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• Although there are quite a number of special trade terms in use, our main focus will be on the two extremely useful trade terms, namely: FOB and CIF. • FOB stands for “Free on Board”.
PROFESSOR DR. ABDUL GHAFUR HAMID
3.1 The Essence of FOB Contracts
(1) Unlike CIF contracts where definitions abound, there are no definitions concerning FOB contract. (2) The lack of definitions could be attributed to its ‘flexibility’. But the gist of an FOB contract can be gathered from some cases.
Stock v Inglis (1884)12 QBD 573 The words free on board would mean that the shipper (seller) was to put the goods on board at his expense; and the goods so put on board would be at the risk of the buyer, whether they were lost or not on the voyage.
In such a case the seller may enter into the contract of carriage but it only will be as an agent of the buyer. (3) The central idea in an FOB contract is clear: the price paid to the seller includes all costs up to the loading of the goods on to a seagoing vessel nominated by the buyer. and the seller’s to put the goods on board and procure a bill of lading. and the buyer agrees to convey it overseas. 3. property and risk normally pass to the buyer at this point and all subsequent expenses are for the buyer’s account. 2 . A court might come to the conclusion that it is not in fact an FOB contract. (The first type) (The classic FOB)… The buyer’s duty is to nominate the ship.Wimble v Rosenberg (1913) 3 KB 743 • The FOB is a contract for the sale of goods where the seller agrees to deliver the goods over the ship’s rail. 2 Types of FOB Contracts Pyrene v Scindia Navigation  2 QB 402 (per Devlin J) (4) But the incidents of the contract may be varied in many ways by reason of express and implied terms in the contract. 1. (5) The fact that the parties have described their contract as ‘FOB’ will not necessarily be conclusive.
The extension of seller’s duties may include an obligation to procure insurance. (good for importers/buyers) 3. Sometimes the seller is asked to make the necessary shipping arrangements (including entering into the contract of carriage). . .2. (The second type) is known as the “extended FOB” or “FOB with additional services”. quite similar to a CIF contract. . The third type is the Strict FOB. .The difference would simply be in the computation of the price. This differs from the classic FOB in two ways: (a) the seller makes the contract of carriage as principal. whether as agent for the buyer or as principal.In the FOB.So FOB price will be less than CIF price. The seller has no function in the making of the contract of carriage. therefore. (b) it is the seller who nominates the ship. 3 . (The seller would make the contract of carriage or insurance for the buyer’s account). the buyer is normally not a party to it. The buyer engages his own forwarding agent at the port of loading to book space and to procure the bill of lading. the price would not include the freight and the cost of insurance.It is.
3.FOB Hull. the choice of port will normally be the buyer’s and he has the corresponding duty of notifying the seller of his choice in good time. procures the shipping space. But it may give alternatives (e.1 Duties of the F.g. FOB Liverpool) . the buyer nominates the ship. • In the strict FOB.3 The Strict FOB In the strict FOB. FOB Danish ports).g. The contract will often state this precisely (e. getting the mate’s receipt and handing it to the forwarding agent to enable him to obtain the bill of lading.3.g. 28. the seller discharges his duty by putting the goods onboard. and is the legal shipper ab initio. To nominate the port of shipment. the vessel’s name and procure the necessary shipping space (a) Nomination of the port of shipment The port of shipment is usually designated in the contract of sale.B buyer 1.O. 4 . Liverpool or London) or a range of ports (e.3. If the contract is a multi-port one. Devlin J’s division of the three types of FOB contract has been approved in The El Amira and The El Minia  2 Lloyd’s Rep.
 1 Lloyd’s L. Date of shipment A date or period of shipment is normally specified in the contract of sale. the seller’s obligation to have goods ready to load at port does not arise. 5 . If a period of shipment is specified. It was held that the buyer had the option of selecting any good Danish port.R. 209 The contract of sale contained the provision “FOB stowed good Danish port”. the option for the actual time of shipment within the period lies with the buyer.R.David Boyd v Louis Louca Gill & Duffus v Societe pour l’ l’ Exportation  1 Lloyd’s L. Until the buyer has made an effective nomination of the date of shipment. 621 Failure to make a nomination of the port of shipment and to notify the seller by an agreed date may amount to a breach of condition precedent to the seller’s obligation to load the goods. A seller who takes goods to port for loading in the absence of an effective nomination by the buyer does so at his own risk.
J & J Cunningham Ltd. The notice was late for four days.The buyer rejected the defective grain and it was held that they were entitled to do so. (b) Nomination of the vessel It is the buyer who has to nominate the vessel to be used.The seller moved his grain to port on 14 October. The buyer is to nominate an effective ship to take delivery of the goods and to give the seller at least 15 days notice of readiness of the vessel to load. The court gave judgment for the sellers and held that the notice was a ‘condition’. . The contract of sale required for the delivery of 15. Bunge Corporation v Tradex Export SA  2 All ER 513 Bungi – Cont. . It stated that “in a contract for the sale of goods a stipulated time of delivery is of the essence. if none is specified in the contract of sale.” 6 . v RA Munro & Co. Ltd. by which time the grain had deteriorated.000 tons of soya bean meal FOB an American port in the Gulf of Mexico.The sellers selected to treat the contract as terminated. He must notify the seller of the ship’s readiness to load within a reasonable time before the date for shipment so as to give the seller sufficient time to complete the loading process.The buyer did not make an effective nomination until 28 October.The contract was for the sale of bran under a contract FOB Rotterdam and the shipment period was specified as October. (1922) 28 Com Cas 42 . .
. . there had been no delivery to the buyer and the seller could not demand the price but merely damages for non-acceptance of the goods. claimed the contract price and failed to recover it. 7 . . The sellers refused to load claiming that the buyers had breached the contract. Substituting the nominated ship with another ship Agricultores Federados Argentinos v Ampro SA  2 Lloyd’ Lloyd’s L.The buyer under a contract ‘FOB Liverpool’ was unfortunate in that five ships successively nominated failed to arrive. Nevertheless.Buyer’ Buyer’s failure to nominate ship: damages Colley v Overseas Exporters  3 KB 302 . he is not confined to it and may replace any nomination by a later one provided that it will be available for loading within the stipulated period. Unless the buyer’s nomination is required by the contract to be final.The contract calls for the shipment of maize on FOB terms between September 20 and 29.R. The buyers sued the sellers for nonperformance.They then made a second nomination at 16:30 on September 29. This ship was delayed by bad weather and would be unable to reach the port of loading within the shipment period. the seller’s remedy is damages and cannot claim for the price.Since there had been no shipment. . who had delivered the goods at Liverpool. if the buyer does fail to nominate an effective ship. 290 .The seller.The buyers nominated ship ‘A’.
(2) To obtain the necessary import license . (c) To secure shipping space In the absence of contractual stipulation to the contrary.Normally it is the seller who is required to procure the necessary export license.On the facts. Held: The sellers were not entitled to treat the contract as repudiated. the buyer must obtain any import license for the importation of the goods. . 193 Where the contract expressly provides that the first nomination is to be ‘final’. the buyer is bound by his first nomination. The buyers’ right to make a second nomination is valid so long as the goods could be shipped within the shipment period by the substitute vessel.However.R. it is the buyer’s duty to procure space on the nominated vessel. Express provision in the contract: final Cargill v Continental SA  1 Lloyd’s L. 8 . . v MW Hardy  AC 588. Ltd. He cannot make a substitution. it would have been possible to complete loading before the end of September 29 (before midnight) if workers were made to work overtime.Agricultores – Cont. See AV Pound & Co.
. Cont. He must contract for the carriage of the goods. of India for delivery FOB London. sold a number of fire tenders to the Govt.While one of the tenders were being lifted into the vessel. their liability was limited to & 200. being carriers. Pyrene Co.However.In the strict FOB. a strict FOB contract was in issue. Pyrene Co. Ltd. after loading. Ltd. . which in turn entitles him to possession of the goods from the carrier at the port of destination.The plaintiffs. .It was repaired at a cost of & 966 and later shipped in another vessel. • The strict FOB (buyer contracting with carrier) contract is thus the most typical form of FOB contract.The buyers nominated a ship belonging to the defendants and through their forwarding agents made all arrangements for the carriage of the goods to Bombay. it was dropped and damaged before it had crossed the ship’s rail. Pyrene.The sellers claimed the cost of repair from the def. the seller will obtain from the master of the ship the mate’s receipt and transfer it to the buyer. the buyer is the legal shipper.It enables the buyer to exchange the mate’s receipt for the bill of lading. (SO) who admitted negligence but pleaded that. . • In the Pyrene case. . .(3) To contract for the carriage of the goods . . 9 . v Scindia Navigation Co.
Cont. 10 . i.Pyrene.e. & 200. 3.2 Duties of the FOB seller (1) To ship goods of contract description at the named port of shipment (a) Goods of contract description Examination of the goods The seller must ship goods that answer in all respects to the contract description. Devlin J held that the sellers were entitled to damages up to the maximum limit of the liability. • The parties may have agreed on “preshipment inspection”. which plays an increasing role in modern export trade.3.
Goods were sold FOB Sidney. he commits a breach of a condition. he will not lose his right of rejection if they do not conform to the contract. the seller were held liable. The port of shipment is of the essence of the contract. 11 . named port of shipment. If the seller fails to ship goods at the agreed. • In this case. Peter Turnbull & Co. v Mundas Trading Co (Australasia) Pty Ltd. The named port of shipment in an FOB contract is a condition of the contract. The sellers then alleged that they could not deliver at Sidney and asked to be allowed to deliver at Melbourne. • If he fails to examine them on that occasion. • The buyer may reject the goods on arrival if they do not correspond to the contract description. the only possible place of inspection would be on arrival of the goods at their place of destination. The buyers refused. the buyer is not obliged to inspect the goods when shipped.  2 Lloyd’s Rep.In an action for non-delivery of the goods at Sidney. (b) At the named port of shipment The due delivery point is the port of shipment designated in the contract of sale. . 198 .• Where they have not so agreed and the custom of trade does not provide for it.
Assuming that the buyer has nominated an effective ship.Rep. . it may be otherwise depending on the custom of the port. his failure to do so may be treated as a repudiatory breach entitled the buyer to reject the goods. therefore. The whole charge. Pyrene Co. 351 .The seller is responsible for loading the goods on board the ship and for paying the cost of this.(c) To pay all costs for loading the goods on board the ship . V Benjamin Smith (1923) 14 Lloyd’s L.  2 All ER 158 at 167 Devlin J: “It is the practice in the port of London for all loading to be done by the port authority at the ship’s expense. .It was held that the seller was in breach for failing to ensure sufficient time for loading.Since time is of the essence in the commercial context.The seller was only able to get the goods to the ship 15 minutes before expiry of the shipment period. 12 . All Russian Cooperative Society Ltd.However. v Scindia Navigation Co. the seller’s duty is to deliver the goods by putting them on board the ship within the stipulated shipment period. . for loading from alongside is paid by the ship and covered by the freight.” (2) To ship goods on time .
See AV Pound & Co. V MW Hardy  AC 588. the passing of property in an FOB contract will depend on several factors: (A) General law as set out in the SGA. (4) To deliver the necessary documents • Unless otherwise agreed. 3.R. thus enabling him to exchange the mate’s receipt for the B/L.4 Passing of property • Unless otherwise agreed. and (C) Whether the seller has reserved the right of disposal of the goods. • In fact.(3) To obtain Export license • Normally it is the seller who is required to procure the necessary export license. 475. (B) The terms of the contract. which in turn entitles him to possession of the goods from the carrier at port of destination. 28 SGA is deemed satisfied by the furnishing of the documents. the seller can demand payment in exchange for the documents. since the delivery obligation in s. 13 . • The seller will perform it by obtaining from the master of the ship the mate’s receipt and transferring this to the buyer. the seller must furnish to the buyer the documents necessary for him to obtain possession of the goods from the carrier at the port of destination. Ltd.  1 Lloyd’s L. • See also Concordia Trading v Richco International Ltd.
(2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract.) the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled. and in such a case.] (2) Where goods are shipped. 14 . • Where there is a contract for the sale of unascertained goods no property in the goods is transferred to the buyer unless and until goods are ascertained. the seller is prima facie to be taken to reserve the right of disposal. (1)….(A) Relevant provisions of the SGA. the conduct of the parties and the circumstances of the case. (notwithstanding the delivery of the goods to the buyer. Section 19 [Cont. 1979 Section 16: Goods must be ascertained. or to a carrier for the purpose of transmission to the buyer. and by the bill of lading the goods are deliverable to the order of the seller or his agent. Section 17: 17: Property passes when intended to pass. Section 19: Reservation of right of disposal (1) …The seller may… reserve the right of disposal of the goods until certain conditions are fulfilled. (3)….
• “Shipment” usually means the goods crossing the ship’s rail. • In Pyrene v Scindia Navigation . (C) Right of disposal of the seller • So far as FOB contracts are concerned.R. then the property will pass when the goods are put on board (or shipped) See Carlos v Charles Twigg  1Lloyd’s L. 240. (i) Seller does not reserve right of disposal of the goods • If an FOB seller delivers the goods to a carrier. the seller is at risk if the buyer does not pay. The goods were held to have been the property of the seller at the time they were damaged. and does not reserve the right of disposal by taking control of the bill of lading.(B) The role of intention • The approach of the SGA to the passing of property is based upon ‘intention’. it is always up to the parties to determine when property passes [s. 17]. a fire tender was badly damaged when it fell back into a lighter from a crane before it had passed over the ship’s rail. Subject to the exception in s. • In many FOB contracts. 15 . the seller will not have been paid by the time the goods are loaded on board. Therefore. when property passes depends on whether the seller reserves the right of disposal of the goods by taking control of the bill of lading. 16 of unascertained goods that remains unascertained.
the risk will usually pass to the buyer on shipment and this will not be affected by the fact that the property does not pass at that time. has been met by the buyer. 3. commonly reserve the right of disposal of the goods. if not assured of payment pursuant to a letter of credit. In these circumstances property in the goods will not pass on shipment. the passing of property may be deemed to be postponed until the seller endorses the bill of lading to the buyer or his agent. 19(2) creates a prima facie presumption that a seller who takes out a bill of lading in his own name and not in the name of the buyer is deemed to reserve the right of disposal of the goods. s. • He will make it clear that the property in the goods is to remain in him. • • Under an FOB contract.5 Passing of Risk • The SGA. • He will normally retain this right of disposal until some condition. • Therefore. usually payment of the price. if the seller enters into contract of carriage with the carrier and obtains the bill of lading (as in the case of the classic FOB or the extended FOB). 16 . irrespective of the fact that the goods have been shipped or even that they have actually come into the possession of the buyer or his agent.(ii) Seller reserves right of disposal of the goods • FOB sellers.
e. i. It was held that the goodst had been at buyer’s risk since shipment even though property had not passed.Stock v Inglis (1884) 12 QBD 564 Sugar was sold FOB Hamburg and shipped with other consignments of sugar sold under other contracts. Particular bags were not appropriated to the different contracts. The ship and cargo were lost. 17 . the goods remained unascertained..
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