n cases of sea transit of goods, it is the duty of the seller to give notice to the buyer so as to enable him to insure the goods S 39 (3) sale of goods act, 1930

In cases of sea transit of goods, it is the duty of the seller to give notice to the buyer so as to enable him to insure the goods S 39 (3) sale of goods act, 1930”. Discuss the nature of duty of seller in reference to common sea route contracts i.e i) C.I.F contracts, ii) F.O.B contracts and iii) Ex-ship contracts.

INTRODUCTION:
It is the duty of the seller and buyer that the contract is performed. The duty of the sellers is to deliver the goods and that of the buyer to accept the goods and pay for them in accordance with the contract of sale.

The contract of carriage by sea is an aspect of the shipping law which has attracted strategic significance because the bulk of international trade is transacted through this medium. In the case of a contract for the sale of goods which are to be shipped by sea a number of conditions are attached by the parties or by custom and practice of merchants. There are a large variety of forms of sale of goods contracts, both domestically and in International Sales. In International Sales the nature of the sale of goods contract depends on where the central duty under the contract, namely the delivery of the goods, is to be carried out. There are three basic categories of international sales contract namely:-

(1) Delivery at port of shipment, with concerns regarding arrangements for transport and import documentation vesting with the buyers and concerns regarding arrangements for transport to the port of shipment and export documentation vesting with the seller, epitomized by the free on board, f.o.b. contract.

(2) Delivery at port of shipment, with concerns regarding import documentation vesting with the buyers and concerns regarding arrangements for transport to the port of discharge and export documentation vesting with the seller, epitomized by the cost, insured freight, c.i.f. contract.

(3) Delivery at buyer’s premises or port of discharge, with concerns regarding arrangements for transport of the goods to buyer’s premises or port of discharge and export and import documentation vesting with the seller, epitomized by the ex-ship contract.

The parties to an international sales contract are free to draw up their own terms and conditions of sale and to make whatever arrangements they feel are appropriate. The courts have provided definitions of and set out the primary rights and duties under f.o.b., c.i.f. and ex-ship contracts.

FOB:

The earliest types of international sales contract developed into what is now known as free on board (f.o.b.) and the free aside ship (f.a.s). In traditional f.o.b. contracts the buyer is usually the shipper. Even today where the seller ships the goods he does so actually, or theoretically as agent of the buyer, under a separate agency contract, which is quite independent of the sales contract. Under the law of agency the seller becomes the alter ego of the buyer for the purposes of the contract of affreightment. Thus the buyer is the principal party with the carrier to the contract of carriage, even where the seller actually negotiates the contract on the buyer’s behalf.

An F.O.B. (free on board) contract is essentially a contract of sale of goods where the seller pays the cost of the shipment and makes delivery as soon as the goods are placed on board. ¹ The buyer bears the risk of whether they are lost or not. The seller must however give notice to the buyer to enable him to insure the goods if he so desires. The risk does not pass to the buyer nor does the property pass, until the goods are actually on board. In a classical F.O.B. contract, the buyer is under a duty to nominate the ship on which the goods may be loaded by the seller and give adequate notice of the nomination to the seller. The buyer may however authorize the seller to select a ship. This duty of the buyer is a condition precedent to the obligation of the seller to load the goods under the contract. Time is of essence in F.O.B. contracts, and failure of the buyer to nominate a ship on time will release the seller from his obligation to deliver the goods. If no time for delivery of the ship is stipulated, the buyer must prima facie nominate a ship within a reasonable time. Where the buyer fails to nominate a ship, the seller cannot claim that he is entitled to sue for the price. He can only sue for the price of the goods when they are loaded. Therefore, failure to nominate a ship by the buyer will amount to a repudiation of the contract. This will entitle the seller to sue for damages for breach of contract. It must be noted, that the buyer is not irrevocably bound if having nominated any particular vessel, that vessel fails to be available. He is at liberty to nominate another ship if the original ship is not available. The other obligations of the Buyer include the costs, stowage, trimming, tallying and other incidental expenses, unless the parties expressly stipulate otherwise.

Furthermore, the other obligations of the seller include the duty to deliver the goods in time to enable them to be put on board before the efflux ion of the contract period, and the duty to ensure that the goods are adequately packed, carefully loaded and that they are in a fit and proper condition for their sea transit.

Where there is a breach of F.O.B. contract, the principles which apply to breach of C.I.F. contracts, apply to F.O.B. contracts mutatis mutandis.

¹Section 32 (3) of the Sale of Goods Act.

Reasons for using FOB Contracts:

1). F.o.b. sales contracts became quite rare during 19th century but are now more popular again. After both World Wars there was a shortage of shipping. Sellers often preferred to let the buyer obtain a vessel or nominate one since that relieved the seller of the problem.

2) The nature of certain goods is such that it is best for the buyer to hire a specific type of vessel such as an oil tanker or a refrigerated ship. The buyer may even own his own ship. This is common for companies such as Shell and B.P.

3). Foreign currency restrictions. F.o.b. involves less foreign currency than c.i.f. for the importer, since the contract of sale does not include shipping costs National Shipping Lines can then be paid in the domestic currency avoiding problems of buying dollars or sterling.

C.I.F

Under a ‘classic’ CIF contract, the seller’s obligation as to time of delivery relates only to the time for shipment of the goods at the load port. Accordingly, despite the fact that the seller makes the carriage arrangements, the seller does not make any commitment to the buyer as to when the goods will arrive at their intended destination. In fact, the seller is not under any positive obligation to ensure the goods actually arrive at the discharge port. Rather, the seller’s duty is to conclude a contract of carriage with a carrier to undertake the transportation of the goods to the discharge port, coupled with a duty not to interfere with or prevent delivery by the carrier.

As between the parties to the sale contract at least, a CIF seller is responsible for supplying the goods to be sold and the ship on to which they are to be delivered. The CIF seller can, therefore, ship the goods without the buyer’s involvement. Where the parties have agreed a time frame for shipment in a CIF contract, it is usually therefore the seller who determines exactly when, (within the shipment window) to ship the goods. ²

The ‘classic’ CIF seller’s obligation, in terms of the timing, is therefore based on a shipment date range rather than a delivery at discharge port date range. The obligation is simply to ship the cargo within the shipment period set out in the contract. To be precise, that is an obligation to complete loading within the contractual shipment period (as opposed to merely commencing the loading of the cargo within the shipment period). If the seller fails to do this, then the buyer may terminate the contract.

In the shipping world, a lay can is the period within which the chartered ship is supposed to arrive at the load port, the first day of the lay can being the earliest date upon which lay time can commence and the last day being the last day for arrival, after which the charter can be cancelled by the chartered. ³

² Pyrene v Scindia [1954] 2 Q.B. 402.

³ Carlos Federspiel v Charles Twigg [1957] 1 Lloyd’s Rep 240.

In the context of a CIF contract, where it is the seller’s obligation to make the carriage arrangements and ship the goods, it is difficult to see how the lay can concept might usefully fit into that arrangement. It is perhaps easier to see how a lay can might appear more at home in a FOB contract, where the buyer is responsible for the carriage arrangements and may want to provide that he will not automatically be in breach of contract if his nominated vessel fails to arrive at the load port by the last day of the lay can (i.e. the cancellation date). ⁴

Variations on FOB and CIF Contracts. There are a number of varieties of f.o.b. and c.i.f. contracts and within each of these varieties there may also be extra standard clauses or ?one off terms? that the parties may choose to incorporate into the contract. Classic f.o.b. and f.o.b. with extended duties provide the main variation points in f.o.b. contracts, away from the original strict form of f.o.b. As a practitioner one should never assume one knows the contents of the contract simply by reading it’s so called nomination as ?c.i.f.? or ?f.o.b.?; always read the contract itself.

The Value of Defining FOB and CIF Contracts. The common law only allows limited changes within the f.o.b. and c.i.f. formats.

· The Single sale: Where there is only one seller and buyer there are no particular difficulties involved in defining and varying contract terms. If a number of re-sales occur during a voyage, it is important to have standardized terms.

· Certain consequences flow from the definitions. If c.i.f. or f.o.b., the risk in the goods usually passes on shipment from the seller to the buyer, always in f.o.b. and usually in c.i.f. whereas in ex-ship contracts, risk does not pass until discharge from the vessel. This factor in turn affects whether the seller or the buyer bears the cost of goods are lost during the voyage and whether it is the insurance underwriter of the seller or the buyer who has to bear the loss.

If a sales contract is called c.i.f. but the terms represent ex-ship then ex-ship terms are applied by the courts. It is the attributes of the contract that are of the essence, not the label that is attached to it by the parties. More variations are allowed in f.o.b. contracts than in c.i.f. contracts. It is less usual to have a resale f.o.b. after the voyage has commenced. There is less need therefore, for the bill of lading to act as a negotiable instrument.

· The classic f.o.b sales contract: The seller puts goods on board a vessel nominated by the buyer. Whilst the seller makes the contract of carriage as agent of the buyer in terms of ultimate financial liability, seller is treated by the courts as a party to the contract of carriage. The buyer only becomes a party to the contract of carriage through the implied contract based on the bill of lading by virtue of Brandt v Liverpool or C.O.G.S.A. 1992. ⁵

^{4 The Parchim [1918] P.C.}

5 Wimble v Rosenburg [1913] 3 K.B. 743

· Strict f.o.b: The seller’s duties: to get conforming goods to the carrying vessel notified to him by the buyer: to procure a matte’s receipt and hand it over to a forwarding agent to send to the buyer. Thus the buyer is the original party to the contract of carriage, since he is the original holder of the bill of lading as the principal of the seller, who is his agent. The buyer’s duties: booking shipping space in advance: nominating the vessel usually through a forwarding agent:

· Insuring cargo: selecting the port of shipment and if there is a range of ports to choose from, giving written notice of that selection: to give notice to seller of the vessel’s estimated and actual time of arrival.

· Extended (classic) f.o.b.: The seller makes the Contract of Carriage, nominates the vessel and insures the vessel / cargo to the buyer’s account. This occurs where the seller has better local knowledge than the buyer. The seller may even hire the vessel on times. This is the least common form and is a variation on the classic f.o.b. ⁶

Freight pre-paid and freight collect

One feature of the early part of the 20^th century was the practice of fob contracts where freight was payable by the buyer on discharge of cargo at the port of destination. This firmly placed the duty of paying the carrier on the buyer in much the same way that that buyer pays for freight directly to the carrier in a strict fob contract. However, the carrier takes a risk and suffers cash flow problems collecting freight on discharge. The carrier can exercise a lien over cargo, which helps to ensure payment where the buyer wants the cargo. However, if the buyer legitimately rejects the bill of lading or otherwise fails to collect cargo, the carrier has problems collecting the freight. Carriers therefore prefer to be paid freight in advance. Hence, the need for the classic f.o.b. seller to pay, up front, for freight and reclaim it from buyers.

The seller is responsible for getting goods to the ship and pre-ship’s rail loading costs. The buyer is responsible for freight, stowage, discharge and insurance costs. By nominating a vessel under an f.o.b. contract the buyer can safeguard himself against foreign currency restrictions and minimize the amount of foreign currency needed in a venture where the foreign exchange rate in his country is unfavorable. A general ship will load any goods on the dock waiting for it. ⁷ Normally there will be abundant shipping space, provided advance notification of requirements of space, are posted by the buyer to the carrier. If there is a shortage of space, it is the buyer’s problem and he has to deal with it and make alternative arrangements. Where a vessel belonging to a buyer’s national shipping line is employed it may be more convenient for the buyer as opposed to the seller to negotiate the contract of carriage. The same applies where the buyer owns or charters the vessel. If freight is payable in advance the buyer is financially more secure if he pays the carrier himself since funds cannot then go astray. If the seller pays in advance and then reclaims the money it affects his cash flow, so again it avoids problems if the buyer deals with it himself. The essential factor in any f.o.b. contract under UK law is the actual contract and its terms.

⁶ Pyrene v Scindia [1954] 2 Q.B. 402.

⁷ The Naxos 1991 1 Lloyds Rep 29

In the US there are codified definitions of f.o.b. but in the UK the courts rely on the terms of the contract. It is important to read each contract you have to deal with carefully. Never approach a contract with preconceived notions of what is involved in the contract, without taking the trouble to verify the actual contents. The label classic gives the impression that this form of f.o.b. is the most common. However, this may not be so, since the standard Incoterm f.o.b. contract is in fact a strict f.o.b. contract.

F.o.b. with additional duties: The seller undertakes to pay freight and insurance to buyer’s account. Under a c.i.f. contract the seller also accepts the responsibility for paying insurance and freight. So, what is the difference of between a c.i.f. contract and an f.o.b. contract with the additional duty of insuring the goods? The answer lies in liability for variations in freight rate.

Ex ship Contracts:

The ex-ship clause indicates that delivery of the goods will take place at the ship upon her arrival. The ?Ex ship? contract is also referred to as an ?Arrival? contract. Property passes when goods are discharged – the seller pays the shipping costs and continues to own the goods until discharge and bears all risks and liability.

The duty on the seller involves: delivery to be made to the buyer from a ship which has arrived at the port of delivery and has reached a place therein which is usual for the delivery of goods of the kind in question. The seller has therefore to pay the freight or otherwise release the ship-owners lien and to furnish the buyer with an effectual direction to the ship to deliver. Until this is done, the buyer is not bound to pay for the goods.? that ?effectual direction? usually takes the form of a delivery order. The delivery order is defined as a ?order by the owner of goods to a person holding them on his behalf, to deliver them to a person named?. The delivery order does not take the place of the goods and is not he subject matter of the ex ship contract. It should be noted that discharge of the ex ship contract is entirely based on the actual delivery of the goods. Everything hinges on the correct delivery of the goods. Where documents are used, they are to be treated as of performing little more than administrative functions. They do not take the place of the goods. That is the distinction between a CIF contract and an ex ship contract.

^{8 Pyrene v Scindia Navigation Co. [1954] 2 Q.B. 402. per Devlin J.}

The seller’s responsibility includes getting goods to the port of discharge. The seller bears all costs and risk till goods arrive at their destination. The date of arrival and the name of the ship are part of the description that must be complied with in the sales contract.

Extent of Liabilities

According to section 3(1) if the conditions in the sub section are satisfied the person who has got the rights under section 2(1) shall become subject to the same liabilities as he has been a party to the contract. The transferee in this subsection is treated as the party to the contract and he incurs all the liabilities, like liabilities for the fright, demurrage and for the damage or loss suffer by the carrier because of the reason that the goods shipped were dangerous. The reason for imposing such liabilities on the transferee is not that he has got rights under the contract, but the liabilities are imposed on him only if he wants to take benefit out of the contract.

Original contracting parties and their liabilities

The position of an original shipper at common law is that he remains liable under the contract, contained or evidence by the bill of lading. In a bill of lading contract the person who made the contract originally remains liable under the common law even though he has transfer the bill of lading to a new implied contract. In transferring the bill of lading to the new holder he comes under the same liabilities under which the original holder remains. The position of the common law has been established by section 3(3) of the Carriage of Goods by Sea Act 1992, which says that “this section, so far as it imposes liabilities under the contract on any person, shall be without prejudice to the liabilities under the contract on any person as an original party to the contract”. This section is about the contract which is evidence or contained by the bill of lading and therefore it preserves the original shipper’s liabilities in the contract.

REFERENCE:

Books

1. Benjamin’s on the Sale of Goods, 7th Edition 2009.

2. Jeason Chuah, Law of International trade, Sweet & Maxwell 2009

3. Indira Car, Statutes and Convention on International Trade

Journals

1. Natalie Campbell, Defining the frontiers of the bill of lading holder’s liabilities “” the Berge Sisar and the Aegean Sea, Case comment, Journal of Business Law 2000, (J.B.L. 2000, Mar, 196-202)

2. Jeason Chauh, Carriage of Goods by Sea Act 1992, bills of lading, intermediate holders of bill of lading, transfer of liabilities, case note. Student Law Review 1999, 27 Sum

Cases

1. The Berge Sisar [2001] UKHL 17

2. The Aegean Sea [1998] 2 Lloyd’s Rep 39

3. The Ythan [2006] 1 Lloyd’s Rep 457