Thursday, October 15, 2009

CIF 2: Cost, Insurance & Freight

This is a term used in the international sale of goods. CIF only specifies delivery terms and sets out the obligations of the seller and buyer respectively. CIF is, thus, only a part of the sale contract that pertains to delivery terms.

The norm is for the buyer and seller to rely on the International Commercial Terms also known as Incoterms prepared by the International Chamber of Commerce, ICC. Incoterms reflect current trade custom and practice and, it applies only to seaborne transportation of goods.

The CIF seller must arrange and bear cost of carriage of goods, marine insurance, customs clearance. All these costs will form part of cost of goods to the buyer.

Delivery of goods and delivery of title via shipping documents
CIF terms deal with the delivery of goods. But it also deals with the delivery of shipping documents. This was confirmed by the case authority of Kwei Tek Chao by the judge, Lord Devlin.

This is a good and practical mercantile law because it enables the buyer to re-sell goods upon receiving documents even before the physical goods arrive. And, the buyer can use shipping documents as security for banks to issue trade finance facilities such as the Letter of Credit to pay for the goods.

In the CIF-type situation, the buyer has 2 rights of rejection. First, the buyer can reject goods . Second, the buyer can reject documents.

Note that the right of rejection must be based on material non-conformity. If the non-conformity is too insignificant, the de minimis rule applies.

Most countries have laws that gives the buyer right to examine goods for conformity with description, or sample.

Note also that most countries have laws that imply a condition on quality, fitness and merchantability.

Shipping documents
Shipping documents referred to in the CIF clause includes the Bill of Lading, marine insurance certificate and invoice.
The Bill of Lading has 3 important characteristics. First, it is a document of title – but title is defeasible until payment is received for the goods.

Second, the Bill of Lading is regarded as evidence of receipt of the goods by carrier. In most cases, the Letter of Credit will be paid based on the condition that the Bill of Lading must be clean which means that the goods were received in good condition by the carrier.

Third, the Bill of Lading is the contract of carriage. Since the Bill of Lading is issued to the seller, the issue tends to be whether buyer has privity of contract to sue carrier if goods damaged.

Passing of Risk
Both buyers and sellers should note that risk passes to the buyer when the goods cross the ship’s rail. This was decided in the case of The Pyrene by Lord Devlin.

Receipt of shipping documents by the buyer gives the buyer a defeasible right to property until payment made. Deafisible means a qualified right of ownership that is subject to the payment being fully made for the goods bought. But defeasible title is enough for buyer to secure trade finace facilities using the shipping documents with a bank for the Letter of Credit.

Sale of goods laws in most countries state that where goods shipped using Bills of Lading, the seller is deemed to reserve right of disposal and the title does not pass to the buyer until full payment is received by the seller.

Under the CIF arrangement, risk passes from the buyer to the seller only when title in the goods have passed. And, as explained above, under CIF arrangements final title or ownership passes only when the seller receives full payment.

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