Trading & Freight Contracts

1. Trading & Freight Contracts Damian Honey 20 June 2011

2. Trading Contracts – Seminar Overview • Trading Contracts - Introduction • What are Incoterms? • FOB Contracts • CIF/CFR Contracts • DES/DAP Contracts

3. Trading Contracts - Introduction • A number of legal issues underlying every trade • Contract does not need to be evidenced in writing (some exceptions) • Contract comes into existence when there is exact agreement on essential terms • Importance of the presence of consideration • Terms can be implied into a contract • At least 5 different contracts involved in any one trade • Sale contract (SPA) • Freight contract (contract of carriage) • Inspection contract • Insurance contract • Payment contract (documentary credit)

4. Trading Contracts - Introduction

5. What are Incoterms? • Incoterms 2000 – well known ICC publication of international delivery bases for trading contracts • Incoterms 2010 is due to be published on 27 September 2010 and will come into effect on 1 January 2011 • No validity as a matter of English law unless incorporated into a contract • English law has well developed understanding of each of the delivery bases • The term describes the obligations of the buyer and seller, in particular regarding delivery, risks and costs • But – still need to look carefully at the contract wording

6. Review of FOB, CIF/CFR & DES/DAP Contracts • Overview of FOB, CIF/CFR & DES/DAP contracts • Duties/responsibilities of the seller and buyer • Passing of title and risk • Remedies for the seller and buyer • Relationship with the carrier • Shipping documents • Insurance contracts

7. Overview of FOB Contracts • Free On Board vessel, named ocean port of shipment • Buyer is obliged to arrange the freight, and so the price reflects that • Seller is obliged to place the commodity on board the ship • Quality testing takes place at load port • The seller is not obliged to enter into contracts of carriage and insurance • The seller completes its obligations before the goods are physically delivered at the port of destination

8. Overview of FOB Contracts • There are often different variations of the FOB contract – one example is where the seller is the shipper, and therefore named as such on the bill of lading • BUT – need to look carefully at the contract wording – what is described as an FOB contract may be more akin to a CFR contract • Whether the seller is required to tender shipping documents before payment is due (and which documents) will depend on the type of FOB contract • Flexibility of FOB contracts can be an advantage and a disadvantage

9. FOB Transaction - Structure Bank 8. Fwd Docs 6. Send docs 2. Request to issue L/C 7. Payment 1. Sale Contract Seller Buyer 9. B/L presented 4. Cargo 10. Goods 5.B/L issued 3. C/P

10. FOB Transaction - Steps • Sale contract • Buyer requests his bank to issue L/C • Buyer/charterer enters into C/P or gets third party to do so (Inspection of quality at loadport) • Vessel proceeds to load port & shipment takes place • Ship issues bill lading to seller/shipper • Seller sends documents to bank including B/L (Bank checks the documents against the credit) • Bank pays the seller under L/C • Bank forwards documents to buyer • Buyer presents bill of lading to vessel • Ship discharges cargo and buyer takes delivery

11. FOB - Duties of the Seller • Deliver the goods on board the vessel nominated by the buyer • To do so at the nominated port • To do so within the nominated period • Bear the costs of delivering the goods to the nominated port and loading them onto the nominated vessel • Supply goods which conform with the contract

12. FOB - Duties of the Buyer • Fix the dates for loading within the agreed shipment period • Procure space on a vessel fit to carry the goods • Nominate the vessel • Payment of the goods as agreed in the contract

13. Responsibilities in FOB Contract

14. Responsibilities in FOB Contract

15. FOB - Shipping Documents • Seller is required to tender on a condition for obtaining payment • In most cases, these comprise: • Commercial invoice • 3 original B/Ls freight prepaid, clean, negotiable • Certificate of weight • Certificate of analysis • Bill of Lading • Generally, each B/L will state that the goods have been received for shipment, provide for their carriage to the port of destination, be issued on shipment, covers the goods sold, and be clean

16. FOB – Contract of Insurance • Obligation of Buyer • Buyer to have insurable interest • Value of goods + 10% • At Buyer's expense • Evidence of cover • Insurers

17. FOB - Passing of Title • Not specifically included in Incoterms • Property passes when the goods are taken over the rails of the ship (as a matter of contract) • Negotiable by the parties: • At same time as risk transfer (ie. port of shipment) • On delivery of documents against payment • Absent contractual provisions, property in a FOB contract will not pass before shipment of the goods

18. FOB - Passing of Risk • Generally, risk under a FOB contract passes on shipment of the goods • "Traditional" view is that risk is transferred as goods pass ship’s rail at port of shipment • To avoid uncertainty, best to include an express moment for risk to pass

19. FOB Contracts - Remedies • Remedies of the seller • Damages • Termination/Rescission • An action for the price • Remedies of the buyer • Rejection of the goods • Damages • Specific Performance

20. FOB - Summary of Basic Principles • The seller's duty is to deliver the goods over the rail of the ship (the issue of a bill of lading or mate's receipt is irrelevant to the issue of property and risk) • The buyer's duty is to ensure that the seller is properly notified as to the vessel to ship the goods • The buyer remains the legal carrier of the goods – the main contracting party in the contract of carriage • Title and risk pass when the goods are taken over the rails of the vessel • When the risk passes, the buyer has an interest in the goods and is entitled to insure them

21. Overview of CIF/CFR Contracts • CIF – Cost, Insurance, Freight, named ocean port of shipment • CFR – Cost and Freight, named ocean port of shipment • Seller must pay the costs and freight necessary to bring the goods to the named port of destination • The seller delivers when the goods pass the ship's rail in the port of shipment, BUT the risk of loss or damage to the goods are transferred to the buyer • Quality testing takes place at load port • In CIF contracts the seller also has to procure marine insurance against the buyer's risk of loss or damage to the goods during the carriage • A contract for documents?

22. CIF/CFR Transaction - Structure Bank 8. Fwd Docs 6. Send docs 2. Request to issue L/C 7. Payment 1. Sale Contract Seller Buyer 4. Cargo 9. B/L presented 10. Goods 5.B/L issued 3. C/P

23. CIF/CFR Transaction - Steps • Sale contract • Buyer requests his bank to issue L/C • Seller enters into C/P or gets third party to do so (Inspection of quality at loadport) • Vessel proceeds to load port & shipment takes place • Ship issues bill lading to seller/shipper (Seller arranges insurance) • Seller sends documents to bank including B/L and insurance policy (Bank checks the documents against the credit) • Bank pays the seller under L/C • Bank forwards documents to buyer • Buyer presents bill of lading to vessel • Ship discharges cargo and buyer takes delivery

24. CIF/CFR - Duties of the Seller • To ship goods meeting the contract description at the port of shipment as agreed or to procure goods already afloat to meet the contractual requirements • To enter into a contract of carriage with a carrier who is able to deliver the goods to the port of discharge as agreed and secure a bill of lading in relation to the goods • To make sure that the goods are properly insured under a contract of insurance to which the Buyer may avail (CIF only) • To append a commercial invoice which conforms to the contractual description of the goods • To tender the required/optional documents

25. CIF/CFR - Duties of the Buyer • Accept delivery of the goods when they arrive at the port of discharge • Receive the goods from the carrier • Accept the documents tendered if they conform with the contract • Obtain any import licence, if required • Settle customs duties at port of entry • Pay such costs as are not for the Seller's account under the contract of carriage

26. Responsibilities in CIF/CFR Contract

27. Responsibilities in CIF/CFR Contract

28. CIF/CFR - Shipping Documents • Required documents • Commercial Invoice • Bill of lading • Transport document/contract of carriage • Export licence, if necessary • Insurance policy (CIF only) • Optional documents • Other documents needed for transit of the goods through any country or for import clearance • Other documents provided for in the contract, eg. Certificate of origin, certificate of quality

29. CIF - Contracts of Insurance • Obligation of Seller • Minimal cover • Value of goods + 10% • At Seller's expense • Evidence of cover • Insurers • (For CFR – see FOB)

30. CIF/CFR - Passing of Title • Not specifically included in Incoterms • Title passes when the goods are taken over the rails of the ship • Negotiable by the parties: • At same time as risk transfer (ie. port of shipment) • On delivery of documents against payment • Absent contractual provisions, title in a CIF/CFR contract will not pass before shipment of the goods

31. CIF/CFR - Passing of Risk • Generally, risk under a CIF/CFR contract passes on shipment of the goods • "Traditional" view is that risk is transferred as goods pass ship’s rail at port of shipment • To avoid uncertainty, best to include an express moment for risk to pass

32. CIF/CFR Contracts - Remedies • Remedies of the seller • Rescission • Action for the price • Action for damages • Rights against the goods • Remedies of the buyer • Damages for non-delivery • Rejection of the documents • Rejection of the goods • Specific performance

33. CIF/CFR - Summary of Basic Principles • The seller's duty is to deliver the goods over the rail of the ship and to contract for carriage and insurance • The buyer's duty is to discharge the goods at the destination port • The seller remains the legal carrier of the goods – the main contracting party in the contract of carriage • Title and risk pass when the goods are taken over the rails of the vessel • In CIF contracts, even though the risk has passed to the buyer, the seller is obliged to insure the goods

34. Overview of DES/DAP Contracts • Delivered Ex Ship, named ocean port of destination • Seller is obliged to arrange the freight, and so the price reflects that • The seller is obliged to deliver the goods at the agreed destination, usually a named port (or a range, with a requirement in the contract to narrow the range) • The buyer is then obliged to discharge the goods and arrange for import • Generally, title and risk pass when goods are delivered to the buyer at the named port of destination • Quality testing takes place at the discharge port

35. DES/DAP Transaction - Structure 8. Payment 5. Send docs 1. Sale Contract Seller Buyer 3. Cargo 6. B/L presented 7. Goods 4.B/L issued 2. C/P

36. DES/DAP Transaction - Steps • Sale contract • Seller enters into C/P or gets third party to do so • Vessel loads cargo at port of shipment • Ship issues bill lading to seller/shipper (Seller arranges insurance) • Seller forwards documents to buyer • Buyer presents bill of lading to vessel • Ship discharges cargo and buyer takes delivery (Inspection of quality at discharge port) • Buyer makes payment to seller

37. DES/DAP - Duties of the Seller • To deliver goods meeting the contract description at the port of destination or to procure goods already afloat to meet the contractual requirements • To do so at the nominated port • To do so within the nominated period • To enter into a contract of carriage with a carrier who is able to deliver the goods to the port of discharge as agreed

38. DES/DAP - Duties of the Buyer • Provide a berth at the destination port and unload the goods from the seller's vessel • Obtain any import licence at discharge port, if required • Settle customs duties at discharge port • Make payment of the goods as agreed in the contract

39. Responsibilities in DES/DAP Contract

40. Responsibilities in DES/DAP Contract

41. DES/DAP – Passing of Title • Not specifically included in Incoterms • Title passes when the goods are taken over the rails of the ship • Negotiable by the parties, but usually at the same time as risk transfer (ie. port of destination)

42. DES/DAP - Passing of Risk • Generally, risk under a DES/DAP contract passes on delivery of the goods • "Traditional" view is that risk is transferred as goods pass ship’s rail at port of destination • To avoid uncertainty, best to include an express moment for risk to pass

43. DES/DAP Contracts - Remedies • Remedies of the seller • An action for the price • Rights against the goods • Remedies of the buyer • Termination of the contract • Rejection of the goods • Damages for non-delivery

44. DES/DAP - Summary of Basic Principles • The seller's duty is to place the goods at the buyer's disposal on board the vessel • The seller arranges the contract of carriage and should insure the goods for its own benefit • The seller is the main contracting party in the contract of carriage • The buyer's duty is to take delivery of the goods once placed at its disposal at the named port of destination • Property and risk pass when the goods are taken over the rails of the vessel at the named port of destination

45. Freight Overview • Time Charters • Voyage Charters • COAs

46. Time Charters

47. Time charters • Vessel chartered for a specific period of time - "period charter" • Vessel at the disposal of charterers for the charter period within the limits of the charterparty • Charterer pays hire on a daily basis vessel between delivery and redelivery • Interrupted by off hire clause – where charterer doesn't have to pay for time lost due to specified causes attributable to owners or vessel • Time charter should be cheaper - trade off for the charterer taking on more risk than under a voyage charter

48. Time charters – key issues • Payment of hire • Trading limits • Off-hire • Performance/delay • Redelivery • Bunkers • Orders

49. Time charters – payment of hire • Price to be paid by charterer to owner for use of the vessel is called “hire” • Normally per day or per calendar month • Charter is obliged to pay hire continuously • Normal requirement is for the payment of hire in advance and without discount • Strictness has generated “anti-technicality clause” • Provides the party in default of hire a period of time in which to remedy his default • If a shipowner withdraws his ship for default in payment of hire, the charterparty is terminated

50. Time Charters – trading limits • Limits may include type of cargo to be carried and geographical ranges set out in the charterparty • Owners must comply with charterers' legitimate orders, within the scope of the charterparty, as to the employment of the vessel • Failure by owners to comply with a legitimate order may be a breach of charter serious enough to justify the charterer terminating the charterparty • Owners not obliged to follow orders falling outside scope of the charter