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When you buy or sell goods across national boundaries, you and the other party must have a clear understanding of the terms for moving those goods to their destination. CIF and FOB are commonly used agreement models for international shipping. Each type of agreement specifies which party is responsible for the goods and the point at which responsibility transfers from the seller to the buyer.
In 1936, the International Chamber of Commerce established a system of 13 international commerce terms, or INCOTERMS. Each INCOTERM refers to an agreement that governs the shipping responsibilities of sellers and buyers engaged in international trade. The purpose of this system is to facilitate orderly international trade by providing contract models that are easily identified across language barriers. CIF and FOB are two widely used INCOTERM agreements. Each specifies which party is responsible for goods in transit, what insurance is required and who pays freight charges. The agreements also specify the point at which a sellers obligation is complete and the buyer assumes responsibility. The shift of responsibility from seller to buyer is considered delivery even though the goods may still be in transit.
FOB stands for Free On Board. With the FOB type of shipping agreement, the seller or shipper arranges for goods to be moved to a designated point of origin. Normally this is a port because FOB and other INCOTERM contracts are mainly intended for maritime shipping. However, FOB contracts are also used for inland and air shipments. Delivery is accomplished when the seller releases the goods to the buyer. FOB contracts stipulate that this occurs when the goods cross the rail of the ship.
When a CIF Cost, Insurance and Freight shipping agreement is used, the seller has responsibility for the cost of the goods in transit, providing minimum insurance and paying freight charges to move the goods to a destination chosen by the buyer. From the point of delivery at the destination, the buyer assumes responsibility for unloading charges and any further shipping costs to a final destination.
The crucial difference between an FOB and a CIF agreement is the point at which responsibility and liability transfer from seller to buyer. With an FOB shipment, this occurs when the shipment reaches the port or other facility designated as the point of origin. With a CIF agreement, the seller pays costs and assumes liability until the goods reach the port of destination chosen by the buyer.
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds masters degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.
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