QUESTION
You are a barrister well known for your expertise in international trade law related matters.
The First question relates to a request by the law firm Spark and Heckle for your legal opinion regarding issues concerning their client Meditest.
Spark and Heckle have sent you a Brief to Counsel – you are the legal Counsel they are referring to.
At this stage you do not have evidence beyond that appearing below in the instructions from Spark and Heckle.
The written advice/opinion must not exceed 1500 words.
1
Brief to Counsel to Advise on a matter concerning Meditest Observations
Counsel’s instructing solicitors, Spark and Heckle, are requesting you to provide your advice about the matters set out as follows.
The Parties
Our client, the seller, is Meditest Pty Ltd, a Brisbane based company that manufactures a 15- minute influenza rapid test platform called Flutest.
The buyer is Farma Pte Ltd, a Singapore based company that operates a chain of pharmacy stores in Singapore.
The facts
On 21 September 2022, Farma ordered 130 batches of Flutest for $US187,000. On that same day Meditest agreed to supply the goods on the terms set out in a contract that included the following clauses:
Clause 11: Farma has the right to inspect and test the goods to ensure the goods confirm to the Contract specifications. Farma may notify Meditest in writing of the identity of any representatives retained for these purposes.
The inspections and tests must be conducted on Meditest’s premises. ...
Clause 32: This contract is governed by the law of Singapore, and the parties hereby consent to the jurisdiction of Singapore.
Clause 33: Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration administered by the Singapore International Arbitration Centre (SIAC) in accordance with the Arbitration Rules of the Singapore International Arbitration Centre (SIAC Rules) for the time being in force, which rules are deemed to be incorporated by reference in this clause.
The seat of the arbitration shall be Singapore. The Tribunal shall consist of three arbitrators. The language of the arbitration shall be English.
The contract also provided that the goods (ie the Flutest) were to be supplied to a warehouse specified in the contract located at Changi Airport, Singapore on or before 31 October 2022. The parties also agreed under the terms of the contract that payment would be made by way of a letter of credit.
On 5 October, Bruce Choung, the Chief Executive Officer of Meditest, emailed Fiona Young, the Head of Sales at Farma, stating that due to unforeseen delays in the supply of ingredients to produce the Flutest product, the delivery of the Flutest would now occur in mid-November, rather than the contracted date of 31 October.
2
Ms Young replied by email that day stating in part:
That is extremely disappointing news. We have a huge pent-up demand for flu test products. We will suffer some lost sales to our competitors because of your delay. We might also take a reputational hit. Please attend to this matter as urgently as possible and get your product to us as soon as possible.
On 7 November, Farma’s bank, the National Bank of Singapore, issued a letter of credit, which was sent to Meditest’s bank, OziBank, as the confirming bank.
On 8 November, Ms Young sent an email to Mr Choung, which stated in part:
We are extremely distressed by media reports we saw this morning which said that your Flutest product, which you sent to your customers in Hong Kong, are having false positives of around 4%. This is completely unacceptable. We are no longer confident about the quality of your product. We note that you are in breach of contract because you did not deliver the product by 31 October as agreed. As far as we are concerned, we no longer require your product.
Our client, Meditest, did not reply to the email at that time. Later, on 8 November, Ms Young sent another email to Mr Choung, which stated in part:
We have contacted our lawyers. In light of our conversations with our lawyers, we request that an inspection be made of any goods you might be intending to send us. We make the request under clause 11 of the contract, and nominate MedInspect to be the inspectors. Under the terms of clause 11, the inspection is to take place at your premises.
On 9 November Meditest dispatched the goods, which were sent to Singapore on a Qantas flight that day. The goods arrived the following day at the warehouse specified in the contract at Changi Airport.
On 9 November, Meditest provided the documents as required under the terms of the letter of credit to its bank, Ozibank.
Also, on 9 November Mr Choung emailed Ms Young in which he said: We agree to the goods being inspected by MedInspect at our premises.
On 10 November, Farma commenced proceedings in the Singapore Supreme Court seeking an order to restrain the National Bank of Singapore from making any payment under the letter of credit. Farma claims that the order should be made because Meditest acted fraudulently by agreeing to have the goods inspected on its premises when it was aware that the goods had already been sent to Singapore.
Our client says that the goods had already left the Brisbane plant and were in the hands of its freight forwarder when Mr Choung answered the email in which he agreed to the inspection. It was his belief at the time he sent his email that the goods could be returned to Brisbane for inspection.
On 14 November, Farma commenced arbitration proceedings at the SIAC, seeking to have the tribunal find that Farma had validly avoided the contract because Meditest had fundamentally breached the contact by not delivering the goods on or before the date specified in the contract (ie 31 October).
3
Advice requested
Our client seeks your advice about the following:
What are Farma’s prospects of success in having the Singapore Supreme Court make an order restraining the National Bank of Singapore from making any payment under the letter of credit? [In answering question 2, you are not expected to know Singaporean law. You are only required to apply common law principles in giving your answer.]
SOLUTION
To
Spark and Heckle
Spark and Heckle Associates
266 George Street, Brisbane, Queensland 4000
Sub: Letter of Advice regarding your client Meditest Pty Ltd.
Dear Spark and Heckle,
I hope this e-mail finds you well. Thank you for your email dated November 18, 2022 requiring my advice regarding whether Farma can avoid contract and likelihood of their success in obtaining a court order from Singapore Supreme Court to prevent the National Bank of Singapore from making any payment under the letter of credit.
After a meticulous examination of the Meditest Pty Ltd. Case, I have compiled the questions you presented and subsequently offered advice for your client which is as follows:
QUESTIONS AND ANSWERS
Q1: Did Farma Validly Avoid the Contract?
A1: Farma cannot legally avoid the contract solely due to the delayed delivery of Flutest. In my opinion, Meditest's actions do not amount to a fundamental breach of the contract, as described in Article 25 of the United Nations Convention on Contracts for the International Sale of Goods (CISG). This is because Farma has not faced a substantial loss due to the delay, and Meditest did not anticipate this delay occurring. Additionally, Meditest's decision to send goods to Singapore does not appear to be a deliberate evasion of inspection. They seem to reasonably believe that goods can still be returned to Brisbane for proper inspection.
Q2: What are Farma’s prospects of success in having Singapore Supreme Court make an order restraining National Bank of Singapore from making any payment under letter of credit?
A2: In my opinion, it seems unlikely that Farma will be successful in obtaining court order from Singapore Supreme Court to prevent the National Bank of Singapore from making a payment under letter of credit. This is because clause 33 of the agreement states that disputes should be resolved through Singapore International Arbitration Centre. The court's involvement in matters referred to arbitration is restricted unless explicitly allowed by law, as stated in Article 5 of Model Law.
REASONS FOR ANSWERS
Background
Whether Meditest has breached the contract?
2. The key factor for taking action to avoid the contract is significance of breach.[1] This fundamental breach is outlined in Article 25 of the United Nations Convention on Contracts for the International Sale of Goods (CISG). As per CISG Article 25, a breach is "fundamental" when it results in a level of harm to the buyer that "substantially deprives" them of the benefits they were entitled to anticipate from contract. Also, there is "foreseeability test," which exempts situations where "the party in breach did not anticipate, and a rational individual of similar nature under comparable circumstances would not have anticipated, such an outcome."[2] Hence, for fundamental breach of contract by Meditest, two questions need to be addressed:
a) Whether Farma has faced substantial deprivation?
3. As per this guideline, the party that has been harmed should have experienced a substantial deprivation of the expected benefits from the contract. To put it more simply, if other party fails to meet its contractual obligations or fulfills them incorrectly, the injured party's primary interest in contract must have been seriously diminished.[3]
4. In the current situation, Farma's primary interest within the contract pertains to obtaining 130 batches of Flutest by or before October 31st. However, when an email correspondence was initiated by Bruce Choung regarding potential delivery of Flutest around mid-November, rather than adhering to originally agreed-upon date, Ms. Young from Farma expressed apprehension. She indicated that this deviation in the delivery timeline could potentially result in a loss of sales to their competitors and emphasized urgency of promptly resolving this matter and expediting product delivery.
5. This situation underscores possibility of adverse outcomes, such as decreased sales and harm to Farma's reputation, resulting from delayed shipment of Flutest. Nonetheless, it is important to note that this setback does not lead to substantial deprivation for Farma, as the goods are anticipated to be delivered by November 9th. This aligns with Farma's primary interest, which is to receive product within the specified timeframe.
b) Whether Meditest had foreseen the unreasonable delay to supply Meditest to Farma?
[1] United Nations Convention on Contracts for the International Sale of Goods, Article 49.
[2] Ulrich Magnus, ‘The Remedy of Avoidance of Contract under CISG-General Remarks and Special cases’ (2005) 25(423) Journal of Law and Commerce.
[3] Franco Ferrari, ‘Fundamental Breach of Contract Under the UN Sales Convention: 25 Years of Article’ (2006) 25 Journal of Law and Commerce 489-500.
6. For a breach to be fundamental, the harm suffered must be something that could have been predicted. If harm was not something party in breach could have reasonably foreseen, nor something that a sensible person of similar nature and under same conditions would have anticipated, then the breach is not considered fundamental.[4]
7. In current scenario, on the 5th of October, Bruce Choung communicated via email that delivery of Flutest would be postponed to mid-November. This adjustment was necessitated by unanticipated challenges in procuring necessary ingredients for producing the Flutest product. As a result, the delay in delivering Flutest to Fama stemmed from unexpected disruptions in ingredient supply to Meditests. Consequently, it can be concluded that breach in delivery timing was not fundamental.
8. Hence, Meditest has not committed a fundamental breach of the contract. This is because Farma has not been substantially deprived of what they rightfully anticipated from agreement, and the delay in delivery was not something that Meditest could have predicted in advance.
Whether Meditest has knowingly avoided inspection of Flutest?
9. Mr. Choung’s reason for consenting to inspection was his reasonable belief that the goods could be returned to Brisbane for the inspection process.
10. Mr. Choung's reasonable understanding was grounded in a concept known as INCOTERMS. These are a standardized set of contract terms that can be integrated into an agreement through reference.[5] One of these terms, Carriage Paid To (CPT), is a widely recognized international trade term. It signifies that seller is responsible for delivering goods, at their own cost, to a carrier or another entity designated by seller.[6]
11. Under CPT, seller bears all potential risks, including any losses, until the goods are taken into the care of designated party. In this specific scenario, Meditest acts as the seller, while carrier is Farma. In context of Meditest's dealings, if CPT terms are employed, the seller can reasonably hold belief that goods might be retrieved for inspection before they arrive at buyer's designated storage facility. The rationale behind this belief stems from seller's ongoing control over goods until they are handed over to carrier.
[4] Robert Koch, ‘The Concept of Fundamental Breach of Contract under the United Nations Convention on Contracts for the International Sale of Goods’ (1998) Kluwer Law International 177.
[5] International Trade Administration, Know your Intercoms (Jan 2020)
[6] Sam Franklin, A simple guide to understanding Incoterms (2022)
12. Hence, Meditest has not knowingly avoided inspection of Flutest and Mr. Choung's belief was reasonable that goods could be returned to Brisbane for inspection.
Whether inspection can be done after goods have been sent to Singapore?
13. Meditest could argue that contract does not explicitly forbid inspecting goods after they have been dispatched to Singapore.
14. According to Article 38 of the CISG (United Nations Convention on Contracts for the International Sale of Goods), the buyer is obligated to examine goods or arrange for their examination, within shortest feasible period given the circumstances. This means that buyer must promptly inspect the goods in line with specific situation.[7]
15. Once the goods have reached their destination, the buyer must make important decisions, such as when to carry out inspection, how to perform the examination, whether delivered goods meet the contract terms, and if not, how to inform the seller.[8] Article 38 requires buyer to personally inspect goods or have them inspected by others within a reasonably short timeframe, considering the circumstances at hand.[9] In current scenario, MedInspect can still examine Flutest at Meditest's location.
16. Once inspection period and notification period have elapsed, buyer's right to raise objections about defects ceases. The time within which buyer must inspect goods as stipulated in Article 38 corresponds to time outlined in Article 39 for buyer to identify any nonconformities. This also marks the beginning of a "reasonable time" in which buyer must notify seller of any non-conformities. The examination of the purchased goods as mandated by Article 38 is a fundamental prerequisite for conveying any instances of nonconformity outlined in Article 39. Therefore, to uphold all the rights connected to the nonconformity provision, the inspection of the goods must occur within shortest feasible timeframe given the circumstances.[10]
17. Consequently, Farma still retains right to inspect Flutests at designated location following their delivery. Meditest's agreement to allow goods to be inspected on its premises, even though it knew goods were already dispatched to Singapore, does not indicate fraudulent behavior.
[7] Mohammed Zaheeruddin, ‘Examination of goods by buyers under International Sales Contract’, (2021) 27(1) Academy of Entrepreneurship Journal.
[8] Chemical France v. Isover Saint Gobain, Interim Award in ICC Case No. 4131 of 1982.
[9] Supra Note 7.
[10] Daniel Girsberger, ‘The Time limits of Article 39 CISG’ (2006) 25(241) Journal of Law and Commerce.
18. As a result, Farma is unable to avoid contract. This is because neither Meditest has committed a fundamental breach of contract, nor has Meditest dishonestly terminated the quality inspection of the Flutests.
What are Farma’s prospects of success in having the Singapore Supreme Court make an order restraining the National Bank of Singapore from making any payment under the letter of credit?
19. Clause 33 of agreement specifies that disagreements must be resolved by arbitration conducted by the Singapore International Arbitration Centre. Meditest may contend that arbitration should be used to settle all issues, including this one, as opposed to going to the Singapore Supreme Court.
20. An essential component of Model Law is Article 5. It adds that until certain issues are expressly addressed in the Law, courts cannot become engaged in arbitration disputes based on the Model Law.
21. Article 5 has always been regarded by courts as a necessary component of Model Law. This affirms that primary standard for determining whether court involvement is permitted in any particular case under Model Law.[11] Since it can be utilized to prevent courts from getting involved in broad subjects that aren't specified in Model Law, courts view Article 5 as a way that Model Law strongly encourages arbitration.[12] However, courts have interpreted Article 5 to limit their level of involvement but not their level of assistance to arbitration panels. Article 5 forbids court intervention, therefore requesting for an interruption in arbitration or barring an arbitrator from making decisions until a court examines their prior selection has been interpreted as an application for court involvement. Misusing court's ability to help could happen if someone asks for this help against agreed-upon procedure or the decisions of the arbitration panel.[13]
21. Also, Meditest could dispute Farma's claim of fraudulent intent by providing evidence that their actions were not intended to deceive or defraud Farma. Instead, they could demonstrate that their actions were grounded in an interpretation of the contract terms that permitted the inspection.
[11] Noble China Inc. v. Lei Kat Cheong, Ontario Court of Justice, Canada, (1998) 81 O.T.C. 1 (GD).
[12] Vibroflotation A.G. v. Express Builders Co. Ltd., High Court—Court of First Instance, Hong Kong, 15 August
1994.
[13] ALC v ALF, High Court, Singapore, (2010) SGHC 231.
23. Hence, Farma has a low chance of succeeding in getting the Singapore Supreme Court to issue an order that prevents the National Bank of Singapore from making any payment under letter of credit.
I hope that the advice and guidance I have provided will be helpful to you. Thank you for valuing my expertise. I look forward to opportunity to assist you again in future.
Yours Sincerely
Junior Counsel
BIBLIOGRAPHY
A Articles/Books/Reports
Daniel Girsberger, ‘The Time limits of Article 39 CISG’ (2006) 25(241) Journal of Law and Commerce
Franco Ferrari, ‘Fundamental Breach of Contract Under the UN Sales Convention: 25 Years of Article’ (2006) 25 Journal of Law and Commerce 489
Mohammed Zaheeruddin, ‘Examination of goods by buyers under International Sales Contract’, (2021) 27(1) Academy of Entrepreneurship Journal
Robert Koch, ‘The Concept of Fundamental Breach of Contract under the United Nations Convention on Contracts for the International Sale of Goods (1998) Kluwer Law International 177
Ulrich Magnus, ‘The Remedy of Avoidance of Contract under CISG-General Remarks and Special cases’ (2005) 25(423) Journal of Law and Commerce 426
B Cases
ALC v ALF, High Court, Singapore, (2010) SGHC 231.
Chemical France v. Isover Saint Gobain, Interim Award in ICC Case No. 4131 of 1982
Noble China Inc. v. Lei Kat Cheong, Ontario Court of Justice, Canada, (1998) 81 O.T.C. 1 (GD)
Vibroflotation A.G. v. Express Builders Co. Ltd., High Court—Court of First Instance, Hong Kong, 15 August 1994
C Treaties
United Nations Convention on Contracts for the International Sale of Goods, signed 11 April 1980 (entered into force 1 January 1988)
UNCITRAL Model Law on International Commercial Arbitration (1985)
D Others
International Trade Administration, Know your Intercoms (Jan 2020)
Sam Franklin, A simple guide to understanding Incoterms (2022)