What is Cost, Insurance, and Freight (CIF), and what are its benefits in foreign trade? Also, why do some businessmen prefer it to other incoterms when dealing with foreigners? Before signing on the dotted lines in any contract, you need to know the implications of every term and condition.
What is Cost Insurance and Freight?
Cost, Insurance and Freight defines a contract in which seller bears the cost of goods and insurance as well as all necessary transportation costs up to the port of destination. However, the risk passes on to the buyer after loading cargo into a vessel.
Also, a seller must provide all relevant documents to the buyer before the latter could lay claim to products at the port of destination.
Under a CIF trade agreement, the seller provides carriage up to the port of discharge. Also, he provides necessary insurance cover to protect the buyer against losses or damage to goods while on transit.
However, the seller is not mandated to provide maximum insurance for the cargo except otherwise agreed by both parties.
Furthermore, risks of trade in a Cost, Insurance, and Freight trade agreement passes to the buyer immediately after the seller loads product to vessel. However, this may not be the case at all times as some buyers may insist on seller bearing all risks until cargo arrives at the discharge point.
For example, let us assume you enter into a CIF trade agreement with Tank Farm and Petroleum Products Marketing Limited to purchase Automotive Gas Oil. All risks automatically pass to you right after the company completes loading of product into a tanker for final freight. In other words, except otherwise agreed, the company is not liable for losses that may occur while cargo is on transit.
However, the assertion that risks pass to the buyer right after loading cargo into a vessel does not mean his exposure to risk is high. Moreover, he can always take advantage of the contract of carriage and policy of insurance. A claim either under the contract of carriage or the insurance policy will sure reduce his losses if damage or loss occurs during shipment.
Kindly talk to an international trade attorney or a law teacher to avoid misinterpretation of a CIF contract.
Buyers Responsibility in A CIF Contract
Some of the responsibilities of a buyer in a CIF trade agreement include obtaining relevant licenses in his home country, payment of all taxes and levies, cost of offloading at the discharge point, and inland freight of goods.
Import license. The most important duty of the importer is to obtain all the necessary permit in his home country. It is essential because, without it, he is liable to face the wrath of the law when his goods arrive at the port of discharge.
Taxes and levies payment. Another thing the buyer has to take care of is paying all necessary taxes and levies. That is essential to be able to obtain his consignment at the port of destination.
Offloading of Cargo: Except otherwise agreed, it is the responsibility of the buyer to pay offloading costs at the point of discharge.
Inland freight cost. Sellers obligations end at the point of discharge, so the buyer shall be responsible for inland carriage charges. Moreover, failure to ship his goods away from the port will attract fines from the port authority, and he may lose his profit to demurrage payment.
However, this does not apply to petroleum products because he has already paid for storage before cargo discharge.
Advantages of Cost, Insurance and Freight
Advantages of CIF trade agreement include convenience, ability to sell goods while in transit, minimal risks to both parties, and extra profit for sellers. Let me explain for clarity.
Cost, Insurance, and Freight offer Convenience. A buyer can sit in his home yet take delivery of goods whenever he so desires. The only time buyer needs to act is when cargo arrives at the port of discharge.
Sales of goods in transit. CIF also enables a buyer to sell his cargo when they are yet to arrive at the port of discharge. Instead of waiting to receive the goods, he can use his bill of laden to negotiate sales with prospective buyers. Also, he can pledge the consignment for finance for other businesses.
CIF offers extra cash for sellers. The seller, on the other hand, stands the chance of making more profits from the carriage. He may choose to inflate the freight cost.
Minimal risks for both parties. Also, both parties are risking little on the transaction. That is because they have passed the risks to the insurance company that covers the goods in transit.
Does CIF share anything in common with FOB? Don’t forget to find out in our subsequent posts.