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.