CIF, FOB

The nature of a cif contract remains unclear. Discuss. - Justin Santiago

The discussion revolves around whether a CIF contract is a sale of goods or a sale of documents pertaining to the goods or both. A CIF contract is a cost, insurance and freight contract. Under a CIF contract the seller is required to arrange the carriage of the goods and their insurance in transit, and the cost of those arrangements is included in the contract price. The seller obtains a bill of lading and a policy of insurance and forwards them to the buyer, together with an invoice for the price, and the buyer pays on receipt of the documents.

It has been argued that a CIF contract is a sale of documents in the lower courts in the case of Arnold Karberg v Blythe, Green, Jourdain and Co by Scrutton, J who said the contract was a sale of documents based on the fact goods can be paid for or sold on the strength of the documents. Support for Scrutton, J's judgement comes from the fact that a number of legal rights and liabilities are attached to the documents such as the buyer's obligation to pay against the tender of the documents or the right to reject the goods against a bad tender of documents.

However the correct definition of a CIF contract was later addressed in the same case at the level of the Court of Appeal and reiterated in Hindley & Co v East India Produce Co where it was stated that it was the contract of the sale of goods to be performed by the delivery of documents. The case of Kwei Tek Chao v British Traders it was stated there were 2 rights of rejection – rejection of documents and rejection of goods emphasised the point that two conditions needed to be fulfileed and that a cif contract meant both a sale of documents or a sale of goods. Additionally this rule is subject to the proviso that the documents tendered are strictly in conformity with the contract i.e. the goods correspond with the description.

Some cases will illustrate the duality of this definition. In Gill and Dufus v Berger – normal duty of the buyer to pay the price against the documents even though the seller has failed to perform his duty to ship conforming goods.
The rationale is that it is the buyer who will take benefit of insurance and eliminates difficult questions of proof of the actual time when the goods were lost/damaged. This is an exception to the provision on the allocation of risk is Section 20(1) in SOGA which states, "Unless otherwise agreed, the goods remain at the seller’s risk until the property in them is transferred to the buyer, but when the property in them is transferred to the buyer the goods are at the buyer’s risk whether delivery has been made or not."

The buyer is also protected in cases where it is physically impossible to deliver the goods. In cases like Manbre Sacharin where the goods did not exist or were destroyed before the passing of documents, the contract was invalid.

In contrast to a CIF contract, in an FOB contract, S20 of the Sale of Goods Act 1979 is applied and risk prima facie passes with property so that risk normally passes to the buyer when the goods are put across the ship’s rail – Pyrene v Scindia - the tender was at the sellers risk when it was dropped during loading prior to crossing the ship’s rail.

Risk of loss may also remain with the seller by virtue of he provisions of s32 of the Sale of Goods Act. Section 32 (3) provides that:

“where goods are sent by the seller to the buyer by a route involving sea transit under circumstances in which it is usual to insure, the seller must give to the buyer such notice as will enable the buyer to insure them during the sea transit”

If the seller fails to supply such information, the goods are at his risk during the sea transit. It has been argued that s32(3) can have no application to FOB sales because the contract requires the seller to deliver the goods “free on board” and delivery to a carrier is normally deemed to be delivery to he buyer.

In the alternative, risk may pass to the buyer prior to shipment. In Cunningham v Munro it was suggested that if the goods deteriorate because of the buyer’s delay in giving the seller shipping instructions (it is the obligation of the buyer to nominate an effective vessel and nominate the port of loading) or because the buyer induces the seller to deliver goods to the port before the goods can be loaded the buyer would be liable for such deterioration; he would be entitled to reject the goods for non-compliance with the implied conditions as to quality in the Sale of Goods Act, but would be liable to the seller in damages for the deterioration.

Risk may also remain with the seller under the following circumstances :-

1.Seller has reserved the right of disposal by retaining the bill of lading
2.Contract goods are unascertained