Sale Contracts. Introduction. Last updated 06-Sep-2015

Contracts for the international sale of goods exhibit a characteristic which is not present in domestic contracts of sale, in that they are entwined with other contracts. These other contracts include the contract for the carriage of goods by whatever means has been agreed, the contract of insurance, and perhaps a contract with a bank or banks under which payment for the goods is to be effected. In many export transactions the delivery of shipping documents to the buyer or the agent of the buyer plays an important, if not pivotal, role in the performance of the transaction. These documents are usually the bill of lading, the commercial invoice and the insurance policy. It is therefore clear that within an export transaction there may be many constituent transactions, …
Because of the international character of the transaction and its complexity, regard must be had to the possibility of a dispute arising between the parties.
Schmitthoff’s Export Trade, 10th ed., p2.

Carriage of the goods by sea is part of international trade transaction in the heart of which is a sale contract, i.e. a contract between the seller of the goods and the buyer. Upon completion of negotiations over sale contract the party responsible for transportation of the goods make necessary arrangements for carriage of the commodity from place of origin to place of delivery. Therefore each international transaction which involves sea transit of the goods normally contemplates at least two contracts: a contract of sale and a contract of affreightment.

Export sale transactions usually embody so-called trade terms. These trade terms have been developed by international mercantile custom with the purpose to simplify the sale of goods abroad. Standard sets of term, such for example as Incoterms 2000 or Incoterms 2010, were sponsored by the International Chamber of Commerce. Publishing of trade terms in standard sets removes any doubts as to the meaning of terms, therefore allowing the buyer and the seller to refer to a term as, for example, “c.i.f. Hamburg (Incoterms 2000)”. The ICC introduced the first version of Incoterms, short for "International Commercial Terms," in 1936. There are currently 11 Incoterms. Incoterms have been revised six times in order to reflect international trade developments.

There are two terms which are most commonly used in international transactions: f.o.b. and c.i.f. Comprehensive definition of f.o.b. contract done by Devlin J in Pyrene Company Ltd v Scindia Steam Navigation Company Ltd [1954] 1 Lloyd’s Rep. 321 for many years remains the leading authority on the subject:

In what … called the classic type [of f.o.b. contract] … the buyer’s duty is to nominate the ship and the seller’s to put the goods on board for account of the buyer and procure a bill of lading in terms usual in the trade. In such a case the seller is directly a party to the contract of carriage at least until he takes out the bill of lading in the buyer’s name. Probably the classic type is based on the assumption that the ship nominated will be willing to load any goods brought down to the berth or at least of which she is notified. Under present conditions, when space often has to be booked well in advance, the contract of carriage comes into existence at an earlier point of time. Sometimes the seller is asked to make the necessary arrangements; and the contract may then provide for his taking the bill of lading in his own name and obtaining payment against the transfer, as in a c.i.f. contract. Sometimes the buyer engages his own forwarding agent at the port of loading to book space and to procure the bill of lading; if freight has to be paid in advance this method may be the most convenient. In such a case the seller discharges his duty by putting the goods on board, getting the mate’s receipt and handing it to the forwarding agent to enable him to obtain the bill of lading. The present case belongs to this third type; and it is only in this type, I think, that any doubt can arise about the seller being a party to the contract.

Diagram 1. Seller-Buyer-Charterer-Owner relationship under F.O.B. contract

FOB

Classic definition of c.i.f. contract one can find in judgment of Lord Atkinson in Johnson v Taylor Bros & Co Ltd [1920] AC 144 at pp.155-156:

I think, that when a vendor and purchaser of goods situated as they were in this case enter into a c.i.f. contract, such as that entered into in the present case, the vendor in the absence of any special provision to the contrary is bound by his contract to do six things. First, to make out an invoice of the goods sold. Second, to ship at the port of shipment goods of the description contained in the contract. Third to procure a contract of affreightment under which the goods will be delivered at the port contemplated by the contract. Fourth, to arrange for an insurance upon the terms current in the trade which will be available for the benefit of the buyer. Fifthly, with all reasonable despatch to send forward and tender to the buyer these shipping documents, namely, the invoice, bill of lading and policy of assurance, delivery of which to the buyer is symbolical of delivery of the goods purchased, placing the same at the buyer’s risk and entitling the seller to payment of the price.…if no place be named in the c.i.f. contract for the tender of the shipping documents they must prima facie be tendered at the residence or place of business of the buyer.

Thus under both c.i.f. and f.o.b. contracts one party has to conclude a contract of carriage for transportation of the goods to destination. When such contract made directly with the shipowner, it may be on one of three forms: the charterparty, the bill of lading, or the waybill.

Diagram 2. Seller-Buyer-Charterer-Owner relationship under C.I.F. contract

CIF

Below some basic terms with short descriptions:

Term
Definition
Risk
Cost
EXW
Ex Works
Buyer arranges for pick up of goods at the seller’s location. Seller is responsible for packing, labeling, and preparing goods for shipment on a specified date or time frame.
Buyer assumes all risk.
Buyer pays all transportation costs.
FCA
Free Carrier
Seller is responsible for costs until the buyer’s named freight carrier takes charge.
Seller and buyer
Split evenly
FAS
Free Alongside Ship (over water only)
Buyer arranges for ocean transport. Seller is responsible for packing, labeling, preparing goods for shipment and delivering the goods to the dock.
Seller: until the goods reach the dock.
Buyer: from dock to destination.
Buyer pays all ocean transport costs. Selleris responsible for costs associated with transporting the goods to the dock.
FOB
Free On Board (over water only)
Seller arranges for ocean transport of the goods, preparing goods for shipment, and loading the goods onto the vessel.
Buyer: once the items are on board.
Seller pays wharfage (charges to load the goods onto the ship) and freight forwarder fees.
CFR
Cost and Freight (over water only)
Seller has the same responsibilities as when shipping FOB, but shipping costs are prepaid by the seller.
Seller assumes risk until the shipment reaches the overseas dock.
Seller pays costs of freight fees up to destination.
CIF
Cost, Insurance, and Freight (over water only)
Seller has the same responsibilities as when shipping CFR with the addition of including a marine insurance policy.
Seller assumes risk until the shipment reaches the overseas dock.
Seller pays insurance and freight forwarder fees.

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Posted by: Naga Sulapani 9 February 2015

Thank you so much… such a wonderful work… always helped me on time with the info. i required… great going …
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