Legal Significance of Fob and Cif Contracts in the International Trade

Introduction

The 21st century has been characterised by rapid globalisation, which has strengthened the connections between countries. In such an environment, international trade has acquired particular importance due to a vast pool of emerging opportunities. The market scales have been on the increase, allowing sellers to encompass larger customer bases. At the same time, buyers have had a better selection of potential suppliers, allowing them to make an optimal choice. Despite a range of evident advantages, international trade poses a range of risks conditioned by the parties’ remoteness and differences between their jurisdictions. To minimize the risks faced by all sides, international trade agreements aim at introducing a comprehensive legal framework, which would regulate the process. CIF and FOB contracts are parts of this model, providing different approaches to the manner, in which the shipment of goods is to be handled. Both types of contracts have varying legal significance for buyers and sellers, making them neither universally convenient nor interchangeable. The purpose of this paper is to discuss the legal significance of FOB and CIF contracts in the context of the international trade of goods.

Background

Historical Context

International trade has been an area of intense interest for legal scholars for decades. Ever since the shipment of various goods between nations became a usual occurrence, the importance of a unified legislative framework has been discussed on all levels. According to Ferrari, the unification of international law, which regulates international commercial relations, ensures the certainty and predictability of the entire trade process. [1]. At the same time, contracts serve as the cornerstone of the system, which scholars refer to as “lifeblood” and “the pillar” of international trade1. The primary purpose of such unified contracts has always been to ensure that commercial relations do not face insurmountable barriers in the form of national borders.

The United Nations have made several attempts to introduce a comprehensive legal framework, which would satisfy all elements of the system. Finally, the United Nations Convention on Contracts for the International Sale of Goods was ratified in the 1980s, creating the current system of international commercial relations. [2]. This document has unified the legal aspect of international trade, enabling unrestricted, borderless trade based on similar terms and conditions for all parties. Ferrari states that, although this legal framework is not binding in foreign jurisdictions, its influence has been observed in courts across Europe and in the United States1. Overall the United Nations Convention on Contracts for the International Sale of Goods has created a favourable environment for the continuous development of foreign trade. The CIF and FOB contract types introduced along with it form an area of interest, and, to understand their importance for sellers and buyers, one should outline the primary differences between them.

Global Trade Framework and Incoterms®

As discussed earlier, a comprehensive framework of international trade law regulates the relations between buyers and sellers across the globe. There is a number of organisations, which aim at facilitating the exchange of goods between nations, and the regulatory nature of international agreements contributes to this purpose. As envisioned by the United Nations Convention on Contracts for the International Sale of Goods, international trade must remain predictable and certain at all stages[3]2. This strategy appears justified, as long shipping distances and limited communication opportunities cause reasonable concerns among buyers and sellers. In addition, different interpretations of legislative systems would entail further indeterminacy. In other words, each participant of the trade relations should know exactly what they can expect from the process of import and export. Each relevant aspect is to be clear and certain, including shipping amounts, timeframe, insurance, and the coverage of related expenditures.

Accordingly, a necessity arises, demanding that all parties speak the same language. This idea extends beyond the use of English and the primary means of international communication, as any language is not immune to misinterpretation. To meet this requirement, the International Chamber of Commerce (ICC) has developed a comprehensive set of rules, covering all parties’ relations during export and import procedures3. Incoterms® provide guidance to all trade specialists, covering the aspects of order placement, labelling, and transportation. The first Incoterms® rules, meaning international commercial terms, were published in 1936, and the ICC continues to update them each decade3. The terms and abbreviations it introduces hold unified meaning for buyers and sellers across the globe, ensuring similar understanding of all trade concepts. Such a unification enables the more active exchange of goods, which positively affects the global economy. CIF and FOB are parts of all the latest editions of Incoterms®, meaning that these contracts are universally appraised by import and export organizations.

CIF Contract Overview

CIF remains one of the most popular contract types among those, which are introduced by the Incoterms®. It demonstrates a range of similarities to the CFR shipping model, in which the seller organises and pays for the transportation of goods. At the same the time, the buyer’s objective is simply to receive the package at its destination and handle the order starting from the moment a transport vessel is unloading[4]. Evidently, such a system entails additional responsibilities placed upon the seller’s side. CIF is an abbreviation, meaning Cost, Insurance, and Freight, which signifies that all these aspects of shipping are to be covered by the selling organisation until the order arrives at its port of destination. Insurance is the primary difference between CIF and CFR, obliging the seller to provide minimum marine insurance. Once all the details are confirmed with the receiving party, the seller funds and organises the entire transportation process, which allows the buyer to delay additional responsibilities until the package has been delivered.

FOB Contract Overview

While CIF and CFR models are widely used by modern companies, the contemporary international trade framework proposes a viable alternative. The Free on Board (FOB) shipping system limits the responsibility of the seller while extending the role of the buyer. In this case, the former organises the process of transportation until the point when the goods arrive at the port of departure, which comprises the loading costs. However, from this moment, the entire transportation procedure is to be handled by the importing company. Therefore, the expenditures of the buyer will include marine transport fees and insurance, unloading of the product, and any further costs upon arriving at the port of destination4. The FOB framework enables a more balanced distribution of responsibilities while entailing additional risks for the importing company[5]. Both approaches to shipment and delivery remain important in the contemporary trade environment, holding special legal significance for all parties involved.

Discussion

FOB and CIF contracts outline the pivotal role of the shipping process in modern trade. Considering the number of goods and the speed of marine transportation, this stage can demand considerable time, during which neither buyer nor seller will have direct access to the product. In addition, shipping is associated with certain risks, which may result in the goods being mishandled, damaged, or even lost6. Accordingly, the primary significance of FOB and CIF contracts lies in the legal responsibilities of the parties concerning the shipping stage. In FOB contracts, the buyer must arrange this process, limiting the area of the seller’s responsibility with a ship’s rail. However, legal precedents show that the preparation for the delivery remains the seller’s obligation, as the goods should be able to survive a regular sea voyage5. For example, the quality of the packaging is a legal responsibility of the exporting side in both FOB and CIF contract relations.

The passing of property is an important element of the trade, as this principle marks the threshold, beyond which the buyer is responsible for the handling of goods. In CIF contracts, the buyer takes it upon themselves to deliver the product in an appropriate shape, organising and financing the shipping procedures. Therefore, as per the international trade law, the goods are still in possession of the exporter until they are received at the port of destination with the corresponding shipping documents. In this case, the importer retains the right to reject the delivery free of charge until they sign the documents, as any damage would indicate the seller’s fault. In the case of FOB, legal disputes become more complicated. The passing of property is considered to occur at the moment when the shipment is loaded. Nevertheless, as discussed prior, international law demands that the seller is to take all precautions in regards to the shipment’s safety through proper packaging5. Overall, the legal responsibility areas of both parties appear to intersect in the case of FOB contracts, adding complexity to possible litigations.

Evidently, the purpose of the contract relations introduced by the Incoterms® is to ensure certainty and alleviate the risks faced by both sides. From the seller’s perspective, FOB may appear a more convenient form of trade, but, naturally, many importers would prefer the CIF framework. According to Asanwana and Efombruh, CIF lays additional emphasis on the principle of ascertained goods5. If the goods are ascertained by the moment of the passing of property, the risks also pass to the other party along with the product. In fact, international law implies that the act of signing a contract reflects both sides’ acknowledgement and acceptance of transportation-related risks. In the case of CIF shipping, the buyer’s interests are protected by the contract until the bill of lading is endorsed. Therefore, if the importer fails to examine the product in due course, further legal claims may have little or no effect, despite possible infringement on the opposing side. Overall, the clear line of the passing of property and related risks form the primary point of significance for all parties involved in the trade using FOB and CIF contracts.

Summary and Conclusion

In conclusion, the complex nature of contemporary international trade demands a comprehensive legal framework, regulating the relations between buyers and sellers. FOB and CIF contracts are universally recognized within the system of Incoterms®. The primary difference between them lies in the handling of transportation, as well as shipping-related risks. CIF contracts oblige the seller to organise shipping to the port of destination, meaning that the buyer is neither in possession nor responsible for the goods until the bill of lading is endorsed. FOB relations limit the area of the exporter’s responsibility for loading in the port of departure. However, while the seller faces fewer risks, improper packaging remains a cause for legal action across the delivery process. Both approaches demonstrate particular flaws and benefits, meaning that the exact nature of contract relations is to be determined by the specific parties based on the level of trust and understanding.

The general purpose of international trade law is to protect the interests of all parties involved. Historically, state borders served as the primary impediments to a large-scale exchange of goods between countries. Today, several global organisations, such as the UN and the International Chamber of commerce, work on designing a secure framework of international trade. Such a system is expected to meet the requirements of the globalised economy, while protecting the rights of those who engage in trade. CIF and FOB contracts demonstrate particular significance in terms of ensuring that all aspects of a goods exchange are covered by international law. This framework serves as a point of reference for legal authorities across the globe, recommending the preferred manner of resolving disputes. A review of literature reveals that there have been precedents when courts justified their rulings by the principles of the discussed agreements. Such a tendency corresponds to the general principle of domination of international law in foreign relations and trade. The further development of these aspects will enable a steady, comprehensive growth of the global economy, from which the entire planet will benefit.

References

Ferrari F, Contracts for the International Sale of Goods: Applicability and Application of the 1980 United Nations Convention (Martinus Nijhoff, 2012).

UN Commission on International Trade Law (UNCITRAL), ‘Convention on Contracts for the International Sale of Goods, (1988) UN Doc #25567.

.UN Commission on International Trade Law (UNCITRAL), ‘Convention on Contracts for the International Sale of Goods’, (1988) UN Doc #25567.

International Chamber of Commerce, ‘Incoterms® 2020’ (International Chamber of Commerce, 2020). Web.

International Chamber of Commerce, ‘Incoterms® 2020’ (International Chamber of Commerce, 2020). Web.

Sinclair J, ‘Shipping Terms Explained: CFR, CIF and FOB’ (Trade Finance Global, 2016) Web.

Sinclair J, ‘Shipping Terms Explained: CFR, CIF and FOB’ (Trade Finance Global, 2016) Web.

Asanwana U and Efombruh O, ‘Understanding FOB and CIF Contracts: And When Property and Risk Pass in These Transactions’ (SSRN, 2018) Web.

Murray, C. et al., Schmitthoff: The Law and Practice of International Trade ( Sweet and Maxwell, 2020).

Asanwana U and Efombruh O, ‘Understanding FOB and CIF Contracts: And When Property and Risk Pass in These Transactions’ (SSRN, 2018) Web.

Asanwana U and Efombruh O, ‘Understanding FOB and CIF Contracts: And When Property and Risk Pass in These Transactions’ (SSRN, 2018) Web.

Secondary Sources

Asanwana U and Efombruh O, ‘Understanding FOB and CIF Contracts: And When Property and Risk Pass in These Transactions’ (SSRN, 2018) Web.

Ferrari F, Contracts for the International Sale of Goods: Applicability and Application of the 1980 United Nations Convention (Martinus Nijhoff, 2012).

International Chamber of Commerce, ‘Incoterms® 2020’ (International Chamber of Commerce, 2020) Web.

Murray, C. et al., Schmitthoff: The Law and Practice of International Trade ( Sweet and Maxwell, 2020).

Sinclair J, ‘Shipping Terms Explained: CFR, CIF and FOB’ (Trade Finance Global, 2016) Web.