CIF Contracts
Aims
• To understand the basic elements of the CIF contracts.
• To identify when the relevant documents and the goods sold pass from the seller to the buyer.
• To evaluate the duties, risks and remedies for the parties under a CIF contract. • To identify the different documents that are involved.
A. Definition and basic elements
The CIF trade terms are the most popular ones in relation to the carriage of goods by sea. CIF is the acronym for Cost – Insurance – Freight.
Lord Porter in The Julia [1949] at p.309 indicated the general characteristics of the CIF term in the following passage:
“The obligations imposed on the seller under a CIF contract are well known, and in the ordinary case, include the tender of a bill of lading covering the goods contracted to be sold and no others, coupled with an insurance policy in the normal form and accompanied by an invoice which shows the price and, as in this case, usually contains a deduction of the freight which the buyer pays before delivery at the port of discharge. Against tender of these documents the purchaser must pay the price. in such a case the property may pass either on shipment or on tender, the risk generally passes on shipment or as from shipment, but possession does not pass until the documents which represent the goods are handed over in exchange for the price. In the result, the buyer, after receipt of the documents, can claim against the ship for breach of the contract of carriage and against the underwriters for any loss covered by the policy. The strict form of CIF contract may, however, be modified. A provision that a delivery order may be substituted for a bill of lading or a certificate of insurance for a policy would not, I think, make the contract be concluded on something other that CIF terms.”
From the business point of view, it has been said that the purpose of CIF contract is not a sale of the goods but a sale of the documents relating to the goods. The seller provides the goods as well as the relevant documents. The risk of the goods passes to the buyer as soon as they are loaded on board the ship. The buyer has to evaluate the goods and the documents and accept them or reject them. By rejecting the documents, the buyer brings the CIF contract to an end. The buyer can accept the documents and sue for damages if suffers loss. By rejecting the goods, the buyer can claim the price paid. The buyer can elect to accept the goods and sue for damages. If the goods are destroyed while they were being transported, the buyer has to sue the carrier. The contract between the buyer and the carrier is the bill go lading. The bill of lading is the most important document in shipping transportation. We shall dedicate a whole separate week in bills of lading. The insurance policy agreed by the seller is also passed to the buyer. As we see these documents should be transferable documents. They are transferred from the seller to the buyer. Obviously, another document procured by the seller is the commercial invoice. The buyer pays for the goods as soon as he receives and examines all the above documents. The seller is entitled to payment of the price despite goods might be lost or damaged. In such case the buyer is protected by the assignment of the sea transit contract and the marine insurance.
Cases and statute:
SGA s.28
The Julia [1949] AC 293 (cf Margarine Union v. Cambay Prince [1969] 1 QB 219)
The Wise [1989] 1 Lloyd’s Rep. 96
The Jambur (1990) LMLN 289
B. Duties of seller and buyer
According to Lord Sumner the seller’s obligations under a CIF contract may be summarised as follows:
(i) to ship goods of the description contained in the contract and clear the goods for export or to buy conforming goods afloat;
(ii)if the goods are not bought afloat, to procure a contract of carriage by sea under which the goods will be delivered at the destination agreed by the contract and obtain the bill of lading as evidence of having done so;
(iii)to arrange, if this has not already been done, insurance on terms current in the trade which will be available for the benefit of the buyer and provide a policy or insurance document which entitles the buyer to make a claim against the insurer;
(iv)to make out an invoice which normally will debit the buyer with the agreed price, or the actual cost, commission charges, freight, and insurance premium, and credit him for the amount of the freight which he will have to pay to the shipowner on delivery of the goods at the post of destination;
(v)to tender these documents in the manner agreed (whether by presentation directly, transmission by electronic means or otherwise) the bill of lading, insurance policy and invoice to the buyer, together with any other documents which may be agreed between the parties and/or might be required by the customs of the trade so that he may obtain delivery of the goods or recover for their loss, if they are lost on the voyage, and know what freight has to pay.
The duties of the buyer may be summarised as follows:
(i) to accept the documents when tendered by the seller, if they are in conformity with the contract of sale, and pay the contract price;
(ii)to receive the goods at the agreed port of destination and bear, with the exception of the freight and marine insurance, all costs and charges incurred in respect of the goods in the course of their transit by sea until their arrival at the port of destination, as well as unloading costs, including lighterage and wharfage charges, unless such costs and charges have been included in the freight or collected by the carrying company at the time freight was paid;
(iii)if war insurance is to be provided, to bear the cost;
(iv)to bear all risks of the goods from the time when they shall have effectively been loaded on the ship at the port of shipment;
(v)if the buyer has reserved to himself the right to determine the period within which the goods are to be shipped and/or the right to choose the port of destination, and he fails to give instructions in time, he must bear the additional costs incurred as a result and all risks of the goods from the date of the expiry of the period fixed for shipment, provided always that the goods have been appropriated to the contract, that is to say, clearly set aside or otherwise identified as the contract goods;
(vi)to pay the costs and charges incur in obtaining the certificate of origin and consular documents;
(vii)to pay all Customs duties as well as any other duties and taxes payable consequent upon the importation;
(viii)to obtain and provide at his own risk and expense any import licence or permit or the like which he may require for the importation of the goods at destination.
C. The CIF documents
The shipping documents consist of:
1. a clean bill of lading evidencing a contract of carriage by sea;
2. a marine insurance policy or certificate covering the usual marine risks and any agreed additional risks; 3. an invoice in the stipulated form.
The bill of lading and the insurance policy should provide continuous documentary cover from the port of shipment to the port of discharge.
The seller has a duty to make a proper contract of affreightment and to procure a clean, shipped and transferable bill of lading:
Article:
Schmitthoff, “When a bill of lading is clean” [1979] JBL 164
Cases and statute:
SGA s.32(2)
The Galatia [1980] 1 All ER 501 (first instance – [1979] 2 All ER 726)
