CIF

July 27, 2023
10 MIN READ
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CIF is an international trade word that only applies to ocean or waterway shipments of commodities. Cost, insurance, and freight mean that the seller will pay for all shipping expenses, including those associated with transporting the buyer's order. Once the cargo is delivered to the customer's destination port, the purchaser is responsible for the charges of importation and delivery. Nevertheless, the risk is transferred from the seller to the purchaser after the items are carried into the vessel. Once aboard the ship, the buyer acquires ownership of the items, and if the cargo is destroyed during transportation, the purchaser must claim with the seller's insurance firm.

What is CIF?

Cost, Insurance, and Freight (CIF) refers to the amount the seller is responsible for paying, including the agreed-upon price and any additional fees for shipping and insurance against potential losses due to loss or theft when the order is being transported to the agreed-upon delivery port. In basic terms, it is an expenditure spent by the supplier to cover all expenses associated with a purchaser's order while the products are in transit, like freight and insurance against loss of goods due to damage, theft, etc. The CIF contract provision states that a buyer's obligation starts when the seller's liability stops.

The concept of CIF

Cost, insurance, and freight only apply to goods moved by inland canal or sea. In this case, the seller must plan and pay for the delivery of the products to the export port specified in the sales agreement. The contract seller will deliver the products stated in the sales contract. The seller bears the risk of the products till the customer receives them from the export port.

Until the customer gets the products, the seller is liable for all related expenses and obligations (if any). Once the buyer receives the products, the risk is transferred to the buyer. It signifies that the seller's liability ends when the customer accepts the items, and the buyer's responsibility begins. The contract seller will not be responsible for the loss, damage, or theft of goods after they have been put onto the vessel for passage to the export port specified in the sales contract.

Responsibilities of the seller

The seller's duties under CIF rules are as follows:

1.     Obtaining the product's export permits

2.     Product inspection services

3.     Any shipping and loading costs or taxes to the seller's port

4.     Fees associated with export packaging

5.     Charges related to exportation, such as customs duties and taxes.

6.     Freight transportation expenses, including fuel, from the seller's port to the purchaser's port.

7.     Insurance premiums are paid up to the point when the cargo arrives at the buyer's port

8.     Taking care of the costs of any harm or total loss of the products

9.     The seller controls the delivery of the goods to the ship on schedule and confirms delivery and loading.

Responsibilities of the buyer

When the items arrive at the buyer's target port, the customer accepts responsibility for the expenses of importation and delivery. Among these expenses are the following:

1.     Product unloading at the port terminal

2.     Product transportation through the terminal and to the delivery location

3.     Customs duties and other costs involved with importing products

4.     Transportation, unloading, and delivery fees to the ultimate destination

The characteristics of CIF

·       CIF was designated as an incoterm by the International Chamber of Commerce. These phrases are analogous to local terminology but have worldwide relevance.

·       CIF is a worldwide shipping agreement that oversees the transportation of goods between a producer and a wholesaler and identifies the responsible authority for the things while in transit.

·       CIF specifies the seller's responsibility for the items delivered to the customer.

·       Only inland oceans and rivers are permitted to use CIF to transport items.

·       The seller bears these costs, and the items are not considered fulfilled until they reach the buyer's hands.

·       It is the same as paying for transportation and insurance.

Risk transfer

It is crucial to remember that, depending on the shipping arrangement, there may be various risk and expense transfer points between the customer and seller when shipping overseas. The risk transfer occurs at a different moment in CIF than the cost transfer. The precise terms of the contract will decide when responsibility for the items passes from the vendor to the customer.

The financial transfer happens when the items arrive because the seller bears the expenses of shipping, freight, and insurance until the cargo reaches the purchaser's destination port. However, the risk is transferred from the seller to the purchaser after the items are carried into the vessel. Although the seller must acquire insurance after the items are placed aboard the ship, the buyer has ownership of the commodities. If the goods are destroyed during transportation, the buyer must submit a claim with the seller's insurance firm.

 Particular considerations

There are circumstances in which a CIF agreement would not be appropriate since the buyer does not bear the risk until the cargo has been placed onto the vessel. For instance, in containerized cargo shipments, the seller's products may wait in a container for many days before being loaded aboard the ship. The customer would be at risk under CIF since the products would not be covered while they were in the container awaiting loading on the vessel. Consequently, CIF export contracts, including containerized freight, would be inappropriate. In contrast to cost and freight provision (CFR), sellers in a CIF transaction are not responsible for arranging transportation insurance.

The international chamber of Commerce (ICC) and Cost, insurance, and Freight (CIF)

CIF is one of the Incoterms (international commerce terms) used in international trade. Incoterms are universal commercial norms established in 1936 by the International Chamber of Commerce (ICC). The ICC created these terms to manage buyers' and sellers' shipping practices and obligations in international commerce. Incoterms are often comparable to local words (such as the Uniform Commercial Code of the United States) but have international uses.

For example, contract parties must indicate the location of the controlling legislation for their terms. The ICC restricts the use of CIF for transporting commodities to those moving by inland waterways or sea.

2020 Incoterms

The International Chamber of Commerce (ICC) has changed the terms and principles of international commerce. The ICC revised the regulations (named Incoterms 2020) in 2020, including shipment security standards improvements.

The insurance coverage criteria under CIF agreements were also modified by Incoterms 2020. Sellers must have insurance that covers more significant ground than was previously needed under Incoterms 2010. Incoterms 2020 includes seven rules applicable to all modes of transportation and four regulations specific to maritime and inland waterway shipping.

Comparing Cost, Insurance, and Freight (CIF) to Free on Board (FOB)

Two standard international shipping agreements are CIF (cost, insurance, and freight) and FOB (free on board), although they are not interchangeable.

·       CIF

The seller typically covers all associated expenses (including shipping, insurance, and tax) under a CIF agreement when cargo is made internationally. Although the customer takes custody of the package after placing it into the boat or ship, the seller is liable for any shipping insurance and freight expenses.

Consequently, the seller is liable for the shipment's transportation fees until the products arrive at the purchaser's destination port. These expenses include shipping, duty, tax payments, and export customs clearing fees. Once the items have been delivered to the purchaser's destination port, the purchaser is responsible for paying the agreed-upon price and any import fees, taxes, or custom duty costs. Additionally, the buyer is responsible for all shipping, inspection, licensing expenses, and the cost of transporting the products to their destination.

·       FOB (Free on Board)

The seller is responsible for transporting and loading the merchandise aboard the ship and any fees related to that operation. However, the buyer assumes responsibility after placing the products aboard the ship.

Under FOB, the seller is responsible for the following:

1.     The cost of packing exported products

2.     Any fees associated with putting the items into trucks and transporting the products to the seller's port

3.     Customs duties, export taxes, and charges

4.     Costs accrued during product transfer, handling, and loading before shipment

Under FOB, the purchaser is responsible for the following:

1.     The cost of transporting goods from the port of origin (the seller) to the final destination (the customer)

2.     The cost of freight insurance, however, the customer cannot purchase insurance.

3.     Costs of unloading and transporting the goods from the buyer's port to the ultimate destination

4.     Any import duties, taxes, or fees related to customs clearance

It should be noted that numerous kinds of FOB agreements exist, and insurance coverage may be arranged between the purchaser and the seller. In other words, the buyer may agree to pay the freight charges or delivery costs, but the seller may agree to pay for the maritime insurance.

CIF and FOB are beneficial since they specify whether the buyer or seller is responsible for the freight throughout the shipment. These clauses are significant because they identify who is accountable for insurance and freight rates and who is liable if the products are destroyed during shipment.

CIF Regulations

The following are the rules of CIF:

1.     General obligations- The supplier must follow CIF standards and give a commercial invoice to the consumer of the products.

2.     Delivery- The products will be delivered when loaded onto the ship, not when they arrive at the export port specified in the sale agreement.

3.     Risk transfer - Without exception, the risk of loss, theft, or damage to the products remains with the seller until the customer receives them.

4.     Carriage- The seller is responsible for transporting the agreed items from his location to the export port.

5.     Insurance - The seller's responsible for arranging and paying for shipping and insurance coverage for the purchased items.

6.     Documents relating to shipping and delivery - The vendor must also provide the customer with all shipping and delivery paperwork.

7.     Export or Import Clearance: The seller will handle all export-related procedures at cost and risk.

8.     Inspecting, packaging, or marking- The seller is responsible for the expenses of checking the standard, packing, or marking of the products.

9.     Cost Allocation- The contract seller must bear all expenditures until the items are delivered to the customer. These expenditures will also include freight and insurance.

10.  Notices- The contract seller shall notify the customer to confirm the delivery of the items.

Is duty included in CIF?

The seller must pay the products' duty costs before they may be exported from the destination port. The customer is in charge of the import taxes incurred when a shipment reaches its final destination country.

When should I apply for CIF?

CIF is only used when transporting products by sea or river. Hence it cannot be used for air freight. CIF may be more convenient for customers who do not want to deal with the hassles of acquiring insurance, paying freight costs, and bearing full responsibility for foreign delivery.

Advantages

1.     The seller will have an additional option to increase his profit statistics if he arranges for transportation and insurance of the products.

2.     The vendor will not be exposed to any danger while the items are in transit.

3.     The seller has complete control over the conveyance of goods until and unless the customer pays for the products.

4.     The customer will not have to worry about the products' transit.

Disadvantages

1.     It might be a costly alternative for the purchaser of the items because the vendor may charge the buyer more to benefit more from the transaction.

2.     A contract's buyer and seller may also have communication problems.

3.     The buyer may also have to pay additional fees at the export port for customs and dock fees before the items are cleared.

Conclusion

Cost, insurance, and freight (CIF) is a shipping phrase used internationally that indicates the seller is responsible for all fees associated with transporting the products from the point of origin to the port destination. CIF indicates that the seller is liable for the expenses of delivering the cargo and getting insurance to safeguard the purchaser if the items are damaged during shipment. But once the cargo arrives at the purchaser's port, the buyer accepts responsibility for the items.