Advice on use of CIF, FOB and other Incoterms

The terms were “codified” by the International Chamber of Commerce in 1936 by way of Incoterms. Incoterm then included only six abbreviations (FAS, FOB, C&F, Ex Ship and Ex Quay). Today, the latest version of Incoterms is the 2020 revision includes 11 basis variation. Those are broadly divided into families of C, D, E and F terms.

For purposes of illustration and in in the interests of brevity, we will only say that C terms involve the making of a contract of carriage, D are tailored to the seller taking the risk of delivery, the sole E term – Ex Works – makes its nature obvious in the name, and F terms contemplate that the seller is free from the risk of delivery.

However, the more prevalent terms c.i.f. – meaning cost, insurance, freight, and f.o.b. – meaning free on board existed at law well prior to Incoterms 1936. For example, the term f.o.b. was mentioned in the case Wackerbarth v Masson as early as 1812 and c.i.f. in 1862 in Tregelles v Sewell.

At law, f.o.b. contracts are categorised as being of three broad types: the buyer arranges the ship, seller ships and takes the bill of lading; seller arranges shipment and takes the bill of lading in his name; and buyer arranges the ship, seller ships but the bill of lading names the buyer as consignor (Pyrene v Scindia).

As can be seen from the above, the f.o.b. contract is highly adaptable: the vessel may be procured either by buyer or seller and the bill of lading may initially name the buyer or the seller. What is intended to be defining feature of f.o.b. contracts is that the seller should not take on the risk after the goods are loaded onboard.

It used to be the case that for FOB contracts that risk passed when the goods crossed the ship’s rail, but since Incoterms 2010, the reference has been replaced by the moment when the goods are placed “on board” the vessel (this paragraph assumes that Incoterms do apply to the contract).

It is sometimes assumed that f.o.b. contracts are quite simple. However, in f.o.b. contacts, the schedule at the load port is often at the control of the seller; yet, it is the buyer’s duty to procure a vessel available for loading (although the seller, acting as agent for the buyer, may carry out the same). Typically, the buyer will have to nominate the performing vessel to the seller and the seller would have to accept or reject such a nomination (eg, because the draught is not suitable for the port). Now also consider a vessel arrived at the roads, but unable to berth for a prolonged period: here, questions of allocation of demurrage are likely to arise. Accordingly, and again speaking generally, in practice f.o.b. contracts require close cooperation between the buyer and the seller and are not quite as simple.

With reference to c.i.f. contract, the key principle is that the seller must procure the vessel, insurance and pay the freight. The seller than must deliver an invoice, the bill of lading and a form of insurance document to the buyer.
Although the seller does procure the vessel, in a classic c.i.f. contract, it is not the seller’s concern whether or not the goods have been delivered at the discharge port. It is against this context that one can sometimes hear that c.i.f. contracts are contracts for the sale of documents rather than of the goods. This is not quite correct: the obligations of the seller are two-fold – he must procure a compliant physical delivery of the goods onboard the vessel (but not at the discharge port) and deliver compliance documents for those goods.

It follows from the nature of c.i.f. contracts that the seller does not have to load the goods himself, instead the seller can buy goods afloat and pass-on the relevant shipping documents to the buyer.

Whilst not sitting well with the law, it is not that rare for c.i.f. contracts to stipulate that the buyer will pay for the goods using delivered weights / quality measured as the discharge port. Those types of contracts can be referred to as ‘out-turn’ contracts. We should remember, however, that in c.i.f. contracts the seller is not meant to take the risk of actual delivery in the discharge port. The outcome of litigating the point of delivery in an “out-turn” c.i.f. contract can be unpredictable and it is then prudent at the outset to carefully consider whether c.i.f. basis is quite suitable to the circumstances.

For deliveries by rail or truck, the terms CPT (carriage paid to) or DAP (delivered at place) are frequently used. We will only note here that using DAP for deliveries by rail may seem natural, but there is a pitfall that may be overlooked in practice: the delivery of loaded railcars can be delayed for a variety of reasons pertaining to the rail operator. Since DAP delivery occurs at the destination (station), any promise made as to time of delivery also refers to the time of the time of arrival of the railcars at the destination (rather than the time when the rail operator accepted the railcars). Such a promise can be difficult to keep.