UNIVERSITY OF LUSAKA SCHOOL OF LAW L200 – COMMERCIAL LAW UNIT 7: INTERNATIONAL SALES CONTRACT

STRUCTURE OF THE PRESENTATION Introduction Incoterms Contracts Involving Sea Transit Ex Works Free Alongside (FAS) Free on Board (FOB) Cost, Insurance and Freight (CIF) Ex-ship

INTRODUCTION As we have already noted a sale of goods becomes international firstly when the transaction involves the movement of goods from one state or country to another and secondly, when the place of business of the seller is in one state and that of the buyer is in another state. Also the laws which governs the international sales contract are firstly, the contract of sale itself; secondly, the particular national law (e.g. Zambian law or English Law) which the parties to the contract of sale have chosen to govern their contract of sale; and thirdly, the Convention on Contracts for the International Sale of Goods.

INCOTERMS The parties to a contract of sale are free to allocate responsibility for arranging carriage or insurance or obtaining customs clearances, etc, to fix the methods of payments, to stipulate for the buyer to accept a document other than a bill of lading or to agree any other terms. However, mercantile practice has developed a number of standard contract ‘formulae’ for international sales.

INCOTERMS The duties of the parties under these contracts are well known, and are set out in detail in INCOTERMS or international commercial terms published by the International Chamber of Commerce (ICC) widely used in international commercial transactions. They are used to divide transaction costs and responsibilities between buyer and seller.

INCOTERMS They closely correspond to the United Nations Convention on Contracts for the International Sale of Goods. The first version was introduced in 1936 and the present dates from 2000. The INCOTERMS are classified n the following categories: (1) Group E – Departure (2) Group F – Main Carriage Unpaid (3) Group C – Main Carriage Paid (4) Group D – Arrival

INCOTERMS (1) Group E – Departure EXW – Ex Works (named place): The seller makes the goods available at his premises. The buyer is responsible for all charges. This term may be the easiest to administer, however may not be in the seller's best interests. There is no control over the final destination of the goods. It may be possible for the buyer to negotiate better freight rates than the seller. A vehicle arriving to take delivery of the seller's goods under EXW may not be suitable for carriage.

INCOTERMS 2. Group F - Main carriage unpaid (a) FCA - Free Carrier (named place) The seller hands over the goods, cleared for export, into the custody of the first carrier (named by the buyer) at the named place. This term is suitable for all modes of transport, including carriage by air, rail, road, and containerised / multi-modal transport.

INCOTERMS (b) FAS - Free Alongside Ship (named loading port) The seller must place the goods alongside the ship at the named port. The seller must clear the goods for export; this changed in the 2000 version of the Incoterms. Suitable for maritime transport only.

INCOTERMS (c) FOB – Free on Board (named loading port) The classic maritime trade term. The seller must load the goods on board the ship nominated by the buyer, cost and risk being divided at ship's rail. The seller must clear the goods for export. Maritime transport only. It also includes Air transport when the seller is not able to export the goods on the schedule time mentioned in the letter of credit. In this case the seller allows a deduction of sum equivalent to the carriage by ship from the air carriage.

INCOTERMS 3. Group C - Main carriage paid (a) CFR - Cost and Freight (named destination port) Seller must pay the costs and freight to bring the goods to the port of destination. However, risk is transferred to the buyer once the goods have crossed the ship's rail. Maritime transport only.

INCOTERMS (b) CIF - Cost, Insurance and Freight (named destination port) Exactly the same as CFR except that the seller must in addition procure and pay for insurance for the buyer. Maritime transport only. (c) CPT - Carriage Paid To (named place of destination) The general or containerised or multimodal equivalent of CFR. The seller pays for carriage to the named point of destination, but risk passes when the goods are handed over to the first carrier.

INCOTERMS (d) CIP - Carriage and Insurance Paid (To) (named place of destination) The containerised transport/multimodal equivalent of CIF. Seller pays for carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier.

INCOTERMS 4. Group D - Arrival (a) DAF - Delivered At Frontier (named place) This term can be used when the goods are transported by rail and road. The seller pays for transportation to the named place of delivery at the frontier. The buyer arranges for customs clearance and pays for transportation from the frontier to his factory. The passing of risk occurs at the frontier.

INCOTERMS (b) DES - Delivered Ex Ship (named port) Where goods are delivered ex ship, the passing of risk does not occur until the ship has arrived at the named port of destination and the goods made available for unloading to the buyer. The seller pays the same freight and insurance costs as he would under a CIF arrangement.

INCOTERMS Unlike CFR and CIF terms, the seller has agreed to bear not just cost, but also Risk and Title up to the arrival of the vessel at the named port. Costs for unloading the goods and any duties, taxes, etc… are for the Buyer. A commonly used term in shipping bulk commodities, such as coal, grain, dry chemicals … and where the seller either owns or has chartered, their own vessel.

INCOTERMS (c) DEQ - Delivered Ex Quay (named port) This is similar to DES, but the passing of risk does not occur until the goods have been unloaded at the port of destination. (Quay: dock, harbor, jetty, pier, wharf) (d) DDU - Delivered Duty Unpaid (named destination place) This term means that the seller delivers the goods to the buyer to the named place of destination in the contract of sale. The goods are not cleared for import or unloaded from any form of transport at the place of destination.

INCOTERMS The buyer is responsible for the costs and risks for the unloading, duty and any subsequent delivery beyond the place of destination. However, if the buyer wishes the seller to bear cost and risks associated with the import clearance, duty, unloading and subsequent delivery beyond the place of destination, then this all needs to be explicitly agreed upon in the contract of sale.

INCOTERMS (e) DDP - Delivered Duty Paid (named destination place) This term means that the seller pays for all transportation costs and bears all risk until the goods have been delivered and pays the duty. Also used interchangeably with the term "Free Domicile". The most comprehensive term for the buyer.

INCOTERMS In most of the importing countries, taxes such as (but not limited to) VAT and excises should not be considered prepaid being handled as a "refundable" tax. Therefore VAT and excises usually are not representing a direct cost for the importer since they will be recovered againt the sales on the local (domestic) market.

CONTRACTS INVOLVING SEA TRANSIT Sometimes, the goods are to be delivered to the buyer through sea routes. In such cases the parties may enter into certain contracts which govern the delivery of the goods through sea routes. The five important and usual forms of contracts of sale which involve the carriage of the goods by sea are as follows:

CONTRACTS INVOLVING SEA TRANSIT (1) Ex-works (2) Free Along Side (FAS) (3) Free on Board or Freight on Board (FOB) (4) Cost, Insurance and Freight (CIF) (5) Ex-Ship

(1) Ex-works An ex works contract imposes the least obligations on the seller. The seller must supply goods which conform to the contract and make them available for collection at his own premises. The buyer must arrange the collection and transport of the goods. The quoted price is therefore the price at the seller’s ‘factory gate’.

(2) Free Along Side (FAS) FAS stands for ‘free alongside ship’. Here the first, inland, journey to the port of shipment is the seller’s responsibility, but assumes no obligation beyond that, except the obligations in regard to procuring certificates of origin, etc. The seller’s duties include the following: To supply the goods, with evidence to conformity with the contract;

(2) Free Along Side (FAS) To deliver the goods alongside the ship, at the place and at or within the time stipulated by the contract or nominated by the buyer; To give the buyer notice of the above; To provide certificate of origin; To co-operate with the buyer in obtaining other necessary documentation, e.g. export licence.

(2) Free Along Side (FAS) The buyer, for his part, will have the following duties: To procure a ship, or shipping space, and give the seller due notice of the name of the ship and the place and time of loading; To pay the price; To bear all the costs of loading alongside ship; To bear the costs of procuring all documentation, including the export licence, bill of lading, etc.

(2) Free Along Side (FAS) Property, possession and risk will normally pass to the buyer on delivery, that is, when the goods have been placed alongside the ship so that they can be taken on board by crane, ship’s tackle or the equivalent. ‘alongside’ may mean, depending upon the custom of the particular port, on the docks, in a lighter, etc.

(3) Free on Board or Freight on Board (FOB) The term ‘FOB’ means ‘free on board’. A FOB is a contract for the sale of goods where, for the purpose of transmission to the buyer, the seller has to put the goods on board a ship at his own expenses. The seller has to bear only the expenses of loading the goods. Once the goods are loaded on board the ship, they are at buyer’s risk, and he is responsible for freight, insurance and subsequent expenses.

(3) Free on Board or Freight on Board (FOB) Stated in another way, the critical moment in an FOB contracts occurs when the goods ‘cross the ship’s rail’, normally by being swung by a crane or derrick, or in case of oil or gas in the course of being pumped or sucked through a pipe from shore to ship. At this point risk normally passes, and possession and property may pass also. But property or ownership will not pass if the seller has ‘reserved the right of disposal’ (e.g. by retaining the bill of lading), or the contract goods are unascertained, or the contract provides otherwise.

(3) Free on Board or Freight on Board (FOB) Under the FOB contract the seller’s duties include the following: To supply the goods, with evidence to conformity with the contract; To deliver the goods on board the ship, at the place and time stipulated by the contract or nominated by the buyer; To obtain the export licence; To bear all costs up to and including loading (across the ship’s rail);

(3) Free on Board or Freight on Board (FOB) To provide documents evidencing delivery to the ship, certificate of origin, etc; To co-operate with the buyer in procuring the bill of lading and other documentation; To give notice to the buyer to enable him to ensure the goods during their sea transit.

(3) Free on Board or Freight on Board (FOB) Under FOB contract the buyer’s duties are as follows: To procure a suitable ship, or shipping space and give the seller due notice of the name of the ship and the place and time of loading; To pay the price; To bear all the costs subsequent to the goods passing the ship’s rail; To bear the costs of procuring all documentation, including the bill of lading and certificate of origin.

(4) Cost, Insurance and Freight (CIF) The term ‘CIF’ means ‘cost, insurance and freight’. A CIF is a contract for the sale of goods at a price which includes the cost of goods, insurance and freight charges. Therefore, in such contracts, the charges of insurance during transit and freight charges are paid by the buyer. Where the buyer orders the goods from a seller, living abroad, under a CIF contract, the seller will ensure the goods and deliver them to a shipping company for transmission to the buyer.

(4) Cost, Insurance and Freight (CIF) The insurance policy on the goods and the bill of lading is delivered to the buyer along with the invoice of the goods. In a CIF contract, the buyer looks to the seller to make the whole of the shipping arrangements, including those relating to insurance, and the buyer takes delivery of the goods symbolically, commonly while they are somewhere at sea, by taking over the shipping documents relating to the consignment – including, at least, the bill of exchange, commercial invoice and insurance policy.

(4) Cost, Insurance and Freight (CIF) In contrast with the FOB contract, which specifies the port of loading, a CIF contract specifies the port of arrival. Under the CIF contract the seller’s duties will include: To ship at the agreed port of shipment goods of the contract description or procure goods afloat which have been so shipped; To procure a contract of sea carriage by which goods will be delivered to the contract destination;

(4) Cost, Insurance and Freight (CIF) To insure the goods under an insurance contract which will be available for the benefit of the buyer; To procure a commercial invoice in conformity with the contract; To tender these documents to the buyer or his agent or bank.

(4) Cost, Insurance and Freight (CIF) Under the CIF contract the buyer’s duties will be: To accept the documents, if they are in conformity with the contract, and pay the price; To take delivery of the goods at the agreed destination, and pay all unloading costs; To pay customs and other duties at the port of arrival; To procure any necessary import licence.

(4) Cost, Insurance and Freight (CIF) Transfer of Ownership In case of CIF contracts, the ownership of the goods is transferred to the buyer when the shipping documents are delivered to the buyer and he receives them by paying price of the goods. However, the parties may vary the terms of a CIF contract, and in that case, the ownership will be transferred to the buyer when it is intended to be transferred.

(4) Cost, Insurance and Freight (CIF) Protection of Parties’ Interest The CIF contract protects the interest of both, the seller and the buyer. It protects the seller in a way that the goods continue to be in his ownership until the buyer pays for them and gets the documents. It protects the buyer in a way that he is required to pay the price only when the documents are delivered to him. These documents enable the buyer to obtain the goods as soon as they arrive at the destination.

(4) Cost, Insurance and Freight (CIF) If in the meantime, the goods are lost during sea transit, neither party will put to loss. The reason for this is that the goods being insured, the owner of the goods, whether the seller or the buyer, can claim the loss from the insurance company.

(4) Cost, Insurance and Freight (CIF) Nature of Contracts The CIF contract is sometimes, described as a contract for the sale of documents without waiting for the arrival of the goods. However, this does not mean that a CIF contract is a sale of document and not of goods. A CIF contract is a contract for the sale of goods to be performed by the delivery of documents representing the goods.

(4) Cost, Insurance and Freight (CIF) A CIF contract contemplates the transfer of actual goods in the normal course of business, and if the goods are lost, the buyer gets his rights on the basis of the documents, that is insurance policy and bill of lading. A CIF contract may therefore be described as a contract for the sale of goods through documents.

(5) Ex-Ship or Arrival Contracts Under a contract of this description, the buyer is bound to pay the price only if actual delivery of the goods is made to him at the port of delivery, the seller bearing all costs up to but not including unloading costs and import duties. Property and risk will pass with delivery of possession.

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