THE FREE ON BOARD (F.O.B) CONTRACT

CONTENTS

1.0. Introduction.

2.0. Objective.

• Main
• O.B Contract
• Types of F.O.B Contract
• Duties of the Seller
• Duties of the Buyer
• Passing of Property
• Breach and Remedies

4.0. Conclusion

5.0. Summary

6.0. Tutor Marked Assignments (TMA)

7.0. References/Further Readings.

INTRODUCTION

Although generally employed in international commerce, it is also a transaction that is applicable to local transactions. The basic feature of this type of contract is that the seller must pay the cost of the  goods and bear the responsibility of putting goods ‘free on board’  (f.o.b) and until they pass the ship rail. After this delivery is complete and the risk of loss in the goods is there and then transferred to the buyer.

OBJECTIVE

The main objective of this unit is for learners to be able to define the term F.O.B, and to be able to distinguish between the contract of C.I.F and that of F.O.B. The learner should be able to know the duties of both the buyer and the seller.

MAIN BODY

F.O.B (FREE ON BOARD)

An F.O.B contract is one in which the seller undertakes to supply the goods and places them free on board the ship to be named by the buyer who in turns pays the freight and the cost of insurance.

Since F.O.B contracts are meant to serve different commercial interests in different periods or times, they have different variants. In Raymond Wilson and Co Ltd v. N Scratchard Ltd (1944) Lloyds Rep 373, it was decided that once the seller had an F.O.B contract, it was deemed that he put the goods on board, bears the expenses and once delivery is made, the risk in the goods passes and it is the buyer who pays the cost of carriage. Payrene Co Ltd v. Scindia Steam Navigation Co. Ltd (1954) 2 QB 402.

Types of F.O.B Contracts

There are two types of F.O.B contract. They are

1. Strict or Classical

Under the strict F.O.B contracts, the arrangement for shipment, (and if he wishes for insurance) are made by the buyer direct. He is a party to the carriage of goods by sea and that of marine insurance, if he insures the goods in transit. It is the main responsibility of the buyer to name an effective ship, if the buyer fails to nominate an effective ship the seller cannot do so.

2. Contract providing for additional service

Here the parties have agreed that arrangements for the carriage by  sea and insurance shall be made by the seller, but for and on behalf  of the buyer and for his account. The buyer bears responsibility for any subsequent increase.

Delivery of goods is complete when the goods are put on board ship and the risk of accidental loss under Section 20 (1) of the Sales of Goods Act passes on to the buyer when the seller has placed the  goods safely on board. See Carlos Federspiel and Co. S.A v. Charles Twigg and Co. Ltd.(1957) 1 Lloyd’s Rep 240.

Duties of the Seller

1. The seller is obliged to deliver the goods to the place of loading and load them on a vessel agreed by the parties or designate by the buyer and also at the time agreed for it. See All Russian Cooperative Society Ltd v. Bejamin Smith & Co. (1955) 14 Lloyds’s Rep 351
2. The seller is usually to pay the charges of loading the goods to the ship.
3. It is the duty of the seller to ensure that the goods are adequately packed, carefully loaded and that they are fit and proper and fit for their sea transit
4. The seller must deliver to the buyer the documents stipulated in the Hence, he must also provide the information necessary for the buyer to insure the goods, failing which the  risk of loss will not pass to the buyer. Section 32(3) Sale of  Goods Act.

Duties of the Buyer

1. It is the buyer’s duty to nominate the ship on which the goods may be loaded by the seller and must give adequate notice to the seller. The ship must be effective ship and in capable condition, both physically and otherwise, of receiving the cargo. This duty is a condition precedent to the obligation of the seller to load the goods under the contract. See Modern Transport Co Ltd v. Ternstrom and Ross (1924) 19 Lloyds Rep 354
2. The choice of loading port in an F.O.B contract is that of the buyer. In David T. Boyd and Co. v. Lousi Louca (1973) 1 Lloyds Rep 209, Kerr J. held that it was the obligation of the buyer to elect the port of shipment.
3. Except otherwise stated, the buyer is responsible for the cost, stewage, trimming, insurance, tallying and other incidental expenses under F.O.B contract.
4. The buyer must pay the price of the goods. Where payment is of letter of credit, unless otherwise agreed, the seller can require a conforming letter of credit before loading. See Glencore Grain Rotterdom BV v. Lebanese Organisation for International Commerce (1997) 1 Lloyds Rep 578.

Passing of Property

In an F.O.B contract there is strong presumption that the parties intend property to pass as soon as the goods cross the ship’s rail. Most F.O.B contracts are concerned with unascertained goods in which property cannot pass until the goods have been ascertained by being unconditionally appropriated to the contract and the parties intend it to pass. The appropriation usually occurs when  the goods pass over the ship’s rail for loading.

Risk of the goods will usually pass on shipment, even if property has not passed. See Inglis v. Stock (1885) 10 A.C 26.

Risk may not pass if the seller fails to  provide  sufficient information to enable the buyer to insure the goods. See Section 32(3) Sale of Goods Act

Breach and Remedies

1. Where the seller fails to deliver, the buyer can bring an action under section 51 (1) Sale of Goods Act against the seller for damages for non-delivery.
2. The buyer can reject the goods if they do not conform to the provisions of the contract or he may instead of rejecting treat the matter as a breach of warranty and sue for damages.
3. The buyer’s right to reject the goods and the documents are separate remedies in that regard.
4. Where the seller withholds delivery when the property has passed to the buyer i.e by transfer of the bill of lading then an action will lie in tort for detinue or conversion

The following are the instances of breach of the buyer and the remedies available to the seller in that regard.

1. Where the buyer fail or refuses to accept the property, an action for damages will be available to the seller in that regard, but not a right to sue for the price of the goods.
2. The seller has three proprietary rights against the buyer in an F.O.B contract in relation to the goods.
3. a lien on the goods while they are still in his possession
4. a right   of   stoppage   in   transitu    after   he   has   parted   with possession, but before the buyer obtains possession of them
5. a right of resale under section 48 (3) and (4) of Sale of Goods Act

CONCLUSION

The contract of F.O.B is a contract of international commercial transactions that risk in the goods passes once the goods crosses the ship rail and the seller bears the cost before then. Once it cross then the buyer bears the risk from then on. The only remedies available for the seller is an action for damages and the price of the goods, not the price of the goods where the buyer fails to accept the goods.

SUMMARY

In a classical F.O.B contract, the seller puts the goods on board a   ship nominated by the buyer. The seller pays the cost of delivering   the goods over the ship’s rail and takes a bill of lading. The buyer  pays the cost of carriage and it is usually when the goods cross the  rail that the risk of loss passes to the buyer, but the seller normally reserves the right of disposal until payment so property  does  not pass.

TUTOR MARKED ASSIGNMENT

1. Under an F.O.B contract, what is the effect of the property passing to the buyer.
2. Briefly explain the duties and remedies available to a buyer in an F.O.B contract

REFERENCES/FURTHER READING

1. Sofowora, General Principles of Business and Coop Law, Soft Associates,
2. Sale of Goods Act,
3. Rawlings, Commercial Law, University of London Press,
4. Okany Nigeria    Commercial    Law,     Africana-Fep    Publisher, Limited,