CHAPTER 3 FOB CONTRACTS

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.

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 ships rail, and the buyer agrees to convey it overseas. (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; property and risk normally pass to the buyer at this point and all subsequent expenses are for the buyers account.

3. 2 Types of FOB Contracts

Pyrene v Scindia Navigation [1954] 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. (5) The fact that the parties have described their contract as FOB will not necessarily be conclusive. A court might come to the conclusion that it is not in fact an FOB contract.

1. (The first type) (The classic FOB) The buyers duty is to nominate the ship, and the sellers to put the goods on board and procure a bill of lading. In such a case the seller may enter into the contract of carriage but it only will be as an agent of the buyer.

2. (The second type) is known as the

extended FOB or FOB with additional services. Sometimes the seller is asked to make the necessary shipping arrangements (including entering into the contract of carriage).

This differs from the classic FOB in two ways: (a) the seller makes the contract of carriage as principal, the buyer is normally not a party to it. (b) it is the seller who nominates the ship. The extension of sellers duties may include an obligation to procure insurance.

- It is, therefore, quite similar to a CIF contract. - The difference would simply be in the computation of the price. - In the FOB, the price would not include the freight and the cost of insurance. (The seller would make the contract of carriage or insurance for the buyers account). - So FOB price will be less than CIF price. (good for importers/buyers)

3. The third type is the Strict FOB. The buyer engages his own forwarding agent at the port of loading to book space and to procure the bill of lading. The seller has no function in the making of the contract of carriage, whether as agent for the buyer or as principal.

3.3 The Strict FOB

In the strict FOB, the seller discharges his duty by putting the goods onboard, getting the mates receipt and handing it to the forwarding agent to enable him to obtain the bill of lading. Devlin Js division of the three types of FOB contract has been approved in The El Amira and The El Minia [1982] 2 Lloyds Rep. 28.

In the strict FOB, the buyer nominates the ship, procures the shipping space, and is the legal shipper ab initio.

3.3.1 Duties of the F.O.B buyer 1. To nominate the port of shipment, the vessels 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. The contract will often state this precisely (e.g. FOB Liverpool) . But it may give alternatives (e.g.FOB Hull, Liverpool or London) or a range of ports (e.g. FOB Danish ports). If the contract is a multi-port one, the choice of port will normally be the buyers and he has the corresponding duty of notifying the seller of his choice in good time.

David Boyd v Louis Louca

Gill & Duffus v Societe pour l Exportation l

[1973] 1 Lloyds L.R. 209 The contract of sale contained the provision FOB stowed good Danish port. It was held that the buyer had the option of selecting any good Danish port.

[1985] 1 Lloyds L.R. 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 sellers obligation to load the goods.

Date of shipment A date or period of shipment is normally specified in the contract of sale. If a period of shipment is specified, the option for the actual time of shipment within the period lies with the buyer. Until the buyer has made an effective nomination of the date of shipment, the sellers obligation to have goods ready to load at port does not arise.

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. v RA Munro & Co. Ltd.

(1922) 28 Com Cas 42 - The contract was for the sale of bran under a contract FOB Rotterdam and the shipment period was specified as October. - The seller moved his grain to port on 14 October. - The buyer did not make an effective nomination until 28 October, by which time the grain had deteriorated. - 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, if none is specified in the contract of sale. He must notify the seller of the ships 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.

Bunge Corporation v Tradex Export SA [1981] 2 All ER 513

Bungi Cont.

The contract of sale required for the delivery of 15,000 tons of soya bean meal FOB an American port in the Gulf of Mexico. 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 notice was late for four days.The sellers selected to treat the contract as terminated. The court gave judgment for the sellers and held that the notice was a condition. It stated that in a contract for the sale of goods a stipulated time of delivery is of the essence.

Buyers failure to nominate ship: damages Buyer

Colley v Overseas Exporters [1921] 3 KB 302 - The buyer under a contract FOB Liverpool was unfortunate in that five ships successively nominated failed to arrive. - The seller, who had delivered the goods at Liverpool, claimed the contract price and failed to recover it. - Since there had been no shipment, 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.

Nevertheless, if the buyer does fail to nominate an effective ship, the sellers remedy is damages and cannot claim for the price.

Substituting the nominated ship with another ship

Agricultores Federados Argentinos v Ampro SA [1965] 2 Lloyds L.R. 290 Lloyd - The contract calls for the shipment of maize on FOB terms between September 20 and 29. - The buyers nominated ship A. This ship was delayed by bad weather and would be unable to reach the port of loading within the shipment period. - They then made a second nomination at 16:30 on September 29. The sellers refused to load claiming that the buyers had breached the contract. The buyers sued the sellers for nonperformance.

Unless the buyers nomination is required by the contract to be final, 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.

Agricultores Cont. - On the facts, it would have been possible to complete loading before the end of September 29 (before midnight) if workers were made to work overtime. Held: The sellers were not entitled to treat the contract as repudiated. 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.

Express provision in the contract: final Cargill v Continental SA [1989] 1 Lloyds L.R. 193

Where the contract expressly provides that the first nomination is to be final, the buyer is bound by his first nomination. He cannot make a substitution.

(c) To secure shipping space In the absence of contractual stipulation to the contrary, it is the buyers duty to procure space on the nominated vessel.

(2) To obtain the necessary import license

- Normally it is the seller who is required to procure the necessary export license. See AV Pound & Co. Ltd. v MW Hardy [1956] AC 588. - However, the buyer must obtain any import license for the importation of the goods.

(3) To contract for the carriage of the goods

- In the strict FOB, the buyer is the legal shipper. He must contract for the carriage of the goods. - However, after loading, the seller will obtain from the master of the ship the mates receipt and transfer it to the buyer. - It enables the buyer to exchange the mates receipt for the bill of lading, which in turn entitles him to possession of the goods from the carrier at the port of destination.

The strict FOB (buyer contracting with carrier) contract is thus the most typical form of FOB contract. In the Pyrene case, a strict FOB contract was in issue.

Pyrene Co. Ltd. v Scindia Navigation Co. Ltd.

Pyrene, Cont. Pyrene,

- While one of the tenders were being lifted into the vessel, it was dropped and damaged before it had crossed the ships rail. - It was repaired at a cost of & 966 and later shipped in another vessel. - The sellers claimed the cost of repair from the def. (SO) who admitted negligence but pleaded that, being carriers, their liability was limited to & 200.

- The plaintiffs, Pyrene Co. sold a number of fire tenders to the Govt. of India for delivery FOB London. - 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.

Pyrene, Cont. Pyrene,

Devlin J held that the sellers were entitled to damages up to the maximum limit of the liability, i.e. & 200.

3.3.2 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.

The parties may have agreed on preshipment inspection, which plays an increasing role in modern export trade.

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 Where they have not so agreed and the custom of trade does not provide for it, the buyer is not obliged to inspect the goods when shipped. If he fails to examine them on that occasion, he will not lose his right of rejection if they do not conform to the contract.

In this case, the only possible place of inspection would be on arrival of the goods at their place of destination. The buyer may reject the goods on arrival if they do not correspond to the contract description.

(b) At the named port of shipment

The due delivery point is the port of shipment designated in the contract of sale. If the seller fails to ship goods at the agreed, named port of shipment, he commits a breach of a condition. The named port of shipment in an FOB contract is a condition of the contract.

Peter Turnbull & Co. v Mundas Trading Co (Australasia) Pty Ltd. [1954] 2 Lloyds Rep. 198 - Goods were sold FOB Sidney. The sellers

then alleged that they could not deliver at Sidney and asked to be allowed to deliver at Melbourne. The buyers refused. - In an action for non-delivery of the goods at Sidney, the seller were held liable. The port of shipment is of the essence of the contract.

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(c) To pay all costs for loading the goods on board the ship - The seller is responsible for loading the goods on board the ship and for paying the cost of this. - However, it may be otherwise depending on the custom of the port.

Pyrene Co. v Scindia Navigation Co. [1954] 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 ships expense. The whole charge, therefore, for loading from alongside is paid by the ship and covered by the freight.

(2) To ship goods on time

- Assuming that the buyer has nominated an effective ship, the sellers duty is to deliver the goods by putting them on board the ship within the stipulated shipment period. - Since time is of the essence in the commercial context, his failure to do so may be treated as a repudiatory breach entitled the buyer to reject the goods.

All Russian Cooperative Society Ltd. V Benjamin Smith (1923) 14 Lloyds L.Rep. 351

- The seller was only able to get the goods to the ship 15 minutes before expiry of the shipment period. - It was held that the seller was in breach for failing to ensure sufficient time for loading.

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(3) To obtain Export license

Normally it is the seller who is required to procure the necessary export license. See AV Pound & Co. Ltd. V MW Hardy [1956] AC 588.

(4) To deliver the necessary documents

Unless otherwise agreed, 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. The seller will perform it by obtaining from the master of the ship the mates receipt and transferring this to the buyer, thus enabling him to exchange the mates receipt for the B/L, which in turn entitles him to possession of the goods from the carrier at port of destination.

3.4 Passing of property

Unless otherwise agreed, the seller can demand payment in exchange for the documents, since the delivery obligation in s. 28 SGA is deemed satisfied by the furnishing of the documents. See also Concordia Trading v Richco International Ltd. [1991] 1 Lloyds L.R. 475. In fact, the passing of property in an FOB contract will depend on several factors: (A) General law as set out in the SGA; (B) The terms of the contract; and (C) Whether the seller has reserved the right of disposal of the goods.

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(A) Relevant provisions of the SGA, 1979

Section 16: Goods must be ascertained. 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.

Section 17: Property passes when intended 17: to pass. (1). (2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case.

Section 19: Reservation of right of disposal (1) The seller may reserve the right of disposal of the goods until certain conditions are fulfilled; and in such a case, (notwithstanding the delivery of the goods to the buyer, or to a carrier for the purpose of transmission to the buyer,) the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled.

Section 19 [Cont.] (2) Where goods are shipped, and by the bill of lading the goods are deliverable to the order of the seller or his agent, the seller is prima facie to be taken to reserve the right of disposal. (3).

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(B) The role of intention

The approach of the SGA to the passing of property is based upon intention. Subject to the exception in s. 16 of unascertained goods that remains unascertained, it is always up to the parties to determine when property passes [s. 17].

(C) Right of disposal of the seller

So far as FOB contracts are concerned, when property passes depends on whether the seller reserves the right of disposal of the goods by taking control of the bill of lading.

(i) Seller does not reserve right of disposal of the goods

If an FOB seller delivers the goods to a carrier, and does not reserve the right of disposal by taking control of the bill of lading, then the property will pass when the goods are put on board (or shipped) See Carlos v Charles Twigg [1957] 1Lloyds L.R. 240. In Pyrene v Scindia Navigation , a fire tender was badly damaged when it fell back into a lighter from a crane before it had passed over the ships rail. The goods were held to have been the property of the seller at the time they were damaged. In many FOB contracts, the seller will not have been paid by the time the goods are loaded on board. Therefore, the seller is at risk if the buyer does not pay.

Shipment usually means the goods crossing the ships rail.

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(ii) Seller reserves right of disposal of the goods FOB sellers, if not assured of payment pursuant to a letter of credit, commonly reserve the right of disposal of the goods. He will make it clear that the property in the goods is to remain in him, 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. He will normally retain this right of disposal until some condition, usually payment of the price, has been met by the buyer. In these circumstances property in the goods will not pass on shipment.

3.5 Passing of Risk

The SGA, s. 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. Therefore, 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), the passing of property may be deemed to be postponed until the seller endorses the bill of lading to the buyer or his agent.

Under an FOB contract, 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.

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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, i.e., the goods remained unascertained. The ship and cargo were lost. It was held that the goodst had been at buyers risk since shipment even though property had not passed.

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