INCOTERMS or International Commercial Terms are standardised set of international trade

terms published by the International Chamber of Commerce (ICC). The incoterms rules and
incoterms logo are trademark and does not imply association with approval of or
sponsorship by the ICC. The Incoterms Rules are protected by copyright owned by the ICC.
The Incoterms provide a common set of rules that traders based in different countries can
choose to incorporate into contracts for the sale of goods. The rules are intended to be
jurisdiction neutral so that no one jurisdiction or legal system is favoured over another. The
rationale is to facilitate international trade by removing the uncertainties that arise from the
disparities in interpretation of trade terms by different countries. The first set of Incoterms
Rules was published in 1936. The current 9th version entered into force on 1st January 2020.
The Incoterms Rules are not lawing rather they are contractual terms that are incorporated
in the contract of sale. They do not take precedence over applicable mandatory laws. The
terms allocate responsibility between the buyer and seller in respect of several key matters
such as the transfer of risk in goods, and responsibility for carriage and loading/unloading of
the goods. Although designed for international contract of sale, the Incoterms Rules can also
be used for UK contracts only.
The Incoterms cover the following factors: -
1) Transfer of risk
2) Location of delivery
3) Packaging and marking
4) Responsibility for loading and unloading
5) Arrangement of contract of carriage
6) Allocations of costs of carriage
7) Responsibility for arranging insurance cover
8) Responsibility for export and import clearance
9) Responsibility for supply chain security measure
10) Notice and assistance with information
The Incoterm Rules are silent on several matters that drafters should address expressly in
the contract of sale. These include: -
1) Transfer of title
2) Price
3) Payment
4) Liability for breach of contract
5) Product liability
6) Governing law and jurisdiction
The current version of the Rules is the Incoterm 2020 Rules. The 2020 version of the Rules
came into effect on 1st January 2020. It comprises of 11 terms. They are: -
1) EXW (Ex Works)- When the goods are at the disposal of the buyer.
2) FCA (Free Carrier)- When the goods have been delivered to the first carrier at the
named place of delivery.
 3) CPT (Carriage Paid To)- When the goods have been delivered into the custody of the
first carrier.
4) CIP (Carriage and Insurance Paid To)- When the goods have been delivered into the
custody of the first carrier
5) DAP (Delivered at Place)- when the goods are placed at the disposal of the buyer on
the arriving means of transport and are ready for unloading at the named place of
destination.
6) DPU (Delivered at Place Unloaded)- When the goods, once unloaded from the
arriving means of transport, are at the disposal of the buyer at the named place of
destination.
7) DDP (Delivered Duty Paid)- When the goods are placed at the disposal of the buyer
having been cleared for import and ready for unloading at the named place of
destination.
8) FAS (Free Alongside Ship)- When goods have been placed alongside the ship.
9) FOB (Free on Board)- When the goods are on board ship, at the port of shipment.
10) CFR (Cost and Freight)- When the goods are on board ship, at the port of shipment.
11) CIF (Cost, Insurance and Freight)- When the goods are on board ship, at the port of
shipment.
These terms are further classified into 3 categories: -
a) E and F terms- here the buyer must arrange the contract of carriage and bear the
costs of carriage.
b) C terms- the seller must arrange the contract of carriage and bears the costs of
carriage.
c) D terms- the seller must arrange the contract of carriage and bears the cost of
carriage.
Among the above terms, FAS FOB CFR CIF are used in Ocean transport and the rest can be
used for any mode of transport. The term CFR and CIF are used for carrying bulk cargoes
overseas. The term CPT and CIP are used for container cargo and all other cargoes.
In this question we are going to discuss about the two most used incoterms-
CIF- Cost Insurance Freight
FOB- Free On-Board Port

CIF (Cost Insurance Freight)

According to Lord Atkinson in Johnson Vs Taylor Bros and Co. Ltd., when a vendor and
purchaser of goods enter into a CIF contract the vendor in the absence of any special
provision to the contrary is bound by his contract to do the following: a) make out an
invoice for the goods, b) ship goods of the contractual description, c) procure a contract of
carriage for delivery of the goods to the agreed destination, d) arrange for insurance of the
goods on the terms current in the trade, and e) forward the shipping documents to the
buyer with all reasonable dispatch to send forward and tender to the buyer these shipping
documents, namely the invoice, Bill of lading and policy of assurance, delivery of which to
the buyer is symbolic delivery of the goods purchased, placing the same at the buyer’s risk
and entitling the seller to payment of their price if no place be named in the CIF contract for
the tender of the shipping documents they must prima facie be tendered at the residence or
the place of business of the buyer.
Sec. 12 of the Sale of Goods Act, 1979 discusses about the Duty to transfer. The section
states that there is an implied condition on the part of the seller that in the case of a sale he
has a right to sell the goods, and in the case of an agreement to sell he will have such a right
at the time the property is to pass. In a contract sale, the goods are free and will remain free
until the time when the property is to pass, from any charge or encumbrance not disclosed
or known to the buyer before the contract is made, and b) the buyer will enjoy quiet
possession of the goods except so far as it may be disturbed by the owner or other person
entitled to the benefit of any charge or encumbrance so disclosed or known.
In a CIF contract the risk presumption is rooted to the very nature of the transport and
therefore the CIF contract is a contract where parties contemplate the risk of loss or damage
in transit and cover it by the contracts of carriage and insurance.
In the case of E. Clemens Horst Co. v. Biddell Brothers, the UK House of Lords ruled that "the
sellers in a c.i.f. contract were entitled to payment of the price upon tender of the bill of
lading and insurance policy. The purchasers' intent to wait for satisfactory delivery and
inspection was overruled. CIF is like the term CFR. The exception to this term is that the
seller is required to obtain insurance for the goods while in transit. CIF requires the seller to
insure the goods for 110% of the contract value under Institute Cargo Clauses (A) of the
Institute of London Underwriters. The insurance policy should also be in the same currency
as the contract. Here, the seller must also turn over documents necessary to obtain the
goods from the carrier or to assert claim against an insurer to the buyer. The invoice,
insurance policy and the bill of lading represents the cost, insurance, and freight of CIF. In
CIF, the seller’s obligation ends when the documents are handed over to the buyer. Once
the documents are handed over the buyer must pay the agreed price.
A CIF contract works in a particular way. For example, let us say that a factory in Shanghai
wants to import 50,000 tons of iron ore from India. Therefore, the party will get into a CIF
contract for the transfer of goods. In a CIF contract there are three main factors that are
distributed between the buyer and the seller- the factors are responsibility, cost, and risk.
The seller in India will-1) load the iron-ore in a truck/train and deliver it to the nearest port
(he will bear the transport cost), 2) pay the freight forwarder’s fee, 3) clear the customs
charges and the terminal fees, 4) pay for the loading of the goods onto the vessel, 5) pay for
the ocean freight, and 6) pay the marine insurance of the goods he is selling. The seller’s
responsibility ends once the goods reach the Shanghai Port. From that point the buyer will
take the responsibilities and the risks. The responsibilities of the buyer are- 1) Bearing the
charges for unloading the goods, 2) transportation of the goods to his warehouse, 3) Custom
clearance and import duties at the respective port.
A CIF contract is written in the following way- “50,000 tons Iron Ore CIF Terminal 4 Shanghai
China”. The seller provides quote of all charges till the Shanghai Port, after that all charges
are borne by the buyer.
The transfer of property depends on party’s intention, presumption that property is not
intended to pass until delivery of the shipping documents to the buyer or shipping
documents to the buyer or posting of the documents to the buyer.
(The Miramichi Case 1915)
In Sander Brothers Vs Maclean and Co. (1883) 11 QBD 327, the law as to the indorsement of
the Bill of Lading is as clear as in the practice of all European Merchants and is thoroughly
understood. A cargo at sea is incapable of physical delivery, and a bill of lading by the law
merchant is universally recognised as its symbol and the indorsement and delivery of the Bill
of Lading operates as a symbolic delivery of the cargo. Property in the goods passes by such
indorsement and delivery of the bill of lading, whenever it is the intention of the parties that
the property should pass, just as under similar circumstances the property would pass by an
actual delivery of the goods. It is a key which in the hands of a rightful owner is intended to
unlock the door of the warehouse, floating or fixed, in which the goods may chance to be.
Another important case, Berger & Co. Inc. Vs Gill and Dufus SA (1984) where a buyer must
accept a valid tender within the contract time and if a buyer rejects a valid tender, it is a
repudiatory breach of contract which frees the seller, should he choose to accept it, from
any further performances. In the case the sellers had agreed to sell 500 tonnes of bolita
beans CIF Le Havre. In the event only 445 tonnes were discharged at Le Havre and the
remaining 55 tonnes were on-carried to Rotterdam. The documents in respect the 500
tonnes were presented but rejected on the ground that they did not contain a quality
certificate. The documents were re-presented with a quality certificate in respect of the 445
tonnes. They were again rejected. The sellers accepted this as a repudiation of the contract
and claimed damages. The 445 tonnes discharged at Le Havre were found not to correspond
with their contractual description.
It was held that a buyer under a CIF contract could not justify a refusal to accept conforming
documents on the grounds that the goods in fact shipped did not conform with their
contractual description. Thus, the buyers’ rejection of the documents was a repudiatory
breach which the sellers had accepted as terminating the contract. Where, at the time of
the buyers’ repudiation the sellers had committed a breach by shipping non-conforming
goods, the buyers could counterclaim for damages caused by that breach.
Lord Diplock, said of s.13: ‘while ‘description’ itself is an ordinary English word, the Act
contains no definition of what it means when it speaks in that section of a contract for the
sale of goods being a sale ‘by description’. One must look to the contract to identify the kind
of goods that the seller was agreeing to sell and the buyer to buy. where, as in the instant
case, the sale (to use the words of section 13) is ‘by sample as well as by description’,
characteristics of the goods which would be apparent on reasonable examination of the
sample are unlikely to have been intended by the parties to form part of the ‘description’ by
which the goods were sold, even though such characteristics are mentioned in references in
the contract to the goods that are its subject matter.’
and ‘[The termination of the contract] had the consequence in law that all primary
obligations of the parties under the contract which had not yet been performed were
terminated. This termination did not prejudice the right of the party so electing to claim
damages from the party in repudiatory breach for any loss sustained in consequence of the
non-performance by the latter of his primary obligations under the contract, future as well
as past. Nor did the termination deprive the party in repudiatory breach of the right to claim
or to set off, damages for any past non-performance by the other party of that other party’s
own primary obligations, due to be performed before the contract was rescinded’.

FOB (Free On-Board)

Michael Bridge in the International Sale of Goods states that FOB is a delivery term used in
international sales with a maritime element to signify that the seller’s delivery obligation is
accomplished when the goods are loaded free on-board ship. Its characteristic feature is the
co-operative performance required of the buyer and the seller when the latter loads the
goods on a ship that is normally provided by the buyer. In the modern commodities trade, a
major concern is that of timetabling with a view to ensuring the smooth operation of the
interlocking obligations of seller and buyer.
Free on Board (FOB) is a shipment term used to indicate whether the seller or the buyer is
liable for goods that are damaged or destroyed during shipping. "FOB shipping point" or
"FOB origin" means the buyer is at risk and takes ownership of goods once the seller ships
the product. Historically, FOB was used only to refer to goods transported by ship; in the
United States, the term has since been expanded to include all types of transportation. For
accounting purposes, the supplier should record a sale at the point of departure from its
shipping dock. "FOB origin" means the purchaser pays the shipping cost from the factory or
warehouse and gains ownership of the goods as soon as it leaves its point of origin. "FOB
destination" means the seller retains the risk of loss until the goods reach the buyer.

Description of a strict FOB contract- The seller’s duty is to ensure that conforming goods are
put on board the ship nominated by the buyer at the port of shipment by the date or within
the shipment period stipulated in or under the contract, and that the buyer is furnished with
such documents as will enable him to obtain possession from the carrier. Identification of
the port of shipment with some level of specificity. There must be certainty even when the
parties wish to keep options ‘open’. Inconceivable that it is in the intention of the parties to
a FOB contract to allow the buyer to designate any port in the world.

Boshwall Properties Ltd. Vs Vortex Properties Ltd. (1976)- in this case the parties agreed to
sell a property of 51 ½ acres of land for a set price of £500,000. The payments were to be
made in unequal instalments. When these instalments were made, a proportionate part of
the land was to be released. There was no suggestion in the agreement of which part of the
land was to be regarded as being proportionate for any of the instalments, and no
mechanism for suggesting how this was to be determined. The first payment was to be
£250,000, followed 12 months later by a payment of £125,000. The balance was to be paid
after a further 12 months.
The agreement was void for uncertainty. The parties had failed to specify a mechanism for
calculating the ‘proportionate’ part of the land that was to be released upon payment of the
instalment and so the entire agreement itself failed for uncertainty. The parties could not
decide which parts or proportions of the land were to be the parts conveyed and so the
agreement was inherently uncertain. The court of Appeal rejected suggestions that a term
implied that provided that one of the parties was to choose which of the parts of the land
were to be the parts which were ‘proportionate’ to the sum paid in the instalment. As such,
the context could not be upheld by the court and it failed for uncertainty.

In a FOB contract, the nomination of the vessel must be made and must be effective in
sufficient time to enable goods to be loaded within the shipping period and the nominated
vessel must in fact be made available for loading by the seller within that period.

In Bunge & Co. Ltd. Vs Tradax England Ltd. (1975), a party contracted to purchase 15,000
tons of US soya bean meal, to be shipped in three shipments. Under the standard form of
contract, clause 7 stipulated that in respect of the first shipment, buyers shall give at least
15 days’ notice of probable readiness of the vessels. The last day to give notice was June 12.
The notice was given on June 17th. The sellers held that the buyers were in default,
terminated the contract and claimed damages. The court held that in a written contract, a
stipulated term must be contracted and the term ought to be constructed as a condition.
Time is of essence and therefore the buyers have breached the condition and the sellers had
the right to terminate and claim for damages.

The notice enabling buyer to insure must include all relevant information: -
In Wimble Sons & Co. Vs Rosenberg and Sons (1913) the seller must put on board the goods
which conform to the contract and must pay all charges in connection with loading. The
seller is not obliged to book shipping space in advance; the buyer must nominate the ship to
carry the goods and notify the seller of the nomination in time to allow the seller to deliver
the goods on board. The cost of carriage is for the buyer’s account.
It is the seller obligation to load the goods is traditionally discharged when goods pass over
the ship’s rail, even if they are still in mid air when some untoward event occurs-
In Pyrene Co. Ltd. Vs Scindia Navigation Co. Ltd. (1954), the plaintiff delivered a fire tender
which was sold by a contract of sale. As the tender was being lifted onto the ship, before it
crossed the rail on the ship, it was dropped and subsequently damaged. As per the contract
of sale between the parties, the possession of the property had not passed at this stage. A
Bill of Lading had been drawn up but was not issued. The seller sued the owners of the ship
for the cost to repair the tender. The court held that limited liability under the Hague Rules
did extend to the loading of the cargo onto the ship. Moreover, it was found that the Bill of
Lading was irrelevant, and the contract could be regarded as the incomplete Bill of Lading
on the basis that all three parties were deemed to have a benefit from the agreement. As a
result of this finding, the plaintiffs could only recover £200 as per the Hague Visby Rules
which were included in the contract.
Like the CIF contract, the FOB contract depends on 3 important factor- they are 1)
responsibility, 2) cost, and 3) risk. Here the responsibility and the risk of the goods are till
the Mumbai port. The seller pays for a) the warehouse services, b) inland transportation, c)
forwarder’s fees and custom clearances, d) terminal charges, and e) cost of loading the
goods on the vessel. From that point all the responsibility and risk are taken by the buyer.
The buyers pay for- a) Ocean freight, b) Insurance, c) Unloading charges, d) Transportation
cost to their warehouse, e) customs clearance and f) import duties and taxes.
FOB is ideal for situations where the seller has direct access to vessel for loading bulk
cargoes or non-containerised goods. It is the duty of the seller to deliver the commercial
invoice, packing list, wood packing certificate, and ocean Bill of lading in an FOB contract.
Therefore, both CIF and FOB are the two most important terms in international trade.
Though these terms have a lot of the similar characteristics, there are three basic
differences in the procedural front- First, an FOB contract specifies a port or a range of ports
for shipment of the goods. A CIF contract specifies a port or ports to which the goods are
consigned.
(ii) Secondly, an FOB contract requires shipment (whether by or on behalf of the seller or
the buyer) of the goods at the port (or a port within the range) so specified, i.e., the seller
cannot buy afloat. In contrast, under a CIF contract responsibility for shipment rests on the
seller, and this can be fulfilled by the seller either shipping goods or acquiring goods already
afloat after shipment, and moreover shipment can be at any port (unless the contract
otherwise provides).
(iii) Thirdly, and as a result, a CIF contract involves (subject to any special terms) an all-in
quote by the seller, who carries the risk of any increase (and has the benefit of any
reduction) in the cost of carriage. In contrast, under an FOB contract, although the seller
may contract for and pay the freight, the buyer carries the risk (and has the benefit) of any
such fluctuation