(PRIVATE) INTERNATIONAL TRADE LAW Lecture 2 06.5.

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VARIOUS RESPONSIBILITIES OF THE PARTIES IN THE FOB CONTRACT

There are several responsibilities of the parties under the fob contract;

1. DUTY ON THE PART OF THE SELLER TO LOAD THE GOODS

ABOARD THE VESSEL –

The cost of loading goods onto the vessel has to be borne by the seller, costs of
course will in the end be passed to the buyer but the initial responsibility of
loading is on the seller. When the goods are shipped or cross the ship’s rail.
Property in the goods will pass the moment that the risk in those goods passes
from the seller to the buyer. While the loading of the goods is a matter of
contractual provision or contractual requirement of the FOB that loading be
effected by the seller it is also a matter for the regulation by the customs of a
particular port i.e. it is possible to find a custom of practice in a particular port
that requires that loading of goods be effected by a different party, this was
discussed in the Pyrene v Scindia Case. Lord Devlin stated as follows concerning
loading of goods “it is the practice in the port of London for all loading to be
done by the port authority at the ships expense. The whole charge therefore for
loading from alongside is paid by the ship and covered by the freight.”

PORTS OF LOADING

It is important to keep in mind that the port of loading may be a single port fob or
a multi port FOB contract. A single port is denominated with the port of
discharge i.e. FOB Mombasa would be a single port but FOB Kenya would be
talking about several ports. The Port of Loading is of the essence in the FOB
Contract. This means that the fob contract will usually state precisely the port or
range of ports from which or at which goods will be shipped. In a multi port
contract and subject to the other parts of the contract the choice of the port of
shipment is that of the buyer provided that the buyer notifies the seller of his
choice of port in good time. Where the contract specified the port of loading
neither party can claim to be allowed to load the goods at a different port. In
Peter Turnbull & Co. v Mundas Trading Co. [1954] 2 LLR In this case the goods
were sold FOB Sydney. The Seller S alleged that it could not deliver at the port of
Sydney and they asked the Buyer B to be allowed to deliver at the Port of
Melbourne. The Buyers refused with the result that litigation ensued with the
buyer claiming for damages for non-delivery of goods and the seller claiming that
the buyer had breached the contract by failing to nominate a vessel. It was held
that the sellers were liable to the buyer for non-delivery. It was the court’s
opinion that the buyers nomination of a suitable vessel was pointless because the
seller could not deliver at the port nominated by the buyer. The buyer cannot
claim delivery of goods elsewhere other than the port agreed by the parties, the
goods in an fob contract are delivered to the buyer when they cross the ship’s rail.
The court said it was pointless for the buyer to nominate a suitable vessel so long

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as the seller insisted on delivery at a different port. It is the duty of the buyer to
nominate a suitable vessel.

DUTY OF BUYER

Defined by Chief Justice Hewart in the case of Cunningham Ltd v Robert A

Monroe [1922] Vol 128 “It is the duty of the purchaser to provide a vessel at the
appointed place at such time as would enable the vendors to bring the goods
alongside the ship and to put them over the ship rail so as to enable the
purchasers to receive them within the appointed time. The usual practice under
such a contract is for the buyer to nominate a vessel and to send notice of her
arrival to the vendor in order that the vendor may be in a position to fulfil his part
of the contract.” This statement introduces the concept or the fact that in most of
the transactions the parties will agree on the time of shipment after which it is
not open to any party to change the time of shipment as it is fundamental to the
contract.

In an fob contract the time within which the buyer should nominate a suitable
vessel is of the essence to the contract. This is because the seller needs some kind
of advance notice of the time within which the ship will be available at the point
of discharge so as to arrange for the goods to be there in time. When one is
dealing with products that require specialised storage facility, it means extra cost
if delivery is made too early and the seller is entitled to treat the contract as
repudiated if the buyer fails to nominate a vessel at the stipulated time which is
reasonable time. This issue was dealt in a case called the The Osterbeck [1972]2
LLR 341 Here there was an FOB contract dated 11 th November 1969 for sale of
soya bean oil. The contract of Anzio and ship was to be effected in March 1970 …
unknown to the seller there were no oil storage facility at Anzio, the buyer did not
provide a vessel in March and the sellers agreed to a request by the buyer to
arrange for a vessel to arrive between the 5 th and 20th of April and the same time
buyer informed the sellers that the goods would be shipped via the vessel the
Osterbeck. It so turned out that the Osterbeck was not expected to be ready for
loading until the 28th April which would push the period. in the end the vessel
did not arrive at Anzio until 2 nd May by which time the sellers refused to deliver
the goods. Matter went to arbitration, decision was against the sellers who went
to appeal out of which appeal an issue came before the court for determination as
to who was liable in the circumstances and the court took the view that sellers
were entitled to refuse to deliver on 2nd of May because the time for shipping or
loading was of the essence of the contract and the buyer had tendered the vessel
by the 28th April way beyond the agreed time and since the seller had not waived
his right to time the deliver of goods then it was taken that they were entitled to
repudiate the contract on that basis.

EFFECTIVE SHIP
What are the consequences on failure of the buyer to nominate a suitable vessel?
What indeed is a suitable ship. A ship is suitable if it is able ready and willing to
carry the goods from the port of shipment to the port of destination, this means

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that if for instance the commodity the subject matter of the transaction requires
the ship fitted with refrigeration, if the ship does not have refrigeration, it is not
able and is inadequate. This issue was addressed in The Vic Mar Navigator
[1981] 2 LLR 466 In this case the cargo the subject matter of the contract
comprised of some huge pipes which had been used for draining purposes and
then excavated and cut out into large pieces that were sold as scrap metal to some
Turkish buyer. The scrap was to be transported from South Africa to Turkey on
an FOB contract. The buyer had nominated the vessel the Vic Mar Navigator and
the seller accepted the nominated and as it turned out the vessel was not suitable
for carrying huge metal types and Justice Mustill considered the question and
said that “this raises one point of principle which is short but not easy, Vic Mar
was not a suitable ship for her task and the tender of this ship was prima facie a
breach of contract. Yet the seller expressly accepted her at the time when she was
fixed” if the buyer nominates an unsuitable vessel the seller can repudiate the
contract. If the seller accepts the nomination of an unsuitable ship Mustill seems
to think that he will have waived his rights. The sellers claim is for nominal
damages since he retains the goods. The seller should look for an alternative
market and try to mitigate his losses. The moral is that a seller is well advised to
insist on a clause in the contract to the effect that the purchase price becomes due
on a fixed date i.e. whether or not a suitable vessel is nominated by the buyer.
The contract ideally should provide that the buyer shall give the seller some
advance notice of the time of the probable and readiness of the nominated vessel
to load so that the seller can have the goods ready for loading at that time.

The nomination of a suitable vessel presupposes that the vessel shall arrive at the
port of shipment at the agreed time but the vagaries of sea voyages and other
problems might encumber the vessel or a vessel could run aground or run out of
provisions and anything can happen. What happens when a vessel is unable to
make the trip or unable to make out of the port? Can a buyer substitute a
nominated vessel? The rule is that in the event the nominated ship is withdrawn
or fails for any reason to make the voyage to the port of shipment, a buyer is
obliged to have a substitute vessel as soon as possible and any additional costs
that arise as the consequence of the substitution must be for the account of the
buyer. Where the contract specifies a period or range of dates within which
nomination should happen, the buyer may indeed nominate a ship within that
period and he can also substitute the vessel within the same period if the time
permits otherwise unless a term is implied in the contract allowing substitution
beyond stipulated time, a buyer will be deemed in breach. The seller will be
entitled to repudiate the contract. In the case of Agricultores Federados v Ampro
S A [1965] 2 LLR 157 This case involved a contract of sale of 2000 tonnes of
maize fob an Argentinian port called Rosario. The contract stipulated that
shipment was to be effected between 20-29 September, it contained no extension
clause. The buyer nominated a vessel that was due at Rosario on 26 th but this
vessel delayed and come the 29 th the sellers representatives informed the buyer
that they had repudiated the contract because of inability to load. At 4 pm on 30th
buyer nominated an alternative vessel and arranged for the vessel to load past
working hours but at 6pm the sellers repudiated the contract. They informed the

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buyer and the buyer cancelled the loading arrangements but regarded the
cancellation as repudiation. The buyer made a claim against the seller and a
number of questions arose one being whether indeed the buyer was entitled to
nominate a substitute vessel and whether the seller was entitled to cancel the
contract before the end of the shipping period and whether the buyer was entitled
to regard sellers cancellation as repudiation of the contract. It was determined
that although the buyer had made the initial nomination, they were entitled to
change their minds and nominate a substitute vessel and secondly the court
noted that the sellers could have cancelled the contract only if the buyers have
evinced the intention not to provide a suitable vessel but the buyer had already
provided an alternative suitable vessel in this case. Accordingly the buyers were
entitled to treat the buyers cancellation as repudiation of the contract and they
were therefore entitled to some fee

DUTY TO PROCURE EXPORT LICENCES

Ideally it is only the seller who would know what regulations exists in his country
but usually parties agree expressly in the contract that any export licences or
permits required shall be procured by the seller. Even when the contract is silent
such an implication shall be presumed. This rule is based on experience and the
fact that the seller would know of any regulations that are required. This issue
was considered in A V Pound v Hardy Co. [1956] AC 588 This case involved an
American who agreed to buy from an English company some 300 tonnes of
Portuguese turpentine on an FAS Contract provided that the goods would be sold
FAS at the port of Lisbon. The time of entry into this contract the seller knew
that the buyer contemplated to ship the goods to a port in East Germany and the
seller bought the goods from a Portuguese supplier well knowing that an export
licence would be required but when they sourced for one it was declined. This
was not known to the buyer who proceeded to nominate a suitable steamer which
arrived at Lisbon within the provided time but loading could not happen because
the Portuguese authorities declined to issue an export licence for goods destined
to ports in East Germany. To their surprise the buyer sued seller for damages. At
the trial it was established that under Portuguese law only Portuguese suppliers
and sellers could attain the required export licence and the law said that the
goods could not be cleared through customs before a licence was obtain. The
matter went to the House of Lords which treated the case as being subject to the
rules applicable in AN FOB contract and held that in the circumstances of the
case the parties intended and agreed that it was the duty of the sellers and not of
the buyers to obtain the export licence and that the sellers had to do their level
best to obtain the licence and since despite their reasonable effort the licence was
not granted, the contract was frustrated and they could not recover damages from
the buyer. The duty is on the export or seller to procure and export licence
because the seller is acquainted with licensing processes of the country of export.

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PASSING OF PROPERTY IN AN FOB CONTRACT
Traditionally property in FOB contracts passes when the goods cross the ships
rail. Indeed it is at this point that the goods are said to have been delivered to the
seller by the buyer. The point at which property in goods passes under a
particular contract may be different and may be defined by
1. Law of Sale of Goods of that jurisdiction;
2. Terms of the FOB Contract that binds the parties;
3. Whether or not the seller has reserved his right of disposal of the
goods.

Regarding the general state of the law of the sale of goods of a particular
jurisdiction, one needs to look at the statute to determine what implications it has
to a particular contract.

As pertaining to 2 generally speaking property in the goods will in terms of the

agreement pass when goods in a deliverable state are unconditionally
appropriated to the contract. This means that when particular goods of the kind
which is called for in the contract and in the condition in which the buyer is
bound to accept particular goods of the kind called for by the contract and in the
condition in which the buyer is bound to accept them are clearly and irrevocably
designated as contract goods by either party with the other party’s consent then
one can say that those goods have indeed been delivered at the point of delivery
to the buyer and that the property in those goods has passed to the buyer.

The 3rd factor talks about whether or not a seller has reserved his right of disposal
of the goods. This is important because the commercial risk is a big risk and
many sellers would want to retain the control of goods until they are sure that the
buyer is going to pay but at the same time a buyer is concerned to have some kind
of control of the goods. If a buyer needs financing and has no other security,
quite often this is done by using the documents that represent the title of the
goods and so there is the collision between the interest of the seller in being paid
or in retaining control of goods to assure payment while the buyer may not have
money to pay out of pocket and needs to borrow the money and the only security
that is valuable enough happens to be the documents of title to the same goods.
Frequently a seller will either expressly in the contract or by implied provision
reserve the right of the disposal of the goods i.e. he will make it known to the
buyer that the property in those goods is to remain in him irrespective of
shipment or irrespective of the fact that those goods are in the buyers possession.
The purpose of retention of title in goods is in order to enforce the payment
obligation on the part of the buyer. What is the efficacy of the reservation? Does
a seller who reserves the right of disposal have a right to deal in the goods as if
they are free? A seller who so reserves the right of disposal is actually not entirely
free to deal with the goods at will without regard to the rights of the buyer. In
fact in the case of Mirabita v Imperial Ottoman Bank [1878]3 Ex 164 the case
involved some goods which were sold subject to the sellers right of disposal and
the seller purporting to exercise his reserve right of disposal purported to sell the
goods to a third party after the buyer had infact tendered the purchase price

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presumably the 3rd party was offering a better price. the issue was whether the
seller was entitled to dispose the goods to a 3rd party. It was held that as far as the
intention of the party went the property vested in the buyer on shipment and
secondly whether the sellers right of disposal was a right of property or a right
entitling the seller to dispose of the property, their intention was that it should
cease at the time when the buyer paid the price. This seems that the seller who
reserves the right has some lien of some sort over the goods and the question is
how far is this acceptable? The value of a bill of lading will be irretrievably lost if
it could not be used as a basis for supporting a bankers commercial credit or
letters of credit or documents of the kind and these documents are issued by
banks on the assumption that the bank will hold the bill of lading and if necessary
in the event of a default on the part of the buyer will retain full ownership rights
over the goods.

The property in the goods passes when the goods cross the ships rail save where
there is a reservation but even then the reservation is to be read carefully
depending on the intentions of the parties to the contract.

CIF Cost Insurance Freight

The CIF has come to be regarded as the most versatile type of trade contract that
has evolved from custom and nature. The greatest majority of international sea-
borne commerce is transacted on the basis of CIF Contracts. It is been
recognized that enormous value of transaction is carried out every year on CIF
contract terms. The CIF Contract has evolved to a level where it is no longer
regarded as a sale of goods but as a sale of documents relating to the goods the
subject matter of the contract. The buyer of goods will be able once he obtains
the documents to easily transact or sell the goods by transferring the documents
to another buyer who can sell to another buyer and so on.

The Locus Classicus in this matter is the case of Arnold Karbery v Blythe [1915]
this case involved two contracts of sale of beans CIF to two European Ports in
Naples and Rotterdam. Each contract contained a clause that payment was to be
made “net cash in London on arrival of goods at port of discharge in exchange for
bills of lading and policies of insurance”. The contract also contained a term that
said that in any case payment was to be made not later than 3 months after the
bills of lading were issued or upon the posting of the vessel at Lloyds in London
as a total loss. These beans were shipped in July of 1914 and unfortunately they
were shipped on board German vessel. When 1st world war broke out, these
vessels took refuge in some far Eastern Ports. After the expiry of 3 months from
date if issuance of bill of lading the seller tendered the documents to the buyers
and demanded to be paid but the buyers refused to pay arguing that the contracts
had been frustrated by the intervention of the war and the question was whether
the contract was frustrated the way the buyer had complained or whether the
seller was entitled to be paid having tendered the documents that represented the
goods to the buyer. It was held that the buyers were entitled to refuse the tender
because at the date of the tender of the documents the documents had by

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consideration of public policy i.e. war between England and Germany the
documents had become void and unenforceable and to carry out the original
contractual obligations would involve entering into contractual obligations with
the kings enemies. Nevertheless Scrutton J. had an occasion to reflect upon the
distinct nature of the CIF contract of sale and made the observation that the
cardinal distinction that a CIF is that a CIF sale is not a sale of goods, but a sale of
documents relating to goods. It is not a contract that goods shall arrive but a
contract to ship goods complying with the contract of sale to obtain unless the
contract otherwise provides the ordinary contract of carriage to the place of
destination and the ordinary contract of insurance of goods on that voyage and to
tender these documents against payment of the contract price. the buyer buys
the documents not the goods and it maybe that under the terms of the contracts
of insurance and of freight he buys no indemnity for the damage that has
happened to the goods.

This identifies the fact that the CIF Contract comprises a number of contracts
1. Contract of sale of goods itself; the contract bringing together seller
and buyer
2. Contract of carriage of the goods contract that enables the goods to be
shipped from seller to buyer;
3. Contract of Insurance – contract that covers the goods during the sea
voyage from the sellers to the buyers or port of destination.

The only obligation on part of the seller is for him to obtain documents that goods
complying with the description on the documents have been sold and that indeed
a carriage contract has been entered into and that the goods have been insured
with a certain insurance company so that in the event of loss it will not be a total
loss and all that he is required to do is tender the documents to the buyer and ask
for the purchase price.