Advantages and Disadvantages of CIF Contract

CIF  stands for cost, insurance,freight. The price of goods in CIF contracts is inclusive of freight (consideration, reward payable in respect of carriage of cargo from loading point to point of discharge) and insurance cost to the destination specified by the contract. A CIF contract, as Scrutton J said in Arnhold Karberg v Blythe, Green, Jourdain  and CO, is not a contract that goods shall arrive, but a contract to supply goods that comply with the contract of sale, and to obtain a contract for carriage and contract of insurance. CIF contracts are generally attractive to both seller and buyer.

From a business point of view, the parties involved in a  CIF transaction have a variety of benefits, which are partially due to the role of the documents in the transaction.The advantages for the seller are given below:

                   a)   he has the opportunity to increase  his profits by making the carriage and insurance arrangements;

                  

                   b)  he retains the right of disposal of the goods until payment is made, thus keeping some level of security; and

                   

                    c)he does not bear any risk during transit of the goods.

The buyer s advantages are that he obtains:

                  a)a means to take delivery of the goods;

                

                  b)a means to trade the goods on or to pledge them as security  for finance;

                

                 c)rights against the carrier and insurer to recover at least the value of the goods if they are damaged or lost in transit.

The main disadvantages of CIF contract is that risk passes to the buyer at the time of contract.S20 of the Sale of the Goods Act 1979 provides that, after delivery of the goods risk passes to the buyer, but in the CIF contract risk passes to the buyer at the time he Pays and takes up the document. On the otherhand, risk passes to the buyer when the seller ships the goods. However, if the contract is made after the shipment risk passes at the time of contract. This seems to be very harsh on the buyer. Moreover, the risk passes to the buyer at the time of shipment, if the goods are damaged while loading into the cargo or the goods are lost in the sea,though the seller knew that,the goods might be lost when he tenders the shipping document.Where the goods are unascertained and shipped in bulk in that case the documents can not identified the goods sold.Hence theCIF contract sometimes seems to be very vague.

The importance of the documents in CIF contracts is illustrated by the rule that allows the seller to tender documents even after the goods damaged or lost. It seems unbelievable that such a rule could exist and even if it did exist that the sale was for the goods and not the documents. If the goods were utmost importance and were to all intents and purpose the subject matter of the contract then this rule would not exist. It seems impossible to argue otherwise than that a CIF is a sale documents when we consider that the documents are key to all elements of the contract and they are central to shaping the parties duties, defining when risk passes, and determining the condition of the goods.

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.

According to the general rule, the property and the risk passes at the same time but this is not the usual case in a C.I.F. contract. Under a C.I.F. contract, the buyer is in effect the insurer, as of the time of shipment. The transfer to him of the bill of lading and the policy of insurance giving him the right of action in respect of loss or damage to the goods has the effect of placing the goods at his risk on and after shipment[ Tregelles v. Sewell(1862) 7 H&N. 574] . But the property in the goods may not, and generally does not, pass on shipment. It very often will not pass until tender and payment. The moment at which the property passes is entirely a matter of intention which can be gathered from the terms of the contract, the parties’ conduct and according to the circumstances of the case.