Q177: We are selling Incoterms DAP, and have been requested to use the buyer’s carrier: what is our exposure?

A177: In an Incoterms DAP contract, the seller is selling the arrival of the contract goods (in good order), at the named place quoted in the contract expression “Delivered At Place [name of place in the buyer’s country] Incoterms 2020”.

This should be compared to the identically-addressed and similar-priced CPT term, expressed “Carriage Paid To [name of place in the buyer’s country] Incoterms 2020”, where the seller is selling the dispatch of the goods, and the underlying documents evidencing this event.

Under DAP then, the seller has the cost and the risk to the destination place, whereas under CPT the seller has the cost only, and the buyer bears the risk of transit to the destination place.

Delivery, that is to say the end of the contract and the moment where the seller perfects their ‘right to be paid’, under DAP happens at the named destination place, but under CPT delivery occurs at the seller’s unnamed place (or place of handover to the carrier) in the country of supply.

The question then is whether there is exposure to the seller in taking a risk on a carrier that they perhaps have no experience of.

For example, under DAP if the goods were damaged in transit, the seller would lose the perfect right to claim delivery, yet this loss of rights arises because of the actions (or omissions) of the buyer’s nominated carrier. Is this a risk the seller wishes to accept?

If not, and the buyer’s carrier must be used, there is merit in changing the term to a CPT sale (or CIP – Carriage and Insurance Paid, if it is a seafreight transaction), preserving the price, but obligating the buyer to take the risk of the performance of their preferred carrier.

The more subtle and important change, however, should be in the payment conditions.

I would never encourage a seller to offer unsecured credit to a foreign buyer. Prepayment is like a hard-boiled egg – you can’t beat it. But, if the seller must offer credit terms (secured preferably) then I would expect to see them in a DAP contract. If the seller only acquires the ‘right to be paid’ on delivery to the named place, then it would be an alignment of sorts if the buyer held on to the payment until delivery was completed.

However, under a CPT arrangement, it would be consistent if the seller was prepaid or had bank-secured payment conditions. Without security of payment, then should something go wrong in transit and the buyer declines to pay as a consequence, CPT would give the seller the right to press for payment, but having the money secured already is better than having the “right”.

Accordingly, it is a reasonable response in this example, that if the buyer requests that the seller arranges the international carriage, but uses the buyer’s carrier to achieve this, that the seller converts the terms to CPT and secures a prepayment.

If credit is the driving factor, i.e., if the buyer cannot or will not renegotiate payment terms, then the seller should really press to keep the matter as originally planned, contracting on DAP terms using their preferred carrier.

To offer unsecured credit to the buyer, to leave the terms as DAP and further to use the buyer’s nominated carrier is a perfect misalignment in the buyer’s favour. This does not mean that the seller cannot capitulate and accept these disadvantages, it means only that they must be aware that they are at a disadvantage. If this position matches the seller’s risk appetite, then all well and good. But it is a high risk.

Using the buyer’s carrier to arrange the international carriage does not obligate the seller to use them to arrange export clearance as well. It may be convenient to do so, but the seller’s obligations under both DAP and CPT (and CIP) to arrange export clearance does not dictate which party they should use to achieve this.

International transport is a complex matter, however errors at Customs are not merely inconveniences but transgressions. Using an unknown service provider to interface with Customs on their behalf only heightens the seller’s risk.

One final point: compliance with SARS at both a customs and VAT level requires that the exporter and vendor have the paperwork on file required under the applicable rules. Certain of these documents may only come to you from the carrier and export clearing agent. Be sure you can obtain the required paperwork from the buyer’s carrier.

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