Merchants, driven by economic goals, have always spoken in a common language. A manifestation of this common language is the use of standard trade terms in cross-border trade. Chapter 1
of Part I
starts by concentrating on frequently used terms, such as CIF (cost, insurance, freight) and FOB (free on board), and examines their interpretation in English law. As and where relevant, reference is made to the Sale of Goods Act 1979. Chapter 1
then moves on to trade terms under the INCOTERMS 2010 drafted by the International Chamber of Commerce (ICC). Chapter 1
also contains useful tables listing the responsibilities of the seller and the buyer under the different trade terms.
As part of the drive toward harmonising the law relating to international sales, the 1970s witnessed the drafting of the Convention on the International Sale of Goods by the United Nations Commission of International Trade Law (UNCITRAL), which has proved, despite the compromises, an extremely popular convention with a growing databank of cases decided in different jurisdictions. Although the United Kingdom (UK) is yet to ratify this convention, Chapter 2
provides a comprehensive account of this instrument adopted in 1980 for a number of reasons. First, the UK may ratify this convention. Second, given its wide ratification by important trading nations, such as the United States, and member states of the EU, courts in England will be interpreting this convention – for instance, where the parties have agreed to apply the convention to their sale contract. Finally, a study of international sales law will be incomplete, regardless of whether a country has ratified the Convention on the International Sale of Goods 1980 (i.e., the ‘Vienna Convention’) or not, due to its dominant position on the international sales law scene. It has been in force since 1988. Its wide acceptance and the resulting database of cases make the study of the Vienna Convention not only academically interesting, but practically relevant.
- Ex works
- CIF contracts
- CIF contracts under INCOTERMS 2010
- C&F contracts
- C&F and INCOTERMS
- FOB contracts
- Variants of an FOB contract
- FAS contracts
- Further reading
International sale contracts commonly contain abbreviations, such as CIF (cost, insurance, freight), C&F (cost and freight), FOB (free on board) and FAS (free alongside ship). These abbreviations are trade terms that define the obligations of the seller and the buyer as regards the point of delivery, procurement of transport documents, contract of insurance, and other documents necessary for the export and import of cargo. Trade terms are largely a product of mercantile custom, which has now been assimilated into English law.
Trade terms, primarily devised for mercantile convenience, over time came to be variously interpreted. CIF contracts, for instance, were often misconstrued as contracts for the delivery of goods at the port of arrival since they named the port of destination. To reduce misunderstandings, international organisations, such as the International Chamber of Commerce (ICC), set out to standardise the rules of interpretation of these terms. The first set of rules, known as INCOTERMS (International Rules for the Interpretation of Trade Terms), was published in 1936. Since then, the ICC has periodically introduced new terms and revised existing trade terms to accommodate new modes of transport and emerging trade practices, such as electronic transmission of transport documents. The latest version was published in 2010, updating and consolidating the rules to reflect modern commercial practice.1
INCOTERMS have to be specifically incorporated in the contract by the parties. Where the parties have failed to do this and the contract is governed by English law, interpretation of these trade terms in English law is relevant.
Although there are a variety of terms in common use, it is beyond the scope of this chapter to provide a full examination of them all. Instead, a lengthy discussion of CIF and FOB terms is provided, since these terms are commonly used in contracts involving sea carriage and most export cargo is transported by sea. This chapter focuses largely on the interpretation of CIF and FOB terms and their variants, such as FOB with additional services, FAS and C&F, under English law,2
before providing an outline of the rules of interpretation under INCOTERMS 2010. This chapter concludes with an overview of other trade terms contained in INCOTERMS 2000.
Ex works is the most convenient trade term for the seller. Under an ex works sale contract, the seller undertakes to have the goods available for collection by the buyer at the seller’s premises – for instance, factory, warehouse or mine. As to whether the seller is obliged to pack the goods for export or for taking delivery of the goods, this has to be determined from the terms of agreement. It is likely that the contract stipulates that the seller is to pack the goods for export at the buyer’s expense.3
Where the parties have incorporated Ex Works INCOTERMS 2010, the seller is required to provide ‘at its own expense ... package the goods in the manner appropriate for their transport, unless the buyer has notified the seller of specific packaging requirements before the contract of sale is concluded’ (A9 Ex Works). This undertaking is imposed on the seller only where it is not usual for the particular trade to make the goods available unpacked. Since it is the seller who knows where the goods are being transported, the onus is on the buyer to ensure that the seller is informed in good time (i.e., when the contract is concluded) as to the type of packing he wants.
As for carriage of cargo, its loading on the relevant transport,4
insurance cover, obtaining export licences and import licences, the arrangements have to be made by the buyer. Under INCOTERMS 2010, the seller is required to render any assistance in obtaining an export licence at the buyer’s request, risk and expense. The buyer is likely to ask for the seller’s help where, for instance, he is unfamiliar with the bureaucratic procedures in the seller’s country or the seller is registered with the relevant authorities for obtaining an export licence. If any security clearances5
must be obtained by the buyer, the seller must provide the buyer with information in his possession, at the buyer’s expense and risk for the purposes of clearance (A2 Ex Works).
CIF is, perhaps, one of the most popular of the trade terms used in international sale contracts where sea carriage is envisaged. ‘It is’, as Lord Wright observed in Ross T Smyth and Co Ltd v TD Bailey, Son and Co
‘a type of contract that is more widely and more frequently in use than any other contract used for purposes of sea-borne commerce. An enormous number of transactions, in value amounting to untold sums, are carried out under CIF contracts’ (at p 67).
What is a CIF contract?
CIF stands for cost, insurance, freight. The price of goods in CIF contracts is inclusive of freight (consideration, reward payable in respect of carriage of cargo from loading point to point of discharge) and insurance costs to the destination specified by the contract. A CIF contract, as Scrutton J said in Arnhold Karberg v Blythe, Green, Jourdain and Co
is not a contract that goods shall arrive, but a contract to supply goods that comply with the contract of sale and to obtain a contract for carriage and contract of insurance (at p 388).
CIF contracts are generally attractive to both seller and buyer. As far as the seller is concerned, he can charge a higher price taking into account the extra services (i.e., obtaining shipping space and insurance) he provides. His margin of profit in a CIF contract could be substantially higher than in an FOB contract, since he may be able to obtain reasonable rates for freight and insurance depending on the prevailing economic conditions. The seller is usually paid for the goods before their arrival at destination, since payment for goods in CIF contracts often takes place when the documents (i.e., invoice, insurance policy and bill of lading) are tendered to the buyer, or to the bank in the event of a documentary credit arrangement between the seller and the buyer. However,
it must be noted that payment does not always take place against tender of documents. The parties may have agreed to deferred payment credit – for example, providing for payment 30 days from the date of bill of lading.8
The attractiveness of a CIF contract, as far as the buyer is concerned, is that he does not have to undertake the task of finding shipping space or insurance, which may be all the more difficult in a foreign country due to unfamiliarity with local business practices. Of course, the buyer could appoint an agent in the country of export to undertake the tasks of obtaining shipping space and insurance cover, but this assumes the costs of an agent can be covered or a reliable and trustworthy agent can be found for a reasonable remuneration. The risk of any increases in transportation and insurance costs also remains with the seller. Further, the goods do not have to be paid for until the relevant documents are tendered. Once the necessary documents are acquired, he is able to sell the goods to a third party on the strength of the documents. The buyer also acquires the right to sue the carrier, under the Carriage of Goods by Sea Act 1992, with the transfer of the bill of lading.9
Interestingly, the use of CIF and FOB terms is closely linked to the economic climate of a country – in particular, developing countries. Where foreign currency (i.e., hard currency, such as US dollars or Euros) reserve is healthy in a developing country, importing merchants do not hesitate to contract on CIF terms. Where this is not the case, merchants prefer FOB terms, since it will result in a saving of freight and insurance payable to the seller in hard currency under a CIF contract. Some countries, such as Colombia, Algeria, Pakistan and Iran, prohibit imports on CIF terms.10
Judicial definition of a CIF contract
CIF contracts have been judicially defined in a number of cases.11
The best definition provided in modern times is perhaps that of Lord Atkinson in Johnson v Taylor Bros
who described a CIF contract as follows:
when a vendor and purchaser of goods … enter into a CIF contract … the vendor in the absence of any special provision to the con...