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Comparison Between FOB CIF (DOC)

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					                  A Brief Comparison Between FOB & CIF


                                             Mi Lina
                  Class Eight (English Majors), School of Foreign Languages
                      Ningbo Dahongying Vocational & Technical College


   Abstract: According to the INCOTERMS 2000 (International Commercial Terms 2000),
there are 13 trade terms. Among them, the FOB and CIF terms, which required to delivery at
the port of shipment, are mostly commonly used. The contract under the two terms belongs to
shipping contract, and in symbolic delivery nature. That is to say, it provided the exporter
fulfills his obligation to deliver the eligible goods in line with the time and site of the contract
stipulations, and the buyer are provided to present against corresponding documents (CIF

consists of the insurance policy), he fulfills the contract completely…. Finally,this paper
deals with the similarities and differences through case studies and analyses.

   Key Words: obligations; risks; responsibilities; costs



1、Introduction:
     FOB (Free On Board) means that the seller fulfils his obligation to deliver when the

goods have passed over the ship‟s rail at the named port of shipment. “This means that the
buyer has to bear all costs and risks of loss or damage to the goods from that point”.
     CIF (Cost, Insurance, and Freight) means that the seller must pay the costs and freight
necessary to bring the goods to the named port of destination with the addition that he has to
procure marine insurance against the buyer‟s risk of loss or damage to the goods during the
carriage. The seller contracts for insurance and pays the insurance premium. “The „cost‟ in
CIF term means FOB, so the primary definition of CIF can be equally to FOB pulsing
insurance and freight charges”.
     There are many similarities and differences between the two terms.

2、FOB trade term
     2.1 Summary

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     FOB the terminology meaning FOB full text is Free on Board, namely on the ship
delivers, in the custom is called on the shipping port ship to deliver. On the shipping port ship
the delivery is in the international trade one of commonly used trade terminology. Finalized a
deal according to this terminology, responsibly sends the ship by the buyer to receive/and
transport the cargo, the seller should in the contract provision shipping port and in the
stipulation deadline, installs the cargo the ships which the buyer appoints, and prompt notice
buyer. Cargo when loading a ship crossed the broad side, the risk namely shifts from the seller
to the buyer. When uses the FOB terminology, business both sides respectively undertake the
basic voluntary summary is as follows.
     2.2 The seller’s duty
     (1) in the contract provision time and the shipping harbor, hands over on the ship the
contract provision cargo which the buyer appoints, and prompt notice buyer. (2) bears the
cargo hands over to the shipping port ship on before all expenses and risk. (3)It is proud the
risk and the expense, obtains the export license or other official authorized documents, and
goes through all custom procedures which the cargo exportation needs. (4) submits the
commercial invoice and pays own expenses provides proved the seller already according to
the stipulation delivery clean documentary evidence, or has the same level function the
electronic information.
     2.3 The buyer’s duty
     (1) works out the transportation contract, the payment transport expense, and the ship
name, the loading place and the request delivery time promptly informs the seller. (2) is
assigned to cargo and the payment loans according to business contract stipulation. (3) all
expenses and the risk which after undertakes is assigned to cargo occurs. (4) is proud the risk
and the expense, obtains the import permit or other official authorized documents, and goes
through all custom procedures which the cargo import needs. The above seller duty and the
buyer duty article, the student necessity has not memorized by rote, but unifies the study
above article, again compares three, the center "13 Kind of Trades Terminology Data sheet",
after will study passes may be very easy to catalog the content memory to get down.

     2.4 Should be noted problems
     The above seller duty and the buyer duty article, the student necessity has not memorized

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by rote, but unifies the study above article, again compares three, the center "13 Kind of
Trades Terminology Data sheet", after will study passes may be very easy to catalog the
content memory to get down. 2nd, uses the question which the FOB terminology should pay
attention (1) "take the broad side as" the accurate meaning ships the port broad side to take the
division risk the boundary is FOB, CFR and CIF one of with other trade terminology
important differences. "The broad side for" indicated the cargo in installs in front of the ship
the risk, including in loads a ship the thing to drop the loss which in the wharf or the sea
creates, undertakes by the seller. After the cargo installs the ship, including which occurs in
the transportation process or extinguishes in front of setting sail and the damage loses, then
undertakes by the buyer.
     Links up the question about the cargo according to the contract which the FOB
terminology finalized a deal to belong to the shipping contract. However because under the
FOB condition is responsible by the buyer to arrange the transport means, namely the
chartering subscribes the cabin, therefore, this has a cargo to link up the qu estion. If processes
is improper, naturally can affect the contract smooth execution. According to relevant law and
convention, if the buyer has not been able according to the customs of the times ship, this to
include ahead of time sends without opposite party agreement the ship to send with the
detention to the shipping port, the sellers all are authorized to refuse to deliver, moreover
from this each kind of loss which produces, like demurrage and the seller increases stores in a
storehouse spends and so on, bears by the buyer. If the buyer appoints the ships arrive on time
the shipping port, but the seller has not actually been able to prepare the proper cargo, then,
from this produces the above expense undertakes by the seller.
     The individual country to FOB differently above explained the related FOB explanation
all is defers to the International Chamber of Commerce "2,000 General rules" to make.
However, the different country and the different convention certainly incompletely unify to
the FOB explanation. Between them the difference aspect in the and so on responsibility duty
which in the related delivery place, the risk division boundary as well as the seller undertakes
stipulation all may manifest. If used "in 1941 in the North America country American Foreign
trade Definition Revised edition" center, the FOB summary was 6 kinds, first 3 kinds were in
export the country interior assigned location on the interior transport means to deliver. The

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fourth kind is in exports the place on the interior transport means to deliver, the fifth kind is
delivers on the shipping port ship, the sixth kind is assigns the interior place delivery in the
import country. Above fourth kind and fifth kind when use should perform to pay attention.
Because these two kind of terminology have the possibility in the delivery point to be same, if
all is delivers in San Francisco, if the buyer request delivers in on the shipping harbor ship,
then should adds on "steamboat Vessel" in FOB and between the port name the inscription, if
"FOB VESSEL NEWYORK", otherwise, the seller has the possibility to deliver according to
the fourth kind of situation on New York's interior transport means. Even if all is delivers on
the shipping port ship, incompletely is same about the risk division boundary stipulation.

3.CIF trade term
     3.1 Summary
     The CIF full text is Cost Insurance and Freight, namely the cost adds the insurance
premium and the transport expense. When uses the CIF terminology deal, seller's basic duty is
responsible to subscribe the cabin according to the usual condition chartering, pays the goal
port the transport expense, and installs in the stipulation shipping port and in the stipulation
deadline the cargo the ship, after loads a ship the prompt notice buyer. The seller also wants
to be responsible to handle from the shipping port to the goal port freight transportation
insurance, the payment insurance premium. In the service, has personal CIF is "the cost
insurance and freight price", this is easy to cause the misunderstanding to cause the loss which
in the work should not have. Under CIF condition seller, so long as has submitted the
agreement documentary evidence, calculated has completed the delivery duty. When first uses
the CIF terminology, business both sides respectively undertake the basic voluntary summary
is as follows.
     3.2 The seller’s duty
     (1) signs from assigns the shipping port to undertake to transport the cargo transportation
contract; In the contract provision time and the harbor, install the contract requirement cargo
the ship and the payment to the goal port transport expense; After loads a ship must promptly
inform the buyer. (2) undertakes the cargo crossed in front of the broad side in the shipping
port all expenses and the risk. (3) defers to business contract the agreement, is proud expense


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to handle the transport insurance. (4) is proud the risk and the expense, obtains the export
license or other official credentials, and goes through all custom procedures which the cargo
exportation needs. (5) submits the commercial invoice and the usual transportation
documentary evidence which takes delivery of goods in the goal port uses or has the same
level function the electronic information, and pays own expenses to the buyer provides the
insurance policy.
     3.3 The buyer’s duty
     (1) accepts the related documentary evidence which the seller provides, is assigned to the
cargo, and according to contract provision payment loans. (2) undertakes the cargo crossed
the broad side after the shipping port all risks. (3) is proud the risk and the expense, obtains
the import permit or other official credentials, and goes through all custom procedures which
the cargo import needs. Are same with FOB and CFR, the above righteousness must unify the
third item of center "13 Kind of Trades Terminology Data sheet" to study, and according to
you custom method, will tabulate the content to record the jail.
     3.4 Should be noted problems
     (1) Safe dangerous other question In the CIF terminology "I" expresses Insurance,
namely insurance premium. Is said in the commodity price has included the insurance
premium; Says from seller's responsibility, he wants to be responsible to handle the freight
transportation insurance. Handles the insurance to have to be clear about the danger to leave,
the different danger leaves, the insurer undertakes responsibility scope different, gathers the
insurance premium is also different. Finalized a deal according to the CIF terminology,
generally when signs business contract, in the contract insurance clause explicitly stipulated
the insurance danger, content and so on insurance, like this, the seller do not should defer to
the contract the stipulation to handle takes out insurance. But if in the contract has not been
able not to wait for the question on the insurance danger to make the specific stipulation, that
must act according to the related convention to process.
     (2) Symbolic delivery question Looked from the delivery way that, CIF is one kind of
typical Symbolic delivery. The so-called Symbolic delivery is aims at the actual delivery to
say. Former refers to the seller so long as on time in agrees the place to complete shipping,
and submits the contract provision to the buyer including the real right certificate related

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single card, calculated has completed the delivery duty, but does not need to guarantee the
arrival of shipment. Latter is will refer to the seller to have in the stipulation time and the
place, will conform to the contract provision cargo to submit for the buyer or it assigns the
person, but will not be able to delivery to replace the delivery.

4.Case Study and Analysis
      4.1 Contract under CIF term
     Case 1
     One Chinese export company A exported a batch of clothes to Japan under CIF term. As
regulated in the contract, company A had to insure all the risks to the People‟s Insurance
Company of China and paid by credit. After delivering the goods on date, obtaining the Bill
Of Lading from the shipping company, A paid the items at the Bank of China. The next day,
the seller received a phone from his partner saying that all the clothes had been damaged
because of the big fire burning out in the sea. And the buyer asked the seller for compensation
from PICC, or refunded all the payment.
     Analysis:The contract of the above is under CIF term. According to INCOTERMS2000,
the division of risks or damage to the goods is based on such time as they have passed the
ship‟s rail at the named port of shipment. Therefore, in this case, the goods are lost during the
transit. “So the buyer, instead of the seller, must undertake the responsibilities and ask the
insurance company to cover the loss with the insurance which had been conveyed by the
seller.”
     4.2 Contract under FOB term
     Case 2
     In one contract of FOB, the buyer insured all risks with warehouse to warehouse.
However, when the goods were carried to the shipping port, they suffered loss which was in
the area of the insurance company‟s compensation. Nevertheless, the company refused their
request though it was regulated in the contract.
     Why did the insurance company refuse?
     Analysis: According to INCOTERMS2000, under FOB term, the buyer must buy the
insurance at his own expenses. Once the seller has delivered the goods on the date at the


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named port of shipment to the buyer‟s ship and acquired the necessary documents, he finishes
the delivery. And all risks from the time the goods have passed the ship‟s rail at the named
port of shipment are transferred to the buyer. Therefore, the buyer only bears the risks after
the transfer of the goods, but not the risks before it. Naturally, the insurance company from
which the buyer has insured has nothing to do with it. “So the risks referred to in this case is
not in the obligation of the insurance company, and it may not pay for the compensation.”

5.     Conclusion
     Under FOB and CIF terms, the buyer and seller have roughly the same liabilities of the
shipment of the goods, transfer of risks and costs of customs formalities. But under CIF term,
it is the seller that must arrange the ship for shipment of the goods while it is the buyer under
FOB term. And the ship‟s rail can be taken as the point where the seller and buyer decide their
risks. The risks happened after the shipment should compensated by the buyer.
     FOB cost structures involve the production cost plus any transport costs to the customers.
This implies that customers located nearby will have a lower overall cost than customers that
are further away. Under the CIF cost structure, every consumer is charged the same price,
which commonly reflects the average transport cost. Customers located close to production
are “subsidizing” the costs paid by customers located further away. This price structure is
common for consuming goods.




                                            Bibliography

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[8] 姚爱萍. FOB、CFR、CIF 术语在出口业务中的利弊分析.中南财经政法大学研究生学报

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