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International Contracts of Sale(INCOTERMS)

INCOTERMS are the riles that have been devise to assist in easing the passage of goods from one trading company to another when entering into   of sale of goods internationally.

In considering proposal of cargo insurance, one starts with the sale contract. The terms of sale dictates which of the parties to the contract is to be responsible for the insurance. In case of international contract of sale, both the buyer and the seller have obligations to fulfil, in return for which the buyer obtains goods and the seller is paid for the agreed price.

Under marine insurance Act, to claim successfully under a policy, the seller(consignor) or Buyer (consignee) must prove an insurable interest in the goods at the time of loss. assuming that all other aspects of the sale contracts are concluded satisfactorily (e.g. the seller receives payment) the INCOTERMS will set down the precise moment when when the duty to bear all risks of loss or damage to the goods passes. The main INCOTERMS are;

Free on Board (FOB)

In FOB, the seller is responsible till the goods are placed on board of the ocean going vessel and provides a clean on board-receipt. The seller or exporter will require protection until the goods are on board. At this point, the risk passes from the seller to the buyer. The seller in their own interest, must arrange for insurance from their own premises to the ships rail at the point of shipment. The buyer takes responsibility for insurance from there and also responsible for the payment of the freight and other subsequent charges.


Cost and Freight (C&F

In this, the seller delivers goods on board the vessel. They therefore, bear the risk of loss or damage to goods until they have been loaded on board the vessel and pay the freight. This is therefore, similar to FOB except that the seller is responsible for freight, which is included in the selling price.  The responsibility to arrange insurance is on the buyer. The seller has to give notice of shipment to the buyer to enable the later arrange insurance. The seller undertakes to fix the shipping space, deliver the goods on board and pay the ocean freight. The risks pass to the buyer on shipment. Until shipment, however the risk remains with the seller.


Cost, Insurance and Freight(CIF)

It involves the seller in arrangement of carriage, insurance as well as provision of the goods. The price of goods CIF will obviously be considerable higher than goods FOB. The contract is based on the discharge port rather than the loading port.

Key Point include;

  • The seller is under obligation to ship goods of the contract description, in accordance with any further stipulations in the contract of sale as to time, place and so on.
  • They must arrange the contract of carriage on usual conditions for the trade in question.
  • Similarly, they must arrange and consignee insurance for reasonable value on the usual terms of the trade in question.
  • They must then prepare an invoice for goods which they are set in accordance with any stipulations in the contract.
  • Finally, the seller must tender all the relevant documents to the buyer, their agent and the bank.

Hence in CIF sale terms, the seller is responsible for insurance from their own premises to that of the buyer destination point, hence the policy is from warehouse to warehouse. The selling price includes the invoice cost, insurance and freight which will be effected by the seller and subsequently endorsed to the buyer. Hence the insurance covers the goods from seller’s warehouse to Buyer’s warehouse; and the same policy protects the interests of both the the seller as well as the buyer, when the interest in the goods insured passes from the seller to the buyer.


Delivery Duty Paid(DPP)

In DEPP, the seller arranges and pays freight to the named destination. Hence the seller bears all the risk of loss or any damage that may occur up to the time they are delivered to the buyer’s warehouse.


Delivery at Terminal (DAT)

In this case the seller is responsible for clearing the goods for the export but not for import. Hence the seller delivers the goods by placing the at disposal of the buyer at the named terminal at the agreed port or place of destination on the agreed date or within the agreed period. The seller will also be responsible for availing the appropriate information to the buyer to enable them arrange insurance. Accordingly, the buyer’s responsibility starts when the goods are delivered at the named terminal at the agreed port.


Basis of Valuation

Marine cargo policies are principally valued policies which are normally expresses as CIF + 10% duty incurred. The 10 percent is generally allowed for covering landing costs and other related charges such as onward delivery to destination. Hull insurance is invariably also on valued basis. Unvalued policies are rarely met in practice; except in insurance of freight.

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