Summary of workshop 6: Advantages and disadvantages of a CIF contract

The basic definition of the CIF contract is provided by Lord Atkinson in Johnson v Trylor Bros [1920].[1] Under a CIF contract, the seller is responsible for arranging the carriage of the goods and their insurance in transit, and the cost of those arrangements is included in the contract price, so that the buyer is not concerned with fluctuations in freight rates or insurance premiums.[2] 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.[3]

The seller has the advantage of receiving the transacting money well in before the goods actually reach the buyer. The advantage of the buyer is that he has a substantial right once he gets the documents of sale and he may still reject the goods on their actual delivery if they turn out to be not in conformity with the standards he had prescribed. The risk which he takes is that the loss or damage of goods may not be covered by the bill of lading or insurance policy.

The disadvantages under the CIF contract is that the buyer must take risk for the period of carriage, as the buyer has no means of controlling or limiting those risks.[4] The seller’s obligation to arrange the shipping of goods gives the seller the upper hand to control the cost incurred for the whole course of shipping.[5] Generally the buyer will have no opportunity to inspect the goods before shipment unless so provided in the contract hence this puts the buyer in a disadvantage position.[6] Apart from that the seller bear the risk of fluctuation of freight and insurance rates depending on the prevailing economic conditions which cannot be negotiated upon conclusion of the sale of contract.[7]

To sum up, the CIF contract is an asset to both seller and buyer despite some disadvantages on either parties of the contract. However this can be resolved with stricter or clearer provisions of the contract to ensure the clarity of the contract in the event of an arising dispute.[8]

---

[1] [1920] AC 144 at 156

[2] Llyod Duhaime, ‘CIF Definition’ <http://www.duhaime.org/LegalDictionary/C/CIF.aspx> accessed 3 November 2010

[3] Alex McIntosh and others, ‘Goods Advice’

<http://www.clydeco.co.uk/knowledge/articles/goods-advice.cfm> accessed 6 November 2010

[4] Incoterms, < http://fastchaingroup.com/INCOTERMS1.pdf> accessed 6 November 2010

[5] Ibid

[6] Peter. A, ‘Contracts of Carriage by Sea, Sale, Marine Insurance and Documentary credits’

<http://www.nigerianlawguru.com/articles/insurance/CONTRACTS%20OF%20CARRIAGE%20BY%20SEA%20,SALE%20MARINE%20INSURANCE%20AND%20DOCUMENTARY%20CREDITS.pdf> accessed on 6 November 2010

[7] I Carr and P Stone, International Trade Law (3^rd edn Cavendish, London 2005) 7

[8] I Carr and P Stone, International Trade Law (3^rd edn Cavendish, London 2005) 7