Implications of the FOB Contract

Joshua has made a contract with Abraham that he will deliver him 500 dell version 1.1 computers to Abraham by May2010. The contract has been concluded on FOB terms and in FOB contracts the buyer is responsible for any loss or damages during shipment up to the delivery. In this assignment we will discuss out what is an FOB contract and it implications, and when the risks of any destruction of goods pass to buyer or seller and will also analyze what is letter of credit as payment is made through it issued by Kentucky Bank. And in the end some thoughts will be thrown on what are the consequences of termination of contract


Joshua and Abraham have signed a FOB contract and according to FOB contract the buyer is accountable for the safety of commodities after shipment. Under FOB contracts it is the duty of vendor that he must surrender commodities as described in the compact such as time of shipment and must hand over the same commodities as explained in the pact. The goods must correspond with the description of contracts. And this clause of FOB is regulated by section 13 of sales of goods act which states that if the contract for the sales of goods is by sake of description than it is necessary that goods must match with the description [1] . In the contract between Joshua and Abraham, Joshua has agreed to sell dell studio mark 1.1 but he hand over dell studio mark 1.11 and in bill of landing he fraudulently altered the bill and mentioning dell studio mark1.1. All these arise to implied conditions mentioned in section 13 of sales of good act and give the right to vendee to end the pact.


The second significant or distinguished point of the assignment is that who is responsible for the loss of goods?. As mentioned in the title 50 computers have become useless due to sea water and 100 of them have been stolen when computers were unloaded at their destination. The question to consider is that whose responsibility was that to protect the good and who will be responsible for the damage of goods. According to section 20 of sales of good act the commodities are at vendors risk unless the belongings are not shifted to the vendee and risk will only pass to the buyer on shipment. In above contract the goods are specific and the shipper has put them on board at his expense and in this case the vendee is accountable for the loss during voyage [2] .According to section 17 of Sales of Goods Act 1979 the belongings transfers when the persons wish to pass it and it is of no importance whether good are specific or ascertained. In the above case Abraham is responsible for the loss of 50 computers as these became useless during the shipment or voyage. Abraham cannot ask for damages to Joshua but he has cause of litigation against the carrier through Carriage of Goods by Sea Act 1992. As we know seller is not responsible for any loss when he has delivered the good on the ships rail and it is generally consider that property of goods also transferred simultaneously and seller must give notice to the buyer if he fails to give notice then good would be on the risk of seller not buyer [3] 


We will discuss who is responsible for packaging and what cause of action can be aroused if the goods don’t correspond with the description. And to understand this easily we must know what the duties of vendor are and vendee are in FOB contracts. It is duty of seller that he must deliver or pack those good as agreed in the contract and must not deviate from the description but in the above mentioned scenario Joshua has been failed to perform his duties keeping in view the points of the pact as he has loaded dell studio mark 1.11 instead of studio mark 1.1 and this is the violation of the contract and is consider as a strong ground to repudiate the contract


The bill lading is a negotiable instrument which recognizes the specified commodities have been received and also explains what are the goods, which would be received by the concerned man. It contains all the conditions of the contract and is also consider as evidence to know who the owner of a goods is and who has got the possession of the goods. In the above contract Joshua has filled the bill of lading and later on also alters it to make it clean and the second important point is the date of shipment as the exact date is that when goods are shipped, which in above scenario is 3rd May. However the bill of lading explains that the goods were shipped in April. The shipment date is very important and is regarded as essence of the pact and Abraham can reject the bill as it contains false date of shipment [4] . Under bill of lading carrier is under obligation for the seaworthiness of the ship, and change of route and delay a ship is worthy if it has a defect and man of prudence would have rectified it before sending the ship to sea and must be fit to receive particular cargo. The ship must not have any physical defect which renders the good defective due to sea water as it happens in above case 50 computers became useless. The vendee can claim compensation from carrier. As in a famous case Maori King (Cargo Owners) v Hughes the ship was unworthy because it has to carry frozen meat and the refrigerator was not working and it must not be working during the time of loading and once the journey has started than there would be no breach of implied terms if it becomes unfit [5] . In the above case ship owner will only be responsible if he doesn’t exercise due care before the start of voyage to make sure ship is properly managed and equipped


It is general mode of giving cash in international trades and has the importance up to such extent that has been declared as life blood of global trade [6] . The importance of letter of credit can be judged from the point that it is used as a mode of transaction and financing. In international practice there is general method of raising the money on documents to cover the time obtaining the payment against documents and shipment. [7] . The banking practice of letter of credit is regulated by the common customs and practice circulated by international chamber of commerce. Any issue that may arise between vendor and vendee relating to the pact they have signed will have no impact upon the credit as the obligation of bank relates to the documents and not the sale of commodities contract [8] . The bank is under obligation to accept the document if it is same as mentioned in the terms of credit. As the credit is irrevocable the bank is under duty to pay as correct documents are delivered [9] . The Kentucky bank can only discard the bill of lading when it is different from the points of credit.


Joshua has violated a implied terms of the pact as not only date of shipment is incorrect but the goods are also not according to the prescribed description but the point is what Joshua can do to he can re tender the bill of lading with correct date which would be in contractual period than Kentucky bank cannot refuse him to pay under credit if the bank do so than bank will be personally liable to Joshua. And payment can be held by bank where the vendor is party to fraud [10] but in this case he is not so bank cannot stop the payment on Abraham’s instruction that he has cancelled the sale contract.


Abraham has notified that he is canceling the contract on the grounds of the breach of implied terms when the good reached the port. Abraham is himself responsible for the loss of 100 computers when they were unloaded and in case of 50 computers he has to claim it from ship-owner if he has fail to observe due diligence at the time of loading. With regard to the payment to Joshua by bank the bank has already accepted the documents which are in conformity with the conditions of credit as this is not the duty of bank to find out the fraud committed by Joshua. Once the payment is made the Kentucky Bank is entitled to reimburse by Abraham. The goods can be rejected by Abraham even after the payment by the Bank [11] .

Question two

“Although the letter of credit is likely to be favoured in the world's more difficult markets because it is a flexible mechanism which can be adjusted to minimize particular risks, increasingly large western retailers importing manufactured products are insisting upon the cheaper payment method of open account terms."


Letter of credit is the common mode for the payment of any commodity in international trade. Almost all the international contracts of trade require letter of credit to secure the payment and avoid fraud. The letter of credit is consider as a safe method of payment in trade when vendor and vendee have no or very minimum dealings in trade and vendor wants to avoid any kind of risk that may arise regarding payment by vendee and this mode is favored by the international community because of the working of letter of credit as it has very minimum risk factor. In letter of credit transactions the paying bank has to give payment without any objection if the person who is benefiting from the letter has fulfilled all the conditions that are essential for the payment in letter of credit this shows that in the contract between vendor and vendee the conditions will have no effect on the payment by the bank. The bank doesn’t take into consideration whether vendor has committed any violation of the term of pact at the time of submitting the documents. The bank is bound to pay even if the vendor has committed any act that is against the contract [12] . This point of letter of credit has a deep influence in harmonizing international commercial law


Tran’s border trade has increased significantly in last three decades and all this has lead to the need of harmonizing commercial law at international arena. There are various steps through which commercial can be harmonized such as having uniform universal rule and those laws which serve as a model for every country. The common mode or the most easy way through which this goal can be achieved is that courts in one area must follow the decision of other court in an other area have the same cause of action or the same question of fact and question of law regarding trade. Yet in practice this goal has remained a distant dream as there are number of hindrances in these defined objectives and one such obstacle is that when the codes or established practices are very simple than there is a possibility that every court will interpret it different form and all this will create such a riddle that no one would be able to solve it. To solve this problem the solution lies in Uniform Customs and Practice for Documentary Credits


The uniform customs and practice for documentary credits and called commonly as UCP they were first promulgated by International Chamber of Commerce in 1933 and since then it has been amended often to fulfill the needs of modern commercial era. The aim of UCP has been to get rid of any misunderstanding that may rise among countries during trade, when it was promulgated the main objective was to establish set of common rules that will be accepted by every country and as a result there will be uniform principles dealing with international trade. The UCP consists of those rules which are in conformity with banking rules for payment by the way of documentary credits. The UCP is not a part of all contracts until or unless the parties of the contract accept it as a part of their contract. The UCP came in to practice from July 1/ 2007 and it is expected that the new revised principles will be used all over the world by the merchants and banks across the globe


Letter of credit has remained a general mode of payment especially in those cases when the merchants conduct trades in the far flung places of the world and the commodity of trade is highly important. It is common saying that no trade can be conducted unless there is no trust between the traders and when the merchants don’t know each other the remedy lies in letter of credit. The importance of letter of credit lies is due to the fact that where the commodities are explained in bill of lading the letter of credit is used as method of payment in the deal. Despite having the advantages the letter of credit are highly priced and the traders look for inexpensive trade dealings and alternative to that is open account conditions where the seller will get his money at a specific time and buyer will get the good and documents at one time..

The letter of credit is encouraged in those places where the risk factor is huge and through this risk is reduced but despite that the merchants from first world countries prefer open account technique of trade dealings. Every trader wants that the payment must be fast and the bank must not charge extra disagreement fee all these difficulties were face by the makers of UCP and movers and shakers of UCP not only wished to be in good books of bankers but also of merchants. The drafter therefore aims at creating the rules keeping in mind the needs of every person involved in a trade


The UCP are those principles that apply to any documentary credits when in the terms of contract it has been specifically laid and the concerned people of contract are under obligation to adhere UCP 600 unless any party has been specifically excluded by it. The UCP consists of 39 articles and are useful for trade merchants, legal practitioners, educationist, bankers and every other person who is involved in the business of financial dealings, the UCP is the sixth revision of the rules since its inception in 1933. in the article 2 of the UCP 600 various definitions are given which shows the scope is much bigger than the previous one it is lengthy article and every step or measure is take to avoid any misunderstanding that may arise who is who in financial dealings

The previous UCP contained 49 articles where as the current has 39 articles and has been drafted in such a way to offer effectiveness and efficiency. In UCP500 the vendee could ask the bank to annul the credit after handing over the payment but in UCP600 it is irreversible and if parties are willing to establish that clause they must incorporate in their text of credits the UCP 500. In the UCP 600 risks have been minimized as it hasn’t used the word reasonable which were used in the last editions.


The doctrine of strict compliance is present in every contract of letter of credit we can define it as “There is no room for documents which are almost the same or which will do just as well…if the bank does as it is told it is safe; if it declines to do anything else it is safe if I departs from the conditions laid down it acts at own risk" [13] . In selling the goods abroad the seller needed assurance from the bank that the method of scrutinizing the documents, it must not change from one country to another if it happens like that of which seller is afraid than selling will become more expensive and delays will become normal standard of trade but besides the seller reservations the law is strict there must some conformity between the document that is given by profiteer and the guarantee that is given in letter of credit. In UCP600 there is a general rule and which explains bank should follow general procedures that are commonly accepted even if not give in UCP it self, which means that the bank must accept those papers which are in conformity with the points of letter of credit as in a famous case Lord Summer said “there is no room for documents which are almost the same, or which will do just as well" [14] .


The UCP600 is used to facilitate international trade and to sort out any confusion that may arise in the trade on letter of credit. The main goal of UCP is to have common rules so that the trade merchants will not have any difficulty while having trade in international markets. This UCP is used by almost all the bankers and international trade merchants all over the world.