Briefing

“Hybrid Incoterms”: A focus on CIF Delivered contracts

The Incoterms® rules (Incoterms) are a well-known set of international trade terms, intended to facilitate negotiations and minimise legal complications by providing a pre-defined, widely understood set of commercial terms which parties may choose to incorporate into their sale of goods contracts. Parties regularly modify the effect of standard Incoterms, for example by incorporating standard terms and conditions (GTCs), or by negotiating express bespoke terms. This can be done deliberately – for a commercial purpose – or inadvertently. Sometimes the result is a contract with terms that reflect those of a variety of Incoterms, or what could be referred to as “Hybrid Incoterms”.

Common examples include:

Delivered at Place (DAP) with quality and quantity determination at the loadport.
Cost, Insurance and Freight (CIF) / Cost and Freight (CFR) with quality and quantity determination at the discharge port.
CIF / CFR with risk and title passing during the voyage.

In this article, we consider the increasingly common CIF / CFR Delivered (CIF Delivered).

What are the usual delivery obligations under CIF / CFR?

Under the standard CIF Incoterm, the seller arranges and pays for carriage to the named destination. The seller then performs its delivery obligation by placing the cargo on board the nominated vessel at the loadport, so that delivery is taken to occur upon loading. Risk of loss and damage also passes at the point of delivery (on loading). Whilst not provided for in the Incoterm itself, title is also often expressly agreed by the parties to pass upon loading in CIF / CFR contracts.

The CIF and CFR Incoterms do not impose timing requirements on delivery. These will instead be determined by the other terms of the sale contract, including any incorporated GTCs. If no time is expressly provided for, Section 29(3) of the Sale of Goods Act 1979 provides that delivery must be effected within a reasonable time of the sale being agreed.

Unless provided otherwise, any arrival window provided for will not give rise to a guaranteed obligation as to the timing of arrival at the discharge port. Instead, it may just require shipment from the loadport to be effected in a time by which it could reasonably be expected that arrival at the discharge port would take place within the specified arrival window.¹

What effect do “laydays” and indicative discharge dates have?

In CIF / CFR contracts, the term “laydays” is often used to denote the period in which the seller’s nominated vessel must tender Notice of Readiness (“NOR“) at the loadport. These terms can also include reference to what happens if the parties indicate the period in which the vessel is to arrive at the discharge port. For example, Section 11 of the BP GTCs² provides as follows:

Section 11.1 provides that there is an obligation for the seller’s nominated vessel to tender NOR at the loadport within the laydays, if laydays are stated.
Section 11.2 sets out that if dates for arrival at the discharge port (defined as “Indicative Discharge Dates”) are provided for in the contract as well as laydays, those Indicative Discharge Dates will be indicative only (i.e. they will not be binding).
Under Section 11.3, if no laydays are specified in the CIF contract but there are Indicative Discharge Dates, these dates will still be indicative only. However, the seller must ensure that the vessel has tendered NOR at the loadport at a time consistent with arrival at the discharge port within the Indicative Discharge Dates, given a reasonable assessment of the applicable customary loading and voyage times.

What is a “CIF Delivered” contract?

A “CIF Delivered” contract may arise where parties expressly state that a contract is “CIF Delivered”, or where they choose to contract on a CIF basis but include as an express term a guaranteed window for arrival at the discharge port – for example: “Delivery: latest 31 October CIF one safe berth/port [discharge port]“.

Trading on a “CIF Delivered” basis will have a significant impact on contractual obligations. The exact impact will depend on whether:

there is a guaranteed arrival window at the discharge port, but other CIF elements of the contract remain the same.
there is a guaranteed arrival window at the discharge port, as well as “legal delivery” at the discharge port (this could be referred to as a “true CIF Delivered” contract).

Whether the contract is a true CIF Delivered contract, or instead one where delivery remains at the loadport will depend on the terms used. This is not always clearly understood by the parties and can lead to confusion and ultimately, disputes.

Additionally, whether a contract can be described as a CIF Delivered contract at all, and whether it therefore provides for a guaranteed arrival window, will depend on the contract as a whole, including any incorporated GTCs. As discussed above, a contract that simply references an arrival window will not usually be sufficient; the contract must instead provide for a clear obligation as to discharge port arrival requirements. For example, under the BP GTCs, simply specifying an arrival window (without including any reference to this being guaranteed) would result in “Indicative Discharge Dates” only.

Why not choose DAP?

It is relevant to ask why parties do not use the standard DAP Incoterm rather than CIF Delivered. The decision may be inadvertent, but there can be sound commercial reasons for choosing CIF Delivered over DAP. For example, in addition to needing a clear arrival window in order to fulfil downstream commitments or an onward sale, a buyer may also want to benefit from obtaining title after loading (perhaps to allow for earlier resale of the cargo on the water). A seller would also usually benefit from earlier payment under the CIF Delivered structure than under DAP.

Issues arising under CIF Delivered contracts

What happens if the vessel misses the guaranteed arrival window?

If it becomes clear that it will be impossible for the vessel to reach the discharge port within the guaranteed arrival window, parties should take legal advice when deciding how to respond. In particular, they will need to consider:

whether there has been an anticipatory breach.
whether the contract is on a “true CIF Delivered” basis, or whether delivery has already occurred at the loadport.
where legal delivery takes place at the loadport under a CIF Delivered contract and the vessel misses the guaranteed period for arrival at the discharge port, whether a claim for late delivery or non-delivery has arisen at all.
whether missing the guaranteed discharge window has given rise to a right of rejection, or only a right to claim damages.
if there is a right to claim damages, how these would be assessed? For example, in a true CIF Delivered contract, would damages for any non-delivery / late delivery be based on the cost of procuring replacement goods at the discharge port rather than the loadport?

Force majeure

Force majeure could become relevant under a CIF Delivered contract if the vessel is delayed after shipment. This would not ordinarily arise in a standard CIF / CFR contract, where delivery takes place on loading.

Time bars

The timing of “delivery” is relevant in the context of time bars. These are typically determined from the date of delivery or the date on which delivery should have occurred. Under a true CIF Delivered contract, changing the place of delivery can therefore have (potentially unintended) knock-on consequences on any contractual time bars.

HFW comment

CIF Delivered contracts can be commercially valuable but should be handled with care. The contractual wording used can have a significant impact on their effect and accordingly, when drafting or negotiating CIF Delivered provisions, it is important to bear in mind the differences between and the potential consequences of agreeing to: (i) ordinary CIF contracts with indicative discharge dates; (ii) CIF Delivered contracts with a guaranteed arrival window; and (iii) true CIF Delivered contracts.

Where a problem arises, the nature of the seller’s obligations will be affected by the type of CIF contract involved. This in turn will affect whether and when a breach occurs, what remedies are available and when a claim must be brought. When in doubt, taking early legal advice can save time and costs further down the line.

Research conducted by Ibrahim Fahmi, Trainee Solicitor.

Footnotes