There are several consequences of using the incorrect Incoterms® and users need to fully comprehend what it means when they put a three-letter Incoterms® rule into their sales contract..
The usage of incorrect Incoterms® rules happens most commonly due to
- Inappropriate rules being used for the chosen mode of transport;
- Lack of understanding of the allocation of costs and risks between the buyer and seller;
- The usage of incorrect version of the Incoterms® rules;
- The rules not being geographically specific;
- Not understanding what the Incoterms® rules does and does not do;
- Choosing rules that do not suit the requirement of the business;
Bob Ronai one of the experts invited by the International Chamber of Commerce to be a member of their Incoterms® Drafting Group to draft the new Incoterms® 2020, has compiled a series of short explanations of various matters critical to understanding and using the Incoterms® 2020 rules in the real world of trade based on various questions he has received about the correct application of the rules..
This is article 2 in the series of these explanations..
CPT stands for “Carriage Paid To” and should be shown as CPT (named place of destination) Incoterms® 2020.
CIP stands for “Carriage and Insurance Paid To” and should be shown as CIP (named place of destination) Incoterms® 2020.
Under CPT and CIP, the seller delivers the goods and transfers the risk to the buyer when
- the goods are handed over to the carrier contracted by the seller, or
- by procuring the goods so delivered.
The seller may do so by giving the carrier physical possession of the goods in the manner and at the place appropriate to the means of transport used.
When either of these two Incoterms® 2020 rules is used, it is the destination place that is named. For example, CPT Santiago means that the seller has contracted for carriage to Santiago.
But is that where delivery under CPT/CIP occurs?
No. Under A2 of each rule, delivery occurs when the seller hands the goods over to the carrier contracted by them before carriage commences. In this example, the buyer is obliged under B2 to both *take delivery* of the goods as delivered under A2, and *receive* them from the carrier at the destination place.
The FCA rule has two options of where delivery takes place, but CPT and CIP don’t say anything about where this occurs, why is that?
Because with FCA, there is a hand-over from the seller to the buyer’s carrier and it is at that very point that costs change from seller to buyer. So we need to be specific about where and when that point occurs.
With CPT/CIP the seller hands the goods to its own carrier and handling/transport costs up to the destination are for the seller. So there is no need to be specific about this point, it is all for the seller to pay.
In summary, for CPT/CIP there are two very distinct named places involved:
- The place of delivery and
- The place of destination
CPT/CIP transfer of risk from seller to buyer
As with all eleven of the Incoterms® 2020 rules, risk transfers from the seller to the buyer instantly at delivery. The variability of “delivery” is not mentioned in the wording of these two rules, conveniently for the lawyers but most inconveniently for the actual traders and their logistics people. The place and time of delivery are not mentioned in the vast number of sales contracts simply because the rules provide no obvious prompt for it.
For the seller it is easy, they know precisely where and when delivery occurs and risk transfers, almost always when they load the carrier’s truck or the container. The buyer however is not present to witness this and even at a later stage has no documentary evidence of this for container shipments or airfreights as the B/L and AWB don’t mention it. Within Europe, a CMR may well give a clue as to that precise moment.
If a CPT buyer has an ongoing annual or open marine insurance policy covering their risk this might not be a problem, but on the other hand, often the buyer needs to declare precise details of each shipment to start the cover rolling.
A CIP buyer is, however, in a better position because the seller is obliged to provide insurance for the buyer’s risk.
Keep in mind, delivery occurs, and therefore risk starts, long before the goods even cross the customs border of the exporting country. Is this something that potentially disadvantages the buyer, being at risk for goods still in the seller’s country under the seller’s control via their carrier?
Always add specific terminology defining delivery in sales contracts – at the time of loading, upon crossing the border of the country of export (or import,) at the port of (loading/unloading.) Otherwise, with no ‘default’ definition of delivery one will always be in the hands of the courts if a dispute needs to be resolved…
The “default” delivery in CPT/CIP is only when the seller physically hands the cargo to their carrier. The problem is that these two rules, unlike FCA, don’t go any further than that, and the transfer of risk hangs off the delivery.
CPT/CIP – Are they compatible with how a Letter of Credit works?
In CPT/CIP, the seller’s obligation is to deliver the goods to its own carrier on the agreed date or within the agreed period. These rules require the seller to provide the buyer with “the usual transport document(s)”. If agreed or customary, the document must also enable the buyer to claim the goods from the carrier. If the document is in a negotiable form in several originals then the full set must be presented to the buyer.
What do banks typically state in a Letter of Credit (LC)?
- Ports/airports of loading and destination,
- the latest shipment date, and
- presentation of an on-board B/L or an AWB.
Nowhere in these two rules is there an obligation of the seller to the buyer to ship from a particular port/airport, though the seller does have the obligation to contract for carriage to the named place of destination which may well be a CY or CFS attached to a destination port, or to an airport.
There is no latest shipment date or period but a latest delivery date or period. If the seller hands the goods to its carrier at its own premises such as is usual, say on the last day agreed, then shipment could occur many days or even weeks after that date.
It is suggested/recommended that in such a case the seller inserts into the sales contract certain specifics which are actually outside of the CPT/CIP rules.
- State the latest shipment date of at least 14 days, better still 21 days, after the contractual delivery date.
- State a broad-based port or airport of loading, for example, “any European port/airport” instead of naming say “Hamburg” or “Frankfurt.”
- State that no responsibility attaches to the seller if the shipment is delayed and remind the buyer that A2 still applies to contractual delivery and B1 still obliges the buyer to pay the agreed price.
- State that if the seller is unable to comply with the terms of the LC because of the buyer’s failure to ensure points 1 and 2, that payment is due immediately upon demand by the seller.
Just like with FCA, this is a messy issue because the rules were written without regard to their practical application and disregarded LCs.