Standardisation of terms: FOB, CIF and Incoterms 2020

1. Why standard terms

An international sale needs answers to recurring questions: who arranges and pays for carriage and insurance, who clears goods for export and import, where delivery takes place, and when risk passes. Merchants abbreviated the answers into trade terms, but courts in different countries read them differently. The International Chamber of Commerce first published the Incoterms in 1936, and has revised them since; the current version is Incoterms 2020, in use from 1 January 2020. Incoterms are not law. They apply because the contract incorporates them (“FOB Mumbai Incoterms 2020”), or as a usage under Article 9 of the CISG. They deal with delivery, risk, costs, and documents; they do not deal with transfer of property, price, payment, or remedies for breach.

2. Incoterms 2020: the eleven rules

Rules for any mode of transport:

• EXW (Ex Works): goods placed at the buyer's disposal at the seller's premises, not loaded, not cleared for export. Minimum obligation for the seller.
• FCA (Free Carrier): delivered to the carrier nominated by the buyer, cleared for export. In 2020 the parties may agree that the buyer instructs its carrier to issue an on-board bill of lading to the seller, for letter of credit purposes.
• CPT (Carriage Paid To): seller contracts and pays for carriage to the named destination; risk passes on handing to the first carrier.
• CIP (Carriage and Insurance Paid To): as CPT plus insurance, which in 2020 must be on the wider Institute Cargo Clauses (A).
• DAP (Delivered at Place): goods placed at the buyer's disposal on the arriving means of transport, ready for unloading.
• DPU (Delivered at Place Unloaded): seller delivers unloaded at the named place. It replaced DAT (Delivered at Terminal) in 2020.
• DDP (Delivered Duty Paid): seller delivers cleared for import with duties paid. Maximum obligation for the seller.

Rules for sea and inland waterway transport: FAS (Free Alongside Ship), FOB (Free on Board), CFR (Cost and Freight) and CIF (Cost, Insurance and Freight).

Each rule lists ten obligations of the seller (A1 to A10) mirrored by ten of the buyer (B1 to B10): general obligations, delivery, transfer of risks, carriage, insurance, delivery or transport document, export and import clearance, checking, packaging and marking, allocation of costs, and notices.

3. The FOB contract

Under FOB the seller must deliver the goods on board the vessel nominated by the buyer at the named port of shipment. In Pyrene Co. Ltd. v. Scindia Navigation Co. Ltd. (1954), Devlin J. described FOB as a flexible instrument and identified three types: the classic type, where the buyer nominates the ship and the seller puts the goods on board and takes a bill of lading for the buyer; the extended type, where the seller also arranges the carriage; and the strict type, where the buyer contracts with the carrier directly and the seller is a party only to loading.

Duties of the buyer:

• to nominate an effective and suitable ship and give the seller sufficient notice of its name, loading point and time (Incoterms B10);
• to contract for and pay freight and insurance (if any);
• to bear risk once the goods are on board, and all costs from then on;
• to pay the price and take delivery.

Duties of the seller:

• to deliver goods conforming to the contract on board the nominated ship within the agreed period, at his cost;
• to clear the goods for export (A7);
• to give the buyer notice of delivery and provide the usual proof of delivery (A6, A10), such as a mate's receipt or bill of lading;
• to package and mark the goods suitably for transport (A8).

Suitable ship. The ship nominated must be capable of loading and carrying the goods in the manner contemplated and arriving within the shipment period. If the buyer fails to nominate in time, the seller is not in breach and may claim damages; the buyer bears risk from the agreed date if the goods have been identified (Incoterms B3). Where the buyer nominates a ship that cannot load in time, he may usually substitute another within the shipment period (Agricultores Federados Argentinos v. Ampro S.A., 1965). The seller must ship within the period; he cannot insist on shipping earlier or later.

Risk and property. Risk passes when the goods are on board (Incoterms 2020 replaced the old “ship's rail” test). Property passes according to intention, often when the bill of lading is transferred against payment; under section 25 of the Sale of Goods Act, 1930 the seller may reserve the right of disposal by taking the bill of lading to his own order.

4. The CIF contract

The seller sells goods and also arranges and pays for their carriage and insurance to the named port of destination. The essence of CIF is a sale performed by the tender of documents. Scrutton J. in Arnhold Karberg & Co. v. Blythe, Green, Jourdain & Co. (1915) described it as a sale of goods to be performed by the delivery of documents.

Duties of the seller:

• to ship goods of the contract description at the port of shipment within the shipment period, or to buy goods already afloat;
• to procure a contract of carriage on usual terms to the destination and pay the freight;
• to arrange marine insurance on terms current in the trade (Incoterms 2020: at least Institute Cargo Clauses (C), for 110 per cent of the price), available to the buyer;
• to make out an invoice; and
• to tender the shipping documents — invoice, bill of lading and insurance policy — to the buyer without delay, so that the buyer may claim the goods from the carrier or claim from the insurer if they are lost.

Duties of the buyer: to accept the documents if they conform and pay the price against them, to bear risk from shipment, and to pay import duties and unloading costs not included in the freight.

In Biddell Brothers v. E. Clemens Horst Co. (1911, affirmed by the House of Lords in 1912), the buyer was bound to pay on tender of documents, and could not insist on first examining the goods. In Manbre Saccharine Co. v. Corn Products Co. (1919), the seller could tender documents even after the goods had been lost at sea, since the buyer was protected by the insurance and the bill of lading: the buyer had to pay. But if the documents are defective the buyer may reject them, and if the goods turn out not to conform he has a separate right to reject the goods (Kwei Tek Chao v. British Traders and Shippers, 1954).

5. Other terms in brief

CFR is CIF without the seller's insurance duty. FAS requires delivery alongside the vessel, the buyer paying for loading. Ex-ship and arrival contracts, now DAP, put risk on the seller until the goods reach the destination.

6. Problem

A, an exporter in Kochi, sells pepper to B in Rotterdam “CIF Rotterdam Incoterms 2020”. A ships the pepper, insures it and tenders the bill of lading, invoice and policy. B learns that the ship sank two days after sailing and refuses to pay. Is B liable?

Issue. Whether a CIF buyer must pay against conforming documents when the goods have already been lost.

Law. Under CIF, risk passes on shipment (Incoterms A3/B3) and the seller performs by tendering conforming documents. Manbre Saccharine holds that tender is good even after loss.

Application. The pepper was lost after it was put on board, so the risk was B's. The documents give B a claim against the insurer under the policy and against the carrier if the carrier is liable.

Conclusion. B must pay the price and pursue the insurer. He could refuse only if the documents were defective, for example a claused bill of lading or insurance below the required minimum.

How this is examined

For the June 2025 essay, set out the nature of each contract, then the seller's duties and the buyer's duties separately for FOB and CIF, with risk and property, and the cases (Pyrene, Biddell, Manbre). For a short note on FOB: the three types, the buyer's duty to nominate a suitable ship, the seller's loading duty, and the passing of risk. For “suitable ship”: the buyer's nomination duty, substitution, and the effect of a failure to nominate.