“C.I.F. or F.O.B.: That is the question!

”
Main features of the two contracts for the international sale of goods

Elis Tarelli, LL.M. (Newcastle University)

Doctorate student, Universität Hamburg
-------------------------------------------------

I. Introduction
Despite the development of technology and internet which by far have affected the
way how business is conducted and contracts performed, goods (save for intangibles1)
are still shipped from the seller’s place to the purchaser’s place in the traditional way,
i.e. by road, rail, sea, or air transportation.
For the purposes of our paper we will focus on the shipment of goods by sea
transportation because the majority of export-import activities are carried out through
the sea.
It is the goal of this paper to identify the two most employed contracts for the
international sale of goods, explain the features characterising each contract and point
out the differences between them.
We will concentrate on the legal position of the seller and buyer, and explain shortly
their rights and duties under each contract.
In the end we will try to weigh the advantages and disadvantages that each contract
offers especially to the buyer, and give some suggestions as to the circumstances
where the use of either term would be more advantageous to him.

Caveat: We have to bear in mind that the advantages or disadvantages that the use of
either contractual term will yield do not depend only on purely legal factors but also
on factors such as economical, political, and technological. In our suggestions we
cannot take fully into account all these factors due to the limited space and scope of
this paper. We will rather refer briefly to such factors and explain the way how they
influence the buyer’s choice on the use of either contractual term.

1
See Bassindale, ‘The passing of ownership and risk in international commodity contracts’, (1993)
4 (2) ICCLR 51

Electronic copy available at: http://ssrn.com/abstract=1467820

II. Historical background
FOB (“free on board”) and CIF (“cost insurance freight”) have both regulated the
international sale of goods by sea for more than a century. These contracts have
experienced over the years moments of rise-and-fall due to reasons which we will try
to explain below.
As we already warned, the reasons for the periodic fluctuations in the use of these
contracts are not purely legal but include influencing factors such as economical,
political and technological.2 We will attempt now to give a short history of the
evolution of the FOB and CIF contracts.
FOB was the first term to be used by merchants for the purpose of seaborne
commerce. The reasons for that are to be found once the conditions in which
international trade in the nineteenth century was carried out are considered.
The merchants of that time were personally more involved in all of the stages of the
sale transaction than they are now. The reason for that was the lack of many facilities
which are easily enjoyable today: lack of regular shipping lines and services, poor
telecommunication and postal services, weak status of shipping documents3, poor
insurance services, etc. Because of the difficulties of that time, the seller would not
usually undertake any services for the buyer. Thus the buyer or his agent had to
personally arrange everything, and had to accompany the ship by being present in it
during the whole voyage. The position of the buyer4 was fragile and not very
favourable. But the situation would not remain like that for long time.
The development of technology, modernisation of telecommunication and postal
services witnessed also a change in the way how international trade was conducted.
Regular shipping lines and services were established, there was more information
available which could be easily transmitted, shipping documents were acquiring full
legal status, means of finance were available while banks began to participate actively

2
Sassoon makes the point that ‘…the terms are not the product of legislation but are rather the
outgrowth of the customs and usages of merchants to whose evolution the courts have contributed
mainly by way of enforcement’. Sassoon, ‘The origin of f.o.b. and c.i.f. terms and the factors
influencing their choice’, (1967) JBL 32
3
See ibid 2 ‘documents as symbols of goods afloat were only beginning to gain recognition’
4
For the purposes of this paper the word “buyer” in its meaning includes also the buyer’s agent.

Electronic copy available at: http://ssrn.com/abstract=1467820

in the transaction process, insurance companies started to offer better policies
covering a wider range of risks. The creation of the new conditions made the
merchants adopt new methods of carrying goods.
CIF evolved from its predecessor FOB as a need to accommodate the new
circumstances in which international trade was being carried out. It appeared with the
expansion of commerce as a result, as we mentioned in pg.2, of the development of
technology and telecommunication services.
Shipping space was not a problem anymore and the buyer needed not be personally
present during all of the stages of the transaction. The seller was more willing to offer
services like, arranging shipping space and contract, procuring insurance, etc, to the
buyer. However, the cost of these services would be reflected in the purchase price the
buyer had to pay. Thus, CIF contract offered advantages both to the buyer and to the
seller, which, advantages, we will refer to in more details in the following chapter.

III. The two main contracts

We continue by explaining in more details the elements of the FOB and CIF contracts,
as well as the rights and duties of the parties to those contracts.

FOB stands for ‘free on board’ and in its simplest form this contract means that the
seller has agreed to deliver the goods to a ship nominated by the buyer and, after such
delivery, property and risk passes to the purchaser. The buyer is responsible for
making the arrangements for insuring and shipping the goods to their final destination.
The seller is not under a duty to ship the goods until he has received instructions from
the buyer as to the name of ship and port of shipment.
In a “classic” f.o.b. contract the duties of the seller are less in number. The seller is to
ship goods that conform to the contract of sale, deliver the goods to the buyer by
placing them on board the ship nominated by him, and pay any cost incidental to the
delivery of the goods5. He also receives the bill of lading which will normally show
him as consignor and transfers it to the buyer. Marine insurance is normally arranged
by the buyer directly.

5
Buckley L.J. in Wimble Sons v. Rosenberg & Sons [1913] 3 K.B. 743

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Whereas the buyer is required to nominate the ship and the port of shipment, give
sufficient notice to the seller of the time and location of the delivery, having,
presumably, contracted with the carrier for the carriage of goods from the port of
shipment. He is also to pay any cost incidental to the importation of goods, and last
but not least pay for the goods. We need to stress the fact that in an f.o.b. contract the
cost of freight and insurance ultimately has to be borne by the buyer.
But the f.o.b. contract is a flexible contract and perhaps due to its flexibility the f.o.b.
term is still in use and popular today. Devlin J. in Pyrenne Co Ltd v. Scindia
Navigation Co Ltd6 described the variations to the f.o.b. contract. ‘The differences
between the main varieties of f.o.b. contract revolve around who nominates the vessel
and who is responsible for making the contract of carriage.’7
In the f.o.b. contract “with additional services” the seller undertakes to arrange
shipping and insurance for the account of the buyer. In this f.o.b. variation, the seller
nominates the ship, enters into a contract with the carrier by sea, places the goods on
board ship and transfers the bill of lading to the buyer. This type of f.o.b. contract has
some similarities with the standard c.i.f. contract in the fact that the seller arranges the
carriage contract and procures insurance, but in the former contract the seller does so
in the account of the buyer and the cost for such service are paid separately, while in
the later the seller is obliged to perform those duties and the cost of the services is
included in the price.
In the “classic” and “with additional services” f.o.b. contracts the seller is party to
the carriage contract, whereas in the “simple” f.o.b. contract the buyer himself enters
into a contract of carriage by sea while the seller puts the goods on board the ship.
The bill of lading goes directly to the buyer, and does not pass through the seller’s
hands.

CIF stands for ‘cost insurance freight’ and under this contract, the seller always
undertakes to secure shipping space, make all the shipping arrangements, ship the
goods and make the carriage contract as principal as well as secure insurance. The
c.i.f. price is an all-inclusive one, i.e. the price includes the cost of goods, insurance
and carriage.

6
[1954] 2 Q.B. 402
7
Todd, Cases and Materials on International Trade Law, 1st ed, (London: Sweet & Maxwell, 2003)
pg.95

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In the c.i.f. contract the seller is required to make out an invoice of the goods sold,
deliver on board the ship goods which comply with the contractual description, and
bear all the costs up to that point. The seller completes his duties under the contract by
transferring to the buyer the documents relating to the contract, which, documents,
transfer to the buyer constructive possession in the goods while they are at sea, or the
right to take them from the vessel on arrival8.
‘The object and result of CIF contract is to enable the sellers and buyers to deal with
cargoes or parcels afloat and to transfer them freely from hand to hand by giving
constructive possession of the goods which are being dealt with’.9 This statement
stresses the crucial role that the shipping documents play in the performance of a c.i.f.
contract10.
The buyer on the other hand, is under the contract required to nominate the port of
destination, to pay for the goods against delivery of the documents, take delivery of
the goods and pay all costs for unloading them. In the standard c.i.f. contract the buyer
is also obliged to procure all import licences and pay all custom and excise duties.
As far as the passing of risk in the goods is concerned, in both contracts risk passes on
shipment even though the passing of property in the goods might be postponed
because of the seller’s right of disposal. The statutes and the case law are very clear
on this point. Whereas property in the f.o.b. contract might also pass on shipment11, in
the c.i.f. contract property will always pass later than risk, i.e. not on shipment, unless
the parties have otherwise agreed.12
We continue by weighing some of the advantages and disadvantages that both
contracts offer to the buyer and will make some suggestions as to the circumstances
where the buyer should consider the use of CIF terms.

IV. F.O.B. or C.I.F.: That is the question

In an international sale transaction both parties to the contract are concerned with
mitigating the consequences of some risk factors which are to affect their status, be it

8
See Hamilton J’s judgment in Biddel Bros v. Clemens Horst Co [1911] 1 KB 214
9
Carr, Principles of International Trade Law, 2nd ed, (London: Cavendish, 1999) pg.5
10
As stated by the Court of Appeal in Arnhold Karberg (1915), a CIF contract is a sale of goods to be
performed by the delivery of documents.
11
Though this is not often the case because of the seller reserving the property through the right of
disposal as security for payment.
12
Section 17 of the Sale of Goods Act 1979

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financial or legal status. Risk factors such as availability of remedies in case of
damages or loss or breach of contract, conflict of laws in the governing of the
contract, different legal systems governing the whole transaction, currency exchange
rates volatility, transportation risk, and political factors need to be seriously
considered. These factors will usually influence the seller’s or buyer’s choice of either
contractual term. Which of these terms offers the best protection to the parties? Which
of these terms offers more advantages, less risks, and yields more profits to the
parties? When we take a closer look to the positions of the seller and buyer under the
contracts, we will sometimes recognise that what can be of a big advantage to one of
the parties, can also be of a disadvantage to the other13. In our paper we will focus
more on the position of the buyer and what contractual term could be more
advantageous to him. Is it more profitable or more convenient to the buyer to contract
CIF?
Let us first have a closer look at the advantages that FOB contract offers to the buyer.
As we explained earlier in this paper, though the FOB contract pre-dated modern
forms of communication, yet survives to this day. Several reasons can be given for
that:
a) where there are foreign currency restrictions, especially where the carrier is of
the same nationality as the buyer, since FOB prices are lower than CIF;
b) freight being payable in advance, satisfying in this way the carrier;
c) where the buyer wants to lower his liabilities in respect of import duties
calculated on the price of the goods, since the FOB price is not a all-inclusive
one;
d) where the buyer hires a particular type of vessel because of the type of goods
being shipped;
e) where the buyer charters the vessel because of purchasing a whole cargo; and,
f) also because it can be used for domestic supply to the loading port, even where
the international sale contract is CIF.
The reason we listed above obviously support the idea that the buyer should buy FOB.
An axiom in international trade states that “you should buy FOB and sell CIF”. The
reason is fairly obvious, all things being equal. An FOB purchase “presumably”

13
As risk passes on shipment, where the loss or damage is due to events not covered by insurance, or is
subject to exclusion clauses in the contract of carriage, the buyer will nevertheless bear the loss.

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covers only the cost of goods at the FOB point, i.e. port of shipment, while CIF can
include a great number of costs. By nominating the ship, and presumably by
contracting with the carrier the buyer could get a better deal. He is in control of the
carriage contract and thus manages more securely the cost of it. We offer the same
logic for the insurance costs. The buyer knows better the domestic market of
insurance and presumably can get a better policy to cover the risk for the cargo he is
purchasing. The better deals for carriage and insurance that the buyer will get will
decrease the overall price that he has to pay for obtaining the goods.
If all these reasons stand why a buyer still chooses to contract CIF? We suggest that
the reason is partly because of convenience. To explain this suggestion we continue
by offering some of the advantages that the CIF contract offers to the seller and to the
buyer.
The seller is the shipper of the goods which he can also tender while they are afloat.
He is the person to whom the bill of lading is issued. Thus no question will arise as to
his right to its possession. He is certain that insurance has been procured (because he
procures it himself) and is therefore less concerned than an FOB seller will be about
the prospect of recovering the value of the goods in the event of loss or damage before
payment14. He will receive the payment for the goods once the shipping documents
have been accepted by the buyer. Thus he does not need to wait for the payment until
the goods arrive at the port of destination. He is sure that he will receive the purchase
price, once the shipping documents have been tendered15, even if the goods suffer
total loss or damage. It seems that the CIF term accommodates better the interests of
the seller.
The CIF term, however, has several clear advantages for the buyer also. The buyer is
released from the burdensome duties of securing shipping space, arranging the
carriage contract, and procuring the insurance policy. Where the buyer is a small
company or a small retailer, this is of a big advantage to him due to the fact the he
might lack the information and expertise needed to perform these tasks himself16.

14
See Sassoon, ‘The origin of f.o.b. and c.i.f. terms and the factors influencing their choice’, (1967)
JBL 32
15
We presume that the shipping documents are correct
16
These tasks are burdensome because of the international aspect involved in a CIF contract.

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The buyer has the advantage of knowing from the first date of the contract the exact
price he is required to pay for obtaining the goods. As the CIF term is an all-inclusive
price, the risk of fluctuations in the cost of freight and insurance falls on the seller17.
The risk of fluctuations especially in the trade of commodities is considerably high
due to the large quantities of goods being traded. With an all-inclusive price the buyer
does not need to worry about the fluctuations in the cost of carriage and freight18.
As the CIF contract is a sale of goods to be performed by the delivery of documents,19
the buyer may receive credit facilities by the bank so enabling trade to take place,
while the banks hold the documents against payment by the next buyer in case of
string contracts. The security for the buyer or the bank lies in the contractual and
insurance arrangements that should protect them, even where the goods may have
been lost or damaged at the time the documents are delivered20.
Whether the buyer is an end-consumer or continuous dealer21 is also to be considered
for the purposes of our suggestions. A continuous dealer22 who buys CIF can also
easily sell CIF on the strength of the documents. This is of great advantage in string
contracts where flexibility and security is required. Once the documents have been
acquired by the buyer, he is enabled to sell the goods while they are afloat to fulfil
other contracts which he is party to.
For the purposes of our suggestions we also need to consider whether the buyer
purchases whole cargoes or small amounts of it. Where the buyer purchases whole
cargo, the FOB contract is a better alternative for him. He can charter the ship
personally and get a better deal with the carrier who in most cases will be from the
same country as the buyer.
Todd makes the point23 that many traders at the exporting end are relatively small and
unable to take large tonnages. But economies of scale and cargo handling

17
This is not the case in the FOB contract where the risk of fluctuations is borne by the buyer alone.
However, the CIF seller is also to enjoy the profits in case of a decrease in the costs of freight and
insurance.
18
Fluctuations are very common especially in the trade of commodities.
19
Ibid 10
20
‘The CIF contract relies on two basic concepts for the protection of buyer: 1)the transfer of
ownership by means of endorsement of the bill of lading, and 2) the transfer of protection for the goods
by the contemporaneous assignment of the insurance policy’. Powles, ‘The CIF buyer and the carrier’s
fraud’, (1986) JBL 149
21
Which is quite often the case
22
Lord Lowry in Bunge v. Tradax: “today’s buyer may be tomorrow’s seller”
23
Todd, Cases and Materials on International Trade Law, 1st ed, (London: Sweet & Maxwell, 2003)
pg.16

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considerations make it much cheaper to ship cargo in much larger quantities. The CIF
contract, through the mechanism of the bill of lading, facilitates the trade in smaller
amounts of goods24 for relatively smaller dealers.
In the end we need also to make the point that CIF is an export contract, and as such
suitable for international sale of goods. The contracts for the international sale of
goods are quite often performed in a currency which is foreign to at least one of the
parties. This raises the problem of the foreign currency limitations. Where a country is
reach in foreign currency reserves, the CIF contract would be of no problems to the
buyer. Otherwise, where a country is poor in foreign currency and where the domestic
transport and insurance industry need support, the buyer is most probably expected to
contract on an FOB contract basis, keeping thus the cost of freight and insurance low.

V. Conclusions and Summary

The international trade is carried out in a quick legal, political, economical, and
technological changing world. Transactions take place in a very dynamic and against
the background of a market in which prices may fluctuate rapidly. This increases the
risks that both buyers and sellers have to consider. Traders need to be able to make
speedy decisions about their rights and duties under the contract. Therefore the law
should be clear, consistent and predictable so as to give parties in their transactions as
much security as possible.
Thus in an international trade contract the values at premium are certainty, clarity and
consistency over flexibility25.
Both parties to the contract before deciding on the terms will take into account all the
factors abovementioned and evaluate which contract provides him with more security
and benefits.
We warned that the choice of CIF term by the buyer will not depend only on purely
legal construction of the contractual terms but rather on a broader consideration of the
political, economical, and technological factors of the time when the transaction is
carried out. We outlined these factors and tried to explain some of the effects that they
have on the performance of a contract for the international sale of goods.

24
This is especially useful in the trade of bulk commodities where intermediaries stand often between
the sellers and the small buyers.
25
Bradgate, Commercial Law, 3rd ed, (London: Butterworths, 2000) pg.720

9
Some of the circumstances that will directly affect the choice of the buyer as to the
contractual terms he will employ for purchasing goods include the consideration
whether he is an end-consumer or continuous dealer, whether he represents a big
company or a small retailer, whether he buys whole cargo or smaller amounts of
goods as well as the financial and economical conditions of his country. These
circumstances though affecting it, are not conclusive to the buyer’s choice of contract
for the sale of goods.
Both contracts, FOB and CIF, offer advantages and disadvantages to the buyer. He
needs to weigh them carefully before contracting in either term so as to provide
himself with more security and bigger profits.
However, his choice will quite often be a trade-off between the two, more security or
more profits.

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3. Sealy and Hooley, Commercial Law: text, cases and materials, 2nd ed,
(London: Butterworths, 1999)

4. Hughes, Casebook on Carriage of Goods by Sea, 2nd ed, (London: Blackstone,

1999)

5. Treitel, ‘Damages for breach of CIF Contract’, (1988) LMCLQ 457

6. Treitel, ‘Rights of Rejection under CIF sales’, (1984) LMCLQ 565

7. Crawford, ‘Analysis and Operation of a CIF contract’, (1955) Tulane LR 396

8. Takahashi, ‘Right to terminate (avoid) international sales of commodities’,

(2003) JBL 102

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