Letter of Credit Forum

Hello

The intention of the buyer and seller in a ‘C’-prefixed sale is that the seller’s price includes the cost of transport, but at the buyer’s risk of non-arrival. In Incoterms CIP contracts, the intention is that the seller ‘delivers’ i.e. the seller has met their final contractual obligation, when the cargo is handed over to a carrier of the seller’s choice, in the country of origin, freight-prepaid to the final named destination point.

So broadly, the concept with CIP (and CPT) is that risks pass from the seller to the buyer in the country of origin while costs pass in the country of destination.

Accordingly, the first thing to understand with CIP is that the seller has no risks in transit. The seller’s contract ends when they ‘send’ the cargo (that is, when they hand it over to the carrier), regardless of whether the buyer actually receives it. The insurance dealt with under a CIP contract has no benefit to the seller (at least not in the usual sense) – the seller procures it for the buyer.

But if the intention was that, in addition to the costs of transit to the named place, the seller also takes the transit risk then the appropriate Incoterm would begin with a ‘D’-prefix, most probably DDU if we were looking for a straight alternative to CPT.

Although they are identical in respect of your question i.e. the import certificate in both cases is the buyer’s obligation, risk and cost, the impact of failure to obtain the certificate (for example) is starkly different. In a C-prefixed supply, should the certificate not materialise, there is no contractual impact on the seller – but in a DDU transaction, there could be, if the ‘named place’ (the place of final delivery in DDU) is a place beyond the customs event. What I mean is: will the DDU seller be able to get to the final place of delivery if the buyer fails in their customs endeavours?

Usually, seller’s manage this risk by either selling only to buyer’s they believe will not do this to them or – more cautiously – they sell only to a named place which may be reached without import clearance e.g. an airport and not a final address in a city. So CIP named Airport should convert to DDU named airport and not a place beyond this.

BUT: Although commercial terms are not connected to payment terms, your (as the seller) ability to manage your position flows from you finding a connection. In a C-prefixed sale (where the seller wants no risk) the payment terms should be within the range from pre-payment deteriorating to no worse than bank security (provided the bank security is triggered by documents the seller generates in the country of origin) whereas in a D-prefix the range runs from bank security triggered by buyer documents to a (worse-case) pure open account (i.e. unsecured credit). I must again stress that payment terms are not considered under Incoterms – commercial terms in general, Incoterms in particular, deal only with your RIGHT to be paid, not the actual mechanism of payment itself. My caution to any D-prefixed seller (and there is an equal and opposite caution for any C-prefixed buyer) is: what will you do with your RIGHT to be paid if the other party has the cargo and the money and they default? This really is the issue if you change from C- to D-prefixes.

As is often the case, there is a clear cut answer to your question regarding the certificate, but this is perhaps not the question to be asking anyway.

Can you tell me what payment conditions you presently employ and those your buyer has suggested (if suggested) along with the contract name change?

cheers

phill doran

one hill at a time, please