Whether you’re buying a tub of yoghurt from the supermarket, a new car from your favourite dealership on the corner, or ten container-loads of generators from the supplier in China, the starting point is a contract. How complex the contract is will depend from transaction to transaction, but the principles remain the same.
In simplest terms, a contract exists when an offer is made, the offer is accepted, which then leads to the goods being paid for. Payment may be:
- all or partially in advance,
- immediately upon collection of the goods,
- or it may be in some form of an extended credit agreement.
3 Examples of Sales Transactions
Yoghurt is neatly arranged in the display fridge with the price clearly marked. The first requirement for a contract has been met – the offer is made. You pick the yoghurt from the fridge and proceed to the checkout. The second requirement for a contract to exist has been met – the offer has been accepted. You proceed to the checkout and pay for the yogurt. The third requirement for the contract has been met – you have paid for the yogurt meaning that ownership of the yogurt has transferred from the supermarket to you. Risk for the safe delivery of the yoghurt to your fridge at home, lies with you
The purchase of a car from the dealership on the corner is clearly more complex. Once again, the contract starts when the car is displayed on the shop floor. There may or may not be a price indicated on the car but, upon asking, the price will be given to you. Some discussion will commence around what is included in the price e.g. license and registration, metallic or non-metallic paint, anti-smash and grab etc. The price is finally agreed upon and everything is reduced to writing. You affix your signature to the Offer to Purchase and the second requirement for a contract has been fulfilled
It is likely (for most mere mortals) that you cannot pay cash for the car and so you enter into a financing agreement with your chosen financial institution. This agreement binds you to the financial institution until the car has been paid for in full. You are entitled to use of the car, but you do not own the car. A condition of the finance agreement will be that you have to cover the value of the car with an approved insurance policy because the financial institution has an insurable interest in the car for the duration of the finance agreement. Risk transfers from the dealer to you from the moment you step into the car and drive out of the showroom. The dealer is off risk, the financial institution is on risk but this is to an extent, protected by the insurance you have taken and you are on risk to the financial institution until your last payment has been settled.
So now for the international sale transaction. On a visit to China you identify the generators that you want and engage at some level with the seller. Upon your return to South Africa you confirm a price for the goods, negotiate the payment mechanism with your bank, and confirm a delivery date with the seller. You prepare and send a Purchase Order for the goods and because you are aware that SARS Customs determines the f.o.b. value to be the Value for Tax and Duty Purposes, your Purchase Order defines the price per unit as “fob”. You further indicate on your Purchase Order, the date of delivery.
Incoterms® Rules and Delivery
The Incoterms® rules under Article A2/B2 define what is meant by “Delivery” by the Seller and “Taking Delivery” by the Buyer.
The place or port of delivery under A2 marks the place at which risk transfers from seller to buyer under A3. It is at this place or port that the seller performs its obligation to provide the goods under the contract as reflected in A1 such that the buyer cannot recover against the seller for the loss of or damage to the goods after that point has passed.
Article 19 in Section IV of the Incoterms® rules
Put another way, the Seller bears all risk until the goods have been delivered. When the Seller has “Delivered”
- it is off risk, and it has earned the right to be paid,
- it is the Seller’s final obligation; the place where the Seller’s contract ends.
Article 24 (in the same section IV) of the Introduction to Incoterms® 2020 goes on to state:
“… Delivery occurs, for example,
- when the goods are placed on board the vessel at the port of loading in CFR, CIF, and FOB; or
- by handing the goods over to the carrier in CPT and CIP; or
- by loading them on the means of transport provided by the buyer or placing them at the disposal of the buyer’s carrier in FCA”
With the above in mind, let us examine the following questions:
- Is f.o.b. the same as fob the same as FOB?
- Would the Purchase Order description of “Date of Delivery” imply the date of placing the goods ‘on board’; or physical delivery to Port of Discharge or some other place
Is f.o.b. the same as fob the same as FOB?
The WCO/WTO defines several Customs Valuation Symbols, including f.o.b. and ex works. These symbols look and in some cases sound, very much like the Incoterms®. The valuation symbol f.o.b. defines the value of the goods ‘on board’ the exporting vessel. The Incoterms® rule FOB talks to the point where risk transfers from Seller to Buyer; it is the point where the Seller’s contract ends, its final obligation. For the seller to quote an f.o.b. price, tells us that the seller will bear the costs to get the goods on board, but does not tell us when he has delivered. The symbol ‘fob’ is yet a variation on f.o.b. and is not to be confused with or relied upon to be or have the same meaning as the Incoterms® rule FOB.
Would the Purchase Order description of “Date of Delivery” imply the date of placing the goods ‘on board’; or physical delivery to Port of Discharge or some other place?
Incoterms® rules are very clear in their definition of delivery and what that means to the seller and to the buyer. FOB Article A2 in Incoterms® 2020 states
“… The seller must deliver the goods
- on the agreed date, or
- at the time within the agreed period notified by the buyer under B10, or
- if no such time is notified, then at the end of the agreed period, and
- in the manner customary at the port
If no specific loading point has been indicated by the buyer, the seller may select the point within the named port of shipment that best suits its purpose”.
Buyers keep in mind, for the buyer to endorse the Purchase Order ‘fob’ and to indicate a “Date of Delivery” he is leaving the clause open to interpretation.
Now let us consider whether the Incoterms® rule is appropriate for a shipment of 10 containers of generators. Ports around the world that handle containers are restricted, (usually) customs-controlled areas. This means that the seller is not able to enter the port to place the goods on board the exporting vessel. The closest he is likely to get is to hand the goods to the custody of the carrier, outside the port area.
For containerised cargo, the seller and buyer may well consider FCA as the more appropriate Incoterms® rule. Why? Because it means that the seller’s risk and expense transfer points are clearly defined and there is no obstacle to fulfilling the contract.
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Next time we will look at managing risk