Carriage of Goods by Sea: Marine Equipment Supply

Marine Equipment Supply

An international transaction for supply of marine equipment will involve the underlying contract, contract of carriage, marine insurance, payment mechanism and adherence to relevant export and import requirements. In respect of the contract of carriage, special trade terms will play an integral part.

Incoterms: The Incoterms (International Commercial Terms) published by International Chamber of Commerce (ICC) [1] are widely used. However it must be noted that they are voluntary rules and not laws. They will not apply if they are not adopted as part of the contractual shipping terms. As such, if the trade term is to be governed by Incoterms 2000 etc, it must be expressly spelt out. The various terms in abbreviated form are CPR, CIF, CIP, DDP, DDU, DEQ, EXW, FCA, FAS and FOB. The terms most widely used are CIF, FOB or ExWork.

The term most favorable to the Seller is that of ex-works, ex-factory or ex-warehouse, where the buyer will have to collect the equipment at the location specified by the seller, either at some factory or warehouse. For the Buyer, DDP term (Delivered Duty Paid) would be the most favorable, where the Seller is required to bear all expenses and in getting the equipment to the place specified in the Contract.

In practice, CIF (Cost, Insurance, and Freight) and FOB (free on board) are the most preferred shipping terms in use. Allocation of Risk: Ex-work term - Buyer is responsible for risk of damage to the equipment after they have collected the equipment from the factory or warehouse. DDP term - Seller is responsible for risk of damage to the equipment until they have delivered the equipment to the place named by Buyer. CIF term - The risk of damage to the equipment passes to Buyer when the equipment passes the ship’s rail at the port of shipment.

CIF Contract (cost insurance and freight)

A CIF contract [2] [The Julia] is a complete package where both seller and buyer know exactly what their rights and obligations are, at every stage and the contract performed by delivery of the Bill of Lading, insurance policy and invoices. The seller is under a duty to ship the goods or equipment, within the agreed date, from the agreed port of shipment [3] to the agreed port of discharge. They will have to arrange for a contract of carriage which is usual and reasonable for the trade concerned and which complies with the contract terms. The insurance that they procure must be for a reasonable value with reputable insurers on terms usual for the trade concerned, which will be available for the buyer (thus the policy must be assignable). They will also have to tender a cpmmercial invoice either for the total price, or for the cost of each item listed separately, tender the stipulated documents to the buyer, or its agent or bank.

Delivery

The Seller’s duty as regard delivery is satisfied by the delivery of the shipping documents. Delivery of the documents transfers the goods to the buyer. Seller is entitled to be paid once the correct documents are tendered. If the documents that have been tendered are incorrect, the Buyer is under no duty to accept them or to pay for the goods. Usually, the title or property in the goods will pass on delivery of the documents against which payment is made. Tender to the wrong place is not good tender, as the documents must be presented correctly.

Buyer’s duty

Is to accept tender of the contractual documents and pay the price at that time. They must pay the price even though the goods are non-conforming, unless it can be attributed to fraud on seller’s part [Gills & Duffus v Berger] [4] or where the goods shipped differ fundamentally from those contracted. They will have to arrange for collection of the equipment from the port of destination, pay all custom duties, taxes and levies for the importation. All arrangement and payment for license or permit required for the importation of the equipment will be for their account.

FOB contract (free on board)

The seller is required to place the goods free on board an “effective:” ship nominated by buyer. In practice buyer will pay for the loading and carrier will see to all the loading [Pyrene Co. Ltd v Scindia Navigation Co Ltd] [5]. The other variation could be “FOB stowed” where seller will pay for all loading costs. Once the goods cross the ship’s rail, risk in the goods passes to buyer. Where the Bill of Lading is in buyer’s name, property (or title) prima facie passes on ship on the goods. (unless seller had kept the documents back till he has been paid). If the Bill of Lading is in the seller’s name there is a presumption that he has reserved property to the goods. In a strict or classic type of FOB contract, the contract of carriage and insurance are buyer’s responsibility. However parties may expressly vary any of the usual term to suit their requirements.

Bill of Lading

Briefly, the three main documents are the Bill of Lading, Marine Insurance Policy and Invoice. Unless otherwise agreed, the Buyer is entitled to receive a Bill of Lading stating that the goods have been shipped on board, without any adverse qualification (also referred to as notation or claused) as to their condition (called a clean shipped bill).

A statement that the goods were shipped in apparently good condition is good factual evidence [Grant v Norway] [6]. However, a bill of Lading will not be considered claused for purpose of the contract of sale if the notation referred to damage after shipment. [The Galatia] [7]. A Bill of Lading has three functions. It is the document of title to the goods, the evidence of the contract of carriage [The Ardennes] [8] and a receipt for the goods shipped. The ship's master is bound to deliver the goods/equipment to whoever produces the documents at the end of the voyage. That person may be a purchaser on a sub-sale from the Buyer or even a creditor of the Buyer exercising rights given under security.

Packaging

The goods or equipment must be packed in such a way as to meet carrier requirements and to safeguard them against damage from weather, loading, unloading and transportation. It is important to ensure proper and adequate packing for the following reasons: Where the buyer has stipulated for a particular packaging, it must be adhered to, or it will be construed as a breach of contract. If the packaging is faulty or defective, the buyer can refuse to accept the goods. Defects or shortcoming in the packing is also a breach of an implied term of the contract. As the Bill of Lading will contain adverse qualifications, due to defective or faulty packaging, it will not be a clean bill of lading. This will affect the terms of the Letter of Credit, which calls for a clean Bill of lading. Certain countries have import restrictions and other regulatory requirements in respect of packaging that must be complied with. The Buyer will be responsible for confirming any special packaging requirements for the import.

Pre-Shipment Inspection

It is usual (especially in customized design) for the Buyer or their customers (ship-owner) to witness the factory acceptance test at the Seller’s premises prior to shipment. Custom-made equipment will usually be subjected to factory acceptance test or FAT at the sellers’ or their subcontractor’s factory to identify any shortcomings and to prove that the equipment will perform according to its specification before it is shipped. This will also allow the seller to rectify shortcomings discovered during the test. Pre-shipment inspection is mandatory in some importing countries. This is usually carried out by established inspection agencies e.g. SGS etc.

Inspection at Destination

Upon the arrival of the equipment at its intended destination, the Buyer will have to inspect the equipment within a reasonable time to ensure that they have not been damaged during shipment, due to wrong stowage or defective or insufficient packaging. Where the Buyer cannot reasonably inspect them at the port of destination, the inspection will be postponed until the first possible opportunity. This will mean arrival at Buyer’s business premises. Any damage or defect must be notified to the Seller within a stipulated or reasonable time.

[In a simple sale of goods, acceptance would mean the point in time when a buyer is deemed to be unable to reject or return the goods (even though defective). Where marine equipment are procured from overseas for shipbuilding project, the expression “acceptance” of the equipment will not be easy expression to define. A typical supply contract will provide that the equipment will be subject to “acceptance” during the following stages: pre-shipment, post-delivery and post-installation, after all tests and trials have been successfully completed]

Documentation
A rather important piece of work to be done is knowing the correct documentation and certificates that will be required. For clarity, the question of who is responsible for obtaining what documents and the expenses thereof should be agreed upon and allocated. Generally, this will include all complete export and import documentation, shipping documents, and the various licenses, permits, authorizations and certificates (statutory, regulatory or otherwise).

Some usual documents/certificates
To be provided by the seller in marine equipment supply for shipbuilding: certified dimension drawings, schematic or single line drawings, installation drawings, test certificate and report, testing procedure and record form commissioning procedure and record form, maintenance instructions, operation instructions and spare parts catalogue or list etc. Certificates will include an asbestos free certificate, manufacturer’s certificate, approval letter from classification society, classification and/or statutory certificate, fumigation certificate and certificate of origin. [As customs and import restrictions or requirements in different countries may differ, advice from the relevant specialists should be sought].

Footnotes:

[1] ICC Incoterms 2000, Publication No.560
[2] For characteristics of a cif contract see description by Lord Porter in Comptoir d’Achat v Luis de Ridder, The Julia [1949] AC 29, Smyth & Co Ltd v Bailey, Son & Co (1940, N/B Incoterms CIF differs slightly from the common law position.
[3] Depending on the contract, the seller may purchase good afloat
[4] [1984] AC 382 2 Lloyd’s Rep 233]
[5] [1954] 2 QB 402
[6] [1851] 10 CB 665
[7] [1980] 1 WLR 495]
[8] [1951] 1 KB 55]

© David Seah 2007