FOB & CIF Contracts
A “free on board" or “freight on board" contract usually entails the buyer of goods paying for and arranging the carriage of those same goods, with the seller having responsibility for then loading the goods onto a vessel nominated by the buyer – thus putting the “freight on board". Once the cargo has been laden onto the transporting vessel, this generally marks the point at which the cargo becomes the property of the buyer – indeed legally speaking this usually takes place when the cargo passes over the ship’s rail at the port of shipment.
The purpose of a FOB contract is, therefore, principally to determine which party in a deal is responsible for shipping costs and at what point responsibility for the goods changes hands. The contract will specify in its text at which point the seller ceases to be financially and materially responsible for the cargo. Within said text will be a short declaration along the lines of “FOB New York", which legally means that the seller is responsible for the cargo’s arrival in New York in one piece, and will be liable to a claim from the buyer if damage is deemed to have taken place prior to this.
A CIF contract stipulates that the price paid by the buyer will include the carriage of the cargo, and furthermore that the seller becomes responsible for insuring the goods to a total of 110% of the price agreed in the contract. Again, the seller’s responsibility for the goods ends once the goods have been loaded on board. In the light of this, the buyer should make sure that he/she insists on an “all-risk" insurance policy.
Hence we can see that amongst the two types of contracts discussed above, the seller has more responsibility in case of the latter, namely the CIF contracts