The Seller reserves the right of disposal to prevent the passing of property to the buyer until payment has been made for goods shipped. A seller who does not reserve the right of disposal incurs a significant insolvency risk and will suffer loss if the buyer becomes insolvent and property has been passed, but payment has not been made.
The seller can do this by:
1. Having the bill of lading drawn out to delivery of the buyer, but retaining possession of the bill
2. Having the bill drawn out to the order of the seller or the seller’s agents, pending receipt of payment by the buyer, acceptance of draft or fulfillment of any other conditions laid down by the seller
An FOB seller who reserves the right of disposal pending payment by the buyer, will not be in breach of his duties to load goods free on board the vessel. Reservation of the right of disposal in CIF contracts hardly arises because goods are usually appropriated to a contract by way of a notice of appropriation when afloat. Further, unlike other cases when property passes upon shipment such as FOB and FAS, property in CIF passes upon payment against shipping documents.
If a buyer is in wrongful possession of a bill of lading, property does not pass to him. However, he will be able to pass a good title to a sub-buyer.
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