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Purpose of CIF ( Cost, Insurance and Freight ) used in international trade terms (INCOTERMS) for sea transportation of goods

Defining CIF

“CIF” means Cost, Insurance and Freight (paid to a named place), e.g. CIF London. - is a contract based on the discharge port.

i) The seller must pay all costs including marine insurance and freight to carry the goods to the named destination, but risk passes from the seller to the buyer when the goods cross the ship’s rail at the loading port. The seller must supply the goods and make a contract (at his own expense) for carriage of the goods to the agreed port of destination, paying freight and charges for loading/unloading. He must arrange (at his own expense) a marine insurance policy covering the goods against the risks of carriage for the CIF price plus 10%. Any war risks insurance required by the buyer must be arranged by the seller but charged to the buyer. (The cost of providing these services are included in the invoice price for the goods.)

ii) The seller must provide the buyer with clean, negotiable bills of lading (dated for the agreed period of loading), an invoice and an insurance policy or certificate of insurance. The bills of lading must be a full set of negotiable “order” marine bills so that delivery can be made to the order of the buyer or his agreed representative. (This enables the bills of lading to be passed to a bank in the documentary credit system, enabling the seller to obtain early payment.) If the bill of lading contains a reference to a charter party, the seller must also provide a copy of the charter party. The seller must tender all the documents to the buyer, his agent or his bank.

iii) The buyer must accept the documents when tendered by the seller, and must pay the agreed contract price. Property passes on transfer to the buyer of the documents. The buyer bears all costs and charges excluding freight, marine insurance and unloading costs unless included in the freight when collected by the carrier. The buyer must also pay for war risks insurance if he requires it. He must effectively bear all risks of the goods from passing the ship’s rail at the port of shipment. (He is protected by the insurance arranged by the seller.)

iv) As freight is paid by the seller, the bill of lading is normally marked “FREIGHT PRE-PAID”, but the master should ensure that freight has been paid before signing the bills of lading.

v) The buyer bears the risks during the voyage, but title in the goods only passes when the documents are taken up by the buyer. When the buyer has received the documents he must pay for the goods; he cannot demand receipt of the goods first.

vi) The purpose of a CIF contract is not so much the sale of goods as the sale of documents relating to the goods, so as to enable the negotiability of the bill of lading. CIF is therefore widely used where the documentary credit system is used.

vii) The advantage of CIF to the buyer is in making the seller wholly responsible for arranging the shipment. The seller is protected against loss or damage before payment by the insurance policy. The seller can also retain title in the goods beyond the time of shipment and as security against payment by the buyer, so it is easier for the seller to obtain credit at his bank. Once the buyer receives the documents and pays, he can secure credit or resell the goods. However, the goods will cost more on CIF terms than on FOB terms.

viii) In view of the advantages in CIF for normal international sales, in which the banks’ documentary credit system requires the transfer of title through the passing of documents (including the set of bills of lading and a certificate of insurance), the vast majority of international seaborne cargo shipments are CIF.

Summarized below seagoing cargo ship various employment guide:
  1. Charty party forms

  2. defines the obligations, rights and liabilities of the shipowner and charterer. Recognised standard form (e.g. GENCON, BALTIME, NYPE)
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    Nature of a time charter
    The charterers agree to hire from the shipowner a named vessel, of specified technical characteristics, for an agreed period of time, for the charterer’s purposes subject to agreed restrictions.
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  3. Voyage charter advantages

  4. contract for the carriage by a named vessel of a specified quantity of cargo between named ports or places.
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  5. Terms of Bareboat charter and lease arrangement

  6. The vessel owners put the vessel (without any crew) at the complete disposal of the charterers and pay the capital costs, but (usually) no other costs.
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  7. Seaworthiness of vessel

  8. A vessel must be fit to encounter the “ordinary perils of the sea” (e.g. bad weather) and other incidental risks to which she will be exposed on the voyage..
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  9. International trade terms (INCOTERMS) in sea transportation

  10. INCOTERMS is a set of rules, published by the International Chamber of Commerce, for the uniform interpretation of the most commonly used trade terms used in international trade contracts.
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  11. Money transfer procedure in sea transport

  12. Money transfer system commonly used in overseas trade to enable sellers to obtain early payment, i.e. soon after shipment of the goods.
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  13. Contract between cargo seller and buyer

  14. The contract of sale between the seller and the buyer of the goods is separate from the contract of carriage which one party or the other, or a third party (such as a freight forwarder), will make with the carrier .
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  15. Parties involved in sea transportation of goods

  16. Forming links in the transport chain- Sea carrier, Freight forwarder, shipper, consignee,agent & banks
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  17. Carriage of goods by sea act 1992 (COGSA 92)

  18. Section 3 of COGSA 92 lays down guidelines establishing when liabilities under a bill of lading, sea waybill or ship’s delivery order will be transferred to a party who is not an original party to the contract of carriage (i.e. an endorsee or transferee). The party who takes or demands delivery of the goods to which a bill of lading, sea waybill or ship’s delivery order relate becomes subject to the same liabilities as the original shipper..
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  19. Laytime interpretation rules

  20. Rules, which were issued jointly by BIMCO, CMI, FONASBA and INTERCARGO, replace the Charter party Laytime Definitions 1980.
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  21. CIF ( Cost, Insurance and Freight ) used in international trade terms (INCOTERMS)

  22. “CIF” means Cost, Insurance and Freight (paid to a named place), e.g. CIF London.- is a contract based on the discharge port
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  23. FOB ( free on board ) used in international trade terms (INCOTERMS)

  24. “FOB” means Free On Board (named port of shipment), e.g. “FOB Newcastle NSW”. It is one of the most commonly used term (INCOTERMS) in sales contracts involving sea transportation of goods.
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  25. Ships employment baltic exchange

  26. Baltic Exchange members undertake to abide by a strict code of business practice, enshrined in the famous Baltic motto “Our Word Our Bond”.
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  27. Ships charter market place

  28. Most ships employed in the charter markets are dry bulk carriers, tankers, combination carriers (e.g. OBOs), or reefer vessels, although there is also a charter market for container ships and for vessels of various special purpose types
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  29. Common Chartering abbreviations

  30. Many terms commonly used by shipbrokers and others involved in ship chartering, mainly to save time and effort in communications. Shipmasters may come across many of the acronyms and abbreviations in documents relating to charters, e.g. in telexed voyage orders and market reports..
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  31. Tanker freight worldscale

  32. "Worldscale" is the code name for the “New Worldwide Tanker Nominal Freight Scale”, published by the Worldscale Association (London) Limited and the Worldscale Association (NYC) Inc
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