CIF & FOB - International Trade Law

Introduction:


CIF and FOB contracts share significant characteristics lacking from other varieties of international sale contract. In all CIF, and arguably in many FOB contracts , possession is transferred constructively, by means of the shipping documents, which represent the goods. Further, the documents can be used to resell or pledge the goods while they are afloat, and the buyer, or if there is a series of chain sales the ultimate buyer, presents the documents to obtain the goods from the carrier at their destination. In these contracts, the documents have a very important role than in other types of contract .

With these types of contracts, the seller loads the goods at the port of loading, and obtains shipping documents, which the buyer uses to discharge the goods at the port of destination. There is no need for the parties ever to meet in order to perform the contract. Transactions can be documentary in form, and neither buyer nor seller needs to leave his country of business .

CIF Contracts:

In Ross T.Smyth & Co Ltd v T.D.Bailey, Son, & Co

Lord Wright observed that, it is a type of contract which is more widely and more frequently in use than any other contract used for the purposes of sea-borne commerce. An enormous number of transactions, in value amounting to untold sums, are carried out every year under CIF contracts.

Under a CIF contract, the seller is responsible for arranging the carriage of the goods and their insurance in transit, and the cost of those arrangements is included in the contract price, so that the buyer is not concerned with fluctuations in freight rates or insurance premiums. The seller obtains a bill of lading and a policy of insurance and forwards them to the buyer, together with an invoice for the price, and the buyer pays on receipt of the documents .

In a CIF contract, the seller makes two secondary contracts. The first contract is contract of carriage by sea, which is known as the contract of affreightment, under which the ship-owner signs a bill of lading on receipt of the goods. The Second one is contract of insurance apart from the essential ancillary relationship; the c.i.f. contract creates additional relationships, which are supplementary thereto .

Variants of CIF Contract:

1. A common one is the C & F contract, which lays the responsibility to insure on the buyer. This is a positive responsibility, and not merely a discharge of the seller’s obligation to insure, because sometimes the seller himself is interested in the insurance. For example if the buyer does not pay or goes bankrupt and the seller is left to reclaim the goods .

2. Then comes CIF delivered contracts and CIF Out-Turn Contract, both are normally used in the bulk oil trade .

3. Moreover, other variants of CIF contract arise when the buyer agrees to pay, in addition to cost, insurance, and freight, for some extra items such as commission, exchange and interest.

FOB Contracts:

The FOB contract has a long history; it can be found as early as the beginning of the nineteenth century. The contract is developed in an era when it was customary for a merchant to charter a ship and travel with it to trade at various ports, the merchant would require the persons from whom he bought goods to place them ‘free on board’ his vessel . According to Sassoon, the seller must pay the cost and bear the responsibility of putting goods ‘free on board’ , in other words, he must bear the full liability for the cost and safety of the goods until the point of their passing the ship’s rail, and that upon this being accomplished delivery is complete and the risk of loss in the goods is there and then transferred to the buyer.

In other words, the seller must not only supply the goods, but also bears responsibility for seeing that they are shipped at the port named in the contract. The buyer normally arranges carriage, but the seller must see that the goods are loaded on the ship and pay the costs of loading .


In Pyrene & Co v Scindia Navigation Co


Devilin J. identified three types of FOB contract.

1. Seller makes contract of carriage, but buyer nominates vessel ( ‘classic’FOB).

2. Seller nominates vessel, makes contract of carriage and arranging insurance cover for the cargo. Probably rarest variety. Also referred to as FOB with additional duties. Similar to CIF except in terms of freight risk.( ‘Extended ’ FOB)

3. Buyer nominates vessel, and makes contract of carriage (Pyrene Case itself). Probably most common variety today. ( Simple FOB)

Comparison between CIF contracts and different types of FOB contracts by analysing the advantages and disadvantages of each form of contract for the parties:


Comparison :

1. Nomination of the ship:

Under CIF it is done by the seller, classic FOB it is done by the buyer, extended FOB its done by the seller and in simple FOB its done by the buyer.

2. Carriage Contract:

Under CIF, Extended FOB and in Classic FOB it is done by the seller, but in simple FOB it is done by the buyer.

3. Insurance Contract:

In CIF and in Extended FOB it is done by the seller. But in simple FOB and classic FOB it is done by the buyer.

4.Who bears the risk of price fluctuations?:

In simple FOB, classic FOB and Extended FOB the risk is with the buyer. Only in CIF it is with the seller.

5. When does the risk pass to the buyer?:

In all the cases, the risk passes on shipment.

6. Generally, when does the property pass to the buyer?:

In CIF on tender of transport documents, in classic and extended FOB on shipment, unless other intention of parties(on tender of documents). In simple FOB it is on shipment.


The distinction between a CIF and FOB contract is in many ways important. It lies in the determining of the method of calculating the price, the passing of property and finally, the risk and the methods in which the parties can perform their obligations under the contract. It would seem to follow from the nature of an FOB contract that the seller must actually ship the goods in accordance with the contract . This does not mean that the seller must personally ship the goods, he can perfectly well procure the shipment to be made by a supplier on his behalf .But he cannot tender documents in respect of goods already afloat, or a shipment made by a third party after and without reference to the contract, and subsequently appropriated by the seller. But this can be done in the case of CIF and C & F contracts. As a result, a CIF contract cannot be frustrated by an export ban . This in turn will help the seller to fulfil his contract to the buyer and this nature of CIF contract is advantageous to both buyer and seller.

Under CIF and C & F contracts, goods may be appropriated to the contract after shipment, but in the case of an FOB contract such appropriation must be made by (or before) shipment. This is the natural meaning of the obligation to deliver FOB. If the seller could appropriate to an FOB contract goods shipped by another person, considerable difficulty might arise in adequately covering the buyer’s interest by insurance .

Under a CIF contract, the seller is not bound to put the goods on board, nor is the buyer bound to nominate an effective ship. If the contract is on FOB terms, a buyer who fails to nominate an effective ship is not bound to claim damages for non-delivery .

Under an FOB contract, the buyer may exercise control over the choice of the carrier, but must also bear the risk of changes in the cost of carriage and is responsible for making carriage arrangements. Thus, sellers will prefer FOB contracts at times when carriage costs are high or likely to fluctuate, or when shipping space is scarce .

Under an FOB contract, the named port is port of shipment, but under CIF contract, the named port is the port of destination. CIF contract is always an export contract, but FOB contract is used in domestic as well as in export contracts .

In CIF contract, the buyer does not have to take the task of finding shipping space or insurance. This is clearly advantageous to the buyer, especially when he is unfamiliar with the trade practices in a foreign country. And the risk of any increases in transportation and insurance costs remains with the seller. Moreover, there is no need to pay until the relevant documents are tendered. When the necessary documents are acquired, the buyer can sell the goods to a third party based on the documents. Then under CIF contract, the buyer acquires the right to sue the carrier according to Carriage of goods by Sea Act, 1992, with the transfer of the bill of lading .

Then under CIF contract ,the seller can charge a higher price taking into account the extra services like obtaining shipping space and insurance. His margin of profit could be substantially higher than in FOB contract, because he may be able to obtain reasonable rates for freight and insurance depending upon prevailing economic conditions. The seller gets paid for the goods before their arrival at destination, because the payment for goods in CIF contracts often takes place when the documents are tendered to the buyer, or to the bank in the event of a documentary credit arrangement between the seller and the buyer .

The FOB contract is not a documentary sale in the sense that expression is used in connection with CIF contracts. An FOB seller may have documentary duties, similar or even identical to those of a CIF seller, but the documents are not a substitute for the seller’s physical duty to load in the way that CIF documents stand in for physical delivery of the goods at the port of discharge .

The CIF term better serve the interests of the seller, because he is the shipper and the person to whom the bill of lading was issued.Thus, no question could arise as to his right to possession. Moreover, he is certain that insurance had been procured and is therefore less concerned than an FOB seller. Seller can recover the value of goods in the event of loss or damage before payment. Finance and banking credit facilities, therefore are much easier to arrange and the buyer is also benefited from the easier finance and credit facilities .

In order to preserve foreign money or support home industries, governments often limited the allocation of foreign currency to the FOB value of the goods at the foreign port of embarkation, forcing the importer to procure carriage and insurance in the local market in domestic currency. In the absence of import regulations, or other measures having a similar effect, pressure was nonetheless exerted to restrict imports to FOB terms in order to support and promote national shipping and insurance industries .

When the First World War causes the scarcity of shipping space, the trade based on the CIF contract began to reduce, because the sellers were not ready to under take the onus of searching the tonnage with the uncertainty of rapid fluctuations in the price and the availability of freight. This lead to a corresponding increase in trade handled by FOB contract. This situation is described in Blyth & Co v Richard Turpin & Co . This situation lasted until the re-establishment of the normal shipping conditions in the late twenties, then the CIF contract regained its position of the prominence it had previously, a revival that lasted until the advent of second world war . CIF contract can survive only if there is normal shipping conditions are available. However, FOB contract can survive in any war like situation.

Conclusion:

The application of CIF and FOB contracts is directly corresponding to the economic climate of a country-in particular, developing countries. In their economy, foreign currency reserve is a healthy sign. Therefore, they prefer trade based on FOB contracts . The use of CIF and FOB terms are based on how it is advantageous to the parties of the contract.


Bibliography:

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