Ontario Company is a multinational corporation organized under the laws of Ontario, Canada, with its principal place of business in Toronto, Ontario, Canada (hereinafter referred to as “Ontario Company”). Ontario Company owns 100% of the shares of stock in subsidiary New York Company, a corporation organized under the laws of New York, USA, with its principal place of business in Albany, New York, USA (hereinafter referred to as “New York Company”). Ontario Company also owns 100% of the shares of stock in subsidiary English Company, a corporation organized under the laws of England and Wales, UK, with its principal place of business in Manchester, England, UK (hereinafter referred to as “English Company”). Bavaria Company is a corporation organized under the laws of Bavaria, Germany, with its principal place of business in Munich, Bavaria, Germany (hereinafter referred to as “Bavaria Company”). Both New York Company and English Company manufacture the same kind of goods that Bavaria Company wishes to buy.
New York Company and Bavaria Company enter into an FOB New York, New York, USA (INCOTERMS 2000) international sale of goods contract for the sale by New York Company to Bavaria Company of the goods manufactured by New York Company (hereinafter referred to as “Sales Contract No. 1″). The quantity of goods subject to Sales Contract No. 1 is 5,000, and the purchase price per individual unit is $1,600 ($1.60 = £1.00). English Company and Bavaria Company also enter into an FOB Liverpool, England, UK (INCOTERMS 2000) international sale of goods contract for the sale by English Company to Bavaria Company of the goods manufactured by English Company (hereinafter referred to as “Sales Contract No. 2″). The quantity of goods subject to Salas Contract No. 2 is 5,000, and the purchase price per individual unit is £1,000 ($1.60 = £1.00).
After setting off from the harbour of New York City, New York, USA, the ship carrying the goods subject to Sales Contract No. 1 sails through a hurricane in the North Atlantic Ocean. After setting off from the harbour of Liverpool, England, UK, the ship carrying the goods subject to Sales Contract No. 2 catches on fire in the North Sea. Both ships carrying the goods subject to Sales Contracts No. 1 and No. 2 arrive in Hamburg, Germany, the port of destination, whereupon Bavaria Company discovers that the goods subject to both Sales Contracts No. 1 and No. 2 are damaged to such an extent that they are worthless to and cannot be used by Bavaria Company.
You teach a module on Carriage of Goods by Sea for an LLM in International Trade Law at a Law School in England, and you wish to use the above scenario as an example to explain certain concepts to your students. How do you explain to your students the following?
FOB INCOTERMS (2000) and (i) why, if at all, it may be better to use FOB INCOTERMS than FOB American or FOB English in Sales Contracts No. 1 and No. 2, respectively, and (ii) what differences, if any, there may be between trade terms constituting INCOTERMS 2000 and INCOTERMS 2010.
The International Chamber of Commerce (ICC), based at Paris, has formulated and published the International Commercial Terms (INCOTERMS) since 1936. Incoterms are a series of international trade terms widely used in international commercial transactions. They are used to divide transaction costs and responsibilities between buyer and seller and reflect modern transportation practices. The parties to international sale contracts have to specify in the contract the set of Incoterms that they choose to apply, e.g. INCOTERMS 2000.
FOB (Free On Board)
The FOB contract is one under which the seller is obliged to put the goods on board a vessel, on account of the buyer. Charges incurred in the process of bringing the goods to the named port of shipment and of loading them on board are normally borne by the seller. Subsequent costs are the responsibilities of the buyer.
Types of FOB Contracts
There are three main types of FOB contracts – classic, FOB Additional services and simple FOB.
a) The Classic FOB
The classic FOB is the FOB contract in which the seller puts the goods on board a ship nominated by the buyer. The seller concludes the contract of carriage himself, but on account of the buyer.
b) FOB Contract with Additional Service
Under this type of FOB contract the seller takes a bill of lading from the carrier in his own name and transfers it to the buyer who becomes a party to the carriage contract.
This type is sometimes referred to as extended FOB contract and differs from the classic and the simple FOB in the respect that it is the seller and not the buyer who nominates the ship. In both the classic and the extended FOB it is the seller who enters into the contract of carriage usually as principal, but for the account of the buyer and later transfers the bill of lading to the buyer.
c) The Simple FOB
Under this type of FOB contract, the buyer, through his agent at the port of loading, obtains the bill of lading from the carrier. The seller’s main duty is to obtain the mate’s receipt and surrender it to the buyer’s agent. The shipping arrangements are made by the buyer or by his forwarding agent, by booking a space on a particular ship and selecting the port of shipment. The seller, therefore has no part in the making of the contract of carriage, whether as agent or as principal.
FOB is always used in conjunction with a port of loading. Specifying “FOB port” indicates that the seller pays for transportation of the goods to the port of shipment, including loading costs. The buyer pays cost of marine freight transport, insurance, unloading, and transportation from the arrival port to the final destination. The passing of risks occurs when the goods pass the ship’s rail at the port of shipment.
E.g.: “FOB Liverpool” indicates that the seller will pay for transportation of the goods to the port of Liverpool, and the cost of loading the goods onto the cargo ship (This includes inland haulage, Customs clearance, origin documentation charges, demurrage if any, origin port, i.e. Liverpool handling charges). The buyer pays for all costs beyond that point (including unloading). Responsibility for the goods is with the seller until the goods pass the ship’s rail. Once the cargo is on the ship, the buyer assumes risk.
FOB INCOTERMS (2000)
The form of FOB used by INCOTERMS 2000 is essentially a classic FOB, but parties frequently use simple FOB terms and FOB with additional terms. The principal difference between simple and classic FOB lies in the fact that in simple FOB the buyer contracts directly with the carrier, whereas in classic FOB the seller makers the contract of carriage with the carrier on behalf of the buyer. Thus, in both cases, the risks inherent in shipment are placed on the buyer.
FOB INCOTERMS (2000) requires the seller to place the goods on board the ship within the time limit agreed with the buyer.  The seller’s delivery obligation is concluded the moment the goods pass over the ship’s rail.  When the goods pass over the rail the risks become those of the buyer.
The seller is, however, responsible for export clearance and must notify the buyer that the goods have been delivered on board the vessel. 
The buyer’s main obligations, apart from paying the contract price, are to pay for expenses incurred, arrange for import clearance  and take delivery of the goods once they have been placed on board the vessel  . He is also responsible for organising the contract of carriage  .
Advantage of using FOB INCOTERMS over FOB American or FOB English
FOB is a commonly used trade term, which has been developed by international mercantile customer with the aim of standardising international trade transactions. However, trade terms can have the same or a similar name, but different meaning assigned to them by different jurisdictions, or even under common law. Thus, parties to international trade transactions may interpret the same term differently in different countries.
E.g.: In North America, FOB is understood as Freight on Board, instead of Free on Board.
Therefore, it is more advantageous to use INCOTERMS, as it is a standard set of International Commercial Terms sponsored by the International Chamber of Commerce.
Moreover, when one party or the other does not want to be bound by the procedures of the other, a reference to INCOTERMS is the answer. By referring to such terms, both parties can ensure that their legal relations are grounded in a fair and reasonable international standard based upon globally followed principles.
Hence, it may be better to use FOB INCOTERMS than FOB American or FOB English in Sales Contracts No. 1 and No. 2, respectively.
Differences between trade terms of INCOTERMS 2000 and INCOTERMS 2010
The INCOTERMS first set out in 1936 were subsequently revised in 1953, 1967, 1980, 1990, 2000 and the latest one in the year 2010.
INCOTERMS 2000 has four groups, as shown in Table 1 below.
Free Carrier (FCA)
Free Alongside Ship (FAS)
Free On Board (FOB)
Cost and Freight (CFR)
Cost, Insurance and Freight (CIF)
Carriage Paid To (CPT)
Carriage and Insurance Paid To (CIP)
Delivered At Frontier (DAF)
Delivered Ex- Ship (DES)
Delivered Ex-Quay (DEQ)
Delivered Duty Unpaid (DDU)
Delivered Duty Paid (DDP)
Table 1: INCOTERMS 2000 Group Terms
There are some considerable changes brought by the new version of INCOTERMS. The numbers of trade terms have been reduced from 13 to 11 terms. However, it has not simply been an exercise of deleting two terms. DAF, DES, DEQ and DDU have been removed. They are replaced with two new terms – DAT (Delivered at Terminal) and DAP (Delivered at Place).
There are also changes to the grouping of INCOTERMS. There are only two groups in INCOTERMS 2010, as shown in Table 2 below.
Any mode of transport
Carriage and Insurance Paid (CIP)
Carriage Paid To (CPT)
Delivered At Place (DAP)
Delivered At Terminal (DAT)
Delivered Duty Paid (DDP)
Ex Works (EXW)
Free Carrier (FCA)
Sea and inland waterway transport
Cost and Freight (CFR)
Cost, Insurance and Freight (CIF)
Free Alongside Ship (FAS)
Free On Board (FOB)
Table 2: INCOTERMS 2010 Group Terms
DAT replaces the current DEQ, and DAP replaces DAF, DES and DDU.
DAT signifies that the seller retains all risks in the movement of the goods until they are delivered, i.e., until the goods are unloaded from the arriving vehicle (road, rail, sea or air) and placed at the disposal of the buyer at the agreed named terminal in the destination country. The seller is also responsible for the transport of the goods through any transit (third countries). The seller must, therefore, enter into a contract of carriage and is also responsible for export clearance. But the seller is not responsible for import clearance.
DAP signifies that the seller retains all risks in the movement of the goods until they are delivered. But unlike DAT, unloading of the goods from the arriving vehicle (road, rail, sea or air) is the responsibility of the buyer. The seller must enter into a contract of carriage and is also responsible for export clearance. But he is not responsible for import clearance.
These are the differences between the trade terms constituting INCOTERMS 2000 and INCOTERMS 2010.
(b) Who bears the risk of loss in the goods in both Sales Contracts No. 1 and No. 2?
Sales Contract No. 1
Sales Contract No. 1 is between New York Company and Bavaria Company. The parties entered into an FOB New York, New York, USA (INCOTERMS 2000) international sale of goods contract, wherein New York Company is the seller and Bavaria Company is the buyer.
The FOB contract is a contract of sale for the shipment of goods. The seller pays for transportation to the ship, and is responsible for the goods until they pass the ‘ship’s rail’ when they are being loaded onto the ship. The seller’s duties are thus discharged upon timely delivery of goods to the nominated vessel, at which time risk passes from seller to buyer and payment becomes due on endorsement of documents. Thus, in Sales Contract No. 1, the New York Company’s risk of loss in the goods ceases as soon as the goods are completely loaded onto the designated ship in New York port. Thereafter, Bavaria Company bears the risk of loss in the goods in Sales Contract No. 1.
Sales Contract No. 2
Sales Contract No. 2 is between English Company and Bavaria Company. The parties entered into an FOB Liverpool, England, UK (INCOTERMS 2000) international sale of goods contract, wherein English Company is the seller and Bavaria Company is the buyer.
As in Sales Contract No. 1, the English Company’s risk of loss in the goods ceases as soon as the goods are completely loaded onto the designated ship in Liverpool port. Thereafter, Bavaria Company bears the risk of loss in the goods in Sales Contract No. 2.
Thus, in both Sales Contracts No. 1 and 2, Bavaria Company bears the risk of loss in the goods as soon as the goods are loaded completely by the respective seller at the designated port.
The various contractual and representations of contractual arrangements by which the goods could have been carried by sea, with citations to examples from the Appendices of the main text (Wilson, Carriage of Goods by Sea (7th ed.)(Pearson: 2010)), between (i) the ports of New York, New York, USA and Hamburg, Germany, in respect of the goods subject to Sales Contract No. 1, and (ii) the ports of Liverpool, England, UK and Hamburg, Germany, in respect of the goods subject to Sales Contract No. 2.
The contract of carriage of goods
The contract of carriage is a separate contract made between the shipper and the carrier, which is different from the contract between seller and buyer. This contract governs the relationship between the shipper and the carrier.
Essentially there are two types of contract for the carriage of goods by sea:
i) Contracts contained in a charterparty; and
ii) Contracts evidenced by a Bill of Lading
It is common for bulk cargo transactions to involve the chartering of a vessel, be it by the seller/shipper or by the consignee/buyer. This is particularly so where there is sufficient cargo involved to justify the hiring of a vessel, since it cuts out the costs of hiring a forwarding agent and considerable economies of scale can thus be made.
Charterparties are mainly governed by the rules of common law and parties may adopt standard form contracts such as the Gencon Charter  , the Baltimore 1939 Charter  or the New York Product Exchange Charters  . The use of such standard forms is of considerable advantage as it produces uniformity in the application of the law and its interpretation by the courts. The choices available to the charterer are demise charter, voyage charter and time charter.
1) Demise Charter
The demise charterer becomes the temporary owner of the vessel and becomes responsible for all aspects of maintenance and operation of the vessel, including insurance, crew, fuel, orders, navigation etc. Demise charters are most useful for charterers who operate a fleet of vessels and need to augment the fleet. A common form of such a charter is the Barecon  . The demise charter is only cost effective for pre-existing fleet operators with spare crew and experience in ship operations.
2) Voyage Charter
The voyage charterparty is ideal for the delivery of dedicated cargoes and frequently used by exporters/importers of bulk cargoes such as fertilizer, grain, fuel and raw materials. Vessels tend to be specialised, for the carriage of a limited range of commodities, often with loading and discharge equipment suitable to the trade and a crew experienced in handling such commodities. Single voyages are as equally common as return trips. Multiple voyage charters are also possible. The most common form of oil voyage charter is the Shellvoy 6  and for dry voyage charters, the Gencon 
3) Time Charter
Time charters are ideal for long term planning. Traditionally time charters tended to be for 6 months, a year or even several years. However, a recent trend has been for short term spot charters for 10 to 20 days. The more universal the use of the vessel, the more practicable this form of charter is. The time charter provides the charterer with a far wider flexibility in terms of where to sail than the voyage charter where the single destination port is usually established in advance, though the range of a vessel is usually prescribed in the charter. Most commonly used time charters are Baltime  and New York Produce Exchange for dry cargo and Shelltime  for tankers.
ii) Bills of Lading
The bill of lading is a document issued by the carrier, which acknowledges receipt of cargo, contains evidence of the contract of carriage and operates as a document of title. It must be looked at in conjunction with present legislation which effects the carrier’s relationship with the shipper, consignee and/or a third party holder of a bill of lading.
The rights and obligations of the carrier and the shipper will normally be stated by the bill
of lading. Some examples of standard forms of bills of lading are Conlinebill 1978, Conline Bill 2000, Congenbill, Maersk Line Bill, GCBS Short Form Bill, Combiconbill and Maersk Line Waybill. These, under normal circumstances, will put a bill of lading into a specific category, the main ones being: shipped and received bills, clean and claused bills and charterparty bills.
1) Shipped and Received Bills of Lading
Most bills of lading are either “shipped” bills or “received for shipment” bills. A“shipped” bill of lading is an acknowledgement by the shipowner that the cargo has been loaded on board his ship. A “received” bill of lading simply confirms that the cargo has been delivered to the shipowner. As the “received” bill does not confirm any shipment of goods it is less valuable than the shipped bill.
Under the Carriage of Goods by Sea Act 1971 incorporating the Hague-Visby Rules, Art III (3), (7) a shipper is entitled:
a) to be issued a “received” bill of lading after the goods have been received and
b) to be issued a “shipped” bill, after the goods are loaded on board the vessel.
2) Charterparty Bill of Lading
Where a bill of lading is issued for the goods transported under a charterparty and that bill incorporates some or all the terms of this charterparty, the bill is referred to as a charterparty bill of lading. On the other hand, a bill of lading, even if issued under a charterparty, which does not incorporate the terms of the charter contract is not a charterparty bill of lading.
In a charterparty bill of lading, the main problem is normally the issue of incorporation. First, the fact that the terms have been properly incorporated must be established, then the consistency of the incorporated terms and the provisions of the bill must be tested.
3) “Clean” and “Claused” Bills of Lading
A clean bill of lading normally states that goods are “shipped in apparent good order and condition”. Conversely, where there is a qualification in respect of the condition of the goods received on board a vessel, it is a claused bill of lading.
Thus, these are the various contractual and representations of contractual arrangements by which the goods could have been carried by sea between
the ports of New York, New York, USA and Hamburg, Germany, in respect of the goods subject to Sales Contract No. 1, and
(ii) the ports of Liverpool, England, UK and Hamburg, Germany, in respect of the goods subject to Sales Contract No. 2.
(d) Who is liable to whom for the damages sustained to the goods subject to both Sales Contracts No. 1 and No. 2, based on the various contractual and representations of contractual arrangements by which the goods could have been carried by sea?
The position in relation to bills of lading issued since 16th September 1992 is that the Carriage of Goods by Sea Act 1992 will apply, section 2(1) of which provides that the lawful holder of the bill of lading (ie the consignee or indorsee) will have title to sue under the contract of carriage as if he or she were a party to that contract.
The Charterparty is subject to considerable responsibilities for the seaworthiness and cargoworthiness of the vessel under international conventions such as the Hague, Hague-Visby and Hamburg Rules.
The standard term of most contracts of carriage and bills of lading place all pre-shipment responsibilities upon the shipper and all post shipment responsibilities on the buyer. The exception to this is the free in and out clause which places all responsibilities for loading and discharge on the buyer, relieving the seller of further duty once the cargo is put into the care of the carrier.
Thus, according to the aforementioned contractual and representations of contractual arrangements by which the goods could have been carried by sea, the carrier would be liable to the buyer, i.e. Bavaria Company for the damages sustained to the goods subject to both Sales Contracts No. 1 and No. 2.
However, a charterparty and other contracts of carriage will usually contain a clause, which exempts liability if damage to cargo has been caused by risks peculiar to the sea which could not be avoided by due diligence or the exercise of reasonable care. This exemption covers losses resulting from vessels colliding with other vessels and collisions with rocks, as long as the shipowner/carrier is not at fault.
The exception does not, however, extend to damage caused by fire, lightning or rain, as held by Lord Wright in Canada Rice Mills Ltd v Union Marine & General Insurance Co Ltd  . It was held “rain is not a peril of the sea, but at most a peril on the sea”.
(e) The limits, if any, on the quantum of damages that Bavaria Company can recover for the damage to the goods subject to both Sales Contracts No. 1 and No. 2.
The Convention on the Limitation of liability for Maritime Claims was signed into law by the International Maritime Organisation in November 19, 1976. It limits the extent to which parties may be liable for a civil claim against them for damages pertaining to the loss of life, personal injury or damage to property – or any loss in general – arising as a result of their own action or lack thereof.
The 1976 International Convention provides for a virtually unbreakable system of limiting liability. It declares that a person will not be able to limit liability except if “it is proved that the loss resulted from his personal act or omission, committed with the intent to cause such a loss, or recklessly and with knowledge that such loss would probably result”.
The limit of liability for property claims for ships not exceeding 2,000 gross tonnage is 1 million SDR.
For larger ships, the following additional amounts are used in calculating the limitation amount:
For each ton from 2,001 to 30,000 tons, 400 SDR
For each ton from 30,001 to 70,000 tons, 300 SDR
For each ton in excess of 70,000, 200 SDR
Thus, the aforementioned limits would apply on the quantum of damages that Bavaria Company can recover for the damage to the goods subject to both Sales Contracts No. 1 and No. 2.
Assuming that arbitration is not an option, in what jurisdiction(s) litigation may take place in respect of the damage to the goods subject to both Sale Contracts No. 1 and No. 2.
Most international sale contracts stipulate expressly the forum and choice of law. But in the absence of such express provisions, the issues of jurisdiction and applicable law will have to be decided by mutual consent of the parties or by the courts.
It is a general principle of private international law  that the parties to a contract are free to designate a court to rule on any dispute, even though that court might not have jurisdiction on the basis of the factors objectively connecting the contract with a particular place. In the European Union (EU), the issue of jurisdiction in disputes concerning international sale contracts is governed by the Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (“Brussels I Regulation”).
Sales Contract No. 2
The basic principle under Brussels I Regulation is that jurisdiction is to be exercised by the EU Member State in which the defendant is domiciled, regardless of his / her nationality  .
Thus, in case of Sales Contract No. 2, since both the buyer and seller are domiciled in EU countries, the aspect of jurisdiction is simple. Jurisdiction would be exercised by the EU Member State in which the defendant is domiciled. Therefore, the courts of UK would have jurisdiction with respect to the damage caused to the goods subject to Sales Contract No. 2.
Apart from the basic principle on jurisdiction, in certain circumstances a defendant may be sued in the courts of another EU Member State. Article 5 of the Brussels I Regulation contains a set of alternative grounds for jurisdiction, according to which persons domiciled in one Member State may be sued in another Member State.
Sales Contract No. 1
Common Law Jurisdiction of English Courts over Foreign Litigants
English Courts have jurisdiction over any matter based on contractual relations if:
a) the defendant is within this jurisdiction and is served with a writ; or
b) the defendant submits to the jurisdiction of the English courts; or
c) the court assumes jurisdiction over the defendant although he is not within the jurisdiction according to Part 6 Civil Procedure Rules (CPR) 1998.
Service of a Writ
By service of process jurisdiction in personam is established. Within England the defendant can be served as of right, and this service establishes the jurisdiction of the courts over him. Part 6 of the CPR governs the service of documents 1998 and Part 11 provides for the procedure for contesting the courts jurisdiction.
Therefore when a defendant has been served a writ while in this jurisdiction, the English courts will have jurisdiction over him.
Submission to English Jurisdiction
The English courts will exercise jurisdiction over a foreign defendant who voluntarily submits to the jurisdiction of English courts. Where the defendant had agreed with the plaintiff to submit disputes to the jurisdiction of the English courts, this will give English courts jurisdiction.
The US Supreme Court’s decision in M/S Bremen v. Zapata Off-Shore Co.  , established that a forum selection agreement in an international contract would generally be upheld. The jurisdiction agreement in that case was a negotiated compromise providing for English jurisdiction in an international towage contract between an American rig owner and a German tug owner.
Word Count: 3,999 words
Canada Rice Mills Ltd v Union Marine & General Insurance Co Ltd  A C 55
M/S Bremen v. Zapata Off-Shore Co. 407 US I (1972)
Custom Made Commercial v. Stawa Metallbau, 1994 E.C.R. I-2913
Roche Nederland v.Primus and Goldenberg, (2006) ECR 1 6535.
Syndicate 980 V Sinco S.A.  EWHC 1842 (Comm.)
CMA CGM SA v Hyundai Mipo Dockyard Co. Ltd  EWHC 2791 (Comm)
Arcado v. Havilland  ECR 1539
Effner v. Kantner  ECR 825)
Kleinwort Benson v. Glasgow City Council  1 AC 153
Unidare plc and Unidare Cable Ltd v. James Scott Ltd  2 IR 88
Ferndale Films Ltd. v. Granada Television Ltd  3 IR 368
Cite This Work
To export a reference to this article please select a referencing stye below:
Related ServicesView all
Related ContentJurisdictions / Tags
Content relating to: "International Law"
International law, also known as public international law and the law of nations, is the set of rules, norms, and standards generally accepted in relations between nations. International law is studied as a distinctive part of the general structure of international relations.
Analysis of South Koreas Adultery Law
The paper will discuss and analyze the fact that despite Korea’s increased modernization and rise in judicial review, the country’s Constitutional Court ......
Transformation of GATT into the WTO
In fact, the birth of the World Trade Organization by replacing the old organization of the GATT was not merely a new game, but it was a necessity that was required by the stage of the nineties of the last century, especially since the GATT failed to achieve its goals....
DMCA / Removal Request
If you are the original writer of this essay and no longer wish to have your work published on LawTeacher.net then please: