SPECIAL CONTRACTS : You have learnt that the applicable law can be the law of either party or that of a third party. It will be the Indian Contracts Act, if Indian law will apply. This act also provides that if the parties use special trade tells the duties and the liabilities under the act can be changed by the expressed provisions in the contract. Similar provision exists in acts of other countries as well. Further, over the centuries, courts in various countries have interpreted trade contracts.
This has given rise to some accepted interpretations of contract terms, such as FOB and CIF.
Let us discuss some principal features of these two types of contracts.
1) FOB Contract: Under FOB contracts, the seller has the duty to place the goods onboard the carrier which has been nominated by the buyer. However, sometimes due to reasons of convenience, the exporter himself may contract with the carrier. In both cases, the freight has to be paid by the importer. The exporter's responsibility ends when he delivers the goods to the carrier.
The major legal implications of FOB contracts are:
I) The delivery is completed by delivering the goods to the carrier. This means that delivery to the carrier operates as delivery to the buyer, unless the seller has reserved the right of disposal over the goods.
ii) The price in a FOB contract covers all expenses upto the loading of the goods on the carrier. All costs subsequent to that point will be on the buyer's account.
iii) Risks in the goods passes from the seller to the buyer at the same time when delivery is completed i.e. when the goods are placed on the carrier.
iv) Normally property in the goods also should pass from the exporter to the importer along with risks. The passing of property may bc postponed by a specific provision in the contract.
v) Payments fall due when the delivery is completed. It is generally stipulated that property will pass only when the buyer fulfils his contractual obligations under the relevant terms. For example, acceptance of the Bill of Exchange submitted along with the Bill of Lading or the Airway Bill.
From a practical point of view, it is easier for an exporter to 'implement an FOB contract. This is because of the following two reasons:
1. When the space is not available on ship, the exporter will be unable to export the goods. In FOB contract reservation of ship is the duty of importer. Therefore, this is the fault of buyer.
2. In FOB contract, risks associated with freight escalation has to be borne by the importer.
Though selling on FOB basis may be easier for an exported, this is not good for the country as a whole. This is because since under on FOB contract, the importer will organise both shipping and insurance, he will give the business to local firms in his own country. As a result, the Indian shipping1Air lines and insurance companies stand to lose considerable amount of business.
2) CIF Contracts: The exporter undertakes the responsibility of contracting the shipping space and also getting the insurance cover for the goods in a CIF contract. These responsibilities are in addition to what he does under an FOB contract.
The legal nature of a CIF contract is rather complicated as it necessarily involves three contracts, viz., contract of sale, contract of affreightment and contract of insurance. Further, over the centuries, the nature of CIF contracts has evolved based upon courts interpretation all over the world. One of the objectives of CIF contract is to facilitate resale of goods while on transit on the basis of only shipping documents. The shipping documents represent title to the goods and, therefore, physical transfer of goods is not required for trading purposes. It is, therefore, said that legally speaking, a CIF contract is not a sale of goods themselves but a sale of documents relating to the goods. Under a CIF contract, the right of the buyer is to have the shipping-documents and not the goods. The seller acclaims payment only by tendering the relevant shipping documents.
The major legal implications of CIF Contracts are:
i) The seller has to procure a contract of affreightment. This will enable him to ship the goods on the due date to the named port of destination.
ii) He must deliver the goods on board the ship, collect the shipping documents and send to the importers
iii.) he must also procure a contract of insurance covering the ships goods and the risk as desired by the importer.
iv) He also has to send along with the shipping documents the payment document, such as the Bill of Exchange.
v) The importer has to make the payment on the basis of the documents tendered to him. He has a right to scrutinise the documents or reject them.
vi.) the property in the goods does not normally pass on the shipment. it passes when the bill of Lading is deliver to the buyer and thereby he acquire the right of dispose of the good.
vii.) the property right that the buyer is acquiring is conditional
vi)The exporter's duty comes to an end when the goods have been placed on board the vessel. The goods will be at the importer's risks, though the freight and insurance have been paid by the exporter.
ix) The CIF contract is so structured that even if the, buyer knows that he goods have already got lost or damaged, he is under an obligation to pay. The importer has fills remedy either I under the contract of affieightment against a ship owner or under the policy of Insurance against the insurance company.