#corporateadvisory
Supply Agreement: CIF vs FOB vs EXW
Khalid Khan
October 20
Transportation. It may sound simple, but it is not. Especially in the international scenario. There are many complexities and stages involved. But moreover, there are various types of transportations through different mediums namely: road, air and sea.

Transportation and transit form an important element of the contract of sale and very often the contract of sale involves transit of goods by sea. Although the forms of transit might differ according to different countries, the three commonest forms such contracts are:
  1. FOB meaning "free on board"
  2. CIF meaning "Cost Insurance and Freight"
  3. EXW meaning "Ex Works"
Although all the above-mentioned forms are transits through sea, they differ largely in terms of the nature of the contract, cost involved, the duties of the seller and the buyer. Therefore, in order to decide which type of sea transit system will suit your business the best, make sure you know the features of each of them well.

Here are the key features of each of these transit systems.
F.O.B. The full form of FOB is "free on board". There are many mercantile contracts which are entered into on free on board terms. According to this type of contract, the seller is the one who puts the goods on board the ship at his own expense. Once the goods are out on board and are under the charge and custody of the master of the ship, the seller is no longer liable and the responsibility of the goods is now on the buyer.

Free On Board is an indicator of who will be liable among the seller and the buyer if the goods are damaged during the time of shipping.

The FOB location is a shipping point. Location is the key to the process of FOB. Location Designation on the other hand is where the ownership will be or is transferred. FOB origin implies that the risk of the buyer and FOB destination means the seller retains the liability until the goods reach the buyer. The legal definition and terms might differ according to each country and it is always advisable to hire a local attorney before putting FOB in the contract so that you have a good understanding of the transit system you are choosing.
Duties of the Seller and the Buyer
Seller must deliver goods at his own expense and has to notify the buyer about the shipment so that the buyer can take the necessary steps for insurance of goods. If the seller's lack of action or failure to notify the buyer about shipments leads to the buyer not being able to take the necessary insurance measures in time, the risk of goods during the voyage is on the seller.

Once the seller has complied with all the duties, it is the duty of the buyer which implies that that the buyer cannot claim the delivery of goods before shipment and secondly it is his responsibility in a FOB contract to apply for a license and other documents if necessary.
C.I.F. CIF implies Cost, Insurance and Freight. It is an international shipping agreement and as the name suggests it is a contract which covers the price to cover the cost, insurance and freight. These charges are paid by the seller of the goods and it is applicable only on goods transported through waterways.

One essential feature of a CIF contract is that the delivery of documents implies the symbolic delivery of goods and not the actual delivery.

Till the goods are delivered to the destination port of the buyer, it is the seller who will take responsibility for the costs of any damage to the products or loss of goods. If there is any requirement of extra customs duties or any other expenses related to the delivery, the costs of the same will be borne by the seller. But once the goods reach the buyer's port, the responsibility of any costs is transferred to the buyer from the seller.

If in any case, the goods are damaged during the transit or the cargo carrying the said goods is damaged, the buyer has to file an insurance claim with the seller's insurance company as the later take the responsibility of insuring the goods during the time of delivery.
Duties of the Buyer and the Seller
The seller has to raise the invoice of the sold goods. The goods shipped must match the description. The seller also has to raise the bill of lading which specifies the date of shipment and freight. The seller also has to make the necessary arrangements for insurance.

The seller has to ensure that all the necessary documents like the invoice, bill of lading and policy of insurance have reached the buyer on time.

It is the buyer's duty to accept these documents if they are in order. The buyer has to pay for the documents and in a CIF contract, the buyer may refuse to accept and pay for the goods if there is a solid reason, mainly if the goods do not correspond to the description.
E.X.W. The full form of EXW, is Ex works. It is when the vendor ensures that the goods are available or have reached a designated spot and then the purchaser or the buyer has to pick it up from there and cover the transportation costs. In other words, an ex-work is when the delivery is made to the buyer from a ship which has arrived at the port of the delivery. The goods in a EXW system are at the seller's risk during the voyage but the seller is not obliged to insure the goods on the buyer's behalf.

The EXW system of transit of goods is a viable alternative for the seller but not as much for the buyer. The sole responsibility of the seller in this situation is to safely pack the goods with the correct label and deliver them or have them delivered on the agreed location. The seller also has to help the buyer with any other required paperwork. But most of the costs are borne by the buyer and not the seller.
Duties of the Seller and the Buyer
It is the responsibility of the seller to deliver goods to the buyer once the ship through which the delivery is to be done. The buyer must pay the price for the freight and furnish an effective delivery to the buyer.

If the seller fails to perform his duties, the buyer is not bound to pay.
All these types of contracts have their own positive and negative features. It will all depend on a particular business type to decide which type of transit is best suited for your work.

CIF is mostly considered more expensive as it covers the cost of insurance and freight. The seller bears the cost of insurance and takes responsibility but the medium of transaction may impose heavy costs on the seller which will increase the expenditure for the buyer.

FOB contracts on the other hand relieves the seller of all the liability once the goods are shipped. Once the ship has sailed they are no longer under the control of the seller and therefore when the ship sails, the buyer assumes the responsibility. This is better expense wise as the buyer can negotiate a favourable price for the freight and insurance.

The major difference between these transit systems lies in who will be taking the responsibility of goods at which stage during the transit. For some goods are considered to be delivered the moment they are out of the seller's control while it is not the same for the others.

Each type of contract of sale will be convenient for different groups and situations. Given the liability on the seller to bear the costs of insurance and the protection provided to the buyer because of CIF, sellers mostly prefer FOB contracts because the costs borne are lesser and the responsibility ceases to exist once the goods are out of the seller's control.

Each country has specific provisions and definitions of these terms. The duties of the sellers, buyers and costs will differ. Therefore, it is always advisable to get the correct assistance from professionals with good knowledge about these things so that you do not suffer any loss and inconvenience.
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