CIF Contracts
1-Introduction
An international CIF contract is the preeminent international sale contract on shipment terms. It stands for Cost, Insurance and Freight which effectively describes what the seller should procure for his buyer and what the buyer is paying for. Namely, the buyer is paying for the price (cost) of the goods, along with the insurance that would cover the goods against risks of loss in transit and the freight which will be due so that the goods are “shipped” to their final destination.
The seller must have ensured the fulfillment of each of the above obligations which will be proved to the buyer through the tender of the respective documents: commercial invoice and insurance policy. This denotes that there are two ways of performing a CIF contract: the physical and the documentary way.
2-What is a CIF Contract?
The CIF acronym is usually used in conjunction with Incoterms, or more specifically with a specific version of them. The features of a CIF contract are: the terms at a price, to cover the cost, freight, and insurance, payment by acceptance on receiving shipping documents, are very usual, and are perfectly well understood in practice. The invoice is made out debiting the consignee with the agreed price (or the actual cost and commission, with the premiums of insurance, and the freight, as the case may be), and giving him credit for the amount of the freight which he will have to pay to the shipowner on actual delivery, and for the balance, a draft is drawn on the consignee which he is bound to accept (if the shipment is in conformity with his contract) on having handed to him the charterparty, bill of lading, and policy of insurance. Should the ship arrive with the goods on board he will have to pay the freight, which will make up the amount he has engaged to pay. Should the goods not be delivered in consequence of a peril of the sea, he is not called on to pay the freight, and he will recover the amount of his interest in the goods under the policy. If the non-delivery is in consequence of some misconduct on the part of the master or mariners, not covered by the policy, he will recover it from the shipowner. In substance, therefore, the consignee pays, though in a different manner, the same price as if the goods had been bought and shipped to him in an ordinary way.
If the consignor is a person who has contracted to supply the goods at an agreed price, to cover cost, freight and insurance, the amount inserted in the invoice is the agreed price, and no commission is charged. In such a case it is obvious that if freight is high, the consignor gets the less for the goods he supplies, if freight is low he gets the more. But in as much as he has contracted to supply the goods at this price, he is bound to do so, though, owing to the rise in prices at the port of shipment making him pay more for the goods, or of freight causing him to receive less himself because the shipowner receives more, his bargain may turn out a bad one.
On the other hand, if owing to the fall in prices in the port of shipment, or of freight, the bargain is a good one, the consignee still must pay the full agreed price. This results from the contract being one by which the one party binds himself absolutely to supply the goods in a vessel such as is stipulated for, at a fixed price, to be paid for in a customary manner, that is, part by acceptance on receipt of the customary documents, and part by paying the freight on delivery, and the other party binds himself to pay that fixed price. Each party there takes upon himself the risk of the rise or fall in price, and there is no contract of agency or trust between them and, therefore, no commission is charged.
The initials (CIF) indicate that the price is to include cost, insurance and freight. It is a type of contract which is more widely and more frequently in use than any other contract used for the purposes of seaborne commerce. An enormous number of transactions, in value amounting to untold sums, are carried out every year under CIF contracts. The seller has to ship or acquire after that shipment the contract goods, as to which, if unascertained, he is generally required to give notice of appropriation. On or after shipment, he has to obtain proper bills of lading and proper policies of insurance. He fulfills his contract by transferring the bills of lading and the policies to the buyer. The essential characteristics of this contract have often been described. The seller has to ship or acquire after that shipment the contract goods, as to which, if unascertained, he is generally required to give notice of appropriation. On, or after, shipment he has to obtain proper bills of lading and proper policies of insurance. He fulfills his contract by transferring the bills of lading and the policies to the buyer. As a general rule, he does so only against payment of the price, less the freight, which the buyer has to pay. In the invoice which accompanies the tender of the documents on the “prompt” that is, the date fixed for payment the freight is deducted, for this reason. In this course of business, the general property in the goods remains in the seller until he transfers the bills of lading.
3-The Seller’s Duties Under a CIF Contract
A seller under a contract of sale containing such terms has:
- firstly to ship at the port of shipment goods of the description contained in the contract;
- secondly to procure a contract of affreightment, under which the goods will be delivered at the destination contemplated by the contract;
-thirdly to arrange for insurance upon the terms current in the trade which will be available for the benefit of the buyer;
-fourthly to make out an invoice or in some similar form; and
-finally to tender these documents to the buyer so that he may know what freight he has to pay and obtain delivery of the goods, if they arrive, or recover for their loss if they are lost on the voyage.
Such terms constitute an agreement that the delivery of the goods, provided they are in conformity with the contract, shall be delivery on board ship at the port of shipment. It follows that against the tender of these documents, the bill of lading, invoice, and policy of insurance, which completes delivery in accordance with that agreement, the buyer must be ready and willing to pay the price.
4-Documents are Sacrosanct in CIF Contracts
It has become apparent that there is a great weight paid to the documentary aspect of the performance of an international sale contract. CIF sale is almost not a sale of goods, but a sale of documents relating to goods. The buyer buys the documents. The reality is CIF contract is a contract for the sale of goods to be performed by the delivery of documents, and what those documents are must depend upon the terms of the contract itself. One of the features of a sale CIF is that, in the absence of special terms, the seller claims payment against presentation of shipping documents.
FOB Contracts
1-Introduction
Three types of FOB contracts have been identified, and FOB contracts are “flexible instruments”.
2-Straight FOB Contract
A straight or bare FOB is a sale contract where the buyer enters into a contract of carriage and the seller is under a duty to load the goods on a nominated vessel, at the port of loading. In this type of FOB, the seller is not a party to the contract of carriage. The goods under a FOB contract are delivered when the goods are placed free on board the ship.
3-Classic FOB Contract
In this type of FOB contract, the buyer nominates the vessel and the seller concludes the carriage contract as agent for the buyer. Usually the bill of lading, in that case, will be in the buyer’s name. However, it is also possible to have the bill of lading issued in the seller’s name; this will be subsequently transferred to the buyer. In that case, the seller will be acting as principal.
4-FOB with Additional Services/Extended FOB Contract
In this type, the seller undertakes extra duties on top of the duty to have the goods ready for loading at the port that the buyer designates. These may include entering into a contract of carriage or procuring insurance, or both depending on what the sale contract specifies. The question now is who will be the shipper. The seller might take the bill of lading in his own name and then transfer it to the buyer. The seller may also pay freight and be reimbursed by the buyer at a later stage. Another possibility is that the seller arranges for the carriage and the insurance of the goods and gets paid for them separately.
Differences Between CIF Contracts and FOB Contracts with Additional Services:
In extended FOB contracts, the seller will invoice the buyer separately for the extra services that he undertakes. This would also mean that the buyer would have to bear the market fluctuations in that case. In CIF contracts on the other hand, cost, freight and insurance are already included in the price that the buyer pays.
