International Trade Law: FOB Contract Analysis and Liability

This case study delves into the intricacies of an international trade law dispute centered on a Free on Board (FOB) contract. The scenario involves New Fads Ltd, a seller of computer mechanisms, and Bell Ltd, a buyer based in Nigeria. The agreement stipulated FOB terms, but a series of events, inclu...Read More

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INTERNATIONAL TRADE LAW
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Issue
The issues involved in the given scenario whether the seller or the buyer will be liable for
compensation in terms of FOB contract.
Rules
In the given scenario, the terms and conditions of the FOB contract between the two
companies will apply here. The contracts regarding the sale of goods in international commerce
will be implicated here to decide the issues that arise in the contract. The term FOB means ‘Free
on Board,’ which is a term of shipment indicates the liability of the consumer or the trader of the
goods if there is any destruction arise.1 The destruction of the products in this situation will occur
if the commodities have been destroyed at the time of shipping. The term ‘FOB origin’ or ‘FOB
shipping point’ means that the buyer of the commodities is at the peril, and the ownership of the
goods will take place when the seller of that product has shipped the products. The case law
Carlos Federspiel & Co SA v Charles Twigg & Co Ltd 1957 and its decision will apply here for
the advice regarding this FOB contract to the parties.2 The rules of case law Bunge Corp vs.
Tradex Export S.A 1981 will apply here as it has decided in this case that if the buyer of FOB
contract fails of nominating a ship or vessel in a reasonable time, then he will liable for the
1 Asanwana, Ufuo, and Okor Efombruh. "Understanding FOB and CIF Contracts: And When
Property and Risk Pass in These Transactions." (2018) Available at SSRN 3278642.
2 Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd's Rep 240 (QB)

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breach of terms of contract and the seller may refuse to deliver the commodities.3 The rules in the
United Nations Convention on the Contracts for International Sale of Goods at Vienna 1980 will
apply here.4 The government of Australia has participated in the Vienna Convention, which has
enforced as the law in several territories of Australia. A series of Territory of State Acts of
Australian Law has enacted this Convention and it is generally named as the Sale of Goods
(Vienna Convention) Acts such as Sale of Goods (Vienna Convention) Acts 1986 (NSW)5, Sale of
Goods (Vienna Convention) Acts (WA), 19866, Sale of Goods (Vienna Convention) Acts (NT)7
and many others. Article 11, along with Article 29 Part II of the Convention8, has dealt with the
requirements of the sale as the contract between the parties may not be required in writing and
does not specify any particular requirement. The case law Woodhouse AC Isreal Cocoa Ltd. SA
vs. Nigerian Produce Marketing Co. Ltd. 1972 will apply here for the consideration to bind a
contract between the international parties.9 According to the judgment of this case, any contract
or agreement for the sale of commodities and products will usually fulfill the requirement as a
3 Bunge Corp vs. Tradex Export S.A [1981] 2. All ER 540: [1981] 1 WLR (HL): affirming
[1981] 2 All ER 524.
4 The United Nations Convention on the Contracts for International Sale of Goods at Vienna
1980
5 Sale of Goods (Vienna Convention) Acts 1986 (NSW)
6 Sale of Goods (Vienna Convention) Acts 1986 (WA)
7 Sale of Goods (Vienna Convention) Acts 1986 (NT)
8 The United Nations Convention on the Contracts for International Sale of Goods at Vienna
1980
9 Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd [1972] AC 741

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bilateral contract, which has been made by an interchange of the executory promises and every
undertaking should be constituted the consideration for another. The case law Nicolene Ltd. Vs.
Simmonds 1953 will apply in this given scenario, that there should be a certainty in terms of the
contract and the agreement of sale can be on any existing product as well as any future goods.10 It
is essential in this context that the subject matter, as well as the goods of the contract, should be
identified with an appropriate particularity to be recognized in the court of law. Mere failure of
ascertaining every term may not have resulted in an invalid contract. The term ‘Incoterms’ will
apply in this scenario as the terms of trade and the vital elements regarding the sale of
international contracts between the parties of the contract.11 It has informed the parties of the
international contract about what to act in respect of carriage the commodities or goods from the
vendor to the purchaser, and the import or export clearance. It has also explained the risks and
divisions of costs between the international parties to such a contract. The International
Chamber of Commerce (ICC) has reviewed this Incoterms for corresponding and adopting the
best practices in every decade for the growth of the international trade and relation between the
parties. This term ‘Incoterms’ is used in such international trade and it has also firmed that the
ship goods in the US should follow the Uniform Commercial Code (UCC) for such type of
international trade.12 It is also mentioned in this context that as there are several rules and
regulations regarding international trade and commerce, thus the parties to the international
10 Nicolene Ltd v Simmonds [1953] 1 QB 543.
11 Schaefer, Thomas J. "Incoterms® use in buyer-seller relationships: a mixed methods study."
(2017).
12 Uniform Commercial Code (UCC) 1987

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contract should expressly mention or indicate the type of governing laws, which they are using
for the shipment of the goods. There are several primary obligations to the parties to the FOB
contract between the international parties. There are variations in the FOB contract, but
generally, the buyer of the contract arranges the shipment of the goods and it is a duty of the
seller to make the commodities available to the specified ship in the stipulated time or port at the
expense of the seller. It has obtained a bill of lading for the commodities or products and tenders
that to the buyer in the return of the payment from the buyer. There are several steps, which
should be fulfilled by the parties for constructing the FOB contracts in such international trades.
These are payments, transfer of title of the goods, transfer of risk arising on the shipment,
insurance, export licenses.13 There is the development of the trend towards disbursement or
payment in every international trade through the letters of credit, which should be issued by the
banks. The rules regarding the credit have depended on such performance the duty of the seller
for delivering the products on boarding the vessel to transmit that to the consumer. The buyer of
the goods will entitle to pay in accordance with the letter of credit as that presented by the seller
and the seller of that goods is also entitled to get payment for any contractual obligation in the
correspondence bank of the buyer’s bank which is situated in the business placed of the seller.
Incoterms have not determined the time of transferring the title of the merchandise. However, it
is the discretion of the seller of those goods as he may add the clause that the title of the goods
will pass after the full disbursement of goods by the purchaser. Under the FOB contract in
international trade, the risk of damage or loss to that commodities will be transferred to the buyer
from the seller when those commodities have crossed the rail of the vessel, that is, on board of
13 Carr, Indira, and Peter Stone. International trade law. (Routledge, 2017).

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such commodities. The rules of the case law Carlos Federspiel & Co SA v Charles Twigg & Co
Ltd 195714 will apply here. The seller, as well as the purchaser, will not in duty to insure such
commodities under the rules of the FOB contract. The export licenses should be obtained by the
seller of the goods and it is a general duty of him for commencing such international trade. There
are several obligations of the buyer in the FOB contract. The buyer should have to pay all prices,
which has required in such a contract and any other costs and obtained his own risk of expenses
of import license or any other authorization. It is a duty of the buyer to bear every risk of
destruction or loss of the commodities after passing the rail of ship at the dock of shipment. In
the given scenario, an employee of the seller has oversight of the fax regarding the shipment of
goods under the FOB contract. Section 180 of the Corporation Act 2001 (Cth) will apply here for
the officer of that seller company.15 According to this section, the officers or employees of a
company should be careful in discharging their duties in due diligence and an amount of care for
the betterment of the company.
Application
In the given scenario, New Fads Ltd has agreed to sell the computer mechanisms to Bell
Ltd. On the terms of the FOB contract. In this context, New Fad Ltd company is the seller of the
merchandise, and Bell Ltd is the buyer, which is situated in Nigeria. The shipment of the goods
has scheduled by both the company in April, and the buyer has sent a fax to the seller as the
buyer has nominated the Moyvale ship and this ship will be ready for loading on 15th April.
14 Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd's Rep 240 (QB)
15 The Corporation Act 2001 (Cth)

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However, for oversight of an employee, the fax does not bring into the notice of the seller and
enables the complete loading of the ship. The goods have been kept in a specific warehouse at
Manchester and for a massive strike by the workers, the rail network was paralyzed. This matter
may also bring as an inevitable incident and a reason for unable for shipment in the chosen ship.
Applying the terms and conditions of FOB contract in this given scenario, the contract
between the companies is satisfied conditions of FOB contract in such universal trade or
commerce.16 It is an obligation of the vendor to available the goods or commodities to the
nominated place of shipment and within the stipulated time arranged by the buyer. The seller
should make available the products at his own risk and expenses with a bill of lading which will
be paid by the buyer. In this scenario, the seller is unable to make those goods in the specified
place within the stipulated time proposed by the buyer. The buyer has nominated the ship, named
Moyvale and informed the seller about it. However, the seller is not able to transfer those goods
within the stipulated time and place; thus, he is responsible for the violation of the FOB contract
in international trade.
Under the terms of the FOB contract, the purchaser of international trade can select the
way of shipment and stipulate the time and place for the goods, which he is importing from
another country.17 The buyer, Bell Ltd, has obeyed his responsibility and selected the ship
Moyvale, as well as the stipulated place and time and fax it to the seller company. In this context,
16 Carr, Indira, and Peter Stone. International trade law. (Routledge, 2017).
17 Asanwana, Ufuo, and Okor Efombruh. "Understanding FOB and CIF Contracts: And When
Property and Risk Pass in These Transactions." (2018) Available at SSRN 3278642.

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the buyer has fulfilled his duty to choose the board of shipping and inform the seller under the
terms and conditions of the FOB contract.
Relating the rules of FOB contract in the given scenario, it is the burden of the seller to
send the goods to the ship and the responsibility of the buyer on the goods will begin after
crossing the rail of the ship. In this given circumstance, the goods were in the custody of the
seller, New Fad Ltd company which has stocked in Manchester. In this scenario, the seller was
not able to send the merchandises to the shipping place required by the buyer. Thus, the seller
has breached his duty to send the commodities in the mentioned place within the time, as
described by the buyer company.
Applying the judgment of the case law, Carlos Federspiel & Co SA v Charles Twigg &
Co Ltd 195718 in this given scenario, the buyer, Bell Ltd, will get such risk of damage to the
goods when those goods cross the rail of the ship. However, in this context, the seller did not
seem able to transport the goods to the vessel; that is why the risk of damage or loss of the
commodities has not handed to the purchaser. The retailer of the products will be liable for any
damage or loss of the products.
Applying the case law Bunge Corp vs. Tradex Export S.A 198119 in this picture stated
here, the buyer will not be exempted from the liability if he does not inform the seller regarding
the place and time of shipment within the reasonable time after the commencement of the FOB
18 Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd's Rep 240 (QB)
19 Bunge Corp vs. Tradex Export S.A [1981] 2. All ER 540: [1981] 1 WLR (HL): affirming
[1981] 2 All ER 524.

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contract in every international trade. The buyer, Bell Ltd company, has informed regarding the
shipment and has stipulated the time and place of such shipment of the commodities within a
reasonable time through fax to the seller, New Fad Ltd company. The buyer has fulfilled his duty
and requirement of the FOB contract as he has informed the seller for shipment within a
reasonable time. Thus, the buyer is not accountable for any loss of commodities in international
commerce.
Applying the guidelines described in the United Nations Convention on the Contracts
for International Sale of Goods at Vienna 198020 in this scenario, there is a binding contract
between the New Fad Ltd, the seller, and Bell Ltd, the buyer. There is a certainty on the theme of
the contract. Each contract of such sale of goods and commodities should be dealt with particular
fundamental issues, whether international or domestic contract. One of the key terms of the
contract in worldwide trade or commerce, the word ‘Incoterms,’ is commonly used and also
recognized a set of guidelines for such interpretation of commerce. This Vienna Convention has
described and recognized the term Free on board (FOB) in every international trade. In Articles
30 to 34, well as 53 to 60 of the Vienna Convention21 has described that in the contract of sale of
merchandises the seller should deliver those contracted goods or products following the
expressions of that contract and the purchaser should accept that and paid for that commodities
under the agreed positions of that contract. In this scenario, the seller should deliver the
20 The United Nations Convention on the Contracts for International Sale of Goods at Vienna
1980
21 The United Nations Convention on the Contracts for International Sale of Goods at Vienna
1980

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commodities to the buyer, and it is the responsibility of the buyer, Bell Ltd should accept those
products and reimburse the similar to the correspondence bank of New Fad Ltd.
Applying the case law Woodhouse AC Isreal Cocoa Ltd. SA vs. Nigerian Produce
Marketing Co. Ltd22 in this scenario, that there is a consideration on the part of the seller, New
Fad Ltd company, as well as on the part of the buyer of the commodities, Bell Ltd. In
international trade and even in the domestic contract, there should be a consideration for binding
the contract legally enforceable. In this context, the seller will send the computer components to
the buyer and in return for that goods, the buyer will send the costs to the correspondence bank
of the seller in his place of commerce. Therefore, there is a binding contract between the seller
and the buyer, and for the breach of a binding contract, the defendant party will be liable.
Applying the decision of the case law, Nicolene Ltd. Vs. Simmonds 195323 in the given
context, there was a certainty in terms of the subject matter of international trade between the
New Fad Ltd and Bell Ltd company. The subject matter of this contract of sale was the delivery
of the computer components to the buyer, and there was a certainty of those products as they
were already sent to Manchester. Thus, there is a binding contract between those international
companies.
22 Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd [1972] AC 741
23 Nicolene Ltd v Simmonds [1953] 1 QB 543.

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Applying the rules of the Uniform Commercial Code24 in this context that the FOB
contract should be dealt with such an international contract, which may be commenced between
two traders of a different country. In this scenario, the New Fad Ltd company is based on
Australia and Bell Ltd company is based in Nigeria. Therefore, the contract between those
companies will come under international trade, and the Uniform Commercial Code will apply
here for the commencing of the contract, which is enforceable by law. Any breach of the contract
on the part of the seller or the defendant will be a breach of the rules of the Uniform Commercial
Code.
The term Incoterms in such international trade has been revised by the International
Chamber of Commerce (ICC) for corresponding and adopting the best practices in every decade
for the growth of business and relation between the parties in different countries. In this context,
several rules of the ICC will apply here for the breach of the contract. In this scenario, the seller
has failed to send certain commodities in the specified place within the stipulated time, which
has specified by the purchaser in expressions of the FOB contract. It is a violation of the contract
in such international trade and business on the part of the seller.
In this context, section 180 of the Corporation Act 2001 (Cth)25 will be applicable to the
employee of the New Fad Ltd company. Any employee of the company should discharge his
duties to the work of the company with due diligence and care. In the given scenario, for the
ignorance of the employee, New Fad Ltd company has suffered a significant loss in the FOB
24 Uniform Commercial Code (UCC) 1987
25 The Corporation Act 2001 (Cth) s.180

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contract with an international company. Due to his negligence, the company is not able to send
the commodities in the specified place within the postulated time, which is mentioned by the
buyer. Therefore, the employee of the seller company will be held legally responsible indirectly
for the breach of the FOB contract, and it may be affected in the trade relationships in the
international commerce of this country.
The employee of the seller company will also be liable under the tort of the law of
negligence, as well as under the Common Law for the breach of duty of care towards the
operating company. In this case, the New Fad Ltd company has breached the FOB contract with
the Bell Ltd company for the duty of care of its employees. It may be assumed that if the
employee has looked at the fax sent by the buyer and obeyed the duty of care of this work, then
the company may have avoided the breach of such an international contract.
In this scenario, the seller company may have taken a defense of an inevitable accident as
the rail network was broken down for a massive strike in Manchester, the goods were kept. In the
recent case law El Dali vs. Panjalingam 201326 it is decided that the defendant should make it
clear the there was no negligence on the part of him, he can take the defense of inevitable
accident.
Conclusion
Therefore, it may be concluded in this scenario of the FOB contract, the seller; New Fad
Ltd company will be held liable for the breach of that contract as it is not able to send the goods
26 El Dali vs. Panjalingam [2013] O.A.C. TBEd. JA.007

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to the specified port within the stipulated time, which has mentioned by the buyer, Bell Ltd
company.

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Bibliography
Journals
Asanwana, Ufuo, and Okor Efombruh. "Understanding FOB and CIF Contracts: And When
Property and Risk Pass in These Transactions." (2018) Available at SSRN 3278642.
Schaefer, Thomas J. "Incoterms® use in buyer-seller relationships: a mixed-methods study."
(2017).
Book
Carr, Indira, and Peter Stone. International trade law. (Routledge, 2017).
Legislations
Sale of Goods (Vienna Convention) Acts 1986 (NSW)
Sale of Goods (Vienna Convention) Acts 1986 (NT)
Sale of Goods (Vienna Convention) Acts 1986 (WA)
The Corporation Act 2001 (Cth)
The United Nations Convention on the Contracts for International Sale of Goods at Vienna 1980
Uniform Commercial Code (UCC) 1987
Cases
Bunge Corp vs. Tradex Export S.A [1981] 2. All ER 540: [1981] 1 WLR (HL): affirming [1981]
2 All ER 524.

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Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd's Rep 240 (QB)
El Dali vs. Panjalingam [2013] O.A.C. TBEd. JA.007
Nicolene Ltd v Simmonds [1953] 1 QB 543.
Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd [1972] AC 741