Sale Contracts
Introduction
Basis of any carriage of the goods by sea is a sale contract, i.e. a contract between the seller of the goods and the buyer. When actual sale and purchase has been agreed between parties they make arrangements for transportation of the commodity from place of origin to place of delivery. Therefore each international transaction which involves sea transit of the goods usually contemplates at least two contracts: a contract of sale and a contract of affreightment.
Export sales 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. 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
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
There are standard sets of terms, such for example as Incoterms 2000 or Incoterms 2010, both editions 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. Incoterms have been revised several times in order to reflect international trade developments. Last revision is Incoterms 2010 in force from 1st January 2011.
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