Authored By: Ogunji Sylvia
Babcock University
ABSTRACT
This essay examines the legal role of Incoterms in maritime trade, focusing on their use in allocating risk, cost and delivery responsibilities in International sales contracts. While Incoterms promote clarity and standardization, they also present legal challenges including limited enforceability and potential misrepresentation. The analysis highlights key terms such as FOB, CIF, CFR, while evaluating their benefits and drawbacks.
INTRODUCTION
Incoterms known as International Commercial Terms are a set of trade term definitions developed by the International Chamber of Commerce (ICC) which are recognized internationally.1These terms describe the rules of international trade. It essentially defines the allocation of risks, costs, freights and other factors associated with international transaction between a seller and buyer.2
Specifically, maritime Incoterms are the terms used only for conventional sea or inland waterway transport. These terms clarify who is responsible for costs, risks and documentation at various stages of shipping process, from loading to delivery. The Incoterms which are commonly used are FOB, CFR and CIF. While these terms simplify global shipping contracts and help allocate risks, they present certain legal ambiguities and practical challenges that can complicate maritime transaction.
BACKGROUND
After the World War 1, the economy of many countries crumbled and to bring back economic prosperity, a group of industrialists, financiers and traders decided to create an industry standard which became known as Incoterm Rules.
In international maritime trade, clarity in responsibility and risk management is essential, thus Incoterms come into play as they help ensure that this clarity is obtained. The latest version, Incoterms 2020 which include 11 terms are divided into 2 categories: the land transport and the sea and inland waterway transport.
The focus of this article is on the sea and inland waterway transport. Some of the terms include FAS, FOB, CFR and CIF. The commonly used Incoterms are the FOB and CIF because they define responsibilities regarding loading, freight cost and insurance coverage during the ocean transit.
FOB means Free on Board. Under this Incoterm, once the seller delivers the goods on board of the vessel, the buyer bears the cost and risk from that point onward.3
CIF means Cost, Insurance and Freight. In using this term, the seller is obligated to cover the cost of goods, insurance, and freight to the destination port. The buyer then assumes risks once goods are loaded on the ship even though the seller pays for transport and insurance.4
CFR means Cost and Freight. When this term is agreed upon, the seller is obliged to bear the cost of transportation to the destination port except that unlike CIF, the seller does not bear the cost of insurance. Once the goods arrive on the destination port, the buyer assumes risks.
IMPORTANCE OF INCOTERMS IN MARITIME TRADE
FOB- FREE ON BOARD
Under FOB, it is the seller obligation to deliver the goods onto the ship at the port chosen by the buyer and pays all costs until then. The seller is to procure export permission and handle all export-related paperwork and fees and provide the buyer with sales documents. He is also responsible for the goods until they are safely loaded onto the ship. He is to tell the buyer if anything goes wrong during delivery to the port and also notify the buyer once the goods are on the ship.5
It is the buyer’s obligations to takes responsibility for the goods (including damage or theft) after they are on the ship. He is obliged to cover the cost of for shipping, import taxes, and customs clearance. The buyer is to notify the seller on which port, ship, and date to deliver the goods.
Under FOB, delivery is considered complete when the goods are loaded onto the ship at the agreed port, on the agreed date, and according to port. Under FOB, neither the seller nor the buyer is required to arrange insurance, but the buyer can choose to.
CFR- COST AND FRIEGHT
If the parties to the contract agree on the terms of CFR, the seller is obligated to load the goods at the starting point, arrange and cover the cost of transport to the buyer’s destination port. He is to provide a commercial invoice and a shipping document (like a bill of lading), check the quality, weighs, counts, and measures the goods before loading.6
The buyer’s obligations are to pick up the goods at the destination port at the agreed time. Handle transport from the port to their location, and unloads the goods. Get import licenses, handle customs clearance, and pay for related costs.
Under CFR, the seller’s job is done once the goods are loaded on the ship. Risk passes to the buyer at that point even though the seller pays for the shipping. Where the buyer forgets to tell the seller when or where to load, he (the buyer) bears extra risk. No one is required to get insurance under CFR. The buyer can choose to buy insurance at their own cost.
CIF- COST, INSURANCE AND FREIGHT
This term is only used for sea and inland waterway transport. The seller’s obligations range from procuring export clearance and paying related fees, buying insurance with minimum coverage and giving proof to the buyer to covering all costs and risks until the goods are loaded onto the vessel.7
The buyer is obligated to take over risk and responsibility once goods are on board. Pay for import duties, customs clearance, and any required documents (e.g. certificates of origin). Tell the seller the destination port, vessel name, and shipping date.
CHALLENGES FACED BY SELLERS AND BUYER
Under FOB, buyers face the challenge of early risk transfer. This is because once the goods cross the rail of the ship, the buyer bears full risk of loss or damage. Thus any problem that occurs at the rail is borne by the buyer. The buyer also handles the freight, insurance and shipping logistics which might be quite daunting for a novice. Unexpected fees such as demurrage, storage or reloading often emerge if the buyer is a novice and lacks experience just like in CFR.8
Although CIF appears more convenient, the buyer faces unexpected hidden charges such as payment of higher cost of freight and insurance and this occurs because most times, the seller fraudulently marks up the prices. The buyer also needs the original bill of lading to collect goods and without it, cargo cannot be claimed. Thus if the seller gives false or incomplete documents, it delays pickup and causes extra charges on the buyer.9
The seller faces the challenge of covering unexpected costs like ports delay or congestion. The seller also loses control once goods are loaded thus if delay or misrouting occur after loading, the seller cannot intervene or assist effectively. Without shipment visibility, it is harder for the seller to prove what went wrong (e.g whether the damage occurred before or after loading. This weakens the position of the seller in case of insurance claims or legal argument.10
CONCLUSION
CIF, CFR, and FOB remain some of the most widely used Incoterms in international trade, especially in maritime transport. While each provides a clear framework for allocating costs, risks, and responsibilities between buyers and sellers, they also present notable challenges. These include early transfer of risk, limited insurance coverage under CIF, and hidden destination charges that often surprise buyers.
In practice, many buyers opt for CIF for its perceived simplicity, even though it limits their control over shipping arrangements and exposes them to unseen costs. On the other hand, FOB offers buyers more control but demands a higher level of logistics expertise.
RECOMMENDATION
Parties should ensure clear communication of responsibilities; specify ports, shipment dates, and document requirements in the sales contract to avoid problems. Buyers should negotiate better insurance terms when importing under CIF; they should request broader coverage or arrange additional insurance independently. Lastly, sellers should desist from adding unnecessary charges to standard prices.
1Lloyd Bank, ‘International Commercial Terms- Incoterms’ (Lloyd Bank, 6 October 2023) <https://www.lloydbank.com/international-commercial-terms-incoterms/> accessed 24 June, 2025
2Ship Hub, ‘Incoterms 2020 and Sea Transport- Which one to choose’ (Ship Hub, 2020) <https://www.shiphub.com/incoterms-2020-and-sea-transport-which-one-to-choose/> accessed 24 June, 2025
3B&G Maritime, ‘The Importance of Incoterms in International Maritime Trade’ (B&G Maritime, 2020) <https://www.bgmaritime.com/the-importance-of-incoterms-in-international-maritime-trade/> accessed 25 June, 2025
4Ibid
5Ship Hub, ‘Incoterms 2020 and Sea Transport- Which one to choose’ (Ship Hub, 2020) <https://www.shiphub.com/incoterms-2020-and-sea-transport-which-one-to-choose/> accessed 24 June, 2025
6Ship Hub, ‘Incoterms 2020 and Sea Transport- Which one to choose’ (Ship Hub, 2020) <https://www.shiphub.com/incoterms-2020-and-sea-transport-which-one-to-choose/> accessed 24 June, 2025
7Ibid
8 WigMoreTrading, ‘FOB V CIF in Nigeria: Key differences and how to choose’ (wigmore Trading.com) <https://www.fob-v-cif-in-nigeria-key-differences-and-how-to-choose/> accessed 25 June, 2025
9Andy Smith, ‘CIF VS FOB: Which is best to Buy’ (Investopedia 9 August, 2024) <https://www.investopedia.com/cif-vs-fob-which-is-best-to-buy> accessed 25 June, 2025
10 The publishers, ‘Drawbacks against CIF terms for exporters’ (How to Export Import 21 April, 2023) <https://www.howtoexportimport.com/drawbacks-against-cif-terms-for-exporters/> accessed 25 June, 2025
