Turkish Law Blog

Different Types of Free on Board (FOB) Contracts

Fikret Tuna Akdemir Fikret Tuna Akdemir/ Akdemir Law Firm
03 September, 2019
206

Over the past years, international trade overseas has been increasing as the day goes on due to the crucial impacts of globalization. As a result of this, trade companies require special trade terms to apply their contracts in order to keep in step with the speed of international commerce transactions. Therefore, the International Chamber of Commerce (ICC)[1] has undertaken the duty and created INCOTERMS including main pre-prepared contacts such as Free on Board (FOB) contracts.[2] First, INCOTERMS was created in 1936 by ICC. From that day, there is a number of INCOTERMS published by ICC in different years such as 1953, 1967, 1980, 1990 and 2000. Overhauling the terms regarding the current requirements, ICC put the terms in final form and published on January 1, 2011, under the name of INCOTERMS 2010.[3] Basically,  FOB contract is a sample sale of goods contract used in international overseas trade in which the parties agree that the seller takes all the responsibility until the goods are carried through the vessel’s rail, and the buyer undertakes all the risks, costs and duties when the goods is passed over her rail and shipped on board.[4] Moreover, FOB contracts are focused on the contracting parties’ area of responsibility in terms of costs, risks and duties rather than ownership, the breach of contracts or other specific conditions.[5] There are three types of FOB contracts by and large: classic FOB, FOB with additional services and simple FOB[6]. There are not only the similarities among these different types of FOB contracts but also there are significant differences applied to trade contracts. Ergo, this is an essay in which the differences and similarities among different types of FOB contracts determined in different INCOTERMS have been shown in respect of the nomination of the vessel, the documentation, and entry into a contract with a carrier to carry the goods so as to understand the exact meaning of each contract.

First of all, the FOB contracts demonstrate some similarities and differences based on different INCOTERMS created by ICC in different years. From the earliest INCOTERMS, created in 1936, to INCOTERMS 1980, there is no difference among different types of FOB contracts. However, in INCOTERMS 1990, the preparation of the goods for exportation has been added in FOB contract terms as one of the seller’s obligations.[7] Besides, in INCOTERMS 2010 which includes the latest form of all trade terms, the content of FOB contracts is literally changed by ICC because of the increasing of multimodal transportation. Firstly, the usage area of FOB contracts has been amended by ICC. In INCOTERMS 2000, FOB contracts could be used for any models of transportation such as by sea, air, land or rail. In contrast, INCOTERMS 2010 does not prompt the use of FOB contracts in other types of transportation except sea[8]. Secondly, ICC took the area of responsibility of risks in consideration for each contracting parties in FOB contracts. It is decided in INCOTERMS 2010 that the seller’s area of responsibility of risks should be expanded until the goods have been shipped on board properly instead of crossing the vessel’s rail[9]. Therefore, the drawbacks of documentation, caused by different cases[10] before INCOTERMS 2010, has been resolved.[11] Finally, a significant term about the obligation of packaging the goods has been attached to the seller’s duties. Formerly, the seller used to be under the responsibility to supply a package in the former form of FOB contracts. However, this rule has also been amended. Since INCOTERMS 2010 came into force, the seller shall not only supply the package but also stow and load the goods into the package.[12] In fact, it was found by courts in such cases before the acceptance of INCOTERMS 2010. However, it also had been requiring a written rule about the obligation of the package in order to clear all doubts on FOB contract disputes.[13] Consequently, INCOTERMS 2010 have overcome the current requirement of transportation whereby including the proper terms for multimodal transportation while the earlier forms of INCOTERMS could not answer them.

As it is found by courts in some cases[14], FOB contracts also have similarities and diversities based on different respects such as the nomination of the vessel, the documentation, and entry into a contract with a carrier to carry the goods in question. Starting from this aspect, the first point illustrating the significant differences and similarities among different types of FOB contracts is about which contracting party has the duty of nomination of the vessel to carry the goods. As it is seen similarly in classic and simple FOB contracts, the buyer has to nominate the vessel in order to discharge this duty.  On the other hand, the arrangement of the vessel is decided as one of the seller’s duties in the FOB contracts with additional services[15]. The reason why the contracting parties need different terms about this issue in FOB contracts is that it is frequently more difficult for the buyer to arrange the vessel on the port of loading in transoceanic sales. In addition, the courts have also deemed the contracts, in which the seller has already agreed to pay the freight and the insurance costs, as a FOB contract in some cases[16]. Therefore the terms of duty about the nomination of the vessel are likely similar between classic and simple FOB contracts while FOB contracts with additional services include literally different terms. It can be easily said that FOB contracts with additional services could be more useful for transoceanic sales by comparison with other types of FOB contracts.

The second point is the documentation of shipping goods on board. In classic FOB contracts, the buyer is given the bill of lading by the master of the vessel. Therefore, the master of the vessel prepares the bill of lading in the buyer’s name.[17] However, the sellers might need to secure the goods. Nowadays the bill of lading has been rarely made in seller’s name rather than the buyer’s name. The seller could endorse the bill of lading to the buyer once the contract price has been paid properly.[18] In addition, the buyers should give the information to the seller about the estimated time of arrival (ETA) of the vessel nominated by themselves. Similarly, the simple FOB contracts have the same legal incidents about collecting the bill of lading. There is just one difference that the mate’s receipt is collected by the seller in order to forward to the buyer or his agent in case of simple FOB contract.[19] Next, giving the mate’s receipt to the master of the vessel, the buyer or his agent exchanges it with bill of lading. On the other hand, the seller is given the bill of lading in the FOB contracts with additional services.[20] Therefore, the seller is in safe whereas it puts the buyer into jeopardy. Because the buyer cannot clear the goods from the port of discharge if the seller do not endorse the bill of lading. Consequently, the classic and simple FOB contracts mostly have more beneficial terms about documentation in favor of the buyers. Nevertheless, the FOB contracts with additional services pose a significant threat against the buyers to suffer a loss.

Last but not least, there are also crucial differences and similarities between these types of FOB contracts in respect of entry into a contract with a carrier to carry the goods. In classic FOB contracts, the seller is under the duty to make a contract with the carrier on behalf of the buyer to carry the goods agreed upon the sale contact. However, the buyer has become one of the parties of carriage contract even though the contract has been made between the seller and the carrier. Since the seller has been acting on behalf of the buyer during the contract negotiations in classic FOB contracts. Therefore, only the buyer has the right to sue against the carrier to demand his losses in case of damages caused by the carriage of goods. On the other hand, the buyer or his agent undertakes the duty to enter into a contract with the carrier in simple FOB contracts.[21] In this case, the contracting parties of the carriage of goods consist of the buyer and the carrier. In other words, the buyers have become directly one the contracting parties of carriage contract in simple FOB contracts whilst they enter into a contract with the carrier via the seller’s act in classic FOB contract. Furthermore, in FOB contracts with additional services, the seller negotiates with the carrier over a contract for the carriage of goods by sea.[22] Therefore, the carriage contract is made between the seller and the carrier. In other words, the seller is the only party who can sue the carrier in FOB contracts with additional services by contrast with the other types of FOB contracts. Provided that the bill of lading is endorsed to the buyer by the seller, the buyer becomes one of the contracting parties of carriage contracts and obtains the right to take the case to the court against the carrier in case of damages. However, it leads to an enormous risk to the detriment of the buyer. Eventually, it could be easily said that classic and simple FOB contracts are intensely prone to protect the buyer's rights in comparison with the FOB contracts with additional services.

To sum up, the FOB contracts divided into three different types which reflect significant differences and similarities based on the nomination of the vessel, the documentation, and entry into a contract with the carrier, as well as based on the different INCOTERMS. The latest form of FOB contracts published within INCOTERMS 2010 has included new regulations which are definitely answering the current requirements of unfettered trade. Besides creating a range of types of FOB contracts, courts allow the contracting parties to make an agreement that reflects their intent literally. Classic and Simple FOB are quite similar. However, FOB contract with additional services includes totally different rules for being liable for risks, costs, and duties. In this case, the seller can put themselves in a safe position. On the other hand, it could be easily said that the classic FOB contract is the most beneficial contract for the buyer regarding its regulations. Since it is very difficult for the buyer to enter into a contract with the carrier in some transoceanic sales because of the long distance between the place of delivery and the port of loading. Taking all into consideration, it might be said that the differences among the different types of fob contracts determined by courts were needed regarding the flexibility of FOB contracts.[23]


Bibliography

Books

  • Bridge M, The International Sale of Goods (2nd edn, Oxford University Express 2007)
  • Benjamins Sale of Goods (8th edn, Thomson Reuters, 2010)
  • Chuah J, Law of International Trade: Cross-Border Commercial Transactions (4th edn, Sweet & Maxwell 2009)
  • Law of International Trade: Cross-Border Commercial Transactions (5th edn, Sweet & Maxwell 2013)
  • Debattista C, Sale of Goods Carried by Sea (Butterworth Legal Publishers 1990)
  • Lorenzon F, C.I.F. and F.O.B. Contracts (5th edn, Sweet & Maxwell 2012)
  • Moens G and Gillies P, International Trade & Business: Law, Policy and Ethics (2nd edn, Routledge & Cavendish 2006)

Cases

  • Stock v Inglis, [1884] 12 QBD 564
  • Pyrene Co Ltd v Scindia Navigation Co Ltd [1954] 2 QB 402
  • Cowasjee v Thompson [1845] 5 Moore P.C. 165
  • The El Amria and El Minia [1982] 2 Lloyd’s Rep. 28
  • Ian Stach Ltd v Baker Bosley Ltd [1958]  2 Q.B. 130
  • Brown (AR), McFarlane & Co v Shaw (C), Lovell & Sons [1921]  7 L1 LR 36
  • President of India v Metcalfe Shipping Line [1970] 1 QB 289

Online Sources 


[1] International Chamber of Commerce (ICC) is a foundation established in 1919 by a small group of merchants on the purpose of providing the world with economic welfare after World War I. For further information see ‘The Merchant of Peace’ (International Chamber of Commerce History) <http://www.iccwbo.org/about-icc/history/the-merchants-of-peace> accessed 30 August 2015

[2] Jason C.T. Chuah, Law of International Trade: Cross-Border Commercial Transactions (5th edn, Sweet & Maxwell 2013) p.34

[3] Ibid p.34

[4] Stock v Inglis, [1884] 12 QBD 564

[5] ‘The Importance of Incoterms for International Sales Contracts’ (Law Teacher, November 2013) <http://www.lawteacher.net/free-law-essays/international-law/importance-incoterms-international-sales-contracts-international-law-essay.php> accessed 30 August 2015

[6] Pyrene Co Ltd v Scindia Navigation Co Ltd [1954] 2 QB 402

[7] Charles Debattista, Sale of Goods Carried by Sea (Butterworth Legal Publishers 1990) p. 328

[8] Supra fn.2 p. 44

[9] Renaud Anjoran, ‘Changes from Incoterms 2000 to Incoterms 2010’ (Quality Inspection, 27 February 2011) <https://qualityinspection.org/incoterms-2000-2010/> accessed 30 August 2015

[10]Cowasjee v Thompson [1845] 5 Moore P.C. 165

[11] Supra fn.2 p. 45

[12] Supra fn.9

[13] Supra fn.9

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

[15] Jason C.T. Chuah, Law of International Trade: Cross-Border Commercial Transactions (4th edn, Sweet & Maxwell 2009) p.260

[16] Ian Stach Ltd v Baker Bosley Ltd [1958]  2 Q.B. 130

[17] Brown (AR), McFarlane & Co v Shaw (C), Lovell & Sons [1921]  7 L1 LR 36

[18] Michael Bridge, Benjamins Sale of Goods (8th edn, Thomson Reuters, 2010) p.78

[19] President of India v Metcalfe Shipping Line [1970] 1 QB 289

[20] Supra fn.18 p.78

[21] Supra fn.5

[22] Filippo Lorenzon, C.I.F. and F.O.B. Contracts (5th edn, Sweet & Maxwell 2012) p.261

[23] Ibid p.262

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