The FOB and CIF contracts are part of 11 international trade conditions, also known as Incoterms, defined by the International Chamber of Commerce in 1936. In 1936, the International Chamber of Commerce established a system of 13 International Trade Conditions, or INCOTERMS. Each INCOTERM refers to an agreement that governs the shipping liability of sellers and buyers engaged in international trade. The purpose of this system is to facilitate orderly international trade by providing model contracts that can be easily identified across language barriers. CIF and FOB are two widely used INCOTERM agreements. A CIF contract is a contract for the sale of goods at a price that includes the cost of the goods, insurance and transportation costs. Therefore, in these contracts, the buyer bears the insurance costs at the time of transport and the transport costs. Indeed, these costs are added to the price of the goods. With CIF, the buyer assumes the risk of loss if the goods are damaged during transport between the port of export and the port of destination, even if the seller enters into a contract with the vessel. However, the seller is obliged to insure the goods during this part of the journey. Shipping contracts can also include other terms, such as delivery details, prices, etc.
However, if you are dealing with large orders, especially international ones, it is very important to determine the obligation and liability of who is responsible for any damage during shipping. In these contracts, the transfer of ownership of the goods to the buyer takes place when he receives the shipping documents by paying the price of the goods. If the buyer refuses to accept the shipping documents, the seller is entitled to sue him for damages for breach of contract and not for the price of the goods. Some of the seller`s responsibilities with a CIF contract include freight charges, freight insurance, and additional fees. Because these expenses add up, buyers often factor them into the cost of goods, which can make things more expensive for everyone involved. When negotiating deals with buyers, you need to be clear about the type of shipping liability obligations your company is willing and able to support. For example, if you prefer to transfer responsibility before transportation, this must be disclosed when negotiating shipping contracts with your customer. However, FOB contracts are also used for domestic and air transport. Delivery takes place when the seller hands over the goods to the buyer.
FOB contracts stipulate that this happens when the goods pass through the railing of the ship. The crucial part of this contract is therefore that the seller is obliged to offer the buyer the limited delivery within the time of the shipping documents. In the event of Seller`s failure to deliver the documents within a reasonable time, the Seller shall be guilty of breach of contract. Well, in this contract, the seller chooses the carrier, who may or may not charge the buyer an amount higher than the actual price. It therefore includes a certain margin or profit at the time of the execution of the work. It should be noted that only the cost of loading the goods is borne by the seller. At the moment the goods are loaded onto deck, the risk is transferred to the buyer. Therefore, it is responsible for freight, insurance, and other tracking fees.
According to this contract, the shipper or seller of the goods clears them for export and also delivers them to the port. If the goods are loaded on deck at the relevant port of dispatch, the buyer is responsible for the goods from that moment on. As soon as the seller fulfils these obligations, the seller`s contractual obligation ends. The delivery of the goods to the buyer is also carried out by the seller. Therefore, the buyer would be obliged to pay the price of the goods upon presentation of the shipping documents. The buyer must pay the price even if the goods were lost at that time. FOB contract means the contract for the sale of goods between the parties. In this contract, the seller will deliver and load the goods on board a ship at its own expense in order to ship them to the buyer. This is particularly important in cross-border business situations.
This is because shipments generally transit through international waters and are subject to different rules and regulations. If everything is clearly documented who is responsible for what, potential problems can be minimized. FOB stands for Free On Board. With the FOB shipping contract, the seller or shipper guarantees that the goods are transported to a specific place of origin. Normally, it is a port, as FOB and other INCOTERM contracts are mainly intended for maritime transport. The CIF contract is one of the very expensive alternatives when it comes to shipping products from one point to another. Well, there might be a question popping up in your head: why is this an expensive option? Cost, Insurance and Freight (CIF) and Free on Board (FOB) are international shipping agreements used to transport goods between a buyer and seller. They are among the most common of the 12 terms of international trade (Incoterms) introduced by the International Chamber of Commerce (ICC) in 1936.
Specific definitions vary somewhat from country to country, but in general, both contracts include origin and destination information that is used to determine where liability officially begins and ends, and describes buyers` responsibilities to sellers. and sellers to buyers. FOB contracts release the seller from any liability as soon as the goods are shipped. Once the goods have been loaded – technically “passing through the railing of the ship” – they are considered to have been delivered to the control of the buyer. When the trip begins, the buyer then assumes all responsibility. The buyer can therefore negotiate a more favorable price for freight and insurance with a carrier of his choice. In fact, some international traders try to maximize their profits by buying FOB and selling CIF. Each party specifies which party is responsible for the goods in transit, what insurance is required and who pays the transportation costs.
The agreements also specify when the seller`s commitment is complete and the buyer assumes responsibility. The transfer of responsibility from the seller to the buyer is considered a delivery, even if the goods are still in transit. CIF stands for Cost, Insurance and Freight Contract. According to this contract, the seller assumes responsibility for loading the goods on the deck chosen for the delivery of the goods. In addition, the seller bears the costs of transport and insurance to the port of destination. According to clause C of the institution`s summons clauses, the conclusion of a minimum level of assurance is essential. The buyer assumes responsibility for the port of destination at his warehouse. It is important that the purchase contract clearly defines when this responsibility is transferred from the port of destination. Does this include unloading cargo from the ship? What we have understood so far is that in FOB contracts, as soon as the seller loads the goods on board the ship, ownership is transferred to the buyer. The transfer of ownership to the buyer takes place even if the goods are not specific. Do you have any idea about shipping arrangements? There are two famous international maritime agreements, namely the CIF contract and the FOB contract. These contracts are used for the transport of goods between the buyer and the seller.
In the case of FOB contracts, the seller is obliged to load the goods onto the vessel offered by the buyer. On the other hand, in CIF contracts, the seller`s obligation is to deliver the goods to the shipping company for transmission to the buyer. Alternatively, a CIF contract may be a better choice until a new buyer gains experience and better understands the import processes. In the case of FOB contracts, the buyer assumes full responsibility for the goods shipped at the beginning of the journey. Overall, the CIF contract is one of the most expensive contracts where the cost of the goods also covers the price of insurance and freight. However, FOB contracts do not include the price of insurance and freight. The seller is responsible for loading the goods properly packed on board the vessel designated by him and for the costs of transport to the designated port of destination on the buyer`s side. The seller must also take out insurance at least up to the port of destination.
Since international maritime agreements have been in use for thousands of years, the resulting modernized buyer-seller contracts help answer these questions in a legally binding manner. New importers are not advised to use FAB because buyers must retain greater responsibility for the goods during shipping.