CIF Contracts in International Sales of Goods
“Cost, Insurance and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
A CIF Contract is in the form a contract for the sale of goods in which the amount to be paid by the buyer covers not only the cost price of the goods but also the terms of insurance and freight.
Article 141(1) of the UAE Commercial Transactions Law (Federal Law 18 of 1993) states: ‘
A CIF Contracts sale is one concluded against a lump sum price covering the price of the item sold, the maritime insurance charges and freight by vessel to the port of destination.’ The goods shall be considered as having been delivered to the buyer upon completion of shipment by the vessel, and the liability for the perishing shall from that moment be borne by the buyer.[1] Where the seller fails to provide insurance cover, the sale shall be deemed a (C.&F.) sale.[2]
Importance of CIF Contracts
With continued expansion in the boundaries of world trade such ability had become urgently desirable. Greater distances intervening between buyers and sellers meant long delays in the arrival at the final destination of merchandise sold, periods during which the goods often would be unavailable for commercial dealings of any kind. The situation called for some kind of machinery that would make it possible to treat substitutes or representatives, more mobile and more readily accessible than the goods as if they were the goods themselves. Substitutes of the kind required were readily at hand in the form of the usual ambulatory documents incidental to the original sale, but the types of sale contract commonly in use were inadequate for the purpose in that they failed to provide for the concentration of these documents in one holder. Invoicing, shipping, and insurance documents tended to become scattered in different hands. The C.I.F. contract furnished the needed solution. From the arrangement of a price that included cost, insurance, and freight it followed as a matter of course that the seller did the invoicing, drew the bill of exchange, if any, took out the bill of lading, and looked after the insurance. All the documents concerned in the transaction thus had a common origin and could be kept together throughout its later stages without difficulty.
Furthermore, the seller is enabled to finance the sale more easily and to get his money more quickly; for the security afforded by the attached documents facilitates the negotiation of bills of exchange and is indispensable to the use of modern letters of credit. The buyer in his turn acquires an earlier right of disposition over the goods that he has bought. Under ordinary circumstances, the documents arrive in material advance of the merchandise, and as soon as he has taken them up in accordance with the terms of the particular contract 7 the buyer is in a position to resell or to pledge as effectively as if the goods were actually present. By emphasizing the documentary aspect of the transaction, by substituting the compact mobility of paper for the bulk of freighted wares, the net result of the C.I.F. provision is thus to minimize the handicap of distance.
Nature of the CIF Contracts
The emphasis placed on the documents in a C.I.F. transaction already has been remarked. This emphasis and the predominant part played by the documents from the time the goods are shipped until they arrive at their final destination raise a question that goes to the essence of the contract. In Arnhold Kar- berg & Co. v. Blythe, Green, Jourdain & Co.,[3] there were CIF contracts for the sale of beans to be shipped from Chinese ports to Naples and to Amsterdam. The beans were shipped in July, 1914, on German ships, but on the outbreak of war both carrying vessels put into ports of refugee, where they remained. The buyer refused a subsequent tender of the documents. Scrutton, J., observed that a C.I.F. sale is not a sale of goods, but a sale of documents relating to goods. This contention presupposes a shipment of actual merchandise, seems self-evident; for otherwise there could be no documents.
Illustration: A contract is entered into for the sale on C.I.F. terms of specific goods afloat, the seller being at the time in possession of the relative documents which he indorses over to the buyer. Unknown to the parties the carrying vessel had become a total loss before the bargain was struck. Under such circumstances, it was argued in Couturier v. Hastie[4] that the purchaser bought, in fact, the shipping documents, the rights and interests of the vendor; “but the argument was rejected by the House of Lords on the ground that the parties contemplated the existence of the goods.
Thus, although a CIF contracts involves an original shipment of goods, it does not necessarily imply that such goods continue to exist at the time when the contract is made.
Important Constituents of CIF contracts
I. Essential Documents
The three essential documents are the invoice, the bill of lading, and the policy of insurance. [5]
The Invoice: The invoice should be made out by the seller in the ordinary commercial form, debiting the buyer with the goods at the agreed price, which may be shown either as a lump sum or by a separate indication of the various items of cost, insurance, and freight.
The Bill of lading: It supports the prime object of the transaction by endowing the holder with property rights in the relative goods and with contract rights under the contract of carriage. The bill of lading must be, or be evidence of, a valid contract of carriage. It must relate to the goods, and only to the goods, comprised in the contract between the buyer and the seller,and its terms must not be inconsistent with the terms of that contract.
The policy of insurance: The insurance policy in the C.I.F. transaction completes the protection afforded to the buyer against loss or damage of the goods by providing cover in situations where the carrier would be excused from liability. The policy should cover the transit and the goods contemplated by the contract of sale for an amount representing the fair value of the goods at the time when the contract of sale was made. As between buyer and seller, the former is entitled to the benefit of any excess insurance effected by the latter and covered by the policy tendered; but the parties may provide otherwise.
II. The Delivery
There are three ways in which deliver in C.I.F. transaction be made. First, by the surrender of the goods to the carrier; secondly, in symbolic fashion by subsequent tender of the documents representing the goods; and finally, by physical delivery of the goods themselves on arrival at destination. The question is which of these operations constitutes a “voluntary transfer of possession” within the meaning of the C.I.F. clause. From the mercantile background of the contract there spring at once to mind two conclusions that seem to dispose of the matter easily enough. In the first place, it cannot be the intention of the parties to defer delivery until arrival, because by taking up the documents the buyer may acquire the power to deal with the goods prior to that time. In the second place, it equally cannot be their intention to effect delivery by surrender to the carrier, since to do so would be inconsistent with the later use of the documents. The inference is thus compelling that through the C.I.F. clause buyer and seller signify their intention that delivery is to be accomplished in the way in which a transfer of possession of goods afloat commonly is accomplished, by a delivery of the relative documents.
III. Risks in Transit
The C.I.F. buyer pays for the insurance as one of the elements in the comprehensive price quoted him by the seller and thereby assumes the corresponding risks.[6] The seller moreover completes his own obligations in taking out and forwarding the documents that represent the goods; to charge him with the hazards of the voyage would be to impose an additional and inconsistent burden. It is no concern of the seller whether the goods actually arrive at the destination. Thus the risks of transit are with the buyer.
Illustration ( Willits & Patterson v. Abekobei & Co.[7]): A contract for 10,000 cases of bean oil, 75 pounds in each case, at $I5.00 per 100 Ibs. C.I.F. San Francisco contained the clause “Net landed weight.” When the oil arrived in San Francisco there was a shortage of 79,555 pounds. The buyer thereupon brought an action against the seller to recover the proportionate amount of the purchase price, which had been paid in full under the letter of credit. The Commercial Court of Havre, upholding the seller, dismissed the action as ill-founded, stating that the purpose of the clause was not to throw the risks of the voyage on the seller but to protect the buyer against loss in weight due to the fault of the seller.
Contracts often provide, for instance, that the seller is to furnish weight certificates or certificates of quality. The obvious purpose of such certificates is to offer satisfactory evidence of the state of the goods on shipment; in this way, therefore, the seller meets in advance the prospective burden of establishing proper shipment.
IV. The buyer’s right of inspection
The buyer has an absolute right of inspection of goods at the time of reception of goods. In E. Clemens Horst Co. v. Biddell Bros.[8], the proposition was laid down that the buyer must accept a tender of proper documents without reference to the goods behind them received. The flaws in this proposition are that firstly, it may occur in particular cases that the goods arrive in advance of the documents and that the buyer, having seen them, has discovered that they are not in conformity with the contract. If the documents appear to be correct, whereas the goods are defective, it is difficult to avoid the inference that the seller has misrepresented the goods in the documents; and that alone should be sufficient to justify the rejection. Secondly, the buyer may have reason to believe that the goods will prove to be faulty when they arrive, as for example in the case of a series of shipments, all so far received has been below standard.
Illustration ( Hardy and Company v. Hillerns and Fowler ): The buyer took up documents on a C.I.F. shipment of wheat, and subsequently took delivery of the wheat, reselling and dispatching a portion of it to sub-purchasers on the same day. It then appeared that the wheat was not of the contract description, and the buyer claimed to reject. The seller disputed the claim because of the re-sales. The buyer contended that property had passed to him so that the seller had no ownership with which the re-sales could be inconsistent.
Lord Atkins decided if the goods are not in accordance with the contract the property does not pass to the purchaser upon his taking up the documents if he has not had at that time an opportunity of ascertaining whether the goods are in conformity with the contract. Though it may be that the property passes subject to its being revested when the buyer exercises his right of rejection.
Frequently Asked Questions (FAQ)s
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What are the essential features of a C.I.F. contract?
- Under C.I.F. contract, the seller boardsthe agreed goods at the named port of shipment and procures a bill of lading under which the goods will be delivered to the destination.
- The sellers undertake the insurance policy which is available for the benefit of the purchaser, makes a commercial invoice and finally tenders these documents to the buyer who pays the price of the shipped goods. In such a case, the title of the goods is passed either on shipment or on tender of the documents.
- The risk generally passes as soon as goods are boarded, but actual possession does not pass until the documents representing the goods i.e. bill of lading are handed over in exchange for the price.
- The buyer pays against the tender of a clean bill of lading that includes the goods contracted to be sold, an insurance policy and an invoice that shows the price.
- The seller provides the necessary documents to the buyer. The documents tendered include a bill of lading.
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Does the seller in the C.I.F. contract have the option of tendering documents or goods?
If a contract gives the seller the option of tendering documents or goods, it is not deemed as a C.I.F. contract, so the seller is not bound to tender the documents. In a C.I.F. contract the seller has no right to exercise this option, hence, must tender the documents and the delivery will be not be completed by only tendering goods alone.
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What are the responsibilities of the seller and the buyer as per the terms of the C.I.F. contract?
The seller’s responsibilities: It includes the provision of the goods and commercial invoice in conformity with the contract of sale, the acquisition and cost of any and all export licenses and other official authorizations, costs of the carriage of goods and insurance coverage. The delivery of goods aboard the ship at the port of destination and during the stipulated time period, as well as the risk of lost or damaged goods up until the point of delivery, and the division of freight, customs and other associated costs are the responsibility of the seller. Moreover, the seller provides the buyer with sufficient notice of delivery, the proof of delivery, and various costs involved in shipment and fulfil any other stipulated obligations.
The buyer’s responsibilities: It is the buyer responsibility for the payment of the price of the goods as agreed upon in the contract, the acquisition of necessary licenses and other authorizations, taking the delivery of goods at the point of delivery and the transfer of risk at that juncture, assuming responsibility at that point for any and all losses or damages of the goods. The division of costs relating to the goods including duties, taxes, customs and other official charges, as well as for payment of the pre-shipment inspection of goods has to be borne by the buyer. The buyer has no contractual obligations for the carriage of goods.
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I.F. vs. CIP
“Carriage and Insurance Paid to” means that the seller delivers the goods to the carrier or another person appointment by the seller at an agreed place. It is similar to the C.I.F. contract with respect to the seller’s responsibility for providing insurance coverage for the goods while in transit for 110% of their value. The seller not only contracts for and pays the costs of carriage necessary to bring the goods to the place of destination, but also the insurance cover against the buyer’s risk of loss of or damage to the goods in transit. Under CIP the seller obtains insurance only on minimum cover. [9]The difference between the two is that the CIP applies to all modes of transport, while C.I.F. can only be used for non-containerized sea freight.
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I.F. vs. CFR
“Cost and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The seller passes to the buyer the risk of loss of or damage to the goods when the goods boarded on the vessel. Under CFR contracts like C.I.F. contacts, the seller contacts to pay the costs and freight charges necessary to transport goods to the port of destination. The risk for lost or damaged goods and the additional costs get transferred from the seller to the buyer once the goods are onboard the ship in the port of shipment. CFR requires the seller to clear the goods for export. CFR and C.I.F. are similar agreements; the distinction being that, under C.I.F., the seller is obligated to ensure the goods while in transit for 110% of their value.
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What are the Fob Contracts?
“Free On Board” means that the seller delivers the goods on board the vessel indicated by the buyer at the port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes from the seller to the buyer when the goods are on board the vessel, and the buyer than bears all costs.
The principle underlying transfer of title in goods in f.o.b. contracts was stated in B.K. Wadeyar v. Daulatram Rameshwarlal[10]. This Court held that in f.o.b. contracts for the sale of goods, the property is intended to pass and does pass on the shipment of the goods.
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Are CIF Contracts and FOB contracts different?
The distinction between CIF (cost, insurance and freight) and FOB (free on board) contracts is well recognized in the commercial world. While in the case of C.I.F. contract the seller in the absence of any special contract is bound to do certain things like making an invoice of the goods sold, shipping the goods at the port of shipment, procuring a contract of insurance under which the goods will be delivered at the destination, etc., whereas, in of FOB contracts the commodities are delivered free on board the ship. Once the seller has placed the goods safely on board at his cost and thereby handed over the possession of the goods to the ship in terms of the bill of lading or other documents, the responsibility of the seller ceases and the delivery of the goods to the buyer is complete. The goods are from that stage onwards at the risk of the buyer.
In Contship Container Lines Ltd. v. D.K. Lall[11], the court observed the contract of sale was on FOB basis even when the contract of insurance proceeded on the basis that the transactions between the seller and the purchaser and meant to be covered by the policy would be on CIF basis.
[References]
[1] Article 141(2) of the UAE Commercial Transactions Law.
[2] Article 141(3) of the UAE Commercial Transactions Law.
[3]Arnhold Karberg & Co v Blythe Green Jourdain & Co [1915] 2 K B 379.
[4]Couturier v Hastie 2 5 H L 673 (1856).
[5]Johnson v Taylor Bros & Co [1920] A C 144.
[6] Smith Co Ltd v Marano 193 App Div 126.
[7]Willits & Patterson v Abekobei & Co I97 App Div 528.
[8]E Clemens Horst Co v Biddell Bros [1912] A C 18.
[9]https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-rules-2010/
[10]B K Wadeyar v Daulatram Rameshwarlal AIR 1961 SC 311.
[11]Contship Container Lines Ltd v D.K. Lall(2010) 4 SCC 256.
