Law problem question – FOB contract

INTRODUCTION

In this case study, Imran bought 20 tons of Alfalfa from James with FOB contract. The buyer nominated the ship which is The Hulk and James made the contract of carriage, procured a bill of lading and put the goods on board within the contract period. When the goods reached to Karachi, were found damaged by mould. The buyer seeks to reject the goods or to gain compensation for the reduction. To answer this case study, this paper will examine the passing of property and passing of risk in FOB sale and the concept of seaworthiness. Finally, the paper will give advice to the buyer with analysing his rights according to related law.

LEGAL ISSUE

There are three types of delivery. Delivery might complete the beginning of carriage or when the goods are received and according to the determination, in other words, delivery depends on the contract. In this particular case, parties agreed to sell the goods under FOB which means free on board agreement. In this case, parties preferred classic type of FOB contract and it was classified in the case of The El Amria and The El Minia as pursues:

‘’In the first, or classic type, the buyer nominated the ship and the seller put the goods on board for the account of the buyer, procuring a bill of lading. The seller was a party to the contract of carriage and if he had taken the bill of lading to his order, the only contract of carriage to which the buyer could become a party was that contained in or evidenced by the bill of lading which was endorse to him by the seller.’’

FOB contracts also regulated under INCOTERMS 2010. The obligations of the parties are quite similar with English law as seeing below.

Under an FOB contract the seller’s duty to load the goods on a ship which is nominated by the buyer at the indicated port. According to s.13 of the Sale of Goods Act 1979 (hereafter SGA) the goods which are shipped must match the contract description. Better understanding this, the case of Manbre Saccharine Co v Corn Products is important. The contract was about the sale of starch in 280 lb bags but the seller shipped the goods partly in 140lb bags. It is clear that shipping goods did not correspond to the contract description. This obligation also regulated under INCOTERMS (A1 FOB).

According to s.16 of SGA, the goods must be ascertained for passing of property. In addition to, according to s.17 of SGA property passes when the parties intend. But in FOB agreements, property mostly passes when the goods cross the ship’s rail, the general principle is property and risk pass on shipment. According to s.20 of SGA, the risk passes with the property. But the rule is quite unlike in an FOB contract. The case of Inglis v Stock is important to understand this. In this case, the goods which are 200 tonnes of sugar are unascertained because there was no indication which bags were designated to which contract, so the property did not pass and but risk did because risk already passed on shipment. According to the information above the property and risk passed to the buyer when James loaded the Alfalfa which is ascertained on board, in this case study.

The buyer’s duty is to secure shipping space and give notice to the seller, this rule also can be found in INCOTERMS 2010 (B7 FOB). In other words, the buyer will nominate the ship and the seller will load the goods on nominated ship. Normally, the duty of entering the contract of carriage belongs to the buyer in an FOB contract. It can be found also under the INCOTERMS 2010 (B3 (d) FOB). Contrast with this, international trade contracts can be edited in order to parties intend such as this case’s contract like as in this case study. In the case of Pyrene Co. LD. v Scindia Navigation Co. Ltd Devlin J addressed that:

“The f.o.b. contract has become a flexible instrument. In what counsel called the classic type as described, for example, in Wimble, Sons & Co. Ld. v. Rosenberg & Sons 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.”

To understand the concept of seaworthiness is also important for this case, according to Hague-Visby Rules Art III rule 1, the shipowner must provide a seaworthy ship and the ship must be seaworthy for the goods. This means the carrier will have the responsibility for any damage or destroy while the goods are in transit high seas.

CONCLUSION

There are two possibilities in this case study, the seller might send the goods damaged or the goods were damaged by mould while transiting at high seas. In this point, the shipowner might have the responsibility because of seaworthiness as mentioned above. Another possibility is more applicable for this case. Imran is seeking to reject to Alfalfa or to gain compensation for the reduction in its quality. Under common law, there are two concepts of breaches which are the breach of condition and the breach of warranty. If Imran reject the goods, it will be breach of condition and he can claim for damages for non-delivery according to s.50 of SGA. If Imran decided to gain compensation for the reduction in the goods quality, it will be breach of warranty and he can claim for damages for breach of warranty according to s.53 and if acceptable s.54 of SGA. It should not be forgotten; the buyer has a right to partial rejection according to the new s.35A of SGA. If the goods were not completely damaged, the buyer might accept the goods which were not damaged and reject the goods which were damaged.

The best advice for this particular case study, the buyer need to gain compensation for the reduction in the goods quality according to s.53 and s.54 of SGA. Because if the buyer rejects to goods, he will put in danger both goods and purchase price but there is a chance to sell Alfalfa again with the lower price with respect to its condition. Addition to this, if the buyer chooses to reject to goods, he cannot claim for profit because generally any profit or loss of the buyer not taken into account for calculating the damages.

BIBLIOGRAPHY

Primary Sources

International Treaties and Conventions

Hague-Visby Rules 1968

UK Statutory Materials

Sale of Goods Act 1979

Cases

Colley v Overseas Exporters Ltd [1921] 3 K.B. 302

Inglis v Stock (1885) 10 App. Cas. 263

Manbre Saccharine Co v Corn Products [1919] 1 K.B. 189

Pyrene Co. LD. v Scindia Navigation Co. Ltd [1954] 2 Q.B. 402

The El Amria and The El Minia [1982] 2 Lloyd’s Rep. 28

Williams Bros v Ed T Agius Ltd [1914] A.C. 510

Secondary Sources:

Textbooks

Baughen, S Shipping Law (3rd ed. Cavendish Publishing 2004)

Bradgate, R and White, F Commercial Law, Legal Practice Course Guide (OUP 2008)

Carr, I International Trade Law (5th ed. Routledge 2014)

Chuah, J Law of International Trade: Cross-Border Commercial Transactions (5th ed. Sweet & Maxwell)

Murray, C Holloway, D and Timson-Hunt, D Schmitthoff The Law and Practice of International Trade (12th ed. Thomson Reuters 2012)

Schnitzer, S Understanding International Trade Law (Law Matters 2006)

Todd, P Cases and Materials on International Trade Law (1st ed. Thomson Reuters 2002)

Journal Articles

Ramberg, J ‘INCOTERMS 2010’ (2011) 13 (3-4) E. J.L. R. 380

Williamson, J ‘FOB Contracts: An Examination of Their Principles and Practical Application in Internal Trade’ (1987) 5 (4) A.U. L. R. 476

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