Buyers Obligations under FOB Contracts - Essay Example

? Buyer’s Obligations under FOB Contracts and Buyer’s Obligations under FOB Contracts Introduction FOB contracts mean ‘Free On Board’ contracts and are widely applied in international trading where goods are shipped from one destination to another. The contracts have provisions that govern the interaction between the buyer and the seller so as to facilitate a smooth transition of the goods and the risks factors that may affect the transaction.1 As pointed out in the ruling of Stock v Inglis, FOB simply means that the seller is to deliver the goods to the buyer at a designated port and load those goods into a designated vessel as instructed by the buyer.2 The ‘free’ part signifies that the cost of delivery to the designated loading point is to be incurred by the seller. Both parties privy to the contracts have their rights and responsibilities. The rights of one party are usually the responsibilities of the other, just like in many other contracts. In FOB contracts, the seller fulfills his obligations with regards to delivery once those goods pass the ship’s rails.3 The most common terms of FOB contracts are Incoterms that were generated and published by the International Chamber of Commerce. They are however subject to be affected by the local laws of the countries from where the buyers and seller are transacting from.4 Despite these most of the obligations of the buyers and sellers remain intact. This paper will explore the buyer’s obligations under an FOB contract to nominate the vessel. The Buyer’s Obligations under an FOB Contract Under the FOB contracts, the main obligation of the buyer is to provide the seller with sufficient notice of the vessel name, loading point, and where necessary, the selected delivery time within the agreed period.5 This obligation has of late been reviewed because of changing circumstances as shall be pointed out later in the paper. Apart from this obligation, the buyer has a series of other obligations that are similar to those in other buyer-seller contracts. First, the buyer has the obligation of paying the price for the goods as provided in the contract.6 This does not even have to be stipulated since it is presumed that both parties know their duties. The seller has the duty of providing the goods and receiving the payments while it is the buyer’s duty to receive the goods and make payments for the same. According to Incoterms, the buyer also is under an obligation, at his own risk and expense, to obtain any official authorization, including a license to import, and where necessary, the permission for the goods to transit through other countries.7 This is because it is the duty of the buyer to transport the goods having been loaded to the vessel that was specified and at the specified loading point. The buyer is obligated to contract, at his own expense, for the freight services to be provided if he does not have his own. Just like in any other contract of sale, the buyer is under an obligation to take the delivery of goods usually at the named loading point and vessel at a specific date or period, where applicable. Since the seller’s obligations cease once the goods pass the ship’s rails on the loading point, the buyer is obligated to bear all the risks of loss or damage to the goods. The buyer should also accept and give proof of delivery of the goods as directed in the notice that he furnished the seller with.8 The other obligation is that of inspecting the goods as to whether they are in sellable condition. It is the buyer’s duty to pay for the cost of pre-shipment inspection expenses.9 The exceptions here are when it was otherwise agreed between the two parties or where the authorities of the country of export explicitly direct the seller to incur the expenses for pre-shipment inspection. Lastly, the buyer is under an obligation to reimburse the seller all the expenses incurred in his bid to render his assistance to the buyer. This obligation is carried out more as an issue of ethics as opposed to legality since the seller rendered his assistance out of his own volition and in good faith. Despite having all those obligations, the most important one and that directly influence the execution of the contract is the buyer’s obligation to nominate a vessel and a loading point and in some instances the loading period. This obligation goes to the core of the contract and is therefore a condition of a contract.10 Either party may rescind the contract and not be sued for specific performance or damages if the other party fails to adhere to the contractual conditions. In this sense, the buyer shall provide the seller with the aforementioned details within a sufficient time so as to enable the execution of the contract. There are some issues that have developed over the years and that may influence the implementation of FOB contract terms in the future. Issues and Recent Developments affecting Buyer’s Obligations under FOB Contracts In relation to the buyer’s obligation to nominate a vessel and a port of loading, there are several issues that are yet to be addressed. The first one is whether the local customs and practices of the exporting country should determine the buyer’s obligation to determine his specifications. The White Sugar Future Contracts No. 407 provided some insight into this issue. It cited a case where goods were to be shipped from Thailand to the UK. In this instance, the Thai terms provided that loading should be done at a berth in Bangkok and any topping up be done at a second Thai Port.11 The Buyer, from Britain, did not take into consideration the provisions and designated the loading port as “Bangkok/Kohsichang”. To the seller who is a Thai native, this instruction meant that the main loading was to be done at the Bangkok port and topped up at Kohsichang berth. The buyer contested this stating that they were supposed to collect the goods at the Kohsichang berth only and that the provision does not apply.12 It is evident that the local customs had influenced contract execution and directions had to be provided. The Refined Sugar Arbitration Panel provided the directions by differing with the seller stating that such customs should not be binding to the buyer unless the buyer is from the same country and is aware that such customs exist. The other contentious issue is whether it is really the buyer’s legal right, and obligation, to nominate the loading port and the specific place within the port. The general provisions of the FOB contracts are that it is the buyer who has the right to make the call. David Boyd v Luis Louca provided that where nothing is expressly agreed the choice of the loading port is that preferred by the buyer.13 But then, the buyer may nominate a vessel that may be too large for the port, and if left to the seller to determine the place, the buyer may still send a vessel that may be deemed too large for the port. Inconveniences are therefore likely to arise due to practical difficulties. The best practice is a consultative arrangement so that both parties end up benefiting.14 The issue of nomination also brought out the issue of substitution of the venue and of the vessel. In the event that the buyer’s exercises the right to nominate the port and to nominate the vessel to be loaded and they later prove unavailable or inaccessible, what is the legal position of the contract? Usually, nomination of vessel and port is a condition and may lead to termination of a FOB contract if broken.15 Failure of the buyer to provide the specific instructions notice to the seller in sufficient time or failure of the vessel to arrive at the designated port at the material time may cause the seller to rescind the contract. This fact was indicated in ERG Raffierie Mediterranee v Chevron substantiating an earlier decision in SHV Gas v Naftomar.16 If the seller fails to load at the designated point or on the specific vessel then the buyer can also refuse to accept the goods and their documentation and sue for damages. The parties therefore have to agree on substitution in the contract in order to enable contract performance. The buyer’s right to substitution however only extends to the vessel but not the port.17 If the seller accepts the change of port then they should be reimbursed for any additional expenses that may be incurred. The logic is that since the seller has the right to be reimbursed the losses incurred they cannot and should not reject valid vessel nominations that have been made by the buyer as substitution. The last issue in relation to the buyer’s obligations to give the seller the notice specifying the details of the vessel and loading point relate to the delivery time. Does the failure of the vessel to arrive at the designated port in time give the seller the right to terminate the FOB contract? Does the buyer have the right to claim an extension in case of the failure? And do charterparty provisions influence individual FOB contracts? The answer is that all these issues should be answered in the wording of the contract. If the buyer thinks that there is a chance that they can fail to provide a vessel within the time they stipulated then they can insert a clause in the contract to that effect so that they can be able to claim an extension. To be fair, the contract will also have to include time extension for the seller in loading and determine who will incur the demurrage costs in case the loading takes more time than earlier anticipated. The demurrage costs are usually incurred by the party that caused the delay. Once all these are agreed then the buyer should provide the notice and follow what it stipulates by availing the vessel at the material place and time. Soufflet Negoce v Bunge directed that the vessel has to be physically and legally ready to load at the time it is supposed to.18 It effectively declared that charterparty provisions need not necessarily affect the FOB contract. This is after the seller in that instance failed to load the goods when the vessel was in place at the right time. The seller had argued that the vessel was not ready to load since it had traces of previous cargo in the holds. The charterparty provisions are that such a vessel is not clean and the seller under FOB contract should not proceed to load. The court restated the obligations of the buyer as providing the vessel in the designated place at the designated time as indicated in the notice that was issued to the seller. The vessel need only be physically and legally ready to carry the cargo and nothing else. Conclusion FOB contracts terms are undergoing a metamorphosis and will be rapidly changing in the next few years. Even the core presumptions that were in the terms are now being challenged. However, the general position worldwide, and by default, is that it is the buyer’s obligations and right to nominate a vessel and the loading point. The other buyer’s obligations under FOB contracts are almost similar to other contracts of sale provisions. They include receiving the goods, making payments for the goods, reimbursing the seller for out of the way expenses, and bearing the risks of loss or damage once the goods are in his position among others. Care should however be taken when entering into contracts since they are tricky sometimes, it is advisable to use an international trade lawyer for guidance. This way one will be able to adequately discharge his duties under a contract and notice when the contract has been breached by the other party. References Primary Sources David Boyd v Luis Louca [1973] 1 Lloyds’s Rep 209 ERG Raffierie Mediterranee v Chevron USA Inc [2007] All ER 364 SHV Gas v Naftomar [2006] 2 All ER 515 Soufflet Negoce v Bunge [2011] 1 LLR 531 Stock v Inglis [1884] 12 QBD 573 Secondary Sources Al-Tal Rami, ‘Nomination of Vessel FOB contracts’ (Al-tamimi, 21st May 2010) Accessed 8th January 2014. Beale B and Furmston E, Contract: Cases and Materials (OUP 2008) Bridge M, The sale of goods (OUP 1998) Chatterjee C, Legal Aspects of Transnational Marketing and Sales Contracts (Routledge 2012) Collins H, The Law of Contract: Law in Context (OUP 2003) Girasa R, “Legal aspects of buying and selling goods abroad’ [1991] Winchester County Business Journal 15. Hamid Ghafur, F O B Contract’ (LIU, 2nd December 2011) Accessed 8th January 2014 Law and Sea, ‘Three Types of FOB Contract’ (Law and Sea, 2nd May 2013) Accessed 8th January 2014 Lookofsky J and Hertz K, Transnational Litigation and Commercial Arbitration: An analysis of American, European and International Law (Juris Publishing Inc 2004) McGonigal Patric, ‘UK: FOB Contract- Rights and Obligations of Buyer and Seller Re-Examined’ (Mondaq, 21st September 2010) Accessed 8th January 2014. Reddy J and Johnson H, Q & A Commercial Laws 2011-2012 (Taylor & Francis 2011) Smith Reed, ‘Shipment/delivery periods in FOB contracts: Confusion explained’ (Lexology, 29th February 2008) Accessed 8th January 2014. WCS, ‘FOB- Free on board- (named port of shipment)’ (WCS, 25th June 2004) Accessed 8th January 2014 Read More