The Incoterms® rules developed by the International Chamber of Commerce are the industry standard for the interpretation and usage of trading terms used in a contract of sale in domestic and international trade.
In this article, we will discuss the CIF Incoterm which is one of the 11 Incoterms® 2020 rules. We will look at what it is, where it is used, and its advantages and disadvantages.
What is the meaning of CIF?
CIF stands for Cost, Insurance, and Freight. As defined in Incoterms® 2020, CIF means that the seller is required to deliver the goods on board the vessel or procure the goods already so delivered.
Rules of Cost Insurance Freight incoterm
The seller is responsible for the contract of the carrier and also for the payment of all, costs of pre-carriage, insurance, and delivery of the goods to the named port of destination.
The risk of loss or damage to the goods, however, passes from seller to buyer when the goods are on board the vessel.
This rule is to be used only for sea or inland waterway transport.
How does CIF Incoterm work?
It places the obligation on the seller to organize the movement of the cargo to the named destination. This named destination may be a mutually agreed location between the buyer and seller.
As the Incoterm CIF may only be used for waterway transport, this destination must be a destination accessible through waterways and may not include a land-locked destination.
Seller’s obligation
CIF means that the seller is obligated but not restricted to :
- Taking care of export customs clearance formalities at origin
- Entering into relevant contracts of carriage with the various carriers
- Arranging and paying for the transportation of the goods from door to the named and agreed destination
- Obtain and pay for cargo insurance
- Handle any and all export permits, quotas, special documentation, etc. relating to the cargo
- Paying for the loading and unloading costs of the cargo on/from the ship
It is crucial for the buyer and seller to understand that in a CIF transaction, the “risk” passes from seller to buyer once the seller delivers the cargo on board the performing vessel, whereas the costs to the named destination will still be for the seller.
The seller is expected to ensure that the insurance cover is equal to the commercial value of the product + 10%.
Buyer’s obligation
CIF means that the seller is obligated but not restricted to :
- Handle any movement past the agreed place of destination
- Cover the risk to cargo from the time the seller delivers the cargo on board the ship
- Handle any and all import permits, quotas, special documentation, etc. relating to the cargo
- Handle import customs clearance and all related formalities
CIF Freight
When agreeing on the Incoterm CIF, the contract of carriage is arranged by the seller at his expense, and therefore the seller may use his service contract and also prepay the cost of the freight to the destination.
The agreement between seller and buyer generally ends at a seaport in the destination country or a feeder port in the same or another country and it does not include any inland movement.
By agreeing on CIF, the seller is required to provide the buyer with a transport document – such as a bill of lading as proof of delivery and termination of his risk.
Where applicable, the bill of lading should follow the requirements of a documentary credit. When used with a documentary credit, it may be issued as a negotiable document in case the buyer wants to sell the cargo further while in transit.
Advantages and Disadvantages of CIF
While considering the advantages and disadvantages of using CIF, it is important to remember that the seller bears more responsibility when CIF is agreed on. Therefore a seller needs to know when to agree on the Incoterm CIF.
1) As contract of carriage and payment is part of seller’s obligation, it is important for the seller to understand their strength in terms of their freight rate and rate negotiation with the carrier
2) If they feel that they have and can achieve the best rates for that port pair, then the seller can confidently agree on the Incoterm CIF
3) If not, they would be better off negotiating FCA, FAS, or EXW with the buyer because here the seller’s cost is restricted to delivering the goods to the carrier, alongside the ship or at their warehouse, all of which does not include ocean freight or carriage costs
4) The same holds true for Insurance costs or origin logistics costs. If you, as the seller, are unsure of obtaining the best rates possible for these activities, then it may be better to negotiate the sale based on FCA, FAS or EXW with your buyer.
5) But on the other hand, as a seller on CIF Incoterms rules, you are only expected to provide minimum insurance (usually Institute Clauses C) and need not provide cover based on Clauses (A) or (B) of the Institute Cargo Clauses.
6) Under CIF Incoterm rule the seller’s obligation in terms of risk ends once the cargo has been delivered on board the ship and not when it reaches the named destination.
7) Therefore, any risk to cargo after it has been delivered to the named destination will be to the buyer’s account which may also include further on-carriages.
8) As an example, if the cargo is moving from Shanghai to Hamburg, and the terms of sale are based on CIF Hamburg, the seller’s risk ceases when the container has been loaded on board the ship in Shanghai. All risks from then till Hamburg will be for the buyer, but the cost will still be that of the seller.
Differences to similar incoterms
As CIF terms are used for all cargo using waterway transport, the seller needs to ensure that the proper and suitable carrier is used for the carriage, as different cargo needs different vessels and the costs are different for both.
If the buyer’s premises or place of delivery is based in an inland location, CIF would not be the correct Incoterms rule to use as CIF is only used for transport by sea and does not include other modes of transportation.
In such cases, a more suitable Incoterms rule such as CPT or DAP may be used.
As with all Incoterms®, it is important that the seller and buyer have an express agreement on the point of delivery and any extra requirements that may be required by the buyer from the seller.
Here you find a complete list of all Incoterms.
