FOB and CIF:
dropped while loading on board

1954: a fire tender dropped before it crossed the rail

The British company Pyrene sold a fire tender to the Government of India FOB London. While it was being lifted aboard by the ship's tackle in the Port of London, it was dropped through the ship's fault and damaged. It fell before it had crossed the ship's rail.

Under FOB as then understood, risk passed when the goods crossed the rail, so the loss was the seller's. Pyrene paid £966 for repairs and claimed it from the shipowner. The shipowner admitted fault but relied on the Hague Rules package limitation to pay no more than £200 — and the court agreed.

A load falling off a hook: structurally it is the same as the strap failure I went through during a DDP unload. The case is seventy years old but still teaches two things: when the moment risk passes is hanging in mid-air, there will be a dispute; and even when the other side admits fault, recovery can be capped.

From "the rail" to "on board"

Tying risk to the instant cargo swings over the rail never matched reality, and from Incoterms 2010 delivery under FOB, CFR and CIF became when the goods are placed on board the vessel. A drop during the lift is now clearly before loading is complete — the seller's risk.

CFR and CIF are widely misread. The seller pays freight to the destination port, but risk has already passed to the buyer at the port of shipment. These are "two critical point" rules: costs and risk split at different places. A loss at sea is the buyer's risk, and under CIF the buyer claims on the insurance the seller took out.

Using FOB for containers

FOB, FAS, CFR and CIF are sea and inland-waterway rules designed for bulk and heavy cargo whose condition can be checked at the port of loading. They are not suited to containerised cargo.

A container is typically delivered to the terminal days before it is loaded. Under FOB, risk passes only when it goes on board, so the seller keeps carrying the risk of a box that has already left its hands and sits in a terminal it cannot control. That is why FCA, CPT and CIP, where risk passes on handover at the terminal, are recommended for containers.

What carrier liability limits mean

In Pyrene the shipowner admitted fault but the payout was capped. Under the widely used Hague-Visby Rules, carrier liability is still limited to 666.67 SDR per package or 2 SDR per kilo, whichever is higher (unless the value of the goods is declared on the bill of lading).

With hundreds of small cartons the limit rarely bites. With heavy equipment, where one machine is "one package", it does — even the weight-based limit can fall well short of the price of new equipment. The other side can admit fault and you still don't get your loss back, which is why cargo insurance has to fill the gap.

Before you sign

• For containerised cargo, use FCA or CIP rather than FOB or CIF.
• For heavy-lift shipments, confirm who arranges the crane and whether it is ship's gear or a shore crane.
• Under CFR or CIF, make sure the buyer knows risk passes at the port of shipment and checks cover for the voyage.
• For a single high-value piece, compare the carrier's liability limit with the cargo value, and cover the gap with a value declaration or insurance.

References

· CMI Database, Pyrene Co Ltd v Scindia Navigation Co Ltd — facts of Pyrene — FOB London, dropped before crossing the rail, £966 repair, £200 limit
· Wikipedia, Incoterms — the four sea-only rules are not for containerised freight

Trade terms and site risk — series

· DDP and unloading accidents
· DDP to the Middle East: who holds the import licence?
· EXW vs FCA: dropped while loading at the factory
· FOB and CIF: dropped while loading on board (this article)
· CIF vs CIP: what the insurance actually covers