Part 3 Chapter 1

Standard Trade Terms

Contents

1â	Introduction	183
2â	CIF contracts	183
3â	FOB contracts	192
4â	Ex Works	195
5â	FAS contracts	196
6â	Conclusion	196
7â	Recommended reading	196

1â Introduction

Standard trade terms have long been used by tradesmen to establish the duties of the buyer and seller. This chapter will examine two of the main standard trade terms in use in international trade, mainly CIF (cost, insurance, freight) and FOB (free on board). We will also examine variants of these terms, as well as the relevance of INCOTERMS, a series of commercial terms developed and published by the International Chamber of Commerce (ICC), which are widely used in international commercial transactions. First published in 1936, the latest set of these rules was published in 2010.

2â CIF contracts

As stated above, CIF contracts have long been part of the mainstream of international sales transactions. In Ross T Smyth & Co. Ltd v. TD Bailey, Son & Co. Ltd1 Lord Wright summarises the characteristics of a CIF contract as follows:

the price is to include cost, insurance and freight. It is a type of contract which is more widely and more frequently in use than any other contract used for purposes of seaborne commerce. An enormous number of transactions, in value

1 [1940] 3 All ER 60.

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amounting to untold sums, are carried out every year under cif contracts. The essential characteristics of this contract have often been described. The seller has to ship or acquire after that shipment the contract goods, as to which if unascertained he is generally required to give a notice of appropriation. On or after shipment he has to obtain proper bills of lading and proper policies of insurance. He fulfils his contract by transferring the bills of lading and the policies to the buyer. As a general rule he does so only against payment of the price, less the freight, which the buyer has to pay. In the invoice which accompanies the tender of the documents on the ‘prompt’, that is, the date fixed for payment, the freight is deducted for this reason. In this course of business the general property in the goods remains in the seller until he transfers the bills of lading.2

(a)â What is a CIF contract?

In a CIF contract the seller will quote the buyer the contractual price; this price will include the cost of the goods, the cost of insuring the goods, as well as the cost of freight for the carriage of the goods. The CIF contract will be most suitable for buyers and sellers who are located in different countries, where the buyer may not have any agents or brokers to act on his behalf. The seller will bear the risk of any fluctuations in the market rate of insurance or transport once he has entered into the contract of sale with the buyer. The buyer will pay the contractual price against tender of the documents. The CIF contract will state the port of destination, for example ‘CIF Antwerp’, however the seller in a CIF contract is not guaranteeing the physical arrival of the goods to the named port. Rather, the seller’s duties are to procure the goods, arrange the contract of affreightment as well as the contract of insurance, and tender these documents to the buyer. Thus, the documents represent the buyer’s interests in the goods.

CIF contracts usually involve more than one buyer and seller in a string sale; in many cases the goods are bought and sold while they are afloat. As stated by Scrutton J in Arnold Karberg & Co. v. Blythe, Green Jourdain & Co.:3

It is not a contract that goods shall arrive, but a contract to ship goods complying with the contract of sale, to obtain, unless the contract otherwise provides, the ordinary contract of carriage to the place of destination and the ordinary contract of insurance of the goods on that voyage, and to tender these documents against payment of the contract price.4

(b)â Sale of documents

The CIF contract is often described as a sale of documents rather than a sale of goods. While this may be true to some extent, the obligation to deliver the goods still remains in the contract of sale. As Lord Wright in Ross T Smyth & Co. Ltd v. T D Bailey, Son & Co.5 stated:

2	Ibid. 68.â	3â [1915] 2 KB 379.
4	Ibid. 388.â	5â [1940] 3 All ER 60, 70.

185	2â CIF contracts

one peculiarity of the cif contract … is that the sale can be completed after the loss of the goods by the transfer of the shipping documents. That does not mean that a cif contract is a sale of documents, and not of goods. It contemplates the transfer of actual goods in the normal course, but, if the goods are lost, the insurance policy and bill of lading contract– that is, the rights under them– are taken to be, in a business sense, the equivalent of the goods.

Perhaps the most practical approach is to consider the buyer’s obligation under a CIF contract as twofold: first, he has an obligation to pay against the tender of documents which conform to the contract, and secondly, he has the obligation to take delivery of the goods if they conform to the contractual description.

(c)â Duties of the seller

The duties of the seller under a classic CIF contract were best summarised by Lord Atkinson in Johnson v. Taylor Bros & Co. Ltd:6

First, to make out an invoice of the goods sold. Second, to ship at the port of shipment goods of the description contained in the contract. Third, to procure a contract of affreightment under which the goods will be delivered at the port contemplated by the contract. Fourth, to arrange for an insurance upon the terms current in the trade which will be available for the benefit of the buyer. Fifthly, with all reasonable despatch to send forward and tender to the buyer these shipping documents, namely, the invoice, bill of lading and policy of assurance, delivery of which to the buyer is symbolical of delivery of the goods purchased, placing the same at the buyer’s risk and entitling the seller to payment of the price.7

The seller’s first obligation in relation to procuring the necessary documents is in relation to the invoice. The invoice should contain information relating to the contractual price of the goods, the insurance premiums paid, as well as the cost of freight credited to the buyer.

The seller is also responsible for procuring the bill of lading as this will allow the goods to be bought and sold during transit.8 It is essential that goods are shipped in good order and condition so that the master of the ship can issue a clean bill of lading. The buyer, in most cases, will only be willing to pay against a clean bill of lading; a clean bill will also be required by the bank before a letter of credit will be opened.9 The bill of lading must be issued to cover the whole of the voyage10 as well as having the correct date of shipment. Failure to do so entitles the buyer to reject such documents as non-conforming. In James Finlay & Co. Ltd v. Kwik Hoo Tong HM,11 the CIF contract stated that shipment was to take place in September, and the bill of lading inaccurately stated

â6â

â8

â9

10

11

[1920] AC 144.â 7â Ibid. 155–6.

Must be a ‘to order’ bill to make it negotiable. See Part 3 Chapter 4 for a more in depth discussion.

See Part 3 Chapter 3 for further discussion.

Hansson v. Hamel & Horley Ltd [1922] 2 AC 36. [1929] 1 KB 400.

186	Standard trade terms

that the shipment did indeed take place in September. However, some time later the bills were rejected by sub-buyers after the inaccuracy was discovered. The buyer was awarded damages for his loss of the right to reject the nonconforming documents. It some cases, the parties may substitute a delivery order for the bill of lading, for example, where the goods are shipped in bulk and need to be apportioned. Such substitution will not result in the contract no longer being on CIF terms. In Comptoir d’Achat et de Vente du Boerenbond Belge S/A v. Luis de Ridder Ltda (The Julia)12 it was stated by Lord Porter:

The strict form of c.i.f. contract may, however, be modified: a provision that a delivery order may be substituted for a bill of lading or a certificate of insurance for a policy would not, I think, make the contract concluded upon something other than cif terms, but in deciding whether it comes within that category or not all the permutations and combinations of provision and circumstance must be taken into consideration.13

The seller is also under a duty to procure a contract of insurance for the goods. The insurance should be appropriate cover against the risks for the length of the voyage as well as the type of goods. In most cases the contract of sale will contain clauses as to the nature of the insurance policy, for example, whether the policy should cover all risks as embodied in the Institute Cargo Clauses A. Failure on the part of the seller to obtain a suitable contract of insurance will be a breach of his obligations under the contract and he will be liable for any loss or damage that occurs. Unless the contract states otherwise, it is the policy itself that must be tendered to the buyer and not merely a certificate of insurance.14

It is generally accepted in international sales that where export licences are necessary in order to ship the goods, this will be the responsibility of the seller while import licences are the responsibility of the buyer.15 In the absence of any express contractual stipulations, the seller is only required to take reasonable steps to procure the licence.16

The seller may have additional documents to procure under the terms of the contract. For example, it is common for the buyer to ask for a certificate of quality that guarantees the goods are of a specific class or grade. However, the statements given in a certificate of quality are not to be confused with the order in which the goods were shipped. In Cremer v. General Carriers SA (The Dona Mari),17 Kerr J stated:

Generally speaking, if a contract contains distinct provisions relating respectively to quality and to condition, then the parties will be taken to have intended to draw a distinction between those two characteristics. That is so in the present

12 [1949] AC 293.â 13â Ibid. 309.

14Diamond Alkali Export Corp. v. Fl Bourgeois [1921] 3 KB 443.

15Mitchell Cotts and Co. (Middle East Ltd) v. Hairco Ltd [1943] 2 All ER 552.

16Anglo-Russian Merchant Traders Ltd v. Batt [1917] 2 KB 679.

17[1974] 1 All ER 1.

187	2â CIF contracts

case, with the added factor that the provision relating to quality also contains a conclusive evidence provision by stipulating that a certificate as to quality is to be final. It must therefore be construed restrictively so that full effect must be given to the incorporation of [the clause] which provides distinctly and expressly that shipment is to be made in good condition.18

In some cases the buyer may demand that the seller procure a certificate of origin; this may be required if there are prohibitions in place in the buyer’s country which may prevent import of goods from certain countries.

(d)â Tender of documents

The seller is under a duty to tender the documents, namely the invoice, insurance policy and bill of lading, in addition to any other documentation required by the contract as soon as he is able to do so. If there is a time for tender stipulated in the contract the seller must comply with this time limit. Failure to do so gives the buyer the right to reject the late documents. If the seller tenders non-complying documents and there is still time left to run, he may retender the documents before the date of tender has passed.19 In the absence of any expressed time the seller must take all reasonable steps to tender the documents as soon as possible. In Sanders v. Maclean,20 Brett MR stated:

The stipulations which are inferred in mercantile contracts are always that the party will do what is mercantilely reasonable. What, then, is the contract duty which is to be imposed by implication on the seller of goods at sea with regard to the bill of lading? I quite agree that he has no right to keep the bill of lading in his pocket, and when it is said that he should do what is reasonable it is obvious the reasonable thing is that he should make every reasonable exertion to send forward the bill of lading as soon as possible after he has destined the cargo to the particular vendee or consignee. If that be so, the question of whether he has used such reasonable exertion will depend upon the particular circumstances of each case. If there is a perishable cargo or one upon which heavy charges must surely be incurred, the reasonable thing for him to do is to make even a greater exertion than he would in the case of another cargo. That is one of the circumstances which has to be considered. Another circumstance would be from whence is the shipment? How near is the consignor to the ship so as to enable him to get possession of the bill of lading?21

(e)â Passing of property

There are two main rules in relation to the passing of property in a CIF contract.

If the goods shipped are specific or ascertained goods, section 17(1) of the Sale of Goods Act 1979 provides:

18Ibid. 14.

19Borrowman, Phillips & Co. v. Free and Hollis (1878) 4 QBD 500.

20 (1883) 11 QBD 327.â 21â Ibid. 337.

188	Standard trade terms

(1) Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.

In such a case property will therefore pass when the parties intend it to pass, which will be determined from the terms of the contract as well as the surrounding circumstances. However, in most CIF contracts, the type of goods shipped will not be specific goods. Section 18(5) of the 1979 Act provides that in the case of unascertained goods, property will not pass until the goods have been unconditionally appropriated to the contract. Under section 19, the seller may reserve the right of disposal over the goods until certain conditions have been met, which can include payment by the buyer. In Re Wait,22 the seller sold 500 ton of wheat to the buyers, however, before the documents were tendered but after the buyers had paid for the goods, the seller was declared bankrupt. The buyers claimed ownership of the goods but it was held that as their 500 tonnes of wheat was in an unidentified portion of the bulk, no property had passed.

In a CIF contract if the goods have been ascertained23 there are several different stages at which property in the goods can pass.

First, property may pass on shipment of the goods; however, if the seller retains the bill of lading in his own name, property will not pass. As stated earlier, the seller may choose to reserve the right of disposal until he has secured payment for the goods. Some dicta indicate that property may pass on shipment; for example, in Biddell Bros v. E Clemens Horst Co.,24 Kennedy LJ stated:

the property in the goods has passed to the purchaser, either conditionally or unconditionally. It passes conditionally where the bill of lading for the goods, for the purpose of better securing payment of the price, is made out in favour of the vendor or his agent or representative … It passes unconditionally where the bill of lading is made out in favour of the purchaser or his agent or representative, as consignee.25

However, it is unlikely that property will pass on shipment in most CIF contracts as the seller would have no security over the goods in the event the buyer fails to make payment.

The second stage at which property could pass is when the documents are tendered to the buyer for payment. This is the most common method in CIF contracts; the documents represent a conditional ownership of the goods by the buyer, but if the goods arrive and are found to be physically non-conforming then the buyer can reject the goods.26

However, these situations concern ascertained goods. As stated above, most goods will be shipped in bulk and property will not pass until they are

22 [1927] 1 Ch. 606.â 23â Sale of Goods Act 1979, s.16. 24 [1911] 1 KB 934.â 25â Ibid. 959.

26 Kwei Tek Chao v. British Traders & Shippers Ltd [1954] 2 QB 459

189 2â CIF contracts

unconditionally appropriated to the contract. This approach has led to unfair results, as seen in Re Wait (above), and to alleviate this harsh approach the Sale of Goods (Amendment) Act 1995 inserted sections 20A and 20B in the Sales of Goods Act 1979. These provisions allow the buyer to become tenant in common, in proportion to the quantity paid, in an unidentified bulk.

(f)â Passing of risk

Section 20 of the Sale of Goods Act 1979 provides that risk will pass when property is transferred to the buyer. However, in a CIF contract risk passes on shipment, whereas property is usually transferred to the buyer at a later stage, i.e., payment against the documents or when goods are ascertained. In Biddell Bros v. E. Clemens Horst Co.,27 Kennedy LJ stated:

Two further legal results arise out of the shipment. The goods are at the risk of the purchaser, against which he has protected himself by the stipulation in his cif contract that the vendor shall, at his own cost, provide him with a proper policy of marine insurance intended to protect the buyer’s interest, and available for his use, if the goods should be lost in transit.

Thus, where the goods are sold while afloat, the risk passes to the buyer retrospectively. If the goods are lost or damaged at the time they are sold this does not prevent the buyer from accepting the documents; he can recover his losses either from the contract of carriage or the policy of insurance. In Manbre Saccharine Co. Ltd v. Corn Products Co. Ltd.28 it was stated by McCardie J:

If the vendor fulfils his contract by shipping the appropriate goods in the appropriate manner under a proper contract of carriage, and if he also obtains the proper documents for tender to the purchaser, I am unable to see how the rights or duties of either party are affected by the loss of ship or goods, or by knowledge of such loss by the vendor, prior to actual tender of the documents. If the ship be lost prior to tender but without the knowledge of the seller it was, I assume, always clear that he could make an effective proffer of the documents to the buyer. In my opinion, it is also clear that he can make an effective tender even though he possess at the time of tender actual knowledge of the loss of the ship or goods. For the purchaser in case of loss will get the documents he bargained for; and if the policy be that required by the contract, and if the loss be covered thereby, he will secure the insurance monies. The contingency of loss is within and not outside the contemplation of the parties to a cif contract.29

However, if the cause of loss is not covered by an exception or the policy of insurance the buyer will bear the losses.30

27	[1911] 1 KB 934, 937.â 28â [1919] 1 KB 198.
29	Ibid. 203.â 30â C. Groom Ltd v. Barber [1915] 1 KB 316.

190 Standard trade terms

Q1 What are the basic duties of a seller under a CIF contract? Explain in light of the decision in The Julia.

Q2 How are risks allocated under a CIF contract? Does this approach favour one party to the contract?

(g)â Seller’s remedies

The seller is afforded a number of remedies under the Sale of Goods Act 1979.

This applies to both CIF and FOB contracts. Section 49 provides that the seller can bring an action for the price where property has passed to the buyer and the buyer refuses to make payment for the goods.

Section 50 of the 1979 Act provides the seller the right to claim for damages for non-acceptance of the goods:

(1)Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an action against him for damages for nonacceptance.

(2)The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the buyer’s breach of contract.

(3)Where there is an available market for the goods in question the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price at the time or times when the goods ought to have been accepted or (if no time was fixed for acceptance) at the time of the refusal to accept.

The seller may also exercise a lien over the goods under section 41 of the 1979 Act, however the goods must be in his possession to do so. Section 44 gives the seller the right to stop the goods in transit, however he may only do so if the buyer is insolvent and the goods are still in transit.

(h)â Duties of the buyer

It is the duty of the buyer under a CIF contract to make payment against the tender of documents. The buyer must pay the price if the documents are conforming to the contract and cannot delay payment until he has examined the goods. If the buyer knows that the goods are not in conformity with the contract, the general rule is that he must nevertheless pay against documents if they are conforming. The buyer must make payment in accordance with the terms of the contract. Failure to do so may give the seller the right to reject performance, for example, the buyer may be under an obligation to open a letter of credit in favour of the seller.31

The buyer is also under an obligation to take delivery of the goods. He has the right to inspect the goods on arrival and may reject them if he can prove that

31 See Part 3 Chapter 3 for further discussion.

191 2â CIF contracts

the goods did not conform when they were shipped by the seller. Alternatively, if the loss or damage was caused after the time of shipment the buyer must look either to the carrier or to his insurance to claim damages.

(i)â Buyer’s remedies

The buyer’s right of rejection under a CIF contract is twofold. First, he may reject the documents if they do not conform to the contract, for example, a wrongly dated bill of lading. However if the documents on their face conform to the contract, he must accept them even if he suspects the goods may be nonconforming. If the goods on arrival are indeed found to be non-conforming the buyer can then reject the goods. However, the right to reject the goods can only apply if the buyer accepts the documents. In Kwei Tek Chao v. British Traders & Shippers Ltd,32 Devlin J stated:

there is a right to reject documents, and a right to reject goods, and the two things are quite distinct. A cif contract puts a number of obligations upon the seller, some of which are in relation to the goods and some of which are in relation to the documents. So far as the goods are concerned, he must put on board at the port of shipment goods in conformity with the contract description, but he must also send forward documents, and those documents must comply with the contract. If he commits a breach the breaches may in one sense overlap, in that they flow from the same act. If there is a late shipment, as there was in this case, the date of the shipment being part of the description of the goods, the seller has not put on board goods which conform to the contract description, and therefore he has broken that obligation. He has also made it impossible to send forward a bill of lading which at once conforms with the contract and states accurately the date of shipment. Thus the same act can cause two breaches of two independent obligations.33

Under section 51 of the Sale of Goods Act 1979, the buyer may claim damages in respect of non-delivery by the seller, under both CIF and FOB contracts. Where there is an available market for the goods in question, the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered or (if no time was fixed) at the time of the refusal to deliver.34

Section 53 of the 1979 Act gives the buyer the right to claim damages in respect of any breaches of warranty by the seller. In the case of breach of warranty of quality, such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had fulfilled the warranty.35

32	[1954] 2 QB 459.â 33â Ibid. 481.
34	Sale of Goods Act 1979, s.51(3).â 35â Ibid. s.53(3).