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CHAPTER 3CHAPTER 3

FOB CONTRACTS FOB CONTRACTS

PROFESSOR PROFESSOR

DR. ABDUL GHAFUR HAMIDDR. ABDUL GHAFUR HAMID

• 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”.

3.1 3.1 The Essence of FOB ContractsThe 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 Stock v InglisInglis (1884)12 QBD 573(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.

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Wimble v RosenbergWimble v Rosenberg (1913) 3 KB 743(1913) 3 KB 743

• The FOB is a contract for the sale of

goods where the seller agrees to deliver

the goods over the ship’s 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 buyer’s account.

(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.

3. 2 3. 2 Types of FOB ContractsTypes of FOB Contracts

PyrenePyrene v v ScindiaScindia NavigationNavigation [1954] 2 QB [1954] 2 QB

402 (per Devlin J)402 (per Devlin J)

1. (The first type) (The classic FOB)… The

buyer’s duty is to nominate the ship, and

the seller’s 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.

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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 seller’s 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 buyer’s 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.

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In the strict FOB, the seller discharges his duty

by putting the goods onboard, getting the mate’s

receipt and handing it to the forwarding agent to

enable him to obtain the bill of lading.

Devlin J’s division of the three types of FOB

contract has been approved in The El Amira and

The El Minia [1982] 2 Lloyd’s Rep. 28.

3.3 3.3 The Strict FOBThe Strict FOB

• In the strict FOB, the buyer nominates the

ship, procures the shipping space, and is

the legal shipper ab initio.

3.3.1 3.3.1 Duties of the F.O.BDuties of the F.O.B

buyerbuyer

1. To nominate the port of

shipment, the vessel’s name

and procure the necessary

shipping space

(a) Nomination of the port of (a) Nomination of the port of

shipmentshipment

� 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 buyer’s and he has the corresponding duty of notifying the seller of his choice in good time.

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David Boyd v Louis David Boyd v Louis LoucaLouca

[1973] 1 Lloyd’s 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.

Gill & Gill & DuffusDuffus v v SocieteSociete pour lpour l’’ ExportationExportation

[1985] 1 Lloyd’s 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 seller’s

obligation to load the goods.

Date of shipmentDate 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 seller’s

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.

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J J & J Cunningham Ltd. v RA Munro & Co. Ltd.& J Cunningham Ltd. v RA Munro & Co. Ltd.

(1922) 28 Com (1922) 28 Com CasCas 4242

- 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 nominationuntil 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(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 ship’s

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.

BungeBunge Corporation v Corporation v TradexTradex Export SAExport SA [1981] [1981]

2 All ER 5132 All ER 513

� 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.

BungiBungi –– Cont.Cont.

� 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.”

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BuyerBuyer’’s failure to nominate ship: damagess failure to nominate ship: damages

� Nevertheless, if the buyer does fail to

nominate an effective ship, the seller’s

remedy is damages and cannot claim for

the price.

Colley v Overseas ExportersColley v Overseas Exporters

[1921] 3 KB 302[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.

Substituting the nominated ship with another Substituting the nominated ship with another

shipship

� Unless the buyer’s 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.

AgricultoresAgricultores FederadosFederados ArgentinosArgentinos v v AmproAmpro

SASA [1965] 2 Lloyd[1965] 2 Lloyd’’s L.R. 290s L.R. 290

- 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 loadclaiming that the buyers had breached the contract. The buyers sued the sellers for non-performance.

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AgricultoresAgricultores –– Cont.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: finalExpress provision in the contract: final

Cargill v Continental SA [1989] 1 Lloyd’s 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(c) To secure shipping space

In the absence of contractual stipulation to

the contrary, it is the buyer’s duty to

procure space on the nominated vessel.

(2) To obtain the necessary(2) To obtain the necessary

import licenseimport 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.

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(3) To contract for the(3) To contract for the

carriage of the goodscarriage 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 mate’s receipt and

transfer it to the buyer.

- It enables the buyer to exchange the mate’s

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.

PyrenePyrene Co. Ltd. v Co. Ltd. v ScindiaScindia Navigation Co. Ltd.Navigation Co. Ltd.

- 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.

PyrenePyrene, , Cont.Cont.

- While one of the tenders were being lifted into the

vessel, it was dropped and damaged before it

had crossed the ship’s 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.

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PyrenePyrene, , Cont.Cont.

Devlin J held that the sellers were entitled

to damages up to the maximum limit of the

liability, i.e. & 200.

3.3.2 3.3.2 Duties of the FOBDuties of the FOB

sellerseller

(1) To ship goods of contract

description at the named port of

shipment

(a) (a) Goods of contract Goods of contract

descriptiondescription

The seller must ship goods that answer

in all respects to the contract

description.

Examination of the goodsExamination of the goods

• The parties may have agreed on “pre-

shipment 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) (b) At the named port of At the named port of

shipmentshipment

� 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 Peter Turnbull & Co. v MundasMundas Trading Co Trading Co

(Australasia) Pty Ltd.(Australasia) Pty Ltd.

[1954] 2 Lloyd’s 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) (c) To pay all costs for loading the goods To pay all costs for loading the goods

on board the shipon 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.

PyrenePyrene Co. v Co. v ScindiaScindia Navigation CoNavigation 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 ship’s expense. The

whole charge, therefore, for loading from

alongside is paid by the ship and covered

by the freight.”

(2) (2) To ship goods on timeTo ship goods on time

- Assuming that the buyer has nominated an

effective ship, the seller’s 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 All Russian Cooperative Society Ltd. V

Benjamin SmithBenjamin Smith

(1923) 14 Lloyd’s 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(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(4) To deliver the necessary

documentsdocuments

• 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 mate’s receipt and transferring this to the buyer, thus enabling him to exchange the mate’s receipt for the B/L, which in turn entitles him to possession of the goods from the carrier at port of destination.

• 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 Lloyd’s L.R.

475.

3.4 3.4 Passing of propertyPassing of property

• 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) (A) Relevant provisions of the SGA, Relevant provisions of the SGA,

19791979

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 17Section 17: : Property passes when intended Property passes when intended

to pass.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: Section 19: Reservation of right of Reservation of right of

disposaldisposal

(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 Section 19 [Cont.][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) (B) The role of intentionThe 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) (C) Right of disposal of the sellerRight 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) (i) Seller does not reserve right of Seller does not reserve right of

disposal of the goodsdisposal 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] 1Lloyd’s L.R. 240.

• “Shipment” usually means the goods

crossing the ship’s rail.

• 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 ship’s 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.

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(ii) (ii) Seller reserves right of disposal of the Seller reserves right of disposal of the

goodsgoods

• 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.

• 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.

•

3.5 3.5 Passing of RiskPassing of Risk

• 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 Stock v InglisInglis

(1884) 12 QBD 564(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 buyer’s risk since shipment even though property had not passed.