C.I.F. contract on determining price, exchanging property and risks and methods outlined under this type of contract.
Review current information on C.I.F. contracts.
C.I.F. contracts provide a usable agreement for international trade between different countries. It clearly delineates the responsibilities of both the buyer and seller.
Before discussing the importance of a C.I.F. contract in determining price and the obligations associated with this type of agreement, it is first necessary to understand what type of contract this is. The terms of a C.I.F. contract are very well delineated and outline the responsibilities of both the buyer and seller according to each one's obligations.
C.I.F. contracts refer to cost, insurance and freight for the international sales of goods, where the seller accepts responsibility for arranging insurance. The cost of the insurance is charged in the invoice itself and is prepared by the seller.
C.I.F. contract is considered an incoterm, which provides international rules governing foreign trade. The International Chamber of Commerce in Paris, which helps to regulate trade between different countries by using easily acceptable contracts worldwide, creates Incoterms. The scope of these contracts is limited to matters relating to the rights and obligations of the contract of sale with respect to the delivery of goods sold. One important distinction about incoterms, such as a C.I.F. contract is that they do not deal with the consequences of breach of contract.
Basically, they provide a set of rules for foreign trade, regardless of the country. The seller insures that his pricing will include all of the necessary costs plus his profit margin.
Discussion a) Calculating the Price
According to the terms of a C.I.F. contract, the seller pays the costs and freight necessary to bring the goods/deliverables to the port of their destination. The destination has an obvious impact on the price. The seller is also responsible for obtaining the appropriate marine insurance against the buyer's risk or loss during shipment. The buyer on the other hand is responsible for the goods once they have been delivered and the cost of damages is transferred.
While the seller has to pay all costs required to bring the goods to the port of shipment and to deliver the goods onboard the vessel (as well as unloading charges at the port of discharge, provided they have been included in the freight), the buyer then has to pay any additional costs that may arise after the seller has delivered the goods onboard the vessel. In this sense, the transfer of the risk also determines the division of costs. If something occurs as a result of contingencies after shipment - such as collisions, strikes, government directions, hindrances because of ice or other weather conditions - any additional costs charged by the carrier as a result of these contingencies, or otherwise occurring, will be for the account of the buyer.
The cost of the insurance premium falls on the seller but the seller only needs to obtain minimal coverage. If the buyer wants any additional insurance, then he must initiate and pay for that. So although the seller pays for the premium, it is often in the buyer's best interest, depending on the value of the shipment, to procure additional coverage.
It's also interesting to note that C.I.F. contracts can only be used for sea and inland waterway transport and the seller is required to clear the goods for transport.
The seller bears the majority of the burden in this type of agreement. Besides the insurance, the seller must also obtain (at his own risk) any necessary exports licenses or other documentation and customs formalities needed to export the goods.
Not to mention that the seller must also pay the freight and any other associated costs for loading and unloading the shipment and the customs costs. Obviously, the seller must factor all of these additional costs into the contract.
The costs for the buyer include paying the contract price as well as all of the importation costs such as licenses or other documentation and customs formalities needed to import the goods.
A b) The Passing of Property and Risks
Both parties are subject to some risks in the transfer of these goods. First, the seller must insure that the goods are delivered to the destination port on time as specified in the contract. The buyer on his end must be able to accept delivery at the destination port according to the terms of the contract.
As far as the transfer of risks, the seller is obliged to bear all of the potential risk involved in the shipment of the goods until they have passed from the ship to the port of shipment. Once that happens, the risks are then transferred to the buyer, who must now assume loss or damage risks once the goods touch down in the port.
The seller must also provide proof of delivery and transport documentation at his own expense upon arriving at the shipping destination. This is usually a bill of lading which must cover the goods, be dated within the agreed upon timeframe and allow the buyer to claim the goods from the transporter at the final destination. The buyer and the seller must have previously agreed for documentation to be hardcopy or electronic before the transfer takes place.
In turn, the buyer must accept the proof of delivery and any other relevant documentation for the exchange to take place. There is an even exchange of proof of delivery and acceptance and once that takes place, the transfer of risk is shifted from the seller to the buyer. In between that time, the vessel carrying the goods is often regarded as the buyer's floating warehouse until he claims his goods at the dock.
Obligations Under the Contract
As with any contract, there are obligations associated with a C.I.F. contract for both the buyer and seller.
The seller must first provide the goods as defined within the scope of the contract and the buyer on the other hand must make satisfactory payment based on the agreed upon price. A standard negotiation practice.
Both parties are responsible for the legal documents and customers paperwork associated with the transfer of goods based on the country they ship from and receive in.
The major difference in obligations is that the seller is solely responsible for obtaining the appropriate contracts of carriage to the named port, using a vessel that normally transports goods to the final destination. Neither the buyer nor the seller is under obligation to obtain a contract of insurance.
The division of costs is another obligation for both the buyer and seller. The costs shift from seller to buyer upon receipt of the goods. Duty and taxes upon receipt are the responsibility of the buyer.
Notice to the buyer is incumbent upon the seller. The seller has to give the buyer ample notice that the goods have been delivered according to the terms of the contract.
Checking, marking and packing is a key obligation imposed on the seller. Operating expenses such as measuring, weighing, and checking the quality and condition are necessary and the seller pays for this. He must also arrange for and check the packaging for transport. On the other end, the buyer is responsible for paying for the inspection of the goods.
There are other miscellaneous responsibilities that fall on both parties. The seller must assist the buyer in obtaining any documents that are needed in the country of origin and when the transit country has been reached. The seller also has to advise the buyer about the potential need for additional insurance.
The buyer's role is to pay all the costs incurred in obtaining any of these documents as well as reimbursing the seller for any expenses he incurred in securing documentation.