Q172: Why is the Incoterms rule CIF deemed inappropriate for containers?

A172: Although coming quite late in the development of containers, in the 1990 version of the Rules there was a caution on the use of the term CIF (and CFR) in containerized trades. This caution has been repeated in all versions since.

In the early 1800s, and almost 100-years before Incoterms was first published, the expression “cost, insurance and freight” was invented and developed by European merchants, originally expressed c.f.&i. but soon enough universally expressed c.i.f.

With it, the seller ‘delivers’ (that is, completes their side of the contract) by surrendering conforming documents to the buyer. Classically, these are a commercial invoice (evidencing Cost); an insurance certificate (evidencing Insurance) and a bill of lading marked ‘freight prepaid’ (evidencing the Freight portion of the seller’s obligation, and also the loading of the goods on board the vessel).

The term itself relies on a merchant’s assumption that a bill of lading may be used as a ‘transferable’ instrument, one representative of the holder’s entitlement to the goods the bill describes.  This mercantile fiction freed sellers to sell the document, independent of the continued existence of the goods.

By the early 1900s, c.i.f. was sufficiently widespread (and important to trade) that a universal definition among ‘western’ powers was considered necessary. This culminated in the Warsaw-Oxford rules of 1932, and the Incoterms version of the term was, and remains, based on these rules, albeit in a very simplified form.

Given the colonial aspect of most European countries taking part in the 1932 agreement, the agreed definition of c.i.f. found its way into many countries’ legal systems and c.i.f. is rare among commercial terms in having an almost universal legal foundation (as opposed to being a private definition, unsupported by law, as is the case with most other commercial terms). A notable exception in this regard is the USA, where the Uniform Commercial Code definition of C.I.F. (written in this manner) is at odds with the Warsaw-Oxford definition in some key aspects of meaning.

Merchants used c.i.f. for the sale and trading of bulk commodities. This required the underlying bill of lading to be consigned ‘to order’, allowing for the sale of entitlement to the goods by endorsement of the documents (both the bill and the insurance certificate). A holder of the documents might then (by replacing the commercial invoice only) on-sell the goods to a new holder, who in turn could repeat the process, allowing for ‘string’ selling, a practice meeting the needs of the commodity trading industry.

You can see the remains of these concepts in the current Incoterms rules, where (at A6) the seller must supply a transport document which allows for the transfer of the goods, a limitation which frequently bars the use of a freight forwarder’s ‘house’ document (which at law potentially lacks this capacity). This is understandable, given that logistics service providers were unknown at the time of the term’s original development.

Equally, the same is true of containers. With the most primitive exceptions of the loading of passenger effects onto cruise ships, containerization as we understand it today did not exist during the early development of c.i.f.

Although c.i.f. allowed the seller to avoid the risks of the physical world by equating delivery with the handover of documents (divorcing the seller from the risks of the cargo), as the party appointing the carrier and paying the freight, the seller was placed in the position of the shipper; a separate party to the seller, and one bound to the carrier regardless of the private division of risk agreed between the seller and buyer. It is because of the shipper’s exposure to risk during the sea journey that the insurance element of c.i.f. exists – by ensuring that the consignee is indemnified against claims a carrier may make (a General Average contribution in particular), the seller endeavours to ensure the shipper is protected from a carrier’s claim against them, occasioned by the consignee’s default.

Again, referencing the Incoterms equivalent CIF you will note at A5 the requirement for insurance against the buyer’s risk (not the seller’s), and at a level (Cargo Clauses “C”) which addresses the risks more commonly associated with commodities (total loss, fire, explosion etc.,) as opposed to modern, manufactured goods, which would require cover against partial loss, pilferage, theft, partial damages etc.

Crucially though, c.i.f. assumes the shipper needs only to manage port-to-port risks (which therefore is the default period of insurance cover under the term), whereas the container trades extend the shipper’s risk from a period prior to the vessel sailing, up to and beyond the arrival of the vessel, potentially far inland, and that further includes risks associated to the very equipment of containerization and not just the cargo.

The primary change brought with containerization however is the practicality and reality of the seller’s initial delivery. The original c.i.f. required the bill of lading to evidence ‘the loading on board’ of the goods. But it was invented for a physical environment where the seller often would have direct access to the vessel, sometimes being the shoreside labour; where the lifting equipment (if any) was located on the vessel and not on the harbour; where the outward condition of the lifted or loaded cargo could be physically seen, and where the vessel arrived first, and the cargo was brought to it for loading. Loading ‘on board’ had meaning and could be supervised.

In a modern port the seller has no access to the vessel; the lifting equipment is on the harbour, generally not the vessel; the outward condition of the cargo loaded in the container cannot be readily observed, and containerized trades depend on preplanning, which requires the containers to come to the port prior to the arrival of the vessel, against stack-dates and so forth. Loading ‘on board’ cannot be overseen by the seller and, in effect, none of the conditions of c.i.f. exist in a containerised operation

This conflict explains the on-going caution in Incoterms rules, presently expressed at point 2 of the introductory notes to CIF as follows –

“…Mode of transport – This rule is to be used only for sea or inland waterway transport. Where more than one mode of transport is to be used, which will commonly be the case where goods are handed over to a carrier at a container terminal, the appropriate rule to use is CIP rather than CIF…”

Note that this is not a prohibition, only a statement of inappropriateness. Sellers and buyers may do as they wish, within the bounds of the law, and there are no laws flowing from Incoterms rules.

However, perceived contractual protection in the event of a dispute is severely compromised if the parties’ physical performance is at odds with the physical obligations contained in the Incoterms rule. In short, by acting in a manner that contradicts the term, the seller (and buyer) loses whatever protection they hoped using the rules would grant them.

CIP is more ‘appropriate’ because handover to a carrier is the moment of contractual delivery – an event which takes place before the restricted area of a port, and which, coincidentally, allows for the application of the term in any form of transport.

CIP assumes the manufactured nature of the cargo, for example raising the minimum insurance cover to the “A” clauses, and extending this cover to the point where the seller’s costs end, allowing for an inland place or point to be named.

CIP allows for the traditional ‘to order’ bill of lading if required, but it also allows for any other form of transport document, not only making the term multi-modal but allowing for (if not assuming) the involvement of third-party logistics companies like freight forwarders (refer to the subtle difference in wording between CIF A6 and CIP A6).

The continued (and apparently inappropriate) use of the Incoterms rule CIF in containerized trades perhaps flows from a confusion of the private trade term with the similar but wholly unrelated Customs valuation symbol c.i.f.

Failing to make a distinction between these disparate systems often results in the seller pointlessly endorsing their Incoterms rule on the commercial invoice (a far more ‘inappropriate’ action than using the term to regulate the contract, and yet one that is frequently encouraged by banks, and occasionally customs clearing agents, both of whom should really (but rarely do) know better).

In short, a c.i.f. price is no indicator of a CIF contract. Mind your language.

Key to any benefit which may arise in the use of Incoterms rules is the party’s willingness to act in the manner assumed by the rules. The benefit of the Incoterms system begins by READING the rules, acquiring an understanding of the meaning, and applying the rules (where they may be applied), in the correct manner.

To continue to use CIF in containerized transactions, disregarding the very caution the people who draft the rules raise, is to take a risk which may otherwise be avoided.

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