A201: In an Incoterms CIP sale, the Seller is off-risk on handover of the goods to the first Carrier at the point of supply, and the tender of the correct documentation to the Buyer.

The Seller contracts with the Carrier and pays the international carriage to the named place – in this case the Buyer’s address in Malawi.

In roadfreight, the journey from South Africa is via Zimbabwe and Mozambique, and involves several land border crossings.

This is a very low-risk contract for the South African Seller, and correctly structured, risks may even pass from the Seller to the Buyer while the goods are still on the Seller’s premises, without the Seller taking exposure for the movement within their warehouse to get the goods to the carrying vehicle.

As with any C-prefixed Rule, the CIP Seller is only selling documents and not the underlying cargo that the documents appear to represent.

As noted, this is a low-risk approach to selling. Notwithstanding that the Seller controls the costs to a named place, risks pass at the Seller’s place of supply, and provided that the Seller tenders the correct documentation to the Buyer there is little for the Seller to worry about.

In this particular instance, the delivering vehicle was delayed at a border post, and stood idle for several days and at great cost.

If the question is considered on the basis of the CIP Rule alone, then the answer depends on the integrity of the documentation that the Seller provided.

If the Seller provided the documentation called for under the Rule and any additional documents required by the terms and conditions of the contract of sale, then the costs of the delay are the Buyer’s.

Under CIP A9(d) the Seller is only liable for “…the costs of transit that were for the Seller’s account under the contract of carriage…”, whereas under B9(b) the Buyer is liable for “…the costs of transit, unless such costs were for the Seller’s account under the contract of carriage…”

Read together, as the standing time is not part of the original “freight” charge, it defaults to being the Buyer’s cost.

Of course, if the Seller failed to provide the correct documents, and it was that failure which gave rise to the delay and consequential standing charges, then the Seller has the liability for the additional costs, as the charges arise from their omission.

If the Seller has not tendered the correct documents then they have not fulfilled their side of the contract, and not only would they be liable for the costs, but also for all transit risks, as risk would not yet have passed to the Buyer.

This is an excellent example of how quickly a query can be resolved using the Rules, provided that the parties have a well-worded sales contract to support the Rule.

But it is an equally excellent example of just how limited the Rules are too.

What we have covered so far is the Seller’s position; we’ve not addressed the Carrier’s position or that of the Shipper.

In the CIP sale, the Seller’s obligations include, as mentioned, paying the Carrier the international carriage charges (the “freight”) to the named place. In doing so, the Seller becomes the Carrier’s principal, and in that role they become liable to the Carrier for all costs the Carrier may incur in the execution of the transport contract, should no other party accept liability.

Should additional costs arise in transit, then generally the Carrier first claims these from the destination Consignee as a condition of release.

If the Consignee settles with the Carrier, all well and good. However, if the Consignee declines the charges and abandons their interest in the goods, then the Carrier will look to their principal – the Shipper – to settle the charges (and to direct them on the disposal of the cargo).

It is common practice though, in the example of charges arising in transit during long distance road freight, that a road Carrier will claim from the Shipper automatically, before advancing further in the journey.

This is good business practice in that the Carrier has no guarantee that the Consignee will accept the charges, and so they look to the Shipper for settlement, before they incur further cost in the continuation of the transport contract.

What should be clear is that the Seller and Buyer’s positions under the Incoterms Rule will not be considered by the Carrier: the fact that the Seller is off-risk in terms of the sale contract has no bearing on the Shipper’s position in the transport contract.

Commercial terms are irrelevant to Carriers and to carriage contracts.

Where the clarity of Incoterms comes into play is in the resolution of the matter in respect of the relationship between the Seller and Buyer.

For example, if the Seller, having incurred the standing charges as Shipper, believes that the Buyer is liable for these charges (as per A9 and B9 quoted above) then the Seller must press their claim for the reimbursement of these charges privately with the Buyer.

On the other hand, if the Buyer, as Consignee, incurred the charges as a condition of release, yet believed that the Seller should be held to account through the sales contract terms, then that is a private claim between the Buyer and Seller that needs to be resolved.

So, for the question “Selling CIP to Malawi, who pays for delays and standing time incurred at any one of the land borders?” The answer is, the Shipper, unless the Consignee accepts to do so.

As discussed, only after the Shipper or Consignee have settled their obligation with the Carrier may the Incoterms Rule be applied to resolve the matter privately between the Seller and Buyer, if required.

The next 2-day course dealing with Commercial Terms and Incoterms 2020 in August, is fully booked, however a version of this course is also offered online (more information) and bookings are open for the course in Dowerglen, Gauteng on the 15th and 16th of October (course outline).

The next 2-day course dealing with Export Exchange Control and VAT will be held on 16th and 17th of September, also in Dowerglen, Gauteng (course outline).

If you have not already booked, then mail me if you are interested, and note that I also offer in-house workshops.