6. A Brazilian company exports 200 bags of green coffee to a Chinese company The

Question

6. A Brazilian company exports 200 bags of green coffee to a Chinese company The bags are shipped from Brail on 8 March, 201X on a FOB basis. On 10 March, 201X, due to heavy seas, the ship sinks en route to China. Please answer the following questions; Which party the loss in this instance? what if the bags had been shipped on CIF basis? what if due to leakage, water spoils the shipment of coffee, which arrives ruined in China? What difference might this make in the outcome in a FOB or CIF shipment?

Explanation / Answer

1. When the sale is on a FOB basis shipping point, the buyer pays for the freight, insurance, etc. from shipping point to the destination. The title to the goods is transferred from the seller to the buyer once the goods are shipped and hence any risks and rewards will be to the account of the buyer.

Since the Brazilian company has shipped the goods on a FOB basis, the title to the goods has been transferred to the Chinese company when they are shipped and hence the loss due to the ship sinking will be the Chinese company’s loss.

2. If the bags had been shipped on CIF basis, the freight, insurance would have been paid by the Brazilian company and the title to the goods would have been transferred to the Chinese company only on the goods reaching the destination. In such case, the Brazilian company would have borne the loss.

3. In case of a FOB shipment, the loss due to ruined goods would have to be borne by the buyer. However, if it were a CIF shipment, the seller would have to make good the loss of the goods to the buyer and would have to replace or refund the amount for the goods.

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