Learning the Ropes - Is FOB Stowed a standard
international commercial term?
Anne Mickey and Kelly O’Conner, of Washington-based Sher
& Blackwell, provide an insight into the ambiguities of the term FOB Stowed, and the
implications that surround its use in international commercial transactions
by Anne Mickey & Kelly O'Connor
published in The
Maritime Advocate, May, 2000
CONSIDER the following scenario. An Indian salt supplier
agrees to sell 17,000 metric tons of salt, FOB Stowed at a specified Indian port. Payment
for the salt is to be made through a letter of credit upon presentation of a clean onboard
bill of lading for all of the salt. The buyer, a US trading company, memorialises the
transaction in a short, one-page purchase offer which refers to, but does not incorporate
the terms of, the letter of credit. All remaining terms of the contract between the buyer
and the seller are placed in the letter of credit.
The US buyer charters the vessel, which arrives in the Indian
port as scheduled, and loading of the salt begins. Midway through the loading process,
without any advance warning, a cyclone unexpectedly hits the Indian port, lifting the
vessel from its berth and crashing it down several miles inland. Operations at the port
are closed for several weeks while the damage caused by the cyclone is assessed.
Miraculously, the vessel is intact,
albeit grounded several miles inland. The 8,000 metric tons of salt that was loaded on
board are also intact and not damaged. Who owns the salt on board the vessel? The answer
to this question should be easy to determine since the term of the sale was FOB Stowed.
But is it?
Without a choice of law provision, the answer is far from
straightforward. The above scenario is not part of a fantastic and far-fetched law school
examination question, but rather the unfortunate circumstances that two very real parties
found themselves in after the worst cyclone in 25 years struck the west coast of India in
1998.
The seller contended that, under FOB Stowed, it was entitled
to payment for the partial delivery of salt on board the vessel. The buyer argued that,
under FOB Stowed, it did not assume title to, or risk of, loss for the salt until the
entire quantity of salt ordered had been loaded and stowed and a clean onboard bill of
lading issued.
The single-page purchase order did not provide an answer to
the dispute, nor did it state what law governed this international transaction. Did
international commercial law, Indian law or US state law apply? Did it even matter since
the internationally recognised commercial term FOB Stowed had been agreed to by the
parties?
Although frequently used in international commercial
transactions, the definition and resulting implications of FOB Stowed can vary
significantly - depending on what law applies. FOB Stowed is defined by a number of
sources, including the International Chamber of Commerce’s International Commercial
Terms (Incoterms) and the United States Uniform Commercial Code. Yet variations in
definitions can greatly impact dispute resolution.
Incoterms were created in 1936 to remedy the problem of
contract parties having different understandings or definitions of thirteen commonly used
trading terms. Incoterms were revised in 1953, 1967, 1976, 1980, 1990 and presently in
2000, to bring the rules associated with trading terms in line with evolving international
trade practices. Therefore, it is important to reference which version of Incoterms will
apply to a given transaction.
Under Incoterms 2000, FOB or Free on Board means that the
seller must deliver the goods at the named port of shipment on board the vessel nominated
by the buyer in the manner customary at the port. The seller bears all risks of loss or
damage to the goods until such time as they have passed the ship’s rail at the named
port of shipment.
The seller’s obligation to place the goods on board may
be extended by a phrase added to FOB, for example, FOB Stowed or FOB Stowed and Trimmed.
Although these words are primarily intended to make sure the seller has to pay all the
loading costs, it is unclear whether such phrases also move the delivery point to the
extent that the seller would be considered to have failed to fulfill its delivery duty
until the loading, stowing and trimming have been completed for the full amount of the
cargo.
Incoterms 2000 do not address when title to goods passes from
seller to buyer. They deal rather with delivery responsibility and risk of loss. Although
Incoterms 2000 reference a bill of lading or sea waybill as possible proof of delivery,
Incoterms do not require that the seller produce a bill of lading as part of performance.
In contrast, the Uniform Commercial Code (UCC) does require a
seller to produce a bill of lading. Originally published in 1952, the UCC is a
codification of US common law. The UCC has been adopted with some modifications by each of
the fifty United States. Although it is US law, it contemplates application to
international business transactions.
In an FOB transaction under the UCC, title to the property
passes from seller to buyer at the designated FOB point. Use of the word
‘Stowed’ after FOB means that the parties agree that the responsibility of the
seller continues until the stowage of the goods is completed in the hold of the ship. The
word ‘Stowed’ added to FOB also requires the seller to pay all the delivery
costs in loading the cargo in the vessel hold. The effect of the FOB Stowed clause is that
the risk and cost of the goods do not pass from seller to buyer until completion of the
stowage.
Under the UCC, FOB Stowed (FOB Stowed is merely a variation
of FOB Vessel) requires the seller to bear the risk and expense until the goods are loaded
onboard and the seller obtains an onboard bill of lading (Sumitomo Corporation of
America v M/V Siekim, 632 F Supp 824, 835, SDNY, 1985). A clean onboard bill of
lading states that the goods were loaded on board in apparent good order and condition. In
cases in which an onboard bill is clearly required by the parties in the underlying sales
contract, when the proper bill issues, the seller then ceases to assume any risk of loss
or damage (Berisford Metals Corporation, 779 F 2d at 846-847, 2d Cir 1986).
The above principals are incorporated in Sections 2-319 and
2-323 of the UCC. Section 2-319 provides that ‘FOB Vessel’ is a term which, by
its very language, makes express the need for an onboard document. Where the contract
contemplates overseas shipment and contains the term ‘FOB Vessel’, the seller,
unless otherwise agreed, must obtain a negotiable bill of lading that the goods have been
loaded on board.
Under FOB Vessel terms, payment is required only against the
tender of the bill of lading. This is not merely a technical requirement. Where a bill of
lading cannot be produced by the seller, performance of the contract cannot be completed.
Therefore, under the UCC, failure to obtain a bill of lading means that title to the cargo
does not pass from seller to buyer, and the seller is not entitled to payment as a matter
of law.
Thus, under two standard definitions of FOB, two very
different results can be reached. Under Incoterms 2000, unless a bill of lading is
specifically required, risk of loss may pass from the seller to the buyer once the cargo
is loaded over the ship’s rail. While under the UCC, a bill of lading is essential
before risk or title may pass.
In the case of the Indian salt shipment, the letter of credit
specified that Incoterms would govern the transaction. But the sales contract was silent
on the issue. Although the dispute involved a commercial transaction between international
merchants, the United States District Court for the Eastern District of Virginia decided
that the UCC applied (Bharat Salt Refineries Ltd v Allied International Marketing
Corporation, Civil Action No 99 CV 1079-A, US District Court for the Eastern District of
Virginia, January 7, 2000). As a result, a bill of lading was required as part of the
seller’s performance. Without presentation of the bill of lading by the seller, the
buyer was not obligated to pay for the partial cargo of salt.
There are a number of lessons to be learned. Merchants
trading in the global marketplace are advised to state in their sales contracts which
commercial terms apply. If Incoterms are used, the sales contract should also state that
performance is not complete, and payment is not required, until an onboard bill of lading
has been delivered. If such provisions are in a letter of credit, the letter of credit
should be incorporated by reference in the sales contract.
