Cost, Insurance and Freight (CIF) and Free on Board (FOB) | CIF and FOB Contracts

By | April 24, 2018
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Cost, Insurance and Freight (CIF) and Free on Board (FOB) are international shipping agreements used in the transportation of goods between a buyer and a seller. They are among the most common of the 12 international commerce terms (INCOTERMS) established by the International Chamber of Commerce (ICC) in 1936. The specific definitions vary somewhat in every country, but in general, both contracts specify origin and destination information that is used to determine where liability officially begins and ends, and outline the responsibilities of buyers to sellers as well as sellers to buyers. In CIF, the buyer should note that seller is required to obtain insurance on minimum cover.

CIF and FOB mainly differ in who assumes responsibility for the goods during transit.

In CIF agreements, insurance and other costs are assumed by the seller, with liability and costs associated with successful transit paid by the seller up until the goods are received by the buyer. The responsibilities of the seller include transporting the goods to the nearest port, loading them on a vessel and paying for the insurance and freight. In some agreements, goods are not considered to be delivered until they are actually in the buyer’s possession; in others, the goods are considered delivered (and the buyer’s responsibility) once they reach the port of destination.

FOB contracts relieve the seller of responsibility once the goods are shipped.

After the goods have been loaded – technically, “passed the ship’s rail,” – they are considered to be delivered into the control of the buyer. When the voyage begins, the buyer then assumes all liability. The buyer can, therefore, negotiate a cheaper price for the freight and insurance with a forwarder of his or her choice. In fact, some international traders seek to maximize their profits by buying F.O.B and selling CIF. It is to be noted that F.O.B clause is frequently taken as a basis for the calculation of the goods sold and not as a term defining the method of delivery.

Each agreement has particular advantages and drawbacks for both parties.

While sellers often prefer F.O.B and buyers prefer CIF, some trade agreements find one method more convenient for both parties. A seller with expertise in local customs that the buyer lacks would likely assume CIF responsibility to encourage the buyer to accept a deal, for example. Smaller companies may prefer the larger party to assume liability, as this can result in lower costs. Some companies also have special access through customs, document freight charges when calculating taxation, and other needs that necessitate a particular shipping agreement.

Contributed By – Lakshay Anand

Sources:

  1. SCC Online
  2. Indira Carr and Peter Stone, International Trade Law Paperback – Sixth Edition, 2017


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