Incoterms 2010 – New opportunities using CPT

Under Incoterms 2010 the C-terms CPT and CIP can be used for all forms of transport.  But when should CPT be used?

Negotiating international trade contracts can be a bit tricky at times.  Once matters of price, supply and delivery have been sorted, very often the next question that should be asked by the relevant parties is, what sales terms should we be using?  In other words, which parts of the shipment are paid for and the responsibility of the seller, and which parts are at the cost, risk and responsibility of the buyer?  Its usually a good idea to sort these questions out at the contract stage and not when something goes wrong later in the transaction.

With Ex-Works (EXW) the seller has very little risk and only the responsibility of supplying the goods packed and available at the door of a named place.  From this point onwards, the buyer is responsible for everything.  With the F-terms, FAS (Free Alongside Ship), FOB (Free on Board) and FCA (Free Carrier), the seller has more costs, responsibilities and risks, but only up to the named place, usually in the country of export.  With FAS and FOB this will be either beside or loaded onto a sea-going vessel.  With FCA, as I have pointed out in a previous article, it can be at any point from the initial place of manufacture/supply to a named place in a completely different country.

With the C-terms, the sellers risk and responsibility ends at the port of export, even though the price supplied by the seller includes the cost of the freight (and other relevant charges) and sometimes the Goods in Transit insurance as well.  The C-terms CFR (Cost and Freight) and CIF (Cost, Insurance and Freight) are, under the 2010 Incoterm rules, only supposed to be used for sea or inland waterways shipments, where the goods are delivered directly to the ship.  This does include bulk cargo, break-bulk cargo and Ro-Ro (Roll On, Roll Off) vessels.

All other types of shipment, such as those by air, truck and train, plus sea-freight container shipments, and courier and postal services (although technically these last two are best served using some of the D-terms) can use CPT (Carriage Paid To).  I would add another condition as well.  If the method of payment is by Documentary Letter of Credit, where one of the documents to be supplied is a transport document of some sort, such as an airway bill or Bill of Lading, then using CPT (or CIP  – Carriage and Insurance Paid to and any of the D-terms) is absolutely vital.

The reason behind this statement is the realisation that the shipping company should only release the shipping document to the party who is responsible for organising the shipment.  With EXW or any of the F-terms, this is never the seller.  The seller only has a legal right to the shipping documents when they have arranged the shipment i.e. under a C-term or D-term incoterm.  So if the seller is getting paid by Documentary Letter of Credit, they would be well advised to ask for either CPT or CIP terms.  The reason I concentrate on these two incoterms is because they are the best terms for the seller.  Not necessarily the best terms for the buyer, but definitely the best terms for the seller.

This is because CPT and CIP are “shipment” terms.  This means that the risk and responsibility for the shipment passes to the buyer from the seller at the port of export.  Even though the seller is paying for the freight, their responsibility still ends at the port of export.  With the D-terms, the risk and responsibility passes from the seller to the buyer at the port of import.  This is why the D-terms are traditionally known as “delivery” terms.

Generally speaking this only becomes important when something goes wrong with the shipment, and it is either delayed or something more permanent results in the shipment being lost.  Under the CPT term the seller is not obliged to take out Goods in Transit Insurance, so the responsibility (and risk) for the insurance is for the account of the buyer.  The Goods in Transit insurance will cover a number of different losses, depending on the level of insurance taken out, but what it does not cover, unless insured through a very specialised (and costly) policy indeed, are consequential losses.  Consequential losses are only for the account of the seller when the sales terms used are one of the D-terms.

So for shipments which are paid for under Documentary Credits and to avoid being made responsible for consequential losses, the shipper/exporter is well advised to choose CPT.  The buyer, on the other hand, should really try and negotiate for one of the D-terms instead.  (I can see battles ahead if everyone takes my advice).  However, the reality is that a lot organisations who are exporters and/or importers, tend to stick to using the same incoterm for all their orders, regardless whether they are actually the best incoterm for the type of contract concerned.  By doing this, organisations can sometimes lose the opportunity to fully protect their interests.  I know of companies who stick to using EXW or FCA all the time for their exports because they find it causes less work.  This is true, but they are then sacrificing control of their export to other parties.  This is personally something I dislike doing, but each organisation must make their own choice in this matter.

But I would argue that by using CPT, the seller is in the best of both worlds.  They have limited risk, but the opportunity to control the shipment all the way to the country of export.  This can have beneficial cost implications in that the more shipments a seller arranges, the more buying power they have with shipping companies, which could result in less expensive shipping costs.  By passing on these potential cost savings to their customers, exporters can add value to their supply, which should please their present customers and improve their reputation in the market place.

There are benefits for the buyer/importer too.  It can sometimes be difficult (and more expensive) for the buyer to arrange for the shipment of goods under FCA terms.  And it might be rather difficult (especially if they have read this article) to convince the seller to ship on a D-term.  In which case, CPT can be helpful, especially if the seller can obtain better shipping rates and are willing to pass these on.  The only thing that should be remembered is that under CPT terms, the buyer should arrange for suitable Goods in Transit insurance.  Please note that this is not a requirement under Incoterms 2010.  Its just good business advice.  However, if the buyer would prefer for the seller to arrange the insurance and the seller agrees, then the term to use is CIP.

Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training.  She is based in the United Kingdom.  If you require any further assistance with the matters mentioned above, please do contact us by e-mail on info@point-point.com or check out other International Trade articles on the Point to Point Export Services website at www.point-point.com

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