The Law of the International Sale of Goods
In an international sale of goods contract, there is the fundamental issue of who bears the risks of the goods and at what point there is the transfer of risks from the seller to the buyer. There is also the issue of the responsibilities of the buyer and seller for insuring the goods, and paying export and import duties, inter alia.
In an international sale of goods, a set of rules known as incoterms answers the above questions and would be the subject of this note.
These are a set of terms that clarify the obligations of buyers and sellers in an international sale of goods. These terms are standard terms that the parties to an international sale of goods may adapt. There are several incoterms, and these are explained below:
1. Ex Works: The seller only has the obligation to make the goods available at a designated location (in the seller’s country) and the buyer has the obligation to load the goods on his designated method of transport. Consequently, the buyer bears responsibility for the transport cost and cost of insuring the goods. Summarily, the seller has minimal responsibility under an ex works arrangement.
2. Free Alongside Ship (FAS): The seller has the obligation to load goods that have been cleared for export onto a truck, obtain expert documentation of the goods, transport the goods to a designated port, and unload the goods from the truck next to a specific vessel for delivery to the buyer. At this point, the buyer is responsible for loading the goods onto the vessel and for all the costs thereafter.
3. Free on Board or Freight on Board (FOB): The seller, in addition to all the obligations of the seller in Free Alongside Ship, has the additional obligation of placing the goods on board a vessel for shipment to the buyer, after which the legal title, risks, and costs passed onto the buyer. Sometimes, the FOB designation is followed by the port name (either the port in the seller’s country or the port in the buyer’s country). The port name represents when the liabilities for transporting the goods move from the seller to the buyer.
Section 62 of the Sale of Goods Act, 1962 (Act 137) makes the following provisions on Free on Board Contracts:
In a f.o.b. contract, unless a contrary intention appears —
(a) the buyer is entitled and bound to nominate a ship to the seller calling during the agreed period, if any, at the agreed, or where the buyer has an option, one of the agreed, ports, and ready and willing to carry the goods;
(b) the seller is bound, at his own expense, to have the goods loaded on the ship nominated by the buyer;
(c) the seller is bound to give such notice to the buyer as required by section 20(2) of this Act except where the buyer already has the necessary information;
(d) the seller is not bound to effect any insurance on the goods;
(e) the seller is bound to transmit to the buyer bills of lading by which the goods are
deliverable to the buyer or his order or to transfer to the buyer bills of lading by which the goods are deliverable to the seller or his order;
(f) where by the bills of lading, the goods are deliverable to, or to the order of the seller, the property passes to the buyer when the bills of lading are transferred to him, and whereby the bills of lading the goods are deliverable to, or to the order of the buyer, the property passes to the buyer when the goods are shipped;
(g) the risk in the goods passes to the buyer when they are shipped.
4. Cost Freight (CFR): The seller is also responsible to pay for the main carriage of the goods till it reaches the point of destination.
5. Cost Insurance and Freight (CIF): The seller pays for the costs, insurance, and freight of the goods in transit to the buyer. Until the goods are delivered at the destination port, the seller bears the responsibility for loss or damage to the goods.
Section 61 of Act 137 makes the following provisions for C.I.F contracts:
In a c.i.f. contract, unless a contrary intention appears —
(a) the seller is bound at his own expense, to ship the goods during the agreed period, if any, to the port agreed upon or to acquire goods afloat which have been so shipped;
(b) the seller is bound, at his own expense, to effect on the goods an insurance of the type normal for goods and a voyage of the kind in question;
(c) the seller is bound to transfer to the buyer proper shipping documents in accordance with the terms of the contract;
(d) the buyer is bound to take up proper shipping documents and, on doing so, to pay the price in accordance with the terms of the contract;
(e) the goods are deemed to be delivered to the buyer, and the property therein accordingly passes to the buyer, on the transfer to him of the bills of lading;
(f) the risk in the goods passes to the buyer when they are shipped or acquired afloat.
6. Delivery Duty Paid (DPP): The seller assumes all the responsibilities and costs of delivering the goods to the buyer. These include the payment of both export and import formalities and all applicable taxes. The risks transfer from the seller to the buyer when the goods are made available to the buyer for unloading unto the buyer’s means of transport.
The Obligation of the Seller to Transfer Proper Shipping Documents to the Buyer:
To enable the buyer to take delivery of the goods, the seller must transfer “proper shipping documents" to the buyer.
Section 64 of Act 137 defines proper shipping documents as:
For the purposes of this Part "proper shipping documents" means—
(a) the seller's invoices for the goods;
(b) bills of lading which acknowledge that the goods have been shipped and which contain no reservation as to the apparent good order and condition of the goods or the packing; and
(c) in a c.i.f. contract and in any other contract where the seller is bound to effect insurance on the goods, policies of insurance, or, where permitted by commercial custom, certificates of insurance.