Draft of CIF Contract

By Amita Sinwar

III Semester
Nature of c.i.f. contract

This is the most recognizable term associated with the export trade which mercantile custom has
evolved. Lord Wright1 observed that the term c.i.f. (cost, insurance and freight) “is a type of
contract which is more widely and more frequently in use than any other contract used for the
purposes of seaborne commerce. An enormous number of transactions, in value amounting to
untold sums, is carried out every year under c.i.f. contracts.”The nature of the c.i.f. contract is
best understood if its economic purpose is kept distinct from the strict legal effect of the
transaction.

A c.i.f. contract is an agreement to sell goods at an inclusive price covering the cost of the goods,
insurance and the freight payable for the carriage of the goods to the destination specified in the
contract.2 From the business point of view, it has been said that the purpose of the c.i.f. contract
is not a sale of the goods themselves but a sale of the documents relating to the goods. It is not a
contract that goods shall arrive, but a contract to ship goods complying with the contract of sale,
to obtain, unless the contract otherwise provides, the ordinary contract of carriage to the place of
destination, and the ordinary contract of insurance of the goods on that voyage, and to tender
these documents against the payment of the contract price. The essential feature of such a
contract is that a seller, having shipped, or bought afloat, goods in accordance with the contract,
can and must fulfill his part of the bargain by tendering to the buyer the proper shipping
documents. If he does this, he is not in breach even though the goods have been lost before such
tender. In the event of such loss the buyer must nevertheless pay the price on tender of the
documents, and his remedies, if any, will be against the carrier or against the underwriter, but not
against the seller on the contract of sale.

Two variants of the contract, even if described as “c.i.f.” by the parties do not satisfy the
essential legal requirements of the c.i.f. contract.

1. If it is the intention of the parties that the actual delivery of the goods is an essential
condition of performance.
2. If on transfer of the shipping documents, no direct relationship is created between the
transferee on the one hand, and the carrier and insurer on the other.
3. If there is a term to the effect that the goods are to be at the risk of the seller until actual
delivery to the buyer.3

1
TD Bailey Son & Co v. Ross T Smyth & Co Ltd (1940) 56 T.L.R. 825 at 828.
2
Benjamin’s Sale of Goods, 8th edn.(London, 2010) at para. 19-001.
From the legal point of view, the choice of the c.i.f. term raises complex issues because the c.i.f.
transaction embodies, by necessity, elements of three contracts; the contract of sale, the contract
of carriage by sea and the contract of marine insurance. Legal implications involve every part of
the underlying transaction from the nature of the contract itself to the rights and obligations of
the parties, the distribution of risks, and the transfer of title. In some instances these implications
are so clear as to furnish slight ground for disagreement; in others, they have presented problems
that still continue in a state of considerable confusion, a confusion worse confounded when
internationally regarded because of differences in the basic laws of the various countries.

Shipment

The seller’s duty to ship may be performed by actually shipping goods, by allocating such goods
which he has already shipped, or by buying such goods afloat. He is not under any duty to ensure
the actual physical delivery of the goods at the c.i.f. destination; though he is under a duty not to
take active steps to prevent such delivery, for example diverting them elsewhere, or by ordering
the carrier not to deliver them to the buyer.

Certain requirements which are attached with the shipment:

1. Goods must be of the contract description

2. The shipment must be of the contract quality: this is prima facie determined by reference
to the time of shipment though there is in some cases an implied undertaking that he
goods are at the time of shipment in such a condition that they can survive normal transit.
The seller’s duty with regard to the quality of the goods likewise refers to their quality at
the place of shipment.
3. The shipment must be of the correct quantity. If it is not, the buyer is not deprived of his
right to the full quantity sold merely because he accepts the smaller quantity shipped. He
is also entitled to reject the quantity tendered, unless the discrepancy is trifling or unless,
as will commonly be the case, the seller has stipulated for a margin.

Shipment period:

The contract may define the shipment period in various ways. It may provide that the goods are
to be shipped, or that they have been shipped, within specified limits of time; it may,
alternatively, provide for tender of a bill of lading dated within certain limits of time: such
provisions have been interpreted as requiring shipment within the time stated. 4 A contract which
specifies no such time will however be regarded as containing an implied term requiring the
seller to ship the goods within a reasonable time. This term has been described as a condition,
with the result that, where the seller was in breach of it, the buyer would be entitled to reject the
goods.
3
Rowlatt J. in Law & Bonar Ltd v British American Tobacco Co Ltd [1916] 2 K.B. 605. Approved in Comptoir d’
Achat et de Vente du Boerenbond Belge SA v Luis Ridder Limitada (The Julia) [1949] A.C. 293.
4
Suzuki & Co v. Burgett and Newsam (1922) 10 L1. L.R. 223.
Notice of shipment:

The contract of sale may expressly require the seller to give advance notice of the shipment or to
give a “notice of nomination”(i.e. one declaring the name of the ship carrying the goods which
he has appropriated to the contract). One object of such a requirement is to make it possible for
the buyer to contract to resell the goods before shipping documents are actually tendered to him.
Even where the buyer does not intend to resell the goods, a “notice of nomination” may be
important to him (e.g. in the oil business) to enable him to make the necessary berthing and
discharging arrangements. Because of the importance of the receipt of notices of these kinds, the
provisions of the contract with respect to the giving of such notices must be strictly complied
with.

Duties of the seller:

 To ship goods of the description contained in the contract and clear the goods for export
or to buy conforming goods afloat.
 If the goods are not bought afloat, to procure a contract of carriage by sea under which
the goods will be delivered at the destination agreed by the contract and obtain the bill of
lading as evidence of having done so.
 To arrange, if this has not already been done, insurance on terms current in the trade
which will be available for the benefit of the buyer and provide a policy or insurance
document which entitles the buyer to make a claim against the insurer.
 To make out an invoice which normally will debit the buyer with the agreed price, or the
actual cost, commission charges, freight, insurance premium, and credit him for the
amount of the freight which he will have to pay to the shipowner on delivery of the goods
at the port of destination.
 To tender these documents in the manner agreed whether by presentation directly,
transmission by electronic means or otherwise; the bill of lading, insurance policy and
invoice to the buyer, together with any other documents which may be agreed between
the parties and/or might be required by the customs of the trade so that he may obtain
delivery of the goods or recover for their loss, if they are lost on the voyage, and know
what freight he has to pay.

Duties of the buyer:

 Duty to pay price on tender of documents: In the case of a c.i.f. contract, the duty to pay
prima facie arises on tender of shipping documents; but the parties can vary this rule, e.g.
by providing for payment against letter of indemnity, should shipping documents not be
available at the time at which they ought to be tendered. It is arguable that the prima facie
rule is a general rule as tender of shipping documents amounts to tender of constructive
possession of the goods. However the buyer is only bound to pay against documents
 which are in accordance with the requirements of the contract. The rule that the duty to
pay arises on tender of documents has two important consequences:
i) No right of examination before payment: A c.i.f. buyer must pay against
documents: he is not entitled to refuse to pay until he has examined the goods for
the purpose of determining whether the bulk corresponds with the sample or
whether the goods are otherwise of the contract description, quality or quantity. If
the buyer insists on examination of the goods before payment, the seller is entitled
to refuse to ship.
ii) Duty to pay though goods not in conformity with contract: The buyer must, as a
general rule, pay against conforming documents even though the goods are not in
conformity with the contract, even though he knows or rightly suspects that this is
the case.5 However it has two exceptions: First, the rule does not apply in the
cases of fraud, e.g. where the seller tendered documents knowing that they
contained false statements of fact about the date of shipment or about other
aspects of the description or about the quality of the goods, and the buyer would
have been entitled to reject the documents if they had stated the truth with regard
to those matters. Secondly, it may not apply where the goods are actually shipped
differ fundamentally from those that have been sold: e.g. where the contract is for
the sale of peas and the documents tendered relate to goods that are in fact beans.6
 Duty to pay even if goods are lost in transit: If the goods are shipped and lost during the
ocean transit, the seller is still required to tender shipping documents to the buyer and
claim the purchase price from him. Donaldson J. said7: “the fact that the ship and goods
have been lost after shipment or that a liability to contribute in general average or
salvage has arisen is no reason for refusing to take up and pay for the documents.”

This rule applies even when the seller at the time of tender of the shipping documents knows that
the goods are lost. The buyer’s remedy in case of loss of the goods in transit, is normally a claim
against the carrier or insurer. He is also bound to pay the price on tender of documents even
though he has no claim either against the carrier, because the goods were lost through some
cause for which the carrier was not responsible, or against the underwriter because they were lost
by a peril not insured against.8

 To bear all risks of the goods from the time when they shall have effectively passed the
ship’s rail at the port of shipment.
 To receive the goods at the agreed port of destination and bear, with the exception of the
freight and marine insurance, all costs and charges incurred in respect of the goods in the
course of their transit by sea until their arrival at the port of destination, as well as
unloading costs, including lighterage and wharfage charges, unless such costs and
5
Gill & Duffus SA v Berger & Co Inc [1984] A.C. 382.
6
Supra
7
M. Golodetz & Co. Inc. v Czarnikow Rionda Co. Inc.(The Galatia) [1980] 1 W.L.R. 495.
8
Law and Bonar Ltd v. British American Tobacco Co. Ltd.[1916] 2KB 605.
 charges have been included in the freight or collected by the carrying company at the
time freight was paid.
 If the buyer has reserved to himself the right to determine the period within which the
goods are to be shipped and/or the right to choose the port of destination, and he fails to
give instructions in time, he must bear the additional costs incurred as a result and all
risks of the goods from the date of the expiry of the period fixed for shipment, provided
always that the goods have been appropriated to the contract, that is to say, clearly set
aside or otherwise identified as the contract goods.
 To obtain and provide at his own risk and expense any import license or permit or the
like which he may require for the importation of the goods at destination; and to pay all
Customs duties as well as any other duties and taxes payable consequent upon the
importation.

Shipping Documents:

The shipping documents consist, in principle, of a clean bill of lading evidencing a contract of
carriage by sea providing continuous cover to the agreed place of destination, a marine insurance
policy or certificate covering the usual marine risks and any agreed additional risks and an
invoice in the stipulated form.

Two of these shipping documents, the bill of lading and the insurance policy, should provide
continuous cover from the port of shipment to the port of discharge, “so that the c.i.f. buyer,
whatever happens to the goods, will have either a cause of action on the bill of lading against
the ship or a cause of action against the underwriters on the policy.” 9 If documents are not to be
presented to a bank under an arrangement for payment, it is usual to send the buyer at least two
sets of documents by separate secure dispatch.

The bill of lading:

This valued document in international trade is used in both C.I.F. and F.O.B. contracts. The
authoritative definition of bill of lading was uttered in the case of Lickbarrow vs. Mason [1974].
In this case, it was stated that, a bill of lading is the formal receipt by ship owner that good have
been received for shipment in the stated condition and quality, is the memorandum which
evidence and repeats in detail the contract of carriage by sea and lastly it is a document of title to
the goods which enable the consignee to dispose the goods by endorsement or delivery. Certain
definite requirements as to the bill of lading supplied by the c.i.f. seller follow as a matter of
course:

i) The bill of lading must be, or be evidence of, a valid contract of carriage.

9
Roskill J. in Margarine Union GmbH v. Cambay Price Steamship Co Ltd [1969] 1 QB 219 at 245.
 ii) It must relate to the goods, and only to the goods, comprised in the contract between the
buyer and the seller, and its terms must not be inconsistent with the terms of that
contract.
iii) The c.i.f. clause indicates a definite transit, and the bill of lading must cover the whole of
that transit.
iv) Only a clean bill of lading is acceptable, a bill that may be described as “in good
merchantable order.”

It often is provided in c.i.f. contracts that warehouse receipts, delivery orders, dock warrants,
etc., may be substituted for bills of lading. However such a document is not an adequate
substitute for a bill of lading. The effect of the decision in Comptoir d’Achat v. Luis de
Ridder10may be summed up as follows:-

1. A pure c.i.f. contract is one in which the seller performs his obligations by tendering a clean
bill of lading, an invoice and a marine insurance policy covering only the goods sold and in
which the buyer is bound to accept them and pay irrespective of what happens to the goods
themselves.

2. The parties may expressly agree to substitute other documents (e.g., a delivery order and
insurance certificate) for the bill of lading and insurance policy.

3. Where they do so it is a question of construction in each case whether the other normal
obligations of a c.i.f. contract remain unaffected so that 'the documents take the place of the
goods '. The use of the expression c.i.f. is far from decisive, it may merely indicate that the seller
is to arrange shipment and insurance and be paid accordingly.

4. The courts will be very reluctant to construe these hybrid c.i.f. contracts as providing that the
documents take the place of the goods unless the substituted documents are such as to give the
buyers an immediate and enforceable right to obtain the goods (e.g., a delivery order attorned to
by the master) and rights which can be made effective against the insurer in the event of loss. In
other cases they will strive to construe the contract as one in which the seller is obliged to deliver
the goods themselves at the named port of destination and in which the risk remains with him
until he does so.

The insurance document:

The function of the marine insurance policy in the c.i.f. transaction is to complete the protection
afforded to the buyer against loss or damage of the goods by providing cover in situations where
the carrier would be excused from liability. In general therefore very similar considerations apply
as in the case of the bill of lading. In the absence of any special stipulation in the contract of sale,
the seller must take out an effective policy on the terms usual in the trade. The policy should

10
Comptoir d’Achat v. Luis de Ridder [1949] 1 All E.R. 269 (H.L.).
cover the transit and the goods contemplated by the contract of sale for an amount representing
the fair value of the goods at the time when the contract of sale was made.

The invoice:

The invoice should be made out by the seller in the ordinary commercial form, debiting the
buyer with the goods at the agreed price, which may be shown either as a lump sum or by
separate indication of the various items of cost, insurance, and freight. If the freight is payable at
destination, a corresponding credit should be allowed to the buyer. Questions occasionally arise
as to the propriety of adding to the invoice certain charges connected with the shipment that
might not appear to fall naturally within any of the three elements comprised in the agreed price.
So far as such charges are necessarily incidental to the preparation and shipment of the goods, it
is well settled that the seller should assume them as part of the cost. This would be true, for
instance, in the case of export duties, for where such duties are levied the goods could not be
shipped at all unless they were paid.

Other documents:

The parties may further agree that, in addition to the three principal documents, other documents
shall be included in the shipping documents, such as certificates of origin, or quality, or of
inspection. Failure to tender these documents in the proper form will normally have the same
consequences as a failure to tender the appropriate principal documents.11

11
Re Reinhold & Co and Hansloh (1869) 12 T.L.R. 422.