Monday, November 8, 2010

FREE ON BOARD CONTRACT,NATURE,ADVANTAGES AND DISADVANTAGES.

INTRODUCTION
The nature of free on board(fob)contract in  International trade law has been modified overtime to ensure that the contract of sale between the seller and the buyer are followed to the latter and are seen to be binding between parties . This is essay will look at the, nature, advantages and the disadvantages of free on board (fob) contract. 
DEFINITION:
The term FOB means free on board and Staughton L J.[1]started that fob contract determines how the goods shall be delivered, how much of the expense shall be borne by the sellers, and when risk of loss or damage shall pass to the buyer. It does not necessarily decide when the property is to pass.
CLASS OF FOB
There are three major classes of fob, as mentioned in the case of Pyrene Co Ltd v Scinda Navigation Co Ltd[2] and they are 
1. The Classic Fob: Under the this type of contract, the buyer nominates the ship and where it will arrive, while the seller places the goods on the account of the buyer. The seller receives the bill of lading and transfer to the buyer. The marine insurance is arranged by the buyer, but the seller bears the cost.
2. Fob Contract “with additional service” :Here, all arrangement are made by the seller on the account of the buyer but the buyer unlike the classic fob is not obligated to nominate a suitable ship
3. Fob contract “buyer contracting with the  carrier” or Simply fob: The buyer here enters into a contract of carriage by sea  directly or through an agent ,he nominates the ship, the seller puts the goods, The bill of lading goes directly to the buyer, usually through the agent.

THE NATURE OF FOB CONTRACT
The seller often makes the contract of carriage. It must be reasonable in terms of the nature of goods and other circumstances, If not when the goods are lost or damaged in the course of  transit, the buyer  may decline to treat the delivery to the carrier as a  delivery to himself or may hold the seller responsible in damages.[3]


This is to say that the seller bears the burden the burden of the goods even though there is an existing contract between the parties involved but the general liability passes to the owner once the goods gets to buyer.[4] The seller has the general property in the goods at the time of the contracting and retains such property throughout the period of carriage. He is normally the proper party to sue on the contract and in tort.[5] However, where  the buyer can acquire the right of sue is if he is  lawfully  the holder  of a bill of lading irrespective  of whether he has also acquired property in the goods. The buyer can also bring an action on the contract of carriage from the time when he takes possession of the consignment note, or accept the goods or ask the carrier for the consignment note for the goods or for a change to the terms of the contract of carrage.Again,a buyer who has bought goods under certain types of Fob  contracts will be under a duty to make the contract of carriage and he will consequently be a party to that contract even before he comes to own the goods under a contract of sell.[6]
ADVANTAGES OF FOB CONTRACT
1. The general rule is that the buyer arranges for the freight and marine insurance, it is inconvenient for the buyer because the seller knows the whereabouts in that country to dispatch unlike the buyer.[7]
 2. The buyer has control over the shipping document because he gets to select the ocean carrier and keeps the papers of all the payments made in pursuit of the transportation of the cargo.
3. The seller can easily recover the merchandise before it is on board a vessel especially in       cases where the buyer defaults in payment or contract terms.
DISADVANTAGES OF FOB CONTRACT.
 1The buyer suffers in the case of loss of cargo or ship in transit. Once the cargo crosses the rail of the ship, whether it gets to the buyer or not he will bear the consequences of whatever happens.
 2. The seller has very limited or no possibility of recovering his merchandise after the cargo crosses the rail of the ship.
 3. The seller cannot recover the price of the goods where the buyer fails to name an effective ship; his remedy lies only in damages. See the case of Petraco ltd v. petromed International S.A[8]

CONCLUSION
Before drafting the contract, some points must be considered. It must be considered if FBO contract is more beneficial than another type of contract according to subjective situation of the parties, economic climate (fluctuation) and shipping conditions.
The INCOTERM FOB still has an application in some markets, but these are more and more in the minority. Note that the use of an 'on-board' Bill of Lading or mate's receipt could be appropriate in recording the passage of risks under FOB making FOB one of the few terms still unavoidably dependant on such documents.[9]


[1] Mitsui&Co Ltd v Flota Mercante Grancolombiana SA (The ciudad de pasto and The ciudad de Nevia)[1989]1 AC 951
[2] [1954]2QB 402
[3] Sale Of Goods Act 1978 s32(2)

[4] N.kouladis,Principal Of Law Relating To Overseas Trade(Blackwell Publishers,oxford1994)

6Wimble ,son &co v Roseberg & Son[1913]3  kBD743
7n2
8 (1988) 3 All ER 454
[9] Emotrans. Incoterms http://www.emotrans.com.au/incoterms.htm#fob accessed 5 november 2010.

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