Comparing CIF and FOB Contracts

Summary of Dissertation Question (approx. 300 words)

Literature Review (approx. 1200 words)

A literature review is a body of text that aims to review the critical points of current knowledge on a particular field. Most often associated with science-oriented literature such as a thesis, the literature review usually precedes a research proposal, methodology and results section. Its ultimate goal is to bring the reader up to date with current literature on a topic and forms the basis for another goal such as the justification for future research in the area. A good literature review is characterized by a logical flow of ideas, current and relevant references with consistent, appropriate referencing style, proper use of terminology and an unbiased and comprehensive view of the previous research on the topic.

Standard terms of contracts of doing business especially the relationship between the seller and buyer in regard to their roles and commitments in the event of sale have existed in many economies all over the world. These terms have been significant because of conflicting laws that doesn’t clearly spell out the roles of both the buyer and the seller in a transaction thus a need for neutral rules that would govern the conduct of business. The good distribution functions and delivery of goods would have no complications if the seller and buyer enjoyed a positive commercial relationship. The contractual laws that have governed the previous transaction can be used for present and future business engagements.

The commitments of the seller and the buyer have been the basis for the development of such contacts to guide the business transaction and ensure that every fairness in the transaction. Nominating the vessel to be used in the shipment of goods has been a major drive to engagement of contracts of sale in terms of trade. Depending on the type f sale contract, the parties will specify the suitable vessel or line of vessels to be used to deliver goods. This also includes nomination of a substitute vessel in case the previous vessel withdraws. The transfer of risks has also been another contributing fact to the use of sales contacts in buyer-seller transactions. In most contacts of sale, the ownership of the products is at the seller until the goods are shipped while on others, the ownership of goods by the seller extents to the buyer’s preferred ports. On the other hand, most contracts give the ownership of the products to buyer once the seller has despatched them at his/her country. The responsibilities for obtaining custom clearance certificates as well as export and import license have contributed to the need of sales contracts. There are two main types of sales contracts used in buyer-seller business engagements. They are: Cost, Insurance and Freight (CIF) and Free on Board (FOB).

Cost, Insurance and Freight (CIF)

Bridge (2010) notes that, the contracts that govern sale of goods impose a variety of obligations to both the buyer and the seller. The (CIF) contract governs the sale and movement of goods from the point of production to the agreed destination. According to this contact law, the buyer is expected to make the agreed payment once the documents relating the contact are produced by the seller. According to CIF contact, the risk of goods loss or damage passes from the seller to the buyer once the seller has fulfilled an obligation to deliver the goods. This includes passing the cost to the buyer and the contract stipulates that such risks and costs are transferred to the buyer once the goods are shipped for delivery from the seller’s geographical location. In CIF contact, the seller has a greater extent of duties compared o the buyer.

The most important duty of the seller in the CIF sale contact is to ensure shipping the products as agreed in the CIF contract. The seller has the responsibility to ship goods that the buyer ordered. This involves making sure the delivery of the goods is timely and to the agreed destination. The seller has also the responsibility of nominating the vessel that will be used to do the shipping. Additionally, the seller is charged with preparation for the loading and offloading the products at various stations before such goods are shipped out of his/her country to the buyer’s country or destination. CIF also requires the seller to prepare the invoices for the goods and tendering such invoices to the buyer before the goods are delivered.

On the other hand the duties of the buyer according to CIF sales contact law include making the agreed payment to the seller upon the receipt of the relevant documents such as invoices, insurance policy and bill of landing. The buyer can make the payment directly to the seller or through the agreed agent. Furthermore, the buyer has the duty to receive goods from the seller since according to this contact law risk of the goods and property ownership passes to the buyer once the goods have been shipped at the sellers point.

Free on Board (FOB)

Free on Board sale contract stipulates that the responsibility of the seller in the transaction is complete when the goods are loaded onto the agreed shipment vessel. Therefore, the buyer bears all the damage or loss costs that may happen to the goods from that point. Such costs are not included in the seller invoices or bills of landing. However, the seller is required to clear the goods for export. In FOB sales contract, the seller obligations include providing goods according to the original contract with the buyer. A commercial invoice to the buyer should be generated in conformity with the agreements in this contact of sale. The seller is supposed to bear all costs involved in clearing goods for export including obtaining an export license for the goods

FOB contract of sale demand that the seller should deliver the goods to agreed named port at the specified time in the same vessel that the buyer nominated. The seller should bear all risks of the loss, damage and any other costs until the goods have passed the ship rails in the preferred port of the buyer when the risks are transferred to the buyer. The seller is also subject to pay all costs involved in shipping the goods until the risks are transferred to the buyer. Such costs include loading, offloading custom clearance and obtaining export licences among others. The seller is also charged with the responsibility of providing of all documents related to the shipment of the goods such as notices of shipment, delivery document, transport documents, invoices among other documents.

The obligations of the buyer in the FOB contact include paying for the goods as provided in the FOB contract of sale. Additionally, the buyer has the duty of obtaining the import license for the received goods as well as incurring all the costs involved once the goods have been received in his/her preferred port especially loading, offloading and choice of transportation. The buyer has also the responsibility of taking the delivery of goods at the port. He/she must also bear all the risks involved after the goods have passed the rails of the ship at the agreed port of delivery. Furthermore, the buyer assumes all the costs that incur the delivery of goods once they have passed the ships rails at the named port of delivery. This includes costs incurred in customs clearance and the goods transit to their destination. The buyer has the responsibility to give a timed notice to the seller concerning the date and time of delivery, the vessel name o be used and the preferred port as well as sending a proof to the seller on the delivery of goods and the condition of the goods

Research Methodology

Data Resources and Collection Methods

For the purposes of this research, the main sources of primary information shall be the information accrued from the primary data collection instruments which include in depth interviews and questionnaires. Secondary sources like books, research and interviews with experts are crucial to making an informed reading of the text. A wealth of information was also accrued from candid conversations with identified buyers and sellers involved in international business transactions that have involved either the CIF or FOB sales contracts. Focused group discussions, surveys and questionnaires promise to be dynamic inputs too. Relevant articles, journals, seminar papers, books, online web pages, company reports, research databases, magazines and the like information materials related to the use of CIF and FOB contacts in buyer-seller business relations. This secondary data collected shall be helpful in providing a literary basis for a research as well as providing it with a comparative angle.

Sampling Methods

For this research, stratified sampling was used for the survey questionnaire to come up with the appropriate sample. Stratified sampling is whereby a stratum is a subset of populations that have common characteristics. The researchers categorize the appropriate stratums then enough subjects from each stratum are chosen through random sampling. It is the best probability method since it lowers sampling error. For the in- depth interviews, judgment sampling shall be used for the sampling. This is where samples are chosen on the basis of judgment and are often chosen from one “representative" location. The reason behind the choice of this method lies in the fact that since the objective is to obtain the experiences of buyers and sellers in the use CIF and FOB contracts of sale, the target sample is already known and is very specific and thus judgment based on their existing expertise will help narrow down the sample.

Research Design

The proposed study will be based on an inductive as opposed to deductive approach. This is mainly due to the fact that this research is to a large extent qualitative in nature. Inductive reasoning, as compared to deductive reasoning, is prevalent in qualitative studies because it is theory generating. The focus of inductive researchers is to search for a theory that provides an explanation for the data while deductive researchers search for data that matches a particular theory they may have. In terms of the approach or strategy, exclusively inductive researches begin with data collection, measurements of some kind or empirical observations. Such an approach is appropriate for this study since the attempt is to generate data concerning the differences of CIF and FOB sales contracts in international business relations of both the buyer and the seller. Since the available data is scanty, an inductive research is important to fill this knowledge gap by generating data.

The study shall also be exploratory in nature and the approach to be used will be the mixed design approach- a combined qualitative and quantitative approach defined by Creswell (2003) as a “Sequential Exploratory Strategy". In order to meet the research objectives, such an exploratory study is crucial in benefiting from the strengths of both approaches. It is also known as the triangulation approach and is geared towards capturing a more holistic, complete and contextual depiction of the respondents under research while at the same time reducing the effect of bias in any approach used. Moreover, researchers can attain high levels of data validity, verifiability and generalizability by making use of triangulation approaches that provide justification and replication of data results across all methods. In addition, the combination of both research approaches within one research project releases tremendous opportunities for mutual advantage because the weaknesses of one strategy can be neutralized through the incorporation of other methods (Simon and Vosseberg, 2001).

On its own, qualitative research is important as it provides a detailed description of the data while at the same time allowing for a flexible approach to the study. As Myers (2000) aptly put it, qualitative research is a tool used to understand and describe the world of human experience. Since we remain human during the entire span of a qualitative research process, our humanity guides us through subtleties such as 'aha' moments or intuition. Therefore, qualitative studies have an important human touch to it thereby adding a certain amount of reality to the results accrued in the end. In this research, it was especially necessary to attain this human touch since the opinions and experiences of the ready made clothes consumers are what form the bulk of the basis for the final results.

In addition to this, an importance of a qualitative research is that it is more open to the refinements and adjustments that researches undergo with time. Moreover, the research setting of an in depth interview is not subject to manipulation as is the case with quantitative studies. Instead, the main focus is to get a better grasp of phenomena as they naturally occur (Matveev, 2002). This ensures that the data collected is more accurate.

A quantitative research approach, nevertheless, is likewise necessary as it allows for the measuring of the performance of the research subject while clearly identifying what the independent and the dependent variables to be studied are. Quantitative studies also strictly follow the research goals set on from the onset, arriving at more objective conclusions, testing hypothesis, determining the issues of causality and eliminates or minimises subjectivity of judgment. Therefore, while descriptiveness is important, data analysis based on facts and figures are crucial particularly in the interpretation phase for marketing researches.

This mixed/ combined approach will function differently for the different phases of the research. Qualitative secondary information from a wide range of secondary sources will be collected and quantitative data shall be obtained from the various company registries and databases.

Research Methods

Narrowing down on a particular research method is one of the toughest parts of a research. The previous discussion has highlighted all the available options and evidently, each method has its own benefits. However, every research differs in terms of the research problem; the scope; mandate; size; and resource availability. As such, every researcher needs to understand the unique qualities of their particular research so as to adopt a research that suits their specific research. If the incorrect or inappropriate method is used, it may have a negative bearing on the results of the data analysis. This step of the research should thus be accorded the seriousness and sensitivity it deserves to ensure that the most accurate results are obtained.

With this in mind, choosing the correct research method will undoubtedly be a major aspect of the proposed study in question. The study by its nature is quite wide in scope, targeting no particular geographical area or a specific population of seller and buyers. After a comparative analysis of all the available methods, the proposed research has narrowed down to the use of in depth interviews and questionnaires for the quantitative methods and related secondary data for the qualitative methods.

Research Pitfalls:

Time constraints: During the study of cross- cultural issues, there exist major time constraints involved in straddling different countries. The planning of the dissertation time schedule must be given the utmost importance with the times allocated for each section strictly adhered to. International business studies are time consuming and complex undertakings thus proper time management in terms of studying for the research, collecting data, analyzing data, etc must be done to avoid rushing through the process and subsequently negatively affecting the quality of the research.

Financial- the cost of conducting this research will require considerable amounts of finances especially in relation to collecting data, transportation, producing/ printing the questionnaires, and so on. The lack of adequate resources may thus serve as a stumbling block for this research.

Scope- the scope is quite wide as it spans several countries because imports and exports must involve parties of different nations and this may create logistical problems during the research particularly with regards to data collection.

Reflective Diary

Reflecting on this dissertation, I feel the all the step in the process of coming up with this project has been successful in terms of planning the resources and time spent to accomplish it. The most successful steps in this project were the review of related literature due to availability of up to date information related to my topic of study. However, collection of raw data was the most challenging step in this project. The time and financial resources slotted to collect data for this study became limited towards the end of the study especially due to spatial distribution of the sampled population to be interviewed and issued questionnaires.

Generally, I feel that I transferred my original visualization and understanding of this research topic into this project. This product reflects not only my own view of the topic of study but those of others through the rich informational materials consulted in the course of the study. Though the project pushed to think conceptually which made me think its challenging, I eventually found it fun and an accomplishment, a step to furthering my professional creativity which is adequately reflected all through the project.