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Free On-Board Contracts in International Trade The Law and Practice
Free On-Board Contracts in International Trade The Law and Practice
Free On-Board Contracts in International Trade The Law and Practice
Stephen W. Makau
Abstract
FOB is used to bifurcate between the liability of the buyer and the seller. The
term is used only in cases where the trade is happening by way of the sea.
Let’s understand the situation through an example. For instance, the seller is
a resident of country A and the buyer is a resident of country B. Now, the
goods need to be transported via a sea route, starting from port x, in country
A and port y, in country B. Here, the seller has the liability to pay for
warehouse services, loading from the place of origin, inland transportation,
custom, and terminal charges and loading the goods in the vessel. After the
loading, freight charges, insurance, loading and unloading, transportation,
customs clearance, import duties, and taxes shall be borne by the buyer. In
a simpler form, from the warehouse to the vessel loading on port x, the
responsibility is on the seller and after that all the responsibility is on the
buyer.
From the Pyrene co ltd v Scindia Navigation co Ltd The court identified the various types of
FOB contracts, namely, three types of contracts:
(i) the ‘strict’ or ‘classic’ type: the buyer nominated the ship and the seller put the goods
on board (for account of the buyer) procuring a bill of lading. The seller was directly
party to the carriage contract;
(ii) ‘FOB with additional duties’, a variant on the first; the seller arranged for the ship to
come on the berth. Again, the seller was a direct party to the carriage contract;
(iii) ‘Buyer contracts with carrier’, which involved the buyer making the carriage contract
in advance; the bill of lading going directly to the buyer. Here the buyer was a party to
the carriage contract from the beginning.
In the case, there was a third type of contract. The plaintiffs, although not directly party to the
carriage contract, they participated in the carriage sufficiently to became bound by Hague
Rules. Therefore, the plaintiffs could only recover £200.
Ph.D Cand (Bayreuth), LL.M (Dar), LL.B (Moi), Dip.Law (KSL). Adjunct Lecturer in Law, Mount
Kenya University, School of Law. Contacts: tomsteve734@gmail.com
1
Pyrene Co ltd v Scindia Steam Navigation Co Ltd [1954] 2 QB 402
Prior to Inglis v Stock, it had probably been assumed that risk passed along with property, but
in Inglis risk passed although property could not.
Reservation clause.
A retention of title (ROT) clause, or Romalpa clause, prevents title to the goods passing to the
buyer until stated conditions are fulfilled (usually the payment of a specified sum),
notwithstanding the delivery of the goods to the buyer. Such a clause protects the seller if the
buyer becomes insolvent, as the seller is able to retake possession of the goods or proceeds of
the sale of the goods if they have already been on-sold by the buyer.
There are two parties in an FOB contract and that is the buyer and the seller and their duties
are as discussed below.
The case of Bunge Corporation v Trader Export SA3 outlines the duties of the seller. Time
factor is key in Mercantile contract hence it is the duty of the seller to nominate a suitable ship
2
Inglis v Stock [1885] 10 A.C 263
3
Bunge Corporation v Tradax Export SA [1981] UKHL 11
The seller must provide the goods and the commercial invoice or its equivalent electronic
message in conformity with the contract of sale and any other evidence of conformity which
may be required by the contract.
On licensing, authorization and formalities the seller must obtain at his own risk and expenses
any export license or other official authorization and carry out where applicable, all customs
formalities necessary for the export of the goods.
On transfer of risks, the seller bears all risks of loss or damage to the goods until such time as
they have passed to the ship’s rail at the named port of shipment. On division of costs, the seller
must bear all costs relating to the goods until such time as they have passed the ship’s rail at
the named port of shipment and where applicable, the cost of customs, formalities necessary
for export as well as duties, taxes and other charges payable upon export.
The seller also bears the cost of checking, packaging and marking and any other formalities
necessary for the exportation of the goods.
A seller in an FOB contract has the duty to deliver the goods on board the vessels and should
put the goods on the ship at his own expense. He performs his obligations towards the contract
when he puts the goods on board the vessel.
The seller must deliver the goods on the date or within the agreed period at the named port of
shipment and in the manner customary at the port on board the vessel that has been nominated
by the buyer.
The seller has an obligation to give sufficient notice to the buyer that the goods have been
placed on board to enable the buyer to insure the goods during the sea transit. The notice should
be given without delay.
The seller must provide the buyer at the seller’s expense, with the usual proof of delivery.
Unless the document referred to is the transport document, the seller must render the buyer at
the latter’s request, risk and expense, every assistance in obtaining a transport document for
the contract of carriage for example a negotiable bill of lading, a non-negotiable sea waybill,
an inland watery document among others. Where the seller and the buyer have agreed to
communicate electronically, the transport document may be replaced by an equivalent
electronic data interchange (EDI) message
The other obligation that the seller has is that the seller must render the buyer at the buyer’s
request, risk and expenses every assistance in obtaining any document or Equivalent electronic
message other than proof of delivery and transport document issued or transmitted in the
country of shipment and/or of the origin which the buyer may require for the import of the
goods and where necessary for their transit through any country. The seller must also provide
the buyer upon request with the necessary information for procuring insurance.
4
Wimble, Sons & Co v Rosenberg & Sons [1913] 3 K.B. 743
The buyer has an obligation to pay the price as provided for in the contract of sale since the
goods are at the buyer’s risk after the goods are out on board the vessel by the seller. The buyer
therefore is responsible for payment of other costs in essence duties and taxes including import,
license and transport. He must also pay the cost of any pre-shipment inspection except when
such inspection is mandated by the authorities of the country of export.
The buyer must pay all costs and charges incurred in obtaining the document or Equivalent
electronic messages and reimburse those incurred by the seller in rendering its assistance
therewith.
Buyers are obliged to nominate the ship which will transport the goods.
Under the strict FOB contracts, remedies are only available to the buyer and not the seller
because the buyer arranges for everything from the ship to the bill of lading. The buyer also
pays for the goods after they have been loaded into the ship meaning the seller cannot breach
the contract since his obligations are done before loading the goods and ends after loading the
goods to the ship.
The normal rules regarding remedies for breach of contract apply to FOB contracts. However,
there are detailed points of difference arising from the nature of such contracts.
Generally, in cases of breach of condition, the buyer has the right to reject the goods and
repudiate the contract. The buyer can also be awarded damages in case of late delivery, short
5
Cunningham Ltd v RA Munro and Co Ltd [1922] 28 Com Cas 42
Other remedies available to the buyer include the remedies of repair, replacement,
reduction in price or rescission as per the 2002 guidelines.
C.I.F (Cost, Insurance and freight) is an international contact which represents the charges paid
by the seller to cover the cost, insurance and freight of the goods while in transit. C.I.F has
been defined under section 141 of the UAE Commercial Transaction Laws to mean a sale
concluded against a lump sum price covering the price of the terms sold, the maritime insurance
charges and freight by vessel to port of destination.6 The goods only pass as being delivered
only upon completion of shipment by the vessel and liability of perishing shall from that
moment be borne by the buyer of the goods.7 For this type of contacts liability to the good in
transit is on the seller and only transfer to the buyer upon receiving the goods. Until the goods
are delivered the seller bears all the costs and losses of the goods.
A product is only considered as sold to the buyer once the vessel has completed its shipment,
and the buyer becomes liable for the losses from there on. CIF contacts basically outline where
liability of the parties’ end and start. The nature of such international contracts is that upon
delivered of the products requested to the port, the buyer has a responsibility to pay the agreed
amount and any import fees, taxes or custom duty required. In commercial terms this contract
entails that the buyer costs encompass the cost of the goods, insurance and transport.
The nature of C.I.F contracts translates into two subordinate contacts to be made by the seller
of goods;
6
The Federal Law. NO. 18 of 1993
7
Section 141(2)
The seller has an obligation to contact an alternative contract for the carriage of the goods to
the port destination. This contract is made at the expense of the seller until the goods are
delivered to the buyer. This is an alternative contact other than the main CIF contract between
the seller and the buyer.
The Institute of Cargo clause C outlines the risks that are to covered by the seller of goods in
transit. It covers;
a. Fire or explosions
b. Vessels or craft being stranded grounded or capsized
c. Overturning or derailment of land conveyance
d. Collision or contact of vessel craft of conveyance with any external object other than
water.8
The clause however provides for exceptions that are not covered by the seller of the goods in
transit. The clause in general gives assurance to the buyer that the seller will procure minimum
insurance cover over the goods until the destination.
The features of C.I.F contract have been elaborately been laid down in Comptoir d`Acat et
Vente SA v Luid de Ridder Limitadad (The Julia)9, the seller has responsibility under the
contract to deliver the goods in the prescribed form to the buyer at the allocated destination.
Upon contracting the seller is under precise obligation to deliver the goods in the destination
agreed upon. Property passes to the buyer either through delivery of shipment or the tendering
of a bill of lading. As stated by Hartherly in the Barber v Meyerstein10 case a bill of lading can
be termed as a mode of delivery when `in the case of goods which are at sea being transmitted
from one country to another, you cannot deliver actual possession of them, therefore the bill of
lading is considered to be the symbol of the goods, and its delivery to be a delivery of them.
8
Institute cargo clauses C 2009
9
Comptoir d’Acat et de Vente SA v Luid de Ridder Limitadad (The Julia) [1949 AC 293]
10
Barber v Meyerstein [1870] LR 4 HL 317
In Johnson v Taylor Bros and co. Ltd,11 Lord Atkinson stated that the vendor has the
responsibility with all reasonable dispatch to send forward and tender to the buyer the invoice,
bill of lading and policy of assurance. The delivery of these documents is symbolic to the
delivery of the goods and therefore the buyer has the duty to pay the greed price. Liability
thereafter passes to the buyer.
The seller has the obligation to arrange for insurance cover over the gods in transit for the
benefit of the buyer awaiting delivery. As prescribed under the institute of Cargo clauses the
seller has an obligation to cover some risks that may occur in transit. This is a precautionary
step taken by the seller of goods to secure them.
An invoice of goods should be made that contains information on contractual prices of goods,
the insurance premiums paid and the cost of freight credited to the buyer. Such salient elements
to the contact ensure transparency and accountability of the goods in transit.
Importance of documents
As highlighted in the Cotecna Inspection SA v Hems Group Trading Co Ltd,12 the importance
of shipment documents is to ensure that title to the goods has been conferred from the port of
shipment to the port of destination. They also guarantee payment arrangements between the
seller and the buyer. The seller is to deliver the bills of lading, certificate of insurance and
commercial invoices.
In Biddell Bros v E. Clements Horst Co,13 CIF buyers informed their sellers that they were not
prepared to pay for the goods before arrival. The seller as a result declined to ship the goods.
The HOL held that possession must be deemed to have been given when the goods were loaded
and the documents have been tendered to the buyers. A buyer who has paid against conferring
documents can nevertheless reject the goods if on arrival they are found not to be of contractual
11
Johnson v Taylor Bros Co Ltd [1920] AC 144 at pp. 155-157
12
Cotecna Inspection S.A. v Hems Group Trading Company Limited [2007] eKLR
13
Biddell Brothers v E. Clemens Horst Company [1911] 1 K.B. 934
Kennedy LJ stated that the property in the goods had passed to the purchaser conditionally
when the bill of lading for the goods for purpose of better securing payment price was made
out in favour of the vendor or his agents, it passed unconditionally when the bill of lading was
made out in favour of the purchaser or his agent’s representative as consignee.
A CIF contract requires the vendor to ship at the port of shipment the agreed goods in the
underlying contract of sale, to procure a contract of carriage (bill of lading) under which the
goods will be delivered to the agreed destination, to arrange for insurance which will be
available for the benefit of the purchaser, to make out a commercial invoice and finally to
tender these documents to the buyer who must be ready and willing to pay the price of the
shipped goods.
The vendor performs his obligations by tendering the documents to the purchaser. He is not
obliged to deliver the goods to the agreed destination but he is under a negative duty not to
prevent the goods from being delivered to the purchaser at their destination. This might be done
by preventing the carrier from delivering them to the purchaser or by sending them to a different
destination. However, if the contract contains a clause that imposes on the vendor an obligation
to deliver the goods to the agreed destination, it is not considered as a CIF contract, even if the
letters of ‘CIF’ appear in the contract.
Check the quality of goods and mark all of them, in conformity with contract of sale of goods.
The seller must give the buyer sufficient notice that the goods have been delivered. CIF was
described by Lord Atkin in Johnson v Taylor Bros14 as when a vendor and a purchaser of
goods… enter into a CIF contract… the vendor in the absence of any special provision to the
contrary is bound by the contract to do [the following]:
(b) To ship at the port of shipment goods of the description contained in the contract.
14
ibid
(d) To conclude insurance covering against the buyer’s risk of loss of/damage to the goods
from the port of shipment to, at least, the port of destination; the seller is required to obtain a
minimum insurance according to Clauses (C) of the Institute Cargo Clauses. Once contracted,
the seller has an obligation to provide the insurance policy or certificate to the buyer.
(e) With all reasonable dispatch to send forward and tender to the buyer these shipping
documents, namely the invoice, bill of lading an policy of assurance, delivery of which to the
buyer is symbolic delivery of the goods purchased, placing the same at the buyer’s risk and
entitling the seller to payment of their price…if no place be named in the CIF contract for the
tender of the shipping documents they must prima facie be tendered at the residence or place
of business of the buyer’s in a CIF transaction the loading of the goods on board the ship/vessel
and the subsequent tender of the relevant set of documents replace physical delivery and
transference of property.
-Seller bears all risks (goods’ damage or loss) until the goods are in the port of shipment and
have not yet passed the ship’s rail.
-The goods are to be delivered under the CIF Incoterm when the seller places them on board
the ship or procures them so delivered;
-Although the transfer of risk takes place at the port of delivery, the seller has an obligation to
conclude a contract of carriage of the goods until the port of destination;
-The seller must bear all costs related to unloading at the port of destination resulting from the
contract of carriage, unless agreed otherwise.
The purchaser is obliged to pay against the tender of a clean bill of lading that covers the goods
contracted to be sold, an insurance policy and a commercial invoice that shows the price. The
purchaser is obliged to pay against the tender of the documents notwithstanding of fact that the
goods have been lost or damaged at sea after the shipment. In the event of loss, the purchaser
must pay the price on tender of the documents and his remedies, if any, will be against the
carrier as per the bill of lading or against the underwriter as per the insurance policy, but not
against the vendor under the contract of sale. If the purchaser refuses to pay against the
The buyer bears all risks (goods’ damage and loss) from the time when the ship has passed the
ship’s rail.
The buyer must, whenever he is entitled to determine the time for shipping the goods and/or
the port of destination, give the seller sufficient notice thereof.
English case law, which forms the basis for many international shipping contracts, has
established that it is irrelevant whether both buyer and seller knew of the loss of the ship before
the latter tendered the documents; the buyer must pay the price. Hence, the vendor can tender
the documents even though he possesses, at the time of tender, actual knowledge of the loss of
the ship or the goods. Consequently, in the event of loss, the purchaser will receive the
documents rather than the goods for which he contracted. Even if the purchaser had already
paid the price, he cannot demand its return. In addition, a vendor under a CIF contract for the
sale of goods who has shipped the agreed goods under a clean bill of lading and obtained the
proper documents, can tender those documents to the purchaser notwithstanding he knows at
the time of such tender of the loss of the goods
Goods must be tendered at the buyer’s place of business. In the Albacruz (Cargo Owners) v
Albazero (Owners),15 the C.I.F sellers of goods were at the time charterers of a vessel called
The Albazero. A bill of lading was issued to them as shippers pursuant to the charterparty.
During the voyage the Albacruz and her goods sank and were totally lost, due to a breach of
the charter party, and also the bill of lading contract, by the ship-owners. At the time of the
loss, the bill of lading had been posted to the c.i.f buyers but had not been received by them.
The Court of Appeal held that the property had passed to the buyers on posting the bill, and
this view was upheld in the House of Lords.
Failure to accept valid documents; a breach to the C.I.F contract. In Arnhold Karberg & Co v
Blythe, Green, Jourdin & Co,16 the facts of the case were that under two C.I.F contracts made
in peacetime, the goods were shipped on two German vessels, and in one case, under a German
policy of insurance, at the outbreak of the first world war on August 14, 1914, both vessels
15
The Albazero [1977] AC 774
16
Arnhold Karberg & Co. v Blythe, Green, Jourdain & Co [1915] 2 K.B. 379
Scrutton J. observed; ‘I am strongly of the opinion that the key to many of the difficulties
arising in C.I.F contracts is to keep firmly in mind the cardinal distinction that a C.I.F sale is
not a sale of goods, but a sale of documents relating to the goods.’
A buyer purchases the documents, not the goods and it may be that under the terms of contracts
of insurance and affreightment, he buys no indemnity for the damage that has happened to the
goods. Therefore, the relevant question will generally be not, ‘what at that time of the
declaration of tender of the document is the condition of the goods?’ But, ‘what at the time of
the tender of the document as to compliance with the contract of sale’. Whatever happens to
the goods in transit, the bill of lading and the insurance policy provide an almost complete
continuous cover from the port of shipment to the port of destination.
If the goods are lost at sea, the document remains valid and can be tendered as normal for the
full purchase price to be paid. The buyer has to pay in full price if the goods were lost from a
peril not covered by the ordinary policy of insurance.
Buyer.
A buyer may recover damages for the seller’s breach in tendering a bill of lading which was
not genuine because it contains a false date of shipment. In Proctor &Gamble Philippines
Manufacturing Corp v Kurt A. Becher,17 it was stated that a buyer is entitled to reject a bill of
lading which is not genuine from the reasons stated above. And;
is also entitled to reject goods which have been shipped outside the shipment period, since the
statement that they will be or have been shipped within that period forms part of the description
of goods.
17
Proctor & Gamble Philippines Manufacturing Corporation v Kurt A. Becher G.m.b.H & Co.K.G. [1988] 1
Lloyd’s Rep. 88
The buyer will normally exercise one these rights to reject where the market has fallen between
the time of contracting and the time of discovery of the breach. In this way, he will be able to
avoid the loss which has resulted from the fall in market, and to throw that loss back to the
seller. The buyer will be able to do this even if the breach has caused him no loss at all.
Where the seller fails to tender valid documents or deliver goods, the buyer has a right to sue
for damages for non-delivery.
Seller.
Action for price. Section 49 of the Sale of Goods Act provides that the seller may maintain an
action for the price of goods against the buyer where;
(1) The property in goods has passed to the buyer and the buyer wrongfully refuses or neglects
to pay for the goods according to the terms of the contract
(2) The price is payable on a day certain irrespective of delivery and the buyer wrongfully
refuses to pay the price.
Action for non-acceptance Section 50, of the Sales of Goods Act provides that where the buyer
wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an
action against him for damages. The measure of damages is the estimated loss directly and
naturally resulting in the ordinary course of events from the buyer’s breach of contract. If there
is an available market for the goods, the measure of damages is to be ascertained by the
difference between the contract price and the market price or the current price of goods at the
18
Kwei Tek Chao v British Traders and Shippers Ltd [1954]2 QB 459