Features of a CIF contract

‘The central feature of a CIF contract is that it is a shipment contract. This fact explains virtually every contractual and legal feature of the contract’.

Even if the CIF contract was the only standard form of shipping contract, which it is not, it would be very difficult to agree with the above statement; the contractual and legal features of this contract are explained by its title rather than its industry application.

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The acronym C.I.F. stands for cost, insurance, freight and represents those features which are included in the cost-price of the goods to be purchased[1]. ‘Cost’ simply pertains to the actual cost of the goods being purchased, ‘insurance’ quite literally means that the goods will be protected by an insurance policy during their transit and ‘freight’ refers to the cost of shipping the goods by carrier to the final delivery point.

The best way to explain and understand the contractual and legal features of the C.I.F. contract is by way of an example. Consider the following:

A. Ltd. [based in Ireland] offers to sell to B. Ltd. [based in England] 10,000 Kilograms of King Edward potatoes [A-grade quality] for £2000 C.I.F. Liverpool. B Ltd. accepts the offer in writing. A legally binding contract has thus been formed. Let us now examine every stage of the execution of this contract, with particular focus of the respective contractual duties of A. Ltd., the seller, and B. Ltd. the buyer.

Clearly, the first duty of A. Ltd is to appropriate 10,000 Kilos of A-grade quality King Edward potatoes. It may be that A. Ltd. already has this quantity of potatoes stocked in one of its warehouses in Ireland. Alternatively, A. Ltd. may know of a carrier which is on its way to Liverpool carrying this quantity of potatoes on board, in which case, A. Ltd. might choose to purchase them from their current owner while they are afloat. Alternatively, A. Ltd. may have already dispatched a shipment of potatoes to Liverpool, in which case, it may simply choose to assign the appropriate quantity of potatoes to meet B. Ltd.’s order.

In light of the fact that the contract stipulates both the quantity, namely 10,000 kilos, and the quality, namely A-grade quality King Edward variety potatoes, the seller is under a duty to ensure not only that the goods dispatched/purchased/assigned meet this description, but also that they will continue to meet this description on delivery; in the case of Mash & Murrell Ltd. v. Joseph I. Emanuel Ltd. [1961][2] it was held that there is an implied term in all C.I.F. shipping contracts that, at the ‘time of shipment’, the goods are of a sufficient quality to survive normal transit.

A. Ltd., having appropriated the 10,000 kilos of potatoes, must then arrange for these potatoes to be shipped to Liverpool, the destination stipulated in the contract, and it is A. Ltd.’s duty to pay for the cost of this shipment, i.e. the freight.

In return for this shipment fee, the carrier must provide to A. Ltd. a valid[3] Bill of Lading. A Bill of Lading is a document which contains the terms of the contract of carriage, as well as a statement that the goods have actually been shipped[4]. Essentially this document serves at the title of ownership, i.e. whoever possesses this document is entitled to take possession of the goods. In the case of Hansson v. Hamel & Horley [1922] A.C. 36, the House of Lords held that once the seller has transferred the Bill of Lading to the buyer, conferred on they buyer are two distinct rights; “(a) a right to receive the goods[5], and (b) a right against the shipowner, who carries the goods, should the goods be damaged or not delivered’. …” Regarding the former right, it therefore follows that this document be freely transferable [Soproma SpA v Marine & Animal By-Products Corp. [1966] 1 Lloyd’s Rep. 367]. Regarding the latter right, it therefore follows that the Bill of Lading, when procured by the seller, in our example A. Ltd., must be an accurate reflection of the state of affairs at the time of shipment. This principle was confirmed by the Court of Appeal in the case of The Galatia [1980] 1 W.L.R. 495. In this case it was held that the Bill of Lading must include a factually accurate statement as to the quality and quantity of goods which have been shipped. Where any quality or quantity is listed as ‘unknown’ on the Bill of Lading, the Court has tended to infer a presumption that the presumed state of the goods is “not wildly at odds” with the quantity or quality in fact loaded[6]; be “not wildly at odds” with the quantity in fact loaded.

Returning to our example: A. Ltd. has thus far appropriated the cargo of potatoes, has made/procured a contract of carriage, at his own cost, and has received a valid Bill of Lading from the carrier, as receipt of shipment. A. Ltd. must now, as part of his final contractual duties, secure an insurance policy, again at his own cost, to protect the potatoes from all ‘usual risks[7]’ which might occur during their transit from the point of shipment to delivery at the port of Liverpool[8]. It is also important that the type of insurance policy secured is fully transferable, i.e. assignable by endorsement under S. 50(3) of the Marine Insurance Act 1906[9]; after all, after the goods have been delivered to B. Ltd., this company may wish to transfer the goods to a third party, who may then need to rely on the insurance cover, should it later transpire that the potatoes were damaged during their voyage at sea.

These documents having been obtained, A. Ltd.’s final contractual duty is to ensure that these documents are sent and delivered to B. Ltd. I good time, so that they will have them in their possession at the moment the carrier delivers the potatoes to Liverpool[10].

Having discussed the contractual duties of the seller under a C.I.F. contract, let us now turn to examine the contractual duties of the buyer, B. Ltd:

The first thing to note is that the buyer does not buy the goods themselves, but rather buys the documents pertaining to the goods, namely the Bills of Lading and the Insurance policy. Thus the buyer, B. Ltd., is under a duty to accept these documents from A Ltd. and pay for them. This duty is not absolute; the buyer has a right to reject these documents if they indicate that the cargo has been shipped late (i.e. later than the shipping date stipulated by the contract). This was confirmed by the High Court in the case of Kwei Tek Chao v. British Traders & Shippers Ltd. [1954] 2 QB 459. Likewise, the buyer has a right to reject improperly tendered documents: In the case of Alkali Export Corp. v. Fl. Bourgeois [1921] 3 K.B. 443, the High Court held that the buyer was within his right to reject the documents for they did not contain a valid insurance policy, but rather an insurance certificate.

Interestingly, under this conception of the C.I.F. contract, the buyer has a duty to pay against the documents even if he has not yet had a chance to inspect the goods[11]. This principle was confirmed in the case of Biddell Bros v E Clemens Horst Co. [1911] 1 K.B. 214, and was reiterated in the case of Manbre Saccharine v. Corn Products [1919] 1 K.B. 198, in which it was held that the buyer must pay against the documents even where the goods are damaged upon arrival. Prima facie, this might seem somewhat unfair; after all, why should a buyer pay for goods which have arrived in a damaged condition. However, if one considers the mechanisms operating under the C.I.F. contract, in particular the seller’s duty to secure appropriate insurance documents, one can see that the interests of the buyer are still protected regardless of his duty to pay for the documents prior to inspection; if the goods are faulty, and the Bill of Lading states that the goods were shipped in good condition, then the insurance company will reimburse the purchaser for any[12] damage to the goods which was caused in transit. If the Bill of Lading indicated damage prior to shipment, then the Buyer can take out action against the seller to reclaim his monies. This does not mean that the buyer must necessarily accept the goods once hey have arrived however. Unless the terms of the contract stipulate that the buyer cannot reject the goods[13], they buyer is entitled to refuse to take possession of the goods if, at the moment of delivery[14], an inspection reveals that the goods are not of the quantity and/or quality which was contracted for, e.g. if only 5,000 Kilos of B-grade Desiree potatoes were in fact delivered by the chartered carrier to B. Ltd. The statutory remedy which is available in relation to this right is provided by s53(3) of the Sale of Goods Act 1979 (as amended), pertaining to an implied warranty over the quality of goods purchased. S53(3) of this Act states: “(3) In the case of breach of warranty of quality such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had fulfilled the warranty.”

One final point regarding the duty of the buyer under a C.I.F. contract: it is the responsibility of the buyer to secure all the necessary import licences which are legally required for the product(s) in question. If any stage of the delivery is stalled as a result of the buyer’s failure to secure the necessary Custom permissions, then any resultant damage to the goods, e.g. from their having to stay on board the carrier for an extended period of time and thus perishing, will be deemed, at law, his fault.

In conclusion, whilst we have not been able to examine every single contractual and legal feature of the C.I.F. shipping contract, the above provides a near comprehensive description of the workings of such a contract in the real world. The C.I.F. contract is a standard termed tool which has been designed and evolved to ensure that the interests of each party to a shipping contract are protected, and also that the practical difficulties which would otherwise be faced by importers and exporters are somewhat mitigated.

In response to the statement offered at the top of this paper: I hope I have argued convincingly that this statement is absolutely incorrect. The fact that a C.I.F. contract is a shipping contract is merely a description of its specific industry application; this description does not explain any of the complex and multifarious contractual and legal features of such a commercial arrangement. Perhaps what the statement meant to express what the fact that most of the legal and contractual features of a shipping contract are explained by the fact that it is a C.I.F. contract; in that case, the statement would certainly be more correct, although event then, the complexities regarding the duties of rejection and the procurement of valid documents cannot be gleaned from this description alone. I would argue, in final conclusion, that one should not attempt to explain the workings of the C.I.F. contract in one sentence alone. Such an endeavour will only serve to omit certain vital information and lead to a poor understanding of the contractual and legal features thereof.

References/ Bibliography:

Alastair C.L. Mullis. (1997). Termination for Breach of Contract in C.I.F. Contracts Under the Vienna Convention and English Law; Is There a Substantial Difference? Published in Lomnicka / Morse ed., Contemporary Issues in Commercial Law (Essays in honour of Prof. A.G. Guest), Sweet & Maxwell: London (1997) 137-160.

John Adams ‘The Negligent Carrier: The Buyer’s Success’ The Modern Law Review, Vol. 45, No. 6 (Nov., 1982), pp. 690-693.

Sassoon, David M., (2006). C.I.F. and F.O.B. contracts (London: Sweet & Maxwell, 5th Ed. 2006)

Footnotes

[1] T. D. Bailey, Son & Co. v. Ross T. Smyth & Co., Ltd. (1940) 67 Ll. L. Rep. 147.

[2] 1 W.L.R. 862 (QBD).

[3] In the case of Arnhold Karberg & Co v Blythe Green Jourdain & Co [1916] 1 K.B. 495 the Court of Appeal confirmed, at 495, that under a C.I.F. contract, “the seller is obliged to tender documents representing contracts which are valid and effective at the time of tender.”

[4] Diamond Alkali Export Corp. v. Fl. Bourgeois [1921] 3 K.B. 443.

[5] On this point, Mullis (1997) p139 writes: “The c.i.f. contract is a type of sales contract where, although physical delivery is contemplated, the contract is performed by the delivery of documents” Termination for Breach of Contract in C.I.F. Contracts Under the Vienna Convention and English Law; Is There a Substantial Difference? Alastair C.L. Mullis. Published in Lomnicka / Morse ed., Contemporary Issues in Commercial Law (Essays in honour of Prof. A.G. Guest), Sweet & Maxwell: London (1997) 137-160.

[6] As per Phillips J at 615: The Sirina [1988] 2 Lloyd’s Rep. 613.

[7] Law & Bonar, Ltd. v. British American Tobacco Company, Ltd. [1916] 2 K.B. 605.

[8] In the case of Belgian Grain & Produce Company, Ltd. v. Cox & Co. (France), Ltd. (1919) 1 Ll. L. Rep. 546, it was held that the insurance policy must cover the goods for the continuous journey, i.e. from shipment to delivery.

[9] The importance of assignability within the context of commercial C.I.F. contracts was discussed, at length, in Diamond Alkali Export Corp. v. Fl. Bourgeois [1921].

[10] After all, the Bill of Lading represents the title in the goods and so B. Ltd. will not be able to take possession of the potatoes without these documents to verify his ownership.

[11] However the buyer does not, and indeed should not, accept the documents if they have been tendered incorrectly. A rule in regards to this point was most elegantly expressed by McCardie in his famous and oft quoted dicta from the case of Mandre Saccharine Co. Ltd. v Corn Products Co. Ltd [1919] 1 KB 198. He stated: “there may be cases in which the buyer must pay the full price for the delivery of the documents, though he can get nothing out of them, and though in any intelligible sense no property in the goods can ever pass to him – i.e., if the goods have been lost by a peril excepted by the bill of landing, and by peril not insured by the policy, the bill of landing and the policy yet being in the proper commercial form called for by the contract.”

[12] This is strictly true; the insurance document will only cover the goods against all usual risks, and therefore, if the damage caused was due to an exception circumstance, there will be no form of financial redress for the buyer. If the exceptional circumstances were caused by the carrier, the buyer may sue this company in the tort of negligence or even in contract law [s2(1) Carriage of Goods by Sea Act, 1992 removes the normal rules of Privity to allow the ‘right to sue’ in such cases to be transferable].

[13] Shipton, Anderson & Co. v. John Weston & Co. (1922) 10 Ll. L. Rep. 762

[14] In the case of Kwei Tek Chao v. British Traders & Shippers Ltd. [1954] 2 QB 459, the High Court held that this right arises the moment the goods are passed over the ships rail on delivery.