At last! An answer of sorts to a question that has been bothering me for more than thirty years: where does title to a cargo of oil pass from seller to buyer on a CIF or CFR deal? Don’t nod off yet before you have read a very welcome article in today’s Shipping Oil News entitled “Bills of lading – who is the owner of the cargo?”, written by the law firm Ince & Co. http://www.hellenicshippingnews.com/bills-of-lading-who-is-the-owner-of-the-cargo/
This reported on the outcome of a case where a cargo of frozen swordfish was traded several times down a chain of supply in which the contracts were not back to back. Half way down the chain there was a contractual right to reject the cargo if the fish were off. That right, I understand, was not passed on to the receiver at the end of the chain who was in receipt of a properly endorsed bill of lading in its favour. The cargo was rejected half way up the chain and suit was brought by the end-receiver who had paid for a load of dodgy fish because it reckoned that, being in possession of a B/L endorsed in its favour, it was the title holder of the cargo and the only party with a legitimate right to bring suit.
The court’s decision makes my non-legal head ache. But as I understand it the court said that the end receiver was the legitimate owner of the fish the minute it had its hands on the B/Ls. Irrespective of what else happened further up the chain of supply the end receiver had a legitimate claim against the carrier in whose custody the fish went off.
The Relevance to Oil Trading
Where title in oil passes from seller to buyer in oil contracts has been open to question throughout my disturbingly lengthy career in the oil industry. Despite this there are many training course providers who still insist that, in the case of a tanker of oil, risk and title in a cargo passes from the seller to the buyer at the load port in an FOB sale and at the discharge port in the case of a CFR (cost of freight), CIF (cost of insurance and freight) or DES (delivered ex-ship) sale. Wrong! This confuses the transfer of custody with the transfer of title.
In the case of an FOB (free on board) sale risk and title to oil pass at the load port and the buyer charters the tanker. In the case of a CFR, CIF or DES sale the seller charters the tanker and passes over custody of the oil to the buyer at the discharge port. But the discharge port is not necessarily where title passes, except in the case of a DES sale. Terms such as FOB, CFR, CIF and DES are defined by the international chamber of commerce in its “INCO” terms. But INCO is silent on the passage of title.
For example, most contracts agree that in the case of an FOB sale the quantity paid for by the buyer is the bill of lading quantity at the load port. This is suggestive, but not conclusive, of the fact that traders believe that the load port is where title passes. Similarly most contracts agree that in the case of a DES sale the quantity paid for by the buyer is the out-turn quantity at the discharge port. But when it comes to CFR and CIF sales there is quite a divergence: some buyers pay for the B/L quantity and some for the out-turn quantity. You have to make sure the contract spells out what the invoice quantity will be in a CFR or CIF deal.
According to INCE: “The Court pointed out that, under a CFR contract, the question of when property passes is one of “actual intention”. However, the Court also noted that, whilst transfer of a bill of lading is prima facie evidence of intention to pass property, it is not determinative.” At last a court has agreed that this whole issue is open to interpretation and you have to be extremely careful that your contract spells out where title passes and consequently what quantity you should pay for, because industry custom and practice is schizophrenic on this point.
I don’t know what the correct answer is objectively, but I am very careful to find out how my clients’ counterparties regard this issue and to ensure that there is no room for doubt left in the contract.
Like the contract for suspect swordfish referred to above, cargoes of crude oil and refined products frequently pass down a chain of contracts, which may turn out not to be back-to-back. My suggestion would be that possession of the full set of B/Ls endorsed in your favour is a necessary, but not a sufficient, condition for “enjoying quiet title to” a cargo of oil. To protect your position to the full extent possible a buyer should ask for letters of indemnity in its favour against claims from third parties, issued by its supplier and secured by a first class bank capable financially of honouring any claims that it is forced to bring or defend.