INCOTERMS: Is C for Confusing

INCOTERMS:  Is C for Confusing?

The C Group has the main heading of ‘Main Carriage Paid’, meaning that the main   carriage is paid by the seller. It is a constant within the Incoterms ® rule system that a place must be named when the term is formalised within the contract of supply between buyer and seller. The place named within the C term will always be a place in the country of destination, hence CIF Bangkok, CPT Sydney and so on. This is because the seller has the responsibility for paying the carriage to the point named. As we will see under ‘key points and responsibilities’ there are common confusions and misconceptions related particularly to the C group of terms which prompted the quote from Professor Ramberg referred to at the beginning of this article.

Common pitfalls

There are 2 groups of C terms . One is intended for use only when the goods are carried by sea (CFR and CIF). The other group (CPT and CIP) can be used for any mode of transport, including sea and multimodal transport. The sea freight terms have the ships rail as a critical point whereas the multimodal terms have delivery attached to putting the goods into the first carrier’s hands. A common pitfall is in not understanding the significant difference between the 2 groups.

Without doubt, however, the C group causes considerable confusion in that unlike the other groups E, F,and D there are two critical points instead of one contained within the term. Risk passes from seller to the buyer in the country of departure but freight is paid and arranged by the seller to a point named in the country of destination. The fact that only one place is named in expressing the term, sellers and buyers fall into the trap of regarding that as the only significant point.

As if these traps were not enough there is an additional pitfall in connection with insurance, two of the four C terms (CIF CIP) require the seller to take out insurance in the name of the buyer even though risk passes from seller to buyer in the country of departure.

Key points and responsibilities under C group terms

1. The seller must contract for carriage to the destination specified in the term agreed in the contract of supply. This applies in each of the 4 group C terms. It is important, however, for the seller to note that two of the terms are intended for sea freight shipment only, these are CIF and CFR. With the sea freight terms the ship’s rail plays a key part as the point at which risk passes from seller to buyer.

Real life example:

Company H in the UK concluded an order for a New Zealand customer with the Incoterms ® rule CIF Auckland included in the written contract document. When despatch was achieved the goods were sent air freight. Because no ship’s rail was crossed risk effectively did not transfer to the buyer. No damage occurred in transit but the buyer hastened to point out to the seller a lack of compliance in the procedure which could have led to dispute.

2 .  Risk passes from seller to buyer in the country of departure either when the goods are in the hands of the first carrier (CPT and CIP) or have crossed the ships rail (CIF CFR) . Effectively the seller has no risk after these points BUT in two of the terms CIF and CIP the seller has the obligation under the term to take out insurance cover in the name of the buyer, this cover is set out in the Incoterms ® rules published by the ICC, it limits the sellers obligation to taking out minimum cover of the Institute of London Underwriters Cargo Clauses or similar. Further cover must be negotiated by the buyer and seller to cover risks additional  to the minimum referred to.

Jan Ramberg has the opinion that this minimum cover comes about because of the sale of goods in transit (as in commodity trading) how, though, he asks, is the seller to know at the outset what the insurance requirements of the buyer are?  He cannot.  Therefore if the buyer requires additional cover it should make it known at the outset.

Real life example:  UK buyer agreed the term CIF Felixstowe (Incoterms ® 2010) but realised that they had not understood the extent (or lack of) of insurance cover until the goods arrived from Russia in a damaged state due to ‘civil commotion’ which was not covered by the buyers insurance requirement. It then came to light that the buyer had an insurance policy for goods in transit which covered the cost, the question they were then forced to ask themselves  was “why are buying under CIF when we already are covering the risk with our own insurance ?’

Real Life example:  UK seller quoted CFR and CIF on various export quotations but did not always adhere to the requirement to ship by sea freight, this meant that they were not always able to provide a bill of lading to the buyer. The buyer in one case was not impressed by the sellers’ lack of competence or understanding which turned out to be detrimental to the relationship.

Essential differences between the 4 C terms

The broad characteristics of each of the 4 groups contained within the new  (2010) set of Incoterms ® rules apply to the terms contained within the particular group, e.g. under the C group terms the main carriage costs must be paid by the seller and risk will pass in the country of departure these are constants.

The differences in the 4 terms are significant. Two apply to sea freight and two are multimodal. Two have obligations on the seller to insure the goods. One by one we look at the differences.

CFR (Cost & Freight)

Main responsibilities of the seller are:

·                     to contract for carriage

·                     to deliver the goods on board the vessel with the main carriage paid to the named point in the country of destination

·                     provide a clean transport document (bill of lading or sea waybill)

·                     arrange export clearance

·                     pay unloading costs if for their account under the contract of carriage

Remember that, as with FOB, the ship’s rail is no longer the point at which risk passes from seller to buyer as under the 2010 set this has changed to loaded at port of export but this still means that only conventional sea freight should be used under this term.

CIF (Cost, Insurance and Freight )

Main responsibilities of the seller are:

·                     To contract for carriage and insurance (as defined by the ICC rules)

·                     Deliver the goods on board

·                     Provide a clean transport document and a cargo insurance policy or certificate

·                     arrange export clearance

·                     pay unloading costs if required under the contract of carriage

The safe loading on the ship is the key point where risk passes so conventional sea freight is the required mode of transport.

CPT (Carriage paid to … named place of destination)

Main responsibilities of the seller are:

·                     To contract for carriage

·                     Deliver the goods to the (first) carrier

·                     Provide a usual and ‘clean’ transport document

·                     Arrange export clearance

·                     Pay loading costs

·                     Pay unloading costs if required under the contract of carriage

This term applies to any mode of transport. Risk passes when the goods are in the hands of the first carrier

CIP  (Carriage & Insurance paid to … named place of destination )

Main responsibilities of the seller are:

·                     To contract for Carriage & Insurance

·                     Deliver the goods to the (first) carrier

·                     Provide a clean and usual transport document and certificate of insurance (or policy)

·                     Arrange export clearance

·                     Pay loading costs

·                     Pay unloading costs if required under the contract of carriage

This term applies to any mode of transport.

Remember that the Incoterms ® rules give valuable support to buyers and sellers in establishing responsibilities in international contracts of supply but there are elements of interpretation involved which can sometimes be clarified by reference to the ICC publications referred to in this article.

Article written by Sandra Strong - Managing Partner at Strong & Herd LLP

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