Briefing Note - Use of Defined Terms in Commercial Contracts

A recent Scottish case provides a reminder that in contracts, it is advisable to spell out (preferably in words of two syllables or less) the meaning of any terms in the contract which might otherwise subsequently be the subject of dispute.

The case involved the Port of Dundee, which was holding in its warehouse two cargoes of wood pulp shipped by the Finnish wood products giant, Stora Enso. Whilst the goods were in storage a fire broke out, which destroyed the consignments. Stora claimed against the Port, which argued that it did not have any liability on the basis that Stora no longer had title to the consignment, which had been shipped on a 'carriage and Insurance paid' (CIP) basis.

The terms of the standard form of contract under which the wood pulp was supplied stated that the title to the consignment would not pass from Stora Enso until the whole sum due under the contract was paid. The question which applied was whether the use of the term ‘CIP’ on the sales invoice overrode terms agreed under the Sale of Goods Act 1979, which allows parties to agree expressly when the title (and thus the risk in the goods) passes from seller to buyer.

Under international law that governs CIP contracts, the seller pays the cost of conveying the goods to their destination and the buyer assumes the commercial risk in the goods (i.e. the insurance risk) once that has been done. The Port argued that in this case, CIP meant just that - Stora had supplied the goods, title had passed and thus they could no longer sue, since they did not own the goods.

In this case, in the view of the seller and the ultimate purchaser, the risk in the goods passed to the purchaser only when they had been paid for and put on the purchaser’s lorry. The Court of Session agreed that in this instance, CIP meant that the seller and buyer were agreeing that the seller should pay for the goods up to the point of delivery only. The CIP clause was, in effect, just a means of setting the price for the consignment. Since the General Trade Rules for Wood Pulp were agreed to apply, and those rules were quite unequivocal that title in the goods would only pass when they had been paid for, the title still rested with Stora. Accordingly, Stora could sue.

Conclusion

The ultimate purpose of this case was undoubtedly to see which organisation’s insurers would meet the tab for the loss. However, it does make the point well that it is always better to make sure that any terms incorporated in contracts are clear and consistent. In this case the use of the term CIP threw doubt on whether a standard term applied.