International Sale Contracts Thashira Gunatilake LLB(Colombo), LLM(Auckland) Attorney-at-Law

People from different geographical areas seek to improve their financial worth via the establishment of trade networks. Therefore, shipping of goods from one country to another has become a common occurrence. There are many types of contracts involved in such international sale transactions. However, there are few commonly used contract types in international trade. FOB (Free on board) CIF (Cost insurance freight)

Introduction CIF and FOB contracts share significant characteristics lacking from other varieties of international sale contract. With these types of contracts, the seller loads the goods at the port of loading and obtains shipping documents which the buyer uses to discharge the goods at the port of destination. Transactions can be documentary in form, and neither buyer nor seller needs to leave his country of business. FOB (“free on board”) and CIF (“cost insurance freight”) have both regulated the international sale of goods by sea for more than a century.

FOB Contracts The FOB contract has a long history; it can be found as early as the beginning of the nineteenth century. The contract is developed in an era when it was customary for a merchant to charter a ship and travel with it to trade at various ports. FOB stands for ‘free on board’ and in its simplest form this contract means that ; the seller has agreed to deliver the goods to a ship nominated by the buyer and, after such delivery, property and risk passes to the purchaser. in other words, the seller must bear the full liability for the cost and safety of the goods until the point of their passing the ship’s rail.

The buyer is responsible for making the arrangements for insuring and shipping the goods to their final destination. The seller is not under a duty to ship the goods until he has received instructions from the buyer as to the name of ship and port of shipment. In Pyrene & Co V. Scindia Navigation Co Devilin J. identified three types of FOB contract. Seller makes contract of carriage, but buyer nominates vessel (Classic FOB). Seller nominates vessel, makes contract of carriage and arranging insurance cover for the cargo. Probably rarest variety.( Extended FOB) Buyer nominates vessel, and makes contract of carriage (Pyrene Case itself). Probably most common variety today. ( Simple FOB)

What happens in Simple FOB…..? Classic FOB The seller is to; Contract with the ship and Ship goods that conform to the contract of sale. Deliver the goods to the buyer by placing them on board the ship nominated by the buyer. Pay any cost incidental to the delivery of the goods. He also receives the bill of lading which will normally show him as consignor and transfers it to the buyer. When doing this, the buyer has to pay for the Goods bought. Marine insurance is normally arranged by the buyer directly.

Extended FOB In the f.o.b. contract “with additional services”, the seller undertakes to arrange shipping and insurance for the account of the buyer. In this f.o.b. variation, the seller; Nominates the ship Enters into a contract with the carrier by sea Places the goods on board ship and transfers the bill of lading to the buyer.

CIF Contracts CIF stands for ‘cost insurance freight’ Under this contract, the seller always undertakes to; secure shipping space make all the shipping arrangements ship the goods and make the carriage contract as principal secure insurance In Ross T.Smyth & Co Ltd v. T.D.Bailey, Son, & Co Lord Wright observed that, it is a type of contract which is more widely and more frequently in use than any other contract used for the purposes of sea-borne commerce. The seller completes his duties under the contract by transferring to the buyer the documents relating to the contract, which, documents, transfer to the buyer constructive possession in the goods while they are at sea. Eg- Bros v. Clemens Horst Co [1911] 1 KB 214

The object and result of CIF contract is to enable the sellers and buyers to deal with cargoes and to transfer them freely from hand to hand by giving constructive possession of the goods which are being dealt with. This statement stresses the crucial role that the shipping documents play in the performance of a c.i.f. contract. Duties of the Buyer – The buyer on the other hand, is under the contract required to; Nominate the port of destination, Pay for the goods against delivery of the documents, Take delivery of the goods and Pay all costs for unloading them

When do you think the Property and the Risk pass to the Buyer under a C.I.F Contract………….? Risk and Property - Risk passes at the shipment/ Passing of the railing. BUT, the property will always pass later than the risk. Because, title will be gained by the buyer when he receives the shipping documents. However, in a FOB contract Risk and Property both pass at the shipment/ passing the rail.