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The International Sale of Goods, 4th Edition by Bridge, Michael (30th November 2017)

Part I International Sales Governed by English Law, 1 Introduction to International Sales

MG Bridge

From: The International Sale of Goods (4th Edition)

Michael Bridge

(p. 3) Introduction to International Sales

A.  Subject Matter

Introduction

Scope

1.01  This is a book that consists of two parts. The first and larger part deals with the law of international sale of goods1 as administered in the English courts and arbitral tribunals, in those cases where English law is the applicable (or proper) law of the contract. It is largely disengaged from the choice of law process. The second part deals with attempts to create for international sales of goods a uniform law designed as a substitute for a national applicable law.2 In the first part, the focus is firmly placed on those aspects of the English law of sale that are particularly relevant to commercial contracts with an international dimension.3 No rigorous definition of such contracts is possible because the size of the category is a matter of relative judgment and not of the interpretation of a statute. When it comes to the application of English law, contracts of sale that are performed exclusively in England, such as an ex works sale where delivery takes place at the factory gate, will not come under consideration in this book, even though they might take place between parties resident in different countries. The international dimension of such contracts does not bulk sufficiently large for them to be included in a book of this kind. Instead, the internationality of a contract will be judged according to the place of performance of the contract. A striking feature of reported cases on international sale before the English courts is that they are invariably bound up with marine transportation. There is a noticeably close connection between the contract of sale itself and contextually related, even integrated, (p. 4) contracts, such as those of carriage, marine insurance, and bankers’ letters of credit.4 A concrete illustration of this will be given below after an outline discussion of the various delivery terms used in international sales. It will be seen that the delivery terms concerning the English courts are predominantly those with a maritime element, as opposed to delivery terms common in Europe that call for the carriage of goods by road or rail. In this book, the duplication of material that is more properly dealt with in a book on the domestic sale of goods5 will be avoided in order to allow greater concentration on material unique to international transactions. In consequence, for example, not all aspects of remedies will be considered, but some will be subjected to extended treatment. Again, certain detailed aspects of the rules concerning the description, quality, and fitness of goods will be left to works dealing with the domestic law of sale.

Commodities

1.02  The existing body of international sale contracts featuring in the reported decisions of the English courts has an homogeneous character, consisting as it does more or less exclusively of commodity agreements concluded on the terms of London-based commodity associations by major grain dealers or by oil companies on the standard terms of the multinational oil companies. A standard feature of contracts published by the London-based commodity associations is the selection of English law as the applicable law.6 This is true to a lesser extent of bulk oil contracts. The badge of an international sale, as displayed in these reported decisions, is the marine, cross-border character of the contractual performance that takes place. Sales between parties of the same nationality and residence may therefore qualify as international sales for the purpose of the larger part of this book.7 As the reported cases demonstrate, the connection between England and the contracting parties and performance in the commodities trade is usually slight or non-existent. The great majority of international sales litigated in England concern contracts between parties neither of whom is English, which are to be performed by physical or documentary means outside England. The long-settled practice of choosing English law as the applicable law in international commodities contracts in such cases is sanctioned by the Rome I Regulation on the Law Applicable to Contracts,8 which has effectively superseded a Rome Convention of the same name.9

UN Sale Convention

1.03  It was stated above that this book consists of two unequal parts. The smaller part deals principally10 with the United Nations Convention on the International (p. 5) Sale of Goods 1980 (the CISG),11 sometimes known as the Vienna Convention, considers its principal features, compares it to English law, and assesses the impact it would have on the law of international sale in the event of its being applied in lieu of the existing English law. When the CISG is examined, it will be seen that the definition of an international sale used in connection with English law will no longer serve, since the CISG primarily defines internationality according to the place of residence of the contracting parties and not according to the place or type of performance. An international sale contract under the CISG may perfectly well be an ex works contract. Even though the CISG has not been brought into force in England, it has long been the practice explicitly to exclude the operation of the CISG, along with a number of other international conventions, in the standard contract forms promulgated by commodity associations, such as the Grain and Feed Trade Association (GAFTA) and the Federation of Oils, Seeds and Fats Associations (FOSFA), which provide for arbitration in England and for the application of English law as the applicable law.12 The CISG is also excluded from trading forms sponsored by the major oil companies, such as Shell13 and Total.14 The CISG has almost nothing to say about the detailed problems that one sees in reported cases on international sale in England. It does not define delivery terms such as FOB and CIF, nor does it make mention of bills of lading,15 nor does it deal with payment through a letter of credit. Yet the same could equally be said about the Sale of Goods Act 1979. In the great majority of reported commodities decisions on English law terms, the Sale of Goods Act either receives a passing mention or no mention at all. More significant in the resistance of commodities traders to the CISG is the conservatism of commodities traders doing business on standard forms that have evolved in a symbiotic relationship with reported English cases, often over many decades. In addition, the CISG has certain features that are considered to be unsuitable in the commodities trades. For example, the CISG is less free than English law in conferring rights of contractual termination on buyers where the seller supplies non-conforming or late documents or goods.16 In addition, the application of the CISG would alter or cast doubt over established rules on the allocation of risk in both FOB and CIF contracts.17 A further consideration is the close relationship that has developed between the forward delivery and the derivative markets.18 In the latter case, the Financial Markets Law Committee of the Bank of England has drawn attention to the unsuitability of the CISG as a contract instrument and the desirability of its exclusion by market participants.19 One may therefore expect the practice of exclusion in the commodities markets to continue, for reasons that will emerge from the ensuing text.20 The practice accords with Article 6 of the CISG, which expressly (p. 6) permits the parties to exclude the Convention as well as to vary the effect of or derogate from its provisions.

Comparison with English law

1.04  So far, the United Kingdom has not adopted the CISG, but in the long run it is unclear whether the United Kingdom will remain outside a community of more than eighty nations, including most of its major trading partners, that have adopted it. The CISG provides traders with added choice and, for English importers at least, should be more accessible than a foreign seller’s law.21 There is noticeably, however, a lack of enthusiasm for its adoption,22 and indeed a measure of opposition, due to the belief that the international prominence of English law is under threat from uniform legislation of this kind. Parliamentary time, moreover, is itself a commodity in short supply, which suggests that some momentum in favour of the CISG will have to build up before it is adopted in the United Kingdom. The CISG, apart from its importance as positive law, is also a profoundly influential instrument in the development of international and regional (especially within the European Community) uniform law.23 Even though the CISG has not been adopted, English traders may find themselves adopting it by way of arbitral references and through the selection of a foreign applicable law whose state has adopted the CISG. It is therefore prudent to examine the CISG with particular reference to its points of departure from current English law. In the process, it will be necessary also to consider the territorial field of application of the CISG. The law to be applied to sales passing the test of internationality in the CISG will be the uniform law laid out therein, and not some national system of law selected as the applicable law by virtue of party choice or the distribution of connecting factors. Once the CISG applies in its own terms, no particular account need therefore be taken of the connection between any specific contract and England. There is an exception to this. The CISG does not cover all types of international sale contract24 or all aspects of sales law pertinent to international as well as domestic sales contracts.25 English law, if it passes the test of the applicable law under the Rome I Regulation,26 would continue to apply to sale contracts and aspects of sales law excluded from the CISG in the event of the United Kingdom adopting the CISG.27 English law might also have a continuing role to play in filling gaps in the coverage of the CISG.28 Finally, it might also be the law applicable to general contract issues not located in sales law.

(p. 7) Shipping terms

Defining delivery

1.05  A feature of contracts involving delivery across national frontiers is the range of different shipment terms available to the parties. These define variously the way in which the seller, with appropriate assistance from the buyer, is expected to prepare the goods for carriage or arrange for their carriage when placing the goods at the buyer’s disposal. They therefore define the nature, extent, and cost of the seller’s delivery responsibilities and, in so doing, depart more or less from the standard presumption in the Sale of Goods Act 1979 that delivery takes the form of (somewhat passively) placing the goods at the disposal of the buyer at the seller’s premises.29 Without attempting to be exhaustive, it is useful to consider a broad range of physical delivery responsibilities of ascending onerousness from the seller’s point of view. When an independent carrier is employed to transport the goods, the place of delivery may be anywhere between the seller’s premises and the buyer’s. It may occur at the seller’s factory, at some inland collection point, at some point in the harbour where shipment occurs, alongside the ship, or on board the ship. If delivery is postponed to the port of discharge, it may take place on a lighter barge or over the ship’s side, or it may be postponed to some inland collection point in the buyer’s country or at the buyer’s factory.

Excluding domestic sales

1.06  As stated above, the prima facie rule in the Sale of Goods Act30 is that delivery occurs at the seller’s premises, but, since this may occur between parties of different nationalities, there is nothing to distinguish it from a conventional domestic sale. All arrangements for the export of the goods are left in the hands of the buyer. This book deals with those commodity sales where the seller assumes responsibility for at least some of the export arrangements.31 It may therefore include contracts between parties, both of whom are English.32 As stated above, it therefore excludes ex works contracts.33 The parties’ departure from the rule in sub-section 29(2) is expressed by means of numerous special expressions and abbreviations, such as ‘FAS (free alongside ship)’, ‘FOB’, and ‘ex ship’34 (at the port of discharge). These are economical statements of various instances of the seller’s contractual duty to deliver.

Documents instead of goods

1.07  It is quite possible not just to vary the place of delivery, but to commute the delivery obligation so that the subject of the seller’s delivery obligation is not the goods themselves but rather documents representing the goods. For example, unlike ‘FOB Baltimore’, where the seller’s delivery obligations are performed by placing the goods on board a vessel in the port of Baltimore, the expression ‘CIF Rotterdam’ does not connote a place of delivery (since the expression alone does not inform us where, or to whom, the documents are to be delivered). Rather, it tells us that the seller’s delivery duty has been substituted by a duty to deliver to the buyer a number of documents,35 principally (for present purposes) the following. First, there (p. 8) will be a bill of lading, which establishes at the very least that the carrier is in receipt of the goods.36 It may also have to show that the goods have actually been shipped, that is, loaded on board and not merely received for shipment by a carrier taking them in hand. The bill of lading is also supposed to evidence that the seller has entered into a proper contract of carriage to the agreed destination of Rotterdam. The buyer should be able to tell from the face of the bill of lading whether the CIF seller has performed its physical duties under the contract.37 Secondly, the seller will have to tender an insurance document (classically, the policy itself but more often a certificate of insurance nowadays). Thirdly, there will be a commercial invoice identifying the goods shipped and either blending or separating the elements of basic price, freight, and insurance in the overall CIF price.38 The due performance of a CIF sale does not normally depend upon the date or fact of arrival of the goods, though the date of arrival is a common feature nowadays of bulk oil contracts. Instead, the buyer gets documents that, as will be seen, give the buyer rights against the carrier and against the insurance company.

CIF and FOB

1.08  It would be impracticable to discuss each and every delivery term in a book of this length. The bulk of decided cases on commodity sales deal with CIF and FOB contracts, though there is a modern trend outside the commodities trade to move away from these types of sale in their pure form.39 An understanding of these delivery terms will create a solid foundation for an understanding of the others. Besides the FOB sale, references will be made from time to time and by way of contrast to the similar FAS (free alongside ship) term. In addition to the CIF sale, mention will often be made of the very similar ‘C&F’ sale,40 which is like a CIF sale except that the buyer takes care of the insurance. It is of course up to the parties to designate the delivery term of their choice. The use of the letters CIF, nevertheless, is indicative of the nature of the seller’s responsibilities and not a magic formula that fixes despite all else the character of the contract concluded by the parties.41 From time to time, however, when construing the whole of, for example, a ‘CIF contract’, it will become apparent that the contract is something else, such as an on-shore delivery contract, where the buyer pays not against documents but against the goods themselves when they are discharged from the ship.42 A contract for delivery on shore may be ex ship43 or it may call for physical delivery at some other point in the country of destination.

(p. 9) A common transaction

General

1.09  It is useful to put the shipment terms that are the focus of this book in context by taking a hypothetical transaction.44 Suppose a contract of sale is concluded between a New York seller and an English buyer for the sale of a colour printing press. The machine is not yet in a deliverable state but will be ready for delivery in New York in three months’ time. The buyer has the responsibility under the contract for finding a carrier to transport the press to England and engages a freight forwarding agent to book shipping space on a boat calling in New York at the relevant time. This is but one way in which a carrier’s services may be employed. With large cargoes of oil or dry commodities, such as wheat, the buyer may charter an entire ship and will not make use of the services of a freight forwarder but instead employ the services of a ship’s broker to fix the charter.45 In agricultural commodities markets, ships are often chartered at short notice on the spot (or voyage charter) market, in contrast with other commodities manufactured in industrial conditions, where the availability of cargoes can more readily be plotted in advance and ships hired on time charter terms. In the above example involving manufactured goods, the buyer’s agent has booked liner space by consulting shipping timetables and selecting a ship due to visit New York at the relevant time. In other cases, the services of a tramp may be employed, a tramp being a ship that puts into port in no particular rotation in the speculative hope of finding a cargo.

New York shipment

1.10  Building on this example, suppose the parties have agreed that it is up to the New York seller to get the press to the harbour in New York. Where precisely the seller’s responsibilities end will depend on the precise shipping term used. It may be that delivery is required FAS, or free alongside, so that the seller’s duty is done when the goods are brought to the ship. Suppose, however, that the seller is bound to do more and that delivery is to take place on FOB terms. This means that the seller is responsible for seeing to it that the press is not merely received by the carrier but that it is actually loaded on board ship. The FOB buyer is usually responsible for selecting the carrier,46 and there is nothing in the present contract to indicate a contrary intention. Indeed, the contract might explicitly state that this is the buyer’s duty. It is unlikely that New York or US federal law will require an export licence in the case of non-military manufactured goods (or that an import licence will be demanded by English law), but there will be customs clearance requirements to be adhered to at both ends. On the above facts, these will be down to the seller in New York and to the buyer in England.47

Variety of contracts

1.11  It should be stressed that the ways in which an overseas sale may be conducted are almost infinitely variable and that the applicable rules are almost always drawn from a construction of the contract. Consequently, it is necessary to avoid dogmatism in dealing with overseas sales law. One cannot, for example, say that it is always the FOB buyer’s responsibility to select and engage the carrier: sometimes the seller is (p. 10) explicitly, perhaps even implicitly, obliged under the contract to do this.48 Examples of this sort can be multiplied.

Other contracts

1.12  International sale contracts do not exist in a vacuum. As stated above, they are frequently associated with other contracts. For example, it would be most unwise not to insure the press whilst it is in transit. The press might be damaged or lost through an act of God, not uncommon in the case of marine transit. Even if the carrier is at fault, the carrier is likely to be, and will be in the above example, subject only to limited liability. In FOB cases, it is the buyer who arranges insurance, though this may be done by the seller, acting as the buyer’s agent, on account of the buyer. The buyer may need certain information from the seller in order to be able to effect insurance. There is also the contract of carriage to consider. If the carrier is liable for breach of contract, a question that has caused great difficulty in the past is, ‘Liable to whom?’ In the present example, the carrier’s contract will be concluded with the buyer, but this is not invariably the case in FOB transactions.49 This issue of the carrier’s contractual liability, together with any possible liability in tort, has proved much more troublesome in the case of CIF contracts, where the buyer is not originally privy to the contract of carriage50 and will not usually have a proprietary interest in the goods at the time they are damaged by a carrier acting in breach of contract.51 Again, the significance of charter party contracts needs to be considered. Where goods are sold as bulk commodities, it is commonly the head seller (in string CIF contracts) and end buyer (in string FOB contracts) who will fix a charter party to carry the goods and remain parties to those contracts notwithstanding the intervention of multiple parties in the string of sale contracts. Charter parties have a number of clauses in common with sale contracts and the interaction of the two types of contract is an important matter.

Payment

1.13  There is also the issue of payment to consider. Where the buyer and seller have a well-established business relationship, delivery will probably be made on terms giving the buyer thirty days’ (or some other period of) credit. In the above example of a one-off contract, this is unlikely. The seller may reserve the right of disposal52 until payment is made but this may not be sufficient security in the event of the buyer’s default or insolvency: the seller may have to dispose of the press (perhaps customized for the buyer) at a loss in England if the buyer fails to pay. Because of these added costs, over and above non-payment of the price, it is not just the risk of the buyer’s insolvency or repudiation of the contract that needs to be taken into account. If the buyer is not willing to pay cash and the seller not willing to extend credit, then a reliable paymaster must be sought. This will inevitably be a bank. The way in which the bank’s services are likely to be engaged is through the letter of credit system.53 Briefly, the buyer’s bank in England will undertake directly to the seller to pay when the seller ships the press and tenders the stipulated shipping documents. Since the promise of an English bank alone is unlikely to satisfy the New York seller (what if the bank defaults?), this undertaking will usually be confirmed by a New York (p. 11) bank which will handle the shipping documents (for transmission to the buyer’s bank) and make payment to the seller. Commonly, the buyer’s bank will extend credit to the buyer and will take a security interest in the shipping documents and their proceeds54 until the loan is repaid or some other security provided or extended to the press. An interest in the shipping documents might also be taken earlier in the process by the seller’s bank, as security for a short-term loan to the seller pending the receipt of payment through the banks involved in the letter of credit.55

After discharge

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

CIF

1.15  In the above example, the delivery term employed was FOB. It would not be at all unusual in such a case for the seller to ship the press on CIF terms.56 Briefly, this involves a greater share of the responsibility by the seller. The seller will charge the buyer a price that includes the cost of insurance as well as the cost of carriage. The seller will also see to the transport and insurance arrangements. Besides the risks associated with fluctuating freight rates and insurance premiums, the seller who charters a ship also runs the risk, common in some trades, of congestion in the destination port when presenting the goods for discharge. An inability to quantify the risk of this may make FOB dealings more attractive to some sellers. The issues concerning payment, as well as the way the parties deal with those issues, will be just as relevant to CIF cases. Most of the reported cases on international sales that are governed by English law concern transactions in the commodities trades, where the goods will be carried under the terms of a charter party contract rather than an affreightment (or bill of lading) contract. These rarely involve payment difficulties and will not involve the letter of credit system unless they are oil contracts. The cases tend to be preoccupied with difficult issues of contractual construction as these bear on the contractual rights and duties of buyer and seller. As stated above, the buyer’s rights against the carrier have long been a subject of difficulty in CIF sales. The contract of carriage57 could not with its rights and duties have been transferred in practical terms by seller to buyer without statutory intervention. Legislation was passed to permit the transfer of rights and duties under the contract of carriage58 but it depended upon the passing of the property in the goods from seller to buyer in narrowly defined circumstances and worked poorly in the case of modern bulk cargo shipments.59 It took more recent legislation60 to facilitate the transfer of rights (p. 12) and duties under the carriage contract to the buyer before satisfactory results were achieved to fit modern conditions of traffic in cargoes. Meanwhile, the CIF buyer could not turn to tort for comfort in proceedings against a negligent carrier. If the buyer lacked a property interest in the cargo at the time the goods were negligently damaged or destroyed, which he would not acquire before payment and, in the case of goods constituting an unascertained part of a larger bulk, would not acquire even upon payment,61 this meant that the buyer’s action was seen as an attempt to impose upon the carrier liability for pure economic loss, against which the English courts have set their face in modern times.

The above example atypical

1.16  The example of a common transaction involving a New York seller represents one distinctive type of overseas contract. The great bulk of the decided English cases deal with very different contracts, namely, the sale of large amounts of commodities, such as oil in bulk, and large amounts of agricultural commodities like grain or soya beans. These sales take place against a background of speculative trading. A consignment of wheat can be the subject of a large number of paper transactions before delivery is taken by the eventual buyer. Everyone else in the chain is dealing only with paper, namely the various shipping documents, such as the bill of lading. This speculative dimension has a profound effect upon the way in which the parties’ responsibilities are defined and enforced and upon the character of English law as applied to such contracts. The virtue of contractual certainty is regarded as paramount. As Lord Mansfield once remarked: ‘In all mercantile contracts the great object should be certainty. And therefore, it is of more consequence that a rule should be certain, than whether it is established one way or the other. Because speculators in trade then know what ground to go upon.’62

B.  Organizations and Entities

UNCITRAL

1.17  This is a book on the private law of international sale of goods. It is therefore not its concern to review all of the organizations, governmental and non-governmental, whose work bears upon international sales. It is nevertheless useful to review a few international organizations that play a particular role in introducing uniform substantive law to international trade. The United Nations Commission on International Trade Law (UNCITRAL)63 is a branch of the United Nations64 that performs its work through diplomatic conferences, as well as through the formulation of model laws and transactional guides. In 1980, for example, a diplomatic conference in Vienna adopted the CISG.65 It (p. 13) is a blend of common law and civil law principles arranged to take account of the varied interests of manufacturing, producing, and consumer countries. Although there are other areas of concern, such as the rules on risk, it is probably because the CISG lacks the hard certainty that one finds in certain areas of English sales law that, as stated above, it is routinely excluded in the standard forms of trading associations. The primary purpose behind the CISG is the removal of barriers to free trade: legal pluralism is seen as a barrier and various methods have been adopted over the decades to tackle this problem of which the CISG is the latest. Besides the CISG, UNCITRAL has been responsible for the Convention on the Limitation Period in International Sale of Goods 1974.66 It plays an active role in encouraging the adoption of conventions it has sponsored or for which it has accepted responsibility.67 UNCITRAL is or has been heavily involved in other areas of international commercial transactions, such as secured transactions, the assignment of receivables, arbitration, standard form contracts, and electronic commerce.

Unidroit

1.18  Unidroit, or the International Institute for the Unification of Private Law,68 is an intergovernmental organization based in Rome. Originally an organ of the League of Nations, it was reconstituted in 1940 by a multilateral agreement (the ‘Unidroit statute’) in its present form. At present, it has sixty-three Member States, including the United Kingdom, and is maintained by contributions of the Italian Government and the other Member States. Its work consists of the preparation of conventions and model laws addressed to states. It was involved in the work that culminated in the 1964 Hague Conventions relating to the international sale of goods69 and it prepared the 1983 Geneva Convention on Agency in the International Sale of Goods, the 1988 Ottawa Conventions on International Financial Leasing and on International Factoring. It is currently at work on long term contracts and transnational civil procedure and has had a notable success with the Cape Town Convention 2001,70 dealing with international security interests in certain types of mobile equipment. It is also responsible for the Geneva Convention on Substantive Rules for Intermediated Securities 2009. The work of Unidroit is not just addressed to states. The Unidroit Principles of International Commercial Contracts are proffered for adoption by private contracting parties as well as for use by arbitrators. The role that they might play in conjunction with the CISG could prove to be substantial.71

International Chamber of Commerce

1.19  The International Chamber of Commerce is a private Paris-based body, bringing together the various national chambers of commerce, whose varied activities include the issue of Incoterms72 and of the Uniform Customs and Practice for Documentary Credits.73 Incoterms are a collection of rules setting out the various contractual responsibilities of buyer and seller for the different types of overseas sale (such as CIF and FOB). They are written in plain language for (p. 14) lay people and therefore lack the complexity one expects in detailed statutory rules or commercial contracts. To a significant extent, they work as a sort of checklist for business parties, identifying which of them has to take each of the necessary steps required to effectuate the contract. Incoterms apply to a contract of sale only if the contracting parties incorporate it into their agreement.74 They are practically never incorporated in dry commodities transactions75 but may well be encountered in transactions like the one involving the press in the above example. The Uniform Customs and Practice for Documentary Credits76 are a more detailed collection of rules relating to letters of credit. Reference to them in the case law is very common indeed. Again, they apply to a contract created by a letter of credit only if they are incorporated therein, as they almost always expressly are. Whether they may be incorporated impliedly, and if so when, is an uncertain matter.77

Trade associations

1.20  Particular trade associations include the Grain and Feed Trade Association (GAFTA), the Refined Sugar Association, and the Federation of Oils, Seeds and Fats Associations (FOSFA). These bodies are all located in London. Besides providing an arbitration service, they issue standard contracts for particular adventures. FOSFA 24, for example, is an FOB contract for the sale of South American yellow soya beans to be shipped from a South American port. GAFTA 100 is a general feeding stuffs contract entered into on CIF terms: it dates from an early form issued more than 100 years ago. The forms are very detailed and respond to problems arising in the case law. They therefore bear the encrustations of decades of case law. Problems can arise if the standard form is modified in the instant case. Over a century ago, Grove J warned that it was ‘always dangerous to alter established printed forms, for these had been the subject of legal decisions and had had interpretations put upon them’.78 The issue by trade associations in the dry commodities trade of standard form contracts assists in the creation of trading strings,79 in which the various pairs of participants contract on terms that are equal save as to price. This results in a concatenation of nearly identical contracts, which assists in the creation of liquid markets. In the oil trade, standard forms are put out, not by independent trading associations, but by major oil companies whose terms are adopted in contracts concluded between other oil companies.80

(p. 15) Standard form contracts

1.21  It is common in the commodities trade for bulk contracts to be entered into very informally, by telephone, fax, or telex, with a brief reference to ‘GAFTA 100 terms’ or something similar. The traders will be fully familiar with GAFTA 100 and will not exchange the form between themselves. Frequently, however, special clauses are appended to the standard form. The reported decisions on commodity sales usually involve appeals from arbitrators’ decisions.81 In this connection, it should be noted that the construction of a contract is a matter of law. While deference will be paid by courts to arbitrators’ knowledge of the trade, courts do insist on retaining control over the construction of contract terms.82 This allows for certainty and continuity in the use of standard form contracts, with the decisions of courts amounting to authoritative interpretations of what really constitutes private legislation. Recent changes in the arbitral process, in particular the abolition of the case stated procedure, have limited the number of appeals from arbitrators’ decisions and have restricted the powers of the courts to deal with errors of law committed by the arbitrator.83 These developments have substantially limited the number of cases on commodity sales coming through to the courts. This is plainly in accordance with the legislation which, in s 69 of the Arbitration Act 1996, places obstacles in the way of appeals on a point of law by permitting them only if the parties so agree or the court gives leave. For the court to give leave, it must be shown that the rights of one or more of the parties will be substantially affected, that the question is one that the tribunal was asked to determine, and either that the decision of the tribunal was ‘obviously wrong’, or that the question of law is one ‘of general public importance’ with the decision of the tribunal being ‘at least open to serious doubt’. Furthermore, it must be ‘just and proper’ for the court to intervene despite the parties’ agreement to submit their disputes to arbitration. The current state of the law has led to concerns being expressed about the lack of case law feeding the development of the common law, concerns that are not without substance in the areas of law covered by this book.84 The opinions of authors, however sound, are no substitute for settled authority backed up by the doctrine of precedent.

Traders

1.22  Subject to the following paragraph, the trade in commodities is predominately a private trade. The concentration of power in the hands of major oil companies has been a notorious fact for many decades. One of the earliest targets of American anti-trust legislation was Standard Oil. It is a less notorious fact that the trade in agricultural (or dry) commodities has long been dominated by a handful of well-resourced private companies which, in an industry subject to volatility of prices, are largely shielded from market entry by new competitors. Some thirty or so years ago, the market in dry commodities was dominated by five companies whose names (and the names of their subsidiaries) recurred at regular intervals in the reported case law: Cargill, André, Bunge, Continental Grain, (p. 16) and Louis Dreyfus.85 More recently, it has been estimated that between 75 and 90 per cent of the global grain trade is conducted by the so-called ABCD companies: Archer Daniel Midland, Bunge, Cargill and (Louis) Dreyfus.86 The names of the major participants may change from time to time but the phenomenon of market concentration remains the same.

State intervention

1.23  The export of grain has long been a state monopoly in some countries, although the tide is now turning against this degree of state involvement.87 This can be seen in the case of western Canadian wheat and barley, where the export trade used to be controlled by the Canadian Wheat Board exercising a monopoly purchasing power. The Board operated so as to give farmers the security of knowing their future prices without having to sell their crops forward or make an offsetting sale on the futures market. Crop prices were announced by the Board before the growing season; farmers were therefore able to adjust their seeding plans. Farmers received the same price whenever they sold their crops to the Board in the growing season but were subject to individual production quotas. The Board itself did not trade on the futures market.88 It also sold mainly on an FOB basis leaving to private traders the risks associated with the charter, insurance, and currency markets.89 The Marketing Freedom for Grain Farmers Act90 made provision for the Canadian Wheat Board to become a privatized entity91 and therefore a marketing organization with which farmers might voluntarily deal in the free marketing of grain. For other agricultural commodities, such as cocoa, coffee, and sugar, the picture of state involvement, which may take various forms such as marketing, quality control and price intervention, is a mixed one.92 In the case of minerals such as coal and metal ores, state involvement in the export trade appears to be the exception rather than the rule.93 The national control of crude oil, at the levels of production and export, especially in the case of OPEC94 states, which account for 60 per cent of world exports, is both a notorious fact and well chronicled.95

(p. 17) C.  Choice of Law

Sources

1.24  Apart from the CISG, this book is confined to international sale contracts governed by English law.96 So far as English law is the applicable law of the contract,97 it becomes so by virtue of the choice of law rules of an English court, a foreign court, or an arbitral tribunal.98 In all cases appearing before the English courts, the choice of law rules for contracts concluded after 17 December 200999 are to be found in the Rome I Regulation.100 Prior to the Regulation, those rules were located in the Contracts (Applicable Law) Act 1990, which introduced major changes to the antecedent common law rules. The 1990 Act101 gave effect to the Rome Convention on the Law Applicable to Contractual Obligations 1980, the English language version of which is scheduled to it. Further, though less dramatic, changes were brought in by the Rome I Regulation. In the paragraphs that follow, the differences between the Convention and the Regulation will be brought out. The impact of the Regulation on case law decided under the Convention will also be considered. No account will be taken of the possible implications arising out of the decision of the UK government in 2016 to initiate a withdrawal from the European Union. The date when this will take place and the extent to which existing legislation, including EU regulations, will be amended or repealed are not yet known. The process running up to the Rome I Regulation was initiated by the European Commission in 2002,102 leading to a proposal to replace the Rome Convention with a regulation.103 The proposed regulation was modified in a number of important respects in the course of negotiations before it was adopted as the Rome I Regulation in 2008. In accordance with the Maastricht Treaty 1992, the United Kingdom had an opt-out in respect of this measure but it played an active role in the negotiations. In the result, the United Kingdom decided to opt into the Regulation after concluding that its interests were adequately (p. 18) served by the new measure.104 A regulation has an advantage over an international convention in so far as it will avoid the need for a new treaty securing the adherence of accession states, permit amendments to be made without convening a diplomatic conference, and enable the European Court of Justice to give authoritative interpretations of the instrument without there being any need to secure the agreement of Member States by means of a Protocol to a Convention.

Universal rules

1.25  Unlike the case of jurisdiction and enforcement of judgments, the terms of the Rome Convention and Rome I Regulation are not confined to intra-EC contractual disputes but instead extend to all contract cases involving a foreign element. Pursuant to their choice of law rules, the applicable law may turn out to be the law of a non-EU state.105 Before their provisions are considered in detail, a preliminary point about the two instruments needs to be addressed. It concerns the notion that foreign law is a fact that the parties are free to introduce or exclude from the litigation. In the case of the Rome Convention, the contracting parties are not free to exclude the Convention as such since sub-section 2(1) of the 1990 Act provides that it ‘shall have the force of law’.106 On one view, the Convention directs the application of a particular law in the relevant circumstances, but this does not assist an English judge if the parties choose to root their dispute in English law. It is, further, a truism of the conflict of laws process that courts regularly make mistakes when applying foreign law, so it may be that there will be no great support for mandating the application of the applicable law. In such a case, the likelihood is that English courts will continue to apply English law under their own procedural rules relating to the proof of foreign law as a fact, which they may also do if foreign law is pleaded but insufficiently proved to rebut the presumption that it is the same as English law.107 Alternatively, it might be argued that, if the parties conduct their proceedings without reference to the applicable law as designated by the Rome Convention, then they are availing themselves of their entitlement to change the applicable law after the contract date.108 It is not clear how far courts in Member States will go to infer a change of the applicable law in such a passive way. In the case of the Rome I Regulation, it has direct effect in Member States109 and ‘shall apply, in situations involving a conflict of laws, to contractual obligations in civil and commercial matters’. Nevertheless, the same considerations affecting the Rome Convention arise here too, namely, the matters of evidence and procedure and the freedom of the parties subsequently to change the applicable law.110 The outcome under the Regulation should therefore be the same as under the Rome Convention.

(p. 19) Arbitration

1.26  The Rome Convention111 and the Rome I Regulation112 do not apply to arbitration agreements. This exclusion applies also to arbitration clauses in contracts113 that otherwise are governed by the two instruments, which under the doctrine of separability are widely regarded for certain purposes as separate contracts.114 Furthermore, the law applied by the arbitrator to the sale or other contract containing the arbitration clause is not to be determined directly in accordance with the Rome Convention or the Rome I Regulation. Under English law, an arbitrator may nevertheless, despite the exclusion of arbitration agreements, in certain cases apply the same law to that contract that would have been selected under the provisions of either instrument. In the case of an arbitration with an English seat, the arbitrator is required under English law to act in accordance with s 46 of the Arbitration Act (since the notion of a delocalized arbitration is not accepted by English law).115 Sub-section 46(1)(a) requires the arbitrator to respect the parties’ choice of applicable law. If there is no choice, the arbitrator applies ‘the law determined by the conflict of laws rules that [he] considers applicable’.116 The arbitrator should therefore be at liberty in the absence of an agreed applicable law to select his own choice of law rules and should be open to the argument that the Rome Convention or Rome I Regulation is a respected and widely accepted statement of applicable choice of law rules. This freedom given to arbitrators has implications for the application of the CISG under its Article 1(1)(b), which directs the application of the CISG when the choice of law rules of the forum point to the law of a Contracting State. An arbitrator, unlike the courts of a Contracting State, is not bound to apply the CISG but is likely nevertheless to be influenced by the provisions defining its scope and applicability. Finally, if the parties so choose, an arbitrator may be able to apply the CISG as a free-standing instrument in circumstances where it would not be applicable as state-based law under the Rome Convention or the Rome I Regulation.117 Under English law, the Arbitration Act in sub-section 46(1)(b), states that the arbitrator may proceed ‘if the parties so agree, in accordance with such other considerations as are agreed by them or determined by the tribunal’.

Interpretation

1.27  As an authoritative aid to interpreting the Rome Convention, there is the Giuliano-Lagarde Report,118 whose use is permitted by sub-section 3(3)(a) of the Contracts (Applicable Law) Act 1990 in the interpretation of the Convention. There is no similar standing given to the Report in the interpretation of the Regulation, but, in those cases where the Regulation is very similar to the Convention, the Report may still play an influential part. Article 18 of the Rome Convention also exhorts courts to interpret the provisions of the Convention in an internationalist spirit119—a similar provision is to be (p. 20) found in many international conventions—which thus encourages attention to be paid to the views of foreign courts, and also encourages a purposive rather than a literal approach to the Convention.120 In addition, there is a protocol providing for the European Court of Justice to give binding rulings on the meaning of the provisions of the Convention.121 Since, under the Rome I Regulation, its provisions have an autonomous meaning under Community law, and since the European Court of Justice is the final court of resort in determining that meaning,122 there is no equivalent to Article 18 in the Regulation and no need for a protocol on its interpretation.

Party autonomy

1.28  The Rome Convention123 and the Rome I Regulation124 both support the principle of party autonomy by stating the applicable law to be the law chosen by the parties. That law is the substantive law of the relevant country and not the law of a country to which the selected country’s choice of law rules lead: renvoi, in other words, is excluded.125 The choice may be an express one126 or it may be implied, ‘clearly demonstrated by the terms of the contract or the circumstances of the case’.127 The Rome Convention in Article 3(1) required an implied choice to be ‘demonstrated with reasonable certainty etc’. Unless this modest change of wording raises the bar by a substantial amount, which it is submitted it does not,128 the following propositions derived from case law decided under the Convention will still hold good. First of all, an implied choice of law is not to be found in circumstances where it ‘went without saying’ that the parties would have chosen a particular law if they had addressed their minds to the matter.129 An implied choice of a country’s law may be found in a clause providing for arbitration in that country, particularly where the contract contains standard clauses with well-known meanings according to the law of that country.130 An English jurisdiction clause has been held to demonstrate, to the level of a good arguable case for jurisdiction purposes, an implied choice of English law as (p. 21) the applicable law in a guarantee case.131 Previous dealings on the basis of an express choice of law will also point to an implied choice of the same law on the present occasion so long as the omission of the choice of law clause was not intentional.132 In addition, the presence of a choice of law clause in one contract may point to an implied choice of that same law in a connected contract, especially where the former contract mentions the connected contract.133 The parties may after the contract date impliedly vary the choice of applicable law, but this will not lightly be inferred from conduct. In Aeolian Shipping SA v ISS Machinery Services Ltd,134 a contract for the sale of a turbocharger, governed by Japanese law, was followed by a later contract between the same parties for the supply of replacement parts, which latter contract was made subject to English law. The buyer argued that this had the effect of rendering its counterclaim under the first contract subject to English law but the Court of Appeal ruled otherwise. Such a change had not been expressed and would also have severely prejudiced the supplier under its own contract with the Japanese manufacturer, also governed by Japanese law. In sum, the implied choice gate does not license a loose close connectedness approach to linking a contract with a particular legal system: the implied choice must be a real choice and not an imputed choice.135 In the language of the Green Paper that preceded the Rome I Regulation, the search is for ‘the tacit choice’ rather than ‘the purely hypothetical choice’.136

Split choice

1.29  The parties’ choice may extend to a part of the contract or the whole.137 There is no reason why they may not choose more than one law to govern their relations, provided that the different parts of the contract ‘are separable and independent of each other from the legal and economic points of view’.138 It is also possible that the applicable law will be split where the parties do not expressly or impliedly choose the applicable law.139 Nevertheless, care must be taken when applying this dépeçage principle. Suppose the contract provides that matters of breach and matters of frustration are governed by different laws. That raises the possibility of one law holding that the defendant has committed a breach while the other holds that the contract is discharged for frustration. Judicial concern (p. 22) has been expressed about the possibility of an inconsistency of this sort,140 though it is not so easy to see the solution. One possibility is that a court would identify one of the choices as the dominant one, for example, the law chosen to deal with a particular aspect of the contract,141 and decline to recognize the other to the extent that it would otherwise produce an incoherent resolution of the problem.

Floating applicable law

1.30  Once the parties have chosen the applicable law, they are nevertheless free to change it at a later date.142 This gives some support for the notion that a contract may be subject to a ‘floating’ applicable law, that law to be selected by one of the parties at a later date, possibly even on the commencement of legal proceedings. A ‘floating’ law clause is supported by the Giuliano-Lagarde Report.143 This type of clause is not uncommon in bills of lading144 contemplating a wide variety of maritime adventures and giving the carrier the option to choose the applicable law. Until the law in question is chosen, the contract would be subject to the law applicable in accordance with Article 4 of the Rome Convention and of the Regulation, which lays down the applicable law for those cases where the parties have not made a choice. Hence, it would be this law selected further to Article 4 that were changed by the parties in accordance with Article 3(2). Nevertheless, the notion of a contract subject to a floating applicable law has attracted adverse comment in an English case.145 Yet, if Article 4 is invoked at the outset, there is no need for the contract to be without an applicable law before the later choice amounting to a variation of the contract is made by the parties. The court in the same case146 also rejected the idea of a ‘harlequin proper law’, whereby under a global liability policy the insuring clause of the policy and the definition of the insured were to be subject to whatever was the law of the country of the person from time to time claiming under the policy.

Stateless applicable law

1.31  Although the contrary is the case for arbitration under the Arbitration Act 1996,147 under the Rome Convention and the Regulation the choice of applicable law has to be the choice of a system of state law as opposed to a body of non-state-based rules of law.148 In the case of the Rome Convention, the former is clearly the case since the Convention applies ‘to contractual obligations in any situation involving a choice of law between different countries’.149 The position under the corresponding provision of (p. 23) the Rome I Regulation is slightly less clear, since it ‘shall apply, in situations involving a conflict of laws…’,150 but other provisions of the Regulation point overwhelmingly to the same conclusion as the Rome Convention in favour of state-based law.151 Furthermore, a draft provision would have permitted the application of a non-state-based system of rules, but this was rejected in the process leading up to the adoption of the Regulation.152 An English court,153 therefore, should not recognize the choice of the Unidroit Principles of International Contracts, or even of the CISG as a free-standing instrument (as opposed to the choice of the law of a state whose courts would apply the CISG).154 It is possible, however, that provisions in such instruments might be incorporated into a contract whose applicable law is state-based. Such incorporation, however, must be clearly expressed. In Shamil Bank of Bahrein v Beximco Pharmaceuticals Ltd,155 a contractual clause provided: ‘Subject to the principles of the Glorious Sharia’a, this agreement shall be governed by and construed in accordance with the laws of England.’ The principal issue in the case was whether the validity of the contract was subject to both the Sharia’a and English law. Without going so far as to consider whether there were two applicable laws, as though by the operation of the dépeçage principle, the court treated the reference to the Sharia’a as an attempt to incorporate certain principles of the Sharia’a into a contract whose applicable law was English law. The attempt to do so failed because it did not sufficiently identify the principles that were to be incorporated.

Mandatory (non-derogable) rules

1.32  The old restriction in English law, predating the Rome Convention and more apparent than real, that the choice had to be ‘bona fide and legal’,156 did not in practice hamper the parties’ choice of an applicable law. The relevant provision of the Convention is Article 3(3), which prevents the parties to a contract of a domestic character from derogating from ‘mandatory rules’ of the country to which the contract is connected ‘where all the other elements [apart from choice] relevant to the situation at the time of the choice are connected with one country only’ by selecting an unconnected applicable law. This means that the law they have chosen may still be applied but it will pro tanto be overridden by the mandatory provisions of the connected law.157 The next thing to note is that the provision does not apply if, in relation to the country of the chosen law, there are two or more countries where all the elements relevant to the situation are located.158 It is far from clear what is meant by the word ‘situation’. There is authority for the view that its meaning goes beyond the terms of the contract itself, by for example venturing into the commercial background of the contract to take account of another (p. 24) country’s connection with it.159 An expansive interpretation of the word would open the door to a broad range of fanciful suggestions but, even in the absence of such suggestions further restricting the provision, the scope for applying Article 3(3) is strictly limited.160 In particular, since so many international sale contracts involved cross-border traffic, it is hard to imagine an international sale where there is room for the application of Article 3(3). There is the further point that some countries’ mandatory rules are territorially limited in their application. For example, taking the content of English law and a contract containing an express choice of Dutch law, the terms of the Unfair Contract Terms Act 1977 on exclusion, limitation, and indemnity clauses should not qualify as mandatory rules in view of their disapplication in what are called international supply contracts.161 The next issue concerns what is meant by mandatory rules, a concept unknown to English law eo nomine. Some issues that would be classified in English domestic law as pertaining to illegality might appear to fall within the scope of ‘mandatory rules’:162 on the other hand, regulatory legislation, treating certain contracts as unenforceable, might not qualify as mandatory rules.163 The expression was not defined by the Convention, though the expression did seem to incorporate protective provisions for individuals who merit special treatment by the law, namely employees and consumers.164 Article 3(3) of the Rome I Regulation is in terms similar to the Convention provision, except that there is no explicit connection to the notion of mandatory rules. Instead, Article 3(3) refers simply to rules that cannot be derogated from by agreement and the Regulation also states that the category containing such rules is broader than the category of ‘overriding mandatory provisions’.165 In addition to Article 3(3), the Regulation now contains a new provision protecting the application of non-derogable Community law. This provision, Article 3(4), similarly states that the choice of law of a non-Member State shall not prejudice the application of the relevant Community law where all elements of the situation, apart from the chosen law, are located within one or more Member States.

Overriding mandatory provisions

1.33  The Rome Convention has a provision permitting the forum to apply its own mandatory rules, regardless of the law applicable to the contract.166 It provides also that effect may be given to other countries’ mandatory rules (p. 25) with which ‘the situation has a close connection’,167 but the United Kingdom entered a reservation to this provision.168 Mandatory rules, uncertain and undefined in the Convention and rendering unattractive to international litigants any forum that might apply them, remained a source of concern for the United Kingdom in the proceedings leading to the Rome I Regulation, and largely accounted for the provision that now defines what are called overriding mandatory provisions.169 According to Article 9(1) of the Regulation, ‘overriding mandatory provisions’ are defined as ‘provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation’.170 The expression is therefore capable of catching a number of provisions captured under the broad banner of illegality. The Regulation states that nothing in it shall prejudice the application of the forum’s overriding mandatory provisions171 and goes on to state that: ‘[e]ffect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful’.172 Some guidance is given to courts by the same provision, which goes on to state that ‘[i]n considering whether to give effect to those provisions, regard shall be had to their nature and purpose and to the consequences of their application or non-application’. Apart from the introduction of definitional material, the Regulation differs from the Convention in that there is now substituted the place of performance for close connection and overriding mandatory provisions for mandatory rules.173

Public policy

1.34  Apart from non-derogable (or mandatory) rules and overriding mandatory provisions, both the Rome Convention174 and the Rome I Regulation175 release the forum state from any obligation to apply the law selected by the choice of law rules to the extent that this would conflict with the public policy of the forum state.176 These provisions would not as such strike out the whole of the otherwise applicable law and give no guidance on the fate as a whole of a contract unbalanced by this excision. This should be a matter for the applicable law itself. Nor is it clear whether the limits of what constitutes public policy are to be defined by the law of the forum or whether, at least under the Regulation, this expression has an autonomous meaning. The latter view is the likely one.177

(p. 26) Presumptive applicable law

1.35  If the parties have not chosen an applicable law, there are rules for determining it in both the Rome Convention and the Rome I Regulation, with significant differences between the two sets of provisions. The provisions in the Convention work as follows. First of all, the presumptively applicable law is the law of the country with which the contract is most closely connected.178 Secondly, there is a presumption that the country most closely connected to the contract is the country where the party effecting ‘characteristic performance’ under the contract has his habitual residence or central administration.179 The country of habitual residence or central administration gives way, where a contract is entered into in the course of a party’s trade or profession, to the country of that party’s place of business.180 Where a company enters into a contract through a place of business other than its principal place of business, it is the former that supplies the applicable law.181 Thirdly, the characteristic performance rule is displaced if it appears from all the circumstances that the contract is more closely connected with some other country.182 This has the clumsy consequence of introducing the notion of close connection at two stages of the inquiry. Finally, there are special presumptive rules for carriage of goods contracts and contracts for the sale of land.183 The Rome I Regulation has somewhat simplified this structure but at the expense of some flexibility. First of all, the applicable law is explicitly stated for certain nominate contracts.184 For example, the applicable law of a sale of goods contract is the law of the country where the seller is habitually resident,185 except in the case of auction contracts, where the law of the country where the auction takes place is applicable instead.186 The decision of the Supreme Court in The Res Cogitans, that the supply of goods on reservation of title terms, with permission to consume or dispose of the goods prior to the passing of property in the goods to the recipient, is not a contract of sale of goods under the Sale of Goods Act 1979,187 should not require the same interpretation to be arrived at under the Rome Convention or Rome I Regulation. Under these instruments, the court, in giving an autonomous interpretation of a sale of goods contract,188 should be free to adopt a more (p. 27) commercially sensible approach. Secondly, where the law is not a nominate contract, or where a hybrid contract may be identified as more than one nominate type, the applicable law is the law of the country of habitual residence of the party who is to effect characteristic performance.189 Thirdly, where a contract is ‘manifestly’ more closely connected to a country other than the one identified in the first or second steps of this process, the law of the country of closer connection shall apply.190 Fourthly, in residual cases where no other law has been identified as applicable, the law of the country with closest connection to the contract is applicable.191

Characteristic performance

1.36  The doctrine of characteristic performance is less explicitly invoked under the Rome I Regulation than under the Rome Convention. The rules in the Regulation that select the applicable law for nominate contracts in the absence of choice by the parties are nevertheless derived, if not explicitly, from that doctrine. Characteristic performance seems to have its origins in Swiss law.192 The Convention gives no assistance on its meaning but there is an extensive discussion of it, expressed as an idea that looks for the ‘essence of the obligation’, by Lord Brodie in the Scots case of Re Atlantic Telecom Group GmbH.193 It would be uncontroversial to say that the characteristic performer under a contract of sale of goods is the seller,194 as implicitly confirmed by Article 4(1)(a) of the Regulation. A more difficult case is where goods are sold to a distributor, where it was held under the Convention that the characteristic performance is that of the seller to supply and not of the buyer to use best endeavours to expand sales in its territory.195 The Regulation has in effect reversed this outcome by making the applicable law of distribution contracts the law of the country of habitual residence of the distributor.196 It is therefore possible for a master distribution contract to be governed by one law while individual sale contracts concluded thereunder are governed by a different law. The characteristic performance of a reinsurance contract has been held under the Convention to be the reinsurer’s duty to indemnify.197 The characteristic performance of a guarantee is the guarantor’s payment.198 In the case of a bank account, the characteristic performer is the bank.199 More cautiously, Lord Brodie has stated that a contract between a banker and customer in which the bank advances money to the customer will normally have the (p. 28) bank as the characteristic performer.200 In a contract to provide consultancy services in connection with the staining of a building, the characteristic performance is the giving of advice.201 The doctrine of characteristic performance may not be suitable for all types of contract202 and in particular is not helpful for contracts where both parties provide similar or near-identical performance. Under a currency swaps contract, each party would appear to effect characteristic performance. A similar difficulty arises with trade mark agreements where both parties assume matching negative obligations.203 Under the Regulation, the applicable law would therefore in such cases have to be the law of closest connection to the contract.204

Displacing characteristic performance

1.37  A displacement of the characteristic performance rule, pursuant to Article 4(5) of the Rome Convention, occurred in Definitely Maybe (Touring) Ltd v Marek Lieberberg Konzertagentur GmbH.205 It concerned a contract between promoters of a pop group (Oasis) and German concert organizers and a claim for payment in full by the promoters though one of the members of the group declined to participate in the concerts. The ‘only’ connection with England was the ‘location’ of the group and the claimant promoters, who were treated as the supplier of services, and the place of payment. Germany, on the other hand, was the place where the characteristic performance occurred as well as the place where the defendants performed their organizational obligations in full. The governing law, given the strength of the connection between the contract and Germany, was held to be German law pursuant to the closest connection rule in Article 4(5) of the Convention. The court was insistent that the characteristic performance presumption in Article 4(2) flowed out of the closest connection rule in Article 4(1): the latter was not an exception to the former. In reaching its decision the court was conscious that the characteristic performance rule had to be seen as the ‘normal’ rule to apply, given its ease of application, and that simply to focus on Article 4(5) would be to reproduce the pre-Rome English choice of law rule. It tried to steer a path between the Dutch approach, which was to treat the rule in Article 4(2) as a hard rule of law, and the dictum of Hobhouse LJ in Crédit Lyonnais v New Hampshire Insurance Co,206 that Article 4(2) creates a ‘very weak’ presumption. The court would have displaced the characteristic performance rule only if the circumstances of the case had ‘clearly demonstrate[d]’ that this was justified.207 It is clear, nevertheless, that (p. 29) the court in Definitely Maybe rewrote the characteristic performance residence rule in terms of a characteristic performance place rule.208 Under the Regulation, the court, if seeking the same result, would have had to depart from the clear rule that the applicable law of a services contract is the law of the provider’s habitual residence.209 To do so, it would have had to conclude that Germany was ‘manifestly’ the country of closest connection.210 This would be a debatable outcome and open to the same criticism that the rule in fact being applied in services cases is the law of the place where the service is being rendered.

Scope of the applicable law

1.38  Under the Rome Convention and the Rome I Regulation, the applicable law deals with matters of interpretation, performance, damages and the consequences of breach, extinction of obligations and limitations, and the consequences of nullity.211 The consequences of breach test has been held to have quite deep roots in the law governing remedies: the applicable law has been said to apply to the currency of the award, the award of interest and the recovery of interest as damages.212 It is important to note, however, that the United Kingdom entered a reservation under the Convention to this last item, the consequences of nullity.213 This had important implications for restitution. No such reservation was of course possible under the Regulation. Where the country of performance is not the country of the applicable law, the Convention and the Regulation delegate to the former issues concerning the manner of performance and the steps to be taken in the event of defective performance.214 These items should include, for example, what constitutes a working day and what is the currency of payment. They may also include notices of default if the relevant law requires these before a contract is terminated. The applicable law, namely, the law that ‘would govern [the contract] … if the contract or term were valid’, also deals with matters concerning the ‘existence and validity of a contract, or of any term of a contract’.215 The reference to ‘existence’ shows that this provision certainly applies to matters of consent. The Convention and Regulation, nevertheless, go on to apply the law of a party’s habitual residence to determine that party’s lack of consent if it would ‘not be reasonable’ to apply the law dealing with the existence and validity of the contract.216 The burden of establishing unreasonableness rests upon the (p. 30) party in question.217 It is not clear what constitutes validity. It should include rules dealing with one-sided bargains, mistake and duress, for example. It ought to include the question of whether consideration is required for a contract to be duly concluded. It includes also illegality (though this subject raises additional questions).218 Penalty clauses are difficult to classify, but it hardly matters whether any special rules in this area fall to the applicable law under the relevant provisions of the Convention and Regulation.219 The applicable law also applies to formal invalidity.220 Alternatively, a contract is formally valid if it complies instead with either the law of the country in which it is concluded, where both parties are in the same country, or, where the parties are in different countries, the law of the country where either party happens to be. Finally, the legal capacity of companies falls outside the Convention and the Regulation,221 so too that of natural persons except in so far as it is provided that, where contracts are concluded between parties in the same country, a party’s incapacity under the law of another country may be invoked only if the other party knew, or was negligent in not knowing, of that incapacity.222 Otherwise, English law, which has no clear rules on the matter, applies. It is likely to be a matter for the proper law objectively ascertained.223

Illegality

1.39  A contract may be affected by illegality from the outset; alternatively, it may be struck down for supervening illegality. Although the Rome Convention and Rome I Regulation do not use the concept of illegality, it falls under the heading of ‘material validity’ so that it is subject to the applicable law.224 A contract, however, may be illegal under a law that is not the applicable law of the contract. Because the UK Government entered a reservation to Article 7(1) of the Convention, the English courts were in no position to accept the invitation to take account of ‘the mandatory rules of the law of another country with which the situation has a close connection’ within the limits stated in Article 7(1). They are now free under Article 9(3) of the Regulation to apply the ‘overriding mandatory provisions’ of the country where obligations are performed, so the following discussion is largely confined to the application of the Convention and is consequently of diminishing importance with the passing of time. Article 7(1) of the Convention pro tanto frees courts from the obligation to apply the applicable law under Articles 3–4. On the face of it, the above reservation threatened the recognition of illegality under laws of other countries closely connected to the contract. The reason for this was that the Rome Convention superseded prior common law conflict rules in the area of contract, and not just those rules that corresponded to the provisions of the Convention applying in a Member State. Now, prior to the Rome Convention, there were well-established rules dealing with the recognition of illegality under a law other than the proper law of a contract. Might the English courts, when applying the Convention rules, turn to these in appropriate cases? On the face of it, the answer is no for the reason given above. According to one of these rules (the Regazzoni rule), English courts will not enforce a contract that would ‘involve the doing of an act in a (p. 31) foreign and friendly State which violates the law of that State’.225 According to a similar rule (the Ralli Bros rule), it is an implied term of the contract that performance will not be illegal under the law of the place where performance is to be rendered.226 If these rules are regarded as rules of domestic English contract law, they should survive the Rome Convention. If so, where the forum is an English court and English law is the applicable law, the same result as in these cases will be reached pursuant to Article 8(1) of the Convention. It is particularly debatable, however, that the Regazzoni rule can be regarded as a rule of English domestic law. That said, the court in a letter of credit case applied Regazzoni without displaying any concerns about its continuing validity.227 Where the forum is English but English law is not the applicable law, the courts might still reach the same result to the extent that they apply domestic public policy, which they are entitled to do under Article 16 of the Convention and Article 21 of the Regulation, or the mandatory rules of the forum, which they are entitled to do under Article 7(2) of the Convention (to which the UK Government did not enter a reservation). If the forum is English and the illegality is recognized under a foreign applicable law, then that law deals with the matter of illegality pursuant to Article 8(1) of the Convention (and Article 10(1) of the Regulation) in the usual way. It may be that that law contains rules similar to those laid down in the Regazzoni228 and Ralli Bros229 cases.

The CISG

1.40  In the possible event of the CISG being adopted by the United Kingdom and applying on its own terms, the applicable law arrived at according to the rules laid down in the Rome Convention and Regulation will give way to the uniform law contained in the CISG.230 Since, however, the range of contract rules covered by the Rome Convention and Rome I Regulation will be broader than the range of the sale of goods rules contained in the CISG, a court will in some cases be called upon to apply the CISG together with the provisions of the applicable contract law. This is consistent with the tolerance afforded by the Rome Convention and the Regulation to a split applicable law (or dépeçage).231 In so far as the contracting parties seek to exclude the application of the CISG and do so successfully,232 it is useful to consider how such exclusion would intersect with the Convention and the Regulation. If they exclude the CISG by stipulating an applicable national law, then the exclusion must pass the test of an exclusion under Article 6 of the CISG. A simple stipulation in favour of the law of a country that happens to be a CISG state may or may not pass that test.233 To the extent that a court is satisfied that the parties have excluded the CISG, then the next question is to define the applicable law, which will be done pursuant to the terms of the Convention or Regulation as the case may be. If such a law already applies to the general aspects of the contract, it should to the extent of the exclusion of the CISG simply carry over into the sale aspects of the contract.234 Finally, the exclusion (p. 32) of the CISG may be partial under Article 6, which again is consistent with the principle of dépeçage.

Contractual foreign elements

1.41  As stated above, commodity trading organizations based in London provide that English law shall govern the contract of sale. All GAFTA contracts, for example, contain a choice of law clause selecting English law as the applicable law.235 Reported cases contain many examples of contracts entered into by companies, neither of which is English, involving the shipment of goods in a country overseas and their discharge in a country that is not England, with payment being made abroad in a currency that is not sterling. Despite doubts expressed in the past as to whether English law may be chosen despite the absence of any real and substantial connection between the contract and England,236 the Rome Convention and the Rome I Regulation facilitated choice by the parties of whichever applicable law they wanted237 and therefore underwrote the practice in GAFTA and similar contracts. This facilitates the management of string contracts238 since it permits all contracts in the string to be governed by the same law, regardless of matters such as the residence of the parties and the currency of the contract. Where the contract is governed by English law and incorporates Incoterms,239it is still English law that governs the contract. Indeed, it is by virtue of the English law of contract that these supplementary terms are incorporated.

D.  Speculation, Hedging, and String Trading

Market liquidity

1.42  A striking feature of many of the reported cases on international sale of goods is that the contracts in question function as speculative instruments. Speculation is an activity that attracts a measure of opprobrium but is commonly justified by the way that it introduces liquidity into the market and hence stabilizes it. In the words of Donaldson J: ‘The machinery of the market involves the intervention of not one but many traders, between shipper and consumer. Some make profits. Others do not. But the ultimate result is to give a greater guarantee of supplies and of stability of price than would otherwise be the case.’240 Besides the presence of speculators in these markets, there are those, such as farmers and manufacturers, with a practical interest in the future prices of commodities to plan their operations, which encourages on their part hedging activity.

Forward delivery

1.43  The nineteenth century saw the development of forward delivery contracts, which are to be distinguished from spot transactions, namely, physical contracts performed immediately or nearly so. In a forward delivery contract, the parties may agree a price and other terms concerning agricultural commodities even before the crop is grown and reaped. They do not know what the spot market price will be at the future date when (p. 33) the rice, for example, is ready for shipment. The buyer and seller both take a chance as to the state of the market and the volume of the contract commodity in circulation at that time. If the spot price at the time of delivery is lower than the contract price, the seller has gained and, if higher, the buyer has gained.241 This excessively simple statement suggests a zero sum game but the reality is that both parties gain from the forward delivery contract in so far as they receive the assurance they need to plan their future activities. In the normal case, where the market is in contango, the forward delivery price will be higher than the spot price prevailing at the date of the contract. This is because of the carrying costs over the interim period, or, if the seller is not already holding goods for future performance, the cost of hedging activity that avoids carrying costs. In less usual circumstances, the market is in backwardation, so that the present spot price is higher than the forward price for future delivery, as might happen if there is uncertainty about the availability of future supplies.242

Wagers

1.44  Cases in the early part of the nineteenth century had treated forward delivery contracts as illegal wagers on commodity prices since buyer and seller were treated as taking a bet on what the future market price would be.243 When the Sale of Goods Act was first passed in 1893, it was made clear in sub-section 5(1) that a contract of sale could be entered into for future goods.244 Where contracting parties enter into a contract for the sale of goods on forward delivery terms with no intention that any delivery should occur, there is a possibility that the contract will be characterized as a wagering contract. For this conclusion to be reached, however, it is required that neither party may have an interest in the transaction going beyond the sum of money that is at risk and each party must be capable of winning or losing depending upon the outcome of future events.245 Formerly, such a contract was ‘null and void’246 but the position now is that the ‘fact that a contract relates to gambling shall not prevent its enforcement’.247

Need to plan ahead

1.45  Rice, wheat, and other crops are seasonal and dependent upon the hazards of nature. That means that they are subject to price fluctuations as well as to famine and glut. If prices can be settled in advance under forward delivery contracts, prices are thus stabilized. Those participants in the trade with a physical interest in the commodity, such as millers, brewers, animal feed compounders, and pasta manufacturers, therefore welcome the interest of outside speculators since this increases the volume of trading. The farmer gets the assurance that his grain will have a market; the miller grinding wheat into (p. 34) flour ensures there will be supplies of wheat to be called forward from an importer’s warehouse as and when these are needed. This does not mean that opportunistic behaviour will not occur on the part of those with a physical interest in the trade. In Sainsbury (HR & S) Ltd v Street,248 the crop was low because of poor harvesting conditions. The farmer, wishing to escape from the price clause in order to take advantage of the rise in the market that accompanies poor harvests, argued unsuccessfully that his inability to deliver the agreed amount in full because of the weather meant that the contract was frustrated. The conclusion of the court was that the buyer was entitled to call for delivery of the diminished crop at the contract price. In international markets involving intermediate traders, it is even more difficult to run the frustration argument because of poor harvests and similar supervening events affecting market price. Rises in commodity prices are very unlikely to be seen in English law as giving rise to frustration and may not even satisfy an express force majeure clause in the contract.249 Traders, moreover, cannot trace back their sale obligations to a particular affected farm because the description of the goods in the sale contract is never so precise.250

Sales strings

1.46  It will be shown in ensuing chapters that a number of CIF and FOB cases involve sales strings stretching to many parties dealing with the same appropriated cargo.251 Only the first seller physically delivers; only the last buyer takes physical delivery.252 The intermediate parties dealing in the same goods are trading paper and will be brokers or speculators with no physical interest in the commodity at all, looking for a profitable opportunity.253 Speculators will wish to take market risks by taking a ‘long’ or ‘short’ position254 on a particular commodity; physical producers and consumers typically have a lesser appetite for risk. The risks that are taken and avoided will be demonstrated below.

Closing out

1.47  Forward delivery contracts as vehicles for speculation can be closed out in a way that shows this feature of the markets more prominently. ‘[T]here is nothing at all unusual in commodity dealers using contracts of sale and resale as a means of arriving at a position in which the true nature of the transaction is the settlement of a price difference.’255 But forward delivery contracts do not lose their physical quality. According to Sellers LJ in Garnac Grain Co Inc v Faure (HMF) & Fairclough Ltd:256 ‘There may be (p. 35) many cases where the parties do not expect to complete the transaction but to trade on differences in the hope that the result will be a profit, but if there is an obligation to fulfil the contract according to its tenor if circumstances require it, then the contract is enforceable.’ This case involved the deliberate creation of a circle by the head seller, which bought in the goods at the end of the string.257 The head seller would therefore also be the end buyer, in which case the contracts would be performed by financial settlements under circle clauses258 that serve to prevent sellers from triggering default at later stages in the string by the expedient of not performing their own obligations further up the string.259

Futures contracts

1.48  From a paper-based forward delivery market, it is a short step to organizing dealings in futures on an exchange and to treating these futures like any other financial instrument, such as gilts.260 Next September’s Pacific Coast wheat can be dealt with by investors, professional or amateur, just like the shares in a major corporation.261 The investor’s contracting partner, or counterparty, will be a broker on the exchange or the exchange itself.262 Investors’ dealings operate according to the rules of an organized exchange, apart from those cases where over-the-counter derivatives are traded, often in response to the particular needs of a player in the market, seeking hedges that are responsive to its particular business requirements. The rules of an organized market will include, for example, rules dealing with margin calls and market manipulation. A margin call is the deposit by way of security with the exchange in cash or its equivalent of a stated percentage of an investor’s market exposure (the gross amount of this will fluctuate with the state of the market).263 Variations in the margin will be required as the market moves, the amount to be paid or reimbursed depending upon a mark-to-market calculation conducted commonly at daily or even shorter intervals.264 Some exchanges may introduce particularly stringent margin requirements in the event of a trader taking a pronounced short position265 in the futures market.266 The degree of financial risk associated with the very large body of unregulated over-the-counter transactions, conducted outside exchanges, is cause for real concern when the stability of the world’s capital markets comes into consideration, as is evident from the turmoil that invaded the financial markets from 2007 onwards. The forward delivery market also does not operate according to the rules of an exchange.267 In the case of futures (p. 36) contracts, there are various ways in which these can be settled but typically ‘delivery’ will take place in the form of a closing out or settling of financial differences. Occasionally, in the event of settlement not occurring in this way, there will occur a physical performance. For example, the physical delivery of metals under London Metal Exchange (LME) contracts can be accomplished by means of the transfer of warehouse warrants.268 These warrants have themselves become the subject of a secondary market.269

Financial services legislation

1.49  Besides the operation of the rules of a commodity exchange, there is the question of the extent to which financial services legislation imposes a regulatory structure on futures or even forward delivery contracts. The Financial Services Act 1986 has been superseded by the Financial Services and Markets Act 2000, though the regulatory impact of the latter Act is essentially the same as the former in the area under consideration. For that reason, and because of case law under the Financial Services Act 1986 illustrating the reach of regulatory legislation in relation to forward delivery contracts, it is convenient to start with the 1986 Act before proceeding to the 2000 Act. The Financial Services Act regulated investment business,270 the pivotal question being whether forward delivery and futures contracts were investments as defined in Pt I of Sch I to the Act. Listed in para 8 of Pt I, entitled ‘FUTURES’, was: ‘Rights under a contract for the sale of a commodity or property of any other description under which delivery is to be made at a future date and at a price agreed when the contract is made.’ The language was certainly wide, which gave rise to some concern to those dealing in the forward delivery markets or engaging in hedging activity in complementary futures markets. By s 3 of the Act, a person engaging in regulated activity had to be authorized under the Act, or be an exempted person. Any investment contract entered into in breach of s 3 was unenforceable against the other party to the transaction, who was entitled to recover property or money transferred under the investment contract.271 A discretion allowed the benefit of a contract unlawfully concluded to be retained if the person in question reasonably believed that, in entering into the contract, he did not breach s 3, where it was just and equitable that he retain the benefit of the contract.

Exceptions

1.50  The notes accompanying para 8,272 which had authoritative status, however, went some way towards allaying the concern of commodities traders. First of all, the paragraph did not apply if the contract was made for commercial rather than investment purposes.273 A contract was indicatively made for commercial purposes when at least one party was a producer of the commodity or used it in his business. Alternatively, it was indicatively commercial if either the seller intended to or did deliver the commodity, or the buyer intended to or did take delivery of it.274 These cases were apt to cover cases of futures (p. 37) dealings where either party had a general physical interest in the commodity. That interest did not have to be in the very subject matter of the particular contract, which meant that a compounder of animal feeds using a futures contract as a hedging mechanism had no need to envisage the taking of physical delivery under the particular futures contract in order for regulation to be avoided. It might, however, have been the case that an intermediate contract involved traders, neither of whom had a physical interest at all, in which case the contract could be a regulated investment.275 In addition, the language of para 8 was just as apt to embrace a forward delivery as a futures contract. If delivery of the commodity were equated with delivery of documents representing the commodity, which it is submitted should have been the case, the risk of regulation was greatly reduced. This exit from the regulatory scheme would apply to those contracts settled pursuant to circle and book-out clauses only because of the intention of the parties, prior to the invocation of the book-out or circle clauses, was that there be a delivery of the property. Nevertheless, the use of English contract forms would not of itself have subjected overseas parties doing business overseas to regulation under the Financial Services Act.

CR Sugar Trading

1.51  The application of the Financial Services Act 1986 to futures contracts in sugar was considered in CR Sugar Trading Ltd v China National Sugar & Alcohol Group Corp,276 where David Steel J upheld the decision of an arbitral tribunal below that the parties were carrying on an investment business. The case concerned a business relationship between an English sugar trader, CR, and a Chinese company, CNS. Neither was an authorized or exempt person under the 1986 Act. CNS granted to CR, in return for premiums, certain put options, the effect of which was that CR could at a future date require CNS to take delivery of physical sugar. A New York affiliate of CR was then able to use these options to open hedging positions on the New York futures market. While the market price of sugar continued to rise, both CR and CNS made money from the transaction, CR in the form of margin gains on futures trading made by its New York affiliate, and CNS, in the form of premiums paid by CR. CR never contemplated delivering sugar to CNS: the price of the physical sugar in the options was deliberately pitched below the market price. The trouble emerged when the optimistic expectations entertained by the parties in a state of ‘myopic euphoria’ were defeated by a downward plunge in the sugar market, the consequence of which was that CR decided to exercise its options under two contracts. These were for large quantities of raw sugar on C&F free out, one main safe South China port, terms. At the time the put options were granted, the parties’ expectation that they would not be exercised was explicitly recognized in the option agreements, as sellers and buyers agreed to work towards the postponement of the exercise of the options at no cost to the buyer. At all relevant times, moreover, CNS did not conduct the physical business of importing raw sugar into China and refining it. The reasons given by the arbitral tribunal and the court for the conclusion that the parties were carrying on an investment business were as follows. Neither party was a person using the sugar in its business:277 mere traders (p. 38) like CR did not use sugar and CNS was no longer active in the physical importing and refining business in China. The parties were buying and selling sugar in a speculative way. Moreover, there was no intention for delivery to be made,278 intention having to be judged at the date the put options were granted and not the date when they were exercised.

The Financial Services and Markets Act 2000

1.52  The Act prohibits any person from carrying on of a regulated activity in the United Kingdom unless that person is authorized to do so or exempted from the prohibition.279 A regulated activity is one that relates to an investment of a specified kind,280 investment being defined in the widest terms as ‘any asset, right or interest’.281 Regulated activities specifically include options282 and futures, the latter being defined, so as to include also forward delivery contracts, as ‘[r]ights under a contract for the sale of a commodity or property of any other description under which delivery is to be made at a future date’.283 The sanction of unenforceability for acting in an unauthorized way is the same as under the 1986 Act284 and there is a very similar discretion to permit an unauthorized benefit to be retained.285 The outcome of the CR Sugar case286 would in all probability be the same under the Financial Services and Markets Act 2000.

Oil trade

1.53  The oil trade presents an interesting case study of the way that market in commodities operate.287 In the world of stable oil prices that existed prior to 1973,288 it was common for refined oil to be bought in spot sales on the international oil market and for it to be the subject of long-term fixed price domestic contracts. Crude oil was the subject of long-term contracts, with pricing essentially dictated by the oil majors. The world of stable oil prices changed after the Arab–Israeli war of 1973 when the oil producers’ cartel, OPEC, introduced huge price increases and imposed production quotas.289 A number of cases have illustrated the development of forward trading in oil290 to produce commercial activity that in its informality and lack of regulation resembles forward delivery sales in the GAFTA and FOSFA systems. It would seem that this type of activity filled a gap not yet filled by a still-developing futures market in oil products.291 Certainly, the development of forward (p. 39) trading in oil is a relatively recent one.292 Activity of this kind needs a standard product that can be used to create strings (or daisy chains) of activity on identical terms save as to price. This prevents market activity from being spread across too wide a range of products: concentrated activity promotes the efficient and reliable hedging of risks. Standardized forward trading gives, at one end of the distribution chain, oil producers an incentive to maximize production and, at the other, refiners the assurance that their future feedstock requirements will be met.

Standard oil contracts

1.54  Trading in crude oil is referenced to certain benchmark crudes, so that the price of the particular crude in question is either discounted or attracts a premium, as the case may be. These benchmark crudes are Brent crude oil,293 West Texas Intermediate crude,294 and Dubai crude. Trading in Brent crude is the subject of a most helpful expert’s report incorporated in the judgment of Hirst J in Voest Alpine Intertrading GmbH v Chevron International Oil Co Ltd.295 The problem in that case concerned a circle settlement (or ‘book-out’) procedure that was not as fully developed as those in the GAFTA and FOSFA contractual systems.296 This produced problems of contractual uncertainty that need not be dealt with here except to say that the court was satisfied with a loose arrangement whose purport was the payment of financial differences.

Daisy chains

1.55  It appears from the Voest Alpine case297 that the standard quantity of FOB Sullom Voe Brent crude was 600,000 bbls (barrels) +/− 5 per cent. Approximately 400 contracts were struck each month in respect of forty-five physical cargoes. The delivery requirement was that the seller would give fifteen days’ notice of a three-day lifting range.298 Nevertheless, the limited number of participants in this market ensured that their involvement would be confined to a settlement of financial differences as circles (or ‘daisy chains’) were taken out of the physical delivery chain by the book-out procedure. This reduced costs, sparing the parties thus taken out the expense of opening letters of credit for multimillion dollar figures.

Converting to physical delivery

1.56  The FOB Sullom Voe contract for Brent crude was again the subject matter of the decision in Nissho Iwai Petroleum Co Inc v Cargill International SA.299 That contract formed the basis of two different types of transactional activity. First, (p. 40) there was the physical market, where, as in Voest Alpine,300 fifteen days’ notice of readiness had to be given by the seller with a three-day lifting range. The period in question has fluctuated over the years.301 There was also a forward paper market used for speculative and hedging activities, where the normal procedure was, as the due date approached, for contracts to be settled as a ‘book-out’ by the payment of financial differences.302 In this case, the distinction between those paper contracts that retained their paper character, to be closed out in the way of futures contracts, and those that were converted into ‘wet’ contracts, with a physical delivery, was highly significant for the following reason. The two markets traded at different prices, so that, if wet cargoes were trading at a discount in relation to paper cargoes, it was in the interest of a seller holding a wet cargo to convert the paper contract into a wet contract, which sellers were entitled to do under the terms of the paper contract. A buyer chosen by a seller in this way to receive a nomination converting a paper into a wet contract would suffer a substantial loss if the wet market price fell significantly below the paper price. As the physical delivery date approached, one would normally expect a convergence of the two market prices since the earlier, and higher, physical price would include (diminishing) holding costs not associated with the abstract futures market.303 In this case, however, the difference was substantial. A buyer receiving a nomination in these circumstances, besides suffering a financial loss, might also find as a result of the seller’s nomination that its paper and its wet books were no longer balanced. That buyer, if able to do so, would wish to pass on, in the same way, that same nomination to a sub-buyer, and so on. It amounted to a game of passing the parcel that had to be stopped at the above fifteen-day deadline. More precisely, the game came to an end at ‘17 00 hours London time on the 15th day prior to the first day of the laydays [the three-day lifting range]’ … The unlucky buyer at the end of the line was said in the jargon of the trade to be ‘5 o’clocked’.

Availability for nominations

1.57  It was therefore necessary in these paper contracts to establish a protocol for the giving and receiving of these nominations. The practice was for this nomination process to be started a day before the expiry of the fifteen-day deadline, with a chain of forty or fifty nominations developing over a twenty-four-hour period. Each nomination took about ten seconds to deliver and all participants in the trade were required to declare a telephone number and appoint a named person to receive nominations in this way. The dispute centred on the last nomination in the chain. After meticulously reviewing the facts, which included counting the number of rings (timed at two seconds each followed by a four-second interval), Hobhouse J in the Nissho Iwai case304 found that the (p. 41) seller, from its New York office, had placed a call to the Boston office of the buyer so that the buyer’s telephone began to ring at least twenty seconds before the deadline. If the buyer’s nominee had picked up the instrument promptly, there would have been ample time for the seller to complete (as it had to) its ten-second nomination within the deadline. But the buyer’s nominee was unwilling to trust the Boston speaking clock and took her cue from a Geneva colleague, in whose offices the Geneva speaking clock was relayed by tannoy. The ensuing delay resulted in her picking up the telephone receiver outside the 17.00 hours deadline. She then informed the seller that it was out of time.

Seller’s option?

1.58  The buyer in the Nissho Iwai case305 contended that it had not timeously been ‘5 o’clocked’. Since the seller was exercising an option to convert a paper contract into a wet contract, there was no room for any generosity at all when time is in issue in the exercise of an option. But Hobhouse J held that, in failing to respond promptly to the seller’s call, the buyer had acted in breach of an implied contractual obligation not to impede the seller in its attempts to perform the contract (more accurately, to exercise an option under the paper contract). Consequently, the buyer was left holding the parcel, which involved a loss of a little more than US$1 million.

Balancing commitments

1.59  One of the problems of spot markets is their inflexibility and the risks they pose to market participants, whether in the market for dry or wet commodities. There is therefore a compelling reason for the development of risk-controlling devices. It is, above all, a matter of control rather than elimination for the elimination of risk would eliminate also trading profit. Sellers, for example, taking a speculative position in the market are faced with a range of possible products on the market available for covering any short306 position they have taken.307 At one time, it was not possible for buyers of normal refined products such as diesel to enter into a reliable forward delivery contract to suit whatever their needs might be in some months’ time. There now exists a range of devices that they can use to hedge their forward exposure, namely various futures, swaps and options.308 This in turn encourages string trading in the physical goods. Even highly specific products can be the subject of multiple trading activity. For example, the needs of a power station situated at Littlebrook on the Thames were the subject of a paper market in Vitol SA v Phibro Energy AG (The Mathraki).309 On futures and forward delivery markets, investors and traders can equalize their buying and selling commitments. Alternatively, if they anticipate a fall in the market they can go ‘short’, which means that their sale commitments exceed their purchase commitments. If they anticipate a rise in the market, they can go ‘long’ by entering into purchase commitments that exceed their sale commitments. On a futures market, depending upon its rules, these ‘open’ positions can be closed either by a physical delivery or by a cash settlement.310 It is important to realize that there is a close correlation between the physical market price of a commodity and its futures market (p. 42) price.311 A discussion of the relation between the physical and futures (or terminal) markets for sugar is to be found in Gebruder Metelmann GmbH & Co KG v NBR (London) Ltd.312 The two sets of prices generally track each other but the sugar futures market can be extremely volatile within the course of a single day.

Example

1.60  The following simple example shows how a speculating seller can make money on a rising market by means of futures or forward delivery activity. S, who has taken a short position, has agreed to sell September futures to B at $240 per tonne. When September arrives, the market price has fallen to $220. On a cash settlement, S will receive from B $20 ($240–$220) per tonne. If the contract is concluded on forward delivery terms with the market moving the same way, S will make up the shortfall by acquiring a cargo at $220 from another seller and tendering it to B under the contract at $240. Either way, S captures a profit of $20 per tonne. This example can be reversed to the benefit of B if the market is a rising one. Investors have been known to misread the market.

Hedging

1.61  Dealers on the physical, forward delivery market can ‘hedge’ against future market movement by parallel and opposite dealings on a futures market.313 Those who both buy and sell—middlemen—are engaged in a double hedging operation. If they sell forward, they go short and may choose to buy an equivalent amount in the futures market if they wish, which they may not want to do in full or at all, to lay off the risk. As and when they eventually enter into a forward physical purchase314 to ‘close down’ their ‘open’ position and balance their books, they sell an equivalent amount in the futures market. Hedging operations—and they can come in different forms—are especially vital in the oil trade. It was once observed that oil had been known to move by $7 per barrel in the space of ten minutes.315 Market volatility has not disappeared since that observation was made. End sellers (farmers) and end buyers (millers) do not need to go through this double hedging. A farmer hedging against the risk arising from the future sale of his crop when it is reaped can hedge now by selling the equivalent (estimated crop yield) amount on a futures market. This is an alternative to making a forward sale of his crop to a particular buyer, such as a supermarket chain. Unlike the intermediate trader, the farmer at no time needs to buy in either market. Similarly, the end user, a feed mill for example, can enter into a hedge purchase on the futures market and buy on the spot market when the crop is ready for delivery. Apart from hedging, the futures market can also be used to protect participants in the physical market against the price risk associated with the failure of a commodity market to create consistent and transparent prices.316

(p. 43) Standard products

1.62  The activities of string traders are assisted by the way that government-controlled and other inspection agencies standardize a commodity by quality classification, for example, the Canadian Grain Commission and its classification of wheat according to the season’s overall quality and taking into account origin, type, and protein content.317 The same applicable law and the same contract form down the string also play a major role in integrating the string. In a related manner, the fluidity of futures markets is assisted by the standard commodity contracts invented by the exchanges. For example, the standard unit on the sugar terminal markets of London and Paris is ‘50 tonne lots of a standard grade of sugar on standard terms as to delivery at various standardised future periods’.318 Another example is the ICE Gas Oil Futures contract where the amounts traded are in units of 100 tonnes.319 The quantities with which one can deal on futures markets are considerably less than those on forward delivery markets. As for the physical market, the use in oil contracts of basis clauses,320 which provisionally standardize the destination of the oil to a major port such as Rotterdam, is a useful tool in the manufacture of a standard contractual product to suit string trading in cargoes. It should not much matter if the gas oil or other oil product so specified is highly individualized with few buyers and sellers. Nevertheless, when there is hedging between the physical and futures markets, and the commodities dealt with in the two markets are not quite identical, there is a ‘basis risk’ that the two price trends will not be identical. The word ‘basis’ is used in a different sense to connote the pricing differential between the physical and future prices. A trader buying and then selling on a physical cargo, and entering the futures market correlatively to sell and buy, is accepting a commercial risk that is based, not on the price and value of the physical goods, but on the difference between movements in the physical and futures markets over time. This is why it is important to identify a futures product that is similar to the physical product and so should move in the market in concert with it. Traders ‘aim off’ the physical (or forward) commodity for its nearest futures equivalent.321 The two price trends may be sympathetic, since the two commodities are very similar, but the risk of differential movement can produce significant losses. For example, soya bean meal in the physical market may diverge from soya beans in the futures market, though the two price trends should remain close.

Physical production

1.63  The very considerable expansion of futures trading in commodities is matched by increases in physical production. Apart from the increasing appetite for oil, growing world prosperity and technological improvements have been responsible for substantial increases in the volume of dry commodities such as rice and wheat. The world production of wheat increased by 150 per cent in the period between the 1960s and 1980s.322 (p. 44) Statistics maintained by the United Nations Food and Agricultural Organisation323 show that, over a nine-year period ending in 2008, the value of world agricultural imports and exports increased by more than 200 per cent. In broadly the same period, there was a significant increase in world production. In the case, for example, of sugar, the increase in the volume of production was close to 25 per cent; for cereals generally, it was about 20 per cent. The law relating to commodity sales applies to strategically important goods whose importance will not diminish in the years to come.

Footnotes:

1  In PST Energy Shipping LLC v OW Bunker Malta Ltd (The Res Cogitans) [2016] UKSC 23, [2016] AC 1034, the Supreme Court held that a contract for the supply of goods on reservation of title terms, with permission to consume or dispose of the goods before payment was made, was not a sale of goods contract. Instead, it was a bailment contract with a liberty to consume or dispose of the goods, and therefore a sui generis contract for the supply of goods falling outside the Sale of Goods Act 1979. The case in question involved a supply chain of international contracts for the provision of bunker fuels. In so far as it is necessary to do so in this work, attention will be drawn specifically to contracts of this type.

2  See para 1.03.

3  International consumer contracts of sale lie outside the scope of this book.

4  For a useful survey article, see H Berman and C Kaufman, ‘The Law of International Commercial Transactions (Lex Mercatoria)’ (1978) 19 Harv Int’l LJ 221. See also J Ramberg, ‘Synchronization of Contracts of Sale, Carriage, Insurance and Financing in International Trade’ in P Sarcevic (ed), International Contracts and Conflicts of Laws (Martinus Nijhoff 1990); E McKendrick (ed), Goode on Commercial Law (5th edn, Penguin Books 2016), ch 32.

5  See MG Bridge, The Sale of Goods (3rd edn, OUP 2014).

6  See para 1.24.

7  As in the Convention on the International Sale of Goods (CISG) 1980.

8  Regulation 593/2008, applicable to contracts concluded on or after 17 December 2009.

9  The Rome Convention 1980 was implemented by and scheduled to the Contracts (Applicable Law) Act 1990 (see Sch 1). The Rome I Regulation 2008, as directly applicable legislation in the United Kingdom, needed no domestic measure to become law. See M Bridge (ed), Benjamin’s Sale of Goods (10th edn, Sweet & Maxwell 2017), ch 26 (Merrett) and paras 1.24 et seq.

10  It has been withdrawn by the European Commission, which is proposing instead a ‘Modified proposal in order to fully unleash the potential of e-commerce in the Digital Single Market’ (see Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Commission Work Programme 2015: A New Start (COM(2014) 910 final, p 12)).

11  Discussed in detail in chs 10–12.

12  The CISG is excluded from other association standard forms, such as those of the International Cotton Association (formerly the Liverpool Cotton Association) (January 2011, bylaw 202).

13  See eg cl 43(2) of the General Terms & Conditions for Sales and Purchases of Crude Oil (2010).

14  See eg cl XVIII.1 of the General Terms and Conditions for CFR/CIF/Delivered Ex Ship Sales of Crude Oil (2007).

15  See ch 8.

16  See chs 4 and 9.

17  See ch 7.

18  For hedging purposes: see para 1.61. For the importance of contractual certainty in hedging operations, see FMLC Issue No 97: Feasibility Study by the European Commission’s Expert Group on European Contract Law (Letter to the European Commission of 13 June 2011), available at http://www.fmlc.org.

19  Issue No 130: Implementation of the Vienna Sales Convention (July 2008).

20  See further M Bridge, ‘Uniformity and Diversity in the Law of International Sale’ (2003) 15 Pace Int’l L Rev 55. For the contrasting view that the CISG is apt to deal with international commodity sales, see P Schlechtriem, ‘Interpretation, Gap-Filling and Further Development of the UN Sales Convention’ (2004) 16 Pace Int’l L Rev 279; I Schwenzer, ‘The Danger of Pre-Conceived Views with Respect to the Uniform Interpretation of the CISG etc’ (2005) 36 Victoria U Wellington L Rev 795, 799. The question why the CISG has not been taken up by commodity traders is not addressed in the literature that considers it almost self-evidently good for them.

21  Since sellers’ standard terms tend to prevail over buyers’ terms, the likelihood is that a seller’s preferred law will prevail over the buyer’s.

22  See S Moss, ‘Why the United Kingdom Has Not Ratified the CISG’ (2005) 25 J Law & Com 483.

23  Its influence is evident in the Consumer Sales Directive (Directive 1999/44/EC of the European Parliament and Council on the sale of consumer goods and associated guarantees), initially transposed into UK legislation in the form of Part 5A of the Sale of Goods Act 1979 and now incorporated in the Consumer Rights Act 2015.

24  See Art 2.

25  See Arts 4 (validity and passing of property excluded) and 5 (personal injuries excluded).

26  See Arts 3–4 of the Regulation.

27  Discussed further at para 1.24.

28  See Art 7(2): discussed in ch 10.

29  Ex works delivery: sub-section 29(2) of the Sale of Goods Act 1979.

30  Sub-section 29(2).

31  The definition of an international sale for the purposes of the CISG is broader than this: see ch 11.

32  See eg Re Anglo-Russian Merchant Traders Ltd [1917] 2 KB 79, CA.

33  These are capable of being international sales pursuant to Art 1(1)(a) of the CISG.

34  Or DES according to Incoterms 2000. In the current 2010 edition of Incoterms, which are discussed at para 1.19, DES is deemed redundant and subsumed under DAP (delivery at a named place in the destination country). See ICC, Incoterms 2010, Introduction (p 6).

35  See ch 4.

36  For alternatives to the bill of lading under a CIF contract, see ch 4.

37  See ch 4.

38  See Ireland v Livingston (1872) LR 5 HL 395, 406.

39  See the availability of other terms in Incoterms 2010, most of which have had a negligible impact on the reported case law in England.

40  C&F is known as CFR in Incoterms.

41  It is up to the contracting parties to designate their rights and duties but it is for the court to characterize the nature of the transaction they have agreed to: [2001] UKPC 28 at [32], [2001] 2 AC 710 (referring to the difference between fixed and floating charges but the words are of general application).

42  See Comptoir d’Achat et du Boerenbond Belge SA v Luis de Ridder (The Julia) [1949] AC 293, HL, discussed at para 4.18. Similarly, a contract labelled as C&F may on its true construction turn out to be an FOB contract: see Scottish & Newcastle International Ltd v Othon Ghalanos Ltd [2008] UKHL 11, [2008] 1 CLC 186.

43  See para 1.06 on the abandonment of the ex ship (or DES) term by Incoterms 2010.

44  Because the focus of this book is on commodities contracts, the examples chosen are FOB and CIF delivery terms. This is not meant to assert that, in intra-European trade for example, these are commonly employed shipping terms.

45  For a valuable discussion of the background to the bulk shipping markets, and to shipping markets in general, see M Stopford, Maritime Economics (3rd edn, Routledge 2009).

46  See para 3.11.

47  See ch 5.

48  See ch 3.

49  See para 3.17.

50  In some FOB cases, the seller will make the carriage arrangements as agent for the buyer (see para 3.05), which is significantly less likely to happen in the case of CIF contracts.

51  See ch 8.

52  See ch 7.

53  See ch 6.

54  By way of a trust receipt: Re David Allester Ltd [1922] 2 Ch 211.

55  Albacruz (Cargo Owners) Respondents v Albazero (Owners) Appellants (The Albazero) [1977] AC 774, 796–97 (Brandon J).

56  See ch 4. Incoterms 2010 also provide a CIP (carriage and insurance paid to) term applicable to any mode of transport (whereas CIF is specifically designed for sea and inland waterway transport). On CIP, see Geofizika DD v MMB International Ltd [2010] EWCA Civ 459, [2010] 1 CLC 670.

57  Where goods are carried under a charter party entered into by the seller, the charter party is not transferred to the buyer but the bill of lading, a receipt for the goods in the hands of the seller, becomes when transferred to the buyer, constitutive of a contract of carriage with the carrier: Leduc & Co v Ward (1888) 20 QBD 475, CA; Hain Steamship Co v Tate & Lyle Ltd (1936) 41 Com Cas 350, 356–57, HL. The same result is less easy to achieve under the language of the Carriage of Goods by Sea Act 1992, ss 2–3, 5(1).

58  Bills of Lading Act 1855 (repealed by the Carriage of Goods by Sea Act 1992).

59  See ch 7.

60  Carriage of Goods by Sea Act 1992.

61  Until the Sale of Goods (Amendment) Act 1995, now ss 20A–B of the Sale of Goods Act 1979. The buyer of goods forming part of an agreed bulk who has made partial or full payment will now acquire to the extent of any payment made an undivided share in the bulk: s 20A.The characteristics of this right, as it might affect the buyer’s rights in tort against a negligent third party, have not yet been tested, but in principle this reform should overcome the long-standing objection to a buyer without a property interest pursuing the carrier in tort.

62  Vallejo v Wheeler (1774) 1 Cowp 143, 153, 98 ER 1012.

64  Another branch of the United Nations is UNCTAD (United Nations Commission on Trade and Development), founded in 1964, which works as a forum for inter-governmental deliberations; conducts research, collects data and carries out research analyses; and provides technical assistance to developing countries. Its activities are for the most part outside the scope of this book, but its report on Documentary Risk in Commodity Trade (1998), UNCTAD/ITCD/COM/Misc.31, repays careful reading.

65  This has been adopted by 85 countries.

66  This has been adopted by 30 countries (of which 23 have adopted an amending Protocol of 1980).

67  An example of the latter is the New York Convention on the Recognition and Enforcement of Foreign. Arbitral Awards 1958.

69  See ch 10.

70  Adopted by the UK.

71  See ch 10.

72  2010 edition (first issued in 1936).

73  The UCP 600 Rules (2007).

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

75  They are in fact explicitly excluded in GAFTA contracts in the ‘International Conventions’ clause but are nevertheless usually incorporated in oil transactions: see, eg Shell, General Terms and Conditions for Sales and Purchases of Crude Oil (1980), cl 27 and Total, General Terms and Conditions for CFR/CIF/Delivered Ex ship Sales of Crude Oil (2007), Section 1; Erg Petroli SpA v Vitol SA (The Ballenita and BP Energy) [1992] 2 Lloyd’s Rep 455; ERG Raffinerie Méditerranée v Chevron USA Inc (The Luxmar) [2007] EWCA 494, [2007] 1 CLC 807, where however they are of little value in resolving the complex performance issues that arise in such contracts.

76  UCP 600 (2007) were preceded by UCP 500 (1993).

77  See ch 6; M Bridge (ed), Benjamin’s Sale of Goods, (10th edn, Sweet & Maxwell 2017) (Bennett), para 23–006; cf Harlow and Jones Ltd v American Express Bank Ltd [1990] 2 Lloyd’s Rep 343 (setting an undemanding test for incorporating the Uniform Rules for Collections).

78  Cederburg v Borries Craig and Co (1885) 2 TLR 201.

79  See ch 5.

80  See eg Sohio Supply Co v Gatoil (USA) Inc [1989] 1 Lloyd’s Rep 588 and Phibro Energy Inc v Coastal (Bermuda) Ltd (The Aragon) (1987) [1991] 1 Lloyd’s Rep 61 (both involving BP terms).

81  On very limited grounds since the Arbitration Act 1996 s 69.

82  See eg Bunge Corp v Tradax Export SA [1981] 1 WLR 711, HL; Cargill Inc v Marpro Ltd (The Aegis Progress) [1983] 2 Lloyd’s Rep 570.

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

84  See the speech of the Chief Justice of England and Wales, ‘Developing Commercial Law through the Courts: Rebalancing the Relationship between the Courts and Arbitration’ (the Bailii Lecture, 9 March 2016) www.bailii.org. A negative response from practitioners in the field of arbitration was to be expected. See eg W Rowley, ‘London Arbitration under Attack’ Global Arbitration Review (16 May 2016) http://www.20essexst.com/news.

85  See D Morgan, Merchants of Grain (Penguin, 1980), 32–33.

86  The Guardian (1 June 2011). See also M Tamvakis, Commodity Trade and Finance (2nd edn, Informa 2015) 416–18, who also notes the current emergence of Singapore and Japanese trading companies.

87  The position in Australia, a complex one, shows a withdrawal of the state from domestic and export monopoly positions whilst retaining a significant degree of control of the market. In the case of wheat, controlled at the Commonwealth level, a Wheat Export Authority with regulatory functions developed out of the Australian Wheat Board in 1999 when the Board was privatized. In 2008, after a scandal arising out of sales to Iraq, the privatized company’s monopoly was withdrawn. Other grains, controlled at the state level, have also been the subject of privatization. See Kronos Corporate, A Review of Structural Issues in the Australian Grain Market (September 2002), available at <http://www.piagroup.com.au>; US Department of Agriculture GAIN Report (No 1313) on Grain Marketing in Australia, available at http://gain.fas.usda.gov.

88  cf (formerly) the Australian Wheat Board. See CC Carter, ‘Canada’ in D Blandford, CA Carter, and R Piggott (eds), North-South Grain Policies and Trade Policies (Westview Press 1993).

89  See A Schmitz and others, Grain Export Cartels (Ballinger 1981), p 27 (Ch 2: ‘The Nature of Grain Markets and Trade’).

90  Bill C-18, entering into force on 1 August 2012.

91  This happened in 2015 when a majority stake was sold to a joint venture of Bunge and a Saudi company.

92  M Tamvakis, Commodity Trade and Finance (2nd edn, Informa 2015) ch 15.

93  ibid, 295, referring to frustrated attempts in the mid-1970s to tighten control over the production and export of aluminium.

94  Oil Producing and Exporting Countries.

95  M Tamvakis, Commodity Trade and Finance (2nd edn, Informa 2015) ch 2; Consilience Energy Advisory Group, Trading Crude Oil: The Consilience Guide (2013).

96  If the CISG were ever to be adopted by the UK, it would of course be applied by English courts as part of English law.

97  For reasons of convenience, choice of law issues concerning property are dealt with in ch 7.

98  Since only a limited amount of space can in this book dedicated to choice of law, and no space at all to jurisdiction, specialist works on the subject should be consulted for more information: L Collins (ed), Dicey, Morris and Collins on the Conflict of Laws (15th edn, Sweet & Maxwell 2012); R Plender and M Wilderspin, The European Private International Law of Obligations (4th edn, Sweet & Maxwell 2014); R Fentiman, International Commercial Litigation, 2nd edn, OUP 2015); M Bridge (ed), Benjamin’s Sale of Goods (10th edn, Sweet & Maxwell 2017) ch 26 (Merrett). For coverage of the subject prior to the Rome I Regulation, see also JJ Fawcett, JM Harris, and MG Bridge, International Sale of Goods in the Conflict of Laws (OUP 2005) ch 13.

99  See Article 28 of the Rome I Regulation.

100  See M Bridge (ed), Benjamin’s Sale of Goods (10th edn, Sweet & Maxwell 2017) ch 26 (Merrett). The Rome II Regulation on the law applicable to non-contractual obligations (Reg 864/2007) applies to culpa in contrahendo (Art 2(1)), an expression that is broad enough to encompass liability in damages for fraud and misrepresentation. The Rome II Regulation is considered only incidentally in this text. For a fuller treatment, see A Dickinson, The Rome II Regulation (2008); JJ Fawcett and JM Carruthers, Cheshire, North and Fawcett[:] Private International Law (14th edn, OUP 2008). For a review of case law under the Private International Law (Miscellaneous Provisions) Act 1995, preceding Rome II, see VTB Capital Plc v Nutritek International Corpn [2011] EWHC 3107 (Ch) at [119]–[143]. The law applicable to the liability of a carrier in conversion for delivery without production of a bill of lading is referred to in ch 8.

101  The Contracts (Applicable Law) Act 1990 still applies to contracts concluded before 18 December 2009, and also as regards the territory of any Member State to which, pursuant to Art 299 of the EC Treaty, the Rome I Regulation does not apply: Art 24(1) of the Regulation.

102  Starting with a Green Paper (COM(2002) 654).

103  2005 (COM(2005)).

104  ‘The Articles that were of greatest concern to UK stakeholders during negotiations have either been removed, substantially revised or returned to their Convention form subject to later review. In the case of those provisions subject to review, future amendments will not automatically bind the UK’: Ministry of Justice Consultation Paper CP05/08 of 2 April 2008.

105  Article 2.

106  See Halpern v Halpern [2007] EWCA Civ 291, [2008] QB 195.

107  As a rule of procedure or evidence, this matter could be seen as falling outside the Rome Convention and the Rome I Regulation: M Bridge (ed), Benjamin’s Sale of Goods (10th edn, Sweet & Maxwell 2017) para 26-029 (Merrett).

108  Article 3(2): ‘The parties may at any time agree to subject the contract to a law other than that which previously governed it, whether as a result of an earlier choice under this Article or of other provisions of this Convention.’

109  See Art 110(2) of the EC Treaty; the Rome I Regulation (final part).

110  Article 3(2).

111  Article 1(2)(d): see Halpern v Halpern [2007] EWCA Civ 291 at [24], [2008] QB 195.

112  Article 1(2)(e).

113  Choice of court agreements too.

114  Consequently, the invalidity of the contract containing the clause does not entail the invalidity of the clause itself.

115  See L Collins (ed), Dicey, Morris and Collins on the Conflict of Laws (15th edn, Sweet & Maxwell 2012), Vol 1, paras 16-019–16-023.

116  Sub-section 46(3)—a formula identical to Art 28(2) of the UNCITRAL Model Law on Arbitration and Art 33(2) of the UNCITRAL Arbitration Rules.

117  See para 1.31.

118  [1980] OJ C282/1.

119  See Samcrete Egypt v Land Rover Exports Ltd [2001] EWCA Civ 2019, [2002] CLC 35; Iran Continental Shelf Oil Co v IRI International Corp [2002] EWCA Civ 1024, [2004] 2 CLC 696.

120  Samcrete Egypt v Land Rover Exports Ltd [2001] EWCA Civ 2019, [2002] CLC 353; Egon Oldendorff v Libera Corp [1996] 1 Lloyd’s Rep 380, 387.

121  The Brussels Protocol, Sch 3 to the Contracts (Applicable Law) Act 1990. In force in England as of 1 April 2005.

122  For preliminary rulings on the interpretation of regulations, see Art 234(b) of the EC Treaty. See also Art 225(3).

123  Article 3(1).

124  Article 3(1). The case law on the Convention should support the interpretation of the Regulation.

125  Rome Convention, Art 15; Rome I Regulation, Art 20. The prohibition of renvoi should not preclude the application of the CISG as part of the applicable law: JJ Fawcett, JM Harris, and MG Bridge, International Sale of Goods in the Conflict of Laws (OUP 2005) ch 16; Kingspan Environmental Ltd v Borealis A/S [2012] EWHC 1147 (Comm) at [617] et seq.

126  As in Oakley v Ultra Vehicle Design Ltd [2005] EWHC 872, [2005] IL Pr 747.

127  Rome I Regulation, Art 3(1).

128  See Lawlor v Sandvik Mining and Construction Mobile Crushers and Screens Ltd [2013] EWCA Civ 365 at [3], [2013 2 Lloyd’s Rep 98 (change designed only to bring the German and English texts into line with the French).

129  Lawlor v Sandvik Mining and Construction Mobile Crushers and Screens Ltd [2013] EWCA Civ 365, [2013] 2 Lloyd’s Rep 98.

130  Egon Oldendorff v Libera Corp (NYPE time charter); see also Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd [1999] 2 All ER (Comm) 54 (English non-marine insurance form); Gard Marine & Energy Ltd v Lloyd Tunnicliffe [2009] EWHC 2388 (Comm), [2010] Lloyd’s Rep IR 62; Giuliano–Lagarde Report, comment 3 to Art 3. A sale contract on ‘CIF UK port’ terms does not sufficiently indicate an intention to choose English law, given the universality of CIF terms in international trade: Sapporo Breweries v Lupofresh Ltd [2013] EWCA Civ 948 at [15], [2014] 1 All ER (Comm) 484.

131  Marubeni Hong Kong and South China Ltd v Ministry of Finance of Mongolia [2002] 2 All ER (Comm) 873.

132  Aeolian Shipping SA v ISS Machinery Services Ltd [2001] EWCA Civ 1162, [2001] CLC 1708; Marubeni Hong Kong and South China Ltd v Ministry of Finance of Mongolia [2002] 2 All ER (Comm) 873; Star Reefers Pool Inc v JFC Group Ltd [2010] EWHC 3003 (Comm), [2011] EWHC 339 (Comm).

133  Star Reefers Pool Inc v JFC Group Ltd [2010] EWHC 3003 (Comm) at [15], [2011] EWHC 339 (Comm) at [20] (reference to guarantee in charterparty with choice of law clause). See also Golden Ocean Group Ltd v Salgaocar Mining Industries Pty Ltd [2012] EWCA Civ 1265 at [49], [2012] 1 WLR 3674 (implied warranty of authority contract governed by same law as that in charterparty contract).

134  [2001] EWCA Civ 1162, [2001] CLC 1708.

135  Aeolian Shipping SA v ISS Machinery Services Ltd [2001] EWCA Civ 1162, [2001] CLC 1708; Giuliano–Lagarde Report (comment 3 to Art 3 ‘a real choice’—but cf American Motorists Insurance Co v Cellstar Corp [2002] 2 Lloyd’s Rep 216, affd [2003] EWCA Civ 206, [2003] 2 CLC 599, where the court relied upon a series of strong connecting factors to conclude that Texas law was the law of implied choice and not just the most closely connected law (though it reached the same conclusion that Texas law applied under the characteristic performance rule (see para 1.34)).

136  COM(002) 654 final (14 January 2003) para 3.2.4.2.

137  Article 3(1) of both the Convention and the Regulation: dépeçage.

138  Giuliano–Lagarde Report, comment 4 to Art 3. For resistance to the severance of insurance policies, see CGU International Insurance Plc v Szabo [2002] 1 All ER (Comm) 83; American Motorists Insurance Co v Celstar Corp [2003] EWCA Civ 206 at [20], [2003] Lloyd’s Rep IR 295.

139  Intercontainer Interfrigo SC (ICF) v Balkenende Oosthuizen BV [2010] QB 411, ECJ (Case C-133/08).

140  See Ward LJ in Centrax Ltd v Citibank NA [1999] 1 All ER (Comm) 557, CA. Note also the Giuliano–Lagarde Report, comment 8 to Art 4: ‘the courts must have regard to severance as seldom as possible’.

141  On the principle of lex specialis derogat legi generali.

142  Article 3(2) of both the Convention and the Regulation.

143  Comment 5 to Art 3.

144  Oddly, obligations arising under bills of lading, once they have been negotiated, are excluded from the Rome I Regulation: Art 1(2)(d). According to recital 9: ‘Obligations under bills of exchange, cheques and promissory notes and other negotiable instruments should also cover bills of lading to the extent that the obligations under the bill of lading arise out of its negotiable character.’

145  See Toulson J in CGU International Insurance plc v Szabo [2002] 1 All ER (Comm) 83, who is critical of attempts to give the contract no governing law until a later date (‘an impossible concept’), since parties’ rights and obligations crystallize at the contract date—see also EI Du Pont de Nemours and Co v Agnew [1987] 2 Lloyd’s Rep 585, 592, CA (Bingham LJ). The application of Art 4 to the contract before this choice is made is a powerful rebuttal of this criticism.

146  CGU International Insurance plc v Szabo [2002] 1 All ER (Comm) 83.

147  Sub-section 46(1)(b). See para 1.27.

148  See Amin Rasheed Shipping Corp v Kuwait Insurance Co [1984] AC 50, 60, 65, HL (Lord Diplock); Shamil Bank of Bahrain EC v Beximco Pharmaceuticals [2004] 1 WLR 1784, CA; Halpern v Halpern [2007] EWCA Civ 291, [2008] QB 195; Rome I Green Paper (COM(2002) 654 final), para 3.2.3.

149  Article 1(1) of the Convention.

150  Article 1(1) of the Regulation.

151  See eg recitals 6, 15, 19–21 and Arts 3(3), 4–-8, 9(3), 11, 12(2), 20–21.

152  Article 3(2)—‘the principles and rules of the substantive law of contract recognized internationally or in the Community’, an expression that was calculated to embrace instruments like the Principles of European Contract Law and the Unidroit Principles of International Commercial Contracts, though not something as vague and formless as the ‘lex mercatoria’.

153  Arbitration would be a different matter: see para 1.26.

154  For a more extensive discussion of the CISG chosen as a free-standing instrument, see para 10.53.

155  [2004] EWCA Civ 19, [2004] 1 WLR 1784.

156  Vita Food Products Inc v Unus Shipping Co Ltd [1939] AC 277, PC.

157  See Caterpillar Financial Services Corp v SNC Passion [2004] EWHC 569 (Comm), [2004] 2 Lloyd’s Rep 99.

158  A process that requires the collection of mandatory rules from two or more countries with varying degrees of involvement in the contract would in any case give rise to significant difficulties in its application.

159  Caterpillar Financial Services Corp v SNC Passion [2004] EWHC 569 (Comm) at [17]–[18], [2004] 2 Lloyd’s Rep 99. See also M Bridge (ed), Benjamin’s Sale of Goods (10th edn, Sweet & Maxwell 2017) para 26-038 (Merrett) for the argument that the place of manufacture of the contract goods might be relevant to the situation, although not to a contract exclusively connected with another country.

160  See Banco Santander Totta SA v Cia de Carris de Ferro de Lisboa SA [2016] EWCA Civ 1267, [2017] 1 WLR 1323. In that case, in the words of the judge in the court below ([2016] EWHC 465 (Comm) at [411], [2016] 4 WLR 49), ‘the use of standard international documentation, the practical necessity for the relationship with a bank outside Portugal, the international nature of the swaps market in which the contracts were concluded, and the fact that back-to-back contracts were concluded with a bank outside Portugal in circumstances in which such hedging arrangements are routine’, all led to the conclusion that Art 3(3) did not apply to a contract between two Portuguese entities. See also Dexia Crediop SpA v Comune di Prato [2017] EWCA Civ 428 (where both parties to an ISDA swaps contract were Italian but Art 3(3) was held not to be applicable).

161  See ss 26–27 of the 1977 Act, discussed at paras 2.34 et seq.

162  They might also qualify as overriding mandatory provisions: see para 1.33.

163  See CR Sugar Trading Ltd v China National Sugar & Alcohol Group Corp [2003] EWHC 79 (Comm), [2003] 1 Lloyd’s Rep 179, discussed at para 1.49.

164  Articles 6–7 of the Convention.

165  Recital (37). Overriding mandatory provisions are discussed in para 1.33.

166  Article 7(2).

167  Article 7(1) of the Convention.

168  For the difficulties to which this gave rise, in relation to pre-existing rules on illegality in the conflict of laws, see para 1.38.

169  No reservations, of course, are permitted in the case of the Regulation.

170  Article 9(1) of the Regulation.

171  Article 9(2).

172  Article 9(3).

173  Article 9(3) of the Regulation.

174  Article 16: ‘The application of a rule of the law of any country specified by this Convention may be refused only if such application is manifestly incompatible with the public policy (ordre public) of the forum.’

175  Article 21: ‘The application of a provision of the law of any country specified by this Regulation may be refused only if such application is manifestly incompatible with the public policy (ordre public) of the forum.’

176  This includes community public policy, according to the Giuliano–Lagarde Report, comment to Art 16 (‘[i]t goes without saying’).

177  See Krombach v Bamberski (C-7/98) [2000] ECR I-1935, [2001] QB 709.

178  Article 4(1) of the Convention.

179  Article 4(2) of the Convention. The relationship in the Convention of the rules of close connection and characteristic performance was considered by the European Court of Justice in Intercontainer Interfrigo SC (ICF) v Balkenende Oosthuizen BV [2010] QB 411 (Case C-133/08). In concluding that a court should revert to the rule of closest connection, the court in a not especially helpful way concluded that the invocation of the rule of closest connection depended upon all of the circumstances of the case. This meant that, contrary to the European Commission’s contention, the characteristic performance rules did not first have to be addressed to see if they had no genuine connecting value, before a court’s attention could be drawn to other matters.

180  Article 4(2).

181  Article 4(2). In one case, an Iranian company had very good reasons indeed (a US boycott) for doing business through its London office: Iran Continental Shelf Oil Co v IRI International Corp [2002] EWCA Civ 1024, [2004] 2 CLC 696. The existence of multiple ‘principal’ places of business of a reinsurer has been used as a ground for displacing the characteristic performance rule altogether (Lincoln National Life Insurance Co v Employers Reinsurance Corp [2002] Lloyd’s Rep IR 853), but this was a jurisdiction case and the only choice of law issue was whether there was an arguable case that the contract was governed by English law.

182  Article 4(5) of the Convention.

183  Article 4(3), (4) of the Convention.

184  This is of course subject to the rule of express or clear choice in Art 3(1).

185  Article 4(1)(a) of the Regulation.

186  Article 4(1)(g) of the Regulation.

187  PST Energy 7 Shipping LLC v OW Bunker Malta Ltd (The Res Cogitans) [2016] UKSC 23, [2016] AC 1034.

188  And not the interpretation that applies under the Sale of Goods Act 1979.

189  Article 4(2) of the Regulation.

190  Article 4(3) of the Regulation. While this should make it more difficult to revert to a rule of closest connection, the approach of the European Court of Justice when dealing with the Rome Convention, calling for all the circumstances of the case to be considered, should still apply: Intercontainer Interfrigo SC (ICF) v Balkenende Oosthuizen BV [2010] QB 411 (Case C-133/08).

191  Article 4(4) of the Regulation.

192  H D’Oliviera, ‘ “Characteristic Obligation” in the Draft EEC Obligation Convention’ (1977) 25 AJCL 303.

193  [2004] ScotCS 152 (25 June 2004).

194  See Iran Continental Shelf Oil Co v IRI International Corp [2002] EWCA Civ 1024, [2004] 2 CLC 696.

195  Print Concept GmbH v GEW (EC) Ltd [2001] EWCA Civ 352, [2002] CLC 352.

196  Article 4(1)(f) of the Regulation.

197  Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd [1998] CLC 1072; Dornoch Ltd v Mauritius Union Assurance Co Ltd [2005] EWHC 1887 (Comm). There is no rule in Art 4(1) of the Regulation for reinsurance contracts.

198  Samcrete Egypt v Land Rover Exports Ltd [2001] EWCA Civ 2019, [2002] CLC 353. Again, there is no specific rule in Art 4(1) of the Regulation.

199  Sierra Leone Telecommunications Co Ltd v Barclays Bank Plc [1998] CLC 501. Again, there is no specific rule in Art 4(1) of the Regulation.

200  Re Atlantic Telecom Group GmbH 2004 SLT 1031. See also Deutsche Bank (Suisse) SA v Khan [2013] EWHC 482 (Comm) at [358]. The question of what is characteristic performance under various letter of credit contracts will be dealt with in paras 6.91 et seq.

201  Ennstone Building Products Ltd v Stanger Ltd (No 2) [2002] EWCA Civ 916, [2002] 1 WLR 3059. The same conclusion takes the shape of a specific rule in Art 4(1)(b) of the Regulation that the applicable law for services contracts is the law of habitual residence of the provider of the services.

202  See Golden Ocean Group Ltd v Salgaocar Mining Industries Pty Ltd [2012] EWCA Civ 1265 at [52], [2012] 1 WLR 3674 (implied warranty of authority of an agent).

203  See Apple Corps Ltd v Apple Computer Ltd [2004] EWHC 768 (Ch) at [51] et seq, [2004] 2 CLC 720.

204  Article 4(2) of the Regulation.

205  [2001] 1 WLR 1745.

206  [1997] 2 Lloyd’s Rep 1, 5.

207  An approach supported by Keene LJ in Ennstone Building Products Ltd v Stanger Ltd (No 2) [2002] EWCA Civ 916, [2002] 1 WLR 3059, by Potter LJ in Samcrete Egypt v Land Rover Exports Ltd [2001] EWCA Civ 2019, [2002] CLC 353, and by Clarke LJ in Iran Continental Shelf Oil Co v IRI International Corp [2002] EWCA Civ 1024, [2004] 2 CLC 696—which, however, seem to show that the stricter Dutch approach was gaining ground with the aid of Art 18.

208  A more clearly justified departure from the characteristic performance rule came where a German defendant breached its contractual undertaking not to communicate with persons in the United Kingdom to complain of a patent infringement: Kenburn Waste Management Ltd v Bergmann [2002] EWCA Civ 98, [2002] CLC 644.

209  Article 4(1)(b) of the Regulation.

210  Article 4(3) of the Regulation.

211  Article 10(1) of the Convention; Art 12(1) of the Regulation.

212  See Re Lesotho Highlands Development Authority [2002] EWHC 2435 (Comm), [2003] 1 All ER (Comm) 232, applying Art 10(1)(c) of the Rome Convention; Service Europe Atlantique Sud v Stockholms Rederiaktiebolag SVEA (The Folias) [1979] AC 685, 700, HL (Lord Wilberforce). The starting point is whether the parties by contract have made provision for these matters: ibid, 700–01 (Lord Wilberforce); Re Lesotho Highlands Development Authority [2003] EWCA Civ 1159, 2 Lloyd’s Rep 497 at [34]. The Lesotho litigation concerned a challenge to the arbitrators’ award, and the House of Lords (at [2005] UKHL 43, [2006] 1 AC 221) reversed the Court of Appeal which had affirmed the trial judgment that the award was open to challenge.

213  Article 10(1)(e).

214  Article 10(2) of the Convention; Art 12(2) of the Regulation.

215  Article 8(1) of the Convention; Art 10(1) of the Regulation.

216  Article 8(2) of the Convention; Art 10(2) of the Regulation. See Welex AG v Rosa Maritime Ltd (The Epsilon Rosa) (No 2) [2003] EWCA Civ 938, [2003] 2 CLC 307 (incorporation clause in bill of lading referring to charter party that in turn contained arbitration clause).

217  See Welex AG v Rosa Maritime Ltd (The Epsilon Rosa) (No 2) [2003] EWCA Civ 938, [2003] 2 CLC 307.

218  See paras 1.32 and 1.33.

219  Articles 8 and 10 of the Convention; Arts 10 and 12 of the Regulation.

220  Article 9 of the Convention; Art 11 of the Regulation.

221  Article 1(2)(e) of the Convention; Art 1(2)(f) of the Regulation.

222  Article 11 of the Convention; Art 13 of the Regulation.

223  See Bodley Head Ltd v Flegan [1972] 1 WLR 680.

224  Article 8(1) of the Convention; Art 10(1) of the Regulation.

225  Regazzoni v KC Sethia (1944) Ltd [1958] AC 301, HL.

226  Ralli Bros v Cia Naviera Sota y Aznar [1920] 2 KB 287, CA. This rule was considered applicable in Eurobank Ergasias SA v Kalliroi Navigation Co Ltd [2015] EWHC 2377 (Comm).

227  See Mahonia Ltd v JP Morgan Chase Bank [2003] 2 Lloyd’s Rep 911.

228  Regazzoni v KC Sethia (1944) Ltd [1958] AC 301, HL.

229  Ralli Bros v Cia Naviera Sota y Aznar [1920] 2 KB 287, CA.

230  See the fuller discussion of this subject in ch 10.

231  Article 3(1) of the Convention and Regulation.

232  Under Art 6 of the CISG.

233  See ch 2.

234  The contract of sale aspects, not the proprietary ones, which will be subject to the appropriate law selected by the conflict rules of the forum.

235  GAFTA has over 1,500 members in 89 countries. According to the GAFTA website (www.gafta.com), 80 per cent of world trade in grain, rice, and wheat is shipped under GAFTA standard forms.

236  See Vita Food Products Inc v Unus Shipping Co Ltd [1939] AC 277, PC (‘bona fide and legal’).

237  For the limited restrictions on freedom of choice, see paras 1.32–1.34. These various restrictions do not add up to striking down a choice of applicable law on the ground only that the contract has no material connection with the country whose law is chosen.

238  Discussed at para 1.42.

239  See para 1.19.

240  Tradax Export SA v André & Cie [1977] 2 Lloyd’s Rep 484, 491.

241  See E Murray, ‘UK Derivatives and Commodities Markets’, in M Blair, G Walker, and S Willey (eds), Financial Markets and Exchanges Law (2nd edn, OUP 2012), ch 10.

242  See N Schofield, Commodity Derivatives (Wiley 2007), 8–11.

243  See Bryan v Lewis (1826) Ry & Moo 386. See also invoicing back cases like Lancaster v Turner (JF) & Co Ltd [1924] 2 KB 222, CA (Scrutton LJ) and Adair (JF) and Co Ltd v Birnbaum [1939] 2 KB 149, CA (MacKinnon LJ) for the view that the transaction amounts to a wager. The practice of invoicing back, which leads to the closing out of a contract at the prevailing market rate so as to favour even a breaching party who is ‘in the money’, has attracted criticism over the years. See Dunavant Enterprises Inc v Olympia Spinning & Weaving Mills Ltd [2011] EWHC 2028 (Comm) at [2], [2011] 2 Lloyd’s Rep 619 (and cases there cited).

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

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

246  Gaming Act 1845, s 18.

247  Gambling Act 2005, sub-section 335(1). See further H Beale (ed), Chitty on Contracts (32nd edn, Sweet & Maxwell 2015) Vol 2, ch 41.

248  [1972] 1 WLR 834.

249  See eg Brauer & Co (Great Britain) Ltd v James Clark (Brush Materials) Ltd [1952] 2 All ER 497, CA.

250  But if the contract is clear that goods have to be supplied from a particular place, and that is no longer possible, then frustration may be successfully pleaded: see Sanschagrin v Echo Flour Mills Co [1922] 3 WWR 694, Can; CTI Group Inc v Transclear SA (The Mary Nour) [2008] EWCA Civ 856, [2008] 2 CLC 112.

251  For a description of internal Canadian string (or track) trading, see Louis Dreyfus Canada Ltd v Pulses Etc SA [2007] SKCA 58.

252  It is possible to have string arbitrations between the first seller and the last buyer in the string, eg GAFTA 125 (Arbitration Rules, 1 September 2016), cl 7(1). Where the contracts in the string are on ‘materially identical terms’, apart from their varying prices, then, with the written consent of all parties in the string, the tribunal may hold an arbitration ‘between the first seller and the last buyer in the string as though they were parties who had contracted with each other’. Until the September 2016 edition, a truncated arbitration of this sort was confined to matters of condition and quality.

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

254  See para 1.55.

255  Kerr J in Pagnan (R) & Fratelli v Schouten (NGJ) NV (The Filipinas I) [1973] 1 Lloyd’s Rep 349, 356.

256  [1966] 1 QB 650, 674, CA.

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

258  See ch 9.

259  See Re Hall (R and H) Ltd and Pim (WH) (Jnr) and Co’s Arbitration (1928) 33 Com Cas 24, HL.

260  E Murray, ‘UK Derivatives and Commodities Markets’, in M Blair, G Walker, and S Willey (eds), Financial Markets and Exchanges Law (2nd edn, OUP 2012), ch 6.

261  These are treated as contracts for the sale of goods: see Sucden Financial Ltd v Fluxo-Cane Overseas Ltd [2010] EWHC 2133 (Comm) at [4], [2010] 2 CLC 216.

262  In contracts cleared through the London Clearing House, the LCH, as the buyer for every seller and the seller for every buyer, acts as the sole intermediary on some of the world’s leading trade exchanges and over-the-counter market places. The same applies in the case of the ICE (Intercontinental Exchange).

263  ED&F Man Commodity Advisers Ltd v Fluxo-Cane Overseas Ltd [2009] EWCA Civ 406. On timely responses to a margin call, see Marex Financial Limited v Fluxo-Cane Overseas Ltd [2010] EWHC 2690 (Comm).

264  Sucden Financial Ltd v Fluxo-Cane Overseas Ltd [2010] EWHC 2133 (Comm) at [6], [2010] 2 CLC 216. See eg London Metal Exchange (LME) Trading Regulations (October 2011), Rulebook rr 9.1.3, 9.1.5 (futures), 9.1.8 (swaps) (daily).

265  See para 1.55.

266  See ED&F Man Commodity Advisers Ltd v Fluxo-Cane Overseas Ltd [2009] EWCA Civ 406 (additional 20 per cent ‘super margin’ required by the ICE (Intercontinental Exchange)).

267  See D Morgan, Merchants of Grain (Penguin 1980), ch 9: ‘Catch-22’.

268  London Metal Exchange (LME) Trading Regulations (October 2011), Rulebook Part 9 (can take place by offsetting or delivery of warrants); ICE Sugar No 11 Futures Contract (allowing for physical delivery FOB receiver’s vessel). See also Nissho Iwai Petroleum Co Inc v Cargill International SA [1993] 1 Lloyd’s Rep 80, discussed at para 1.54.

269  They can be converted into electronic form under NYMEX (New York Mercantile Exchange) Rules, r 7A04.

270  Section 1.

271  Sub-section 5(1). There is no reason why one unauthorized, etc person might not take advantage of this provision as against another unauthorized person.

272  In Sch 1 to the 1986 Act.

273  Note 1.

274  Note 4. This indicative note had the capacity to pull in a contrary direction to indicative notes 5 and 6. According to the former, a contract was indicatively commercial when it was traded ad hoc and not by reference to standard lots, terms, or delivery dates. According to note 6, the contract was indicatively one of investment if it was traded on an exchange or its performance was ensured by an exchange or clearing house or there was provision made for margin.

275  The chances of regulation were therefore greater where the exchange was a necessary counterparty to each trade.

276  [2003] EWHC 79 (Comm), [2003] 1 Lloyd’s Rep 179.

277  See note 4(a).

278  See note 4(b).

279  Section 19. The grant of exemptions is authorized by s 38. See also Financial Investments and Markets Act 2000 (Regulated Activities) Order 2001, SI 2001/544, especially reg 68 (exclusions concerning sale of goods and supply of services transactions).

280  Section 22.

281  Schedule 2 to the Act.

282  See para 17 of Sch 2.

283  See para 18 of Sch 2.

284  Sub-section 26(1).

285  Sub-sections 28(3)–(6).

286  [2003] EWHC 79 (Comm), [2003] 1 Lloyd’s Rep 179.

287  For a useful description of the oil trade and its various futures markets, see S Mankabady, Oil Trading Law (1997), ch 1; M Tamvakis, Commodity Trade and Finance (2nd edn, Informa 2015) ch 2. See also EJ Swan, ‘Derivatives and the Control of Oil’, in EJ Swan (ed), Derivative Instruments Law (Cavendish 1995).

288  For instability in the iron ore market attributed to expanding Chinese demand, see the Financial Times (Commodities) (30 March 2010).

289  Similar developments have arisen in recent years (2007–2009 in particular) in the iron ore trade, driven by increasing Chinese demands for iron ore. Annual contracts based on a benchmark price have given way to short-term activity with the release of iron ore on the international spot markets and the intervention of price assessors like S&P Global Platts. See ICE Product Guide to Iron Ore, available at http://www.theice.com; Financial Times (Commodities) (30 March 2010)).

290  An over-the-counter activity, in contrast with futures contracting conducted on a regulated exchange with the exchange itself as the contractual counterparty.

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

292  Transpetrol Ltd v Transol Olieprodukten Nederland BV [1989] 1 Lloyd’s Rep 309, 310 (‘a relatively new and highly sophisticated trade’).

293  ‘Brent is by far the most widely traded crude oil in the international market … despite the fact that Brent has never accounted for more than 3 per cent of crude oil in international trade. Roughly two-thirds of internationally traded crude oil is sold at Brent-related prices’: R Weiner, ‘Do Crises Tear the Fabric of Oil Trade?’ (March 2006), 4 (Discussion Paper for Resources for the Future (<http://www.rff.org>)). Brent has the merits of being produced in politically stable conditions and of being exploited by multiple licensees, so that no single licensee can manipulate the market: M Tamvakis, Commodity Trade and Finance (2nd edn, Informa 2015) 88. The declining levels of production of Brent crude have resulted in a ‘blend’ of Brent and three other North Sea crudes (BFOE—Brent, Forties, Oseberg, and Ekofisk), to which will be added in January 2018 the Troll field, operated by Norway’s Statoil, resulting in Statoil overtaking Shell as the biggest producer. See Financial Times, ‘Fight to Keep Oil’s Brent Benchmark Fit for Purpose’ (20 February 2017), noting also the increasing challenge to the Brent contract posed by its rival West Texas Intermediate contract.

294  The underlying oil commodity for NYMEX dealing.

295  [1987] 2 Lloyd’s Rep 547.

296  For the workings of circle clauses, see ch 10.

297  [1987] 2 Lloyd’s Rep 547.

298  Note that in this trade it is the FOB seller who controls the timetable, a departure from the position in sales of dry commodities.

299  [1993] 1 Lloyd’s Rep 80.

300  [1987] 2 Lloyd’s Rep 547.

301  It may also be agreed that the price for a forward cargo will be as reported at a future date or dates by one of the reporting agencies such as S&P Global Platts. See eg OMV Supply and Trading AG v Kazmunaygaz Trading AG [2014] EWCA Civ 75 at [9]–[10], [2014] 1 CLC 113 (price prevailing at date of notice of readiness); ERG Raffinerie Méditerranée SpA v Chevron USA Inc (The Luxmar) [2007] EWCA Civ 494, [2007] 1 CLC 807. For FOB grain contracts on terms governed by the NAEGA (North American Export Grain Association) No 2 form (2000), an American FOB contract, the contracting parties may provide under cl 10 for payment to be made by an exchange of futures prior to delivery and at least five calendar days before the last day of the relevant trading month.

302  See M Tamvakis, Commodity Trade and Finance (2nd edn, Informa 2015) 89 et seq.

303  cf the relationship between current spot prices and forward delivery prices in the physical market discussed at para 1.41.

304  [1993] 1 Lloyd’s Rep 80.

305  ibid.

306  For short and long positions, see para 1.55.

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

308  Consilience Energy Advisory Group, Trading Crude Oil: The Consilience Guide (2013) pp 186–87.

309  [1990] 2 Lloyd’s Rep 84.

310  This is what occurred in Nissho Iwai Petroleum Co Inc v Cargill International SA [1993] 1 Lloyd’s Rep 80. See also the ICE Exchange of Futures for Physical (EFP) mechanism at <http://www.theice.org>. For a case involving futures contracts where the buyer of physical cereals paid by surrendering an equivalent quantity of futures contracts, see Soules CAF v ADM Agri-Industries Ltd 2001 WL 676681.

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

312  [1984] 1 Lloyd’s Rep 614, CA (Mustill J at 623, Donaldson MR at 630).

313  See A Slabotsky, Grain Contracts and Arbitration (Lloyd’s of London, 1984); Socomex Ltd v Banque Bruxelles Lambert SA [1996] 1 Lloyd’s Rep 156; ED&F Man Commodity Advisers Ltd v Fluxo-Cane Overseas Ltd [2009] EWCA Civ 406. A trader’s bank may require it to conduct hedging operations: see Choil Trading SA v Sahara Energy Resources Ltd [2010] EWHC 374 (Comm) at [156], which also contains a useful description of hedging activity at paras [156] et seq (on which also see Glencore Energy UK Ltd v Transworld Oil Ltd [2010] EWHC 141 (Comm) at [14).

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

315  See J Gray, Shipping Futures (2nd edn, Lloyd’s of London 1990), ch 2. On the volatility of freight markets, which will affect CIF prices, see Trading Tanker Co AB v Flota Petrolera Ecuatoriana (The Scaptrade) [1983] 2 AC 694, 703, HL. In summer 2008, the price of oil reached US$147 per barrel, before plunging to US$35 and then stabilizing at US$40 per barrel by the end of the year: M Tamvakis, Commodity Trade and Finance (2nd edn, Informa 2015) 39.

316  N Schofield, Commodity Derivatives (Wiley 2007), 75.

317  See Canada Grain Regulations, CRC c 889, Sch 3 (Grades of Grain), available at <http://www.grain-scanada.gc.ca>. In the United States, standards are applied to grain under the terms of the Grain Standards Act 1916 (PL 64–190) (as amended).

318  Gebruder Metelmann GmbH & Co KG v NBR (London) Ltd [1984] 1 Lloyd’s Rep 614, 630. On the ICE US market, the quantity is 50 tons (see ICE Sugar No 11 Futures).

319  The former International Petroleum Exchange was acquired by ICE in 2001. See J GrayShipping Futures (2nd edn, Lloyd's of London Press 1990), p 20. In the case of Brent Crude Futures, the standard ICE amount is 1,000 barrels (or 42,000 US gallons). For the reason why a barrel consists of 42 (US) gallons, see B Bryson, At Home (Random House 2010), 181.

320  See ch 5.

321  See eg Choil Trading SA v Sahara Energy Resources Ltd [2010] EWHC 374 (Comm) at [157].

322  See D Blandford, ‘An Overview of the World Grain Economy’, in D Blandford, CA Carter, and R Piggott (eds), North-South Grain Policies and Trade Policies (Westview Press 1993).

323  See <http://www.fao.org>.