International contracts typically contain shorthand terms known as Incoterms. Incoterms is an acronym standing for international commercial terms. These standard terms hold a universal meaning for sellers and buyers around the world and are used in sales contracts for importing and exporting, delineating how costs and risks are allocated to the parties conducting international transactions. It is necessary to clarify that Incoterms provide key terms that can be incorporated into a sales contract but they are not in themselves a sales contract. Giambrone & Partners expert maritime an shipping lawyers recommend that, a contract should always be drafted, with expert legal advice, to properly document the whole agreement, incorporating the Incoterms.
Khizar Arif, a partner, pointed out “Incoterms have been developed by the International Chamber of Commerce (ICC) which published the first Incoterms rules in 1936. Since their initial publication, they have been revised eight times, and Incoterms 2020 is the most recent version, entering into force on 1 January 2020.” Khizar further remarked. “the current updated version of the previous Incoterms 2010 rules were adopted to reflect changes to the market over the past ten years. Older versions of Incoterms can still be used if the parties expressly incorporate them into the contract.”
Road, rail, water, and air are all modes of transportation that are covered by the Incoterms. However, this article focuses specifically on one of the Incoterms for transport over water: CIF, which stands for Cost, Insurance and Freight.
CIF means that the seller delivers the goods to the buyer: 1) on board the vessel 2) or procures the goods already so delivered.
In particular, CIF requires the seller to properly deliver the goods, cleared for export, on board the vessel at the port of shipment; to pay for the transport of the goods to the port of destination; as well as to obtain and pay for minimum insurance coverage against the buyer's risk of loss of or damage to the goods through their journey to the designated port of destination.
The minimum insurance required by CIF Incoterms 2020 covers just general average and therefore does not include theft, damage, or missing pieces. However, the parties can always negotiate wider insurance coverage.
Mode of transport
CIF applies to ocean or inland waterway transport only. This Incoterm is also mainly used for bulk cargo, oil, and oversized goods.
CIF should be used in situations where the seller has direct access to the vessel for loading. When more than one mode of transportation is required, which is frequently the case when products are delivered to a carrier at a container terminal, CIP (Carriage and Insurance Paid To) should be the appropriate rule to use instead of CIF.
Risks and Costs for the seller and the buyer
In CIF, to understand when all risks of loss of or damage to the goods transfer from the seller to the buyer, it is important to clearly identify both the port where the goods are delivered on board the vessel and the port identified as the destination of the goods. In fact, the seller bears the risk for the goods until they are loaded on board the vessel at the shipment port. After that moment, the risk passes from the seller to the buyer.
For example, if the cargo is loaded on board a ship at Hong Kong's port for carriage to Liverpool's port, the risk for the cargo passes from the seller to the buyer from the moment the cargo is delivered on board the ship in Hong Kong.
It is important to note that the seller must make a contract for the carriage of the cargo from the point of delivery to the agreed port of destination and pay the freight contract costs. Considering the previous example, the seller must make a contract of carriage from Hong Kong (the point of delivery of the cargo) to Liverpool (the port of destination).
The buyer is also responsible for the costs of offloading and onward transportation to the port of destination. Moreover, while the seller is responsible for all export clearance formalities required by the country of export, the buyer is responsible for all import formalities required by the country of import.
Identifying the shipment port and the destination point at the discharge port
As seen, the specification of the shipment port in the contract is of particular interest to the buyer given that it is at the shipment port that risk passes from the seller to him. It is therefore recommended to identify the shipment port in the contract as precisely as possible. Similarly, another element that parties should clearly identify in the contract is the destination point at the agreed port of destination, as the costs to that point are for the account of the seller.
In conclusion, parties involved in the international transport of goods by ocean or inland waterway on a regular basis should be fully aware and understand their respective risks and responsibilities as defined by CIF (amended to the last version of Incoterms 2020 rules). As seen, until the goods are delivered, the seller bears all costs to the port of loading. Yet, he only assumes the risk up until the goods have been loaded; after this moment, the buyer takes over the responsibility for the risk. Finally, CIF is one of only two Incoterms 2020 rules that specifically determines that the seller is the party who has to bear the insurance costs until the products have passed the side of the vessel at the port of loading.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.