Passing of risk156

According to s 20 of the Sale of Goods Act 1979, risk passes with property. In FOB sales, risk passes along with property upon shipment – that is, when the goods pass the ship’s rail.157

The postponement of passing of property to a time later than that of shipment, however, will not affect the time of passing of risk.158 So, where the goods have not been ascertained or where the seller retains the bill of lading, risk will, nevertheless, pass when the goods cross the ship’s rail.159

Variants of an FOB contract

Merchants, in response to their needs, have tended to add extra obligations to be undertaken by the seller with terms such as FOB stowed (FOBS), FOB trimmed (FOBT), FOB stowed and trimmed (FOBST).160 Where such terms are used, the seller is required to stow the goods on board the ship, so that space on the ship is utilised in the most efficient manner without affecting stability of the ship, or trim (levelling of dry bulk cargo) the cargo. It is likely that, in these cases, risk does not pass when the goods pass the ship’s rail. However, no precise rules can be formulated, since it is dependent on a number of factors – for example, custom at port, terms of the contract, and whether the seller in fact has a say in how the goods are trimmed or stowed.

FOB with additional services

In an FOB with additional services contract, the seller takes on further duties, such as the arrangement of shipping and insurance. The seller procures the bill of lading in his name and tenders it to the buyer for payment. The incidents in this type of contract are comparable to that of a CIF contract.161 The freight and insurance costs in an FOB with additional services contract are to the buyer’s account. Freight charges and insurance premiums are not included in the price quoted by the seller, as in a CIF contract, and any increases in freight or insurance will have to be borne by the buyer, not the seller. By contrast, in a CIF contract, it is the seller who bears the costs. The seller may also charge a commission for the services he has rendered the buyer in obtaining the contract of carriage and the contract of insurance in an FOB with additional services contract. The buyer is likely to require these additional services of the seller when he is ill placed to obtain them in the seller’s country. It is also possible that the buyer may prefer this term to lower his liability in respect of import duties calculated on the price of goods, since the CIF price is an all-inclusive price.

FAS contracts

FAS stands for free alongside ship. Apart from delivery of goods, the obligations of the seller and the buyer are the same as those found under a classic FOB contract. The seller in an FAS contract is to bring the goods alongside the ship and is responsible for all costs incurred, including dock dues and port charges. It falls on the buyer to load the goods on board the ship and to pay all charges

156See also ‘Passing of risk’ in Chapter 2.

157Pyrene and Co v Scindia Navigation Co Ltd [1954] 1 Lloyd’s Rep 321. See also ‘Passing of Risk’ under a CIF contract.

158See Stock v Inglis (1885) 10 App Cas 263.

159See also Chapter 2 on the passing of risk under the Convention on the International Sale of Goods 1980.

160See Reynold, ‘Stowing, trimming and their effects in delivery, risk, property in sales “FOBS”, “FOBT” and “FOBST” ’ [1994] LMCLQ 119.

161See ‘CIF Contracts’, above.

incurred in the loading of the goods. It is possible that the loading may be undertaken by the carrier, in which case the charges are likely to be part of the freight payable. Risk passes to the buyer when the goods are placed at the disposal of the buyer alongside the ship at the port of shipment. The buyer has the duty, as under a classic FOB term, to nominate a suitable ship. As for the export licence, normally the seller will be expected to obtain it, though in some cases circumstances may indicate otherwise.162

INCOTERMS 2000 introduced substantive changes to obtaining licences in respect of FAS, and this has been retained by INCOTERMS 2010.163 Where INCOTERMS 2010 are incorporated, it is the seller’s duty to obtain at his risk and expense export licence and official authorisation, as well as carry out other customs formalities for the exportation of the goods (A2 FAS). Equally, he has to pay duties, taxes and other charges that are payable on export (A6 FAS).

FOB contracts under INCOTERMS 2010

The obligations of the parties to an FOB contract governed by INCOTERMS 2010 are largely similar to those found in English law, except for one important difference. INCOTERMS have clear rules about the party responsible for obtaining an export licence, thereby introducing a much desired element of certainty.

Obligations of the seller

(a)Goods of contract description

The seller must provide goods that are in conformity with the contract of sale (A1 FOB).

(b)To prepare the invoice and other documents

The seller must provide a commercial invoice for the goods. This may be replaced by its electronic equivalent where the parties agree or it is customary to do so. The seller will also be required to furnish other evidence of conformity of goods (A1 FOB). The sale contract would normally stipulate these.They are likely to be certificates of quality or certificates of inspection.164

(c)To check, pack, mark and deliver the goods

The seller must ‘deliver the goods on board the nominated ship at the loading point, if any, indicated at named port of shipment or by procuring the goods so delivered’ on the specified date. Where no date is specified, then he must deliver within the period stipulated in the contract of sale, and in the manner customary at the port (A4 FOB).165 The seller must, at his expense, mark and pack the goods as necessary to meet his obligation of delivery. However, where the buyer has provided specific packaging requirements before the sale contract is concluded, the seller is obliged to pack according to instructions. He is also responsible for the costs of checking operations, such as quality checking, weighing, measuring, and counting, that take place prior to delivery. If any preshipment certificate is mandated by the authorities of the exporting country, the seller is responsible at his expense to obtain this (A9 FOB).

162See ‘Export and import licences’ under ‘FOB contracts’, above.

163Under the 1990 version of INCOTERMS, the duty for obtaining an export licence did not rest on the seller, though he was placed under an obligation to ‘render the buyer, at the latter’s request, risk and expense, every assistance in obtaining any export licence or other official authorisation necessary for the exportation of the goods’ (A2 FAS INCOTERMS 1990). It was the buyer who had to obtain the export licence (B2 FAS INCOTERMS 1990). Equally, the buyer was responsible for duties and other charges for exportation (B6 FAS INCOTERMS 1990).

164A1 FOB.

165Custom at a port, for instance, might require the seller to stow the goods on board the ship.

(d)Loading costs and freight

Since the seller meets his obligation of delivery only when he places the goods on board the ship at the port of shipment, he is responsible for all loading charges until the moment the goods have been delivered (A6 FOB).

(e)Notice to buyer

The seller must give sufficient notice to the buyer that the goods have been delivered. If the vessel has failed to take the goods within the agreed time, he must also notify the buyer(A7 FOB).

(f)Export licences and customs formalities

Under the rules, the seller is responsible for obtaining the export licence and other official authorisation. He must do so at his own risk and expense. He is also obliged to carry out all the customs formalities at his expense and pay any duties, taxes and other official charges required for the purposes of export (A2 and A6 FOB).

(g)Proof of delivery

The seller at his expense must provide the buyer with the ‘usual proof’ of delivery of the goods. This normally would be a mate’s receipt. Where the buyer requires transport documents such as a negotiable bill of lading, a non-negotiable sea waybill, an inland waterway document, or a multimodal transport document, the seller must assist the buyer to obtain such a document at the latter’s risk and expense. Where the parties have agreed or it is customary to do so, the transport document can be replaced with an electronic equivalent (A1 and A8 FOB). Note that there is no obligation on the part of the seller to obtain a contract of carriage. However, where requested by the buyer or if it is commercial practice, the seller may contract for the carriage at the buyer’s risk and expense (A3(a) FOB).

(h)Insurance

There is no obligation on the part of the seller to obtain insurance.The seller must provide the buyer, upon his request, with any information necessary for obtaining insurance (A3 FOB).

(i)Risk

The seller must bear the risk of any loss or damage to the goods until such time as the goods have been delivered in accordance with A4166 (A5 FOB).

(j)Other obligations

Where the buyer requests information, including security related information for the import of the goods, the seller must render every assistance in obtaining these, but at the buyer’s risk and expense (A10 FOB).

Obligations of the buyer

(a)Notice to seller

The buyer must give the seller sufficient notice of the name of the ship, loading port and the delivery time selected within the agreed period (B7 FOB).

(b)Contract of carriage

The buyer must contract for the carriage of goods from the named port of shipment to the port of destination at his expense (B3 FOB). Delays in berthing of the vessel may result in demurrage charges. Under INCOTERMS, these costs lie with the buyer since he is responsible for arranging the contract of carriage. Equally, the responsibility of obtaining a berth lies with the buyer.167 This of course means that any incidental expenses and arrangements to enable

166See (c) ‘To check, pack, mark and deliver the goods’ above.

167See answer to Q17, ‘FOB berthing and demurrage charges’, in Jiménez (ed), Q&A INCOTERMS, 1998, ICC. Though the answer has been given in the context of the 1990 version of INCOTERMS, there is no difference between FOB INCOTERMS 1990 and FOB INCOTERMS 2000 and 2010.

the seller to meet his obligation to deliver on board the vessel is with the buyer.168 In other words, the buyer takes on the risk of transport-related responsibilities.

(c)Accept proof of delivery

The buyer must accept the usual proof that the goods have been delivered provided by the seller as proof of delivery (B8 FOB).

(d)Payment of price

The buyer must pay the price agreed by him in the contract of sale (B1 FOB).

(e)Risk

The goods are at the buyer’s risk from the moment they have been delivered in accordance with A4.169 However, where the buyer fails to inform the seller about the name of the ship, the port of shipment, and the required delivery date, or if the named vessel fails to arrive on time, or is unable to take the cargo, or closes for cargo earlier than the stipulated date, the buyer bears the risk from the agreed date or the expiry date of the period fixed for delivery. He is placed under this risk only if the goods have been clearly set aside, or otherwise identified as the contract goods (B5 FOB).

(f)Payment of other costs, duties and taxes

The buyer is responsible for the costs incurred in pre-shipment inspection, unless mandated by the exporting country’s authorities (B9 FOB). Where the buyer has requested the seller to obtain documents (or their electronic equivalents) for importation of the cargo, or for their transit through third countries, the seller must be reimbursed for the costs incurred (B10 FOB). The buyer is also responsible for any duties, taxes and other charges that may be levied on the goods, and for carrying out all customs formalities during transit, and at the port of destination (B6 FOB).

(g)Import licences and customs formalities

The buyer must, at his own risk and expense, obtain an import licence, or official authorisation necessary for importing the cargo. He is also responsible for carrying out all customs formalities in the country of import and, where required, in the countries through which the goods are passing (B2 and B6 FOB).

(h)Taking delivery

Delivery to the buyer takes place when the cargo is placed on board the named ship on the date or at the stipulated time (B4 FOB). From the moment the goods have been delivered, the buyer bears all the costs. Where additional costs are incurred due to the buyer’s failure to nominate a ship, or where a nominated ship arrives late or is unable to carry the cargo, these will be to the buyer’s account, provided the goods have been clearly set aside or otherwise identified (B6 FOB).

INCOTERMS 2010 – a brief overview

As stated earlier, INCOTERMS, first formulated in 1936 by the International Chamber of Commerce, have undergone various modifications to introduce new terms for emerging modes of transport, such as air and road transport. Since 1980, INCOTERMS have undergone revisions every 10 years, and the latest version is INCOTERMS 2010.The 2010 version has not introduced that many changes to the 2000 version. Hence, INCOTERMS 2000 is described here in brief to highlight the changes introduced by INCOTERMS 2010.

168As Jiménez notes in relation to the answer to Q17, ‘The panel of experts firmly closed the door on the possibility for an FOB buyer to escape his contractual obligations by claiming that berthing was difficult to obtain in a timely manner’. Jiminez (ed), Q&A INCOTERMS, 1998, ICC, p 85.

169See ‘To check, pack, mark and deliver the goods’, p 45.

A point to note about INCOTERMS is that they apply to a contract only where the parties agree to be governed by their provisions. Of course, it is possible that some states may have given statutory effect to INCOTERMS, in which case they would apply if the contract attracts the application of the law of that state. The UK has not given statutory effect to INCOTERMS. It is, however, possible that a contract may not specifically provide for INCOTERMS since it is customary in that particular trade to use INCOTERMS. Were this the case, English courts will take on board prevalent mercantile custom to determine the responsibilities of the parties.170

It must also be noted that, in spite of extensive rules, ranging from providing goods in conformity with the sale contract, obtaining licences, authorisations, contract of carriage, contract of insurance to delivery, passing of risk, checking, packaging and marking, division of costs and giving notice to buyer, INCOTERMS are not comprehensive. Issues such as what constitutes conformity of goods with the contract of sale, remedies for breach of obligations set by INCOTERMS, and passing of property, still need to be resolved by looking to the law that governs the contract.171

INCOTERMS 2000

INCOTERMS 2000, like its predecessor (1990 version), arranged trade terms into four groups:

(a) E term; (b) F terms; (c) C terms; and (d) D terms. Each group reflects the level of risk undertaken by the seller. The level of risk is at its minimum in an E term and at its highest in a D term. An increase in the seller’s level of risk results in a corresponding decrease in the level of risk assumed by the buyer.

(a)E term

This group consists of one term – ex works (ExW). The level of risk is at its lowest, as far as the seller is concerned. His obligation to deliver under the contract is fulfilled as soon as he makes the goods available at his premises for collection by the buyer.

(b)F terms

This group consists of three terms – free carrier (FCA), free alongside ship (FAS) and free on board (FOB). FCA is recommended for use where rail, road, air or multimodal transport is envisaged. FCA can also be used for sea or inland waterway transport where the ship’s rail is not the convenient point for passing of risk, as, for instance, in ro-ro (roll on, roll off) traffic – that is, where trucks or trailers are driven straight on to and straight off a ship. FOB and FAS are to be used for inland waterway or sea transport. In an F term, the seller agrees to deliver the goods to the carrier (FCA), alongside the ship (FAS), or on board the vessel (FOB), and also undertakes to obtain the export licence or other official authorisation.

(c)C terms

This group contains four terms – cost and freight (CFR), cost, insurance, freight (CIF), carriage paid to (CPT) and carriage and insurance paid to (CIP). CFR and CIF are to be used for sea or inland waterway transport, whereas CPT and CIP are to be used where rail, road, air or multimodal transport is envisaged. Once again, CPT and CIP can also be used for sea and inland waterway transport where the ship’s rail is not the point at which risk is to pass from

170See also Chapter 2 on the attitude of the Convention on the International Sale of Goods 1980 to trade usage and mercantile customs.

171Given that many states have ratified the Convention on the International Sale of Goods 1980, it is likely that this convention may decide issues relating to conformity of goods, remedies, etc. Note, however, that passing of property is not dealt with by this convention.

the seller to the buyer (see above, ‘F terms’). Under C terms, the seller is obliged not only to hand over the goods to the carrier and obtain export licences, but has to obtain the contract of carriage (CFR and CPT) and insurance (CIF and CIP).

(d)D terms

This group consists of delivered at frontier (DAF), delivered ex ship (DES), delivered ex quay (DEQ), delivered duty unpaid (DDU), and delivered duty paid (DDP). DAF is intended for use with air, rail, road or multimodal transport. DES and DEQ are to be used with inland waterway or sea transport, and DDU and DDP are recommended for use with any form of transport. The seller’s obligations are at their maximum in D terms. He undertakes to make the goods available for collection at a named frontier (DAF), or on board a ship (DES), or on the quay (DEQ), or at the named place of destination in the country of importation, not having paid the duties (DDU), or having paid the duties (DDP). In the case of DEQ, DDU and DDP, the seller has to obtain the import licences and other official authorisation.

INCOTERMS 2010

There are a couple of immediately noticeable changes in INCOTERMS 2010. The terms are classed into (1) rules for any mode of transport and (2) rules for sea and inland waterway transport. Ex Works, FCA, CPT, CIP, DAT, DAP and DDP fall within (1), and FAS, FOB, CFR and CIF fall within (2). INCOTERMS 2010 does away with DAF, DES, DEQ and DDU found in the 2000 version, replacing them with two new terms: DAT (Delivered at Terminal) and DAP (Delivered at Place), thus reducing the number of terms from 13 to 11. The need for this change is a result of the lack of clarity in respect of some of the trade terms, particularly FOB. In the US, the term ‘FOB’ refers to a point, rather than the vessel, which means that to get the same effect as FOB INCOTERMS, the word ‘vessel’ would have to be added to FOB. It was felt that a new term needed to be introduced that would indicate the place precisely, hence, adoption of the term DAP.172 However, such a term would be inadequate where the buyer requires the goods unloaded from the vessel or vehicle. Therefore, a further term, DAT,173 was introduced to make clear that the formalities of unloading at the destination is to be done by the seller at his expense. Another important change introduced by the 2010 version is the omission of crossing the ship’s rail as the point at which delivery takes place. Instead, as we saw in the sections on CIF and FOB under INCOTERMS, delivery takes place when the goods are placed ‘on board’ the ship and risk passes upon delivery. As the Introduction to the INCOTERMS 2010 states this was to reflect ‘modern commercial reality and avoids the rather dated image of the risk swinging to and fro across an imaginary perpendicular line’.174

It is quite common for parties to use INCOTERMS but to also add extra qualifying words. A frequently found variant of CIF is ‘CIF landed’. Where variants are used, it is not possible to precisely state the extent of obligations undertaken by the parties. In these circumstances, it would be better for the parties to explicitly state the meaning of such variants. As the ICC Guide to INCOTERMS 2010 states that the word ‘landed’ is normally taken to mean the costs of discharge, it would be better for the parties to clarify this by stating so explicitly.

172In DAP the goods would be at the buyer’s disposal as in DAF, DES and DDU INCOTERMS 2000.

173In this term the goods will be at the disposal of the buyer after unloading from the transport vehicle as in DEQ.

174See ICC INCOTERMS 2010 (2010, ICC), p, 7.