Sale Contracts. FOB Terms. Last updated 22-Oct-2015

In retrospect the flexibility of the fob contract is evident. Due to the nature of the fob contract it provides what may be called a "skeleton" set of terms which are the basis of any contract for the sale of goods. This skeleton can be added to, altered or tailored to fit the requirements of the parties using the term.
P.Evans, FOB and CIF contracts, ALJ, vol 67, 1993, p.858.

Introduction

The term fob stands for "free on board" and represents a type of sale contracts described as a contract for the sale of goods where the seller agrees to deliver the goods over the ship’s rail, and the buyer agrees to convey it overseas and therefore under which the buyer generally takes all the risks and expenses from the moment the goods crossed ship’s rail.

… 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 such a contract would be at the risk of the buyer whether they were lost or not on the voyage.
Per Brett, M.R in Stock v Inglis, (1884) 12 Q.B.D. 564 at p.573.

When the goods sold on fob terms the buyer is to nominate the ship and the seller undertakes to place the goods on board of ship at an agreed port of shipment. The seller bears all expenses and charges related to delivery of the goods on board of ship, and also he is under the duty to obtain export license.

Sale contract in President of India v Metcalfe Shipping Co [1970] 1 Q.B. 289, CA listed such expenses, for example, as below :

16. Shipping.

The stores shall be delivered by the sellers free on board stowed on such vessels as may be nominated by the purchaser … Inspection certificates, advice notes, packing accounts and invoices in such manner as may be required by the Director-General, India Store Department, shall be furnished by and at the cost of the sellers. …

The term ‘FOB vessel port of loading’ means:
(a) Loaded and stowed or trimmed on board overseas vessel at named port of loading, free of expense to purchaser.
(b) That it shall be the responsibility of the sellers to do the following:
(i) provide for and pay and bear all charges incurred in placing goods actually on board the vessel designated and provided by purchaser on the date or within the period fixed;
(ii) provide clean on board ocean bill of lading;
(iii) be responsible for any loss or damage or both until goods have been placed actually on board the vessel on the date or within the period fixed and clean on board ocean bill of lading is delivered to the purchasers or the agent nominated by purchasers;
(iv) render purchaser or his authorised agents assistance in obtaining the documents issued in the country of origin or of shipment, or of both, which may be required for purpose of exportation.…

The buyer pays all subsequent charges including cost of stowage of the goods on board ship, freight and marine insurance, all expenses related to unloading of the goods at the destination, import duties and consular fees.

FOB

Relationships between the parties to contract on fob term were described in details by Lord Hewart CJ in J. & J. Cunningham, Ltd. v Robert A. Munro & Co., Ltd. (1922) 13 Ll. L. Rep. 216 at pp.216-217:

The contract under consideration was for 200 tons of Dutch bran for shipment during October, 1920, price £13 per ton f.o.b. Rotterdam, buyers finding freight room. Under such an agreement it was the duty of the purchasers to provide a vessel at the appointed place, Rotterdam, at such a time as would enable the vendors to bring the goods alongside the ship and put them over the ship’s rail, so as to enable the purchasers to receive them within the appointed time – in this case October. It would not, for example, be sufficient for the vendors to bring them to a warehouse in Rotterdam or bring them alongside the vessel at five minutes before midnight on Oct. 31. The usual practice under such a contract is for the buyer to nominate the vessel and to send notice of her arrival to the vendor in order that the vendor may be in a position to fulfil his part of the contract. When the vendors tender the goods in question to the purchasers theoretically by placing them on the ship’s rail, it is open to the purchasers to reject if the goods are not in accordance with the contract.

This being the relationship between the parties the liability on either side may be varied
(1) by express contract altering the place or date of loading
(2) by the conduct of the parties.

For example, there may be circumstances which disentitle the purchaser to reject the goods when they are being placed on the ship’s rail, as for instance where he has by his conduct already accepted them before their arrival there; there may also be circumstances where, although the purchaser may be entitled to reject when the goods are being placed over the ship’s rail, yet the vendor may be entitled to recover damages in respect of the deterioration of the goods. Assuming the sale of a perishable cargo, say of fresh vegetables for October shipment, suppose the purchasers nominate their vessel and write to the vendors saying "she will be at the quayside in three days time." The vendors gather their vegetables and send them to the quayside; but the nominated ship does not arrive for a fortnight, during which time the vegetables go bad. It may be that the purchasers are entitled to reject the vegetables which have so deteriorated, but the vendors are then entitled to rely upon and bring into play another legal principle. It is not exactly an estoppel which prevents the purchasers from rejecting, but it is the doctrine that where one person makes a statement to another meaning that statement to be relied upon and acted upon by that other, if the other suffers damage by so relying and acting upon it he is entitled to recover such damage from the person making the statement. In the case put forward the damage would be the loss of price which the vendors would otherwise have obtained from the purchasers. This legal doctrine might be put in ordinary language as it is put in the case stated by the arbitrator, viz., that under such circumstances after the vendor has brought the goods to the quay at the invitation of the purchaser the goods remained at the purchaser’s risk.

Buyer has a right but not duty to examine the goods upon delivery to him at the place of destination and reject them if they do not meet contractual specification. Risk of loss or damage passes from the seller to the buyer together with property on goods crossing ‘ship’s rail’ or, generally, on the loading of the goods onto the vessel. Such point of the risk transfer is peculiar to FOB contracts and must be carefully examined when FOB terms applied to containerised and roll on ­ roll off shipments. FOB term is considered to be best suited for shipments of bulk commodity cargoes such as oil or grain, where the goods invariably pass the ‘ship’s rail’. In instances where the parties intend to have the risk transfer to be passed at a point other than ‘ship’s rail’ they might option for FCA (Free Carrier) term which limits the seller’s responsibility by the moment when the goods are ‘delivered to the named place and collected by the carrier nominated by the buyer’.

Recent development of the matter of risk transfer at the crossing of ship’s rail, is a decision in Soufflet Negoce S.A. v Bunge S.A. [2010] EWCA Civ 1102 where it was held that if the buyer assumes the risk of loading the cargo into unclean holds the seller cannot reject loading on the basis that holds are not clean enough, because the state of the holds is not a matter in which he has any real legitimate interest.

FOB Seller’s right to reject goods

In Aston FFI (Suisse) SA v Louis Dreyfus Commodities Suisse SA [2015] EWHC 80 (Comm) it was held that subject to the terms of any particular contract, an FOB buyer may be able to reject the goods even if the documents are contractually compliant. In other words FOB Buyer can reject goods without reliance on a certificate of quality which complies with the documentary requirements set down in the payment terms of the contract. Clear and unambiguous expression required for such certificate to be determinative of the quality of the goods, such that the absence of such contractually compliant certificate would, in effect, preclude Buyers from rejecting the goods for relevant disconformity.

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