Incoterms 2010 – Solutions to CIP risks

CIP appears to be one of the less problematic incoterms with regards to international trade.  However, there are still risks which need to be considered.

The incoterms (international commercial terms) devised and monitored by the ICC (International Chamber of Commerce) have traditionally been divided into sections determined by the initial letter of the abbreviated term.  Hence in incoterms 2010 we have one E-term (EXW), three F-terms (FAS, FOB and FCA), four C-terms (CFR, CIF, CPT and CIP) and three D-terms (DAT, DAP and DDP).  However, the ICC has now sub-divided off FAS, FOB, CFR and CIF, since these are terms which they suggest should only be used with sea or inland waterways traffic where the goods are delivered direct to the ship (hence not container shipments, since containers are usually delivered first to a container terminal).

There is a further sub-division which is not as clearly indicated, which divides the remaining incoterms into “shipment” and “delivery” terms.  The difference between the two is that the seller’s risk with “shipment” terms (EXW, FCA, CPT and CIP) passes to the buyer at a port of export, whilst with “delivery” terms (DAT, DAP and DDP), the risk passes from seller to buyer at an agreed point in the country of import, depending on the incoterm used and the agreed point of transfer detailed in the sales contract.

So it could be argued, from the viewpoint of the seller, that a “shipment” term provides less risk, whilst from the buyer’s viewpoint, a “delivery” term might serve their purposes better.  This dichotomy  between what is best for the buyer and what is more provident for the seller, is well illustrated with the CIP (Cost and Insurance Paid to) term.

With CIP (to a named port), the seller has included in their price the following factors.  The cost of the goods, the cost of packing (where applicable), the cost of loading, handling and transport to a port, the export document clearance and all necessary export documentation required by the buyer, the costs of loading and handling onto the chosen method of transport, the cost of the freight, war risk and security to the agreed port of import, and the goods in transit insurance to a named place.

What’s not included in the CIP price are any handling, unloading or delivery costs at the port of import, import customs clearance, the payment of any duties or taxes, the payment of any demurrage or storage charges (if applicable), any specialised import permissions or licences or delivery, unloading or unpacking costs to and at the final place of destination.  All these costs are for the account of the buyer.  In addition, if there are any delays to the shipment or the shipment is damaged or lost in transit and there are any costs relating to the delay or non-delivery of the cargo, then these costs are also for the account of the buyer.

CIP does carry, as do all the incoterms, certain inherent risks to both the seller and buyer.  The seller, when arranging for the shipment of the goods, does so on the understanding that the buyer will accept these goods at the port of import and arrange for the goods to be imported and for all duties and taxes to be paid.  However, what happens if the buyer, in that period of shipment, goes out of business, for whatever reason?  What then happens to the goods?

Incoterms relate to the sales terms of the contract only.  A common misconception is the belief that incoterms confers ownership of the goods to a particular party.  They do not.  The ownership of the goods is determined by the conditions of the sales contract and the terms and conditions of both the seller and buyer.  Any third party, such as a shipping company, should be advised at the time of shipment when the ownership passes from buyer to seller in case anything goes wrong with the shipment, and they should also be advised who to contact if the buyer fails to clear the goods through customs.  This later point is very important because it is this party who would be deemed liable by the shipping company for any demurrage or storage costs incurred due to the non clearance of the goods.  If the shipping company is not advised, then they can also charge additional costs such as investigative costs to determine the ownership of the goods.  If the shipping company cannot determine an owner, then in order to cover their costs they are allowed to sell the goods in “lieu.”

Therefore, the solution to mitigate the costs of any non-acceptance of the goods at the port of import is for the seller and buyer to both ensure that procedures are in place to mitigate as many costs as possible, and to ensure that one party (usually the seller) is responsible for notifying the shipping company who is responsible for the goods during the transit, on arrival, etc.  For example, if the buyer fails to accept the goods within a certain period of time, and the seller wishes to sell the goods to a different customer, then the conditions under which this can be allowed should be agreed beforehand.  All these factors should be clearly documented in the international trade contract and agreed by both parties.

One of the aspects of the CIP incoterm is that the seller contracts and arranges for the transport of the goods to a named port of destination, but the risk passes from seller to buyer at the port of export.  One risk to the buyer is that the transport routing bought by the seller may not meet the buyer’s expectations. For example, in order to keep the cost low, the seller may agree to arrange the transport, but could use a routing which has a number of transshipment points.  Direct sailings and shipments from port to port can be expensive, and there can be extensive savings made by trans-shipping through different ports.  The problem with this is that the saving in cost can increase (in some cases quite dramatically) the period of time that the goods are in transit to the final port of destination.

The way of mitigating this risk is again for both the buyer and seller to agree a transit routing at the time of negotiation and for this to be written into the contract conditions.  It is not a function of incoterms to determine how the goods are shipped.  It is only the function of incoterms to determine who pays for the cost and who takes the risk and responsibility and where these costs, risks and responsibilities pass from seller to buyer.

Another aspect of the CIP incoterm is that the seller contracts and arranges for the goods in transit insurance of the goods to a named place.  There are a number of points that need to be considered with contracting for insurance.  First, it is really important to determine, at the contract stage, whether the local laws in the country of import allow the seller to contract for the goods in transit insurance.  There are a number of countries where this is not possible.  Always check first.  Where it is not possible, then the CIP incoterm cannot be used and the buyer will need to arrange the insurance locally.

In these circumstances, the seller may wish to take out additional insurance just in case.  Please note that although in some countries it is not unlawful or illegal to take out more than one insurance on a cargo, it is extremely illegal to try and claim more than once and, in some cases, the knowledge that more than one policy exists can cause problems and may invalidate both policies.  It is very important that proper advice in this matter is taken from the insurance broker or company dealing with the insurance.

In addition the type of goods in transit insurance taken out needs to be fit for purpose and relating to the form of transport.  For example, goods moving by sea, road or rail should include clauses such as the Institute Cargo Clauses (A), Institute Strikes Clauses (Cargo), Institute War Clauses (Cargo) and, in certain circumstances Institute Classification Clause.  Goods moving by air should include Institute Cargo Clauses (Air), Institute Strikes Clauses (Air), Institute War Clauses (Air) and, where relevant, Institute Ware Clauses (sendings by post).

Other clauses that could be considered (again where relevant) are Institute Cyber Attack Exclusion Clause, Institute Radioactive Contamination, Chemical, Biological, Biochemical, Electromagnetic Weapons Clause, Institute Replacement Clause and Joint Cargo Committee Sanction Limitation and Exclusion Clauses.  If there are frozen goods involved in the shipment, the parties involved should also consider Institute Frozen Food Clauses (A) (Excluding frozen meat) and Institute Strikes Clauses (Frozen food) (excluding frozen meat).

The above information is given as general information only.  Always check with the insurance company first and ensure that all relevant clauses are included and that an agreement is reached at contract stage and detailed in writing in the contract with regards to the insurance cover required and to be supplied.

It is also important for the insurance to cover the extent of the voyage which may actually be greater than that paid for.  For example, the insurance may cover Warehouse to Warehouse even though the freight is only paid to the port of import.  If any such clauses are required they must be printed on the insurance certificate.  Do not rely on this being included as part of the insurance company’s terms and conditions since it can lead to misunderstandings if a claim is made.

Generally speaking it is good business to do a risk analysis on the incoterm being used, and if there are any areas which need clarification, the best time to sort this out is at the contract negotiation stage and the best place to detail any agreement is in writing in the international trade contact itself.  The CIP incoterm acts merely as a form of shorthand, but any real detail needs to be clarified in writing in the contract.

 

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

 

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