MOD003339 – Commercial Law

International sales: c.i.f.

contracts

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 Learning outcomes

• Incoterms
• Key features of c.i.f. contracts
• Physical and documentary obligations of the
seller
• The shipping documents
• Transfer of risk and property

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• International sale contracts: these are contracts
where the parties are based in different countries
(e.g. Buyer in London and seller in Hong Kong).
• The type of contracts that we want to study are in the
area of shipment sales (e.g. cargos)
• Why English is so important in this area?
• Because due to its legal tradition and system of
courts, parties around the world often choose English
law to regulate their contract.

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Incoterms

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 Incoterms

• We said that we have international sale contracts where the buyer

and the seller are based in different countries. The parties must
enter a sale contract. However, what terms will apply to a contract
between parties based in different countries?
• The Incoterms® rules are a globally-recognised set of
standards (contractual terms), used worldwide in international
(and domestic) contracts for the delivery of goods. These are rules
that the parties may use to understand what obligations they have
under the contract.

• The rules have been developed by the International Chamber of

Commerce (ICC). They have become the standard in international
business rules setting. 

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 CIF contracts

• Each INCOTERMS envisages different rights and obligations for buyers and sellers.
• A CIF agreement or contract is a type of Incoterms. So, we will need to understand
what obligations the parties (B and S) have under a CIF contract.

• In a CIF agreement, the seller sells the good for a price including the cost,
insurance and freight (contract of carriage).
• This means that when the buyer pays the Seller, he is paying not only for the price
of the goods, for the insurance policy over the goods and for the cost of the contract
of carriage.

• One of the distinct features of CIF contracts is that the buyer is required to pay
against the tender of documents listed in the sale contract. In other words, the
buyer cannot in principle reject the payment of the contract price conditional on the
actual delivery of the goods.

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• In a sale contract where the parties are based in the
same country, the buyer pays for the goods, usually this
happens when the goods are delivered.
• However, in an international sale contract, the parties are
based in different countries. Imagine that they want to buy
oil. They enter into a contract in November but the
delivery will be a few months later since this is done by
transporting the goods by sea. So, the B and S enter the
sale contract (CIF) in November, the goods are shipped in
HK in December and the delivery is in March.

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• So, in this type of contracts, the buyer
will not pay when the goods are
delivered but he will pay once the seller
will tender documents ensuring that the
goods have been shipped.
• So, basically in a CIF contract, we sell
documents.
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 CIF contracts

• One of the distinct feature of CIF contracts is that the

buyer (in London) is required to pay against the tender of
documents listed in the sale contract by the Seller (in
HK)..

• In other words, the buyer cannot in principle reject the

payment of the contract price conditional on the actual
delivery of the goods.

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 CIF contracts: documentary
obligations of the seller
• The shipping documents (the documents that the seller in HK
transfers to the B in London) are at the heart of the c.i.f.
transaction. The seller is under a duty (contractual obligation) to
procure and prepare the relevant shipping documents which are:
• The seller must ship the goods at the agreed port and to tender
the following documents to get paid:
1. A clean bill of lading evidencing a contract of carriage by sea to
the agreed place of destination.
2. A marine insurance policy covering the usual marine risks and
any agreed additional risks.
3. The invoice in the stipulated form.

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CIF contracts

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 CIF: the shipping documents
• One of the advantages of a CIF contract is that is it is true that
the buyer pays for the documents tendered by the seller, once
he has the documents, he can sell these documents at
someone else to a different, possibly, higher price and, in turn,
the new buyer can do the same. So, the documents will be
transferred various times before the goods will be delivered.

• The aforementioned apportionment of responsibility

between the seller and the buyer may raise in practice
considerable disputes between the parties.

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 CIF: the shipping documents

• There may be instances where for example the

documents tendered by the seller contain inaccurate
information regarding the date and place of the shipment
or the description (including the shipment period as well)
and quality of the goods may be found at the discharge
different from those laid down in the sale contract.

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 CIF: the shipping documents

• The advantage of the c.i.f. contract, which has made it

an essential instrument of sea-borne commerce, is to
enable to deal with cargoes afloat, by transferring the
documents representing the goods.

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 CIF: the shipping documents

• The seller, while taking the risk of the rise or fall in the
price of the goods, the cost of carriage and the rate of
insurance before shipment, has the advantage of being
able to obtain payment of the price of the goods before
their arrival, and even in the event of loss or damage in
transit.

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 CIF: the shipping documents

• The documents are in many ways the heart of the c.i.f.

contract and the importance of documentation is
reflected in some judicial dicta, which lend support to the
proposition that a c.i.f. contract should be classified as a
sale of documents rather than a sale of goods.

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 CIF: the shipping documents

• Since the buyer must pay upon presentation of proper

documents, he will generally be unable to reject the
documents on the grounds that non-conforming
goods were shipped.

• On the other hand, he will be in a position to reject non-

conforming documents even when the seller has shipped
conforming goods.

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 CIF: the shipping documents

• The suggestion that a contract for the sale of goods c.i.f.

shall be regarded as a sale of documents is derived from
the judgment of Scrutton J. in Arnhold Karberg & Co. v
Blythe, Green, Jourdain & Co.

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 CIF contracts: transfer of risk

• However risk transfers from seller to buyer once the

goods have been loaded on board, i.e. before the
main carriage takes place.

• When the seller tender the documents and the buyer

pays for them, the risk for the loss of the goods is now
on the buyer who can take legal action against the
carrier.

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 CIF contracts: transfer of risk

• The general rule in c.i.f. contracts is that the risk

generally passes on or as from shipment.

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 CIF: two separate and independent
rights

• In CIF contracts, the buyer enjoys two separate and

independent rights of rejecting documents and
goods.

• That is to say, the fact that the buyer has accepted the
documents does not affect its right to reject the goods on
arrival.

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 CIF: two separate and independent
rights

• However, where the defects in the documents are so

obvious (e.g., the date on the bill of lading is incorrect
and the seller has nothing to do with this through fraud or
likewise) and the buyer has paid against them, the right
to reject the goods will be lost.

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 The issue of damages

• Yet, despite such a loss of the right of rejection, the

buyer is entitled to claim actual damages (the difference
between the contract price and market price at the time
of delivery) stemming from the tender of defective
documents by the seller.

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 Risk of loss before appropriation

• The issue which still awaits definitive judicial resolution is

whether or not a seller can validly tender documents
which relate to goods which were lost after the contract
between the parties had been concluded but before they
had been contractually appropriated to the contract.

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 Risk of loss before appropriation

• The first supported argument is when Atkin J. in C.

Groom v Barber [1915] held that the buyer was bound to
pay even though, in his view, there had been no
appropriation on the facts.

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 Risk of loss before appropriation

• The second is that McCardie J. in Manbre Saccharine

[1919] did not attach any significance to the question
whether or not the goods had been appropriated to the
contract prior to their loss.

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 Risk of loss before appropriation

• The second is that McCardie J. in Manbre Saccharine

[1919] did not attach any significance to the question
whether or not the goods had been appropriated to the
contract prior to their loss.

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 Risk of loss before appropriation

• The buyer is therefore, where the proper documents are

tendered to him obliged to pay for the goods, although
they may be at the bottom of the sea or through some
unforeseen circumstances they never arrive.

• However, it is arguable that if the seller knows about the

loss and makes the contract with the intention of
appropriating the lost cargo thereto that there has been a
fraudulent misrepresentation.

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