192 Standard trade terms
Q3 The right of rejection under a CIF contract is ‘separate and successive’. Explain in light of the case law.
(j)â CIF and INCOTERMS 2010
INCOTERMS 2010 came into force on 1 January 2011 and contain some modifications on the definition of CIF found in English law.
CIF under INCOTERMS requires that the seller deliver the goods on board the vessel or procures goods which have already been delivered. The risk of loss or damage to the goods passes when the goods are placed on board the vessel. The seller must arrange for and pay the costs and freight necessary to bring the goods to the port of destination. The seller will also arrange for insurance cover against the buyer’s risk of loss or damage to the goods during the carriage. The seller is required to obtain insurance only on minimum cover. If the buyer wishes to have greater insurance protection, it will have to be expressly provided for in the contract or the buyer will have to make his own insurance arrangements.
The CIF trade terms should only be used when goods are transported by sea or inland waterway. The terms should not be used where there is any other form of transport involved in the carriage. The documents which the seller and buyer are required to provide may be supplied electronically ‘if agreed between the parties or customary’.
3â FOB contracts
FOB trade terms are one of the oldest trade terms used in both domestic as well as international trade, with their origins dating back almost 200 years. Unlike CIF contracts, which are primarily used in sea carriage, FOB is used to cover all types of transport. FOB is commonly used where the buyer requires a certain type of ship and it is convenient to nominate or charter his own ship. FOB is often described as a ‘flexible’ instrument, however its core principles remain the same; the seller at his expense places the goods on board the vessel for delivery to the buyer, and property and risk will pass at this stage.36 The price paid to the seller will include all expenses up to the loading of the goods on board the ship nominated by the buyer, while from there on all expenses will be the buyer’s responsibility. In Pyrene Co. Ltd v. Scindia Steam Navigation Co. Ltd,37 Devlin J attempted to set out the various types of FOB contracts. This is summarised by Donaldson J in The El Amria and The El Minia:38
In the first, or classic type, the buyer nominates the ship and the seller puts the goods on board for account of the buyer, procuring a bill of lading. The seller is then a party to the contract of carriage and if he has taken the bill of lading to his
36Usually described as ‘over the ship’s rail’.
37[1954] 2 QB 402.â 38â [1982] 2 Lloyd’s Rep. 28.
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3â FOB contracts |
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order, the only contract of carriage to which the buyer can become a party is that contained in or evidenced by the bill of lading which is endorsed to him by the seller. The second is a variant of the first, in that the seller arranges for the ship to come on the berth, but the legal incidents are the same. The third is where the seller puts the goods on board, takes a mate’s receipt and gives this to the buyer or his agent who then takes a bill of lading. In this latter type the buyer is a party to the contract of carriage ab initio.39
Q4 What are the various types of FOB contracts? Why is a FOB contract described as a ‘flexible instrument’?
(a)â Duties of the seller
In a classic FOB contract, the seller arranges for the goods to be put on board the vessel and procures a bill of lading. The seller may act as the buyer’s agent if he enters into the contract of affreightment. Under a FOB ‘with additional services’ the seller nominates the vessel and enters into the contract of affreightment as principal; he may also be asked to arrange for insurance. In a ‘strict’ FOB contract the buyer or his agent nominates the vessel and enters into the contract of carriage with the ship-owner. The seller loads the goods on board and collects mate’s receipts from the vessel and gives them to the buyer or his agent, who obtains a bill of lading from the master in exchange for the receipts.40
Section 13 of the Sale of Goods Act 1979 places an obligation on the seller that the goods must correspond to their contractual description. This obligation extends to the packaging of the goods.41 The buyer may reject the goods on arrival if they are found to be non-conforming.
The seller must ship the goods from the port of loading specified in the contract. Failure to ship from the specified port is a breach of condition that entitles the buyer to terminate the contract. In Peter Turnbull & Co. v. Mundas Trading Co.42 the contract called for shipment ‘FOB Sydney’, however the sellers contended that they could not ship from Sydney and sought to substitute Melbourne instead. The buyer refused, and the sellers were held liable for failing to ship from the stipulated port of shipment.
The seller is also under a duty to deliver the goods by putting them on board the ship at his expense, within the stipulated period for shipment. Any failure to do so will amount to a repudiatory breach. The courts tend to treat this obligation as strict.43
39Ibid. 32.
40President of India v. Metcalfe Shipping Line [1970] 1 QB 289.
41George Wills & Sons Ltd v. Thomas Brown & Sons (1922) 12 LI. L Rep. 292.
42[1954] 2 Lloyd’s Rep. 198.
43All Russian Cooperative Society Ltd v. Benjamin Smith (1923) 14 Ll. L Rep. 351.
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Standard trade terms |
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Similarly to CIF contracts, it is the seller who procures the necessary export |
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licences.44 The seller is also under an obligation to give the buyer all the neces- |
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sary documentation for him to take control of the goods; this is usually satis- |
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fied by a mate’s receipt that the goods have been put on board the vessel. Under |
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section 28 of the Sale of Goods Act 1979, which provides ‘[U]nless otherwise |
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agreed, delivery of the goods and payment of the price are concurrent condi- |
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tions, that is to say, the seller must be ready and willing to give possession of the |
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goods to the buyer in exchange for the price and the buyer must be ready and |
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willing to pay the price in exchange for possession of the goods’, the seller would |
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be entitled to demand payment when the documents are given to the buyer. |
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(b)â Duties of the buyer |
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Under a classic FOB contract it is the buyer’s duty to nominate a port of ship- |
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ment. This can be a specific port or a range of ports, however the buyer must |
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inform the seller of his choice in time for the seller to load the goods. If there |
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is a date stipulated in the contract for making a nomination, failure to do so |
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amounts to a breach of a condition precedent to the seller’s duty to load.45 |
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The buyer is also under a duty to book shipping space or to charter a vessel |
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for the carriage of the goods. He must do so with sufficient time for the seller |
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to load the goods. Failure to do so may result in the buyer bearing the costs of |
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warehouse charges. However, if the seller delivers the goods too early for load- |
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ing and they deteriorate the buyer will not be liable.46 |
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The buyer is permitted to substitute another vessel if the first nomination |
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is no longer suitable, as long as it still gives the seller enough time to load the |
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goods in accordance with the contract.47 |
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Finally the buyer is under a duty to pay for the goods in accordance with the |
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terms of the contract. He must do so at the time and place stipulated, usually |
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when goods are loaded on board, however the seller may retain the bill of lad- |
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ing until payment is made. |
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Q5 What are the seller’s responsibilities under a FOB contract? What are the |
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buyer’s corresponding duties? |
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(c)â Passing of property |
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Property under a FOB contract will most commonly pass when the goods are |
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placed on board the vessel.48 However, if the seller has reserved the right of dis- |
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posal under section 19 of the Sale of Goods Act 1979, by retaining the bill of |
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44 |
AV Pound & Co. Ltd v. MW Hardy [1956] AC 588. |
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45 |
Gill & Duffus v. Societe pour l’ Exportation [1985] 1 Lloyd’s Rep. 621. |
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46 |
Cunningham v. Munro (1922) 28 Com. Cas. 42. |
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47 |
Agricultores Federados Argentinos v. Ampro SA [1965] 2 Lloyd’s Rep. 290. |
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48 |
Carlos Federspiel v. Charles Twigg [1957] 1 Lloyd’s Rep. 240. |
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