FOB Contracts

LLM International Commercial LawLaw of International Sales

General Definition• A contract for the sale of goods where the seller

agrees to load the goods on board a vessel nominated by the buyer.– Wimble and Sons v Rosenberg and Sons [1913] 3 KB 743

• The buyer is the shipper of goods – it is he who ships the goods by entering into a contract of carriage with the carrier.

• The seller’s principal duty is to ensure that the goods are delivered to the port of loading to meet the nominated ship.

FOB CONTRACT

Seller delivers goods to port of loading to

be placed on nominated vessel

Seller hands the goods over the board

of the vessel nominated by buyer

Buyer [who is the shipper of the goods] enters into a contract

with the carrier

GENERAL FEATURES OF THE FOB CONTRACT

Seller delivers the goods on board (Incoterms 2000 - over the ship’s

rail)

Buyer must ensure that the seller is given proper

notice of the vessel to ship the goods to

Buyer remains the legal shipper of the goods [the main contracting party in the carriage

contract

Property & risk pass from the seller to the buyer once the goods

cross the rail of the ship – Stock v Inglis (1884)

As soon as risk passes to the buyer, he acquires an insurable interest in

them and can insure them

Flexibility of the FOB contract

• Lord Devlin in Pyrene Co. Ltd. v. Scindia Navigation Co. Ltd [1954] 2 QB 402 gave judicial notice to the flexible nature of FOB contracts. He identified three variants:– The ‘classic’ FOB contract– The ‘extended’ FOB contract– The ‘strict’ FOB contract

The ‘classic’ f.o.b. contract•The buyer nominates the ship and the seller

loads the goods on board for account of the buyer and procures a bill of lading.

•The seller becomes a party to the contract of carriage in the buyer’s name, until he endorses the bill of lading in favour of the buyer.

•The bill of lading will normally show the seller as consignee – enabling him, at this point to sue on the contract of carriage.

The ‘extended’ f.o.b. contract•This is an fob contract where the seller renders

additional services.•The seller makes necessary arrangements for the

shipping of the goods.•The seller takes the bill of lading in his own name.•The buyer is named as consignee on the bill of

lading.•The seller then transfers the bill of lading (along with

other shipping documents) to the buyer, and obtains payment against transfer (like in a c.i.f. contract).

‘Classic’ v ‘extended’ f.o.b.

‘Classic’

Seller makes the contract of carriage on behalf of the

buyer, Seller is shown on the bill of

lading as the consignee

Buyer nominates the ship

‘Extended’

Seller makes the contract of carriage as a principal, buyer

is named on the bill of lading as the consignee.

Seller nominates the ship & his duties may extend to include procurement of

insurance

The ‘strict’ f.o.b.

•This is the type used in Pyrene v Scindia•The shipping arrangements are made by the

buyer or his forwarding agent.•The buyer books space on a particular ship.•The seller discharges his duty under the

contract by putting the goods on board, getting a mate’s receipt, and handing it to the buyer or forwarding agent to enable him to obtain the bill of lading.

In this type of fob the seller is never party to the contract of

carriage

Nature of a mate’s receipt

• Lord Wright in Nippon Yusen Kaisha v Ramjiban Serowgee [1938] A.C. 429 describes a mate’s receipt as: “not a document of title to the goods shipped. Its transfer does not transfer property in the goods, nor is its possession equivalent to possession of the goods. It is not conclusive, and its statements do not bind the shipowner as to statements in a bill of lading signed with the master’s authority. It is, however, prima facie evidence of the quantity and condition of the goods received, and prima facie, it is the recipient or possessor who is entitled to have the bill

of lading issued to him.”

Examples of other variants

• FOB stowed, FOB stowed and trimmed– the seller pays the loading costs

• FOB “stowed, costs and risks in connection with loading on the seller”– the seller must bear the risks subsequent to the

passing of ship’s rail or loading

Scottish & Newcastle International Ltd v Othon Ghalanos Ltd (2008)

•Sale of cider – “CFR Limassol, Cyprus” but specified delivery of goods to a ship designated by the buyer at Liverpool. Provision for payment 90 days after arrival. True CFR?Pyrene v. Scindia “that the FOB contract has become "'a flexible instrument‘; it embraces (a) cases where the buyer arranges and nominates the ship,

but the seller ships and takes the bill of lading in his own name as consignor;

(b) cases where the seller arranges shipment and takes the bill in his own name as consignor; and

(c) cases where the buyer arranges and nominates the ship, and the seller ships but the buyer is named in the bill as consignor.”

Scottish & Newcastle International Ltd v Othon Ghalanos Ltd (2008)

•Lord Mance held that

•“There are three general differences between FOB and C&F contracts:

•(i) First, an FOB contract specifies a port or range of ports for shipment of the goods. A C&F contract specifies a port or ports to which the goods are consigned.

Scottish & Newcastle International Ltd v Othon Ghalanos Ltd (2008)

• (cont)• (ii) Secondly, an FOB contract requires shipment

(whether by or on behalf of the seller or the buyer) of the goods at the port (or a port within the range) so specified; (…)

• (iii) Thirdly, (…), in contrast, under an FOB contract, although the seller may contract for and pay the freight, the buyer carries the risk (and has the benefit) of any such fluctuation.”

Seller’s duties under a classic fob contract

• To ship goods of contract description at port of shipment– Petrograde Inc v Stinnes Handel Gmbh [1995] - FOB

Antwerp - the port of delivery in an fob contract is a condition of the contract. The defendants were entitled to refuse delivery at a port other than the one specified in the contract.

– The certainty which would be achieved if the place of shipment was a condition of the contract was clearly a highly relevant consideration in deciding how to classify the term.

Seller’s duties under a classic fob contract

• To pay handling and transportation costs• To ship goods at port of shipment– Description attached to the fob term as to where

the goods are to be delivered must be certain and ascertainable

Certainty of Terms

• David T Boyd v Louis Louca [1973] 1 Lloyd’s Rep 209– Is the contract clear enough for the seller to perform his

part of the contract?• “FOB stowed good Danish port”

– Justice Kerr held that • “The word f.o.b. in the contract was complemented by the

words ‘stowed good Danish port’ and therefore, the contract could not be void for uncertainty. [...] having regard to the relatively short distance between the various good ports in Denmark, which is a small country, and the ease with which goods can be moved on roads in that country.”

(cont)– “I have to come to the conclusion that as a matter

of principle, where nothing is expressly agreed and where there is no custom nor any surrounding circumstances from which any particular conclusion can be drawn, the choice of loading port under an f.o.b. contract is that of the buyer[...].”

Certainty of Terms

Certainty of Terms

• Cumming & Co Ltd v Hasell [1920] 28 CLR 508– Is the contract voidable for uncertainty?• FOB Australian port?

– “There is nothing in evidence to show with reasonable certainty whether the agreement was for delivery FOB Burnie or FOB Tasmanian ports. [...] In the absence of any stipulation express or implied as to the port of shipment, there is, in our opinion, no obligation sufficiently certain to be enforced in a Court of Law.”

Seller’s duties under a classic fob contract

• To deliver goods on specified date– The contract of sale might fix the shipping period

and give the buyer (or the seller) the option to fix the time of shipment

– Seller bound to ensure that the goods are available alongside the ship with sufficient time to complete loading within the shipment period• All Russian Cooperatives Society Ltd v. Benjamin Smith

& Sons [1923] 3 W.L.R. 227 – the seller was in breach for failing to ensure sufficient time for loading

Seller’s duties under a classic fob contract

• To give notice to the buyer under S.32(3) of the Sale of Goods Act 1979 to enable the buyer to arrange any necessary insurance cover– Wimble and Sons v Rosenberg and Sons [1913] 3

KB 743 – S.32(3) applied to fob contract, but in this case, buyer had sufficient information to insure the goods even without the name of the ship or exact date of sailing

– Notice of readiness to load to be given by the seller to the buyer

Buyer’s duties

• To fix the dates within the agreed shipment period when the goods are to be loaded;

• To secure shipping space fit to carry the goods;

• To allow the seller enough time to get the goods to port by issuing a valid nomination of the vessel;

• To make second nomination in certain circumstances.

Buyer’s duty to nominate vessel

• Is time of the essence?–Bunge Corporation v Tradax Export SA

[1981] 1 WLR 711 - HL gave judgment in favour of the sellers, qualifying the provision as a condition of the contract.• “Time being of essence also conforms established

mercantile and business practices.”

Buyer’s duty to nominate vessel

• Is there a right to substitute the vessel?– Buyers to act with the least possible delay to allow

the sellers sufficient time to load and perform other duties within the shipment period

– Agricultores Federatos v Ampro SA [1965] 2 Lloyd’s Rep. 157Shipment of Maize FOB 20-29 Sep; first nomination unsuitable; second nomination made on 1630, 29 Sep. Sellers refused to load. Vessel had to work overtime to complete loading.Held: prerogative of the buyer to replace the original vessel as sees fit and as long as goods could be shipped within the shipment period

Duty to nominate vessel

–Cargill v Continental [1989]FOB Hull, 25000 tonnes English feed barley. The buyers gave “provisional notice” nominating “the Cobetas or sub” followed by a final notice referring to the Cobetas. The Finnbeaver arrived to take delivery. The sellers refused to load. Declaration sufficient to deprive the buyers of any contractual right to make a substitution.

• A duty to co-operate?– All Russian Cooperatives Society Ltd v. Benjamin

Smith & Sons [1923] 3 W.L.R. 227– January f.o.b. London shipment; sellers had

tendered the oats in barges alongside the ship; the last 105 tons delivered to ship at 16:30 on 31 Jan. Working hours ended at 16:15. Buyers assisted with the loading.

- When does such duty start and finish?

Duty to nominate vessel

Time for shipment

• Notice of readiness to load to be given by the buyer and then obligation of the seller to comply with that date– Cunningham Ltd v Munro Ltd (1922) 28 Com. Cas.

42• Delivery FOB Rotterdam October shipment• Goods delivered by Seller to Rotterdam before the Buyer makes a

nomination of the vessel• Goods begin to deteriorate

What if time for shipment not specified?

•General rule – seller to ship within reasonable time (s 29(3) SGA)

•Cereal Investments v. ED&F Man Sugar [2007] EWHC 2843 – sugar FOB Santos; “Shipment period: One vessel only presenting October 2006 Shipment at Buyer's Option, with 10 days pre-advise of vessel arrival" Seller, M, claimed that shipment might be in November and only ship needs to be presented in October. No end date stated. Reasonable estimate by the buyer of when shipment would be complete.