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NATIONAL LAW INSTITUTE UNIVERSITY

BHOPAL

ITL PROJECT WORK

SEVENTH TRIMESTER
PROJECT ON

“ PASSING OF PROPERTY IN FOB CONTRACT”

SUBMITTED BY :
SAMEER CHOKHANDRE
2008 B.A.LLB 41

SUBMITTED TO :
Mrs. MONICA RAJE

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TABLE OF CONTENTS

1. INTRODUCTION..........
2. APPROPRIATION.........

3. SHIPMENT OF PART.........

4. BILL OF LADING TO SELLER’S ORDER/ SELLER’S

RIGHT OF DISPOSAL.........

5. BILL OF LADING TO BUYER’S ORDER.

6. CONCLUSION..........

7. BIBLIOGRAPHY...........

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INTRODUCTION

The f.o.b. (free on board or port of loading/dispatch) contract has been used in international
trade in the Great Britain for more than 150 years. The term is not confined to sea-borne
commerce but carries equal importance in carriage by air, land or rail. In an f.o.b., prima
facie, the seller’s obligation extends to all charges incurred before shipment, including
loading charges, but not freight or insurance. In a nut shell, in a classic f.o.b. contract, the
buyer has the right and responsibility of selecting the port and date and also to arrange for the
shipment of the goods. He must nominate an “effective” ship (capable of receiving the cargo)
invariably and give adequate notice to the seller. When the contract provides for a range of
ports from which the goods are to be shipped, it’s the buyer’s right and duty to select one out
of them. On necessary notices from the buyer, the seller must be ready to ship the goods
within the contractual/reasonable time. Compliance with the obligation to ship at the port
nominated is a condition of the contract. There are further two more modern variants of f.o.b.
contracts1 – where the seller arranges for the ship, but the legal incidents are the same; and
where the seller puts the goods on board, takes the mate’s receipt and hands it over the buyer
or his agent who exchanges it for a bill of lading. Under an f.o.b. contract, the obligations to
deliver and to accept are mutual. 2 However, the f.o.b. contract is a flexible instrument which
allows the parties to agree to different terms. This flexibility element makes it a popular
choice of contract but judicial recognition to the same has been slower than the mercantile
practice.3 
 

Thus, the basic principles of an f.o.b. contract4 may be summed up as following:-

 The seller’s duty is to deliver the goods over the rails of the ship, including all charges
except the freight and insurance, 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.

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 The buyer remains the legal shipper of the goods, he is the main contracting party in
the contract of carriage.

 Property and risk pass when the goods are taken over the rails of the ship.

 When the risk passes, this means that the buyer has an insurance interest in the goods
and be entitled to ensure them.

 
 
 
 
 
 
 
 
 
 
 
 
 

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APPROPRIATION

An f.o.b. contract may be for the sale of specific goods, in which case property may in theory
pass as soon as the contract is made, but such a conclusion is in practice most unlikely as the
parties will hardly ever intend the property to pass at this time. More commonly the goods
will be unascertained, and they may fall into this category either because they are a specified
quantity of goods forming part of an identified bulk or because they are simply generic goods
sold by description. This concept is, however, inapplicable to f.o.b. contracts, under which
goods must be appropriated to the contract by or before shipment. Hence, the authorities on
f.o.b. contracts do not deal with the problems which formerly arose from the rule that
property could not pass so long as the goods formed undifferentiated part of an identified
bulk. Such problems are now dealt with in Sale of Goods Act 1979, S.20A and Indian Sale of
Goods Act 1930, S.23. The problems with which the authorities on f.o.b. contracts do deal
with are those which arise from the rule that property in goods which are unascertained
cannot pass before goods of the contract description and in a deliverable state are
unconditionally appropriated to the contract. The question whether goods are unconditionally
appropriated to the contract depends on the intention of the parties, and “appropriation” is
used both in a “contractual” and in a “proprietary” sense. 5 If it’s proprietary (unconditional)
in nature, the seller doesn’t reserve a right of disposal. Under such a contract, the seller is not
bound to pass the property in the goods at any particular time; he can perfectly well ship the
goods in performance of his contract and so perform his duty to deliver without
simultaneously making an unconditional appropriation so as to pass the property. If this were
not the case, considerable difficulties would arise in financing f.o.b. sales.  

In Carlos Federspiel & Co. SA v. Charles Twigg & Co. Ltd.6, children’s bicycles were sold
f.o.b. United Kingdom port; freight and insurance were to be arranged by the seller, for the
buyer’s account. The goods were paid for and packed in cases marked with the buyer’s name.
Shipping instructions were given, but the goods were never shipped, nor even dispatched
from the works of the seller. On the insolvency of the seller, the question arose whether

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property in the goods had passed to the buyer. Pearson J. said that for the purpose of passing
of property “a mere setting apart or selection of the seller of the goods which he expects to
use in performance of the contract is not enough. If that is all, he can change his mind and use
those goods in performance of some other contract and use some other goods in performance
of this contract. To constitute an appropriation of the goods to the contract, the parties must
have had, or be reasonably supposed to have had, an intention to attach the contract
irrevocably to those goods, so that those goods and no others are the subject of the sale and
become the property of the buyer. He concluded that “usually, but not necessarily, the
appropriating act is the last act to be performed by the seller.” Here the “important and
decisive act,” remained to be done by the seller who was to send the goods to the port of
shipment and have them shipped. The seller had come nowhere near to doing the decisive last
act since the duty to make shipping arrangements was by the contract placed on the seller and
the goods intended for the buyer had never left the seller’s premises. Accordingly property
had not passed. A further reason for this conclusion was the close connection between
property and risk. The parties clearly did not intend the risk to pass before shipment and this
was prima facie an indication that property also should not pass before the point. 

Risk may be separated from property, as commonly happens under a c.i.f. contract, and under
an f.o.b. contract in which the seller retains the property after shipment, even though the risk
may have passed on, or (in the case of a c.i.f. contract) as from, shipment. In such cases risk
passes to the buyer before property, but only passes at a time where the buyer is likely to be
protected by the contract of carriage and covered by insurance. It is much less common,
because it would be commercially inconvenient, for property to pass before shipment, and so
before risk.  

In the most often quoted case by Brett M.R. in Stock v. Inglis7, sugar merchants in London
agreed to sell 200 tons of sugar of a certain description to the plaintiff in Bristol. The sugar
was to be shipped f.o.b. Hamburg, payment in cash to be made in London in exchange of the
bill of lading. In a similar contract with another purchaser, the seller’s agents in Hamburg
shipped 400 tons of sugar in 3700 bags to ‘order Bristol’. It was the usual course of business
in sugar trade not to appropriate specific bags of sugar to any particular contract at the time of
shipment; they were to be done so between the buyers only after the sellers had obtained the
bills of lading. The vessel on which the sugar was loaded was lost prior to the sellers having
appropriated the consignment. The defendant was an underwriter with whom the plaintiff had

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an open-cover policy. The defendant declined to honour the policy on the grounds that the
property had not passed on to the plaintiff and therefore, he had no insurable interest on the
goods lost. The Court of Appeal held (confirmed by the House of Lords) that notwithstanding
the fact that the property in sugar had not passed prior to the loss, the term f.o.b. in a contract
implied that the sugar was shipped at the risk of the plaintiff who was liable to pay it’s price
against the bill of lading whether the sugar arrived or not. This follows the conclusion that the
mere retention of the bill of lading by the seller to protect himself against a hypothetical
default doesn’t mean that the risk of loss or damage has not passed. 8 The judgement is based
on a simple premise that once the seller has shipped the goods f.o.b. as per the requirements
of the contract, he losses all the interest in the goods. Risk prima facie passes with the
property.9 

The rule that the property does not pass before shipment applied whether the fact that the
goods are not shipped is due to the seller’s default, or to the carrier’s default or to the buyer’s
failure to give effective shipping instructions. Whether the buyer wrongfully repudiated the
contract before completion of shipment, and the seller nevertheless continued to ship the
remainder of the goods sold, it seems to have been assumed that the property in those goods
did not pass (so that the seller’s remedy was in damages and not by way of an action for the
price). The assumption was apparently based on the fact that at the time of shipment the
buyer no longer intended the property to pass. But the preferable view is that this is irrelevant
as the buyer can be taken to have given his consent in advance by the contract or otherwise to
the unconditional appropriation of the goods to the contract, so that the only relevant
intention at the time of shipment was that of the seller. 
 

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SHIPMENT OF PART

Where the seller ships only part of the goods, the property in that part may pass if his
inability to ship the whole is due to the buyer’s failure to give proper shipping instructions or
if the ship on which the goods are being loaded is lost through a peril of the seas. If failure to
ship the whole is not due to the buyer’s default, the buyer can reject the quantity shipped, and
if he does reject it, the question of passing of property becomes academic for the purposes of
risk and of the action for the price. But if either party had become insolvent it is submitted
that the buyer could rely on the shipment as passing the property to the buyer, provided that
the seller had not reserved a right of disposal. It is impossible to lay down any hard and fast
rules as to reservation of rights of disposal; so much so that the question whether a right of
disposal has been reserved by an f.o.b.; seller has been described as one of ‘fact’. There are,
nevertheless, certain prima facie assumptions as to the reservation of the right of disposal
under f.o.b. contracts. 
 
 
 
 
 
 
 
 
 
 
 

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BILL OF LADING TO SELLER’S ORDER/SELLER’S

RIGHT OF DISPOSAL

By S.19 (2) of the Sale of Goods Act and S.25 (2) of the Indian Sale of Goods Act
[henceforth referred to as S.19 (2)], a seller is prima facie to be taken to reserve the right of
disposal where goods are shipped, and by the bill of lading the goods are deliverable to the
order of the seller or his agent. 10 This subsection is based on a number of nineteenth century
cases, some of which were concerned with f.o.b. contracts, in which the taking of a bill of
lading in this form was regarded as evidence of intention on the part of the seller to reserve a
right of disposal. It is quite conceivable that the seller might not wish to reserve the right of
disposal by retaining the possession of the bill of lading, where his clear intention is to pass it
on to the buyer at the first occasion.  

In Browne v. Hare11, oil was sold f.o.b. Rotterdam to be paid for on delivery of bill of lading
by a bill of exchange payable three months after date of shipment. The oil was shipped under
a bill of lading making it deliverable to the order of the sellers, who immediately endorsed
the bill of lading to the buyer and sent it to the broker who had negotiated the sale. The
broker presented it to the buyer together with a draft for the price. The ship having been lost,
the buyer returned the bill of lading to the broker and refused to accept the sellers draft or to
pay the price. It was held that the sellers were entitled to sue for the price as the property had
passed on shipment. In the Court of Exchequer it was said that the sellers had no intention to
‘continue their ownership’ by taking the bill of lading to their own order; this was shown by
the fact that they had immediately endorsed the bill of lading and forwarded it to the buyer.
But in fact they forwarded it to the broker and their conduct was at least equally consistent
with the view that they had no intention of parting with such control over the goods as
possession of the bill of lading, either in their own hands or in that of their agent, gave them,
unless and until the buyer accepted the draft for the price. The decision was affirmed in the
Exchequer Chamber by Pollock C.B. where it was said that the question, with what intention

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the sellers took the bill of lading to their own order, was one of fact. The only principle which
can be extracted from the decision is that property is not necessarily prevented from passing
on shipment under an f.o.b. contract merely because the seller takes the bill of lading to his
own order.  

In The Parchim12, German sellers sold a cargo of nitrate to Dutch buyers under a contract
which was nominally a c.i.f. or c.& f. contract but which was said to have ‘more of the
characteristics’ of an f.o.b. contract. The goods were shipped and bills of lading were taken
by the sellers’ agent in the sellers’ name and their order. At the time when he took the bills,
the agent did not know of the sale. Payment was due ninety days after receipt of the first bill
of lading, and to be paid by the buyers three days before maturity, or in case of an earlier
arrival then against acceptance of the documents. The bills of lading were endorsed in blank
by the sellers’ agent and sent to the sellers’ bank in Amsterdam. It was said that the bank held
the bills of lading as it were, in medio. On the one hand they were not to hand them over to
the buyers without the money, but equally they were to be hold them until the due date, and
not hand them back to the sellers unless and until the buyers made default in taking them. The
buyers paid the price in ignorance of the fact that the ship had been seized and her cargo
condemned as prize, and they claimed that the cargo should not have been condemned, since
it was their property. For this purpose they had, under the relevant Prize rules, to show that
the property in the goods had passed by, at the latest, the time of shipment. In upholding the
buyers’ claim, L. Parker relied principally on two points. First, the fact that risk had passed
on shipment pointed “to the property having been intended to pass at that time.” But he also
quoted with approval a dictum of Blackburn J. that property and risk were “not inseparable.”

In The Parchim, the contract made it clear that the risk passed to the buyers on shipment so
that there was no need for the seller to transfer the property at this stage so as to get rid of the
risk. Secondly, L. Parker relied on the way in which the seller had dealt with the shipping
documents this pointed “rather to a desire to support his lien than to a desire to retain the
property or any jus disponendi incident to the property,” and this interference was not
negated by the form in which the bills of lading were taken, as they were so taken by the
sellers’ agent without knowledge of the sale. This reasoning is no longer acceptable as a
general rule. As Lord Wright has said in a case involving a c.i.f. contract 13which called for
payment against documents - “In this course of business, the general property in the goods
remains in the seller until he transfers the bills of landing... The general property in the goods

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must be in the seller if he is to be able to pledge them. The whole system of commercial
credits depends on the seller’s ability to give a charge on the goods and the policies of
insurance. A mere unpaid seller’s lien would for obvious reasons be inadequate and
unsatisfactory.” In another Prize case14, Lord Sumner said that The Parchim had been
“decided on very special facts” and did not “purport to lay down any general rule that a
particular mode of dealing with a bill of lading must, whenever it occurs and in whatever
circumstances, always prove a particular intention.” It is submitted that, in the absence of
special circumstances, an f.o.b. seller who sends bills of lading to his own bank with
instructions not to hand them to the buyer except against payment will be taken to have
reserved a right of disposal so as to prevent the passing of property. Indeed, this much was
admitted by L. Parker in The Parchim for he said that, where the seller dealt with the bill of
lading so as to “secure the contract price”, then “The prima facie presumption... appears to be
that the property is to pass only on the performance by the buyer of his part of the contract
and not forthwith subject to the seller’s lien.” But he added, “inasmuch, however, as the
object to be attained, namely, securing the contract price, may be attained by the seller merely
reserving a lien, the inference that the property is to pass on the performance of a condition
only is necessarily somewhat weak, and may be rebutted by the other circumstances of the
case.” It is submitted that the interference would no longer be regarded as “somewhat weak”
and that it would be particularly hard to displace where the contract envisaged a pledge of the
documents to a third party, such as a bank.  

The current view was taken in The Ciudad de Pasto15, where a consignment of prawns was
shipped in pursuance of an f.o.b. contract under bills of lading making the goods deliverable
to the seller’s order. Eighty per cent of the price had been paid by means of a letter of credit
before shipment; it was not clear against what documents this payment had been made; no
shipping documents could have been available at the time of payment to provide the buyer
with any effective security for the payment. It was held by the Court of Appeal that the
presumption created by S.19(2) had not been displaced, so that property had not passed to the
buyer. This conclusion was regarded as giving effect to the ‘common intention’ of the parties.
As the buyer had been content to pay 80 per cent of the price without security, no intention to
acquire the property could be imputed to him before payment of the balance. So far as the
intention of the seller was concerned, it was said that, “in the ordinary way a seller will not
wish to part with property in goods if they are shipped overseas until he has been paid in
full.”  

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BILL OF LADING TO BUYER’S ORDER

The presumption in section 19(2) applies only where the goods are by the bill of lading
deliverable to the order of the seller or his agent. It has been suggested that the presumption
may be displaced by naming the buyer as consignee; but where this is done, the statutory
presumption simply does not arise, and that a seller should not be taken to have given up his
right of disposal merely because the bill is made out to the buyer’s order. As Lord Sumner
said in a case involving a c.i.f. contract 16- “in spite of the insertion of the consignee’s (i.e. the
buyer’s) name in the bill of lading, the intention to reserve the jus disponendi to the seller till
the documents are taken up is manifested by the way in which the transaction is carried
through with regard to the presentation of the documents.” It is submitted that where the
contract provides for payment against bill of lading the normal inference would be that the
seller had reserved a right of disposal until payment in accordance with the contract had been
made. 

In London Joint Stock Bank Ltd. v. British Amsterdam Maritime Agency Ltd. 17, oil was
sold f.o.b. Amsterdam, put into drums belonging to the buyer, and shipped by the seller under
a bill of lading making it deliverable to the buyer’s order. It was agreed that the seller was to
keep possession of the bill of lading until a draft for the price was actually paid. The ship’s
agents delivered the goods to the buyer even though the latter did not have the bill of lading
and the agents were held liable in conversion to a bank to whom the seller had sold the draft
and transferred possession of the bill of lading. The effect of the arrangement between buyer
and seller was said to be that, notwithstanding the passing of the property, if the property had
passed, the vendors were to have a lien upon the goods which they could give effect to by
keeping, not possession of the goods, but possession of the bill of lading. The suggestion that
property had passed is thus very tentatively made; and, if accepted, may be explained by the
special circumstance that the oil was put in the buyer’s own drums. In any event, the view
that the seller retained a lien after delivering the goods to the carrier can only be explained on
the ground that he reserved some kind of ‘right of disposal, for under section 43(1)(a) of the

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Sale of Goods Act (S.49 of the Indian counterpart), the unpaid seller’s lien is lost when he
delivers the goods to a carrier for the purpose of transmission to the buyer without reserving
the right of disposal of the goods. This presupposes that the property has passed, since a
person cannot have a lien over his own goods and it is arguable that there are two kinds of
‘right of disposal’, one reserving property and the other a lien.18.

    
 
 
 
 
 
 
 
 
 
 
 
 

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CONCLUSION

Starting with appropriation, the same is indispensable in f.o.b. contracts by the virtue of
unconditional appropriation provided in the Sale of Goods Act. But it’s regardless of the fact
of appropriation (Stock v. Inglis) or arrival (Frebold case) of the goods that the risk passes
on to the buyer once the goods are shipped. There has been a series of cases in the period of
100 years, Browne v. Hare to The Ciudad de Pasto where it has been suggested by the
judiciary that seller’s lien should not be confused with a mere retention of bill of lading by
the seller because in the latter case it may not be necessary that the seller is catering any
intention to reserve the right to disposal thus, striking down the view in The Parchim.
Similarly, the bill of lading on the buyer’s order also doesn’t necessarily indicate that the
seller has totally given up his right of disposal. The modern commercial idea is that without
any stipulations to the contrary, property in an f.o.b. contract will not pass until the full
purchase price is made and the bill of lading is delivered to the buyers. From the brief tour of
various case laws, we can safely conclude that the authorities, without exception, hold that
under an f.o.b. contract, the buyer bears the risk of loss damage or misplacement in
transit/after shipment. However, for doing so, they’ve sometimes referred to property
considerations rather than the independent and narrower concept of risk.  

  
 
 
 
 
 
 
 
 
 

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BIBLIOGRAPHY

BOOKS REFERRED :-

 BENJAMIN’S , ‘SALE OF GOODS’, SWEET & MAXWELL, 6TH EDN., 2002.

 SASSOON, DAVID M., ‘CIF AND FOB CONTRACTS’, SWEET & MAXWELL,
2000, 6TH EDN.

SITES REFERRED :-

 www.wiki/internationallaw/property/fob/passingoff.co/html.
 www.google.com.

 www.wikipedia.com.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PASSING OF PROPERTY IN FOB CONTRACT