Incoterms 2010 – CIF – Universally used, but no longer universally relevant?

CIF (Cost, Insurance and Freight) is one of the most commonly used incoterms in international trade terminology, and like CFR, this term is used when the seller has met his obligations and all further costs and risks pass to the buyer when the goods are physically placed on board the vessel.  In addition, the seller contracts for and pays for, the costs and freight necessary to bring the goods to the named port of destination.  The main difference between CFR and CIF is that under the CIF incoterm the seller is also responsible for contracting the Goods in Transit insurance cover against the buyer’s risk of loss of, or damage to, the goods during the carriage.

Because the CIF price traditionally provides all the costs to the port of import, it is the perfect cost against which to calculate duty and other taxes.  Which means that the phrase, CIF value, has a specific meaning when used by Customs Authorities world-wide.  This function, which before matched the phraseology and actual meaning of CIF, is now off-key, mainly because the ICC (International Chamber of Commerce) has changed the guidelines under which CIF should be used.

Under the 2010 rules, the ICC has placed CIF in the same category as FAS, FOB and CFR, and requests that this incoterm is now only used for sea or inland waterways transport, but not for sea-freight container traffic.  Which indicates that the cargo that should be shipped using this incoterm (under the 2010 definition) is generally either bulk or break-bulk cargo.

Bulk cargo (classified as either liquid or dry) is loose, unpackaged, non-containerised cargo (such as cement, grains, ore and oil) carried in a ship’s hold and loaded and discharged through hatchways.  Break-bulk cargo is packaged, non-containerised cargo, which is packed in bags, bales, barrels, boxes, cartons, drums, pallets, sacks, vehicles, etc.

Which brings up an interesting question.  Like CFR, the risk under CIF passes to the buyer at the port of export, even though the freight and Goods in Transit insurance is paid for by the seller.  This is an area where the potential for misunderstandings can arise.  This has been mentioned before, but I will mention it again.  It is important that the sales contract specifies the point at which the cargo is deemed to have been loaded on board the vessel.  For example, is it when the first sack or last sack is loaded? Furthermore, there can be misunderstandings regarding contract stipulations that the delivery should not take place later than a specified date at destination.  This phraseology can lead to alternative interpretations.  For example, one interpretation is that the parties have agreed a ‘delivery’ contract rather than a ‘shipment’ contract.  In which case the seller is not considered to have fulfilled the contract until the goods have actually arrived at the port of destination.  This understanding contradicts the basic nature of the CIF contract which states that the seller fulfils the contract at the point of shipment.

This means that with any F-term (FAS, FOB, FCA) or C-term (CFR, CIF, CPT and CIP) the risk always passes to the buyer from the seller at the port of export and all of these incoterms are used with transport contracts which are ‘shipment’ contracts.  Only the D-term (DAT, DAP and DDP) are ‘delivery’ contracts.  It is sometimes helpful to clarify this point in the sales contract so that there are no arguments at a later stage that any party to the contract misunderstood this point.

CIF (and CIP which will be discussed in another article) are the only incoterms where the ICC makes specific reference to insurance.  Please note that they are referring to ‘Goods in Transit’ insurance.  In many contracts this insurance is referred to as ‘Marine” insurance.  However, Marine insurance covers damage or loss to the hulls of sea-going vessels and is probably one of the most misused phrases in international trade circles.  In all of the other incoterms, the ICC leaves it to the parties concerned to sort out who insures what.  This can lead to a situation where the other party always thinks someone else has sorted out the Goods in Transit insurance.  A rather dangerous assumption, which can cause serious problems when something goes wrong.  All international sales contracts should ALWAYS state in full which party is responsible for the insurance and exactly what that cover includes.

There are a number of different types of Institute clauses that covers different aspects of a shipment.  What is important in an insurance policy is what is excluded (rather than what is included).  The most common types that can be used with CIF are Institute Cargo Clauses (A), Institute Cargo Clauses (B), Institute Cargo Clauses (C), Institute Strikes Clauses (Cargo) and Institute War Clauses (Cargo).  There are also special types of insurance for specific shipments, especially commodity shipments, that carry risks which are particular to the commodity.  Whichever Goods in Transit insurance is used, its really important that it covers all of the clauses that the seller and/or buyer wishes the insurance to cover.  This includes clauses such as Warehouse to Warehouse.

The new definition of CIF under the 2010 rules means that technically CIF should only be used with very specific types of shipments.  Since more than 90% of the annual world-wide traffic of non-bulk cargo is shipped in containers, then it follows that CIF is now not used as frequently as it used to be.  Technically.  The problem is that CIF is still used in a lot of contracts when the terms CIP should be used instead.  This does now matter.  If something goes so seriously wrong with the contract that the relevant parties believe the only way of resolving the problem is in a Court of Law, then be warned.  The Courts might throw out arguments if they are based on the interpretation of CIF when CIF should not have been used in the first place.  So even though CIF is universally used, it no longer follows that it is universally relevant.

Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training.  She is based in the United Kingdom.  If you require any further assistance with the matters mentioned above, please do contact us by e-mail on info@point-point.com or check out our other international trade articles on the Point to Point Export Services website at www.point-point.com

 

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