Introduction
International trade is highly regarded among the international societies and their companies. Selling a good in international area must be in secured and eligible for the commercial world. The basic contract is defined in Sale Of Goods Act 1979 (2)(1) , ‘a contract of sale of goods is a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price.’ Also the Act mentioned that the contract of sale may be absolute or conditional. In this essay, I will analyse a standard trade term and perhaps the most commonly used is CIF (Cost, Insurance and Freight). Particularly, I will mention what type of contract the CIF contract is, the nature of the contract, the duties and rights of the sellers and the buyers and the differences from the other trade terms. I will also discuss the advantages and disadvantages for both the buyers and sellers and the judicial definitions as appropriate. Before this, I will briefly mention the other trade terms and their historical developments.
Using various terms and conditions could be misunderstand for the buyers and sellers. Therefore, international organisations, such as International Chamber of Commerce (ICC) has regulate the rules of interpretation of these terms in order to decrease misunderstanding. Before 1936, there were no global system or rules to govern trade. Since then, International Chamber of Commerce (ICC) has set out global guidelines for traders. The first version of the rules, known as INCOTERMS (International Rules of for the Interpretation of Trade Terms) also published at that year. The most current version was published in 2010 and it is considerably helpful for the merchants in modern commercial practise.
The parties can incorporate the terms which has set out in INCOTERMS for their contract. Thus, if the parties have failed to do this, the contract is governed by English Law, because interpretation of these trade terms relevant in English Law.
The latest version of INCOTERMS 2010 has eleven different kind of contracts for the modern trade:
• EXW – EX WORKS
• FCA -FREE CARRIER
• CPT -CARRIAGE PAID TO
• CIP -CARRIAGE AND INSURANCE PAIT TO
• DAT -DELIVERED AT TERMINAL
• DAP -DELIVERED AT PLACE
• DDP- DELIVERED DUTY PAID
• FAS -FREE ALONGSIDE SHIP
• FOB -FREE ON BOARD
• CFR -COST AND FREIGHT
• CIF – COST INSURANCE AND FREIGHT
Also, two new rules have introduced (DAT and DAP) and they have replaced the INCOTERMS 2000 rules DAF, DES, DEQ and DDU. Furthermore, the 2010 version divided into two classes based on the made of the transport. The rules for any mode or modes of transport include EXW, FCA, CPT, CIP, DAT, DAP and DDU. Those rules can be used for sea and inland waterway transport are FAS, FOB, CFR and CIF.
In this essay CIF contract (Cost, Insurance and Freight) will be focused. Before this, the other contracts which are available in international trade will be briefly discussed. First of all, under an Ex Works contract (EXW), the buyer needs to collect the goods at the seller’s premises or at other named places as a warehouse, mine or factory. The seller undertakes to have the goods for the collection by the buyer. As for the insurance cover, obtaining export licences and import licences, the arrangements must be made by the buyer.
However, despite the fact that under a Free Alongside Ship contract (FAS), the seller undertakes for delivering the goods to alongside the ship so that the goods can be loaded by buyer, under a Free On Board contract (FOB), the seller responsible for placing goods on the board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. In Free Alongside Ship Contract (FAS), the seller also responsible for the all costs including dock dues and port charges. Although the risk of loss of or damage to the goods passes to the buyers when the goods are alongside to the ship under the FAS contract, the risk of loss of or damage to the good passes to the buyers when the goods are on board the ship under the FOB contract and the buyer bears all costs from these moments onward.
The CFR contract (cost and freight), the seller is to arrange and pay for the carriage of the goods to the destination port. It means that the seller delivers the good on board the ship or procures the goods already so delivered. The seller must contract for and pay the costs and freight essential to bring the goods to the port of destination. The risk of loss or of damages passes to the buyer when the goods are on board the vessel.
The CIF Contract
The term CIF is the acronym which means cost, insurance and freight. To start to analyse this contract would be appropriate with Lord Wright’s description of the CIF contract in Smyth & Co Ltd v Bailey Son & Co Ltd case : “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.”
The price of goods in the CIF contract would include the actual cost of the goods, the insurance of the goods also the freight. The insurance is in the such a signification position at this point because the parties have a greater risk than a purely domestic sale: physical risks associated with transport and the extra handling; political risks, financial risks such as movements in exchange rates and even war risks. Some of these risks can be covered insurance. Also, the insurance cost varies depending upon destination. As far as the price is duly noted by the seller, he can charge a higher price taking into account any other extra services he provides, such as obtaining shipping space and insurance of the good. That is why the CIF contract is desirable for both the seller and the buyer.
The desirableness of the CIF contract, as far as the buyer is duly noted, is that he does not need to be responsible to find any insurance company or shipping place. In that, these might be more difficult in a foreign country due to unfamiliarity with local business practises. It is obvious that the buyer could appoint a trade agent in the country of export to undertake the task of insurance cover and obtaining shipping place, but the reliable and trustworthy agent might be found for a reasonable remuneration. Also, in the CIF contract any risk of rising the value of insurance cover or transportation remains with the seller.
As reported by Scrutton J said in Arnhold Karberg v Blythe, Green, Jourdain and Co, the CIF contract is not a contract that goods shall arrive, but a contract to supply goods that comply with the contract of sale and to obtain a contract for carriage and contract of insurance.
According to Lord Porter in the Compteir d Achat v Luis de Ridder Case , this is the type of contract which the seller under obligation to ship the goods at the port, the description of the goods enclosed in the contract, to secure contract of carriage by sea, to make out the invoice which will charge the buyer with the agreed price of the actual cost, commission charges, freight and insurance premium and to tender bill of lading to the buyer covering the goods to be sold.
If we compare the seller’s margin of the profit between the FOB contract and the CIF contract, and we are given the example of a ‘higher margin’ in the CIF contract compared to the FOB contract; this would mean that the seller might be able to obtain reasonable rates for the insurance and freight in his country but, it is depending on the economic conditions of the country. It can be seen that one of the distinct feature of CIF contracts is that the buyer has to pay against the tender of documents listed in the sale contract. This means that the buyer cannot in principle reject the payment of the contract price conditional on the actual delivery of the goods. On the other hand, the seller is obliged to ship the goods as described in the sale contract and to tender to the buyers the bill of lading, insurance policy, invoice, and any other documents that may be required necessary by the sale contract. Also, it should be noted that the payment does not always take place against tender of documents because the parties may have agreed after sight bill. For instance, providing for payment 30 days from the date of bill of lading.
Another fundamental point is that making the CIF contract has so many advantages for the importing merchants of the developing countries in that using the foreign currency (i.e such as US Dollar, Euro, Pound Sterling) is so healthy for the economy of their countries.
Apart from the general obligations of the parties which are mentioned above, the seller also has some obligations under the CIF contract. First of all, the goods would correspond to the description of the contract at the port of shipment. Under the Sale of Goods Act 1979 , there is an implied term that the goods will correspond with the description. If the goods did not match the description, the buyer could reject to obtain. Also, it is regarded as the date of shipment is a part of the description of the goods. In Bowes and Shand case, the contract was a shipment of rice from Madras and the date of shipment is during March and/or April 1874. Some bags of rice had shipped in February and the rest of them had shipped in March. The court held that the parties had agreed for the date of shipment in the contract and the buyers were not bound to take rice shipped during February.
Also, the seller has to provide the goods and the invoice of the goods or its equivalent electronic invoice or message in conformity of the contract of sale. In Arnold Karberg & Co v Blythe, Green Jourdain & Co case, Scrutton J has said ‘’[CIF] is not a contract that goods shall arrive, but a contract to ship goods complying with the contract of sale, to obtain, unless the contract otherwise provides, the ordinary contract of carriage to the place of destination and the ordinary contract of insurance of the goods on that voyage, and to tender these documents against payment of the contract price.’’
The seller also must obtain bill(s) of lading and an insurance policy. If the contract requires the documents which certificates of quality, certificates of origin, the seller have to obtain these.