International Sales Contracts: C.I.F. and F.O.B. Explained

Introduction and Lord Wright's Statement

This paper examines the specific implications of Lord Wright's statement in Ross T. Smyth and Co. Ltd. v. TD Bailey, Son & Co. [1940] 3 All ER 60 and how his reasoning relates to the rights and obligations of buyers and sellers, specifically within the context of C.I.F. and F.O.B. contracts.

In that case, Lord Wright — upon considering the dispute between the parties — stated:

"Now it is true that all these rules both under section 18 and section 19 are prima facie rules and depend on intention in this regard; the intention of the parties is seldom or never capable of proof. It is to be ascertained, as already stated here, by having regard to the terms of the contract, the conduct of the parties, and the circumstances of the case."

What must be resolved is Lord Wright's specific meaning in the statement above. In order to examine exactly what he is saying to the buyer and seller, the definitions of the contracts into which either party has placed themselves must be carefully explored.

Contracts for the Sale of Goods

The specific meaning of the term "goods" has posed many difficulties for the courts. Goods refer to that which is tangible, physical, and movable. A sale consists in the transferring of the title of goods from the seller to the buyer for a price [2-106(1)]. The seller is under an obligation to make transfer and delivery of the goods; the buyer's obligations are to accept and make payment in adherence to the contract [1-301]. Broadly speaking, parties to a contract of sale can agree upon whatever terms they desire, provided both parties are agreeable.

The parties' agreement is inclusive of the bargain they struck, as well as any previous dealings between the parties, general trade custom and usage, and any past course of performance in relation to the present contractual agreement. The following concept is central to understanding what Lord Wright's statement actually expressed concerning the scope of contract law:

"A course of dealing is a sequence of prior conduct between the parties which gives a firm basis for interpreting their communications and conduct between themselves."

This single concept conveys in essence Lord Wright's viewpoint on how contract protocol should be interpreted. Another term of importance is "usage of trade" — a phrase expressing that there are standards and protocols within every sector of the business world. Just as some practices would be tolerated in one part of the world, the very same might be rejected by the trade practice of another. "Course of performance" is descriptive of a contract that will require repeat performances.

A contract can be left open in the area of the price term, provided that the price is fixed at some later date or by some agreed market-standard solution. Flexibility is allowed for in the Code, both in terms of whether a contract is required to be written and in the scope of what is required to be written if the terms are spelled out between the parties.

The Code is designed to ensure fair and balanced dealing between the parties in the output and requirements of the contract. After the details for price and delivery have been agreed upon, the mode of freight should be considered. The seller has an obligation to make transfer and delivery of the goods, and upon releasing the goods to the carrier, the seller has completed those contractual obligations.

The proper contractual passing of property from the seller to the buyer is imperative. The general rules are located in the Sale of Goods Act in Sections 18, 19, and 20. Section 18 contains the provision that property in goods cannot pass "unless and until the goods are ascertained." Unascertained goods become ascertained once the buyer has agreed to the terms.

Section 19, Clause 1 makes provisions concerning the timing of the passing of property and establishes the parties' "intention" regarding what each considered to be the agreed-upon terms of the contract. Section 19, Clause 2 addresses the purpose of ascertaining the intention of the parties as to the terms of the contract. In ascertaining what the intent of the contracting parties was, the following may be used to establish prima facie intent.

Definition and Scope of the F.O.B. Contract

There are considered to be three types of F.O.B. contracts:

Classic F.O.B.: The buyer nominates the vessel and the seller makes the contract of carriage.

Rarely Utilized F.O.B.: The seller nominates the vessel and makes the contract of carriage.

Most Commonly Used Today: The buyer nominates the vessel and makes the contract of carriage.

The classic F.O.B. — which remains common even in today's modern business world — is the type in which the buyer is responsible for selecting the ship, while the seller's responsibility is to contract the shipment, charging that cost to the buyer's account. After loading the goods and obtaining a bill of lading, the goods are shipped to the buyer, who in most cases pays costs plus shipping expenses.

This arrangement is most appropriate where the buyer's goods require shipment on a certain type of vessel or where foreign currency restrictions are involved. In such instances, the buyer would most likely prefer to receive shipment through a vessel of the buyer's own nationality, which is one reason the buyer generally chooses the ship. In the event that shipping arrangements are difficult to secure, or where the shipped items are small in volume, the seller may choose the ship upon the consent of the buyer.

The F.O.B. contract, unless otherwise agreed, is taken to mean "free on board." F.O.B. refers to the place of shipment — that is, the place from which the seller is required by the contract to have shipped the goods and to have borne the expense. When the term is F.O.B. destination, the seller must pay the expenses for shipping to the named destination, which is generally an undesirable arrangement in most business contracts.

The seller's obligation for delivery of the goods is concluded at the time the goods are delivered for shipment to the buyer's chosen carrier. This constitutes delivery on the part of the seller. This is not always the case, however; it holds true only when the seller has not made provisions to reserve the right of disposal. Transfer of property does not take place until after shipment, even if the goods have been completely purchased before shipment.

Under Section 2-319 of the Uniform Commercial Code (UCC), and under either of the above terms, the proper term is F.O.B. Vessel. As is clearly seen, there is some room for confusion between the buyer and seller, and several outcomes are possible under this contract type.

Conclusion

A contract that names a method, place, or time of the transfer of property or risk — or indeed names both — will generally be upheld by the court, even where there is a variation from the provisions of the Sale of Goods Act, the Uniform Commercial Code, or standard commercial practice. Unless the contract is judged to be illegal under general principles of contract law, or causes undue prejudice to either the buyer or seller, or is against public policy, the contract will be found valid.

The statutes, judicial precedents of case law, and local customs of expected protocol should be used as guidelines by the parties forming the contract. Contracts are made to be rewritten and modified — no contract is so infallible that it will forever serve the needs of the parties in protecting their personal and business interests. The theme of ongoing adaptation is central to the practice of contract law.

In the Supreme Court of Africa (1999) Highveld 7 Properties et al. v. Timothy Luke Bailes.

Federal Court of Australia (1999) Westpac Banking Corp v. Stone Gemini [1999] FCA 434.

Smyth, Ross T. & Co. v. T.D. Bailey & Co. (1940) All ER 60 (HL).

The Contract of Sale (n.d.).

Corley, Robert M. et al. (1984) Principles of Business Law, 12th ed. Prentice-Hall, Inc.

Duhaime (n.d.) Interpretation of Contracts. Available at: