Understanding international trade
– A straight line solution
John Levingston1
(revised 1/12/5)
[2005] Ajit 2
Table of contents
Background ................................................................................................................................ 3
The problem - stages in a theoretic international transaction .................................................... 3
The need for a workable solution ............................................................................................... 7
A straight line approach ............................................................................................................. 7
The four major transactions ....................................................................................................... 9
1
Commodity contract ......................................................................................................... 13
Applicable laws .................................................................................................................... 16
1.1 Sale of Goods in domestic law....................................................................................... 17
Three issues ...................................................................................................................... 17
Delivery............................................................................................................................ 18
Passing property ............................................................................................................... 21
Special issues ................................................................................................................... 25
Passing risk ...................................................................................................................... 27
1.2
Vienna Convention on the international sale of Goods (CISG)............................... 28
1.3
Incoterms 2000 ......................................................................................................... 28
Straight line description ................................................................................................... 29
E Terms - Departure group ................................................................................................. 30
Goods collected from Seller............................................................................................. 30
EXW ................................................................................................................................ 30
F Terms – Main carriage unpaid .......................................................................................... 32
Seller delivers Goods for carriage as instructed by the Buyer ......................................... 32
FCA (...named place) ....................................................................................................... 32
FAS (...named port of shipment) ..................................................................................... 33
FOB (...named port of shipment) ..................................................................................... 34
Types of FOB Clauses ..................................................................................................... 35
FOB contracts and risk ..................................................................................................... 37
FOB contracts and passing of property ............................................................................ 38
FOB contracts and loading ............................................................................................... 38
Nomination of a suitable ship .......................................................................................... 39
FOB contract and a substitute ship .................................................................................. 40
C Terms – Main carriage paid group ................................................................................... 40
C Terms – Departure contracts ........................................................................................ 40
1 John Levingston, Practising Barrister, Sydney; Adjunct Professor, School of Law, University of Canberra;
Conjoint Professor, School of Law, University of Newcastle
2
CFR (...named port of destination) .................................................................................. 42
CIF (...named port of destination) .................................................................................... 44
CPT (...named place of destination)................................................................................. 46
CIP (...named place of destination) .................................................................................. 47
D Terms – Arrival group...................................................................................................... 49
DAF (...named place) ...................................................................................................... 50
DES (...named port of destination) .................................................................................. 51
DEQ (...named port of destination) .................................................................................. 51
DDU (...named place of destination) ............................................................................... 52
DDP (...named place of destination) ................................................................................ 53
2
Transport Contracts .......................................................................................................... 55
Modes of carriage................................................................................................................. 55
Sectors of carriage ................................................................................................................ 55
Groups of transport contract ................................................................................................ 56
Seller or Buyer contracts with Carrier for delivery to Buyer ........................................... 56
Seller or Buyer contracts with Freight Forwarder ............................................................ 56
Types of documents used in sea Carriage ............................................................................ 58
Types of documents used in air Carriage ............................................................................. 58
Period of Carrier’s responsibility ......................................................................................... 59
Carriage by Air................................................................................................................. 59
Carriage by sea ................................................................................................................. 59
Ocean Carrier’s period of responsibility – Australian Cogsa .......................................... 60
Summary of transport events ............................................................................................... 60
3
Payments .......................................................................................................................... 62
Cash with order .................................................................................................................... 62
Open account ....................................................................................................................... 63
Documentary collection ....................................................................................................... 63
Documentary credit .............................................................................................................. 64
The unpaid Seller and security for payment (romalpa clause) ............................................. 65
4
Marine Insurance Contract ............................................................................................... 66
Conclusion ............................................................................................................................... 67
3
Background
The idea of a straight line solution to record the stages of an international transaction was
developed by the author in the 1980’s as a means of illustrating for students what appear to be
otherwise complex (and sometimes incomprehensible) relationships in international
transactions.
This paper is a summary with some explanations, and can not be a comprehensive
dissertation on the laws concerning the four contracts in international trade: commodity;
transport; payment; and marine insurance; as each of these areas of law is sufficient to fill its
own a text book.
The problem - stages in a theoretic international transaction
An international transaction involves a group of autonomous but nevertheless, related group
of transactions, and has many ‘traps for the young and inexperienced’.
The complexity of an international transaction is illustrated by the following theoretical
international transaction, which:

uses the physical transport of the Goods

identifies the different legal jurisdictions in which each transaction takes place and the
potential for conflict of law issues

identifies potential issues as each sector or transaction is undertaken
Jurisdiction
1A
Transaction
Issue
Contract for Sale of Seller in one
Goods
jurisdiction
1B
Contract for Sale of Contract contains
Goods
governing law,
jurisdiction and
alternative dispute
resolution (ADR)
clauses
Notes
Buyer in a different
jurisdiction. The
Seller wants to be
ensure payment and
reduce risk of loss
– at the earliest
time
1) Seller, Buyer
and dispute
resolution may all
be in different
jurisdictions eg
court and ADR
processes in a third
place;
2) Seller may be in
a different
jurisdiction to
where Goods
4
2A
Regulatory
requirement
2B
Regulatory
requirement
3
4
5
6A)
Security notification
(export)
originate
US Container
Security Initiative
(CSI) formalities
24 hours prior to
loading
Export licence
Customs export
formalities at place of
export
Payment
Pre-shipment payment Letter of credit or
pre-payment to
Sellers account.
Exchange rate
fluctuations;
falling or rising
market; knock on
delay to transport
arrangements
Transport contract
Combined/multimoda Transport contract
Inland carriage
l transport:
has law,
1st carriage sector
Inland by rail/road/
jurisdiction and
waterway to port of
ADR clause
loading or airport
Stevedore at port of Goods handling and
Stevedore not
loading
loading on board
liable for loss or
damage to Goods
due to Himalaya
clause;
Payment of
Terminal Handling
Charges (THCs);
Goods damaged
prior to or during
loading (between
terminal gate and
ship’s side)
Transport contract
Ocean carriage:
Sea carriage
nd
2 carriage sector
Under Hague/ Hague
document has law,
Visby Rules the
jurisdiction and
Ocean Carrier is liable ADR clause.
for loss or damage to
Some jurisdictions
the Goods from time
prohibit an ouster
Goods loaded.
of jurisdiction
clause, see Cogsa
Under Australian
1991 (Cth) s11;
Amended Hague
Charterparty
Rules the Ocean
nominates
Carrier is liable for
jurisdiction or
5
6B)
Transport contract
2nd carriage sector
7
Contract for onsale of Goods
8A
Sale of Goods
8B
Sale of Goods
9
Transport contract
Ocean Carriage
10
Regulatory
requirement
11
Transport contract
12
Transport contract
Ocean carriage
loss or damage from
time the Goods in its
control from terminal
gate.
Air carriage:
Ground handling the Air Carrier is
liable for loss or
damage from the time
the Goods come
within the airport
boundary.
Buyer become Seller
2 to Buyer in another
jurisdiction
Seller exercises right
of ‘stoppage
intransitu’
Goods in bulk and
part of a larger parcel,
so not yet
appropriated to the
Buyer’s contract
Insolvency of Carrier
contains arbitration
clause.
The Warsaw
Convention allows
the Carrier to be
sued in one of three
jurisdictions, see
Art 28
Goods sold whilst
in transit
Goods discharged
by Carrier during
transit and before
delivery to Buyer
Ship arrested and
cargo interests pay
for cargo discharge,
transit port charges,
container re-hire,
container handling
costs, re-loading at
an intermediate
port.
Ocean Carrier
Preceding incident
Transit
raises customs and
security issues.
Air carriage
Goods lost or
Transit at intermediate damaged during
airport, change of air
transit
carrier
Salvage claim
Eg, ship runs
aground whilst in
transit between two
ports. Another
jurisdiction could
be introduced if
there is a salvage
6
13
Transport contract
Ocean carriage
14A
14B
15
General Average
(GA) claim
SOLAS 1974
formalities
Customs import
formalities
Stevedore at port of Goods discharge and
discharge
handling in terminal
claim involving
salvors from a
nearby port.
GA claim by carrier
against cargo
owners arising
from preceding
incident.
Who is liable to
meet the GA
claim?
Security
notification 24
hours prior to
arrival in port
Customs
16
Transport contract
Air carriage
Ground handling,
Goods damaged
17
Transport contract
Ocean & air
3rd carriage sector
18
Transport contract
Inland
From, airport of
landing or port of
discharge to inland
delivery
Warehouse or bond
store
19
Payment
Post shipment
Stevedore not
liable for loss or
damage to Goods
due to Himalaya
clause;
Payment of
Terminal Handling
Charges (THCs);
Goods damaged
prior to or during
loading (between
terminal gate and
ship’s side)
Air carrier liable
for loss or damage
to Goods within
airport boundary
May involve
customs bond store,
if Goods stolen
customs charges
payable as entry
into home
consumption
Involves bill of
7
20
Marine insurance
payment on credit
terms, with payment
and receipt in
different jurisdictions
Insurable interest of
Buyer at time of loss
exchange, or credit
terms payment in
another jurisdiction
Buyer makes claim
at place of final
destination against
insurer in another
jurisdiction
Figure 1
Notes
It is not suggested that all of this misfortune would befall a single transaction, but this illustrates the range of
difficulties that might arise in any particular transaction.
The need for a workable solution
Trade and commerce has been defined in Australia as all those commercial transactions,
dealings and exchanges between people encompassing either tangible or intangible Goods
and services. 2 It involves operations of a commercial character by which a trader provides
Goods or services for reward to customers.3
This paper is concerned with international commercial transactions involving tangible Goods,
it excludes intangibles such as computer software, and the supply of services.
A straight line approach
The starting point for a straight line approach is to identify the start and end points along the
line. This can be done by starting with a simple contract for sale and plotting it along the
straight line:
Contract for sale
Export
warehouse
Inland
Carriage
Terminal
gate/Airport
boundary
Loading
International Carriage
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Figure 2
It is clear that a lot of things remain to be done if the Seller is to be paid and the Buyer is to
receive the Goods.
The purpose of the straight line approach is to plot the incidents of the various transactions
along a line to provide a working illustration of any particular transaction and issues which
2 Bank of NSW v Commonwealth (1948) 76 CLR 1 at 381-2, including their transport: W&A McArthur Ltd v
Queensland (1920) 28 CLR 530 at 546-7.
3 Ransom v Higgs [1974] 1 WLR 1594 at 1600.
Import
warehouse
8
arise.
The proposition is that international trade and transport of Goods occurs between the export
and import warehouses at each end of the transaction:
Seller’s warehouse
(export)
Buyer’s warehouse
(import)
International Carriage
Goods
Figure 3
It is between the physical location of these two warehouses that the four major transactions
occur:




Commodity contract, the Seller and Buyer’s contract for the Goods
Transport contract concerning the movement of the Goods (including regulatory
obligations such as customs, and security)
Payment contract
Marine insurance contract to cover risk of loss or damage to the Goods
and within each of these commercial transactions issues arise which affect the respective
interests, rights and obligations of the parties.
As can be seen in the following figure Figure 4 , a typical transaction involving carriage by
sea can involve many stages or sectors.
Carriage by sea
Exporter’s
warehouse
Inland
carriage
More inland
carriage
Ship’s rail at
port of
loading
Ocean carriage
Ship’s rail at port of
discharge
Inland
carriage
Figure 4
Notes
This simple illustration does not show all the stages or sectors in a transport transaction, but is provided as an
illustration of the variety which occurs.
Relationship between the four major contracts
Whilst the Goods are the common subject matter of the four major contracts, each of the
contracts is an autonomous transaction at law. For example, the payment contract is based
on the documents representing the Goods rather than the Goods themselves.
It is also important to clearly distinguish the subject of the particular transaction to avoid
Importer’s
warehouse
9
4
confusion.
The four major transactions
The four major transactions in an international trade transaction usually5 involve:
Commodity contract
Seller’s warehouse
(export)
International Carriage
Buyer’s warehouse
(import)
Seller agrees to sell the Goods
Buyer agrees to buy the Goods
Figure 5
Notes
In this contract will be all the substantive terms and conditions agreed between the Seller and Buyer setting out
their respective rights and obligations. Some of the clauses will say how the goods are to be carried and
delivered; how, when and to whom payment is to be made; and who is to insure and when. It will usually
include clauses about what law and jurisdiction governs the contract, and methods of resolving disputes.. The
contract will usually incorporate Incoterms 2000.
Transport contract
Seller’s warehouse
(export)
International Carriage
Seller agrees to arrange transport to
an agreed place
Buyer’s warehouse
(import)
Buyer agrees to take delivery at
an agreed place
Figure 6
Notes
There may be several transport contracts between different parties for different sectors of the carriage (eg Seller
and Carrier; Freight Forwarder and Carrier, Buyer and Carrier etc) or there may be a single contract (eg a
combined transport or multimodal bill of lading for ocean carriage) or a combination of any of these.
In addition there are many and varied sub-parts to each of these transactions, for example,
there are two important regulatory transactions which arise from the physical movement of
the Goods:6
4 For example, Incoterms 2000 is concerned with the terms of the contract between the Buyer and Seller setting
out their respective rights and obligations, but because Incoterms are also referable to the mode of transport, they
can be easily confused with the transport transaction. In fact, their connection with transport is limited to using
the correct Incoterm for the relevant mode of transport. This is dealt with in detail under the discussion on
Incoterms. In short, Incoterms 2000 are used in two categories of transport: any mode of transport, and
ocean/inland waterway transport.
5 Sometimes, there are only three transactions as the Buyer elects to save on the insurance premium and does not
take out marine insurance cover for the Goods, or alternatively, acts as a self-insurer.
6 For this reason the author believes they form a sub- part of the transport transaction.
10
Customs and excise obligations (export and import sides)
To illustrate these obligations we need to add more elements along the straight line.
Export
warehouse
Inland
Carriage
Terminal
gate/Airport
boundary
Port of
loading
International Carriage
Seller obtains export
licence and completes
customs export
formalities
Port of
discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Inland
Carriage
Import
warehouse
Buyer obtains import
licence and completes
customs import
formalities
Figure 7
Security obligations (export and import sides)
US Container Security Initiative (CSI)7 and SOLAS 1974 Convention7
Export
warehouse
Inland
Carriage
Terminal
gate/Airport
boundary
Port of
loading
US CSI – pre
screening prior to
loading - Seller
completes
notification
formalities
24hours prior to
loading
International Carriage
Port of
discharge
Terminal
gate/Airport
boundary
SOLAS
Buyer completes
notification
formalities to
Port Facility
Security
Organisation
(PFSO) 24 hours
prior to arrival in
port
Figure 8
Payment contract
Seller’s warehouse
International Carriage
Buyer’s warehouse
(export)
(import)
Seller receives payment by agreed method on an agreed event
Buyer makes payment by agreed method on an agreed event
Figure 9
Notes
There are a number of different ways for making payment, from cash before the Goods leave the Seller’s
warehouse, to payment on credit terms after the Goods are delivered into the Buyer’s warehouse. In
international trade the usual method of payment is by Bill of Exchange or Letter of Credit.
The parameters for payment are payment before the Goods leave the Seller’s warehouse, or
delivered into the Buyer’s warehouse on credit terms. The event giving rise to the Buyer’s
7 See also: International Maritime Organisation (IMO) – International Ship and Port Facility Security Code
(ISPS) and Saftey of Life at Sea Convention, 1974 (SOLAS).
11
obligation to pay arises somewhere between those two points:
12
Seller’s warehouse
International Carriage
(export)
Seller is paid before the
Buyer’s obligation to pay
Goods leave the warehouse
Seller is not paid before the Goods arrive at the Buyer’s warehouse
Buyer’s warehouse
(import)
Buyer’s obligation to pay
Figure 10
Marine insurance contract
The obligation to take out marine insurance cover (by which party and when) is usually (but
not always) a term of the commodity contract, eg if the commodity contract incorporates
certain Incoterms 2000.8
Seller’s warehouse
(export)
International Carriage
Seller’s risk to an agreed point
Buyer’s warehouse
(import)
Buyer’s risk from an agreed
point
Figure 11
Notes
The risk of loss or damage to the goods is usually covered by a contract of policy of marine insurance which can
be taken out by either the Seller or the Buyer to cover risk from the time the Goods are loaded onto the Carrier at
the Seller’s warehouse to the time they are unloaded at the Buyer’s warehouse or final premises. The terms of
the marine insurance usually incorporates the Institute of Lloyd’s Underwriters clauses (referred to as marine
insurance clauses or Institute Cargo Clauses or ICC clauses. ICC(A) or ICC(Air) are commonly used.
A straight line incorporating all the transactions
It is possible to plot these transactions to illustrate the stages in a typical transaction by air
carriage or by sea carriage:
International carriage by air
Export
warehouse
Inland
Carriage
Airport
Airport
boundary
International carriage
boundary
Air Carrier’s responsibility from airport boundary at place of export to airport
boundary at place of import
Seller’s transport cost
Buyers transport cost
Seller’s marine insurance risk(1)
Seller makes Goods available, or delivers them
to an agreed place
Figure 12
Inland
Carriage
Buyer’s marine insurance risk
Buyer takes delivery of Goods
Notes: (1) Carriage by air is not a marine adventure within the meaning of Marine Insurance laws, but the
practice is that the risk of loss or damage is covered by a marine insurance policy with ICC (Air) clauses.
8 Not all Incoterms create an obligation for one or other of the parties to arrange the marine insurance contract.
Import
warehouse
13
International carriage by sea
Export
warehouse
Inland
Carriage
Terminal
gate
Port of
loading
Seller obtains
export licence,
completes
customs export
formalities and
US CSI
notifications 24
hours prior to
loading
Overseas Carriage
Water carriage
Port of
discharge
Terminal
gate
Inland
Carriage
Import
warehouse
Buyer obtains import
licence, completes
customs formalities and
SOLAS notifications to
PFSO 24 hours prior to
arrival
Seller’s transport cost
Seller’s marine insurance risk
Seller makes Goods available, or delivers them
to an agreed place
Figure 13
Buyers transport cost
Buyer’s marine insurance risk
Buyer takes delivery of Goods
This paper examines the use of a straight line to plot the elements of each of the four major
transactions in international trade.
1
Commodity contract
In a simple transaction this consists of selling and buying the Goods, with rights and
obligations flowing in both directions:
Seller
Buyer
→
W
Goods
W
W
← payment
W
W: Warehouse
Figure 14
A simple contract to sell
Export
warehouse
Inland
Carriage
Seller
agrees to
sell
Figure 15
Notes
Terminal
gate/Airport
boundary
Loading
International Carriage
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Buyer
agrees to
buy
14
In this figure, the Seller and Buyer have entered into a contract to sell and buy, but it is clear that a lot more is
yet to be done if the Seller is to be paid and the Buyer is to receive the Goods.
In Figure 16 the Goods are traveling from Seller 1 to Buyer 2 although there is no contractual
relationship, as there are two sale contracts (contracts 1 and 2) which are independent of each
other.9
In a more complex transaction this can involve additional parties, such as where the Goods
are on-sold to a second or subsequent Buyer before the first Buyer has taken actual delivery of
the Goods as they are still in transit:
Seller 1
Buyer 1 &
Seller 2
Contract 1
Goods
Contract 2
Buyer 2
Figure 16
Figure 16 shows a transaction which consists of two transactions involving the same Goods,
the same transport contract, the same port of discharge and the same marine insurance cover:
First sale
goods
First Seller
First Buyer
payment
Second sale
goods
Second /Seller
Second Buyer
payment
9 However, the limitation by which privity of contract limits the rights and obligations under the contract to the
actual parties, that same limitation does not apply to either the marine insurance policy or the ocean transport
contract.
15
Figure 17
and there may be some overlap in the timing of the rights and obligations, which becomes
more obvious when depicted on a straight line in Figure 18:
Seller 1
Warehouse
→
documents →
← payment
Buyer 1/Seller2
Buyer 2
Warehouse
Goods
documents
→
← payment
Figure 18
In Figure 18, the Goods have been sent by the Seller and are on board the ship traveling
towards the port of discharge. The Seller 1 sent the documents to Buyer 1 and payment has
been made Buyer 1 to Seller 1. Meanwhile, Buyer 1 has become Seller 2 and has sold the
Goods to Buyer 2, by presenting the documents to Buyer 2, who has made payment to Seller
2. In this transaction, the documents are sold, and paid for, even though the Goods have only
just commenced on their journey, and have certainly not arrived at their destination. This also
illustrates that payment is made for the documents, rather than the Goods.
In Figure 19 below, which shows a bill of lading transport contract between Seller 1 and the
Ocean Carrier, Buyer 1 and Buyer 2 are not parties to that contract, there is no privity of
contract between the Ocean Carrier and Buyer 1; and no privity of contract between Seller 1
and Buyer 2, nor the Ocean Carrier and Buyer 2. Nevertheless, all these parties are bound by
the terms of the carriage contract.
Seller
(received Bill
of lading)
Ocean Carrier
(received freight
payment)
Buyer 1
16
Buyer 2
Figure 19
Similarly, see Figure 20 concerning the contract of marine insurance which was taken out by
Seller 1 with an underwriter, covers loss or damage to the Goods which can be claimed by
either Seller 1, Buyer 1 or Buyer 2 although there is no privity of contract between the marine
insurer and either Buyer 1 or Buyer 2. The only limitation is that only one claim can be
made, and the marine insurer will only pay the claim if the claimant has an insurable interest.
Seller
(received
policy)
Marine insurer
(received
premium)
Buyer 1
Buyer 2
Figure 20
Applicable laws
There are domestic laws, international conventions and international agreements which are
relevant to the commodity contract:

Sale of Goods laws, eg Sale of Goods Act 1923 (NSW) (Soga)

The Vienna Convention on the international sale of Goods (CISG)

Incoterms 2000 (Incoterms)
and which set out different rights and obligations.
17
However, as previously observed, where the contract incorporates Incoterms, it is also
referable to the mode of transport used to deliver the Goods.
Incoterms incorporates the rights and obligations in respect of each of those other
transactions:
1.1 Sale of Goods in domestic law
This part is concerned with international contracts for the sale of Goods to which Soga
applies, as neither CISG or Incoterms have been incorporated.
This usually arises as an error from incorrect use of Incoterms and election to exclude the
Vienna Convention on the International Sale of Goods (CISG) so that the contract is
governed only by domestic sale of goods laws. As a general rule, Soga is not suitable for the
international sale of goods as CISG and Incoterms have been written specifically for
international sales and take account of modern developments such as e-commerce.
In this discussion, references are to the Sale of Goods 1923 (NSW) as Soga which has
equivalent legislation in most commonwealth countries.10
Three issues
There are three relevant issues arising from Soga:

Delivery
o s31 (Payment and delivery are concurrent conditions)
o s32 (Rules as to delivery)
o s34 (Instalment deliveries)
o s35 (Delivery to carrier)

Passing property
o s21 (Goods must be ascertained)
o s22 (Property passes when intended to pass)
o s23 (Rules for ascertaining intention)
o s24 (Reservation of right of disposal)
o s25 (Sale by person not the owner)
o s26 (Sale under voidable title)

Passing risk
o s25 (Risk prima facie passes with property)
o s36 (Risk where goods are delivered at distant place)
10 Other States and Territories of Australia, NZ, UK etc.
18
Delivery
In an international sale of Goods, delivery can take place at different times.
Delivery does not mean delivery of the Goods, but can be:

actual delivery to the Buyer

constructive delivery of the Goods, eg when the Goods are delivered to a Carrier

delivery of the shipping documents to the Buyer.
Delivery of the Goods to the Carrier must occur before the Carrier will issue a carriage
document, such as a ‘shipped on board’ bill of lading for sea carriage, or an air waybill issued
by the air carrier. But even this apparently simple transaction can be complicated by the
intervention of a freight forwarder, who becomes the ‘contracting’ carrier, but not the actual
carrier.11
In each of the preceding cases, when the relevant document is delivered to the Buyer
(assuming the payment contract involves a bill of exchange or letter of credit and the Buyer is
not entitled to delay payment on credit terms), the Buyer is then obliged to pay the price
(assuming the documents are in order) and regardless of the state or condition of the Goods.12
Delivery of the documents (not the Goods) is usually the condition for payment under a letter
of credit, and a bill of exchange, as it is the shipping documents (not the Goods) which are
presented to the Buyer and which create the Buyer’s obligation to pay the purchase price.
11 See discussion below under Transport, and Freight forwarders.
12 This raises the issue of the passing of risk, discussed below under Risk.
19
Consider a typical transaction:
Export
warehouse
Seller
delivers
Goods, s31
Seller
delivers
when goods
delivered to
carrier, s35
Seller must
make
reasonable
contract
with
carrier,
s35(2)
Inland
Carriage
Terminal
gate
Port of
loading
(1)
Overseas Carriage
Port of
discharge
Terminal
gate
Inland
Carriage
Import
warehouse
Buyer pays price
Buyer’s inland (first) carrier collects the goods from the Seller’s warehouse, and buyer deemed to
take delivery (Buyer should insure)
Goods at Buyer’s risk (Buyer should insure)
Seller to
Buyer’s risk during sea transit (Buyer should insure)
give notice
of goods
sent by sea
transit,
s35(3)
Seller
Buyer’s risk of deterioration necessarily incident to course of transit (Buyer should insure)
delivers at
an agreed
(distant)
place other
than where
sold, s36
Figure 21
1
Export
warehouse
Delivery of the Goods at the time of payment.13
Inland
Carriage
Terminal
gate/Airport
boundary
Loading
International Carriage
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Seller
Buyer pays for Goods on their delivery
delivers at
agreed
place
Figure 22
13 Eg Sale of Goods Act 1923 (NSW) s31:
Unless otherwise agreed, delivery of the Goods and payment of the price are concurrent conditions, that is to
say, the Seller must be ready and willing to give possession of the Goods to the Buyer in exchange for the price,
and the Buyer must be ready and willing to pay the price in exchange for possession of the Goods.
Import
warehouse
20
This is the simplest transaction, but the two events are unlikely to coincide in an international
sale of Goods, as delivery of the Goods to the carrier usually occurs before delivery of the
documents for payment. And physical delivery of the Goods occurs later after discharge from
the carrier.
Export
warehouse
Terminal
gate/Airport
boundary
Inland
Carriage
Loading
Seller delivers at agreed
place
International Carriage
Discharge
Terminal
gate/Airport
boundary
Buyer pays
for Goods on
receipt of
carriage
document
from
International
Carrier
Inland
Carriage
Import
warehouse
Buyer gets
physical
possession
of the
Goods
Figure 23
There is an important distinction to be made between delivery of these two things.
Delivery to a Carrier14
2
Export
warehouse
Inland
Carriage
Terminal
gate
Port of
loading
Overseas Carriage
Port of
discharge
Terminal
gate
Inland
Carriage
Import
warehouse
EXW (Incoterm)
Seller
delivers
Goods to a
carrier
Buyer is deemed to take delivery when the Goods are received by the first carrier, s35
FOB and CIF (Incoterm)
Seller must deliver Goods to a carrier
Buyer is deemed (see s35(1) fn14) to take delivery when the Goods cross
the ship’s rail at the port of loading
Figure 24
14 Eg Sale of Goods Act 1923 (NSW) s35:
(1) Where in pursuance of a contract of sale the Seller is authorised or required to send the Goods to the Buyer,
delivery of the Goods to a Carrier, whether named by the Buyer or not, for the purpose of transmission to the
Buyer, is prima facie deemed to be a delivery of the Goods to the Buyer.
(2) Unless otherwise authorised by the Buyer, the Seller must make such contract with the Carrier on behalf of
the Buyer as may be reasonable, having regard to the nature of the Goods and the other circumstances of the
case. If the Seller omit so to do, and the Goods are lost or damaged in course of transit, the Buyer may decline
to treat the delivery to the Carrier as a delivery to the Buyer, or may hold the Seller responsible in damages.
(3) Unless otherwise agreed, where Goods are sent by the Seller to the Buyer by a route involving sea transit
under circumstances in which it is usual to insure, the Seller must give such notice to the Buyer as may enable
the Buyer to insure them during their sea transit, and if the Seller fails to do so, the Goods shall be deemed to
be at the Seller's risk during such sea transit.
21
Passing property

Passing property
o s21 (Goods must be ascertained)
o s22 (Property passes when intended to pass)
o s23 (Rules for ascertaining intention)
o s24 (Reservation of right of disposal)
o s26 (Sale by person not the owner)
o s27 (Sale under voidable title)
Goods must be ascertained
A most important principle for transfer of property in Goods in an international transaction is
that property can not pass until the Goods are ascertained.15
This is especially important where the contract is for the Buyer to receive a portion or part of
a quantity of bulk Goods in a ship’s hold or holds. For example, a shipment of 5,000 tonnes
of palm oil from Indonesia to several Buyers whose (proportion) of cargo identified in the bill
of lading is stated generally as ‘1,500 mt palm oil’ without identifying which hold, or which
proportion. The Goods will not be ascertained until pumped from the ship’s hold. Even then
they may not be ascertained if there is more than one Buyer for the oil at that port, and the oil
is discharged into a bulk shore tank, from which it is pumped into the Buyer’s trucks.
This raises the question of which portion or parcel of the Goods belongs to which Buyer.
This is not just a theoretic question, as it raises practical questions of which Buyer suffers a
loss if the Goods are damaged. Some examples of loss or damage to a bulk cargo where the
Goods for delivery to each Buyer are unascertained:

Contamination to liquids in one ship’s tank, but not others;

Short delivery to the last Buyer to whom delivery is made, the earlier deliveries having
been made in the contracted amounts, or slightly over (say where there is a 10% margin
allowed for delivery;

Heat damage to the Goods along one side of the container, but not to the other side;
15 Sale of Goods Act 1923 (NSW) s21:
Where there is a contract for the sale of unascertained Goods, no property in the Goods is transferred to the
Buyer unless and until the Goods are ascertained.
22
Bulk shipment – Buyer’s portion unascertained
Export
warehouse
Inland
Carriage
Terminal
gate
Port of
loading
Overseas Carriage
Port of
discharge
Seller delivers Goods in bulk for several buyers Goods of several buyer’s mixed
to Ocean Carrier
together
Property in Bulk Goods remains with Sellers until Buyer’s portion ascertained, s21
Figure 25
Terminal
gate
Inland
Carriage
Import
warehouse
Buyer’s portion is ascertained only when
separated from bulk
Ditto
Intention of the Seller and Buyer
Property in specific or ascertained Goods passes when the parties intend it to pass by
reference to the terms of the contract, conduct of the parties and circumstances of the case.16
The terms of the contract raises the issue of clarity of intention, by using terms which are
clear and have an accepted meaning, such as Incoterms 2000. For example, whether the
contract is FOB or CIF etc, as the rights and obligations of the parties are defined in the
relevant Incoterm 2000. Under an FOB contract the Seller’s obligation is to deliver the
Goods on board the vessel named by the Buyer at the named port of shipment on the date or
period stipulated and in the manner customary at the port. In those circumstances, property
passes to the Buyer when the Goods cross the ship’s rail.17 Similarly in a CIF contract, the
time when the Goods cross the ship’s rail at the port of loading is the determining factor.
The time of payment is also an indication of intention that property id to pass, especially
where the payment occurs after the Goods commence their journey.18 Intention can also be
indicated by the terms of the contract.
Intention is not an easy issue, and leads to five rules for ascertaining that intention.19
Rule 1 - Property passes when contract made
Where there is an unconditional contract for the sale of specific Goods in a deliverable state,
the property in the Goods passes to the Buyer when the contract is made, and it is immaterial
whether the time of payment or the time of delivery, or both, be postponed.
16 Soga s22: (1) Where there is a contract for the sale of specific or ascertained Goods, the property in them is
transferred to the Buyer at such time as the parties to the contract intend it to be transferred.
(2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract,
the conduct of the parties, and the circumstances of the case.
17 See Carlos Federspiel & C SA v Charles Twigg & Co Ltd [1957] 1 Lloyd’s Rep 240 concerning a shipment
of bicycles FOB where the Buyer paid the price, but the Seller went into liquidation before shipment. The court
considered Rule 5, the definitions of ‘delivery’ and ‘deliverable state’ and the equivalent of Soga ss25 and 35.
Pearson J at 256 held: Therefore, my decision that the prima facie inference which one would have drawn from
the contract is that the property was not to pass at any time before shipment…
18 Matthew Short & Associates Pty Ltd v Riviera Marine (Intl) Pty Ltd [2001] NSWCA 281.
19 Soga, s23: Unless a different intention appears, the following are rules for ascertaining the intention of the
parties as to the time at which the property in the Goods is to pass to the Buyer.
23
Export
warehouse
Seller’s
Goods in
deliverable
state
Inland
Carriage
Terminal
gate/Airport
boundary
Loading
International Carriage
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Property passes to Buyer when contract made
Figure 26
Rule 2 - Property not pass until Goods in deliverable state
Where there is a contract for the sale of specific Goods, and the Seller is bound to do
something to the Goods for the purpose of putting them in a deliverable state, the property
does not pass until such thing be done and the Buyer has notice thereof.
Export
warehouse
Inland
Carriage
Terminal
gate/Airport
boundary
Loading
International Carriage
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Seller must Buyer receives notice from Seller
package
specific
Goods for
transit and
give notice
Figure 27
Rule 3 - Goods to be weighed etc to ascertain the price
Where there is a contract for the sale of specific Goods in a deliverable state, but the Seller is
bound to weigh measure test or do some other act or thing with reference to the Goods for
the purpose of ascertaining the price, the property does not pass until such act or thing be
done and the Buyer has notice thereof.
Export
warehouse
Inland
Carriage
Terminal
gate/Airport
boundary
Seller must provide certificate describing
weight etc of Goods
(eg contract has +/- 10% quantity clause)
Figure 28
Loading
International Carriage
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Property not pass to Buyer until notice of act or thing done is received
Rule 4 - On approval, sale or return
Where Goods are delivered to the Buyer on approval or on "sale or return" or other similar
terms, the property therein passes to the Buyer:
(a) when the Buyer signifies approval or acceptance to the Seller, or does any other Act
adopting the transaction,
(b) if the Buyer does not signify approval or acceptance to the Seller, but retains the Goods
without giving notice of rejection, then if a time has been fixed for the return of the
Goods, on the expiration of such time, and if no time has been fixed, on the expiration
of a reasonable time. What is a reasonable time is a question of fact.
24
Export
warehouse
(1)
Inland
Carriage (1)
Terminal
gate/Airport
boundary
Loading
International Carriage
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Seller delivers Goods to buyer on approval, sale or return etc
Import
warehouse
Buyer
approves
or accepts
etc, or
retains the
Goods
without
notice of
rejection
(2)
Figure 29
Note: (1) The Buyer’s acceptance or approval could take place prior to departure from Seller’s warehouse, point
of loading, such as where the Buyer appoints a certifier to inspect the Goods, who gives a certificate, and the
Buyer advises Seller the Goods are satisfactory.
(2) It is possible to act in such a manner so as to lose the right to reject the Goods, ie to accept the Goods by
conduct: See Kirkham v Attenborough [1897] 1 QB 201
Rule 5(1) - Unascertained or future Goods by description in deliverable state and
unconditionally appropriated
(1) Where there is a contract for the sale of unascertained or future Goods by description,
and Goods of that description and in a deliverable state are unconditionally
appropriated to the contract either by the Seller with the assent of the Buyer or by the
Buyer with the assent of the Seller, the property in the Goods thereupon passes to the
Buyer. Such assent may be express or implied, and may be given either before or after
the appropriation is made.
Export
warehouse
Inland
Carriage
Terminal
gate/Airport
boundary
Loading
International Carriage
Property passes from Seller to Buyer when express or implied
assent given, regardless of if appropriation made
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Property passes to Buyer from Seller when express or implied
assent given, regardless of if appropriation made
Figure 30
The passing of property in Goods shipped in performance of a contract for unascertained
Goods has a number of problems, and the final test of the stage when the transfer of property
in the Goods takes place is the intention of the Seller, and where there is an unconditional
appropriation of Goods the presumption is that property then passes.20
20 James v The Commonwealth (1930) 62 CLR 339 per Dixon J at 377 – 380, inter alia, that the final test of the
stage when the transfer of property in the Goods takes place is the intention of the Seller, and where there is an
unconditional appropriation of Goods the presumption is that property then passes. See Dixon J at 378:
If he (the Seller) does not reserve the right of disposal of the Goods, as it is called, his delivery of the Goods to
the shipowner as Carrier for the purpose of transmission to the Buyer is deemed an unconditional
appropriation of the Goods to the contract. See also Soga s35, which identifies when delivery to the Buyer is
prima facie deemed to occur. See The ‘Albazero’ [1974] 2 Lloyd’s Rep 38; [1975] 2 Lloyd’s Rep 295; [1976] 2
Lloyd’s Rep 467 where the Goods were carried under a CIF contract. The consignor entered into the bill of
lading contract with the Carrier, and paid the freight for carriage. The ship sank during the voyage and the cargo
of oil was lost. Property had passed to the consignee as the oil passed the ship’s rail, which was prior to the loss.
Therefore the consignor no longer had an interest in the cargo.
25
Rule 5(2) - Seller delivers Goods to Buyer, Carrier or other bailee
(2) Where in pursuance of the contract the seller delivers the goods to the buyer or to a
carrier or other bailee (whether named by the Buyer or not) for the purpose of
transmission to the buyer and does not reserve the right of disposal, the seller is
deemed to have unconditionally appropriated the goods to the contract.
Export
warehouse
Inland
Carriage
Terminal
gate/Airport
boundary
Loading
International Carriage
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Seller delivers Goods to Buyer
Seller
delivers
Goods to a
(first)
carrier
Import
warehouse
Goods unconditional
appropriation
deemed to
have
occurred
Goods unconditional appropriation deemed to have occurred
Seller delivers Goods to the
International Carrier
Goods unconditional appropriation deemed to have occurred
Seller delivers Goods to a bailee somewhere along this line
Goods unconditional appropriation deemed to have occurred
at that point
Figure 31
Special issues
Romalpa clauses – reservation of title
Delivery of the Goods to the Buyer and the passing of property or title in the Goods to the
Buyer do not always occur at the same time, An example is the romalpa clause as a
contractual term which reserves title in the Goods in the Seller until payment is received,
even though the Goods have been delivered to the Buyer.21
21 Soga, s24 (Reservation of right of disposal) (1) Where there is a contract for the sale of specific Goods, or
where Goods are subsequently appropriated to the contract, the Seller may by the terms of the contract or
appropriation reserve the right of disposal of the Goods until certain conditions are fulfilled. In such case,
notwithstanding the delivery of the Goods to the Buyer or to a Carrier or other bailee for the purpose of
transmission to the Buyer, the property in the Goods does not pass to the Buyer until the conditions imposed by
the Seller are fulfilled.
(2) Where Goods are shipped and by the bill of lading the Goods are deliverable to the order of the Seller or the
Seller's agent, the Seller is prima facie deemed to reserve the right of disposal.
(3) Where the Seller of Goods draws on the Buyer for the price and transmits the bill of exchange and bill of
lading to the Buyer together to secure acceptance or payment of the bill of exchange, the Buyer is bound to
return the bill of lading if the Buyer does not honour the bill of exchange, and if the Buyer wrongfully retains the
26
Export
warehouse
Inland
Carriage
Terminal
gate
Port of
loading
Overseas Carriage
Port of
discharge
Terminal
gate
Inland
Carriage
Unpaid
Buyer has taken delivery but has not paid the Seller
Seller
delivers
Goods to a
carrier
Seller uses romalpa clause to reserve its title in the Goods until payment received
Import
warehouse
Buyer
delays
paying
Seller until
Goods into
warehouse
Figure 32
Sale by person not the owner
It is perhaps trite to say that the owner can transfer title in the Goods, and the owner is usually
the Seller. But there are situations where the Seller is not the owner.22
Export
warehouse
Inland
Carriage
Terminal
gate
Sale by third party
rogue (not owner)
delivers Goods to
Buyer
Third party rogue
receives payment
from Buyer
Port of
loading
(1)
Overseas Carriage
Port of
discharge
Terminal
gate
Inland
Carriage
Import
warehouse
Buyer has possession from Rogue but property in the Goods does not pass to the Buyer
Buyer pays rogue for Goods
Figure 33
Notes
This problem might arise where the rogue has stolen the Goods from the Seller’s warehouse, or intercepted the
goods after they leave the Seller’s warehouse, or created bogus shipping documents; and in each case selling the
Goods to an innocent and genuine Buyer.
Sale under voidable title
Soga recognizes the need to protect innocent third party such as the Buyer who purchases the
Goods where the sale is made under a voidable title.23 This is important where the sale is a
bill of lading the property in the Goods does not pass to the Buyer.
22 Soga s26: (Sale by person not the owner): (1) Subject to the provisions of this Act, where Goods are sold by a
person who is not the owner thereof and who does not sell them under the authority or with the consent of the
owner, the Buyer acquires no better title to the Goods than the Seller had, unless the owner of the Goods is by
the owner's conduct precluded from denying the Seller's authority to sell.
(2) Nothing in this Act shall affect: (a) the provisions of the Factors (Mercantile Agents) Act 1923 or of the
Registration of Interests in Goods Act 1986, (b)the validity of any contract of sale under any special common
law or statutory power of sale, or under the order of a court of competent jurisdiction.
23 Soga s27 (Sale under voidable title): Where the Seller of Goods has a voidable title thereto but the Seller's
title has not been avoided at the time of the sale, the Buyer acquires a good title to the Goods, provided the
27
sale of the shipping documents in an international sale of Goods, as to allow to the contrary
would undermine the confidence of merchants in international trade.
Similarly, situations may arise in an international sale of Goods where the Seller remains in
possession of the shipping documents (or the Goods) after the sale. Transfer of possession of
the Goods and transfer of the shipping documents (as documents giving title to the Goods, eg
the bill of lading in sea carraige) usually occur at different times, with title being transferred
by the shipping documents which are usually put in the hands of the Buyer upon payment
being made under a letter of credit, which happens after the Goods are loaded on board the
ship – the bill of lading not being issued by the Carrier until that occurs – and the documents
usually arrive by airmail before the Goods are unloaded. Also, protection is required where
the sale involves a mercantile agent, although a modern international transaction protected by
a letter of credit will not involve a mercantile agent.24
Passing risk
Prima facie, risk passes at the same time as property passes,25 though this rule might be
modified where there is a mixed risk26 or the Buyer delays taking delivery.27
Buyer buys them in good faith and without notice of the Seller's defect of title.
24 Soga s28: See s28: (Seller or Buyer in possession after sale): (1) Where a person having sold Goods
continues or is in possession of the Goods or of the documents of title to the Goods, the delivery or transfer by
that person or by a mercantile agent acting for that person of the Goods or documents of title under any sale
pledge or other disposition thereof to any person receiving the same in good faith and without notice of the
previous sale shall have the same effect as if the person making the delivery or transfer were expressly
authorised by the owner of the Goods to make the same.
(2) Where a person having bought or agreed to buy Goods obtains with the consent of the Seller possession of
the Goods or the documents of title to the Goods, the delivery or transfer by that person or by a mercantile
agent acting for that person of the Goods or documents of title under any sale pledge or other disposition
thereof to any person receiving the same in good faith and without notice of any lien or other right of the
original Seller in respect of the Goods shall have the same effect as if the person making the delivery or transfer
were a mercantile agent intrusted by the owner with the Goods or documents of title.
(3) In this section the term mercantile agent means a mercantile agent having in the customary course of
business as such agent authority either to sell Goods, or to consign Goods for the purpose of sale, or to buy
Goods, or to raise money on the security of Goods.
25 Soga s25: Unless otherwise agreed, the Goods remain at the Seller's risk until the property therein is
transferred to the Buyer, but when the property therein is transferred to the Buyer, the Goods are at the Buyer's
risk, whether delivery has been made or not: Provided that where delivery has been delayed through the fault of
either Buyer or Seller, the Goods are at the risk of the party in fault as regards any loss which might not have
occurred but for such fault: Provided also that nothing in this section shall affect the duties or liabilities of either
Seller or Buyer as a bailee of the Goods of the other party.
26 Soga s36 (Risk where goods are delivered at a distant place) when the Seller delivers at his risk, but the
Buyer (unless otherwise agreed) takes the risk of deterioration incident to the journey:
Where the Seller of Goods agrees to deliver them at the Seller's own risk at a place other than that where they
are when sold, the Buyer must nevertheless, unless otherwise agreed, take any risk of deterioration in the Goods
necessarily incident to the course of transit.
27 Soga s40:
When the Seller is ready and willing to deliver the Goods and requests the Buyer to take delivery, and the Buyer
does not within a reasonable time after such request take delivery of the Goods, the Buyer is liable to the Seller
for any loss occasioned by the Buyer's neglect or refusal to take delivery, and also for a reasonable charge for
the care and custody of the Goods: Provided that nothing in this section shall affect the rights of the Seller
where the neglect or refusal of the Buyer to take delivery amounts to a repudiation of the contract. See Demby
28
There are a number of issues associated with the passing of risk under Soga which are not
discussed here.28
The time at which the risk of loss or damage to the Goods is relevant to identifying who of
the Seller or Buyer has suffered the loss or damage, and consequently, which party has an
insurable interest under the contract of marine insurance, and can make the claim on the
marine insurer and receive payment.29
1.2
Vienna Convention on the international sale of Goods (CISG)
30
CISG applies to the international sale of Goods where the Seller or Buyer is in a country
which has ratified, accepted, approved or acceded to CISG.31
The provisions in CISG which are relevant to the rights and obligations of the Seller and
Buyer are similar to Soga, but with additional rights and remedies, including aspects of the
civil law previously unknown to the common law.
Any issue arising under CISG can be plotted using the principles of the straight line identified
for the sale of goods in domestic law.
1.3
Incoterms 2000
Incoterms is concerned with the rights and obligations of parties to a contract for sale and the
delivery of the Goods. 32 It does not apply to the contract of carriage, though the carriage of
Goods becomes important as the Buyer is interested in getting delivery of the Goods
purchased. For that reason, it is convenient to plot the relevant Incoterm against the straight
line to see where the rights and obligations in the transaction arise.
Hamilton Ltd v Barden [1949] WN 73.
28 Soga s10 (Existing or future goods). s10(2) the contract can be dependent on a contingency, and such a
contract is an agreement to sell future Goods, s10(3). An example for the operation of this section is a
transaction involving an on-sale of the documents where the Goods have been shipped on board and the bill of
lading and other shipping documents have been issued. This section is given further practical effect by s11
(Goods which have perished) which provides that if the Goods have perished at the time of the contract (without
the knowledge of the Seller as will be case where the contract is a sale of the documents), the contract is void.
Similarly, s12 provides that after the contract is made but the Goods perish before the risk passes to the Buyer
(neither Seller nor Buyer at fault), the contract is avoided. Again, this section operates in the circumstances of a
sale of the documents. The crucial issue of when risk passes will be determined by the terms of the contract.
29 See discussion under Marine Insurance below. See The ‘Sanix Ace’ [1987] 1 Lloyd’s Rep 465. See also
Leigh & Sillivan Ltd v Aliakmon Shipping Co The ‘Aliakmon’ [1983] 1 Lloyd’s Rep 203; [1985] 1 Lloyd’s Rep
199 [1986] AC 785; [1986] 2 Lloyd’s Rep 1 (HL) involving a C&F (now CFR in Incoterms 2000) contract. See
The ‘Albazero’ [1974] 2 Lloyd’s Rep 38; [1975] 2 Lloyd’s Rep 295; [1976] 2 Lloyd’s Rep 467 where the
Goods were carried under a CIF contract and the claim was in tort.
30 In Australia, CISG forms part of the domestic law, and can be found as a Schedule to the Sale of Goods
(Vienna Convention) Act 1986 (NSW) and equivalent laws in other Australian States and Territories.
31 A list of countries is available at the Uncitral web site <www.uncitral.org>.
32 ICC, Incoterms 2000, 1. Purpose and scope of Incoterms, p5.
29
There are two groups of Incoterms which identify the mode of transport:


Any mode of transport, which refer to ...named place...
Exclusively sea or water carriage, which refer to ...named port...
and these are set out in Figure 34.
Straight line description
Export
Carriage
Import
Goods
E
F
Departure
Mode
Seller makes the Goods
available to the Buyer at
the Seller’s premises
Ex Works (...named
place)
C
Mode
Seller delivers the
Goods to a Carrier
appointed by the Buyer
Any
EXW
Main carriage
unpaid
FCA
Any
Free On Board
(...named port of
shipment)
CFR (1)
Sea
CIF (1)
Sea
CPT
Sea
Carriage and Insurance
Paid To (...named
place of destination)
DAF
Any
DES
Sea
Delivered Ex Ship
(...named port of
destination)
Any
Carriage Paid To
(...named place of
destination)
CIP
Mode
Delivered at Frontier
(...named place)
Cost, Insurance and
Freight (...named port
of destination)
Sea
Arrival
Seller bears all costs
and risks to bring the
Goods to the place of
destination
Cost and Freight
(...named port of
destination)
Free Alongside Ship
(...named port of
shipment)
FOB (1)
D
Mode
Seller contracts for
carriage, but without
assuming risk of loss
or damage to the
Goods or additional
costs caused by events
after shipment and
despatch
Free Carrier (...named
place)
FAS
Main carriage
paid
DEQ
Sea
Delivered Ex Quay
(...named port of
destination)
Any
DDU
Any
Delivered Duty Unpaid
(...named place of
destination)
DDP
Delivered Duty Paid
(...named place of
destination)
Figure 34
Notes:
Any transport
Sea carriage
(1) In Incoterms 2000, the delivery point is the same under FOB, CFR and CIF. The concept of delivery of
Any
30
Goods ‘across the ship’s rail’ is said by some to be inappropriate, though court decisions have turned on it, and it
is an idea which is understood by merchants and applied in a manner taking into account the Goods and port
facilities. The ICC considered in Incoterms 2000 that a change in the FOB point would be confusing,
particularly for Goods carried under charterparties.
E Terms - Departure group
Goods collected from Seller
E terms are the group where the Seller has minimum obligations as the Seller has only to
place the Goods at the disposal of the Buyer at the agreed place which is usually at the Seller's
premises, see Figure 34.
However, the Seller might sometimes volunteer (erroneously) to assist the Buyer in loading
the Goods on the collecting vehicle sent by the Buyer. This can raise an important issue
under marine insurance where loss occurs during loading: for example, the Seller’s storeman
drops the Goods during loading; the Goods are stolen as they are loaded with the assistance of
the Seller’s storemen on to a vehicle sent by a rogue; or a loss occurs when the vehicle turns
over before it exits the perimeter of the Seller’s premises (the author has encountered all these
examples). Importantly, the E terms (EXW) do not extend the Seller's obligations to loading,
and retains the principle of minimum obligation. If the Buyer wants the Seller to do more, this
must be a specific contractual term in the contract of sale.
EXW
Meaning: Ex Works (...named place)
Usage: Minimum obligations on Seller (See Figure 34).
Export
warehouse
Terminal
Inland
gate/Airport
Carriage
boundary
Any mode of transport
Point of
loading
(1)
International Carriage
Point of
discharge
Terminal
gate/
Airport
boundary
Inland
Carriage
Import
warehouse
Buyer obtains export, transit and import licences and
completes export and import customs formalities
Buyers transport cost
Buyer’s marine insurance risk
Buyer takes delivery at Sellers warehouse
Figure 35
Incoterms provides the following explanation:
<<Ex works>> means that the Seller delivers when he places the Goods at the disposal
of the Buyer at the Seller's premises or another named place (i.e. works, factory,
warehouse, etc.) not cleared for export and not loaded on any collecting vehicle. This
term thus represents the minimum obligation for the Seller, and the Buyer has to bear
all costs and risks involved in taking the Goods from the Seller's premises.
31
However, if the parties wish the Seller to be responsible for the loading of the Goods on
departure and to bear the risks and all the costs of such loading, this should be made
clear by adding explicit wording to this effect in the contract of sale. This term should
not be used when the Buyer cannot carry out the export formalities directly or
indirectly. In such circumstances, the FCA term should be used, provided the Seller
agrees that he will load at his cost and risk.
EXW, when used in an international export transaction, is the closest term to an ordinary
transaction in domestic sale of Goods law. This is because the term requires the overseas
Buyer or the Buyer's agent to collect the Goods from the Seller's works, factory, warehouse or
store.
The purchase price becomes due on delivery of the Goods unless other arrangements have
been made. Where the contract is concluded and performed at the Seller's premises in NSW,
it will be governed by the law of NSW.
Disputes sometimes arise in an EXW contract about who has to pay the cost of packing, but
this is dealt with in Incoterms A9 - Seller’s obligations. The Seller must provide the usual
trade packaging for transport of the Goods. 33 This also has implications for the transport
contract:

the Buyer will be liable to the Carrier if the Goods are inappropriately packed for the
voyage causing damage to the Carrier’s vessel or to other Goods;

the Buyer will lose its right to claim against the Carrier who is excused from liability
for damage to Goods insufficiently packed;
and the marine insurance contract as:

the marine insurer can deny liability for Goods insufficiently packed.
An EXW clause may contain the address where the Goods are to be collected, but in some
cases may only refer to the town where the Seller's works, factory, warehouse or store is
situated. This latter form is used where the Seller's business is carried on at various premises
within the same town and the Seller wishes to maintain some flexibility prior to the
collection. However, the Seller is required to inform the Buyer of the actual local address in
sufficient time for them to be collected, and the Seller’s failure to give that notice may result
in its loss of any subsequent claim for damages arising from the Buyer’s failure to collect the
Goods.34
33 Commercial Fibres (Ireland) Ltd v. Zabaida [1975] 1 Lloyds Rep 27 where the Sellers undertook to provide
export packing at the expense of the Buyers and the Buyer is then not required to or to bear the cost of export
packing: see Schmithoff, Export Trade 9th Edition, p12.
34 For example, in Davies v. McLean (1873) 21 WR 264, 265 Brett J said: The words are "ex quay or
warehouse Liverpool". Liverpool is a large place, and is there not, then, an implied condition for notice to be
given?
32
An Ex Works contract is not necessarily an international supply contract even where the
Seller knows that the Goods are destined for export, and consequently domestic consumer
protection provisions may apply to the contract.35
In addition, words such as Ex Store, Ex Factory and Ex Warehouse are erroneously used as
a (non-existent) Incoterm to identify the place where the Goods are stored on land, 36 and do
not include storage of the Goods afloat such as on a barge or lighter, because in the latter
case, the Goods when insured are a marine risk. In addition, the words Ex Store is again
erroneously used to refer to a particular kind of storage, for example where frozen meat is
sold Ex Store the term is used to mean Ex Refrigerating Store. But none of these are
Incoterms and should not be used.
F Terms – Main carriage unpaid
Seller delivers Goods for carriage as instructed by the Buyer
The F Terms require the Seller to deliver the Goods for carriage as the Buyer instructs. See
Figure 34.
FCA (...named place)
Meaning: Free Carrier
Usage: All modes of transport, including combined transport (see Figure 34).
Export
warehouse
Terminal
Inland
gate/Airport
Carriage
boundary
Any mode of transport
Port of
loading
(1)
International Carriage
Seller obtains export
licence, completes
customs export
formalities
Seller’s transport cost to place of delivery
Buyer’s (marine) insurance risk to place of
delivery
Seller must deliver Goods to Buyer’s Carrier at
named place
Port of
discharge
Terminal
gate/
Airport
boundary
Inland
Carriage
Buyer obtains any
transit and import
licence and completes
import customs
formalities
Buyers transport cost from place of delivery
Buyer’s marine insurance risk from place of
delivery
Buyer takes delivery at named place when its
Carrier receives Goods
Figure 36
35 Quite apart from any issue of extra-territorial application of domestic law. For example, in Australia the
Trade Practices Act 1974 (Cth) and similar state legislation such as the Fair Trading Act 1987 (NSW) may
apply: see Rasbora Ltd v. JCL Marine Limited [1977] 1 Lloyds Rep 645, although this case was decided under
the UK Sale of Goods Act 1893, s62(1) similar provisions apply in the Sale of Goods Act 1923 (NSW), s35.
36 Fisher, Reeves and Co v. Armour & Co [1920] 3 KB 614.
Import
warehouse
33
Incoterms provides the following explanation :
<<Free Carrier>> means that the Seller delivers the Goods, cleared for export, to the
Carrier nominated by the Buyer at the named place. It should be noted that the chosen
place of delivery has an impact on the obligations of loading and unloading the Goods
at that place. If delivery occurs at the Seller's premises, the Seller is responsible for
loading. If delivery occurs at any other place, the Seller is not responsible for
unloading.
The Incoterms commentary notes that the point at which the parties intend delivery in the
FCA term has caused difficulty because of the variety of contracts using this term. For
example, the Goods may be loaded on a Carrier’s truck sent by the Buyer to pick them up, or,
the Goods have to be unloaded from a truck sent by the Seller to deliver the Goods at a
terminal nominated by the Buyer. Incoterms accommodates these alternatives by stipulating
that when the place named in the contract as the place of delivery is the Seller’s premises,
delivery is complete when the Goods are placed at the disposal of the Buyer, but not unloaded
from the Seller’s vehicle.
FCA Incoterms 2000 is different to FCA Incoterms 1990 as it does not deal with the
variations for different modes of transport in FCA A4 - Delivery.
This is an important and frequently used container term based on the same principles as an
FOB clause except that the Seller's obligation is to deliver the Goods into the custody of the
Carrier at the named place or port.
FAS (...named port of shipment)
Meaning: Free Alongside Ship
Usage: Sea or inland waterway transport only (see Figure 34).
Export
warehouse
Inland
Carriage
Terminal
gate
Port of
loading
(1)
Seller obtains export
licence , completes
customs export
formalities (1) and
proof of delivery
alongside vessel
Seller’s transport cost
Seller’s marine insurance risk
Seller must deliver Goods alongside ship
Figure 37
Overseas Carriage
Water carriage only
Port of
discharge
Terminal
gate
Inland
Carriage
Buyer obtains seacarriage document, transit and
import licences and completes customs
formalities
Buyers transport cost (2)
Buyer’s marine insurance risk
Buyer takes delivery of Goods alongside ship
Notes: (1) The Incoterms 2000 FAS term now requires the Seller to clear the Goods for export. 37 This is a reversal from
previous incoterms versions which required the buyer to arrange for export clearance.
37 In Compagnie Continentale D'Importation Zurich SA v. Ispahani [1962] 1 Lloyds Rep 213 the contract
provided that export duties would be based on current rates and that "change of export duties for Buyers'
account". Export duties were abolished after part of the shipment was made and the Court of Appeal held that
the Buyers were entitled to recover from the Sellers a sum equivalent to the export duties which were saved.
Import
warehouse
34
(2) The Seller places the Goods near the ship's anchorage, and where the ship cannot enter a port, has to provide and pay for
lighters which will take the consignment alongside the ship, unless the contract provides for delivery "free on lighter". The
actual loading of the Goods over the ship's rail is the Buyer's obligation and cost.
Incoterms provides the following explanation:
<<Free Alongside Ship>> means that the Seller delivers when the Goods are placed
alongside the vessel at the named port of shipment. This means that the Buyer has to
bear all costs and risks of loss of or damage to the Goods from that moment.
The Buyer also has the obligation of nominating a suitable ship to the Seller under an FAS
contract 38 unless other arrangements have been made.39 The Courts have held that there is no
difference in the legal obligations between an FAS and FOB contract.40
FOB (...named port of shipment)
Meaning: Free On Board
Usage: Sea and inland waterway transport only (see Figure 34).
Export
warehouse
Inland
Carriage
Terminal
gate
Port of
loading
(1)
Seller obtains export
licence (3), completes
customs export
formalities and any
transit licences
Overseas Carriage
Water carriage only
Port of
discharge
Terminal
gate
Inland
Carriage
Import
warehouse
Buyer obtains import
licence and
completes customs
formalities
Seller’s transport cost (2)
Buyers transport cost
Seller’s marine insurance risk
Buyer’s marine insurance risk
Seller must deliver Goods on board
Buyer takes delivery as Goods cross ship’s rail
Figure 38
Notes: (1) The delivery point under FOB is as the Goods cross the ship’s rail in the port of loading (same as
CFR and CIF). This concept of delivery across the ship’s rail is understood by merchants and applied by the
Courts taking into account the Goods and port facilities. The ICC noted that a change in the FOB point would
create confusion, particularly for Goods carried under charterparties. Where the ship's rail serves no useful
purpose such as for roll-on/roll-off and container transport, ICC suggests the FCA term is more appropriate, see:
Thermo Engineers Ltd v. Ferry Masters Limited [1981] 1 Lloyds Rep 200.
(2) All charges incurred up to and including the delivery of the Goods on board ship are to the Seller's account
whilst the Buyer has to pay all subsequent charges such as stowage of the Goods on board ship. The Buyer must
nominate a suitable ship to the Seller under an FOB contract unless other arrangements have been made.39
(3) See A V Pound & Co Ltd v. M W Hardie & Co Inc [1956] AC 588 where the Portuguese Seller was the only
38 For an example of interpretation of an FAS contract, see Metro Meat Limited v. Fares Rural Co Pty Ltd
[1985] 2 Lloyds Rep 14.
39 Anglo-African Shipping Co of New York Inc. v. J Mortner [1962] 1 Lloyds Rep 610. In Gill & Duffus
Landauer Limited v. London Export Corporation GmbH [1982] 2 Lloyds Rep 627 a contract "FAS California"
was in issue and Goff J held that the place of performance was California and the law of California governed the
contract.
40 In MW Hardie & Co Inc v. AV Pound & Co Ltd [1955] 1 QB 499, 512, affirmed by the House of Lords
[1956] AC 588, Lord Goddard CJ considered there was no distinction between an FAS and an FOB contract: ...
that in the present case the contract was FAS and not FOB is in my opinion immaterial. See also MW Hardy &
Co Inc v AV Pound & Co Ltd [1955] 1 Lloyd’s Rep 155; Metro Meats Ltd v Fare Rural Co Pty Ltd [1985] 2
Lloyd’s Rep 13.
35
party under Portuguese law who could obtain the export license. The Court held that the Portuguese Sellers had
to do their best to obtain the license, and there was duty on both parties to co-operate reasonably in obtaining
that licence.
Incoterms provides the following explanation:
<<Free on Board>> means that the Seller delivers when the Goods pass the ship's rail
at the named port of shipment. This means that the Buyer has to bear all costs and risks
of loss of or damage to the Goods from that point. The FOB term requires the Seller to
clear the Goods for export. This term can be used only for sea or inland waterway
transport. If the parties do not intend to deliver the Goods across the ship's rail, the
FCA term should be used.
FOB is one of the more commonly used Incoterms. The Courts have held that there is no
difference in the legal obligations between an FAS and FOB contract.40
Types of FOB Clauses
Many different41 and confusing42 uses of FOB clauses have emerged, but should be avoided.
In the explanatory notes to Incoterms, the ICC notes:
...the word FOB is used by some merchants merely to indicate any point of delivery such as ‘FOB factory’, ‘FOB plant’, ‘FOB Ex Seller’s works’ or other inland points thereby neglecting what the abbreviation means: Free on Board. It remains the case
that such use of ‘FOB’ tends to create confusion and should be avoided.
The use of variants not only causes confusion and uncertainty, but creates difficulties for the
parties in determining the rights and obligations.43
41 The uses and incidents of the FOB contract in general are discussed in Sassoon & Merren, CIF and FOB
Contracts, British Shipping Laws, Volume 5, 3rd edition, 1984. An exporter should be aware that an FOB
clause used in a supply contract, for example, where an exporter buys Goods from a Seller in Sydney to resell
overseas the term FOB Sydney may carry different obligations from an FOB clause used in an export
transaction. In MW Hardie & Co Inc. v. AV Pound & Co Ltd [1955] 1 QB 499, 508, 510 per Singleton LJ who
explained that this difference is material for the decision as to whether an export licence is to be obtained by the
Seller or the Buyer.
42 The confusing use of FOB variants has been the subject of considerable debate in the courts: for example, see
President of India v. Metcalfe Shipping Co [1970] 1 QB 289; David T Boyd & Co Ltd v. Louis Louca [1973] 1
Lloyds Rep 209; The Filipinas 1 [1973] 1 Lloyds Rep 349; Kollerich & Cie SA v. The State Trading
Corporation of India [1980] 2 Lloyds Rep 32; Compagnie D'Renflouenent etc Baroukh v. W Seymour Plant
Sales and Hire Ltd [1981] 2 Lloyds Rep 466, 470; Gill & Duffus SA v. Societe Pour L'Exportation des Sucres
SA [1985] 1 Lloyds Rep 621; Pagnan Spa v. Tradax Ocean Transportation SA [1987] 2 Lloyds Rep 342.
43 An example of difficulties which can arise from the use of FOB variants occurred in Thermo Engineers Ltd v.
Ferry Masters Limited [1981] 1 Lloyds Rep 200 where the issue was whether damage suffered by Goods during
loading on board ship was governed by the CMR or by the Hague Rules. In that case the cargo was a heat
exchanger sold by an English Company to Buyers in Copenhagen. The heat exchanger was carried on a trailer
and driven on board the vessel. The protruding super-structure of the exchanger struck the bulk head of the
lower deck and was damaged. The trailer had already passed the outward ramp of the ship and crossed the line
of the stern. The Court held that the carriage by road had ceased although the exchanger was still on the trailer,
and the trailer and its load had not yet been secured within the ship's hold, and therefore the damage was
governed by the Hague Rules.
36
The usual analysis of FOB divides the type of FOB contract into three broad types,44 which
are determined by the intention of the parties:
1
Strict or Classic FOB Contract where the Buyer has to nominate a suitable ship;45
2
FOB Contract with additional services;46
3
FOB Contract (Buyer contracting with Carrier);47
The Courts have recognised important legal differences between the first three types of FOB
contract. In the example of the first and second types,48 there is a contract between the Seller
and the Carrier, but not with the third type where the carriage contract is between the Buyer
and the Carrier.
44 The first three types of FOB contract are described in Pyrene & Co v Scindia Steam Navigation Co Ltd
[1954] 2 QB 402, 424 by Devlin J:
The FOB Contract has become a flexible instrument. In ... the classic type... for example, in Wemble,
Sons & Co Ltd v Roseburg & Sons [1913] 3 KB 743 the Buyer's duty is to nominate the ship, and the
Seller's to put the Goods on board for account of the Buyer and procure a Bill of Lading in terms usual
in the trade. In such a case the Seller is directly a party to the contract of carriage at least until he takes
out the Bill of Lading in the Buyer's name. Probably the classic type is based on the assumption that the
ship nominated will be willing to load any Goods brought down to the berth or at least those of which she
is notified. Under present conditions, when space often has to be booked well in advance, the contract of
carriage comes into existence at an earlier point in time. Sometimes the Seller is asked to make the
necessary arrangements; and the contract may then provide for his taking the Bill of Lading in his own
name and obtaining payment against the transfer, as in a CIF Contract. Sometimes the Buyer engages
his own forwarding agent at the port of loading to book space and to procure the Bill of Lading; if the
freight has to be paid in advance this method may be most convenient. In such a case the Seller
discharges his duty by putting the Goods on board, getting the mate's receipt and handing it to the
forwarding agent to enable him to obtain the Bill of Lading.
and was approved by the English Court of Appeal in The El Amria & El Minia [1982] 2 Lloyds Rep 28, 32:
In Pyrene & Co v Scindia Steam Navigation Co Mr Justice Devlin instanced three types of FOB
Contract. In the first, or classic type, the Buyer nominates the ship and the Seller puts the Goods on
board for account of the Buyer, procuring a Bill of Lading. The Seller is then a party to the contract of
carriage and if he has taken the Bill of Lading to his order, the only contract of carriage to which the
Buyer can become a party is that contained in the Bill of Lading which is endorsed to him by the Seller.
The second is a variant of the first, in that the Seller arranges for the ship to come on the berth, but the
legal incidents are the same. The third is where the Seller puts the Goods on board, takes a mate's receipt
and gives this to the Buyer or his agent who then takes the Bill of Lading. In this latter type the Buyer is a
party to the contract of carriage ab initio.
45 The Handel MY. J. Smits Import-Export v. English Exporters (London) Ltd [1957] 1 Lloyds Rep 517, 519;
Scandinavian Trading Co A/B v. Zodiac Petroleum SA & William Hudson Ltd The Al Hofuf [1981] 1 Lloyds
Rep 81, where an FOB clause was used in the oil trade, and although the Judge referred to the clause as being of
the classic type, Schmittoff (p20, fn46) considers the clause as more likely an FOB (Buyer contracting with
Carrier) clause; Lusograin Comercio Internacionale de Sereas Limiteda v. Bunge HE [1986] 2 Lloyds Rep 654,
658; Spiliada Maritime Corporation v. Cansulex Limited [1987] AC 460.
46 Under this arrangement the shipping and insurance arrangements are made by the Seller for the account of the
Buyer who is under no obligation to nominate a suitable ship as this is done by the Seller.
47 In this case the Buyer enters directly into a contract with the Carrier, or indirectly by using a freight forwarder
as agent. In this case the bill of lading goes directly to the Buyer through the freight forwarder and is never
delivered to the Seller.
48 The second type has been described as a variant of the first type by Donaldson LJ in El Amina & El Minia
[1982] 2 Lloyds Rep 28, 32.
37
To the above three types of FOB terms can be added:
4
American practice: where FOB is used as a general delivery term and when used in the
following form: FOB (place of destination); means free delivery at that place;49
and to distinguish an FOB and non-FOB contract:
5
The parties are using a general (non-Incoterm) form of contract, but intend to
incorporate some element(s) of an FOB Incoterm, but do so without making their
intention clear.
But even this approach is problematic as the Courts have dealt with this problem by
adopting a presumption that the parties adopt the established meaning of FOB, without
modifying the normal consequences,50 and then proceed to ascertain the intention of the
parties (who are by then in dispute and unlikely to agree about much) to determine the
dispute;
6
7
Incorrect use of Incoterms FOB. There are two common examples in this category:
6.1
Container transport:51 use of FOB as a general delivery term, such as FOB (name
of container freight station). ICC notes this is confusing, should be avoided and
the better term is Incoterms FCA. This is best characterised as simply an incorrect
use of an Incoterm;
6.2
Air transport:51 use of FOB (erroneously but commonly) in the following form:
FOB (name of airport).
Invention of a term which poses as an Incoterm, but is not: for example, FOA; which is
used as a variant of FOB (name of airport).51
Even where the FOB contract with additional services arises and the Seller arranges the
freight and insurance, these costs are ultimately borne by the Buyer.52
FOB contracts and risk
Under an FOB contract the risk of damage to the consignment passes from the Seller to the
Buyer when the Goods are shipped, ie. when they are delivered over the ship's rail.53
49 Northland Airliners Ltd v. Dennis Ferranti Metres Ltd (1970) 114 SJ 845 where the term was used by a
Canadian Company. The American practice represents a "trap for young players" and the problem can be
overcome by use of the American term "FOB (name of vessel)", Uniform Commercial Code (US) s2-319(1).
50 Frebold an Sturznickel (Panda OHG) v. Circle Products Ltd [1970] 1 Lloyds Rep 499, 504. The Seller gave
instructions to the shipping agents not to hand over the Goods until payment had been received, although the
Seller nevertheless completes delivery of the Goods when they are placed on board the ship in the port of
dispatch.
51 FOB is strictly a term used where the Goods are carried by water, see Figure 34.
52 N V Handel My J. Smits Import-Export v. English Exporters Limited [1957] 1 Lloyd's Rep 517; The Mahia
(2) [1960] 1 Lloyds Rep 191, 198 (Supreme Court of Victoria).
53 Carlos Federspiel & Co SA v. Charles Twigg & Co Ltd [1957] 1 Lloyds Rep 240.
38
However, difficulties arise under domestic sale of Goods legislation unless the Goods are
ascertained Goods. An example of unascertained Goods is a portion of a shipment of liquid
vegetable oil going to several Buyers. The entire consignment may be 1,000 tonnes, but there
may be a number of Buyers who are entitled to different quantities of the consignment. Just
which part of the liquid belongs to which Buyer cannot be resolved until the contracted
quantity is pumped out at the port of delivery.
FOB contracts and passing of property
In an FOB contract involving unascertained Goods such as those consisting of portions of a
bulk consignment sold to several Buyers, the property does not pass until various quantities
are appropriated to the individual Buyers, even though the parties may have agreed in the
contract that property passes as the cargo is loaded on board the carrying vessel.54
A question about the intention of the parties for passing of property may arise as to whether
title to the Goods passes on shipment or on transfer of the Bill of Lading, as the Bill of lading
is a document of title.
Usually, the intention is that title to the Goods does not pass until the Bill of lading is
delivered to the Buyer or his agent, for example, the advising bank under a Letter of Credit.
However, the facts of a particular case may disclose a different intention.55
FOB contracts and loading
Where loss or damage occurs during loading a closer legal analysis is required to determine
the point at which risk and property passes to an FOB Buyer as two legal relationships are
affected:
1
Contract of Sale (see both the Sale of Goods Act 1923 (NSW) and the Sale of Goods
(Vienna Convention) Act 1986 (NSW) as both may apply, unless CISG has been
specifically excluded from applying to the contract;
2
Contract of Carriage by Sea, see Australian Cogsa 1991.
In the contract of carriage by sea, the loading operation is an indivisible whole and the
Carrier's liability for negligence, in fact, extended to all stages of the operation irrespective of
whether they occurred before or after the crossing of the ship's rail. Stowage is part of the
loading operation, and if the Goods are taken from their position at the dock directly into the
ship's holds or tanks, it does not matter on which side of the ship's rail the Goods are lost or
54 Obestain Inc v. National Mineral Development Corporation Ltd. The Sanix Axe [1987] 1 Lloyds Rep 465,
467; Vitol SA v. Esso Australia Ltd (Unreported: The Times, 1 February 1988).
55 Mitsui & Co Ltd v Flota Nercante Grancolonbiana SA. The Ciudad de Pasto & Cuidad de Neiva [1988] 2
Lloyds Rep 208 where the Court of Appeal held that according to the intention of the parties, the passing of
property was postponed until the balance of the purchase price was paid, the Bills of Lading were deliverable to
the order of the Sellers, and the Court considered that the presumption of s19 of the Sale of Goods Act 1979
(UK) was not displaced: The Kapetin Markos (2) [1987] 2 Lloyds Rep 321.
39
56
damaged if the accident occurs during loading.
Nomination of a suitable ship
Where the contract does not specify the name of the ship or the Carrier to whom the Goods
should be delivered it is the duty of the Buyer to inform the Seller of the name of the suitable
ship, although sometimes the contract was simply referred to as delivering the Goods to an
effective ship. 57
When the Buyer fails to nominate a ship within the time stipulated in the contract, or a
reasonable time, the Seller may treat the contract as repudiated by the Buyer, terminate it and
sell the Goods to another Buyer for a higher price (in a rising market) or sell the Goods at a
loss (where the market is falling) and sue the Buyer for damages.58
However, not any ship will do, and a suitable ship must be nominated 59 such that the
nomination is not a fictitious nomination, and the ship must be able, ready and willing to
carry the Goods from the port of loading to the port of discharge, and it has all suitable
equipment such as refrigeration.60
The Seller is entitled to claim damages for the Buyer's failure or delay in nominating a
suitable ship, but it cannot claim the purchase price as it still has the Goods. This applies even
when the Buyer fails to name the suitable ship due to a chain of unfortunate circumstances
which may be beyond the Buyer's control.61
Other examples are where a Buyer is required to give the Seller notice within a stated time of
the probable readiness of the nominated vessel to load so they can get the Goods ready for
56 Pyrene & Co v Scindia Steam Navigation Co [1954] 2 QB 402, ,419 Devlin J observed: Only the most
enthusiastic lawyer could watch with satisfaction the spectacle of liabilities shifting uneasily as the cargo sways
at the end of the derrick across a notional perpendicular projecting from the ship's rail.
57 The duty was dealt with in J & J Cunningham Ltd v. Robert A Monroe & Co Ltd (1922) 28 COM CAS 42,
per Lord Hewart CJ at 45: It was the duty of the purchasers to provide a vessel at the appointed place at such a
time as would enable the vendors to bring the Goods alongside the ship and put them over the ship's rail so as
to enable the purchasers to receive them within the appointed time... the usual practice under such a contract is
for the Buyer to nominate a vessel and to send notice of her arrival to the vendor, in order that the vendor may
be in a position to fulfil his part of the contract. Other cases in which this matter has been considered include, H
O Brandt & Co v. H M Morris & Co Ltd [1917] 2 KB 784, 798; Brener Handelsgesellschaft GmbH v. J H
Rayner & Co Ltd [1978] 2 Lloyds Rep 73, 85-86; Miserocchi & C. S. p.A v. Agricultores Federados Argentinos
SCL [1982] 1 Lloyds Rep 202, 207; Gebruder Metelmann GmbH & Co KG v. MBR (London) Ltd [1984] 1
Lloyds Rep 614, Bunge AG v. Sesostrad SA. The Alkeos [1984] 1 Lloyds Rep 687, 688.
58 : Olearia Tirrena SpA v MV Algerneene Oliehandel The Osterbeck [1972] 2 Lloyds Rep 341. The question
of who carries the onus of proving that the Buyer was or was not able to provide a suitable ship in time was dealt
with in Petraco (Bermuda) Ltd v. Petroned International SA [1988] 2 Lloyds Rep 357.
59 Texico Ltd v The Eurogulf Shipping Co Ltd [1987] 2 Lloyds Rep 541, 545.
60 Compagnie D'Renflouenent de Recouperation et de Travaux Sous-Marins VS Baroukh etc CIE v. W
Seymour Plant Sales & Hire Ltd [1981] 2 Lloyds Rep 466. In that case the Buyer nominated a vessel to carry the
Goods and the Sellers accepted the nomination: This raises only one issue of principle, which is short but not
easy. As I have already stated Vicmar was not a suitable ship for her task and the tender of this ship was prima
facie a breach of contract. Yet (the Sellers) expressly accepted her at the time when she was fixed, subject to
shipper's approval.
61 Colley v. Overseas Exporters [1921] 3 KB 302.
40
loading; Bunge Corporation v. Tradax Export SA [1980] 1 Lloyds Rep 294 where the notice
was a condition and not an innominate term because in mercantile contracts stipulations as to
time are usually of the essence of the contract; Gill & Duffus SA v. Societe Pour
L'Exportation des Sucres SA [1985] 1 Lloyds Rep 621 where in an FOB Contract with
additional services the duty to nominate the load port within a specified time fell on the Seller
and the obligation to do so was held to be in breach of a condition relieving the Buyer from
the obligation to perform; Lucograin Comercio Internacionale de Sereas Limiteda v. Bunge
AG [1986] 2 Lloyds Rep 654 where the Court also held that in the case of non-accepted
repudiation the Seller's damages have to be calculated at the date of failure to ship, and not on
the date of failure to give notice.
In the oil trade there is a custom obliging the Buyer to give the Seller timely loading notice,
Scandinavian Trading Co A/B v. The Zodiac Petroleum SA and William Hudson Ltd. The Al
Hofuf [1981] 1 Lloyds Rep 81, 84.
FOB contract and a substitute ship
Sometimes a nominated ship is withdrawn and the Buyer is obliged to name a substitute ship
as soon as possible subject to the qualification that if the contract of sale provides that the
Buyer shall nominate a ship within a certain time, the Buyer can only nominate a substitute
ship if within the contract time, Agricultores Federados Argentinos Sociedad Co-operativa
Ltda v. Ampro SA Comerciale Industrielle et Financiere [1965] 2 Lloyds Rep 657, 767.
C Terms – Main carriage paid group
C Terms – Departure contracts
C terms deal with two essential points, being the point to which the Seller has to arrange and
bear the costs of a contract of carriage and the other is the allocation of risk. The respective
obligations of Seller and Buyer are defined and it is important that the sale contract does not
vary those obligations inconsistently with Incoterms 2000, especially CIF and CIP terms.
If the contract of carriage arranged by the Seller also involves payment of duties, taxes and
other charges, those costs are paid by the Seller if that is a term of the sales contract, see the
A6 clause in all the C terms.
C terms require the Seller to contract for carriage on usual terms at his own expense, and it is
necessary to indicate to where the Seller pays transport costs. Interestingly this raises an issue
dor Australian imports and exports due to the operation of Part X - Liner Conference
provisions of the Trade Practices Act 1974 (Cth) as there is a negotiated combined transport
bill of lading which applies to the Australian trade, and it is arguable that use of a bill of
lading on different terms may not be the ‘usual’ terms if there is some disadvantage therein.
Where transhipment arises, and this is becoming more common for example where shipment
41
occurs via a feeder line through a hub port such as Singapore, and the Seller will pay all
associated transhipment costs, including costs incurred when the Goods are transhipped from
one means of conveyance to the other. However, Carrier’s offer combined transport bills of
lading which cover multi-modal transport and transhipment within one freight rate for the
entire journey so this question is unlikely to arise in that context. However, there are two
other instances where additional costs might arise, for example, if the ship is involved in an
incident leading to a declaration of general average requiring a contribution from each cargo
owner, or where the Carrier exercises its rights under the usual liberty clause contained in the
bill of lading which allows the Carrier to vary the route (eg to avoid ice, congestion, labour
disturbances, government orders, war or warlike operations and so on) then any additional
cost will under Incoterms 2000 be for the account of the Buyer as the Seller's obligation is
limited to arranging the usual contract of carriage.
The essential nature of C terms involves the common use of documentary credits as the
preferred mode of payment (see UCP500). Where the parties agree in the sale contract that
the Seller will be paid by presenting the agreed shipping documents to a bank under a
documentary credit, there is no reason for the Seller to bear further risks and costs after
payment is made. The Seller pays the cost of the contract of carriage irrespective of whether
freight is pre-paid upon shipment or is payable at destination (freight collect). But, additional
costs subsequent to shipment and dispatch are at the Buyer’s cost.
C terms are not arrival contracts, in which the Seller would bear all risks and costs until the
Goods have actually arrived at the agreed point. However, C terms are of the same nature as
the F terms in that the Seller fulfils the contract in the country of shipment or dispatch, and
the contracts of sale under C terms (like contracts under F terms) fall within the category of
shipment contracts.
The parties may also wish to deal with costs of discharge, including additional expenses such
as Terminal Handling Charges (THC’s) which have emerged as a significant cost since the
early 1990's. THC’s and document charges may or may not be included in the freight charges
when the Goods are carried by conference Carriers or independent (non-conference) Carriers,
so that this question is not necessarily clarified even where the contract of sale stays that the
Goods are to be carried under liner terms.
Parties sometimes add non Incoterms 2000 words or expressions which they believe clarify
their obligations.
Almost without exception such variations have unforseen consequences or create
interpretation problems, eg in the event of an incident occurring during carriage. For
example, a Seller under C terms should not undertake any obligation concerning the arrival of
the Goods at destination, as the risk of any delay during the carriage is borne by the Buyer.
Further, where Goods are bought while they are at sea the word ‘afloat’ is sometimes added
after the Incoterm. But this alters the risk of loss of or damage to the Goods which would by
then under CFR or CIF terms have passed from the Seller to the Buyer, leading to
interpretation problems. It is usually impossible to ascertain the condition of the Goods while
they are being carried, and a clean bill of lading is only prima facie evidence of the condition
of the Goods.
42
CISG Art 68 provides:
...if the circumstances so indicate, the risk is assumed by the Buyer from the time the
Goods were handed over to the Carrier who issued the documents embodying the
contract of carriage.
An exception to this rule arises when ...the Seller knew or ought to have known that the
Goods had been lost or damaged and did not disclose this to the Buyer. This leads to
complex legal issues and interpretation of the addition of the word "afloat" depends upon the
law applicable to the contract of sale, the parties should get professional advice about the
applicable law.
Parties continue to use C&F, C and F, or C+F which is no longer an Incoterm, and the current
correct use is CFR which the only world-wide accepted standard abbreviation for the term
‘Cost and Freight (... named port of destination)’.
The previous obligation of the Seller under CFR and CIF (see 1990 terms in A8) to provide a
copy of the charterparty together with other transport documents has been deleted in
Incoterms 2000, as this apparently created problems particularly in connection with
documentary credit transactions.
The A8 clauses of Incoterms 2000 requires the Seller to provide the Buyer with which is
satisfied by a ‘clean’ and ‘shipped on board’ bill of lading or a sea waybill. ‘Clean’ means no
notation declaring a defective condition of the Goods or packaging, as any notation will not
be accepted by banks in documentary credit transactions, and more importantly will defeat a
claim by the Buyer against the Carrier for loss or damage to the Goods.
CIF and CIP require the Seller to procure insurance for the benefit of the Buyer. Under the
Institute Cargo Clauses drafted by the Institute of London Underwriters, insurance is available
in "minimum cover" under Clause C, "medium cover" under Clause B and "most extended
cover" under Clause A. ICC(A) is commonly used in the Australian trade, but ICC(C) has
traditionally been chosen with the possibility for the Buyer to require the Seller to take out
additional insurance. Minimum cover is however unsuitable for sale of manufactured Goods
where the risk of theft, pilferage or improper handling or custody of the Goods would require
more than the cover available under Clause C. A Buyer should be aware of which ICC
clause is used, and if necessary, should ‘upgrade’ the level of cover, or instruct the Seller to
arrange the appropriate level of cover.
CFR (...named port of destination)
Meaning: Cost and Freight
Usage: Sea and inland waterway transport only. Where the ship's rail serves no useful purpose
such as for roll-on/roll-off and container transport the CPT term is more appropriate (See
Figure 34).
43
Export
warehouse
Inland
Carriage
Terminal
gate
Port of
loading
Overseas Carriage
Water carriage only
Seller obtains export
licence and completes
customs export
formalities
Seller’s transport cost to port of discharge
Seller’s marine insurance risk to
when Goods cross ship’s rail
Seller must deliver Goods on board
Figure 39
Port of
discharge
Terminal
gate
Inland
Carriage
Import
warehouse
Buyer obtains transit and import
licences and completes customs
import formalities
Buyers transport cost
Buyer’s marine insurance risk from time Goods cross ship’s
rail
Buyer takes delivery as Goods cross ship’s rail
Incoterms provides the following explanation:
<<Cost and Freight>> means that the Seller delivers when the Goods pass the ship's
rail in the port of shipment.
The Seller must pay the costs and freight necessary to bring the Goods to the named
port of destination BUT the risk of loss of or damage to the Goods, as well as any
additional costs due to events occurring after the time of delivery, are transferred from
the Seller to the Buyer.
The CFR term requires the Seller to clear the Goods for export.
CFR should be used rather than the commonly but erroneously used C&F which does not
exist in Incoterms.
A Buyer under a CIF or CFR contract can only reject shipping documents in three situations:62
1
Fraud;
2
where, by their express terms, they do not conform to the requirements of the contract in
a respect which is more than minimal;
3
where, even if they appear to conform to the requirements of the contract, they are not
genuine in the sense that they contain false information about an aspect of the
performance of the contract which would normally be disclosed in the documents and
which is of more than minimal importance, eg the date of shipment:
62 The ‘Intan 6 V.360A SN’ [2003] 2 Lloyd’s Rep 700 per Havelock-Allan J at [25]:
The test is whether the documents contain a statement or statements which, without further investigation,
demonstrate that the contract has not been honoured in one or more respects of more than minimal importance.
This must be apparent from the terms of the documents themselves, without inquiry into the physical performance of
the contract. Benjamins Sale of Goods, 5th edn, pars 19-074 to 19-075.
44
CIF (...named port of destination)
Meaning: Cost, Insurance and Freight
Usage: Sea and inland waterway transport only. Where the ship's rail serves no useful purpose
such as for roll-on/roll-off and container transport the CIP term is more appropriate (See
Figure 34).
Export
warehouse
Inland
Carriage
Terminal
gate
Port of
loading
Overseas Carriage
Water carriage only
Seller obtains export
licence, completes
customs export
formalities
Seller’s transport cost
Port of
discharge
Terminal
gate
Inland
Carriage
Import
warehouse
Buyer obtains
transit and import
licences and
completes customs
import formalities
Buyers transport cost
Seller must provide marine insurance cover
Seller must deliver Goods on board
Buyer takes delivery and risk as Goods cross ship’s rail
Figure 40
Incoterms provides the following explanation:
<<Cost, Insurance and Freight>> means that the Seller delivers when the Goods pass the
ship's rail in the port of shipment.
The Seller must pay the costs and freight necessary to bring the Goods to the named port of
destination BUT the risk of loss of or damage to the Goods, as well as any additional costs
due to events occurring after the time of delivery, are transferred from the Seller to the
Buyer. However, in CIF the Seller also has to procure: marine insurance against the
Buyer's risk of loss of or damage to the Goods during the carriage.
Consequently, the Seller contracts for insurance and pays the insurance premium. The
Buyer should note that under the CIF term the Seller is required to obtain insurance only
on minimum cover. Should the Buyer wish to have the protection of greater cover, he
would either need to agree as much expressly with the Seller or to make his own extra
insurance arrangements.
The CIF term requires the Seller to clear the Goods for export.
This term can be used only for sea and inland waterway transport. If the parties do not
intend to deliver the Goods across the ship's rail, the CIP term should be used.
CIF is commonly used63 and has well recognised characteristics.64
63 T D Bailey Son & Co v Ross T Smyth & Co Ltd (1940) 56 TLR 825 per Lord Wright 828:
This is a type of contract which is more widely and more frequently in use than any other contract used for
45
In a CIF contract the contract is not a sale of Goods but a sale of the shipping documents relating
to the Goods65 of which the following are typically used:

Clean ‘shipped on board’ Bill of Lading

Marine insurance policy or certificate

Commercial Invoice
The delivery of the Bill of lading is of great importance when the Goods are lost in transit but the
shipping documents have been delivered, see Figure 40.
Buyers right to reject the documents and the goods are separate
The Buyers rejection of the documents is distinguished from the right to reject the Goods.66
A Buyer under a CIF contract can only reject shipping documents in the three situations also
applicable to CFR contracts.62
1
Fraud;
2
where, by their express terms, they do not conform to the requirements of the contract in a
respect which is more than minimal. The right to reject documents is lost when the Buyer
or bank which advises a Letter of Credit for payment of the price takes up the documents
even where they are inaccurate, and pays against them without objection. The documents
purposes of seaborn commerce. An enormous number of transactions, in value amounting to untold sums, is
carried out every year under CIF Contracts.
64 Conptoir D'Achat v. Luis D'Ridder [1949] AC 293, 309 per Lord Porter at 309:
The obligations imposed on the Seller under a CIF Contract are well known, and in the ordinary case, include the
tender of a Bill of Lading covering the Goods contracted to be sold and no others, coupled with an insurance policy
in the normal form and accompanied by an invoice which shows the price and, as in this case, usually contains a
deduction of the freight which the Buyer pays before delivery at the port of discharge. Against tender of these
documents the purchaser must pay the price. In such a case the property may pass either on shipment or on tender,
the risk generally passes on shipment or as from shipment, but possession does not pass until the documents which
represent the Goods are handed over in exchange for the price. In the result, the Buyer, after receipt of the
documents, can claim against the ship for breach of the contract of carriage and against the underwriters for any
loss covered by the policy. A strict form of CIF Contract may, however, be modified. A provision that a delivery
order may be substituted for a Bill of lading or a Certificate of Insurance for a policy would not, I think, make the
contract be concluded on something other than CIF terms.
P J Van der Zrjden Wildhandel MV v Tucker & Cross Ltd [1975] 2 Lloyds Rep 240, 242 Donaldson J at 242:The
contract called for Chinese rabbits, CIF. The obligation was, therefore, to tender documents, not to ship the rabbits
themselves. If there were any Chinese rabbits afloat, they could have bought them.
65 Bowden Bros & Co Ltd v Robert Little (1907) 4 CLR 1364 construction of CIF; Arnold Karberg & Co v. Blythe,
Green Joudane & Co [1915] 2 KB 379, 388, which made it clear that the obligation was to tender documents such as
the bill of lading(a document of title) against payment of the contract price.
66 Kwei Tek Chao v. British Traders & Shippers Limited [1954] 2 QB 459, 481; Proctor & Gamble Philippine
Manufacturing Corp v. Kurt A Becher Gmbh & Co KG [1988] 2 Lloyds Rep 21, 26:... the right to reject the
documents arises when the documents are tendered, and the right to reject the Goods arises when they are landed
and when after examination they are not found to be in conformity with the contract.
46
are inaccurate if they disclose a defect to a person who could have read them, but where
the Buyer or agent could not realise that the documents were inaccurate, the Buyer does not
lose the right to claim damages for a breach of a condition relating to the documents.
67
3
where, even if they appear to conform to the requirements of the contract, they are not
genuine in the sense that they contain false information about an aspect of the performance
of the contract which would normally be disclosed in the documents and which is of more
than minimal importance, eg the date of shipment.
The Seller is still entitled to tender shipping documents to the Buyer and to claim the purchase
price even though the Goods may be lost or damaged during carriage, 68 even when the Seller
knows that the Goods are lost.69
The CIF clause does not prevent the Buyer from rejecting Goods which are found upon
inspection not in accordance with the terms of the contract,70 so the Buyer may rescind the
contract after their arrival,71 and recover the purchase price, though the problem becomes how to
recover the purchase price.
Where the documents or the Goods are rejected, the rejection must be clear and unequivocal,72
and must indicate that the Buyer wants to have nothing to do with the documents or Goods, and
must not be ambiguous and the Buyer must not engage in contradictory action such as resale.
CPT (...named place of destination)
Meaning: Carriage Paid To
Usage: All modes of transport, including combined transport (See Figure 34).
67 Panchaud Freres SA v. Establissements General Grain Co [1970] 1 Lloyds Rep 53 where the Bill of lading was
falsely dated but the shipping documents were taken up and paid for by the Buyers. Lord Denning MR stated at 58:
By taking up the documents and paying for them, they are precluded afterwards from complaining of the late
shipment or of a defect in the Bill of Lading.
68 : Golodetz & Co Inc v Czarnikow - Rionda Co Inc. Galatia [1979] 2 Lloyds Rep 452, 455 affirmed by Court of
Appeal in [1980] 1 Lloyds Rep 453 ... the fact that the shipping Goods have been lost after shipment or that a
liability to contribute in general average or sale which has arisen is no reason for refusing to take up and pay for
the documents.
69 State Trading Corp of India Ltd v Golodetz Ltd [1988] 2 Lloyds Rep 182, 183, as the Buyer's remedy is an action
against the Carrier under the marine insurance policy.
70 The Buyer's right to inspect and examine the Goods arises under the Sale of Goods Act are similar to that of a
Buyer under an FOB contract.
71 Bergerco USA v. Vegoil Ltd [1984] 1 Lloyds Rep 440. 446 per Hobhouse J:
The exercise of the right to reject the Goods is one which the Buyer is entitled to postpone until the Goods
arrive. He can make up his mind then to exercise the right as it suits him best. He may lose his right meanwhile
if he deals with the Goods or documents so as to disable himself from restoring title to the Sellers or by actual
labour...
72 Vargas Pena Apezteguia Y Ciasaic v. Peter Cremer Gmbh [1987] 1 Lloyds Rep 394, 398,
47
Export
warehouse
Terminal
Inland
gate/Airport
Carriage
boundary
Any mode of transport
Point of
loading
International Carriage
Seller obtains export
licence and completes
customs export
formalities
Seller’s transport cost to named place
Seller’s marine insurance risk to named place
Seller must deliver Goods to named place
Figure 41
Point of
discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Buyer obtains transit
and import licences
and completes customs
import formalities
Buyers transport cost from named place
Buyer’s marine insurance risk from named place
Buyer takes delivery of Goods at named place
Incoterms provides the following explanation:
<<Carriage paid to..>>means that the Seller delivers the Goods to the Carrier nominated
by him but the Seller must in addition pay the cost of carriage necessary to bring the Goods
to the named destination. This means that the Buyer bears all risks and any other costs
occurring after the Goods have been so delivered.
"Carrier" means any person who, in a contract of carriage, undertakes to perform or to
procure the performance o I transport, by rail, road, air, sea, inland waterway or by a
combination of such modes.
If subsequent Carriers are used for the carriage to the agreed destination, the risk passes
when the Goods have been delivered to the first Carrier.
The CPT term requires the Seller to clear the Goods for export.
CIP (...named place of destination)
Meaning: Carriage and Insurance Paid To
Usage: All modes of transport, including combined transport (See Figure 34).
Export
warehouse
Terminal
Inland
gate/Airport
Carriage
boundary
Any mode of transport
Point of
loading
International Carriage
Seller obtains export
licence and completes
customs export
formalities and any
transit licences
Seller’s transport cost to named place
Seller to provide marine insurance cover (1)
Seller must deliver Goods to named place
Figure 42
Point of
discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Buyer obtains transit
and import licences and
completes customs
import formalities
Buyers transport cost from named place
Buyer takes delivery of Goods at named place
Notes: (1) This term means that the Seller has the same obligations as under a CPT contract but with the additional obligation on
the Seller to buy marine cargo insurance against the Buyer's risk of loss or damage to the Goods during carriage. The Seller pays
the premium and obtains the insurance policy or certificate for coverage such as ICC (A) clauses.
48
Incoterms provides the following explanation:
<<Carriage and insurance paid to>> means that the Seller delivers the Goods to the
Carrier nominated by him but the Seller must in addition pay the cost of carriage necessary
to bring the Goods to the named destination. This means that the Buyer bears all risks and
any additional costs occurring after the Goods have been so delivered. However, in CIP
the Seller also has to procure insurance against the Buyer's risk of loss of or damage to the
Goods during the carriage.
Consequently, the Seller contracts for insurance and pays the insurance premium.
The Buyer should note that under the CIP term the Seller is required to obtain insurance
only on minimum cover . Should the Buyer wish to have the protection of greater cover, he
would either need to agree as much expressly with the Seller or to make his own extra
insurance arrangements. "Carrier" means; any person who, in a contract of carriage,
undertakes to perform or to procure the performance of transport, by rail, road, air, sea,
inland waterway or by a combination of such modes.
If subsequent Carriers are used for the carriage to the agreed destination, the risk passes
when the Goods have been delivered to the first Carrier.
The CIP term requires the Seller to clear the Goods for export.
49
D Terms – Arrival group
These differ from C terms, as the Seller is responsible for the arrival of the Goods at the
agreed place or point of destination at the border or within the country of import, and the
Seller bears the risk and cost in getting the Goods to that point.
Under D terms (except DDP) the Seller does not have to deliver the Goods cleared for import
in the country of destination.
Traditionally, the Seller had the obligation to clear the Goods for import under DEQ, as the
Goods had to be landed on the quay and were brought into the country of import. But owing
to changes in customs clearance procedures in most countries, it is now more appropriate that
the Buyer undertakes customs clearance and pays the duties and other charges. DEQ has been
changed to accommodate this.
International land transport (road or rail) does not occur in the Australian trade but commonly
arise in other trades, eg European trade involving railway (‘franco border’, ‘franco-frontier’
etc). However, such terms do not normally intended that the Seller will assume the risk of
loss of or damage to Goods during the transport up to the border and it is preferable to use
CPT indicating the border. If, on the other hand, the parties intend that the Seller should bear
the risk during the transport, DAF indicating the border is appropriate.
The DDU term is not suitable where difficulties might be expected in clearing the Goods for
import, and it is risky for the Seller to undertake an obligation to deliver the Goods beyond
the customs clearance point, although under DDU B5 and B6, the Buyer has to bear the
additional risks and costs which might follow from his failure to fulfil his obligations to clear
the Goods for import.
50
DAF (...named place)
Meaning: Delivered at Frontier
Usage: All modes of transport, but principally for inland carriage by rail or road (See Figure
34).
Export
warehouse
Terminal
Inland
gate/Airport
Point of
Point of
Carriage
boundary
loading
Frontier
discharge
Any mode of transport, usually rail, road and inland water crossing a land frontier
Seller obtains export
licence and completes
customs export
formalities
Seller’s transport cost to named place at frontier
Seller’s marine insurance risk to
named place at frontier (no
obligation to insure)
Seller must deliver Goods to named place at frontier
on carrying transport (not unloaded)
Figure 43
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Buyer obtains transit
and import licences
and completes customs
import formalities
Buyers transport cost from named place at frontier
Buyer’s marine insurance risk from named place at frontier
Buyer takes delivery of Goods at named place at frontier and on carrying
transport
Incoterms provides the following explanation:
<<Delivered at Frontier>>means that the Seller delivers when the Goods are placed at
the disposal of the Buyer on the arriving means of transport not unloaded, cleared for
export, but not cleared for import at the named point and place at the frontier, but before
the customs border of the adjoining country. The term "frontier" may be used for any
frontier including that of the country of export. Therefore, it is of vital importance that the
frontier in question be defined precisely by always naming the point and place in the term.
However, if the parties wish the Seller to be responsible for the unloading of the Goods
from the arriving means of transport and to bear the risks and costs of unloading, this
should be made clear by adding explicit wording to this effect in the contract of sale.
This term may be used irrespective of the mode of transport when Goods are to be
delivered at a land frontier. When delivery is to take place in the port of destination, on
board a vessel or on the quay (wharf), the DES or DE-Q terms should be used.
This term is frequently used for inland carriage by rail or road where there are inland frontiers
such as in continental Europe, it is unlikely to be used by Australian merchants for exports from
Australia, though it might be encountered where an Australian importer is to take delivery at a
foreign frontier.
51
DES (...named port of destination)
Meaning: Delivered Ex Ship
Usage: Sea and inland waterway transport only (See Figure 34).
Export
warehouse
Inland
Carriage
Terminal
gate
Port of
loading
(1)
Overseas Carriage
Water carriage only
Seller obtains export
licence and completes
customs export
formalities
Seller’s transport cost to named port of destination
Seller’s marine insurance risk (no obligation to insure)
Seller must place Goods at disposal on board ship at port of destination
Port of
discharge
Terminal
gate
Inland
Carriage
Import
warehouse
Buyer obtains transit
and import licences
and completes
customs import
formalities
Buyers transport cost from
port of delivery
Buyer’s marine insurance risk (no obligation to
insure)
Buyer takes delivery of Goods on board ship at
port of destination
Figure 44
Incoterms provides the following explanation:
<<Ex Ship>> means that the Seller delivers when the Goods are placed at the disposal of
the Buyer on board. the ship not cleared for import at the named port of destination. The
Seller has to bear all the costs and risks involved in bringing the Goods to the named port
of destination before discharging. If the parties wish the Seller to bear the costs and risks
of discharging the Goods, then the DEQ term should be used.
DEQ (...named port of destination)
Meaning: Delivered Ex Quay (Duty Paid)
Usage: Sea and inland waterway transport only (See Figure 34).
Export
warehouse
Inland
Carriage
Terminal
gate
Port of
loading
Seller obtains export
licence and completes
customs export
formalities
Overseas Carriage
Water carriage only
Port of
discharge
Terminal
gate
Inland
Carriage
Import
warehouse
Buyer obtains
transit and import
licence and
completes customs
import formalities
Seller’s transport cost to named quay/wharf at port of destination
Buyers transport cost from wharf
Seller’s marine insurance risk (no obligation to insure)
Buyer’s marine insurance risk (no
obligation to insure)
Seller must place Goods at disposal of Buyer on the quay/wharf at port of destination Buyer takes delivery on quay/wharf
Figure 45
52
Incoterms provides the following explanation:
<<Delivered Ex Quay (duty paid)>> means that the Seller delivers when the Goods are
placed at the disposal of the Buyer not cleared for import on the quay (wharf) at the named
port of destination. The Seller has to bear costs and risks involved in bringing the Goods to
the named port of destination and discharging the Goods on the quay (wharf). The DEQ
term requires the Buyer to clear the Goods for import and to pay for all formalities, duties,
taxes and other charges upon import.
THIS IS A REVERSAL FROM PREVIOUS INCOTERMS VERSIONS WHICH REQUIRED
THE SELLER TO ARRANGE FOR IMPORT CLEARANCE.
If the parties wish to include in the Seller's obligations all or part of the costs payable upon
import of the Goods, this should be made clear by adding explicit wording to this effect in
the contract of sale.
This term can be used only when the Goods are to be delivered by sea or inland waterway
or multimodal transport on discharging from a vessel onto the quay (wharf) in the port of
destination. However if the parties wish to include in the Seller's obligations the risks and
costs of the handling of the Goods from the quay to another place (warehouse, terminal,
transport station, etc.) in or outside the port, the DDU or DDP terms should be used.
DDU (...named place of destination)
Meaning: Delivered Duty Unpaid
Usage: All modes of transport (See Figure 34).
Export
warehouse
Terminal
Inland
gate/Airport
Carriage
boundary
Any mode of transport
Point of
loading
Named place for delivery
Seller obtains export
licence and completes
customs export
formalities, and
obtains any transit
licences
Seller’s transport cost to named place of destination
Seller’s marine insurance risk to place of delivery
(no obligation)
Seller must place Goods at Buyer’s disposal on carrying
transport not unloaded
Figure 46
Point of
discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Buyer obtains import
licence and completes
customs import
formalities
Buyers transport cost from named place
Buyer’s marine insurance risk from delivery (no
obligation)
Buyer takes delivery of Goods at named place
Incoterms provides the following explanation:
<<Delivered duty unpaid>> means that the Seller delivers the Goods to the Buyer, not
cleared for import, and not unloaded from any arriving means of transport at the named
place of destination. The Seller has to bear the costs and risks involved in bringing the
53
Goods thereto, other than, where applicable, any "duty" (which term includes the
responsibility for and the risks of the carrying out of customs formalities, and the payment
of formalities, customs duties, taxes and other charges) for import in the country of
destination. Such "duty" has to be borne by the Buyer as well as any costs and risks caused
by his failure to clear the Goods for import in time.
However, if the parties wish the Seller to carry out customs formalities and bear the costs
and risks resulting therefrom as well as some of the costs payable upon import of the
Goods, this should be made clear by adding explicit wording to this effect in the contract of
sale.
This term may be used irrespective of the mode of transport but when delivery is to take
place in the port of destination on board the vessel or on the quay (wharf), the DES or
DEQ terms should be used.
DDP (...named place of destination)
Meaning: Delivered Duty Paid
Usage: All modes of transport (See Figure 34).
Export
warehouse
Terminal
Inland
gate/Airport
Carriage
boundary
Any mode of transport
Point of
loading
International Carriage
Point of
discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Seller obtains all export, transit and import licences and completes all
customs export and import formalities
Seller’s transport cost to named place of destination
Seller’s marine insurance risk (no obligation)
Seller must deliver Goods on carrying transport at named place of destination not unloaded
Figure 47
Buyers
transport
cost
Buyer’s marine
insurance risk (no
obligation
Buyer takes delivery
Incoterms provides the following explanation:
<<Delivered duty paid>> means that the Seller delivers the Goods to the Buyer, cleared
for import, and not unloaded from any arriving means of transport at the named place of
destination. The Seller has to bear all the costs and risks involved in bringing the Goods
thereto including, where applicable92/, any "duty" (which term includes the responsibility
for and the risks of the carrying out of customs formalities and the payment of formalities,
customs duties, taxes and other charges) for import in the country of destination.
Whilst the EXW term represents the minimum obligation for the Seller, DDP represents the
maximum obligation.
54
This term should not be used if the Seller is unable directly or indirectly to obtain the
import licence.
However, if the parties wish to exclude from the Seller's obligations some of the costs
payable upon import of the Goods (such as value-added tax: VAT), this should be made
clear by adding explicit wording to this effect in the contract of sale.
If the parties wish the Buyer to bear all risks and costs of the import, the DDU term should
be used.
This term may be used irrespective of the mode of transport but when delivery is to take
place in the port of destination on board the vessel or on the quay (wharf), the DES or
DEQ terms should be used.
55
2
Transport Contracts
The transport contracts can be divided into the following groups:

Five modes of carriage

Three sectors of carriage

Two groups of transport contract
Modes of carriage
There are five essential modes of carriage:
Area
Mode
Inland at export side Air
Rail
Road
Waterway
International
Air
Rail
Road
Sea
Waterway
Inland at import side
Similar modes to the
export side
Document
Air waybill
Consignment note
Consignment note
Consignment note
Air waybill
Consignment note
Consignment note
Sea carriage
document
Sea carriage
document
Comment
(1)
(1)
(1)
(1)
Warsaw Convention
Europe, CMI
Europe, CMR
Hague Rules
Hague Visby Rules
SDR Protocol
Hamburg Rules
Hague Rules
Hague Visby Rules
SDR Protocol
Hamburg Rules
(1)
Figure 48
Notes
(1) One or more of these modes of carriage is used to transport the Goods from the Seller’s warehouse to the
place for loading for the international carriage, and then from the place of discharge to the Buyer’s warehouse.
Sectors of carriage
Three sectors of carriage:
56
Export
warehouse
Inland
Carriage
Terminal
gate/Airport
boundary
Loading
International Carriage
Discharge
Sector 1
Sector 2
Figure 49
Notes
The international carriage is ‘bracketed’ by the inland carriage sector.
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Sector 3
Groups of transport contract
There are two essential groups of transport contracts:
Seller or Buyer contracts with Carrier for delivery to Buyer
Simple transport contract
Export
warehouse
Terminal
Terminal
Inland
gate/Airport
gate/Airport
Inland
Carriage
boundary
Loading
International Carriage
Discharge
boundary
Carriage
Seller contracts with inland and international Carrier(s) either separately or under a combined transport or
multimodal contract for all sectors
Import
warehouse
Buyer
receives
Goods
Figure 50
More complex transport contract – Ocean Carriage
Export
warehouse
Inland
Terminal
Terminal
Inland
Carriage
gate
Loading
Ocean Carriage
Discharge
gate
Carriage
Seller contracts with International Carrier who contracts to transport Goods for all sectors (eg combined
transport bill of lading, or multimodal bill of lading) (1)
Figure 51
Notes
(1) The contract is between the Seller and the Carrier, and the Buyer is not a party to the contract, ie there is no
privity of contract between the Buyer and Carrier. However, under bills of lading laws (eg Sea-Carriage
Documents Act 1997 (NSW), ss8,9,10) the Seller’s rights are transferred to the Buyer who then has the same
rights and obligations as if it was a party to the contract, and is bound by the terms of the carriage document.
Seller or Buyer contracts with Freight Forwarder
In this arrangement, there are two transport contracts for the same Goods:
o
Contract between Seller (or Buyer) and the Freight Forwarder

o
no privity of contract between the Buyer (or Seller) and the Freight
Forwarder
Contract between the Freight Forwarder and the actual Carrier
Import
warehouse
Buyer
receives
Goods (1)
57

no privity of contract between the Buyer or Seller and the actual
Carrier
which are illustrated as follows:
Contracts: Seller – Freight Forwarder – Actual Carrier
Export
warehouse
Seller
contracts
with Freight
Forwarder
Inland
Carriage
Terminal
gate/Airport
boundary
Loading
International Carriage
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Freight Forwarder contracts with Seller to deliver Goods to Buyer’s warehouse
Seller has no contract with actual Carrier
Freight Forwarder
contracts with Actual
Carrier
Buyer has
no contract
with
Freight
Forwarder
Buyer has no contract with actual Carrier
Figure 52
Contract: Buyer – Freight Forwarder – Actual Carrier
Export
warehouse
Inland
Carriage
Terminal
gate/Airport
boundary
Loading
International Carriage
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Buyer
contracts
with Freight
Forwarder
Seller has
Freight Forwarder contracts with Buyer to deliver Goods to Buyer’s warehouse
no contract
with actual
Carrier
Seller has no contract with actual Carrier
Freight Forwarder
Buyer has no contract with actual Carrier
contracts with Actual
Carrier
Figure 53
58
Types of documents used in sea Carriage
There are several types of carriage documents referred to in Cogsa: 73

Sea carriage document 74

bill of lading

negotiable document of title that is similar to a bill of lading75

Freight forwarders House bill of lading

bill of lading that is not negotiable

non-negotiable document

consignment note

sea waybill

ship’s delivery order
and outside the scope of Cogsa is a charterparty.76
Types of documents used in air Carriage
The Warsaw Convention refers only to an air waybill,77 but there are two types of air
73 Carriage of Goods by Sea Act 1991 (Cth) Schedule 1A Amended Hague Rules Art 1(g) (g)“Sea carriage
document” means:
(i) a bill of lading; or
(ii)a negotiable document of title that is similar to a bill of lading and that contains or evidences a contract of
carriage of goods by sea; or
(iii)a bill of lading that, by law, is not negotiable; or
(iv)a non-negotiable document (including a consignment note and a document of the kind known as a sea waybill or
the kind known as a ship’s delivery order) that either contains or evidences a contract of carriage of goods by sea.
Sea-Carriage Documents Act 1997 (NSW) s5: sea-carriage document means a bill of lading, a sea waybill or a
ship's delivery order.
74 See Cogsa 1991, Sch 1A, amended Hague Rules, and Sch 1 Hague Visby Rules, both at Art 1(1)(g), includes
bills of lading, negotiable documents of title and non-negotiable document such as sea waybill or ship’s delivery
order, but does not include all carriage documents, see Art 10; see Sea-Carriage of Documents Act 1997 (NSW),
s5 definition of contract of carriage, bills of lading, sea waybills and ship’s delivery order.
75 Eg, a negotiable sea carriage document issued under a charterparty:. RW Miller & Co Pty Ltd v Australian
Oil Refining Pty Ltd (1967) 117 CLR 288. See Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust)
Pty Ltd (1977-78) 139 CLR 231; Nissho Iwai Australia Ltd v MISC (1988) 12 NSWLR 730. F Kanematsu & Co
Ltd v The Ship ‘Shahzada’ (1956) 96 CLR 477. Cogsa 1991, Sch 1A, amended Hague Rules, and Sch 1 Hague
Visby Rules, both at Art 1(1)(b):
“Contract of carriage” means a contract of carriage covered by a sea carriage document (to the extent that the
document relates to the carriage of goods by sea), and includes a negotiable sea carriage document issued
under a charterparty from the moment at which that document regulates the relations between its holder and
the carrier concerned.
76 RW Miller & Co Pty Ltd v Australian Oil Refining Pty Ltd (1967) 117 CLR 288. See Port Jackson
Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (1977-78) 139 CLR 231; Nissho Iwai Australia Ltd
v MISC (1988) 12 NSWLR 730. F Kanematsu & Co Ltd v The Ship ‘Shahzada’ (1956) 96 CLR 477.
77 Warsaw Convention Arts 5, 6, 7and 8. Art 8 sets out the particulars (a) to (q) which the air waybill must
59
waybills:

Freight forwarders House air waybill78

Carrier’s air waybill77
Period of Carrier’s responsibility
Carriage by Air
In international air carriage under the Warsaw Convention, 79 the Carrier’s obligations
commence at the aerodrome boundary and continue until they pass the aerodrome boundary at
the place of delivery.80
Air Carrier’s period of responsibility
Export
warehouse
Terminal
gate at
export
aerodrome
boundary
Aircraft
loading
Aircraft
unloading
Carriage by air
Terminal
gate at
import
aerodrome
boundary
Import
warehouse
Figure 54
Carriage by sea
Generally, in international carriage of Goods by sea, the Carrier’s obligations for the Goods
commence as they cross the ship’s rail at the port of loading and cease as the Goods cross the
ship’s rail at the port of discharge:
Ocean Carrier’s period of responsibility – generally
Export
warehouse
Terminal
gate
Stevedor
e
operation
Ship’s
rail
Carriage by sea
Ship’s
rail
Stevedore
operation
Terminal
gate
Import
warehouse
Figure 55
contain.
78 See Figure 52and Figure 53.
79 This forms part of the domestic law of Australia and appears as a schedule to the Civil Aviation (Carriers’
Liability) Act 1959 (Cth), .
80 Fn 79, Art 18(2) but does not extend to any carriage outside the aerodrome, Art 18(3).
60
Ocean Carrier’s period of responsibility – Australian Cogsa
Under the Australian Cogsa, the ocean Carrier’s obligations commence at the terminal gate 81
and continue to the terminal gate at the port of discharge, rather than the traditional boundary
of the ship’s rail. This is consistent with the period of responsibility for an international air
Carrier, compare Figure 54 and Figure 56.
Export
warehouse
Terminal
gate at
export
boundary
Ship’s
rail
Carriage by sea
Ship’s rail
Terminal
gate at
import
boundary
Import
warehouse
Figure 56
Summary of transport events
Transport events
Export
warehouse
Inland
Carriage
Terminal
gate/Airport
boundary
Loading
International Carriage
Stevedores loading
Seller obtains export licence,
completes customs export formalities
Seller completes US
CSI notifications 24
hours prior to loading if cargo by sea carriage
to US Port
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Stevedores discharging
Buyer obtains transit and
import licences and completes
customs import formalities
Buyer completes
SOLAS
notifications to
PFSO 24 hours
prior to arrival if
cargo by sea
carriage
Carriage by sea
Carriage by air
Figure 57
An illustration of two modes of transport through three sectors in the international carriage of
Goods by sea, might involve the following:
81 Carriage of Goods by Sea Act 1991 (Cth), s9A, and the Amended Hague Rules in Schedule 1A,
Art1(1)(e),(3),(4) and (5). This represents an increase in the period of the Carrier's responsibility to include the
period from ship's side to terminal gate.
Import
warehouse
61
Illustration of the three sectors – Sea carriage example
Export
warehouse
Inland
Carriage
Terminal
gate
Loading
International Carriage
Discharge
Terminal
gate/
Inland
Carriage
Import
warehouse
Figure 58
Which can be illustrated along a straight line as follows:
Exporter’s
warehouse
Inland
carriage
Ship’s rail at
port of
loading
Ocean carriage
Ship’s rail at port of
discharge
Inland
carriage
Figure 59: A typical journey for carriage by sea from export to import warehouse.
Importer’s
warehouse
62
3
Payments
There are four traditional methods of payment, 82 each with a different level of risk:
1
Method
Cash with order
2
Open account
3
Documentary
collection
4
Documentary
credit
Description
Buyer pre-pays before
despatch by:
Cheque
Bill of exchange
Bank draft
Telegraphic transfer (T/T)
Electronic transfer
Regular shipment of Goods.
Buyer pays after receipt
either of shipping documents
or actual Goods
Seller asks remitting bank to
make arrangements for
payment with buyer’s bank
(correspondent bank) to
collect payment on a bill of
exchange drawn on the buyer
by the seller. Payment is by
D/A or D/P
Bill of exchange or
Letter of Credit
Seller’s risk
None
Buyer’s risk
High
Non receipt of
Goods ordered
and payment
made
High
Non-payment
None
If payment made
after receipt of
Goods
Low
Payment is made
on receipt of the
documents, so
there is some risk
the Goods will
not conform with
the order
Low
Payment is made
against receipt of
the documents so
there is some risk
the Goods will
not conform with
the order
Low
Non-payment due
to insolvency of
buyer after the
Goods are
despatched and
before payment is
made
Low
No risk provided
documents
conform to
contract
Notes
D/A – documents against acceptance, where the buyer accepts the bill of exchange
D/P – documents against payment, where the buyer pays for the goods
Cash with order
Export
warehouse
Inland
Carriage
Terminal
gate/Airport
boundary
Loading
International Carriage
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Seller has
Buyer’s risk: non delivery; defective or different Goods delivered; loss or damage to Goods during carriage
no risk of
non
payment
Figure 60
82 See KCDM Wilde (Editor) International Transactions, Law Book Co 1993, Chapter 3 L Roberts
International Payments p74.
63
Open account
A typical example is where the seller sends the Goods to the Buyer on credit terms.
Buyer pays after receipt of Goods
Export
warehouse
Inland
Carriage
Terminal
gate/Airport
boundary
Loading
International Carriage
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Seller’s risk of non payment; loss or damage to Goods during carriage
Import
warehouse
Buyer has
no risk
Figure 61
Buyer pays after receipt of shipping documents
Export
warehouse
Inland
Carriage
Terminal
gate/Airport
boundary
Loading
Seller’s risk of non payment; loss or damage to Goods
until Buyer accepts shipping documents (eg when
issued by ocean carrier)
Figure 62
International Carriage
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Buyer’s risk of loss or damage after receipt of shipping documents
Because of the Seller’s risk of the Buyer’s non-payment for the Goods delivered, the device
of the Romalpa clause88 has been devised to reserve ownership of the Goods to the Seller
until payment is received. This is discussed below under the Unpaid Seller and security for
payment (romalpa clause), below.
Documentary collection
A typical example involves payment by a Bill of Exchange.83 There is some risk that the
Buyer will not honour its obligation to pay on the Bill of Exchange, particularly if the Buyer
has received the Goods. The Seller must then sue on the Bill of Exchange to enforce
payment.
Export
warehouse
Inland
Carriage
Terminal
gate/Airport
boundary
Loading
International Carriage
Seller’s risk of non payment if Buyer does not pay on the Bill of Exchange
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Buyer has
no risk
Figure 63
83 Bills of Exchange Act 1909 (Cth), mostly identical to the Bills of Exchange Act 1882 (UK) except for section
numbers and some minor wording.
64
Documentary credit
In a typical international commercial transaction this involves a Bill of Exchange or a Letter
of Credit. Payment is made for the shipping documents, and the Buyer is bound to pay for
documents if, on their face, they conform to the terms of the contract.84 The Seller’s right to
payment and obligation to pay is based on the documents and is independent of the physical
Goods.
Export
warehouse
Inland
Carriage
Terminal
gate/Airport
boundary
Loading
Seller’s entitlement to payment arises from presentation
of the shipping documents
International Carriage
Discharge
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
Buyer pays on documents.
Buyer has some risk of defective or different Goods delivered; loss or
damage to Goods during carriage (latter should be covered by marine
insurance)
Figure 64
Payment by a documentary credit pursuant to UCP50085 is the most secure method for the
Seller to ensure payment from the Buyer for Goods sold in the export trade. Such method of
payment is …the life blood of international commerce, 86 the utility of which can not be
overstated.87
In a typical transaction, the Seller hands the Goods over to the Carrier who issues the relevant
Carriage document (as specified in the commodity contract) to prove shipment. These
documents are then negotiated through the respective banks.
84 Gill & Duffus SA v Berger & Co Incv [1984] AC 382; [1984] 1 Lloyd’s Rep 227, Lord Diplock.
85 The International Chamber of Commerce (ICC) Uniform Customs and Practice for Documentary Credits
(UCP 500) is a set of rules for international payments which came into effect on 1 January 1994 replacing the
earlier version UCP400. It has been adopted by banking associations and individual banks in over 175
countries. UCP 500 addressed developments in the transport industry and technology advances. A documentary
credit is defined as:
Any arrangement, however named or described whereby a Bank (the ‘Issuing Bank’) acting at the request and
on the instructions of a customer (the ’Applicant’ or on its own behalf,(i) is to make a payment to or to the order
of a third party (the ‘Beneficiary’), or is to accept and pay bills of exchange (Draft(s)) drawn by the
Beneficiary; or (ii) authorizes another Bank to effect such payment, or to accept and pay bills of exchange
(Draft(s)), or (iii) authorizes another Bank to negotiate, against stipulated document(s), provided that the terms
and conditions of the credit are complied with. UCP500 only applies if the parties have embodied them into
their contract, Art 1.
86 RD Hardbottle (Mercantile) Ltd v National Westminster Bank Ltd [1978] QB 146 per Kerr LJ at 155.
87 See also Intraco Ltd v Notis Shipping Corporation of Liberia. The Bhoja Trader [1981] 2 Lloyd’s Rep 256
per Donaldson LJ and Ackner LJ at 257: Irrevocable letters of credit and bank guarantees given in
circumstances such that they are equivalent to an irrevocable letter of credit have been said to be the life blood
of commerce. Thrombosis will occur if, unless fraud is involved, the courts intervene and thereby disturb the
mercantile practice of treating rights thereunder as being equivalent to cash in hand.
65
The unpaid Seller and security for payment (romalpa clause)
Romalpa clauses are concerned with payment for the Goods after the Buyer has taken
delivery.
The romalpa clause first arose in Aluminium Industrie Vaasen BV v Romalpa Aluminium
Ltd88 and was followed in Australia in the context of the CISG in Roder Zelt-Und
Jallenkonstruktionen GmbH v Rosedown Park.89
In Figure 65 the unpaid Seller has a contract to sell the Goods to the Buyer, who has not paid
for them. The Seller can then pursue his rights against the Goods, even though they may have
been used up in a manufacturing process and on-sold to a third party Buyer.
Unpaid
Seller
Delivery
Buyer
Goods used in manufacture process to
produce new Goods
New Goods
sold to new
Buyer
Contract between Seller and Buyer
Unpaid Seller can recover Goods from third parties, until paid
Figure 65
88 Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676,
89 (1995) 57 FCR 216 per von Doussa J at p223, also citing Armour v Thyssen Edelstahlwerke AG [1991] 2 AC
339.
66
4
Marine Insurance Contract
Marine insurance90 is concerned with covering the risk of loss or damage to the Goods during
their carriage from the Seller’s warehouse to the Buyer’s final warehouse or premises. Under
the Act, marine insurance is concerned with the sea voyages and losses on inland waters and
includes any land risk which is incidental to the sea voyage.91 Despite this limited application,
marine insurance cover is also available for the international carriage of goods by air carriage,
and the land risks incidental thereto.92
There are two relevant issues:

Cause of the loss (the risk) is covered (ie not excluded)

Insured has an insurable interest93 at the time of the loss94
Once the journey has commenced, there are certain aspects of marine insurance which require
attention, eg, where the Goods are delayed before delivery. The issue is whether the
insurance policy covers the risk of loss or damage during a delayed transit.
Export
warehouse
Terminal
Inland
gate/Airport
Carriage
boundary
Loading
International Carriage
Discharge
Marine insurance cover for carriage from Seller’s warehouse to Buyer’s warehouse
Terminal
gate/Airport
boundary
Inland
Carriage
Import
warehouse
90 Marine Insurance Act 1909 (Cth), which is identical to the Marine Insurance Act 1906 (UK) except for the
section numbers.
91 Fn 90, ss7, 8 and 9.
92 The Institute of London Underwriters (Lloyd’s) uses the Institute Cargo Clauses (Air) for carriage of Goods
by air for use with the New Marine Policy Form.
93 Fn 90, defined in s11 as:
(1) Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine
adventure.
(2) In particular, a person is interested in a marine adventure where he stands in any legal or equitable relation
to the adventure, or to any insurable property at risk therein, in consequence of which he may benefit by the
safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the
detention thereof, or may incur liability in respect thereof. And see See Piper v Royal Exchange Assurance
(1932) 44 Lloyd’s Ll Rep 103.
94 Fn 90, s12:
(1) The assured must be interested in the subject-matter insured at the time of the loss, though he need
not be interested when the insurance is effected:
Provided that where the subject-matter is insured ‘lost or not lost,’ the assured may recover although he
may not have acquired his interest until after the loss, unless at the time of effecting the contract of
insurance the assured was aware of the loss, and the insurer was not.
(2) Where the assured has no interest at the time of the loss, he cannot acquire interest by any act or
election after he is aware of the loss.
unless the subject matter is insured ‘lost or not lost’, which is defined in the Act, Rules of Construction, rule 1;
and see See NSW Leather v Vanguard Insurance (1991) 25 NSWLR 699 per Handley J at 707F concerning the
passing of property in an FOB contract for leather goods to be shipped from Brazil to Sydney, and the container
arrived empty with seals intact.
67
Seller’s marine insurance risk to agreed event,
Buyer’s marine insurance risk from agreed event
when risk passes to the Buyer and Seller ceases to from which time risk passes to Buyer who has
have an insurable interest
an insurable interest
Figure 66
Notes
The timing of the agreed event , its location along the straight line and the passing of risk from the Seller to the
Buyer will depend upon the terms of the commodity contract.
Conclusion
The four major transactions usually occur (with some exceptions) between the time the Buyer
and Seller enter into their agreement, and the agreement is completed. This might be depicted
as follows: