A183: This question is a bit like, “I am about to be hit over the head. Should I ask them to use a brick or a rock?”
A C-prefixed contract is the sale of documentation, not the sale of goods. The buyer is contracted to buy documentation evidencing that the seller dispatched the contract goods. Whether the goods arrive or not is not a condition of the contract.
Notwithstanding that the seller engages the carrier(s) and pays the freight charges, the buyer takes the risk of the carriers’ performance. The seller has the cost of transit, the buyer has the risk of transit.
Given this final point, asking the seller – who has no cargo risk – to arrange insurance cover for the buyer, is not necessarily helpful to the buyer’s cause.
The crucial difference between CIF and CIP is in determining the moment when delivery takes place, that is, identifying when and where risks pass from the seller to the buyer. Under CIF the documents must evidence that the goods were loaded on the vessel. Under CIP, the documents need only evidence that the transit began. This could be at the seller’s point of supply (the seller’s works), meaning that the CIP buyer is at risk for a longer period, beginning at the earliest inland point in the supply chain, whereas the CIF buyer is ‘only’ at risk from the loading port.
As a small upside note however that the insurance cover the seller procures for the buyer under CIP is substantially more inclusive than the minimum given under CIF. But the default basis of valuation (cost plus 10%) is insubstantial under both terms.
As best possible:
1. Don’t allow the seller to control the supply chain. Instead, buy under F-prefixed terms. However, if you cannot, then –
2. Procure under D-prefixed terms, making the seller contractually responsible to deliver the contract goods to your care. However, if you cannot, then –
3. Buy on a C-prefix but take out your own insurance cover, that is, buy excluding insurance. However, if you cannot, then –
4. Tell the seller how you would like your risks insured. Specify the values, the cover, the excess and even the insurers to be used. Do not let the insurance cover default to the minimum levels. However, if you cannot, then –
5. Buy CIF rather than CIP as it delays the moment when risks pass to you, but remember that you are still only guaranteed to receive documents, not goods. But –
6. While you may be able to describe your contract at an Incoterms Rules contract under CIP, I doubt if you (or the seller) would achieve the Incoterms Rule CIF. Opting for CIF then would mean working outside of the Incoterms Rules. It is for you to decide if this would expose you or not, and if it does then how best to manage that risk. Then –
7. Try to negotiate unsecured credit. In the event of a disaster you might find yourself contractually obligated to make payment, but you might also be in the practical position to use payment as leverage. Defaulting (even if only temporarily) in order to put pressure on the other party isn’t a ‘nice’ way to conduct business, but business is not the coming together of benign forces for the greater good of humankind and you are on the payroll to protect your shareholders, not the seller’s. However, –
8. If you ultimately find you are left buying CIF or CIP, having made a pre-payment or payment under an L/C, and if you find that you have no influence over the insurance cover or arrangements, pick the rock as a brick has sharper edges.
Next Incoterms Course 18th April – mail me: [email protected]