Cost and Freight Cost Insurance Freight
Under Cost and Freight (CFR) and Cost Insurance Freight (CIF), the seller is responsible for arranging and paying for the main carriage. The risk of damage and loss rests with the buyer. CFR and CIF are used in relation to transport by sea or inland waterways.
Under Cost and Freight, the seller arranges the carriage and is responsible for the goods until they pass the ship’s rail at the port of shipment. The seller must pay the cost of bringing the goods to the port of destination. The buyer is responsible for the goods in terms of risk and other costs once they cross over the ship’s rail at the outgoing port.
Under CIF, the seller has the same obligations as under CFR but is also responsible for arranging and paying for insurance for the buyer’s risks during the transit / movement of the goods. The buyer is responsible for the goods, and they are at its risk once they have been delivered over the ship’s rail, but the seller carries the cost of insurance under CIF. This is one of the most common arrangements.
Classic CIF Contract
The cost insurance freight (CIF) INCOTERM is one of the most widely recognised in export trade. In the ordinary course, carriage under CIF involves the tender of a bill of lading covering the goods contracted to be sold, with an insurance policy in the normal form and an invoice which shows the price (which usually provides a deduction for the freight).
The purchaser pays the price against the tender of these documents at the point of delivery at the port of discharge. In a sense, CIF involves the transfer of the documents rather than the goods. The documents constitute title to the goods. Accordingly, it is usually sufficient to tender or deliver the bill of lading.
The term of the CIF contract may be modified. A provision that a delivery order be substituted for a bill of lading. The certificate of insurance may be substituted for a policy
The property in the goods may pass either on shipment or on tender of the documents. The risks generally pass on shipment or as and from shipment, with property and possession passing when the documents which represent the goods are handed over in exchange for payment. The result is that the buyer, after receipt of the documents can claim against the carrier and the ship for any breach of the contract of carriage and against the underwriters for any loss covered by the policy.
Duties of Seller
The seller’s implied duties under a CIF contract have evolved at common law. They are broadly
- to ship the goods in accordance with the contractual description;
- to clear them for export;
- unless bought afloat, to arrange a contract for carriage of the goods by sea to deliver them to the destination required in the contract;
- to obtain a bill of lading in respect thereof;
- to arrange insurance in accordance with the terms current in the trade for the benefit of the purchaser;
- to prepare and make out an invoice for the price, cost, freight and premium charges, commission charges giving the buyer credit for freight payable to the carrier on delivery at the destination;
- to tender the documents in paper form or electronically; namely the insurance, policy bill of lading invoice together with other documents agreed are required in accordance with the customs of the trade.
Duties of the Buyer
It is the duty of the buyer under a CIF
- to accept the documents and the goods when tendered in accordance with the contract;
- to pay the price;
- to receive and take custody of the goods at the port of destination;
- to pay costs and charges in relation to the goods other than carriage and insurance including unloading costs, whaferage charges, lighterage charges unless these are included in the freight or collected by the carrier when freight is paid; If additional risks such as war insurance are to be covered, to bear that cost.
- to take the risk in the goods from the time that they cross the ship rails at the port of shipment.
- to give instructions required to be given in relation to carriage to the port of destination and in default thereof to bear the additional costs thereby incurred from the date on which they should have arrived;
- to pay costs and charges in obtaining any certificate of origin or consular documents required;
- to pay customs duties and other duties arising on importation;
- to obtain any importation licence et cetera required;
CIF landed implies that the cost of unloading to the point of landing including lighterage, wharfage et cetera are carried by the seller.
Clean Bill of Lading
A clean bill of lading is required evidencing the contract of carriage and the receipt of the goods by the carrier. A marine insurance policy or certificate of insurance covering the usual or customary maritime risks and any other agreed risks are required. The invoice must be in the agreed form.
The requirements for a clean bill of lading means that it must not contain a qualification or reservation. In essence, it confirms the goods are shipped in apparent good order and condition.
The exact requirements usually depend on the contract. It may be determined by the custom or trade as to which wording is required. It is presumed that the bill of lading must indicate that the goods have been shipped. In container traffic the normal presumption is that a “received for shipment” bill is sufficient.
A delivery order may be furnished in lieu of a bill of lading in some cases. It may be attorned by the carrier to the purchaser by giving the latter a direct right of action and right to receive the goods.
The goods must be shipped within the period required by the contract. They should be shipped by the customary route unless otherwise specified in the contract. There may be an agreed shipping period or shipping date. If there is no specified route or customary route, the goods should be shipped by a reasonable and practicable route.
The contract should define the place of shipment/destination. There may be provision for a substituted destination. The contract may provide that shipping must be direct or may contemplate calling at an intermediate port.
The bill of lading should name the port of destination in accordance with the contract. Otherwise it may be rejected by the buyer. The bill of lading may provide that the goods can or may be transhipped provided that the entire carriage is covered by a single bill of lading. Transhipment means loading from one vessel and reloading onto another.
Where the contract is for direct shipment, the buyer is usually entitled to a bill of lading which gives evidence of continuous carriage from the port of shipment to the destination without a transhipment. In the absence of a prohibition on transhipment, it is permissible.
The contract should specify standard marine policy cover. In some cases, there may be other customary cover although it may be subject to uncertainties of interpretation in different jurisdictions. The custom may vary from port to port. Marine insurance policies provide standard cover together with supplemental cover which can be purchased. The basic cover may not meet the requirement.
The insurance should be for the value of the goods together with incidental costs and charges, usually at a particular percentage of the basic cost. Commonly, CIF contracts provides for the goods value plus 10 to 15 percent. The reasonable value of the goods should be insured. In the absence of an agreement or custom otherwise, the other costs charges, commission et cetera together with the insurance premium itself are insured. The anticipated rise in value and profit is not insured under the contract.
The seller may have a policy of open cover which requires specific declarations in each case. In these cases, a broker’s cover note may be furnished. The certificate of insurance may be issued by the shipper himself. These documents are not equivalent to an insurance policy as such. However, they may be sufficient to enable the holder to demand and insurance policy by contract or custom. It must be such as to enable the holder, in particular the buyer, to claim against the insurer.
An invoice is required in accordance with the terms of the contract. There may be regulatory requirements in respective of invoices in particular jurisdictions. They must properly identify the goods concerned.
Certificates of origin, certificates of quality, certificates of inspection and other documentation may be required in accordance with the particular circumstances.
Rejecting the Documents
The right to accept or reject the documents is distinct from that in respect of the goods. The right to reject the documents arises when the documents are tendered. The right to reject the goods may arise when the goods are delivered and for a reasonable period thereafter for examination in order to confirm that they comply with the contractual requirements.
The right to reject the documents terminates when the bank advises a letter of credit payment against the documents, even if this is incorrect. The loss of the right to reject the documents does not necessarily coincide with the right to reject the goods. There may be a right to reject the goods may arise when the goods later arrive and are found be non-conforming.
The right to reject the goods must be clear. The buyer must not act inconsistently with his declaration.
In exceptional cases, the right to reject the documents may be postponed where the documents are false or there is fraud, even where the goods have been accepted.
Seller’s Obligations Re Documents
In accordance with the above principles, the seller is entitled to tender documents even if the goods have already been lost. In this case, the buyer succeeds to the relevant rights under the bill of lading and insurance documents.
If the document furnished does not give the buyer a right to claim against the carrier or insurer then the requirements of the CIF contract have not been complied with.
The seller must have the capacity to transfer the property in the goods by the bill of lading. They must exist. They need not necessarily have been appropriated to the particular bill of lading. In such cases, the buyer’s recourse is against the insurer or carrier.
Rejection of Goods
If the documents are delivered and property passes, the buyer may nonetheless have the right to reject the goods in a normal manner when they are physically delivered. The ordinary principles of law applicable to the sale of goods apply. If the goods do not conform or there is a fundamental breach or breach of condition, the buyer may reclaim the purchase price.
If the price becomes payable on delivery or a certain amount of days after delivery, it may be that there is not a true CIF contract. The actual delivery of the goods in conformity with the contract may be a condition for payment of the price so that contract is not in essence one for the acquisition of the title to them by way of documents and therefore not a CIF contract. If, however, the clause determines the date of payment only, it may be nonetheless being a CIF contract.
Property Risk and Payment
In a typical cost insurance freight contract, the risk passes on shipment. The property in the goods passes with the documents upon the delivery of the bill of lading.
Property passes on delivery of the bill to the buyer or to the bank, where payment is made under a letter of credit. However, the property in the goods may revert to the seller if they are rejected.
It is presumed in a CIF contract that the payment is due when the documents are furnished in accordance with the contract. The documents must be presented in conformity with the contract requirements. If there is an undue delay or if the buyer is entitled to reject, then the obligation to pay does not arise.
It is commonly the case that the seller has the right to ship goods or to sell on goods that are already afloat. In this case, the seller must still tender the requisite bill of lading in respect of the confirming goods in accordance with the latter contract.
The seller may be able to secure goods afloat if he cannot make the carriage arrangements for practical, administrative or legal reasons. If the contract provides for shipment from a particular port, the inability to do so may frustrate the contract. In other cases, the right to sell good afloat may be expressly provided.
Cost and Freight
Cost & Freight (C&F) contracts refer to cost and freight. The seller arranges for the contract of carriage to a named port of destination and pays the freight. The goods are not at his risk. Risk passes when the goods are placed on the ship. Under Cost and Freight the seller / shipper is not obliged to obtain marine insurance. In all other respects C&F is equivalent to CIF contracts terms.
The seller must give the buyer sufficient notice to allow him to insure the goods. Otherwise the carriage may be at the seller’s risk.
Carriage paid (CPT) (as with CFR and CIF) makes the seller responsible for arranging and paying for the main carriage, notwithstanding that the risks and any extra costs pass to and rest with the buyer.
CPT means Carriage Paid to a specified destination. Under CPT, the seller is responsible for choosing the carrier and delivering the goods to that place. The seller is responsible for paying the cost of transport and must clear the goods for export.
The buyer is responsible for the risks associated with the goods once they have been delivered to the nominated carrier. It pays for the costs of carriage and other costs once the goods have reached their named place of destination.
CIP refers to carriage and insurance paid to a stated destination. The contract is similar to a CIF contract. The seller has the same responsibilities as under CPT, but in addition, is obliged to arrange and buy insurance covering the buyer’s risks of damage or loss during transport to the named place.
The seller pays the cost of freight and insurance to the stated place. The risk passes when the goods are delivered to the carrier. The seller bears the costs any increase in the freight and insurance prior to the delivery of the goods.
The buyer is liable for the risks associated with the goods once they have been delivered by the carrier. The buyer becomes responsible for the goods and for further costs after they reach their destination.
CIP and CPT require the seller to clear the goods for export. The buyer becomes responsible for the onward transport costs and risks, once the nominated carrier has delivered the goods.
The CPT and CIP INCOTERMs can be used for any form of transport or for more than one type.
References and Sources
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