'C' Terms Most Suited for Effective Trading in Motion
In a continuing series by former Halliburton Vice President of Global Logistics John Vogt, you’ll gain the critical information needed to reduce shipping risks to your company whether you’re the buyer or shipper. Look for John's new installments in BreakbulkONE each month.
We are now ready to look at the last two of the C terms: Carriage Paid To (CPT) and Carriage and Insurance Paid To (CIP), which hold for all modes. We know from our exploration of the water-only terms CFR and CIF that these terms are valid only from the port of loading to port of discharge. Uniquely, the C terms have the risk transferring at the point of loading, and the seller chooses the route and point of loading.
Consider the wider ramifications of these principles as we move to all modes. The CPT and CIP add to the complexity of the Incoterms® rules and in particular the C terms by moving the point of loading to the point where the goods are first loaded for movement, not just the first port as for CFR and CIF. The risk transfers at this point to the buyer, the route is chosen by the seller, and the costs extend for all the modes in the route to the named place, which can be any location not necessarily a water port. The rules allow the seller to choose the route and loading point, as the rule only defines the named destination, which can be somewhere other than an ocean port.
Let us take an extreme example. The seller is in India and the buyer is in Germany. The seller can choose to move the goods from its manufacturing plant to the coast via rail first and then road, onto the first ship, to South Africa, then from South Africa to Brazil, then from Brazil to Europe, enter the EU via Holland and then barge the goods to Germany and do final delivery to the named destination in Bremen. The buyer might well expect the move to be via the Suez Canal and through the Mediterranean Sea which is far shorter and with far fewer transshipments.
There is a rule of thumb that the more transshipments in the route, the slower the move and the greater the potential for issues to arise. In this sort of example one can see this is a potentially disastrous situation if the goods are of high value, or urgently needed, as they will have a long transit time which ties up working capital. Yet these are valid Incoterms® rules and are frequently utilized. As in many aspects of logistics, common sense dictates that the extreme of lowest cost route with months for delivery is going to prejudice future sales, so the seller is sensible enough not to go to the extreme. However, trading on the belief that the seller will choose a route that ensures continued trading is not the way to sustain a trade contract. These C rules have value, it is just they must be used with understanding to minimize risks and be effective.
Before we explore all this complexity, let’s address the insurance in the CIP rule. With the water-only CIF, we explored some of the principles of the Clause (C) insurance and noted this was not an all-risks policy. For the longer, more complex movements in CIP, the insurance has been enhanced to the essentially all-risks Clause (A). The insurance is more comprehensive, but there are still exemptions, and the value is still limited to the 110 percent of the value of the goods. In reality, this allows for the replacement of the goods, not the loss of sales or goodwill, nor for the working capital tied up in the cost of the goods while in transit. The insurance is also for a much longer period as the point of loading is the start of the journey for the goods, not the first water port as in the case of CIF, and hence is more expensive.
Remember this is not insurance for the whole journey to the buyer, but from point of first loading to the named place. If insurance cover is required for the whole movement, then this is an additional insurance to complement the insurance specified in the Incoterms® rules. If the buyer is happy with just this insurance, then the CIF or CIP rule is used. If not, then the CFR or CPT rule is used, and a clause specifying what insurance is required is added to the agreement. Remember, additional cost for insurance above the insurance specified by the chosen C rule is for the account of the buyer. Implicit in this is the seller must specify the point of first loading to the insurer of the goods to define and obtain the insurance.
We mentioned earlier that the choice is either to deliver goods to the ship or first transport or, if the goods are available on the transport, these can be purchased on the transport, often on a ship as the example below shows. This means the seller purchases goods that are on a transport, rather than providing them from the seller’s stock on land. This is trading in motion and is used for commodities and many raw materials. The trading can be direct between the various traders, or even on a commodities board, much like a stock exchange.
The simple example is a raw material such as cast aluminum. This is loaded in large quantities – 5,000 tons and upwards in many cases. The owner can sell portions of this cargo, say 1,000 tons, while the cargo is still in motion, thereby allowing the seller who purchased the goods to satisfy the buyer’s order. The Incoterms® rules allow for this trading. It is not complicated in concept, but some thought needs to be added for a more comprehensive understanding of the practice.
Firstly, the trading is usually done once the ship is in international waters, so the sending or receiving country does not claim that sales or value added tax must be paid on the trade. Once the goods are in international waters, they are outside the commerce of the exporting or importing country and can be traded without attracting these taxes.
Secondly, the question of who owns the goods must always be known. In trade, this is a Bill of Lading (BOL) which is the document issued by the shipping line to say they have the goods for transport. A BOL merely reflects what is visible when the goods are loaded, be it a container, a crate, a load of steel or a free-flowing commodity like grain. It does not give details which are carried in the packing list and the Commercial Invoice.
Now BOL’s have different versions, but for trading to take place the BOL must be without any added comment by the shipping company which reflects concerns, such as damage, for it to be suitable for trading. These are called clear, clean or unclaused BOLs. It must be emphasized that most of the Incoterms® rules, bar EXW, allow for trading. As trades occur the BOL must be amended to record who owns the cargo, so the final owner can prove its ownership and claim the goods. This is done by the parties involved in the buying and selling, and the shipping line which issues revised and original versions.
Remember these C terms also require the seller to clear the goods for export and obtain any licenses to achieve this. The contract of movement must also cover the cost of unloading at the named place. The seller is also responsible for organizing the movement of the goods through intermediate countries on its way to the named place, including any transit customs and or tax submissions.
With all this complexity and issues of the seller choosing the route and the buyer taking the risk much earlier in the movement than other rules, the question is how to use this rule effectively. These C rules are valuable, but it is worth stating the obvious: if you use Incoterms® rules without knowledge and without precision, you increase your risk significantly. So how does one overcome the complexity? It is necessary to add to the Incoterms® rule a number of additional items to make the risk the lowest possible. These all must be agreed between the buyer and seller with the Incoterms® rule.
I will list them from the least comprehensive and definitive with the highest risk, and then build them up to the most comprehensive and least risk for the buyer. If the basic choice of Incoterms® rule for these C terms is merely to define the named place, leaving the route and loading point open to the choice of the seller, this is the highest risk as we have described. Then progressively these following options decrease the risk, but add to the additional information to supplement the Incoterms rule:
• Adding a loading point improves the knowledge of the start of the route.
• Adding a loading point and a route where trans-shipments between carriers occur improves the knowledge of the movement considerably.
• Adding a loading point and a period for delivery at the named place improves the delivery requirements to reduce risks of delays.
• Adding a loading point, route where trans-shipments between carriers occur and a period for delivery.
• Adding a loading point, route and service providers with a period is the ideal.
Note that where a period is set with the Incoterms® rule, then the specific period for each shipment must be added. It is rare that a seller will accept that they must advise the service providers, but it is sensible to ask in a trade negotiation for the loading point, and the transshipments in a route so that ports and movement can be tracked. After all, the buyer wants to know when the goods are going to arrive!
One further thought must be borne in mind. The route is of vital importance if the goods could move through a sanctioned country. For many countries, the routing of the goods through a sanctioned country will mean the goods may not be accepted by the buyer. While the terms and conditions of the agreement will say to not use the sanctioned countries, that is a legal clause which does not always get communicated correctly to each of the on average 25 entities involved in an international shipment. Take for example, a shipment sent from an Indonesian manufacturer to Kazakhstan where the buyer is a subsidiary of an American company. The Indonesian forwarder shipped using its fastest route to Kazakhstan which takes the goods through Iran, a sanctioned country for American companies, but not for Indonesian companies. The goods could not be utilized by the American company and had to be reported to the U.S. government with the attendant costs and delays to replace the goods.
It is highly recommended that the buyer and seller should discuss at the very least and agree the aspects of insurance, loading point, route with transshipments, a delivery period, and the named place with precision. The C terms are also generally regarded as the ones most suited for effective trading in motion, which adds the complexity of the BOL being endorsed with different owners as the goods might be sold or traded numerous times. This is well established, so it is not that complex in practice. One further thought needs to be added. If the delivery is to a location after a port in another country, the importation declaration and duties devolve onto the buyer, so delivery must be in bond, that is without paying customs duties which adds to the complexity. Unless there is a pressing need to have the risk transfer at the loading point, if insurance is specified outside of the Incoterms®, it may be cleaner and simpler to use one of the two D terms of Delivered at Place (DAP) or Delivered at Place Unloaded (DPU). The route and service providers are still chosen by the seller, and it is responsible for all the movement to the named place. We will discuss these in the next article, so you can make informed decisions.
Missed Jon Vogt’s Previous Articles? Find Them Here:
Why Everyone Needs a Better Understanding of Incoterms (January 11, 2022)
For Incoterms, Devil is in the Details (February 8, 2022)
Why Use Ex Works Incoterm Rule? (March 3, 2022)
When FCA Can Be a Four-letter Word (March 31, 2022)
Exploring the 'C' Rules for Cost and Carriage (June 10, 2022)
About the Author
John Vogt has his own consulting company and, at the end of his 42 years in industry around the world, was the Vice President of Global Logistics for Halliburton. Thereafter he spent five years as a Professor of Record for the University of Houston-Downtown MBA for International and Supply Chain courses. He has experience as a Board Director and has traveled the world to improve trade.
In his career, he has driven the correct use of Incoterms as part of the trade improvements he has implemented to drive efficiency and effectiveness. In his role as a professor of record, he taught multiple courses on the use of Incoterms and trade-related agreements. He has published with colleague Dr. Jonathan Davis (Associate Professor, Supply Chain Management Chair GMSC Department, Marilyn Davies College of Business, University of Houston-Downtown), three formal research papers on Incoterms with two more in consideration, making him the most published Incoterms researcher. He has also published numerous articles, presented papers at multiple international conferences around the world on logistics, trade and compliance including Incoterms. He has served as track chair for multiple conferences as well.
Vogt has a Ph.D. (Logistics), an MBA, and a B.Sc. (Engineering), holds the title of European Engineer (Eur. Ing), is a Chartered Engineer (UK) and has been elected as a Fellow of the Institute of Engineering and Technology (UK). You can reach him at [email protected].
