Common Misinterpretation of C-Terms

C-terms or ‘Main carriage paid by the seller’ are terms frequently used by traders in trade. There are two groups of C-terms, one is intended to be used when the goods are carried by sea; CFR and CIF, the other group can be used for any mode of transport, including sea and multimodal transport; CPT and CIP.

Unlike F-Terms, the place mentioned after the abbreviations under C-terms is an indication of a place at destination instead of place of origin or shipment. For instance, “CIF Port Klang” or “CFR Busan” is an indication that Port Klang and Busan Port are respectively the ports of discharge at destination. It is not to be read as ports of shipment or port of loading. This is the opposite of F-terms where “FOB Port Klang” or “FOB Busan” indicates that Port Klang and Busan Port are respectively the ports of shipment or port of loading.

There are two “critical points” that traders need to understand when applying C-terms in a trade, one is the point of shipment and the other one is the point of destination. C-terms are normally used in the event where contracting and arranging for the main carriage in the country of the seller is not possible for the buyer where it would be much faster and convenient if it is left to the seller to arrange. Therefore, to ensure the goods reached the buyer, the seller has two main obligations to be discharged under C-terms:

1. to make a delivery which is to take place in his country either by placing the goods on board the vessel nominated by him at the port of shipment or by handing over to a carrier nominated by him at any place on land and;

2. to undertake to arrange and pay for the main carriage with the addition of insurance under CIF and CIP up to a named point determined by the buyer in the country of the buyer.

It is for the second reason why the ‘destination’ point is required to be determined by the buyer and to be indicated after the abbreviations. The buyer must first determine a named place for the goods to be discharged in his country. The seller than, contracts and pays for the main carriage on behalf of the buyer in his country up to that named point determined by the buyer.

Secondly, the insurable interest to the goods while in transit under C-terms lies on the buyer. The risks are transferred from the seller to the buyer at the point of delivery in the country of the seller. Therefore, buyer is the party who is responsible to procure for insurance in his country to cover the risks from point of delivery up to point of discharge under CFR and CPT. However, under CIF and CIP, the seller is to procure for the insurance for the benefit of the buyer.

So, under C-terms, seller is responsible to contract and pay for the main carriage similar to those in D-terms and buyer has to bear the risks similar to those in E-term and F-terms.

Other duties and responsibilities of buyer and seller are explained in the LC guidelines & checklists.

Trade terms: Point of delivery in the country of the buyer

As mentioned in the earlier post, there are various methods and ways of making a delivery. Besides making a delivery in the country of the seller, it can also be made in the country of the buyer. Generally speaking, the responsibility and obligation of the seller increased when delivery is to be made in the country of the buyer. The seller is not only obligated to arrange and contract for the carriage but also to ensure safety of the goods while in transit. The points of delivery vary in accordance with the trade terms agreed upon by the contracting parties.

Similar to the delivery that take place in the country of the seller, the delivery in the country of the buyer may take place either at the seaport, airport, country border or at any named place where goods are customarily being loaded and unloaded. When this is done, buyer is said to haven taken the delivery and the obligation of the seller in making a delivery is completed.

The responsibility and obligation of the buyer becoming lesser if delivery is agreed to take place in the country of the buyer. To accommodate this advantage to the buyer, the appropriate term to be incorporated in the sales contract is either DAF, DES, DEQ, DDU or DDP.

Under these terms delivery is made by placing the goods at the buyer’s disposal on the arriving vehicle.

Trade Terms: Points of delivery in the country of the seller

One of the most important aspects of trade terms is point of delivery, that is the moment when the goods are either handed over to a carrier or place on board the collecting vehicle for onwards shipment to the buyer. As of this moment, the seller is said to have completed his obligation with regards to the delivery and the buyer is said to have taken the delivery of the said goods.

Whatever risks the goods may be exposed to or costs incurred from this point onwards are to be borne by the buyer. The trade terms are therefore be the important factor in determining the point of delivery. The point of delivery can either be in the country of the seller or in the country of the buyer. It may take place at the seller’s premises; at the factory, workplace or warehouse. It may also take place at the seaport, airport, country border or at any place where goods are customarily being loaded and unloaded.

When delivery is to be made in the country of the buyer, the goods may be collected at the seaport, airport, country border or at any named place.

Terms such as Ex-work, FCA, FAS, FOB, CFR, CIF, CPT and CIP are terms where the point of delivery is to take place in the country of the seller. There are three different methods of making a delivery by the seller when the delivery is to take place in the country of the seller.

Firstly, by having the goods ready at the buyer’s disposal by placing the goods at the seller’s premises as mentioned above. Under this condition, buyer is therefore responsible to arrange and to contract for the carriage to the final destination. This type of arrangement is represented by Ex-work term.

Secondly, by handing over to the carrier where the forwarding agent will come and collect the goods at the seller’s premises or at any named place. This type of arrangement is represented by terms such as FCA, FAS, CPT and CIP. There are two conditions apply under FCA; if the goods are to be handed over to a carrier at a named place other than the seller’s premises, buyer is responsible to unload the goods. On the other hand, if the handing over of the goods is taking place at the seller’s premises, the seller is responsible to load the goods onto the collecting vehicle. The term FCA requires the buyer to arrange and to contract for the carriage. Whereas the arrangement for transport under CPT and CIP is the obligation of the seller.

Finally, by placing the goods on board the vessel at the port of shipment. The seller must ensure that the goods are actually on board the vessel. This is where the terms FOB, CFR and CIF are used. Under the term FOB, the buyer is the party who is responsible to arrange and to contract for the transport. On the other hand, such obligation is transferred to the seller under the terms CFR and CIF.

INCOTERMS

Once the LC is issued and received by the seller, the next event to take place is the movement of the goods. The seller is liable and responsible to ensure that the goods ordered by the buyer are delivered and received by the buyer at the agreed place and within the agreed time. The delivery process requires engagement of a third party where risks and costs are inherent.

Firstly, transport. Goods can be moved using variety modes of transport such as vessel, truck, barge, airplane and train. Regardless of the modes of transport, the inherent factor here is cost.

Secondly, safety of the goods or cargo. The goods, while waiting to be loaded on the carrying vehicle or while in transit may be exposed to the risks of damage or loss to the goods.

In some cases, the goods are required by the regulations of the exporting or importing country where pre-inspection must be carried out to ensure compliance and conformity. Besides, it is customary that custom clearance must be obtained by both, importer as well as exporter. That means custom duty is to be incurred.

All these duties, obligations and costs may form ground for disputes between buyer and seller of different countries as there bound to be trade practice differences, political policies differences, restriction on foreign currencies and other uncontrollable trade limitations.

Therefore, it is imperative that a uniform understanding should be established to enhance the process of trade between trading parties of different countries. This understanding should be able to be applied internationally regardless of geographical locations. Finally, it should form a rule where it is binding on all parties involved in international trade, particularly buyer and seller. Henceforth, International Commercial Terms or INCOTERM comes into picture.

INCOTERMS expressly spells out clear guidelines on the distributions of risks and costs between buyer and seller. The obligations of each party are also expressly stated as to how the delivery should be made by the seller, who should arrange for transportation, who should bear the costs of insurance, transportation, import and export duties and so on. This rule is specifically applicable to the sales contract between the buyer and the seller. The current INCOTERMS applied worldwide which is published by the International Chamber of Commerce (ICC) is known as INCOTERM 2000.

FOB and Cargo Insurance under LC

Question from Indian trader:

Insurance is a must why? To whom it is necessary? But sometimes the seller may feel that for FOB shipments,their responsibility stops on shipping the goods: This is not so,business should be a continuous process with another trader: If there is any negligence on the part of the buyer.It is prime responsibility of the seller to insure the goods: he can inform this and get the small amount from the buyer.

I don't quite get what you want to say. But I believe that you are saying the seller should take up cargo insurance if there is a negligent occurs on the part of the buyer.

First and foremost, in actual fact, transfer of risk from seller to buyer starts before the goods pass the ship's rail and on board the vessel or before the delivery point. If the buyer fails to arrange the vessel on the date and time as agreed, where seller is unable to load the goods, the risk passes to the buyer.

Secondly, buyer is also to bear the risk from the point of delivery onwards. On both situations above, buyer is said to have an "insurable interest" to the goods. Therefore, it is necessary for the buyer to procure cargo insurance even though it is not obligatory.

The question is, can the seller procure the cargo insurance for the benefit of the buyer on both situations above? Or can the seller take up cargo insurance for the benefit of the buyer under FOB?

Of course yes. The seller can also take up cargo insurance for the benefit of the buyer PROVIDED that the local law in both countries permit it. Both parties may agree on this arrangement and it must be precisely and expressly stated in the sales contract. This also applies to contracting a vessel. This however, does not change the important features of FOB term. It cannot be termed as "FOB+I" or any other weird terms just to signify that seller is to procure the cargo insurance. Under this situation, seller is not under obligation, but merely offering an ADDITIONAL SERVICE to the buyer. The accountability and responsibility to procure cargo insurance under FOB, still lies on the buyer.