerce (EC Directive) Regulations 2002 (SI 2013/2002)

(the ‘Regulations’) is domestic UK legislation which was originally passed to
implement the EU’s E-Commerce Directive 2002 (‘the Directive’).

A stated aim of the Directive is to ensure free movement of so-called

‘information society services’ across the EU and therefore much of its
provision was aimed at resolving uncertainty about jurisdiction over online
activities within the EU, establishing a so-called ‘country of origin principle’. In
anticipation of Brexit, the UK enacted the E-Commerce (Amendment etc)(EU
Exit) Regulations (SI 2019/87) (the ‘E-Commerce Exit Regulations’ to
address this. The primary alteration this made to the Regulations was to the
so-called ‘country of origin’ principle - which is beyond the scope of this
chapter.

The impact of the E-Commerce Exit Regulations has been minimal and most
will not have noticed any changes to UK e-commerce regulatory regime
following Brexit.

In the following paragraphs we outline the main provisions of the E-Commerce

Regulations, as amended, of which general commercial practitioners ought to
be aware.

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18. The Electronic Commerce (EC Directive) Regulations

2002 (SI 2013/2002) (the ‘Regulations’)

18.1 Introduction

The provisions of the Regulations on which we will focus address certain

aspects of business activity online and provide a measure of protection for
customers.

This paragraph 18 provides quite detailed commentary on the

Regulations so you are recommended to have the Regulations to hand
for reference before continuing.

18.2 Key defined terms

The text of the following definitions can be found at Regulation 2(1) in the
CLIP Handbook. We have selected only those which are of particular
importance for SGS 9 and/or are not self-explanatory.

Information society service

The Regulations define the term ’information society service’ (Reg. 2(1)) by
reference to earlier EC Directives (not provided in your CLIP Handbook). The
decision not to include a definition per se has been much criticised. Reg. 2(1)
summarises the definition as ‘any service normally provided for remuneration,
at a distance, by means of electronic equipment for the processing ... and
storage of data, and at the individual request of the recipient of a service’.
For our purposes, we will treat this summary as the definition itself.

What is clear (and government guidance has clarified this) is that the term is
intended to be interpreted widely. In effect, any commercial activity via
electronic media (including the Web) is likely to amount to an information
society service. The term includes, but is not limited to, the following:
 services that are commonly provided by ISPs such as provision of
access to a communication network (such as the internet), transmission
of information via a communication network, email hosting and
transmission and website hosting;
 selling, and even just advertising, goods/services online; and
 providing services via mobile phone.

It is worth noting that a ‘plain old telephone’ conversation does not take place
by means of ‘equipment for the processing and storage of data’ (the
underlying technology being analogue) and falls outside this definition.

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Service provider and recipient

A ‘service provider’ is ‘any person providing an information society service’

(Reg. 2(1)). As that term refers to ‘services normally provided for
remuneration’ (emphasis added) it is possible for a person who provides
services for free to qualify as a service provider (if the service is of a
commercial kind). Thus, the provision of pro bono legal advice via email is as
much an information society service as is the website of a City law firm.

The ‘recipient’ of an information society service is a person who uses an

information society service, including consumers and business users. Again,
whether or not the recipient pays for the service is immaterial. Viewing a
commercial-type website is likely to render one a recipient.

Commercial communication

This term (see Reg. 2(1)) covers promotional activity in a wide range of
communications media such as emails, websites, banners and pop-ups.
Government guidance acknowledges that it will not always be easy to identify
a commercial communication, because it must be ‘designed to promote’
goods, services or a person's image. So, for example, is an electronic
greetings card ‘designed to promote’ the e-card service itself, because the
person who receives the e-card may be drawn to send his own e-cards using
the same service? Or is any such promotional effect a mere by-product of the
service itself?

Sub-paragraphs (a) and (b) of Reg. 2(1) set out two clear exceptions to the
definition: a communication consisting of nothing more than contact details, for
example a service provider's address, email and telephone number does not
fall within the definition. Nor does a communication ‘prepared independently
of the person making it’ - this would include, for example, a fan site.

18.3 Regulations applying to electronic contracts

Where provision of an information society service involves the placing of
orders by technological means or the conclusion of contracts by electronic
means, Regulations 9 and 11 impose specific obligations on the service
provider which call for some brief commentary here.

It is essential to recognise that the Regulations dealing with online contracts

have no effect on the operation of the common law of contract formation.
Thus:
 Under Reg. 11(1)(a), a service provider is obliged to acknowledge
receipt of a customer's order. This does not amount to an obligation to
‘accept’ (at common law) a contractual offer.
 The effect of Reg. 11(1)(b) is that any online ordering system (such as a
form) must be designed in such a way that it is technically possible for
the customer/recipient to correct any errors before finally placing an
order (Reg.9(1)(c) requires that the recipient must be able to understand
how to achieve this) - if that order happens to amount to a contractual
offer at common law (see Reg.12). This does not mean that Reg. 12

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operates to turn all orders placed online into contractual ‘offers’ at

common law.

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Note that the obligations under Reg. 11(1) do not apply:

 if the recipient is not a consumer, and the parties have agreed to
dispense with the service provider's obligations; or
 if the contract is formed by means of an exchange of emails (which are
not fully automated: emails are sent and read by human beings, so
errors or misunderstandings can generally be cleared up before the
contract becomes binding) – Reg. 11(3).

Reg. 9 imposes specific obligations on service providers to provide certain

information ‘where a contract is to be concluded by electronic means’.
Government guidance clarifies that this does not include all situations where a
website plays a role in the formation of the contract, only where the contract is
actually concluded online. So, for example, if a website advertises goods but
provides a telephone hotline for the actual ordering process, Reg. 9 will not
apply.

Reg. 9 is generally self-explanatory. Reg. 9(1)(b) refers to the

communications forming the contract, (e.g. any order form submitted) and any
applicable terms and conditions. Most online sales transactions are based on
the standard terms and conditions of the service provider (in practice these
are usually made available for reference online prior to the agreement being
formed, usually via a pop-up window or hyperlink). This regulation protects a
customer who may wish to be able to refer to the terms of the contract once
the contract has been concluded (for example, if something goes wrong with
the delivery). The service provider may have altered their terms and
conditions in the meantime so that the terms available for reference online at a
later date may be different from those applicable to the already formed
contract. The customer needs to know in advance whether or not the terms
applicable to its contract will be available online from the service provider. If
not, the customer needs to be forewarned so that he/she is able to print out or
save a copy of the applicable terms. The Government advises that website
owners retain evidence of the information that recipients had available at the
time of their transaction and whenever a change is made.

There are exceptions to Regs. 9(1) and 9(2) which are similar to the
exceptions to Reg. 11(1). These do not apply to the service provider's
obligation to make its terms and conditions available in a printable form under
Reg. 9(3).

18.4 Consequences of non-compliance with the Regulations

Note that the consequences differ, depending on which Regulation has been
breached.

Failure to provide technical means for correcting input errors under Reg.
11(1)(b): the consequence will be that the recipient has made a contractual
offer in terms he/she did not intend (e.g. he may have ‘clicked’ on the wrong
product or the wrong amount). If that offer is accepted, a valid contract will be
formed and the recipient will be bound.

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Reg. 15 applies only to a breach of Reg. 11(1)(b), that is, where this has
occurred because the service provider did not make it technically possible for
the recipient to correct his mistake before the offer became ‘final’. In such
circumstances the recipient may rescind the contract (subject to the service
provider’s right to apply for a court order upholding the contract).

Failure to provide terms and conditions in a way that allows recipients to

store and reproduce them under Reg. 9(3): the consequence will be that, in
the event of a dispute, the recipient may find itself unable to consult the terms
on which he contracted. Reg. 14 applies only where the service provider has
not acted on a request to comply with 9(3): the recipient may seek a court
order compelling the service provider to comply.

All other cases of default: Reg. 13 allows a recipient to enforce the

Regulations against a service provider in breach, and claim damages for
breach of statutory duty.

18.5 Some issues of interpretation

There is little in the way of judicial interpretation of the Regulations and some
of their wording appears vague. For example, there is no clarification as to:
 how to meet the requirement for information to be ‘clearly identifiable’
(Reg. 7(a)); or
 what is ‘clearly and unambiguously identifiable’ (Reg. 8); or
 when information is indicated ‘in a clear, comprehensible and
unambiguous manner’ (Reg. 9(1); or
 exactly when the order and acknowledgment are deemed to be received
(Reg. 11(2)(a)) – in each case, this is when the addressee is ‘able to
access’ the relevant communication. There is some uncertainty about
exactly what this means, for technical reasons: if an acknowledgment is
sent in email form, when is the addressee able to access it? Is this
when the email reaches the mail server on which her emails are hosted
or is it when the incoming mail is downloaded to her own hard disk so
that she can actually read it? Commentators suggest that the correct
interpretation is when the message reaches the server because at that
point the addressee should be capable of accessing it if she opens her
email software but the point remains to be tested in court.

Although uncertain, from a commercial point of view, the lack of precision in

the drafting of such provisions has the advantage of allowing reasonable
scope for flexibility and technological development. These are questions of
fact to be addressed on a case-by-case basis.

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19. Common law of contract applied to e-commerce

As noted above, the Regulations establish certain duties for service providers,
but they do not affect the common law of contract formation. When analysing
a contract formed via the Web, you should apply general contract law
principles. It is important to be aware that there remains a degree of
uncertainty in the law in this area. This is simply because there are as yet no
cases where the courts have set about mapping the common law concepts of
offer and acceptance on to the technically complex facts of how electronic
communication works. You will need to refresh your memory as to the
principles of invitation to treat, offer, acceptance and incorporation of terms as
you will be exploring these issues in SGS 9.

Clarification: which terms and conditions?

Be aware that most websites have standard ‘terms and conditions of

use’. These are not the same as any ‘terms and conditions of sale’
applicable to any commercial activity conducted via such a website.

Terms and conditions of use cover a contract under which recipient

may access and view the content of a website. The usual analysis is
that the service provider gives consideration by allowing the recipient to
view the website content (usually free of charge); the recipient gives
consideration by abiding by the provider's terms and conditions of use.

Terms and conditions of sale cover the contract under which (using a
website) a provider agrees to provide, and a recipient to pay for, goods
and/or services.

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20. Other legislation and regulation relevant to e-commerce

The following are examples of further provisions which are relevant to e-

commerce and which you are likely to encounter if you practice in this area.
These relate to topics which are not covered on this module, such as those
below.

Consumer protection, which is particularly important online. All usual

consumer legislation applies to consumer contracts formed by electronic
means (e.g. consumer-specific provisions of UCTA, the Unfair Terms in
Consumer Contracts Regulations 1999). There have been changes made in
this area following the UK’s withdrawal from the EU but these are beyond the
scope of the CLIP module.

Many information society services include, or amount to, advertising, and

advertising and marketing are regulated, for example under the Business
Protection from Misleading Marketing Regulations 2008.

The Electronic Communications Act 2000 implemented an EC Directive on

Electronic Signatures. It permitted existing legislation to be amended to
authorise or facilitate the use of electronic communications (where, previously,
a handwritten signature would have been required). An example is the
Companies Act (Electronic Communications) Order 2000, which inserted
provisions into the Companies Act 1985 about giving notices and filing
documents at Companies House in electronic form (these have been largely
re-enacted in the Companies Act 2006).

A company with a website is likely to obtain personal data from its visitors and,
if so, must comply with the General Data Protection Regulation. Data
protection is a complex and specialised area of law.

21. Liability issues online

21.1 Terminology: ‘Internet service provider’ (‘ISP’)’ vs ‘intermediary

service provider (‘intermediary SP’)’
In order to conduct any online activity, we are all reliant on the services of
internet service providers (‘ISPs’) to supply the technical means to access the
internet via the Web and/or email. A ‘basic’ ISP service is provision of online
access via a broadband or dial-up connection and the transmission of content
in electronic form via such connection.

However, most ISPs also provide their customers with additional services,
which might comprise:

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 hosting and transmission of emails;

 hosting of customers’ own websites; and/or
 its own websites: portals, news, search engines and so on.
Thus the business of an ISP involves transmitting and storing vast amounts of
so-called ‘user-generated content’ - that is, content created by third parties -
along the way. ISPs

It is important to bear in mind that ISPs are not the only kind of service
provider to provide information society services as an intermediary between
users. An ISP is simply a sub-category of service provider and falls within the
definition in Reg. 2(1) by virtue of providing an “information society service”.
The rise in popularity of user-generated content means that many service
providers are intermediary service providers (‘intermediary SPs’). This applies
to well-known sites like YouTube, Facebook and Flickr and to any service
provider whose website includes a members' forum. An intermediary SP
hosts user-generated content (on its own server or via hosting services
provided by an ISP) and transmits it to other users of its service.

The difficulty for all service providers (whether intermediary SPs or not) is that
some user-generated content may be unlawful, e.g. defamatory, in breach of
confidence or infringing a third party’s IP rights. Clearly, the originator of the
content is liable for generating unlawful content but the service provider may
also be liable for transmitting and/or storing such content. This is potentially
harsh as the service provider has no real responsibility for, or control over, the
content. Given the volume of third party content handled by a given service
provider in the course of its day to day business, it is not realistic to expect all
content to be vetted in terms of the legal risk(s) it may present.

The law recognises that there is a need to balance service providers'

responsibility for transmitting, hosting and making available material which
injures others and the fact that they are only intermediaries and not primarily in
default.

21.2 Immunities under the Regulations

The Regulations provide certain, limited, immunities from liability for damages
or criminal sanctions which would otherwise arise for service providers. These
are found at Regs. 17-19 inclusive. Each of these regulations provides an
immunity in relation to a particular specified act of the service provider relating
to the transmission or storage of information - provided that the service
provider fulfils specified conditions in relation to the act in question.

You will apply only Reg. 19 in SGS 9 as an example of how the immunities
work.

The Regulations are not the only source of comfort for service providers;
provisions relevant to specific causes of action can be found in other
legislation, for example s. 28A CDPA provides a ‘caching’ defence to copyright
infringement; and there is a similar, statutory ‘internet defence’ to defamation.
We do not apply these provisions on the CLIP module.

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Specified acts

These are:
 Simple transmission of information as a mere conduit (Reg. 17). An
example is the transmission of an email.
 Caching of information (Reg. 18). This is temporary storage for technical
purposes (for example, if you download Hub content from BPP’s server
on your home computer, your ISP may need to make a temporary copy
on its own server).
 Hosting the information (Reg. 19). This is permanent storage, for
example where a business outsources storage of its website to an ISP,
rather than purchasing its own server.

The Regulations do not address the question of liabilities arising from other
acts, e.g. the inclusion on a website, or provision via a search engine, of
hyperlinks to a third party's site.

Specified conditions

The precise conditions to be met by an intermediary SP to use the shield

provided by the Regulations vary according to the act in question. Broadly,
the conditions that the service provider must meet are that it has not originated
or modified the information and has no actual knowledge of its unlawful
nature.

Scope of protection

Regulations 17, 18 and 19, if applicable, protect intermediary service providers

against liability for damages (or any other pecuniary remedy, such as an
account of profits) and against criminal sanctions. They do not shield against
an injunction, even if the service provider has met the conditions of the
relevant regulation.

21.3 Practical implications

Government guidance states that ISPs and other intermediary SPs have no
general obligation to monitor information they transmit or store but should
remove such material once it is brought to their attention. Service providers
need to act quickly once they are made aware that they are transmitting,
hosting or caching unlawful material. Reg. 22 gives some guidance as to
when a service provider has ‘actual knowledge’ for the purposes of Regs.18
and 19.

Generally, service providers will err on the side of caution by co-operating with
requests to remove potentially unlawful content without investigating the
substance of the complaint too closely.

This poses a risk that an originator of content complained of and who has, for
instance, paid a subscription fee to his ISP in return for the hosting of a blog,
may claim that his ISP removed the content too hastily in breach of contract.

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Such a risk can be controlled under the terms of the contract under which the
hosting service is provided. For example, the recipient should undertake not
to post any unlawful or offensive content and the ISP should reserve the right
to remove content at its discretion.

Further reading

Fundamental principles of sale of goods

Atiyah: Sale of Goods

Benjamin’s Sale of Goods

International sale of goods

Goode: Commercial Law

International Chamber of Commerce (ICC) website:
https://iccwbo.org/?s=incoterms

e-commerce

Beginners Guide to e-commerce:

http://webarchive.nationalarchives.gov.uk/20121205140530/http://
www.bis.gov.uk/files/file14640.pdf

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Exercises

PART A

Exercise 1
A buyer (‘B’) purchases industrial equipment from the seller (‘S’), based on a
performance specification set out in S’s sales catalogue and referred to in the definition
of the equipment in the contract.

Following installation of the equipment at B’s premises, B finds that the equipment
performs at a rate 20% slower than the rate specified, which is unacceptable to B
(although B had not notified S of any particular requirements in that respect).

B has already paid the contract price in full to S.

1. What rights (if any) does B have against S?

2. Would the position be different if the purchase contract had expressly excluded
any liability for failure by S to meet the performance specification for the
equipment? What tests would be applied?

PART B

Exercise 2
Consider, in respect of each clause below: (a) does the Hague Convention apply?
and, if so (b) will an English court accept jurisdiction, so that it can apply English law to
determine the contract’s governing law?
Assume that each clause appears in a written agreement between an English company
and a Spanish company, relating to sale of goods.
1. ‘The courts of England and Wales shall have jurisdiction to hear any dispute
arising out of this Agreement.’

2. ‘The courts of Germany shall have exclusive jurisdiction to hear any dispute
arising out of this Agreement.’

3. ‘The courts of New Zealand shall have exclusive jurisdiction to hear any dispute
arising out of this agreement’

4. ‘The courts of any Contracting State to the Hague Convention shall have
jurisdiction to hear any dispute arising out of this agreement’.

5. ‘The courts of England and Wales shall have non-exclusive jurisdiction to hear
any dispute arising out of this Agreement’.

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Exercise 3
Silverstone Ltd (‘S’), an English registered company, sold machinery parts to Basin
Street Ltd. (‘B’), for delivery by ship CIF Dun Laoghaire (Republic of Ireland) Incoterms
2020. A clean, shipped bill of lading was contractually required for payment, with the
ship departing from Plymouth. The underlying contract of sale and the bill of lading are
governed by English law.

The parts were contained and delivered in five packages, one of which was received
for loading apparently broken open and it appeared that the contents inside might be
damaged. This was noted on the bill of lading.

The bill of lading was presented to and accepted by B who then paid the purchase
price. The goods have now arrived at Dun Laoghaire and B has immediately noticed
the damage. It substantially affects the whole shipment.

1. Explain whether B has any right of action against S and/or a right to reject the
goods.

2. Would the position be different if the ship’s Master had failed to note the damage
and a clean bill of lading had been presented?

Exercise 4

Hospital B proposes to order five new scanners from manufacturer S at a price of £10
million. B will be required to pay a deposit of £2 million on signing the purchase
agreement.

How, in principle, could both S and B ‘secure’ payments to be made under the
contract?

Suggested answers to these exercises can be found on the Hub.

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