NATIONS SCHOOL OF LAW

LONDON LLB PROGRAMME

Commercial law worksheet 9 – FOB AND CIF contracts

FOB – “free on board” contracts

Initially the elements of an FOB contract was defined in Wimble & Sons Co v Rosenberg as one where the seller must put
on board the ship the goods as conformed to the contract of the buyer and must pay all charges in connection with the
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. All costs of carriage are paid by the
buyer - meaning the seller meets all the expenses of delivering the goods over the ship’s rail but the buyer meets all subsequent
costs. Generally once the loading obligation has been fulfilled the property and the risks in the goods pass to the buyer unless
the seller indicates otherwise in the document (bill of lading or some other separate document) a retention of title of the goods
until they are paid for in which case risks will transfer to the buyer once the goods have been loaded onto the ship and the
seller’s obligations have ended but title or property however will be delayed to the buyer until payment is received by the seller.

However, FOB contracts are very flexible instruments and can be modified to suit the specific needs of the parties involved.
In Pyrene Co ltd v Scindia, Lord Devlin identified 3 circumstances where a modification may occur:

1. The first is the basic / FOB contract where the buyer designates a ship on which the seller loads the goods. There is
no prior contractual arrangement between the buyer and the carrier. The seller delivers the goods to the ship and puts
them on board in return for a bill of lading. In either case, seller forwards the bill of lading to the buyer – hence
making them both parties to the contract.
2. Seller may undertake additional duties. Seller may undertake the duties to arrange carriage and possible insurance.
Seller places the goods on board and receives a bill of lading in his own name which he forwards to the buyer in
return for payment. This FOB is similar to a CIF contract with the exception that the contract price excludes carriage
costs and so if they increase, the buyer must pay extra.
3. The buyer may take the contract of carriage in advance, in which case the seller puts the goods on board in exchange
for a mate’s receipt (receipt from carrier that would be used to issue a bill of lading to the buyer). According to section
20 of the sale of goods act 1979 – risk prima facie passes with property which normally passes to the buyer when the
good are put across the ship’s rail. Even in circumstances where property does not pass to the buyer when the goods
are across the ship’s rail (due to a retention of title clause) risk normally passes.

In addition to the above distinctions mentioned by Lord Devlin in Pyrene, Lord Mance in the Scottish case of Scottish
& Newcastle International ltd v Othon Glananos Ltd (2008) also sets out some differences between FOB and CIF
contracts as states at p. 127 of the Studyguide.

However considering the fact that the distinctions between CIF and FOB have evolved over time, the contracts
themselves will have to be perused and thoroughly scrutinized in order to determine whether the parties intended a CIF or
an FOB contract. While the terms used are important they are conclusive and the court will look at substance over form –
see the cases of:

The Albasero (1977)

The Parchim (1918)

Law and Bonar v British and American Tobacco Co ltd (1916)

 DUTIES OF THE SELLER IN FOB CONTRACTS

1. Deliver the goods to the place of loading

The seller is obliged to deliver the goods to the place of loading and load them on the vessel agreed by the parties or
designated by the buyer. Failure to do so is a breach of a condition. See the case of CTI Group Inc v Transclear SA
(2008). However the seller is not liable where the failure to deliver is caused by the buyer’s breach of their obligations
to nominate a ship. See FE Napier v Dexters Ltd (1926).
2. Pays the charges of loading the goods to the ship’s rail
3. Make contract with the carrier on behalf of the buyer
4. Provide necessary information for the buyer to insure the goods. Failure to do so will mean that risk of loss does not
pass to the buyer but remains with the seller. This is usually not difficult for if the buyer is required by contract to
nominate the ship or carrier and stipulate the date of loading, they will usually have sufficient information without
notification by the seller. Wimble & Sons v Rosenberg ( 1913)
5. Ensure that the goods confirm to the implied and expressed terms under the contract. See cases of:
Bowes v Shand (1877)
KG Bominflot v Petroplus Marketing AG (2009)
George Wills & Sons Ltd v Thomas Brown & Sons (1922)
6. Tender to the buyer the documents stipulated in the contract

DUTIES OF THE BUYER IN FOB CONTRACTS

1. In classic FOB contracts, the Buyer must nominate the ship on which the goods are to be loaded and must give
sufficient notice of the nomination to the seller for the goods to be loaded within the contractual shipment period. It
is a condition precedent that the ship must be capable of receiving the goods. See cases of Cunningham Ltd v
Robert (1922), Bunge v Tradax Export SA (1981)
2. The buyer must accept delivery of the goods within the shipment period and pay the price. See the cases of Glencore
Grain Rottendam BV v Lebanese Organisation for International Commerce (1997)
3. The buyer must pay the costs after the goods have crossed the ship’s rail

PASSING PROPERTY AND RISK

While one may think that property and risk passes simultaneously to the buyer when the goods are across the ship’s rail, in
FOB contracts this is not the case. While risk may pass, property does not. See Inglis v Stock (1885). However risk may not
pass to the buyer where the seller fails to provide sufficient information to enable the buyer to insure the goods or where the
seller’s contract with the carrier is not reasonable having regards to the nature of the goods or the relevant circumstances.
Regardless of whether risk passes, the implied terms of satisfactory quality and fitness for particular purpose are likely to
require that the goods can sustain a voyage of the type contemplated by the parties. In classic FOB contracts property and risk
pass to the buyer at shipment or loading across the ship’s rail. See Carlos v Charles Twigg & Co Ltd (1957), President of
India v Metcalfe Shipping Co (1970). However modern position in FOB contracts is that the seller will retain the property
in the goods as security for payment – through a clause in the bill of lading document which states that the seller is taken to
reserve the right of disposal until the condition of payment is made by the buyer. See the cases of:

Mitsui & Co ltd v Flota Merchante Grancolumbiana SA (1989)

Leigh & Sullivan Ltd v Aliakmon Shipping (The Aliakmon) (1986)

REMEDIES OF THE BUYER AND SELLER

See previous worksheet – revision

Activity 7.2

a. Glass sold fob Liverpool to a buyer in France is packed by wrapping in some sheets of paper. As a result, the glass is
damaged during transit. Advise the buyer.

b. The seller under a contract ‘fob Liverpool, April shipment’ brings the goods alongside the ship shortly before midnight
on 30 April. The seller cannot put them on board because the stevedores hired for this task are ‘too busy’. The
stevedores will be able to load the goods on 1 May. Advise the buyer.

c. How might your answer to (b) have differed if half of the goods were loaded in March and the rest in April?

d. Under an fob contract, does the fact that property in goods has not passed to the buyer mean that risk will not have
passed?

e. Cheese sold ‘fob Liverpool October’ is delivered by the seller to Liverpool port on 14 October. The buyer is required by
the contract to nominate a ship, but fails to do this until 28 October by which time the cheese has perished. Advise the
seller.