Are you clear on your sale contract terms?

Feb 14, 2005
Author: Dusty Lee Donnelly
Of the legal firm Routledge Modise Moss Morris

If the letters CIF, FOB and FCA mean nothing to you the chances are that you are not involved in international trade. They stand of course for Cost Insurance Freight ("CIF"), Free on Board, ("FOB") and Free Carrier Alongside ("FCA"). They form part of a body of Incoterms which were developed by the International Chamber of Commerce to facilitate a clear understanding in international trade transactions of the rights and obligations of the seller and buyer. It is vital for a trader to use Incoterms correctly and to understand when ownership and risk will pass under his contract of sale.

You will find your claim against the shipping line for damage to the goods dismissed if you are unable to prove that you are either the owner of the goods, or the party bearing the risk of loss in or to the goods, or that you have title as the bill of lading holder.

Ownership is a familiar term and is of course the strongest right. Risk is something separate. It means being on risk to bear the loss arising from damage to or destruction of the thing. Once risk has passed the buyer must perform in terms of the contract of sale (including paying the purchase price) regardless of loss of or damage to the thing sold.

Take the example of the fruit trade: exporters usually act as middlemen buying from farmers and selling overseas on consignment. There is technically no valid contract of sale if the price between the farmer and the exporter has not been determined. Legally the exporter is probably acting as the farmer's agent, and does not acquire ownership or risk.

In a contract on the following terms "CIF St. Petersburg; Payment: 55days from b/l", the Inco term CIF means that the seller arranges carriage to the port of destination and arranges insurance cover for the voyage. However risk passes from the seller to the buyer when the goods are loaded across the ship's rail at the port of shipment. If South African law governs the contract then, as the sale is on credit ownership will usually pass to the buyer when the buyer, or his bank, receives the original bill of lading. This also means that the buyer is the party who should claim against the insurance company. Many sellers come short, opting to refund their buyer for commercial reasons only to discover that as far as the insurance company and shipping line are concerned they have no title to claim for the damage.

Take legal advice early to ensure that you protect claims against carriers, insurers and third parties, and identify correctly which parties to the transaction have title to sue.



By Dusty Lee Donnelly
Of the legal firm Routledge Modise Moss Morris