This paper advises parties to a sale of goods contract under two alternative contract types: CIF (Cost, Insurance, Freight) and FOB (Free on Board). It examines the obligations of buyers and sellers under each contract type, focusing on the transfer of risk and property, documentary tender requirements, insurance obligations, and notice requirements. The paper draws on the Sale of Goods Act 1979, the Carriage of Goods by Sea Act 1992, the Hague-Visby Rules, and INCOTERMS to assess liability for lost or damaged goods at sea, including scenarios involving war risk and carrier deviation.
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CIF (Cost, Insurance, Freight) is a contract term used in contracts involving sea carriage. The price of goods in a CIF contract is inclusive of freight and insurance costs to the destination specified in the contract. The seller charges a higher price to cover these additional services.
Technically, a 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 both a contract of carriage and a contract of insurance.
The seller is usually paid for the goods before their arrival at the destination, since payment in CIF contracts typically takes place when the shipping documents — invoice, insurance policy, and bill of lading — are tendered to the buyer. However, the parties may agree to deferred payment credit, for example 30 days from the date of the bill of lading. Goods do not have to be paid for until the relevant documents are tendered. The buyer also acquires the right to sue the carrier upon transfer of the bill of lading.
A CIF contract is a contract under which the vendor, in the absence of any special provision to the contrary, is bound to:
1. Make out an invoice of the goods sold.
2. Ship the goods from the port of shipment in conformity with the description of goods contained in the contract.
3. Procure a contract of affreightment under which the goods will be delivered at the destination contemplated by the contract.
4. Arrange for insurance upon terms current in the trade that will be available for the benefit of the buyer.
5. With all reasonable dispatch, send forward and tender to the buyer the shipping documents — namely, the invoice, bill of lading, and policy of assurance. Delivery of these documents to the buyer is symbolic delivery of the goods purchased, placing the goods at the buyer's risk and entitling the seller to payment of the price. If no place is named in the CIF contract for the tender of the shipping documents, they must prima facie be tendered at the buyer's residence or place of business.
Under the Sale of Goods Act 1979, the seller may sue the buyer for damages for non-acceptance where the buyer wrongfully neglects or refuses to pay for the goods. Here, the seller may sue the buyer for non-payment after tendering the shipping documents, which are symbolic of the goods. Under a CIF contract, the buyer is obligated to render payment upon receipt of the shipping documents.
In commercial contracts generally, risk passes along with property. However, in CIF contracts the passing of risk and the passing of property are not simultaneous. Risk passes upon shipment, whereas property normally passes much later, when the documents are tendered to the buyer.
Because risk passes upon shipment, the buyer is under an obligation to pay for the goods against a valid tender of documents. The buyer must accept a good tender of documents and pay for the goods upon that tender; payment cannot be postponed until the actual arrival of the goods. This is the case even when the goods have been lost or damaged before the tender of documents.
In C. Groom Ltd. v Barber [1915] 1 K.B. 316, the goods were lost before appropriation to the contract owing to war. The insurance policy did not cover loss or damage due to war, and there was no right of action against the carrier. Nevertheless, the buyer was required to pay for the goods against the tender of documents.
Property may pass upon transfer of the documents to the buyer and payment of the price by the buyer to the seller — the most common mechanism in CIF contracts. The property the buyer receives is, however, conditional property. Property may also pass on tender of the bill of lading even where the buyer has not yet paid, provided the seller has agreed to extend credit.
Because property passed from seller to buyer upon delivery of the documents, the seller is deemed to have met the obligation of delivery of goods. The buyer is therefore obligated to render payment. Because risk passes from seller to buyer upon shipment — when the goods pass the ship's rail — the seller bore no risk at the time the documents were delivered to the buyer. The risk is accordingly with the buyer, who has no recourse to the seller for goods that are lost, damaged, or delayed.
The buyer may argue that the seller, as the procurer of an insurance policy in a CIF contract, should have obtained war risk cover. Under this argument, the seller would be responsible for lost or damaged goods resulting from a failure to secure adequate insurance in accordance with the contract requirements.
Under a CIF contract, the buyer has a right to minimum insurance cover in accordance with the Institute Cargo Clauses. However, the Institute Cargo Clauses contain a war exclusion clause. Standard minimum cover therefore does not include war risk insurance. Where the buyer requires cover for risks such as war, strikes, riots, and civil commotions, the seller must arrange such cover, but only at the buyer's expense and upon the buyer's request.
In this case, the seller did not arrange for war risk insurance. However, the buyer did not request separate war risk cover, which is necessary to create that obligation. The seller was therefore under no obligation to procure war risk insurance, and minimum cover was sufficient to satisfy the seller's obligations under the CIF contract.
FOB ("Free on Board") is a contract term that has been subject to varying uses over the years. It is defined in INCOTERMS as FCA ("Free Carrier"). An FOB contract is a contract for the sale of goods under which the seller agrees to deliver the goods over the ship's rail, with the buyer assuming responsibility for overseas carriage.
The seller's obligations under an FOB contract are as follows:
(a) Provide goods in conformity with the contract of sale.
(b) Prepare the commercial invoice and other documents, including any required certificates of quality or inspection as stipulated in the sale contract.
(c) Check, pack, mark, and deliver the goods.
(d) Pay for loading costs and freight to the ship's rail.
(e) Give sufficient notice to the buyer that the goods have been placed on board the ship.
(f) Comply with export licence and customs formalities.
(g) Provide the buyer with any proof of delivery of the goods.
(h) There is no obligation on the seller to obtain insurance, although the seller must provide the buyer, upon request, with any information necessary for the buyer to obtain insurance.
(i) Bear the risk of any loss or damage to the goods until such time as the goods have passed the ship's rail at the port of shipment.
The buyer's obligations under an FOB contract are:
(a) Give notice to the seller.
(b) Obtain a contract of carriage.
(c) Accept the transport document provided by the seller as proof of delivery.
(d) Pay the price agreed in the contract of sale.
(e) Bear the risk of the goods from the moment they have passed the ship's rail at the port of shipment.
(f) Pay all other costs, duties, and taxes.
(g) Comply with import licence and customs formalities.
(h) Accept delivery when the cargo is placed on board the named ship on the date or within the stipulated time.
Under an FOB contract the buyer is required to accept the transport documents provided by the seller as proof of delivery. Where the seller delivered the shipping documents as promised and the buyer accepted them, delivery of goods is constituted under the FOB contract and the buyer is therefore obligated to pay for those goods.
The buyer cannot reasonably deny that the seller delivered the promised shipping documents, nor can the buyer claim that the seller should bear the risk of damaged goods. As with CIF contracts, the seller in an FOB contract bears the risk of loss or damage only until the goods have passed the ship's rail at the port of shipment; from that moment, risk rests with the buyer.
"Seller's duty to notify buyer of war risk"
"Cargo loss and deviation under Hague-Visby Rules"
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