A London arbitration tribunal has found that under a sale on FOB terms, a seller is obliged to load goods on board the vessel nominated by the buyer even where the terms of the purchase contract specify a date for the cargo to be “ready for shipment” only and do not require the buyer to nominate a vessel.
We regularly see “hybrid” contracts, where parties contract on the basis of a sales term such as FOB or CIF but then seek to amend their respective rights and obligations using the particular terms of the agreement.
Under a classic FOB sale, a seller is obliged to load the goods “free on board” a vessel nominated by the buyer. This obligation exists whether or not it is expressly stated in the contract. The decision in this case is a reminder of what is required to affect those FOB obligations.
The seller and the buyer entered into three contracts for the sale and purchase of steel bars. The contracts stated that the cargo was to be “FOB stowed, lashed, secured and dunnaged [name of load port]” and “Delivery: Total cargo to be ready for shipment by 30 April”.
Between 22 and 29 April, the seller delivered quantities of steel bars to its freight forwarder and was issued with forwarder’s certificates of receipt.
The buyer nominated a vessel (Vessel A) to lift the cargo purchased under the first contract and another vessel (Vessel B) to lift the cargo purchased under the second and third contracts, for delivery to different receivers at a different destination.
The buyer alleged that:
- On arrival of Vessel A at discharge port there was a shortage of 68 bundles of steel bars.
- On arrival of Vessel B at discharge port there was an over-shipment of 66 bundles of steel bars.
As a result, the buyer incurred various losses which it sought to recover from the seller.
The seller disputed the alleged shortage and over-shipment. On the evidence the Tribunal found that there had been a shortage and over-shipment, despite contradictory figures stated in certain reports and surveys produced during the discharge operations of both vessels.
The key question then became whether the seller was in breach of the contracts because of the under and over-shipment and therefore liable to pay the buyer damages for its losses. The buyer submitted that because of the FOB nature of the contracts, the seller was obliged to place the correct quantity and quality of the cargo on the board the vessels nominated by the buyer.
Both parties agreed that under a classic FOB contract it was the obligation of the seller to load the goods on board the vessel nominated by the buyer and the obligation of the buyer to nominate a vessel in time. The issue in this case was whether the normal FOB obligations of the seller had been displaced by the particular terms of the contracts.
The seller relied on the delivery clause (see above) and submitted that its obligation was only to deliver the goods to the forwarding agent by 30 April, pointing out that the contracts did not include any obligation on the buyer to nominate a vessel or any date by which such a vessel was to be nominated.
The Tribunal disagreed. The delivery clause related only to timing and did not purport to define the extent of the seller’s obligation. The fact that the contracts did not specifically require the buyer to nominate a vessel did not affect the seller’s obligations under the contract. The fact that this was an FOB contract, under which the loadport and destination were specified, made it clear that the obligation was on the buyer to nominate the carrying vessels.
Accordingly, the seller was in breach of the contracts in relation to the cargo shipped on board both vessels and liable to the buyer in damages.
It is not yet known whether the award will be subject to an appeal before the High Court.
Parties should always consider carefully which sales term (e.g. FOB, FAS, CIF, CFR or DES) is most appropriate to their contract, keeping in mind the rights and obligations each sales term imposes. If parties wish to replace or vary those rights or obligations, they should use clear and express wording in the contract to do so.