CIF and FOB Contracts: What the Seller Must Do, When Property and Risk Pass, Payment Against Documents, and the Buyer's Two Rights of Rejection

Goods sold across a sea route are almost always sold on one of two standard bases. Under an FOB contract, free on board, the seller's duty ends when he puts the goods on a ship the buyer has nominated; the buyer arranges and pays for carriage and insurance. Under a CIF contract, cost, insurance and freight, the seller ships the goods, insures them and takes the bill of lading, and performs by tendering the documents against payment. Neither term appears in the Act, but both are worked out through its provisions on appropriation, reservation of the right of disposal, risk and delivery to a carrier.

The two terms compared, and the special feature of a CIF contract

1. FOB Contracts

The buyer nominates an effective ship and must do so in time. If he fails, he is in breach, and the seller's remedy is damages rather than the price, as Colley v. Overseas Exporters (1921) shows.
The seller puts the goods on board at the named port, and his duty is then discharged.
Risk passes on shipment. The traditional expression is that risk passes as the goods cross the ship's rail, though modern practice looks at loading as a whole.
Property usually passes on shipment as well, under Section 23(2), unless the seller reserves the right of disposal under Section 25.
Insurance is the buyer's affair, but Section 39(3) requires the seller to give notice enabling him to insure during the sea transit, failing which the goods are at the seller's risk at sea.

📖 Pyrene Co. Ltd. v. Scindia Navigation Co. Ltd., [1954] 2 QB 402

Facts: A fire tender sold on FOB terms was being lifted on board by the ship's tackle when it was dropped and damaged, before it had crossed the ship's rail. The question was whose loss it was, and on what terms the carriage contract bound the seller.

Held: The loss fell on the seller, because the goods had not yet been placed on board and neither property nor risk had passed. Devlin J. also explained that FOB is a flexible instrument, which may be arranged in several ways according to who makes the contract of carriage.

Ratio: Under an FOB contract, risk passes when the goods are effectively placed on board; until then the seller bears the loss. The precise incidents depend on how the parties have arranged the shipment.

2. CIF Contracts

The price includes the cost of the goods, the insurance and the freight, so the buyer pays one figure for goods delivered at destination.
The seller must ship goods of the contract description, procure a contract of carriage on usual terms, insure them for the buyer's benefit, and tender the documents: the bill of lading, the policy of insurance and the invoice.
Performance is by tender of documents. The seller performs by handing over the documents, and the buyer must pay against them.
Risk passes as from shipment, even though the buyer receives the documents later, and even if the goods were already lost when the documents were tendered, provided they were in order.
Property ordinarily passes on transfer of the documents, since the seller usually takes the bill of lading to his own order and so reserves the right of disposal under Section 25(2).

📖 E. Clemens Horst Co. v. Biddell Brothers, [1912] AC 18 (HL)

Facts: Hops were sold on CIF terms. The buyers contended that they were entitled to inspect the goods on arrival before paying, and refused to pay against the shipping documents tendered to them.

Held: The House of Lords held that the buyers were bound to pay against the documents. In a CIF contract the seller performs by tendering conforming documents, and the buyer's obligation to pay arises then, not on arrival or inspection of the goods. The right to examine the goods survives as a separate matter.

Ratio: Under a CIF contract payment is due against conforming documents, and the buyer cannot defer it until the goods arrive or are inspected.

3. The Buyer's Two Rights of Rejection

A CIF buyer has two distinct rights to reject, which may arise at different times and must be exercised separately. He may reject the documents if they are not in conformity, for example if the bill of lading shows shipment outside the contract period or the policy does not cover the voyage. And when the goods arrive he may reject the goods if they do not answer the contract. Accepting the documents does not bar rejection of the goods, as the English courts held in Kwei Tek Chao v. British Traders and Shippers Ltd., [1954] 2 QB 459. In India the same result follows from the buyer's right of examination under Section 41 and the implied conditions in Sections 14 to 17.

4. Where the Act Supplies the Answers

Question	The provision
Does shipment appropriate the goods to the contract?	Section 23(2): delivery to a carrier without reserving the right of disposal is an unconditional appropriation
Has the seller kept control?	Section 25(2): a bill of lading to the seller's order is prima facie a reservation of the right of disposal
Who bears loss at sea?	Section 26: risk follows property, unless otherwise agreed, which CIF and FOB terms commonly do
Was the carriage contract adequate?	Section 39(2): the seller must make a reasonable contract with the carrier
Was notice to insure required?	Section 39(3): on a sea route where insurance is usual
May the buyer examine before accepting?	Section 41: a reasonable opportunity to examine

⚠ The terms are not fixed by statute

FOB and CIF are mercantile shorthand, not statutory definitions. Their incidents vary with the contract and with trade usage, and modern contracts often incorporate a published set of trade terms which defines them precisely. The Act supplies default rules only where the contract and the usage are silent, and the parties may and often do displace them, particularly on the point at which risk passes.

5. The Position Stated Shortly

Under FOB the buyer nominates the ship and the seller delivers the goods on board.
Pyrene v. Scindia: risk passes when the goods are effectively placed on board.
Under CIF the seller ships, insures and tenders the documents, and the price covers all three.
Clemens Horst v. Biddell Bros: a CIF buyer must pay against documents, not on inspection.
Risk under CIF passes as from shipment, though the documents come later.
A CIF buyer may reject the documents and, separately, the goods.
The Act supplies the machinery through Sections 23(2), 25(2), 26, 39 and 41.