What Remedies Does a Buyer Have for Defective Goods Under UAE Law and English Law?
In international sale contracts, the difficulty is often in determining exactly what obligations the terms of the contract create. This difficulty is not always apparent in negotiating the contract but becomes apparent when there is a dispute in which the parties argue that the terms in question hold different meanings. Merchant traders want to know the standard which the law applies so they can plan their business often do not have fine legal semantics in mind during contract negotiation. But they are subject to the niceties of the law in fixing their rights and obligations.[1] This being stated, it would seem to follow that a high degree of legal certainty and predictability is required. This paper will consider the extent to which the law of the United Arab Emirates (“UAE”) and the English law relating to termination recognize and provide for this need.
For a contract to be enforceable by court, its terms must be expressed with sufficient certainty or must be capable of being ascertained. The traditional reason for this is for the parties, and not the courts, to make the contract. The function of the court is limited to the interpretation of the contract made by the parties, and it does not extend to creating contracts on their behalf.[2]Amongst the principal causes of uncertainty is vagueness. In some cases, vagueness can be resolved by custom or customary terms in a particular trade[3], or by applying a standard of reasonableness[4], that is why the certainty and predictability is required. These are generally acknowledged[5] to be a result of three factors:[6]
Firstly, the trader unlawfully terminates the contract, he may be liable for an enormous amount of damages as volatile market conditions can drastically alter the value of the goods in a short period of time and the quantity of goods is often huge in cases of bulk shipment.[7] The traders in the international sale of commodities therefore need to be able to accurately determine when they are legally entitled to terminate contracts.
Secondly, traders need to be able to tell promptly whether the right to terminate exists as traders have many contracts to manage on the volatile market. The international sales of commodities many more contracts are concluded than the number of cargoes that can be delivered. It is contended that most of these contracts are concluded to speculate on the market price and do not actually contemplate delivery.[8]
Thirdly, the law and its interpretation should be capable of producing consistent results where string sales are involved. As stated above, about the tendency in international sales of commodities to enter into speculative sales, when goods are appropriated to these sales, a sales string emerges. It is undesirable if termination of some contracts is allowed, with others on the same string not allowed for the same breach.
Where English law governs the international sale of commodities contract between traders, the Sale of Goods Act (“SGA”) 1979 as amended will apply.[9] From the other side, where UAE law governs the same contract the UAE Federal Commercial Transactions Code (“CTC”) of 1993, amongst others, will apply. This will mean that terms will be implied into the contract relating to the quality and fitness for purpose of the goods, as well as terms relating to sale by description. The terms implied into contracts by either the SGA or the CTC specify whether they are to be considered as conditions or warranties. In addition, both the SGA and the CTC provide for delivery, payment, and other duties. Often, terms relating to delivery and passing of property will be displaced in international sales by the specific provisions made by the contracting parties, such as the incorporation of the INCOTERMS to their contract, as stated forth in Articles 133-163 of the CTC.
Where a breach of contract is sufficiently serious, the injured buyer will have, in addition to the right to pursue a claim for damages, a right to terminate the contract.[10] Termination may arise because the term broken is a condition, in which case any breach of that term provides a right to terminate under either Article 110 of the CTC or the section 11(3) of the SGA.
However, pursuant to Article 110 of the CTC which states that: “If it is noticed after delivery of the sold goods that they are different, in quantity or type, or if they are defective, termination of the contract shall not be granted to the buyer unless it results, from such difference or defect, the unsuitability of the goods sold for the purpose for which they were to be used, or if they become difficult to be marketed. The court, upon rejecting the application for termination of the contract, may decide to reduce or complete the price, depending on the deficiency or excess in quantity, the discrepancy in type or the degree of defect. This is so unless there is an agreement or custom imposing termination.” Thus, the right to terminate may arise where the term broken is an innominate or intermediate term. In this case, the right to terminate only exists if the breach in the circumstances goes to the root of the contract or deprives the injured buyer of substantially the whole benefit of the bargain, this was confirmed by the landmark English contract law case, the Hong Kong Fir.[11]
Takahashi[12] states that many of the key terms in cost, insurance and freight (“CIF”) and free on board (“FOB”) contracts are conditions, such as those concerning documentary obligations,[13] the place of shipment,[14] time for shipment,[15] time for tender of documents,[16] and time within which an FOB buyer must give notice of readiness of the ship to load.[17]
It may therefore be thought that both the UAE law and the English law relating to the international sale of commodities do provide a high degree of legal certainty and predictability. However, in relation to innominate or intermediate terms, the test of termination is difficult. The need to assess “the unsuitability of the goods sold for the purpose for which they were to be used, or if they become difficult to be marketed” as stated by Article 110 above, and consequently “whether the breach has gone to the root of the contract” creates uncertainty in this area of the law, undermining the highly prized concept of predictability.
Knowing that an innominate term is neither a condition nor a warranty, but it has the characteristic that, if the contract is breached, its effect depends on the gravity of the said breach. Thus, if the breach is “grave” then the innocent buyer is entitled to treat the contract as terminated or apply for its termination by the court following the procedures stated forth by Article 111 of the CTC, whereas if it is “slight”, the contract subsists. It is necessary to be able to determine whether the right to terminate exists because, if the innocent party misjudges it and wrongly treats the contract as terminated, they themselves will have committed a “grave” breach.
In the Commercial Appeal N. 1739 of 2019, the Dubai Courts applied the innominate term to the law of international sales of commodities. In the said case, a Kuwaiti company bought a quantity of carpentry accessories (doors locks and hinges) on cost and freight (“C&F”) basis from a Dubai company, the payment was by irrevocable and confirmed letter of credit. The accessories were to be used in the manufacture of doors to be installed by a sub-contractor in a project in Kuwait City and were agreed to be from a specific brand which was certified by the consultants of the said project for their quality and durability. On arrival the buyer discovered that the accessories were not branded as agreed, the seller argued that they are original equipment manufacturer (OEM) and are produced by the same factory and suggested to the buyer to stick printed labels on the boxes to show the agreed brand. The buyer refused and filed a lawsuit requesting compensation.
The Court of Appeal of Dubai confirmed the ruling of the first instance court which based its ruling on Article 110 of the CTC which requires the goods to be as described fit for purpose but restricts the right of the buyer to reject the goods where there has been a breach of the sale contract provides that the right to terminate the contract is lost where the breach is so slight. No definitions for the terms “so slight” and “grave” were given, however. As for the term “fit for purpose”, it was explained that it means any specific purpose that the buyer agreed with the seller. Both courts explained that the goods sold must match the samples shown to the buyer in store and any description in the brochure provided by the seller showing the goods to be a specific brand, the one that was certified by the project consultant consequently, the court ruled that the seller must pay the buyer the market difference in the price between the branded goods and the OEM ones.
From the English law perspective, the English court applied the same principle in the Hansa Nord.[18] In this case, a German company sold a quantity of US orange pellets CIF to a Dutch company. The pellets were to be used in the manufacture of cattle food. The contract was made on a form provided by the Cattle Food Trade Association, containing the term: “shipment to be made in good condition”. On arrival the market price of the goods had fallen considerably. cargo hold 1 of the ship was found to be damaged, but the cargo hold 2 was in good condition. The buyers rejected the whole consignment. The Rotterdam court ordered its sale. A middleman purchased it for approximately 30% of the original value. He then sold the pellets on the same day to the original buyers for that reduced price. Although the buyers received a smaller quantity of goods, it was clear that they had obtained them at a much-reduced price.
The Court of Appeal eventually heard the matter and held that the term, “shipment to be made in good condition”[19], was an innominate term. Lord Denning MR stated: “If a small proportion of the goods sold was a little below that standard, it would be met by commercial men by an allowance off the price. The buyer would have no right to reject the whole lot unless the divergence was serious and substantial.”[20]
The buyers therefore did not have a right to reject the whole consignment of pellets but were entitled to damages for the difference in value between the damaged and the sound goods on arrival.
Whether a particular term amounts to a condition or an innominate term is not always clear and is a matter of construction.[21] The intention of the parties will normally be given effect, though establishing their intention is not always straightforward. Even where the legislation provides the label for the term, this is not followed completely consistently by the courts. In Tradax International v Goldschmidt,[22] despite section 13 of the SGA providing that a ‘description’ is a condition, the term describing the purity of barley as “four per cent foreign matters” was held to be an innominate term. In contrast, in Tradax Export v European Grain & Shipping,[23] the term describing the quality of soya bean meal as “maximum 7.5 per cent fiber” was held to be a condition, despite an earlier decision that it was a warranty.
Section 15A of the SGA refers to remedies for “slight” breach of conditions by the seller in non-consumer cases. It provides that where a buyer would have a right to reject goods on the grounds of a breach of a condition implied by sections 13, 14 or 15, and does not deal as a consumer, he may not treat the breach as a breach of condition where it is “so slight” that it would be unreasonable to do so.
This undermines certainty and predictability because it is again unclear whether the breach will give rise to a right to terminate, and an analysis of the seriousness of the breach must again be undertaken.
Overall, although the application of either the UAE law or English law to contracts for the international sale of commodities does provide some certainty and predictability, unclear definition of the term “slight” and the continued classification of terms as innominate seriously undermine these aims. So too does the uncertainty over whether Article 110 of the CTC or Section 15A respectively apply and the operation of this provision. Therefore, to promote greater certainty in this area of the law, a more rigid approach to the types of terms which will form conditions or warranties should be adopted, with a lesser reliance on innominate terms following. Instead, traders are advised to use standard form contracts presented as pre-drafted contracts where the parties in international trade should specifically state their expectations by setting in all the terms, rather than leave their meaning to be determined once litigation has begun.
The author of this publication is Abdelhak Attalah. Abdelhak is a UK-qualified maritime and international trade lawyer. He holds a postgraduate diploma in Maritime Law from London Metropolitan University and an LL.M in International Trade Law from the University of Northumbria. If you have any queries regarding the above, or international trade and maritime laws more broadly, Galadari Advocates and Legal Consultants are on hand to assist – abdelhak@galadarilaw.com.
