The Definition And Essence Of F O B Contract

A seller f.o.b. performs his obligation by putting the goods which conform to the contract onboard the ship at his expense. The general rule in f.o.b. contracts is that risk passes on shipment and according to the traditional view, this is made when the goods cross the ship’s rail. Moreover, there are various types of f.o.b. contract, and for the sake convenience, they have been grouped under three major headings which depend on the intention of parties as decided by the terms of contract and the surrounding circumstances. It is in the first place directed exclusively to the elaboration of the first of the two basic features of the f.o.b. contract mentioned earlier, namely, to the division of costs and responsibilities which putting goods free on board may actually entail in various instances. For this reason they have been termed respectively the strict or classic f.o.b. contract, the f.o.b. contract with additional services and the f.o.b. contract (buyer contracting with carrier).

The definition of F.O.B.

It is difficult to define a FOB contract because there are many different variants: Devlin J. [1] explains the FOB contract as “a flexible instrument”. The main obligations of the parties to an FOB contract were described judicially in Wimble, Sons and Co v Rosenberg. [2] The seller must put on board ship goods which conform to the contract a must pay all charges in connection with loading. The seller is not obliged to book shipping space in advance; the buyer must nominate the ship to carry the goods and notify the seller of the nomination in time to allow the seller to deliver the goods on board. The costs of carriage are for the buyer’s account.

The essence of F.O.B. Contract

It is not easy to state in general terms the duties of an f.o.b. seller, for the obvious reason that they vary according to the type of f.o.b. contract in question. A further difficulty in discussing the duties of the seller results from the fact that shipment under an f.o.b. contract is in many respects a collaborative enterprise, involving co-operation between buyer and seller. It can, however, be said that the principal duties normally undertaken by an f.o.b. seller are to put goods which conform with the contract on board the ship in accordance with the shipping instructions (if any) received from the buyer, and the buyer are to bear the expense of doing so. Additional duties may, of course, be undertaken in the contract. [3] 

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When looking at the various judicial pronouncements that have attempted to define the f.o.b. term, one statement may be struck by the general term in which they are implicit. One of the earliest is probably Stock v Inglis [4] a case dealt with specific goods, where it was stated:

If the goods dealt with by the contract were specific goods, it is not denied but that the words free on board, according to the general understanding of merchants, would mean more than merely that the shipper was to put them on board at his expense; they would mean that he was to put them on board at his expense on account of the person for whom they were shipped; and in that case the goods so put on board under a contract would be at the risk of the buyer whether they were lost or not on the voyage.

Now that is the meaning of those words free on board in a contract with regard to specific goods, and in that case the goods are that the purchaser’s risk, even though the payment is not to be made on the delivery of the goods on board, but at some other time, and although the bill of lading is sent forward by the seller with documents attached, in order that the goods shall not be finally delivered to the purchaser until he has accepted the bills or paid cash. [5] 

Almost a century later Lord C.J. similarly stated in J. Raymond Wilson & Co. Ltd. v. N. Scratchard Ltd. [6] that the f.o.b. term has:

For a long time, certainly more than one hundred years, had a well-known meaning, and if a party sells goods free on board, the meaning is that he has to put the goods on board and to pay the expense of doing so, and delivery is made and the goods are at the risk of the buyer when they are on board, the expense having been paid by the seller. [7] 

Looking in both these judgments, there are two characteristics of the f.o.b. terms, which can be summarized as follows:

€ the seller must pay the cost and bear the responsibility of putting goods “free on board” , in other words, bear the full liability for the cost and safety of the goods until the point of their passing the ship’s rail, and

that upon this being accomplished delivery is complete and the risk of loss in the goods is there and then transferred to the buyer. [8] 

However, the above cited definitions are only directed to the essential features of the f.o.b. term. They do not include an extensive or detailed examination of a variety of marginal responsibilities of which many have been the subject of dispute and even litigation between parties to f.o.b. sales. For example, they do not indicate whether an obligation, monetary or other, which relates to the shipment of the goods, that must be complied with before the goods can in fact be loaded, is for the buyer’s or for the sellers account. [9] In the absence of express contractual stipulations, judicial interpretations have had to rely on usage or custom and by implication attempt to ascertain what the intention of the parties with respect to performance must have been.

Furthermore, there are various types of f.o.b. contracts, and for the benefit of convenience, they have been divided into three groups. The variations appear in the other incidents of the relationship between the parties depend upon the terms of the contract and the surrounding circumstances. [10] The first type is the strict or classic f.o.b. contract. The second is the f.o.b. contract with additional services. The last type may be described as the f.o.b. contract (buyer contracting with carrier). [11] 

Type of F.O.B. clauses

Schmitthoff states that the term f.o.b. is used in transactions of different character and the responsibilities which arise under the clause differ according to the nature of the transactions in which the term occurs. The incidental obligations which the term f.o.b. implies have to be ascertained by an analysis of the express or implied intention of the parties. A distinction of considerable practical importance is that between three types of f.o.b. contracts, and, it depends on the parties which of these types are used. [12] 

The first type is the strict or classic f.o.b. contract. Schmitthoff explains this type of f.o.b. in the following term. He said:

Under this arrangement the buyer has to nominate a suitable ship. When it arrives in the port of shipment, the seller places the goods on board under a contract of carriage by sea which he has made with the carrier, but this contract is made for the account of the buyer. The seller receives the bill of lading which normally shows him as consignor and is to his order, and he transfers it to the buyer. Marine insurance is normally arranged by the buyer directly, if he wishes to insure, but he may also ask the seller to arrange marine insurance for the buyer’s account. [13] 

The second type is the f.o.b. contract with additional services. Schmitthoff notes that:

Under this arrangement the shipping and insurance arrangements are made by the seller, but this is done for the account of the buyer. In this type of f.o.b. contract the buyer is not under an obligation to nominate a suitable ship but the nomination is done by the seller. Again, as in contracts of the first type, the seller enters into a contract with the carrier by sea, places the goods on board ship and transfers the bill of lading to the buyer. [14] 

The third type may be described as the f.o.b. contract (buyer contracting with carrier). Schmitthoff states that:

Here the buyer himself enters into a contract of carriage by sea directly or through an agent, e.g. a forwarder. Naturally the buyer has nominated the ship, and when it calls on the port of shipment, the seller puts the goods on board. The bill of lading goes directly to the buyer and does not pass through the seller’s hands. [15] 

Consequently, in f.o.b. contract of the first and third type the buyer has the duty to nominate the ship, but in the second type this duty rests with the seller. [16] Furthermore, in contracts of the first and second type ‘the seller is in contractual relationship with the sea carrier, and for this reason the second type has been described as a variant of the first type.’ [17] However, for the third type it is the duty of the buyer who may make the contract of carriage by sea with the carrier and the seller is not a party in this contract. [18] 

The Duties of the Parties

The f.o.b. term is very flexible. Therefore, the duties of the parties between three types of f.o.b. contract subjects to the intention of the parties and the surrounding circumstances which of these types is used. [19] 

1) Nomination of Vessel

The obligation to nominate the vessel can be placed on the seller or the buyer. However, unless agreed otherwise, this duty in f.o.b. contract is on the buyer. [20] Hence, in this case the buyer has to nominate an effective vessel in which he has booked shipment space. The buyer also has the duty to inform the seller of the name of the ship and the date when the vessel will be available for loading. [21] The nomination must be notified to the seller to give the seller sufficient time to put the goods on board a ship nominated by the buyer.

If the buyer fails to nominate an effective vessel is a breach of contract, the seller is entitled to claim damages for breaching of the contract. Nevertheless, the seller will not be able to claim the purchase price if the buyer has not nominated an effective ship because the ownership in the goods will remain with the seller. In Colley & Overseas Exporters [22] the seller was only entitled to damages, and not to the purchase price since the buyer failed to name a ship so property in the goods still remain with the seller and never passed to the buyer. [23] As a result of this uncertainty, the seller is advised to insist upon a contract clause requiring the purchase price to become due on a fixed date, whether a suitable vessel has been named or not. [24] 

Some f.o.b. contracts need the purchaser’s notification of the vessel’s nomination and readiness to receive delivery of the goods is given to the seller in advance of delivery. Then, if the buyer fails nominate a vessel on time means he is in breach of the contract, and the seller may refuse to deliver the goods on board, in Bunge Corp. v Tradax Export S.A. [25] was held that:

The court will require precise compliance with stipulations as to time, wherever the circumstances of the case indicate that this would fulfil the intention of the parties…

And that:

It is clearly essential that both buyer and seller… should know precisely what their obligations are, most especially because the ability of the seller to fulfil his obligation may well be totally dependent on punctual performance by the buyer.

Schmitthoff states that the buyer has the duty to nominate a vessel in a strict f.o.b. contract and an f.o.b. (buyer contracting with carrier) contract. However, this duty is not necessarily for him in f.o.b. contracts with additional services since ‘in this type of contract he may leave the choice of the ship to the seller.’ [26] 

2) Substitute Vessel

Time of nomination is usually of the essence of the f.o.b.contract. Therefore, if the nominated ship is withdrawn or the nomination fails for some other reason, the buyer is obliged to name a substitute vessel, on condition that loading can be accomplished within the contract period. [27] This was so held in Agricultores Federados Argentinos v. Ampro S.A. [28] .Consequently, it means that if the buyer’s first nomination fails and the original vessel becomes unavailable for any reason, a substitute vessel may still be nominated by the buyer, provided loading can be completed within the contract period. [29] Moreover, the purchaser must respond any additional expense caused by the substitution.

3) The Duty to Obtain an Export License

Normally the duty to obtain an export license is on the seller since he is in the better position to do so and the language of the contract or the surrounding circumstances may indicate that the seller was intended to assume this duty. [30] On the other hand, if he does not, there is no rule about who should have the duty to procure an export license under an f.o.b. contract. Each case must be determined on its own fact and situation. In H.O. Brandt & Co Ltd. v H.N. Morris Ltd [31] the Court of Appeal held that ‘the obligation of applying for and obtaining an export license lay with the buyers rather than the sellers’ and

Scrutton L.J. observed that:

…the buyers were under a duty to provide an effective vessel that is to say a vessel, which can legally carry the goods. If this is so the obtaining of a license is the buyer’s concern. It is their concern to have the vessel sent out of the country after the goods have been put on board and the fact that a prohibition against export includes a prohibition against bringing the goods to the port or other place for exportation does not cast a duty of obtaining a license on the sellers. Bringing the goods on to the port is merely subsidiary to the export, which is the gist of the license.

On the other hand, in A.V. Pound & Co Ltd. v M. W. Hardy & Co. Inc. [32] , by the House of Lords was held that ‘in the circumstances of the case the duty to secure the export license was cast on the sellers and not on the buyers.’

Accordingly, it is obvious that duty to secure an export license will depend upon the circumstances of each case that it shall be obtained by the seller or the buyer.

4) Transfer of Property

Under the ship’s rail rule is explained that for the f.o.b. contract there is a presumption that the passing of property to the buyer occurs when the goods pass the ships rail, but this remains subject to any express indication by the parties that they intend the passing of the property can occur at a different time under the Sale of Goods Act 1979, s.17.

According to the above rule, there is the legal notion is applied despite the fact that some period before passing the ship’s rail it will have become impractical for the seller to recall and substitute the goods.

In Pyrene v Scindia Navigation Co. Ltd. [1954] [33] , said:

…a fire tender was damaged during the loading process immediately before it had crossed the ship’s rail. The property in the soods remained with the seller at the time they were damaged even though, in reality, the seller could not by then have halted the loading to call the fire tender back to shore to substitute it with another.

5) Transfer of Risk

In f.o.b. contract Goode notes to the passing of risk of the goods that ‘the risk passes to the buyer on shipment even though the seller has retained the bill of lading, or has had it made out to his own order to secure the price, and even if he intended to reserve a right of disposal’. [34] 

Conclusion