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CIF contracts : all you need to know

May 3, 2022

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This article is written by Michael Shriney from the Sathyabama Institute of Science and Technology. This article summarises the CIF contract, including the buyer and seller’s obligations, the contract’s relevance, nature, important elements, constituents, and the differences between CIF and FOB contracts. A sample format of a CIF contract has also been added to the article at the end for reference purpose only.

It has been published by Rachit Garg.

Introduction

A CIF contract, which stands for Cost, Insurance, and Freight, is a form of sale of goods contract in which the price is based on cost, insurance, and freight to the specified selling location. CIF, which is one of the Incoterms, was created by the International Chamber of Commerce (ICC). According to the International Chamber of Commerce (ICC), a CIF signifies that a seller will send goods abroad through a ship and that the danger of damages and losses to the products will be passed on to the buyer when the items are transported on board. The cargo seller will create a contract and pay the freight and costs associated with transporting the items to the specified location. The seller will additionally negotiate a contract for insurance to cover the buyer’s risk of damage to the items while onboard a ship. The seller’s contract covers only the minimum necessary coverage. If the buyer wants more insurance than the minimum amount necessary for the goods they carry, they must agree on the amount with the dealer and arrange their own insurance agreements.

What is a CIF contract

The term CIF stands for Cost, Insurance, and Freight. A CIF contract is a contract for the sale of goods carried by ship in which the buyer’s payment includes not only the cost price of the products but also freight costs and insurance, which must be paid. The seller must either transport the products onboard via a vessel or procure goods that have already been delivered in this manner. When the goods are loaded on board through the vessel, the risk of loss or damage to the goods shifts to the shipper. The seller will enter into a contract in this respect and pay the fees and freight charges associated with transporting the products to the final destination address.

As per Article 141 of the UAE Commercial Transactions Law Federal Law (18) of 1993, a CIF contract is one in which the price of the goods sold, marine insurance charges, and freight via vessel until the destined port, the expenses are all paid in one lump sum amount. The products will be considered sold to the buyer once the vessel has completed its shipment, and the buyer will be responsible for any perishing from that point on. The sale will be regarded as a cost and freight sale if the seller fails to offer insurance coverage.

Responsibilities of a seller

The seller must be responsible for a number of things under the CIF contract including-

The CIF contract covers all items and business invoices provided by the seller, as well as the collection and expense of any and all export licences and other official authorizations, as well as the expenses of transportation and insurance coverage.
The seller must obtain export licences for the items and check them as well.
The seller is responsible for the delivery of goods carried overseas by ship to the planned port and within the specified time frame, the risk of missing or damaged products up until the time of dispatch, and the split of freight, customs, and other associated charges.
The seller is responsible for any charges or fees associated with shipping and loading the products at the seller’s port, as well as packing expenses associated with exporting the cargo.
The seller is responsible for all expenses associated with exporting, including customs clearance, duty, and taxes.
The seller is responsible for the expense of shipping the freight via waterways from the seller’s port to the buyer’s port of destination.
The seller is responsible for insuring the shipment until it arrives at the buyer’s port of destination.
Furthermore, the seller shall just provide the buyer with adequate evidence of delivery with proper notice of delivery including several other fees, spent in shipment, as well as meet any other need that is the obligation of the seller.
He must also cover the cost of any products that are damaged or destroyed.

Responsibilities of a buyer

The buyer is responsible for all costs involved with importing and delivering the products after they arrive at the buyer’s destination port. The buyer must be responsible for a number of things under the CIF contract including-

unloading the product at the port terminal,
transferring the product within the port and to the delivery site,
custom duty and associated costs of importing the goods,
charges for transporting, unloading, and delivering the products to their final destination
paying the cost of the goods they have committed to acquire,
the presence of the essential permits and licences including other authorizations,
taking delivery of products and transferring risk at the time of delivery,
at that moment, the buyer assumes responsibility for any including all damages or losses to the items,
Also, the buyer is responsible for the distribution of goods-related costs, such as duties, taxes, customs, and other government fees, as well as the payment of pre-shipment inspection fees, for the conveyance of goods, the buyer is not compelled by any contract.

Importance of CIF contracts

The limitations of global commerce and the ability to work on a CIF contract have become extremely valuable. Because of the distances between buyers and sellers, there were considerable delays in the delivery of products sold at their end destination, durations during which the commodities were often unavailable for economic transactions of any type. The CIF contracts are used to provide the required solutions. All costs, insurance, and freight are included in the contract. The papers pertaining to the transactions have a similar origin and may be easily retained together throughout their phases. The seller is able to finance the transaction more simply and quickly since the security provided by the attached papers helps the negotiation of bills of exchange and is required for the use of recent letters of credit. In turn, the buyer receives an early right of disposal over the items that he has purchased. Under normal situations, the paperwork comes in advance of the product, and after he has accepted them in compliance with the requirements of the specific contract, the buyer is able to resell or promise as effectively as if goods were physically present.

Nature of CIF contracts

The CIF documents play a vital part in the delivery of products till they reach their final destination. For example, when parties engage in a CIF contract that includes terms & conditions of specified goods that are on a ship from their port of origin to a specified port of destination, the seller has custody of the relevant documentation, which he sends to the buyer. The parties were ignorant that the vessel had already been declared a total loss before the agreement was made. This issue was addressed in the case of Couturier v. Hastie (1856). Here, the buyer obtained the shipping documentation with the seller’s rights and interests, but the argument was rejected by the House of Lords on the grounds that the parties anticipated the existence of the goods. As a result, while a CIF contract involves the original shipping of goods, it does not always mean that the commodities exist at the time the contract is signed.

Arnhold Karberg & Co v. Blythe, Green Jourdain & Co. (1915)

Facts of the case

In this case, there were two CIF contracts for the shipment of beans from a Chinese port to England. Each contract specified that the payment must be made in total cash in London when the products are delivered. The payment was to be made within three months after the date of the bills of lading. The beans were delivered by German ships in July 1914, but when war broke out between Germany and England, both vessels carrying the beans were diverted to refugee ports, where the ship stayed. After three months from the date of the bill of lading, the sellers provided the purchasers with the shipping documents. It was a German bill of lading and English insurance coverage in one case. In the other case, it was a German bill of lading and German insurance coverage. The buyers rejected the seller’s offer of the documents.

Issue

The question is whether the buyers had the right to decline the shipping documentation given by the vendors.

Judgement

The Court ruled that the buyers hesitated to purchase the shipping paperwork. After the conflict broke out, the seller’s offer became null and void. Accepting the offer and carrying out the obligations would imply that customers were getting into contractual connections with the king’s enemies. The Court ruled that a CIF contract is not a sale of goods but instead a sale of documents included in a shipment connected to goods.

Essential features of CIF contracts

The seller ships the agreed products to the buyer at the stated shipping port and issues a bill of lading for the items to be sent to the destination under a CIF contract.
The seller must take out an insurance policy that is accessible for the buyer’s benefit, create a commercial invoice, and then offer these documents to the buyer, who bears the cost of the shipping items.
The goods’ title is either for shipping or on submission of the documentation in this scenario. Risk passes on as soon as the items are loaded onto a ship for delivery, but real possession does not transfer until the documentation representing the commodities, such as the bill of lading, is exchanged for money.
The buyer pays in exchange for a fresh bill of lading that includes the products to be sold, an insurance policy, and an invoice that shows the amount.
The seller will give the buyer all the required documentation. The documentation will be delivered along with the bill of lading.

Important elements of a CIF contract

Necessary documents

There are three necessary documents: an invoice, a bill of lading, and an insurance policy.

The invoice

The seller should issue an invoice in regular commercial type, paying back the buyer with the products at the agreed-upon price, which can be indicated as a lump sum amount or by specific indications of the different cost, insurance, and freight elements.

The bill of lading

The basic aim of the transaction is supported by the bill of lading, which grants the owner ownership rights in the relevant commodities as well as contract obligations under the contract of carriage. The bill of lading must be or can be proof of a valid carriage contract. The papers must be in connection to the items and only the goods that must be included in the contract between the buyer and seller, with terms and conditions which must not be inconsistent.

The policy of insurance

The CIF contract’s insurance policy completes the buyer’s protection for the products against loss or damage by providing security in cases in which the carriers would be freed from duty. The insurance must cover the shipment as well as the products covered by the contract of sale for an amount equal to the fair prices of the goods at the time the contract was signed. The buyer is subject to the advantage of any excess insurance performed by the seller and protected by the policy issued between both the buyer and seller, however, the parties may agree otherwise.

The delivery

There are three methods for delivering in a CIF transaction:

by surrendering the items to the carrier;
in ordinary commerce by a subsequent offer of the documentation representing the products;
by physically delivering the goods themselves upon arrival at the named port of destination.

Risks in transit

Contracts signed under the CIF state that the buyer is responsible for paying for insurance, which is an important component that the seller offers with the assumption that hazards may develop. If an inconsistent burden emerges, the seller will complete his obligations by taking out and transmitting the documentation that represents the products, he will also be charged with voyage risks. The seller is unconcerned about the products’ arriving at their destination. As a result, the buyer bears all transportation risks. Weight certifications or quality certificates are provided by the seller as part of the transaction. The goal of these certificates is to provide sufficient verification of the products during shipping, allowing the seller to satisfy the potential burden of proving an appropriate shipment in advance.

Special considerations

When the buyer considers that the risk occurs only after the cargo has been placed onto the vessel, the CIF contract may not be suitable in certain circumstances. For example, when a godown or a room is loaded with containerized cargo shipments, the items may sit in the container for several days before being transferred onto the vessel at the seller’s port. The customer would be at risk under CIF since the goods would be uninsured while they are kept in the container waiting to be put onto the vessel. CIF agreements, in reality, would not be suitable for shipments, including containerized material.

Difference between CIF contracts and FOB contracts

	CIF contract	FOB contract
1.	Cash, Insurance and Freight contract is the abbreviation for CIF contract.	Free on Board contract is the abbreviation for FOB contract.
2.	Under this contract, the seller will bear all transportation expenses and hazards until delivery, at which point the buyer will accept responsibility.	Under this contract, the seller will pass all costs and risks to the buyer after the shipment is put on board the shipping vessel.
3.	The CIF contract is preferred by the buyers.	The FOB contract is preferred by the sellers.
4.	The CIF contract is expensive.	The FOB contracts are cheaper and more cost-effective.
5.	In CIF contracts, the seller has more control as they choose preferred shippers who may be more costly.	In FOB contracts, the buyer has more control over choosing shippers and insurance limitations.
6.	The CIF is considered a better way to buy goods for those who are new to international trade.	The FOB is considered a better way to buy goods for those who are familiar with international trade.
7.	The seller makes profits from the freight services.	The buyer makes profits from buying FOB. This is advantageous in buying this contract.

Mistakes to be avoided while drafting a CIF contract

The mistakes to be avoided while drafting CIF contract are as follows:

Incorrect modes: There are various modes of transportation to choose from. The contract terms used to ship goods by sea and inland waterways, such as FAS, FOB, CFR, and CIF must be properly mentioned. If the contract specifies the wrong means of transportation, one of the parties will be held responsible for the deal.

No named place: Another common mistake is missing or forgetting to use a designated named place, which leads to disagreements over the duties. There must be no confusion in the contract, as well as the appropriate address and location must be specified.

The contract does not mention the title of goods: Under this contract, the title of the goods must be defined in the contract by the parties to ensure that the buyer and seller’s responsibilities are clear when those goods are to be delivered and who is responsible for the cost of those goods. However, forgetting to specify the title of the goods leads to a dispute in the contract, which is a mistake. The goods’ title must be mentioned individually and clearly in the contract.

Understanding the roles and duties of customs: Both parties make mistakes and have issues in recognizing their roles and responsibilities of customs. The contract clearly outlines the roles and responsibilities for export and import procedures in the contract. It is the parties’ obligation to conduct these formalities appropriately, but parties do not follow the contract’s terms and do not grasp their duties and responsibilities.

Insurance issues: When selecting a CIF contract, the contractors must ensure that they are selecting the proper amount of insurance to match the contract’s criteria. The price of insurance that the seller must declare for the items in the contract should be sufficient to cover the consequences that may arise.

CIF contract FAQs

Who pays CIF freight?

The seller is responsible for all freight transfer and shipping charges, as well as cargo insurance, until the goods are delivered to the buyer’s port.

Does CIF include duty?

Duty charges for exporting the goods from the seller’s port of destination are the seller’s responsibility. Duty charges at the buyer’s port of destination, i.e. import duties, are, therefore, the buyer’s responsibility.

When should I use CIF?

CIF is only used when transporting products by waterways, hence it cannot be used for air freight. CIF is a good option for buyers who don’t want to deal with the stress of getting insurance, paying freight charges, and taking full responsibility for foreign delivery.

Sample format of CIF contract

NOTE: This sample format is only for reference and understanding, an actual contract may vary with the facts and circumstances

Agreement for Sale of Goods (C.I.F. Basis)

This Agreement is made at ______ this ______ day of ______ between M/s.___________., a company registered under the (English) Companies Act and has its registered Office at ____________ London. Hereinafter referred to as the ‘Seller’ of the one part and M/s.___________, a Company registered under the (Indian) Companies Act, 1956 and having its registered office at ______________ hereinafter referred to as ‘the Buyer’ of the other Part;

The Seller agrees to sell to the Buyer and the Buyer agrees to buy from the Seller, ______________ (type of goods) of ___________ tons ________ quantity at the price of ___________ sterling per ton (hereinafter referred to as the said ‘goods’) C.I.F. for December – January shipment.
The Seller- will engage space in a ship at the port of shipment and intimate the name of the ship and her expected date of arrival in any port in India.
The Seller will enter into a contract of affreightment with the owner of the ship for transporting and delivery of the said goods at the port of _____________ in India. The Buyer shall also obtain a Policy of Insurance for the value of the said goods upon the current terms and make out an invoice.
The Buyer shall open a Letter of Credit through its Bankers for the agreed price of the goods and including the freight, insurance and other charges in favour of the Seller’s Banker viz..
The Seller shall ship the goods in the ship and dispatch the documents relating to the said goods namely the contract of affreightment, insurance policy, invoice. bills of lading etc. to its Bankers at the port of arrival.
The said documents duly endorsed in favour of the Buyer will be handed over to the Buyer’s Bankers against encashment of the Letter of Credit and the Buyer will receive the same from its Bankers to enable the Buyer to get the goods cleared at the port of arrival. Such delivery of documents will be deemed to be delivery of the goods to the Buyer and thereafter the goods will be at the risk of the Buyer.
If the said goods are short delivered or are not according to the quantity or quality agreed upon by the Buyer, he will be entitled to claim compensation for the loss suffered by it due to short delivery or breach of warranty and the Seller will be liable to make good the loss.
If the goods are not shipped by the Seller within the shipment period mentioned above, the Buyer will have the option either to cancel this contract or to extend the period. If the contract is not cancelled within two weeks from the last date of shipment, the Buyer shall be deemed to have agreed to an extension of a reasonable period for shipment.
It will be the responsibility of the Buyer to obtain a licence for the Import of the goods In its country and to pay all the customs duties, import duties and other clearance charges for clearing the goods from the ship and carrying them to its factory or godown.
Similarly, it will be the responsibility of the seller to take out an export licence if required by the law of its country and to pay all charges for transport and shipment of the said goods.
The seller shall enter into the contract at its own expense for the carriage of the goods to the port of destination namely – by the usual route In a seagoing ship for the transport of the said goods.
The seller shall obtain at its own costs cargo Insurance for the price of the goods plus 10% so that the buyer shall be able to claim directly from the insurance and provide the buyer with the Insurance policy or other evidence of insurance cover. The insurer shall be of good repute and the Insurance shall be in accordance with a maximum cover of the cargo clauses embedded by the institute of underprescribed writers. The declaration of the insurance shall be from the delivery of the goods on board the ship at the port of shipment namely ____________.
The seller shall be responsible for all the risk of loss or damage to the goods until such time as they have passed the rail of the ship at the said port of shipment. The seller shall also bear the risk to the goods until they have been delivered as aforesaid including costs of loading the goods on a boat or a ship and charges for unloading at the port of discharge which may be levied by the shipping line when contracting for carriage and also pay all customs charges for exportation as well as all duties taxes and other Government charges payable on exportation.
The seller shall give sufficient notice that the goods have been delivered on board the ship as well as any other notice required to allow the buyer to take measures necessary to enable him to take delivery of the goods.
The buyer shall pay all costs relating to the goods from the time they have been delivered to the ship and pay all costs and charges relating to the goods whilst in transit until her arrival and other charges and duties and taxes payable at the port of discharge.
If any dispute arises between the parties in respect of this contract of whatsoever nature or if any claim by one against the other is disputed the same will be referred to arbitration under the Bye-laws of the ___________ Association in London.

_______________

Signature of Seller

________________

Signature of Buyer

Conclusion

As a result, under a CIF contract, the seller agrees to be liable for transportation and insurance to a specified destination point, while the buyer agrees to pay not against delivery of the goods, but against an offer of the shipping documents. It is a deal with the shipping industry all over the world. Only products carried through waterways are subject to costs, insurance, and freight. The buyer will hold the seller liable for the shipment under this contract. The seller will be covered by the insurance coverage for any loss or damage that occurs during the travel prior to payment. In comparison to FOB (Free on Board) terms, the cost is higher in CIF terms.

References

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