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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.
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.
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.
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.
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
[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.
(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.
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.
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.
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.
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.
- 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.
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.
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.
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.
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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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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(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.
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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