International Commercial Sales: Understanding Incoterms and CIF Contracts
1. International Sales and Trade Law
Trade Law originated in the eleventh century. Article 2 of the relevant legislation establishes the value of use in commercial transactions. This value is crucial in international commercial sales and purchases. In private law, disputes arise when each state applies its own laws. However, in commercial law, disputes are often minimized through the use of standardized model contracts worldwide.
We will focus on the Incoterms model, which standardizes sales contracts, ensuring traders understand applicable clauses. By using three letters, the governing regime of the contract is identified (e.g., CIF, FOB, EXW).
There are three main positions regarding responsibilities:
- First Position (EXW): The seller places goods at the buyer’s disposal, with the buyer bearing costs and risks.
- Second Position (Group D): The buyer sets conditions as goods are generic, and the seller assumes responsibility.
- Third Position (Interim): Each party bears some costs and risks.
When the seller dictates terms, the contract is called EXW. The seller’s only obligation is to prepare, pack, and place the goods outside their facility, with the buyer bearing all risks and transportation costs. When the buyer sets conditions, we are in Group D, with the opposite effect.
Contracts need to be simple and clear. The Chamber of Commerce established Incoterms, which contains 13 sales modalities updated according to changing practices. These are divided into four groups: Group E (Departure), Group F (Main Carriage Unpaid), Group C (Main Carriage Paid), and Group D (Arrival).
Incoterms are drafted by and for entrepreneurs, using clear and neutral language (not legal jargon) understandable in any language. To achieve simplicity, Incoterms use a mirror system: the seller is always A (left side) and the buyer is always B (right side).
Key aspects covered by Incoterms:
- a) Production and packaging of goods.
- b) Risks and costs of transporting goods from factory to port (e.g., from Madrid to Algeciras), including customs.
- c) Addressing the 78% of goods damage occurring at the port, clarifying who bears risk and costs.
- d) Main transportation scheme (e.g., sea transport), including responsibilities for hiring ships and loading.
- e) Arrival at the destination.
A) Incoterms 2000: Cost, Insurance, and Freight (CIF)
The CIF contract is the oldest, most complex, and widely used for goods moving across the world. CIF stands for Cost, Insurance, and Freight. It means the seller delivers when the goods pass the ship’s rail at the port of shipment.
The seller pays costs and freight to transport goods to the destination port and secures marine insurance for the buyer against loss or damage during transport. This insurance coverage is minimal unless expressly agreed otherwise with the seller. CIF can be used for sea or inland waterway transport. If goods are not delivered across the ship’s rail, the CIP term should be used.
Seller Obligations (A) and Buyer Obligations (B)
A.1 Provision of Goods: Deliver goods as stipulated in the contract.
B.1 Payment of Price.
A.2 Licenses, Authorizations, and Formalities: The seller manages customs documents (taxes, documentation, etc.).
A.3 Contract of Carriage and Insurance:
- a) Contract of Carriage: To simplify the sale, the seller contracts a vessel to transport goods to the destination port. If the buyer contracts the vessel, FOB Incoterms apply.
- b) Contract of Insurance: Marine insurance must be 110% of the goods’ value. Only CIF and CIP Incoterms require insurance.
Note: While Incoterms are simple, they don’t resolve all issues. However, 90% of transactions using Incoterms proceed smoothly, and 5% are resolved through negotiation. Incoterms provide legal certainty in international sales, complemented by the Vienna Convention of 1988.
A.4 Delivery: The seller must place goods aboard the ship. Risk transfers when goods pass the ship’s rail. For ships without rails or truck deliveries, the ICC Incoterm is used.
B.4 Taking Delivery: The buyer accepts delivery when goods are delivered according to A.4 and receives them from the carrier at the destination port. The buyer can only verify shipment condition upon delivery. Title conveys possession. Delivery for compliance occurs at the destination port. In CIF contracts, a bill of lading (title to the goods) is provided.
A.5 Transfer of Risk: The seller bears risks until goods pass the ship’s rail at the port of shipment.
B.5 Transfer of Risks: The buyer assumes risks once goods pass the ship’s rail. It’s crucial to establish who receives insurance compensation (seller or buyer). If goods are on the ship, the buyer receives compensation.
A.6 and A.7 Distribution of Costs and Notices: Relate to cost distribution and notices between buyer and seller.
A.8 Proof of Delivery: The seller provides the buyer with the usual transport document for the destination port (e.g., negotiable bill of lading, non-negotiable sea waybill, or inland waterway document) covering the contract goods.
B.8 Proof of Delivery: The buyer accepts the transport document if it complies with A.8.
A.9 and A.10 Verification and Inspection: Refer to goods verification, inspection, and other aspects.