20CIF (Cost, Insurance, Freight) contracts

20.1General

Clemens Horst v Biddell Bros (1911) HL

A contract for the sale of hops provided ‘CIF to London, Liverpool or Hull. Terms net cash’; but it contained no term expressly calling for payment against the shipping documents. The goods were shipped and the bill of lading was presented to the buyer. But he refused to pay until he had inspected the goods.

Held under a CIF contract the buyer must pay the price against the tender of the shipping documents. At first instance, Hamilton J stated the duties of the parties under a typical CIF contract:

A seller under a [CIF] contract … has

–first, to ship at the port of shipment goods of the description contained in the contract;

–secondly, to procure a contract of affreightment, under which the goods will be delivered to the destination contemplated in the contract;

–thirdly, to arrange for an insurance upon the terms current in the trade which will be available for the benefit of the buyer;

–fourthly, to make out an invoice …; and

–finally, to tender these documents to the buyer so that he may know what freight he has to pay and obtain delivery of the goods if they arrive, or recover for their loss if they are lost on the voyage.

It follows that against tender of these documents, the bill of lading, the invoice, and policy of insurance … the buyer must be ready and willing to pay the price.

Smyth v Bailey (1940) HL

The facts are irrelevant.

Lord Wright described the main features of CIF contracts and how they are financed:

The seller has to ship or acquire after that shipment the contract goods, as to which, if unascertained, he is generally required to give notice of appropriation. On or after shipment, he has to obtain proper bills of lading and proper policies

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of insurance. He fulfils his contract by transferring the bills of lading and the policies to the buyer. As a general rule he does so only against payment of the price, less the freight, which the buyer has to pay. In the invoice which accompanies the tender of the documents on the ‘prompt’ – that is, the date fixed for payment – the freight is deducted, for this reason.

In this course of business the general property remains in the seller until he transfers the bill of lading … The property which the seller retains while he or his agent, or the banker to whom he has pledged the documents, retains the bills of lading is the general property, and not a special property by way of security.

In general however the importance of the retention of the property is not only to secure payment from the buyer but for purposes of finance. The general course of international commerce involves the practice of raising money on the documents so as to bridge the period between shipment and the time of obtaining payment against documents … By mercantile law, the bills of lading are symbols of the goods. The general property in the goods must be in the seller if he is to be able to pledge them.

20.2Duties of the seller

Karberg v Blythe (1916) CA

Under a contract for the sale of Chinese horse beans, the goods were shipped aboard the German ship Gernis. Shortly afterwards, war was declared on Germany and so the contract of carriage within the bill of lading became void for illegality. The buyer refused to take up the documents.

Held the buyer was entitled to do so. The documents must be valid at the time tendered.

Diamond Alkali v Bourgeois (1921)

Under a contract on CIF terms for the sale of soda ash, the seller tendered the documents, which included a certificate of insurance, but not an insurance policy. Normally, a certificate states that the goods are covered by a policy and refers to that policy, but it does not contain any terms of the policy. The buyers rejected the documents.

Held the buyer was entitled to reject the documents on the grounds that no proper policy of insurance was tendered. Unless otherwise agreed, the seller must tender the insurance policy.

Note

The reason for this is that the person in receipt of the certificate shall not be able to determine what the terms are. It seems that modern English practice is to tender a certificate entitling the holder to demand the issue of a formal policy, unless the contract expressly stipulates otherwise. Compare with Donald H Scott v Barclays Bank (1923) (below). See, generally, Schmitthoff, The Law and Practice of International Trade, 9th edn, 1990, pp 39–40.

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Donald H Scott v Barclays Bank (1923) CA

Under a contract for the sale of 100 tons of steel plates, payment was agreed to be by documentary credit. By the terms of the letter of credit the bank agreed to pay the sellers on presentation of documents accompanied by an insurance policy covering the shipment of goods. The sellers tendered an American certificate of insurance, which differs from the English: it is not a document issued by a broker stating that the goods are covered by a policy; it is tendered in lieu of an insurance policy and good tender in the United States (see Uniform Commercial Code, s 2-320(2)(c) and comment). The bank refused to pay.

Held the bank were entitled to refuse payment. The document did not contain the terms of the insurance. There was no means of asserting these terms except by reference to another document which was not in convenient reach for reference. See Diamond Alkali v Bourgeois (1921) above.

Kwei Tek Chao v British Traders & Shippers Ltd (1954)

For the facts, see above, 15.1.1.

Held the buyer has two rights to reject. Per Devlin J:

... the right to reject the documents arises when the documents are tendered, and the right to reject the goods arises when they are landed and when after examination they are not found to be in conformity with the contract.

20.3Duties of the buyer

Law & Bonar v BAT (1916), see below, 20.5.

Groom v Barber (1915)

A contract for the sale of Hessian cloth CIF Calcutta was made on 8 June. One of the terms stated ‘war risks for buyer’s account’. The goods were insured but war risks were not covered. The goods were shipped on 5 July and war broke out on 4 August. The ship was sunk by a German cruiser. The buyer rejected the documents and refused to pay, claiming that the sellers should have taken out war risks insurance.

Held the contract was made in peacetime when it was not the custom of the trade to insure against war risks. Therefore, in the absence of a contrary intention the sellers were not bound to insure against war risks. The phrase ‘war risks for buyer’s account’ cannot be said to mean that in times of peace, war risk insurance must be taken out by the seller.

Gill & Duffas SA v Berger (1983) HL

The sellers had agreed to sell on CIF terms 500 tons beans in two loads (445 tons and 55 tons). The first load was delivered but the buyers’ wrongly considered it to be unmerchantable. The documents, which were in order, were then tendered and the buyers rejected them.

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Held the rejection of documents which were in order amounted to a repudiation of the contract. Thus the sellers were released from their obligation to deliver the second load and the buyers were liable for non-acceptance of the whole 500 tons.

Note

See this case also in 13.3.

20.4Passing of property

Leigh & Sillavan v Aliakmon Shipping, The Aliakmon (1986) HL.

See above, 18.2.

Cheetham v Thornham Spinning (1964)

One hundred bales of cotton were sold on CIF terms; it was agreed that payment in cash must be made upon tender of the shipping documents. The ship discharged the goods but upon presentation of the documents the buyers asked for credit; this was refused. However, the sellers were worried about incurring quay charges so it was agreed that the goods should be sent to the buyer’s warehouse. The sellers retained the shipping documents. The buyers used or resold the cotton and then went into liquidation. The sellers claimed the proceeds of the resales, contending that the property did not pass to the buyers when the goods were delivered to their warehouse.

Held the property had not passed to the buyers. Although the buyers took possession of the goods they did so to avoid the quay charges; the sellers retained the documents. It was clear from the circumstances that the parties did not intend that property pass.

Ginzberg v Barrow Haematite Steel Co Ltd (1966)

Under a sale of manganese ore on CIF terms, it was agreed that payment must be made upon tender of the shipping documents. The goods arrived before the documents and to assist the buyers, who were anxious to obtain possession, the sellers sent a delivery note. This enabled the buyers to take possession. Subsequently, the buyers went into receivership without having paid. The receiver argued that the variation agreed changed this contract to ‘ex-ship’ and so payment was no longer a condition of property passing. Hence the property had vested in the buyers. The sellers sued for conversion.

Held the property had not passed and the sellers would be entitled to the return of their goods or their value. The sellers did not intend to depart from the CIF terms, they merely intended to expedite delivery.

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20.5CIF and risk

Groom v Barber (1915), see above, 20.3.

Law & Bonar v British American Tobacco (1916)

In May 1914, a contract was made for the sale of a quantity of Hessian cloth CIF Smyrna, to be shipped from Calcutta to arrive in Smyrna by September. A term in the contract stipulated that the risk would be with the seller until actual delivery. The seller took out insurance which was on the usual terms of the trade at that time – it did not cover war risks. The goods were shipped in July, but it was not until 21 August that the seller informed the buyer of the shipping details which would enable the buyer to take out any extra insurance. It was too late: on the same day the loss of the ship was reported in London. It was sunk by a German cruiser following the outbreak of the First World War on 4 August. The buyers refused to pay for the goods claiming that (i) the sellers failed in their duty (imposed by s 32(3) of the Sale of Goods Act) to give notice enabling the buyers to insure (against war risks); and (ii) in any case by the contract the goods were at the seller’s risk.

Held for the seller. First, s 32(3) did not apply to CIF contracts in times when no one contemplated war. This was because CIF contracts cater for all the insurance usually needed or contemplated. On the evidence the parties and trade in general did not contemplate war at the time the contract was made. Secondly, the contract term retaining risk with the seller was repugnant to a CIF contract because the buyer was paying for insurance against all contemplated risks. Therefore, the term was inapplicable.

Manbre Saccharine v Corn Products (1919)

Corn Products sold quantities of starch and syrup to the plaintiffs. Subsequently, the ship carrying the goods was lost. Two days later Corn Products tendered the documents for payment; the plaintiffs refused to take up the documents or pay.

Held the plaintiff buyers were bound to take up the documents and pay the price. Risk normally passed to the buyer upon shipment. A CIF contract is a contract for the sale of goods performed by the delivery of the documents. The transfer of the documents transfers to the buyer the right to the goods or, in the case where goods are lost or damaged, rights to compensation from the shipper or insurer.

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