The importance of clear contractual terms

Dec 3, 2004
Author: Dusty Donnelly, Routledge Modisse Moss Morris

We have held several in house seminars for our clients at which one of the most popular topics is the question of ownership, risk and the proper use of Inco terms.

If the letters CIF, FOB and FCA mean nothing to you the chances are that you are not involved in international trade.

They stand of course for Cost Insurance Freight ("CIF"), Free on Board, ("FOB") and Free Carrier Alongside ("FCA"). They form part of a body of other such codes which were developed by the International Chamber of Commerce to facilitate a clear understanding in international trade transactions of the rights and obligations of the seller and buyer. In order to understand and correctly apply the appropriate Incoterm for any transaction it is important to first look at the underlying concepts of ownership and risk.

The importance of doing so was recently illustrated in a judgment by the Durban and Coast Local Division of the High Court where a fruit exporter found his claim dismissed on the basis that he was unable to prove that he was either the owner of the goods, or the party bearing the risk of loss in or to the goods. Accordingly, the Court found that he had no title to sue.

Ownership is a familiar term and is the most comprehensive right which one can have to a thing. Risk is a different concept to ownership. Risk is the liability to bear the loss arising from damage to or destruction of the thing. For example in a lease the lessor is usually the owner of the thing, but the risk of loss or damage to the property is usually passed to the lessee.

In a sale transaction the passing of ownership from seller to buyer, and the passing of risk from seller to buyer may take place at different times. Once risk has passed the buyer must perform in terms of the contract of sale (including paying the purchase price) regardless of loss of or damage to the thing sold.

According to South African law ownership passes in accordance with the intention of the contracting parties and upon delivery of the goods. In a cash sale there must be delivery plus payment of the purchase price. Where credit is extended to the buyer, delivery of the goods is sufficient to transfer ownership, unless there has been a reservation of ownership to the seller until the price is paid.

In an international sale contract delivery is usually understood to mean transfer of the original bill of lading which takes place before the goods are physically landed in the country of destination. The bill of lading accordingly plays a crucial role in transferring title to the goods.

Risk passes under South African law when the contract of sale is complete. The only legal requirements for a valid contract of sale are that there be agreement on the thing sold and the price.

Returning to the example of the fruit exporter, he stood in the position of the middle man who purchased fruit from farmers inland and sold it to buyers in the Middle East. There was an arrangement between him and the buyer that the farmer would be determined once the goods were sold at the final destination. The evidence was that no fixed price had been agreed with the farmer when the goods left South Africa. The law relating to the sale of goods and in particular the fixing of a price is complex. It is not necessary for a price in money terms to be named although this is the usual position. However it is necessary that the price be readily ascertainable without reference to the contracting parties. The Court found that as no price had been fixed there was no valid contract of sale, and accordingly neither ownership nor risk in the goods had passed from the farmer to the exporter.

A further complication arose in that the exporter had sold on a CIF Dubai basis with payment to be made 55 days from the date of the bill of lading. The Inco term CIF means that the seller arranges carriage to the port of destination and arranges insurance cover for the voyage. However risk passes from the seller to the buyer at ship's rail at the port of shipment. Thus in the international sale between the exporter and the foreign buyer, the risk passed when the goods were loaded on board the ship at Durban.

The term Free on Board means that the seller "delivers" the goods on board the vessel. The buyer pays the seafreight and other charges and arranges his own insurance. Once again, however, risk passes from the seller to the buyer at ship's rail at the port of shipment.

On opposite ends of the scale, the term "Ex Works" means that risk passes from seller to buyer when the goods leave the seller's warehouse and the buyer is fully responsible for the transport of those goods to final destination. The term Delivered Duty Paid ("DDP") means that the seller is responsible for the delivery of the goods to final destination and that risk only passes upon delivery at the buyers warehouse.

In the event of any loss of or damage to goods during the course of international transit it is always advisable to take legal advice on the steps which should be taken to protect claims against carriers and other responsible third parties, and in particular to identify early on which parties to the transaction have title to sue.

Dusty Donnelly is an associate of the firm Routledge Modisse Moss Morris

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