The passing of property and risk under the international sale

Introduction

there are four types of contract will be considered, the central tow kinds being contracts whose essential terms have become standardized by commercial practice although there is considerable variation in

matter of detail, these four are;

F O B (free on board).

F A S (free along side ship).

C F R (cost and freight).

C I F (cost insurance fright).

Many export and import transaction are made subject to incoterms 2000.

F O B

Free on board means that the seller delivers when the goods pass the ships rail at the named port of shipment this means that the buyer has to bear all costs and risk of loss or damage to the goods from that point. The FOB term requires the seller to clear the goods for export.

The Fob contract is very flexible. In its pure form (some times called strict FOB), the buyer acts as the shipper and as such nominates the vessel concludes the contract of carriage, collects the bill of lading and pays the freight and insurance premium. The seller need only put the goods on board the ship nominated by the buyer at the port of shipment, on the date or within the period agreed and in the manner customary at that port. The seller must pay for such delivery over the

ships rail as well as export duties, the buyer for such delivery and provide the buyer with the commercial invoice and such documents or documents as will enable him to take possession of the goods at the port of discharge or to obtain bill of lading. In incoterms 200, FOB para.A6 (the seller must pay for and obtain any export license or other official authorization required) and para.A2 (while the buyer must pay import duties and obtain any needed import license or other official authorization required for import).

Frequently, however, the terms of the sale contract custom, a course of dealing between the parties or other circumstances (such as the convenience of the buyer) may impose additional responsibilities on the seller in an FOB sale. In what is sometimes called an extended FOB sale it is the seller rather than the buyer, who acts as the shipper. The seller books space on the vessel, delivered the goods on board at his own expense. And procure the bill of lading (usually as an agent of the buyer) and at the latter's expense, which he must send to the buyer (or a bank) promptly. The seller does not have to pay the freight, however or to advance it on the buyers behalf, such responsibilitiy, as well as the cargo insurance arrangements, resting with the buyer. Nor is the fright or insurance premium include in the price of the goods. The FOB seller must, however, provide the buyer, on request, with the necessary information for procuring insurance. Neither according to section32 (3) of the sale of goods Act 1979(Unless otherwise agreed, where goods are sent by the seller to the buyer by a route involving sea transit, under circumstances in which it is usual to insure, the seller must give such notice to the buyer as may enable him to insure them during their sea transit; and if the seller fails to do so, the goods are at his risk during such sea transit) those section requiring the seller to give notice to the buyer as may enable him to insure the goods during their voyage , a provision which has been applicable even in strict FOB sales.

In FOB sales, once the goods are aboard, the seller has no further responsibility. Even where he has procured the bill of lading, he is not necessarily treated as a party to the contract of carriage. He does not undertake that the goods will arrive safely or at all. The buyer therefore

is left to sue the carrier for loss or damage to the goods attributable to the letters fault or negligence in performing the carriage and- or the cargo insurer if such loss or damage falls within the coverage provided by the marine insurance policy.

In Pyrene Co Ltd Vs Scindia Navigation Co Ltd 1954, 2 QBD an air port fire tender, which had been sold on FOB terms by pyrene to the government of India, was dropped and damaged while being loaded for export on to a ship belonging to Scindia. It had not crossed the ships rail.

Contract for the carriage of goods by sea were at the material time regulated by an international convention know as the Hague rules, which limited the liability of the carrier for negligent damage to the goods to £200 .but the contract of carriage here had been made between Scindia and the buyer . This action was brought in tort by the sellers (as consignors of the goods in question), claming £966 damages against Scindia for negligently damaging the tender. The question was weather the limitation of liability under The Hague rules could be pleaded in defence. It was argued that the doctrine of privity prevented Scindia from relying directly on the contract of carriage. Devlin J held, however, that on the facts the sellers had participated on the contract of carriage sufficiently for them to be bound by The Hague Rules, or that (alternatively) there was a collateral contract between the parties, into which the Hague rules could be incorporated on the basis of usage or custom. In the course of his judgment, he explained some details regarding the nature of FOB contracts and the incidence of their

performance.

Where the goods and the documents conform to the contract, the buyer must of course, pay the price stipulated in the contract. The buyer may reject the documents, however if they do not conform with the contract of sale , but the seller may cure the defect by tendering new, conforming documents if there is still time to do so under the contract. The buyer may also reject the goods, if they are nonconforming to the contract, even if he has already accepted the documents, provided that the non conformity was not evident on the face of the documents. Alternatively he may accept the goods and sue for damages for breach of warranty.

This term can only be used for sea inland waterway transport; if the parties do not intend to deliver the goods across the ships rail the FCA

term should be used .

The seller's duties are as follows;

To supply the goods with evidence of conformity with contract.

To deliver the goods on board the ship at the place and the time stipulated by the contract or nominated by the buyer.

To obtain the export license.

To bear all costs up to and including loading (a cross the ships rail).

To provide documents evidencing delivery to the ship certificate of origin.

To co operate with the buyer in procuring the bill of lading and other documentation.

To give notice to the buyer to enable him to insure the goods during their sea transit.

The buyer's duties are as follows;

To procure a suitable ship or shipping space and give the seller due notice of the ship and place and time of loading.

To pay the price

To bear all costs subsequent to the goods passing the ships rail.

To bear the costs of procuring all documentation including the bill of lading and certificate of origin.

The passing of property and risk in FOB contract

The combination of the two presumptive rules concerning the passing of property and the transfer of risk means that in the case of an FOB contract –risk will pass when the goods are put on board. And property presumptively passes when the goods are delivered to the carrier even if

The seller reserves the right of disposal. Delivery considered complete once seller places the goods on board the named vessel at the named port and at stipulated time. This means that the seller bear all cost and risk of loss or damage to the goods until they have passed the ships rail at the named port of the shipment and the buyer bear all cost and the risk of loss or damage to the goods from the time they have passed the

ships rail at the named port of shipment .

C I F contract

Cost insurance and freight means that the seller delivers, when the goods pass the ships rail in the port of shipment.

The seller must pay the cost and freight necessary to bring the goods to the named port of destination but the risk of loss or damage to the goods, as well as any additional cost due to events occurring after the time of delivery, are transferred from t5he seller to the buyer. However in CIF the seller also has to procure marine insurance against the buyer's risk of loss or damage to the goods during the carriage.

Consequently, the seller contracts for insurance and pays the insurance premium. According to the rule under the incoterms 200, para.A3 (b) requires the seller to obtain cargo insurance such that the buyer or any other person having an insurable interest in the goods may claim directly from the insurer. The insurance must be contracted with underwriters or an insurance company of goods repute and failing express agreement to the contrary, is in accordance with minimum cover of the insurance cargo clauses .the duration of the insurance must be from the time the goods pass the ships rail in the port of shipment. The buyer should note that under the CIF term the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have the protection of greater cover, he would either need to agree as much expressly with the seller or to make his own extra insurance arrangements.

The CIF term requires the seller to clear the goods for export this term can be used only for sea and inland water way transport. If the parties do not intend to deliver the goods across the ships rail the CIP (carriage and insurance paid to) term should be used.

The CIF seller is the shipper, who contracts for carriage of goods, not as agent of the buyer, but rather as a principal in his own name. The seller nominates his vessel and notifies the buyer accordingly. The seller also insures the goods in the name of the buyer and pays the freight, which charges are then normally included in the price of the goods. The shipper at his expense must deliver the goods on board the ship at the port of shipment on the date or within the period agreed and notify the buyer of this delivery. He then sends the usual shipping documents promptly to the buyer (or to a bank, in a document credit transaction).

The CIF seller may also himself buy the goods when they are already afloat. In such a case, he must transfer his right under the contract of carriage and insurance to the buyer, together with the usual shipping documents. The CIF sale has sometimes been described (some what misleadingly) as a sale of documents relating to goods rather than as a sale of goods.

The CIF seller does not undertake that the goods will arrive safely or at all. The buyer is there fore left to his recourse agents the carrier and or the cargo insurer in respect of loss or damage to the goods in transit. The buyer must accept the documents if they are in conformity with the contract, he must also pay for the goods if they are similarly conforming. If the documents do not sue conform, and if the buyer is unable to tender conforming documents in the time specified by the contract the buyer may reject them as being other than the usual shipping documents to which he is entitled and refuse payment. The goods shipped must also conform to their description in the sale contract, otherwise the buyer may reject them even if he has already accepted the documents or, alternatively, sue for damages for breach of warranty or abatement of price.

The main features of c I f contract were summarized by Lord Wright in SMYTH & CO LTD V BAILEY SON & CO L T D the contract in question here is of a type familiar in commerce, and is described as a c I f contract. The initials indicate that. The price is to include cost, insurance and freight, it is a type of contract which is more widely and more frequently in use than May show that the property was not intended to pass on shipment

but upon tender and payment the seller by the form in which he took the bill of lading intending to reserve his right of disposal until he was paid against the shipping document.

This term can only be used for sea inland waterway transport

The seller's duties are as follows;

To ship at the agreed port of shipment goods of the contract description or (procure goods afloat which have been so shipped).

To procure a contract of sea carriage by which the goods will be delivered to the contract destination.

To insure the goods under an insurance contract which the goods will be available for the benefit of the buyer.

To procure a commercial invoice in conformity with the contract.

To tender these documents to the buyer or his agent or bank

This means that the seller bear all risk of loss or damage to the goods until they have passed the ships rail at the named port of shipment.

The buyer's duties are as follows;

To accept the documents, if they are in conformity with the contract and pay the price.

To take delivery of the goods at the agreed destination and pay all unloading costs.

To pay customs and other duties at the port of arrival.

To procure any necessary import license.

It is quit clear that the buyer bear all risk of loss or damage to the goods from the time they have passed the ships rail at the named port of shipment.

The passing of property and risk in CIF contract

The rule is that upon shipment the risk is transferred to the buyers he assumes all risk of loss or damage from the time the goods have passed over ships rail at the port of shipment. Shipment means the actual loading of the goods on board, it does not mean delivering the goods at the docks to an agent of the ship for future shipment and the property only passes when the documents are transferred and paid for. Also the delivery considered complete once

product has been loaded at port of shipment .

In a CIF contract the property in the goods and the right of possession normally pass to the buyer when the documents are handed over. In Kweitek Chao Vs British traders & shipper ltd this case conforms that the buyer has two rights to reject, he may refuse to take up the documents if they are in conformity with the contract and he may reject the goods even after having accepted the documents if he later discovers a breach on the seller part.

The document tender under a CIF contract must be valid an effective at the time of tender; it is not sufficient that they were valid when issued in Arnold Karberg & Co Vs Blythe, Green, Jourdian& Co in this case Blyth & co had contracted to buy Chinese horse beans CIF Naples, beans were duly shipped in July 1914 aboard German ship, the genres; but before the document s were due to tender war was declared against Germany, with the consequence that the contract of carriage contained in the bill of lading became void for illegality the court of appeal held that ;the buyers were entitled to reject this bill. It doesn't as such deny that the parties to a CIF contract may transfer to the buyer the risk of having in effectual rights agents an enemy alien carrier or insurance.

The documents relating to the sale and carriage of goods have been elevated to apposition of special importance to the point where from many purpose they are treated in law as representing the goods themselves. For instance delivery of the goods can be affected by handing over these documents. The principal documents for this purpose are;

The bill of lading

The commercial invoice

The policy of marine insurance

But there have been a few unusual cases in which property has been held to pass in CIF contract at some other time than the transfer of document;

1-for instances where the relationship between the parties was such that the seller was not concerned over the immediate payment of the price; then the property was held to pass on ship shipment or at latest on the transfer of the bill of lading even though the price was then paid. In Alba zero the seller and buyer were both companies which were member of one corporate group and the sale was not a genuine arms length transaction. It held that; property passed on the posting of the bill of lading, conversely where a seller sold goods in his warehouse and make deliveries as required, payment being made only after the goods left the warehouse, it held that; property had not passed prior to delivery of bill of lading.

2-another case is that of the sale of an undivided share of goods carried in bulk. Because of section (16) of the sale of goods Act 1979 to be ascertained before property can pass. (Where there is a contract for the sale of unascertained goods no property bin the goods is transferred to the buyer unless and until the goods are ascertained)

Variant on c I f contract is c&f

The c I f in which the buyer arranges his own insurance but in other respects the shipping arrangements are made by the seller and once again property usually passes when the documents are transferred in exchange for payment of the price.

F A S contract

Free along side ship means that the seller delivers when the goods are placed along side the vessel at the named port of shipment, and delivery is considered complete when seller places goods alongside vessel at the

named place and at stipulated time. This means that the buyer has to bear all costs and risk of loss or damage to the goods from that moment however, if the parties wish the buyer to clear the goods for export. This should be made clear by adding explicit wording to this effect in the contract of sale. This term can be used only for sea or inland water way transport.

With the exception of the place of loading (alongside rather than on board), FAS sales generally follow the same rules as FOB sales.

C F R contract

Cost and freight means that the seller delivers when the goods pass the ships rail in the port of shipment.

The seller's duties are as follows;

The seller must pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss or damage to the goods as well as any additional costs due to events occurring after the time of delivery, until full payment has been made, are transferred from the seller to the buyer.

2-The C F R requires the seller to clear the goods from export this term can use only for sea and include waterway transport. If the parties do not intend to deliver the goods across the ships rail the c p t term should be used (carriage paid to).except for the fact that the CFR seller does not have the obligation of insuring the cargo, the rules on CFR sales (formerly termed C & F cost and freight) sales generally follow those of CIF sales.

The buyer's duties are as follows;

-accept delivery of the goods at the named port of destination after receipt of the transport documents.

-bear all risk of loss or damage to the goods from the time they have passed the ships rail at the named port of shipment.

The passing of property and risk in CFR

Risk is with the seller before the delivery of goods at the ships rail and with the buyer after the time of delivery.

Where those terms of sale can be used in land, waterwaytransport.

Conclusion

Understanding that CIF & CFR are not arrival contract s, and this means that the point of transfer of risk with these (C) terms is the same as with(F) terms in the country of departure.

Understanding that FOB (free on board) is only a appropriate where the seller fulfills his obligation to deliver when the goods have passed over the ships rail at the named port of shipment. The FOB terms require the seller to clear the goods for export. This term can be used only for sea or in land water way transport. Where goods are handed over to the carrier for subsequent entry into the ship for example when the goods are contained or loaded on Lorries or wagon .the term FCA should be considered.

s.