Are the rules on the passing of risk in CIF and FOB contracts satisfactory?

Introduction

The aim of this paper is to examine the rules on the passing of risk in c.i.f. and f.o.b. contracts and determine whether or not such rules are satisfactory in the twenty-first century having regard to how international trade is conducted. In order to achieve this aim, the paper will be separated into two parts: (1) the passing of risk in fob contracts and (2) the passing of risk in c.i.f. contracts. Whether or not the passing of risk in each type of contract is satisfactory will be examined in the relevant part.

Part One: The passing of risk in FOB contracts

As a general rule, risk passes with property unless the parties have agreed otherwise (section 20 of the Sale of Goods Act 1979). This reflects the judgment of Blackburn J in Martineau v Kitching 1872 where his Lordship expressed that “when you can shew that the property passed the risk of the loss, primâ facie, is in the person in whom the property is”. One must therefore determine when property passes to a buyer (See also Sterns v Vickers 1923). Section 17 of the Act stipulates that the property in the goods is transferred to the buyer ‘at such time as the parties to the contract intend it to be transferred’. The rules for determining intention are set out in section 18. The applicable provision is contained in Rule 5 (2) which provide:

Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee or custodier (whether named by the buyer or not) for the purpose of transmission to the buyer, and does not reserve the right of disposal, he is to be taken to have unconditionally appropriated the goods to the contract.”

This reflects the common law position as is reflected by Brown v Hare 1858. One can therefore formulate the following principle from the common law and statute: subject to contrary agreement, the risk will pass in an f.o.b. (free on board) contract where the goods have been sipped on board the vessel (Stock v Inglis 1884).

Since risk passes to the buyer upon shipment, it becomes crucial in determining when shipment occurs. The traditional position has always been to equate shipment with the passing of the goods on board the ship’s rail. However, in the words of Devlin J. (as he then was) in Pyrene v Scindia Navigation 1954, “…the ship’s rail has lost much of its nineteenth-century significance” His Lordship continued and expressed that “only the most enthusiastic lawyer could watch with satisfaction the spectacle of liabilities shifting uneasily as the cargo sways at the end of a derrick across a notional perpendicular projecting from the ship’s rail.”

A criticism of the terminology and methodology of determining when shipment takes place from such a distinguished judge leads one to question the very essence of the rule and whether it is due for alteration. A variant suggested is adopting the ‘delivery test’ to determining when shipment occurs. Under this test shipment take place once the seller accomplishes his delivery obligations under the contract of sale. For example, where the contract stipulates ‘fob stowed and trimmed’, shipment would not be complete and the risk will not pass until the goods have been loaded on board the vessel, stowed and trimmed by the seller. This test was preferred over the traditional ‘ship’s rail’ test by Michael Bridge who asserted that this variant is less artificial than the ship’s rail test and should therefore be commended.

The decision of the Court of Exchequer in Anderson v Morice 1875 provides further support for the adoption of the ‘delivery test’ since it is inconsistent with the ‘ship’s delivery’ test when critically examined. There, the Court rejected the argument that risk passes upon each bag being loaded and preferred a test where shipment occurs once all the goods have been loaded. This, on a literal interpretation, sits uneasily with the ‘ship’s rail’ test since under that test risk should pass as the goods pass the ship’s rail and not upon completion of loading.

One must also note that the risk may be held not have passed to the buyer if the seller is in breach of its obligation to arrange a reasonable contract of carriage having regard to the nature of the goods and the circumstances of the case (section 32 (2)). The buyer can reject delivery to the carrier as delivery to himself in such cases.

Satisfactory?

Before expressing anything as to whether or not the rules on passing of risk is satisfactory in f.o.b. contracts, one must remember that although in most cases the presumptive rules are applicable, in some cases where parties alter the rules on the passing of risk (Castle v Playford 1872) or where the rules are modified by usage (Bevington v Dale 1902), they will not and the views which will now be expressed may be inapplicable in such cases.

However, concentrating on the presumptive rule and its satisfactoriness, it is submitted that the ‘ship’s rail’ test should remain the presumptive position in simple ‘f.o.b.’ cases. In such cases the ‘ship’s rail’ test may be the most appropriate. However, in cases where the contract is expressed to be ‘f.o.b. stowed’ or ‘f.o.b. stowed and trimmed’, it is suggested that the most appropriate test to use is the ‘delivery test’. The goods should only be deemed to have been shipped once the seller completes his contractual obligations.

It would be unacceptable to a buyer to suggest that a seller is permitted to pass the risk of loss or damage to him notwithstanding that the seller has not yet completed his contractual duty of loading the goods on board the vessel and stowing and trimming the goods. If risk does not pass and the seller is negligent in stowing the goods, provided that negligence is excluded, the seller can avoid being liable. This result should surely not be one which any sensible commercial person would accept.

Part Two: The passing of risk in CIF contracts

As was mentioned above, risk passes when property passes. The applicable provision insection 18 as to determining the intention of the parties in the absence of agreement to the contrary is Rule 5 (1) which stipulates that property in the goods pass to the buyer once the goods are ‘unconditionally appropriated to the contract’. The notice of appropriation therefore serves to earmark the goods which is an essential requisite under section 16 where property will not pass unless the goods are ascertained (See Re Goldcorp Exchange 1995).

In c.i.f. (cost insurance freight) contracts, the risk of loss or damage passes on or ‘as from’ shipment (The Julia 1949 per Lord Porter). The ability of the seller to appropriate the goods at a later stage after shipment thus passing property in the goods while passing the risk raises questions as to whether or not goods can be appropriated after loss (retrospective appropriation). This is a hot topic and disagreements exist even between the most eminent writers of the field.

It is universally accepted that a seller is entitled to appropriate damages cargo so long as the documents are complying documents in accordance with the contract of sale. It should follow that the same principle should apply in cases where the cargo is lost before appropriation thus paving the way for the risk to pass as from shipment. However, no clear authority exists for such a proposition and conflicting views have been expressed by two authoritative texts within the field.

The starting point is the case of Groom v Barber 1915 where Atkin J. (as he then was) held the seller entitled to appropriate lost cargo. However, his judgment, as is recognised by Benjamin’s Sale of Goods, focused on ‘appropriation’ in the proprietary sense (in the sense that the seller unconditionally appropriated the goods so as to pass the property in the goods) as opposed to ‘appropriation’ in the contractual sense (in the sense that the seller unconditionally appropriated the goods by contractually binding himself to deliver the particular goods. Benjamin’s Sale of Goods therefore advocate that the case is not authority for the proposition that goods can be appropriated contractually so as to pass the risk of loss after the goods have been lost. It is argued there that since in contracts for the sale of unascertained goods other than c.i.f. appropriation after loss is not permitted, there is no reason to adopt a different approach/rule in c.i.f. cases.

Michael Bridge, the general editor of Benjamin’s Sale of Goods (since 2007), however, disagrees in his book ‘The International Sale of Goods’ where he expressed his disapproval of adopting different rules for cases where the goods are merely damaged and cases where the goods have been lost, the former capable of being appropriated.

It is useful to note, before moving on to assessing how satisfactory the rules on the passing of risk in c.i.f. contracts are, that a seller is entitled to tender documents for cargo which he knows to have been lost before such tender (Manbre Saccharine v Corn Product 1919). The position with regard to knowledge of loss prior to appropriation is, however, not clear. Judicial enlightening is required in that respect.

Satisfactory?

It may seem to a layman that property passing upon appropriation which has retrospective effect while property does not pass until payment by the buyer against documents to be illogical. However, having regard to the nature of a c.i.f. contract and its components, it is only logical.

If the documents are complying the buyer has what he has bargained for, namely the goods as evidenced by the bill of lading, the insurance policy on the goods and the freight paid for by the sellers. If the goods are lost or damaged during transit then he can claim under the policy. If the policy does not cover the loss occasioned he only has himself to blame for not bargaining for a policy with better coverage. If the seller committed a breach by not obtaining the type of policy required, then the buyer always has a claim for damages for breach of contract. It is therefore suggested that the separation of property and ownership in c.i.f. contracts is the inevitable result from the nature of the contract itself.

The position becomes harder to justify the possible rule that a seller can appropriate cargo lost during transit. The ability of the seller to do this with regards to damaged cargo is universally accepted. It is difficult to determine when the goods were damaged/detoriated so excluding appropriation in such cases will force sellers to undertake checks of cargoes on board the vessel prior to giving a notice of declaration which will be impractical and unworkable. This line of reasoning was accepted by Benjamin’s Sale of Goods and undisputed by Michael Bridge.

The real problem arises, as was mentioned above, with regards to appropriation of lost cargoes. Two eminent writers disagree on this point so it is particularly difficult to choose one over the other. However, the view expressed by Michael Bridge is to be preferred. The reasoning for this line of contention are:

  • There should not be two different tests for permitting appropriation in cases of damaged and lost cargoes;
  • The distinction between proprietary and contractual appropriation is unsatisfactory since an assertion that property can pass after loss but not risk is untenable, particularly in the light of the presumptive position that risk passes when property passes. Although c.i.f. contracts do not follow this presumption strictly, it is commercially more acceptable to allow both property and risk to pass after loss. Groom v Barber should therefore be applied across the spectrum without being limited to cases of passing the property after loss.
  • The buyer in a c.i.f. contract, once the goods have been shipped, becomes concerned only with the documents and so long as the documents are complying the seller should be permitted to appropriate lost cargoes (see Arnhold Karberg v Blythe, Green, Jourdain 1915 per Scrutton J.). In this respect the Manbre Saccharine principle is to be given a wider interpretation as applying not only to tender of documents after loss but also appropriation in the contractual sense.
  • Linked with the above point, if the loss is covered by the policy, then the buyer has a right of claim against the insurer to be indemnified under the marine policy. If the loss is not covered, he only has himself to blame for a bad bargain.
  • Last, but not least, as a matter of commercial practice no seller who wishes to maintain its reputation will go around appropriating lost cargoes. If he does so without knowledge of the loss, the buyer should seek indemnity from the insurer. If he does so with knowledge, it is the buyer’s bad call to purchase goods from the seller and he should live with the consequences. A general rule should not be adopted to prevent abuse of the system by a small minority of seller of a system which otherwise functions perfectly well.

In conclusion, the law is satisfactory in the sense interpreted by Michael Bridge which must be clarified by a Court of Appeal judgment as soon as possible since the cases cited are mainly first instance judgments which are only persuasive.

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