To regulate both domestic and cross border trade, the terms and conditions to determine the risk and liabilities are crucial for smooth transaction and dispute settlements. The interpretation of many terminologies has different meanings in different languages and cultures. The International Chamber of Commerce (ICC) came up with solution to a common understanding on risk and liabilities.
The international commercial terms (Incoterms®) define the risks and responsibilities of both shipper and consignee in all shipments. ICC first created Incotermsin 1936 to facilitate and promote international trade and commerce. Since then, the ICC has been updating these terms. The latest updated incoterm announced in 2020. These terms explain aspects and obligations of international commerce in simple, clear terms so that there is no miscommunication between sellers and buyers when they trade in goods on the international level.
The terms spell out who will pay the costs of freighting and insuring the goods, where and when the goods are to be delivered, what the payment is for the goods, and who assumes the risk of loss or damage of the goods once they have been delivered.
The purpose of the Incoterms is to leave no room for trade misunderstandings, but the terms are not, in themselves, binding contracts. Sellers and buyers should have proper legal contracts in place for their transactions and they should make sure that they follow the governing laws of the countries in which or through which they are trading. The sellers and buyers can stipulate in their trade contracts any of the changes that they want to make to the Incoterms®.
There are 11 common Incoterms to use for your company and choosing which to implement is a strategic decision that can expose or shelter your company from risk and cost. A carrier is any person or company who undertakes the carriage of goods, such as a shipping line, airline, trucking company, railway or freight forwarder.
At present the term Carriage and Insurance Paid To (CIF) and Carriage Paid To (CPT) are widely used and international transaction gradually accepting CPT instead of CIF. While CIF and CPT may look similar, they are incredibly different. CIF is only viable of sea and inland waterway shipments and requires the seller to deliver the insured cargo to the port of destination. Under CPT, the seller does not need to purchase insurance, and can deliver to any agreed point, and is not bound to shipping via boat.
CPT denotes that the seller incurs the risks and costs associated with delivering goods to a carrier to an agreed-upon destination. With multiple carriers, the risks and costs transfer to the buyer upon delivery to the first carrier.
In Carriage and Insurance Paid To (CIP), the seller assumes all risk until the goods are delivered to the first carrier at the place of shipment-not the place of destination. Once the goods are delivered to the first carrier, the buyer is responsible for all risks.However, with CIP, the seller is responsible for the cost of carriage as well as all-risk insurance coverage until the freight reaches the named place of destination.
CIP includes insurance, while CPT does not. CIP functions the same as CPT, in that the seller is responsible for all the expenses and risks in delivering goods to a carrier, but with CIP, insurance is added to insure the goods.As per Incoterms, CPT means Carriage Paid to (named destination mentioned). CIP means, carriage and insurance paid (up to the destination mentioned).One of the main differences between CIF and CPT is that CIF is meant for movement of goods by Sea and Inland waterways only whereas CPT may be used for all modes of transport.
Under CIF terms, the seller is responsible for arranging Insurance on movement of goods covering minimum clause. However, under CPT terms keeps silent about insurance hence, the buyer or seller may arrange Insurance as per the mutual understanding under contract of carriage in Sale contract. Under CIF terms, insurance covering all-risks may be arranged by paying additional premium as per the agreement between buyer and seller.
CPT is widely used to move goods from Warehouse to Warehouse, movement of LCL cargo, shipments under break bulk etc. especially to Dry ports and intermediary ports. CPT modes are used widely used for the shipments by air also. CIF delivery rules are widely used for the movement of goods by sea with destination to a port in buyers side.
Under CIF, the seller transfers the risks involved in movement of goods when goods gone onboard the vessel. Under CPT terms, the delivery takes place when goods are handed over to the carrier contracted by seller, where the risks are transferred from seller to buyer.
ICC revised Incoterms 2020 to set out the important fundamentals of the Incoterms rules i. e. the basic roles and responsibilities of seller and buyer, delivery, risk, and the relationship between the Incoterms rules and the contracts surrounding a typical contract of sale for export/import and, where appropriate, for domestic sales. The Incoterms 2020 is designed to explain how best to choose the right Incoterms rule for the sale contract.
The writer is a Non-Government Adviser, Bangladesh Competition Commission
