In this article, Miguel Angel Bustamante Morales discusses the key differences between the Incoterms® rules, CIP and CIF.
Miguel is an ICC certified trainer on the Incoterms® 2020 Rules and an active participant in the last three revisions of the Incoterms® Rules: 2000, 2010, and 2020.
The views and opinions expressed in this article are those of our authors and do not necessarily reflect the official policy or position of the ICC Academy or ICC.
Incoterms® Rules
The Incoterms® Rules are a set of trade rules created by the International Chamber of Commerce (ICC) in 1936. The Rules are reviewed and updated from time to time, with Incoterms® 2020 being the latest one.
The Incoterms® Rules provide sellers and buyers or exporters and importers, international standardised trade terms that clearly define, important and relevant matters in a sale of goods contract, such as the place of delivery of the goods and the transfer of risks for loss of or damage of the goods from the seller to the buyer.
Each of the eleven Rules also provide clarity on:
- The costs that the seller and the buyer must assume
- Who, between seller and buyer, must contract the transportation of the goods, including the security requirements for their transportation
- Clarify responsibility for insurance coverage over the goods
- Determine who is responsible for completing export and import formalities
- Assign responsibility for packing, packaging, marking and the certifications of quality or weight of the goods
The Incoterms® rules, are represented with three letters, such as FOB or FCA, CIP or CIF, DPU or DDP. In this article we will focus on just two of the Rules; CIP and CIF including when each of them should be used and their key differences and similarities.
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CIP and CIF
Deciding whether to use CIP or CIF in the trade transaction depends on numerous factors. Let’s start with some similarities between the two Rules. Both terms:
- Place the obligation on the seller to deliver the goods to the carrier designated by the seller.
- Require the seller to carry out export formalities.
- Make the buyer responsible for taking delivery, risks and costs, from the moment the seller has delivered the goods to the carrier (nominated by the seller).
So, when is it right to use CIP or CIF if both terms have several features in common? To better understand this, we will explore both terms in more depth. Explore this and other key insights related to the ‘C’ terms in Incoterms® Rules.
Read the article: Incoterms® 2020 vs 2010: What’s changed?
Understanding CIP (Carriage and Insurance Paid To)
Under CIP, the seller delivers and transfers the risks for loss of or damage of the goods to the buyer when the goods have been handed over to the carrier hired by the seller. Upon delivery to the carrier – whether at the cargo terminal of the airport of departure, the train’s cargo terminal of departure, or the container’s terminal of the port of shipment – the seller has fulfilled their obligation and delivered the goods. CIP requires the seller to contract and pay for the carriage and insurance of the goods up to the place of destination.
Basic obligations of the buyer and seller under CIP
(1) The seller delivers the goods and transfers the risks when they are handed over to the carrier, or if there are multiple carriers, when the goods are delivered to the first carrier.
(2) CIP is suitable for any mode of transportation or the combination of at least two different modes of transportation (multimodal shipments).
(3) Nowadays, multimodal shipments are the trend and suitable for the transportation of goods in containers. CIP responds perfectly to this practice.
(4) The seller must contract (and pay) carriage up to the agreed place of destination.
(5) The seller must obtain insurance that complies with coverage provided by Clauses ‘A’ – ‘all risks’ or ‘maximum’ – of The Institute Cargo Clauses (LMA/IUA) or similar clauses.
When do you use CIP?
CIP is used:
- When the seller commits to deliver the goods by handing them over to the carrier – essentially at the location where the transportation of the goods begins – the seller is responsible for completing the export formalities and providing the insurance up to the agreed place of destination with maximum coverage, under Clauses (A), of Institute Cargo Clauses, or similar.
- Although the CIP rules does not require that the place of deliver be specified in the contract of sale (the place where the seller hands the goods over to the carrier, or the first carrier, as the case may be), buyers are well advised to clarify this in the contract as far as possible, since this is where risk for the goods passes from the seller to buyer.
- When the seller and the buyer understand that all ‘C’ terms are shipment terms, not delivery terms. This means that risk for the goods passes to the buyer before the main leg of transport, and buyer – rather than the seller, even though the seller has paid for the main leg of transport — bears the risk that the goods may not arrive at their destination in sound condition.
- When buyer is required to complete import formalities (and the customs in transit, if any).
Understanding CIF (Cost, Insurance, and Freight)
Under CIF, the seller delivers the goods and transfers the risk of loss or damage of the goods to the buyer once the goods are loaded on board the vessel at the named port of shipment. CIF also requires the seller to arrange and pay for the port-to-port carriage and insurance of the goods up to the port of destination. It is important to note that CIF can only be used where for sea or inland waterway transport is used. It should also be noted that the level of insurance required to be arranged by the seller is different from CIP. In CIF, a lower level of insurance cover is required: Clauses (C), sometimes referred to as minimum cover.
Basic obligations of the buyer and seller under CIF
(1) The seller delivers and transfers the risks once the goods have been loaded on board the vessel at the port of shipment.
(2) CIF is to be utilised only for maritime or inland waterway transportation, meaning, it applies to port-to-port shipments.
(3) CIF is the second most traditional Incoterms® rule, likely because it was created in the mid-1800s, when oceanic shipments were the only option for the transportation of goods in international trade and containers did not yet exist.
(4) The seller must arrange and pay for the maritime carriage (or inland waterway transportation) up to the port of destination.
(5) The seller must arrange insurance that complies with the coverage provided by Clause ‘C’ – minimum cover – of The Institute Cargo Clauses (LMA/IUA) or similar clauses.
When do you use CIF?
CIF is used:
- When the seller commits to delivering the goods on board the vessel at the agreed port of shipment, including the export formalities and the insurance for the goods up to the agreed port of destination, with minimum coverage under Clauses (C) of Institute Cargo Clauses or similar.
- Although the CIF rules does not require that the port of shipment be specified in the contract of sale, buyers are well advised to clarify this in the contract as far as possible, since this is where risk for the goods passes from the seller to buyer.
- When buyer is responsible for completing import formalities (including customs procedures at ports in transit and/or transshipment, if any).
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Comparative analysis of CIP and CIF
In terms of costs, for both Incoterms® Rules, the commercial invoice amount will include good’s costs, freight’s cost and insurance’s cost, as well as export clearance costs and documentation requirements.
The key difference when comparing CIP and CIF lies primarily in the place of delivery and the modes of transportation each Incoterm® is designed for. I recommend reviewing the previous two questions and answers for a clearer understanding.
Use cases
CIP is the appropriate rule when goods are transported in containers or on pallets, and when multiple modes of transportation will be used.
For instance, the seller is in Stuttgart, Germany, and the buyer is in Beijing, China. The goods are brand new cars. The parties agree to a contract of sale as follows: CIP Beijing China, Incoterms® 2020.
- The seller delivers the goods to the first carrier (a train’s company) at its facilities in Stuttgart within the agreed time period, with the export clearance completed. At that moment, the seller transfers the risk of loss of or damage of the goods to the buyer.
- The carrier contracted by the seller picks up the goods at the seller’s facilities (loaded onto a train) and transports them to the port of Hamburg, Germany. Then, an ocean shipment from Hamburg to the port of Shanghai, China is carried out. The buyer completes the import clearance in Shanghai, and the cars are transported by train to the buyer’s facilities in Beijing.
It is worth noting that, despite the use of different modes of transportation, all are covered under a single Multimodal Bill of Lading, and the seller paid the entire transportation cost. The seller also arranged insurance for the goods under Clauses ‘A’ of Institute Cargo Clauses covering them up to Beijing, China.
CIF is the appropriate rule when goods are transported in bulk from one port to another, and is only appropriate when maritime/oceanic or inland waterway transportation is used.
A good example might be the following: the seller is in Vietnam and the buyer in Spain. The goods are 100,000 tons of cement and the parties sign a contract of sale as follows: CIF Barcelona, Spain, Incoterms® 2020.
- The seller delivers the goods by loading the 100,000 tons of cement on board the vessel at the agreed port of shipment within the agreed time frame and with export clearance completed. At that moment, the seller transfers the risk for loss or damage of the goods to the buyer.
- The oceanic carrier contracted by the seller transports the cement from Da Nang Port to the port of Barcelona, making it a port-to-port shipment.
- The seller arranges insurance for the goods under Clauses ‘C’ of Institute Cargo Clauses, covering them up to the port of Barcelona, Spain.
- The buyer completes the import clearance in Barcelona, Spain. In this case a Marine/Ocean Bill of Lading is issued by the carrier hired and paid for by the seller.
Choosing the right Incoterms® Rule
There is no ‘right or wrong” Incoterms® Rule’, but rather the appropriate Incoterms® Rule.
Whether using CIP or CIF, the seller and buyer, after reviewing and analysing the information mentioned above, along with the insights gained from various courses and certifications provided by ICC Academy – based on the Incoterms® 2020, publication 723 – will be well-equipped to make informed decisions.
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