Incoterms_® and Commercial Contracts

Preliminary remark: The graphic representation of the CPT rule suggests that the seller is to hand over the goods to its carrier at the seller’s premises for transportation to the buyer. Note however that the Guidance Notes to the CPT Incoterms® 2010 rule clearly stipulate that ‘Carriage Paid To’ means that the seller may also deliver the goods at another named place to the carrier or another person nominated by the seller. This ‘ship from’ place may even be situated outside the seller’s country.

The CPT rule has two critical points, because risk and the costs of freight are transferred at different places. The parties are well advised to identify as precisely as possible in the contract both the place of delivery, where the risk passes to the buyer (‘ship from’), and the named place of destination to which the seller must contract for the carriage (‘ship to’). That named place of destination is not referred to in the graphic presentation above and may be the buyer’s premises or any other place, even outside the buyer’s country.

How are goods handed over to the carrier?

‘Carriage Paid To’ means that the seller must hand over the goods to the carrier at the agreed place of delivery (if any such place has been agreed upon by the parties) and contract for carriage to the named place of destination. The CPT seller and the carrier contracted by the seller should agree on the place of delivery of the goods.

Delivery happens when the goods have been passed into the custody of the carrier as evidenced by a transport document to the named place of destination, executed by the seller’s carrier. Depending on the mode of transportation, the transport contract, the nature of the goods, the infrastructure available etc., the handing over to the carrier may require loading the means of transportation and/or different specific actions to secure the cargo.

Unless the manner in which the goods were delivered to the carrier precludes this, when taking delivery, the carrier will verify whether the apparent condition of the goods and/or their packaging allows for a safe journey. It may verify the apparent nature, quantity, dimensions and weight of the goods.

Unless the seller and buyer have agreed on a specific point of departure (‘ship from’) where the goods are to be delivered, the seller may choose the point of delivery (pickup) of the goods at any convenient point that best suits its purpose.

The carriage contracted for should cover the entire transport under a single contract, from the selected point of pickup all the way until the goods are made available to the buyer at the named place of destination. However, the carrier (which may be a freight forwarder) contracted by the seller may subcontract parts of its obligation to other (actual) carriers (road – air – sea – rail). If the parties did not agree on a specific point of delivery, the default position is that risk passes to the buyer when the goods have been delivered to the first carrier under that ‘principal’ contract of carriage to the named place. This point would be entirely of the seller’s choosing and over which the buyer has no control.¹ Should the parties wish the risk to pass at a later stage (e.g., at an ocean port or airport), they need to specify this in their contract of sale.

When and how are goods made available to the consignee?

Under the CPT Incoterms® 2010 rule the seller must contract for carriage to the named place of destination. That place may be the buyer’s address or any other place (port, terminal, …). The parties are well advised to identify as precisely as possible in the sales contract the point within that agreed place of destination where the carrier is to present the goods to the buyer. Whenever the buyer is entitled to determine the time for dispatching the goods and/or the named place of destination, or the point of receiving the goods within that place, it must give the seller sufficient notice thereof. If a specific point at the place of destination is not agreed or is not determined by practice, the seller may select the point at the named place of destination that best suit its purpose and instruct its carrier accordingly.

The seller must notify the buyer that the goods have been delivered to the carrier (name of the carrier, date of departure, mode of transport,) and must give the buyer any notice needed in order to allow the buyer to take measures that are normally necessary receive to the goods.

At the named place of destination, the buyer must receive the goods from the carrier. Depending on the mode of transportation, the transport contract, the nature of the goods, the infrastructure available etc., this reception from the carrier may require the buyer to discharge the means of transportation. The CPT Incoterms® rule allocates to the seller only such costs of discharging that are part of the contract of carriage and thus included in the price of transport.² The buyer must pay all other unloading costs. Regardless of whether discharging is part of the contract of carriage or not, the risk of unloading will be for the buyer.

Generally speaking, it is reasonable to expect that containerized goods should be discharged from the ocean vessel at the port of discharge and be delivered to the container yard depending on the contract of carriage. However, bulk goods may well be delivered ‘free out’, i.e. presented for discharge while still in the cargo holds, with discharging to be paid for and handled by the buyer. Breakbulk goods may be presented ‘Hook’,³ with unstrapping to be paid for and handled by the buyer. If the named place is the buyer’s address, the means of transportation will most often have to be unloaded by the buyer. For full container load shipments, the parties are well advised to agree in advance who has to clean and return the container to the carrier.

Upon receipt of the goods from the carrier at destination, the buyer (consignee) will verify the nature, quantity and weight of the goods as well as their condition and packaging, and make any appropriate reservations when signing the transport document for receipt of the goods. Such verification does not equal a full conformity assessment. In case of redirection or redispatch, such assessment may be deferred until after the goods have arrived at the final destination.⁴

If the buyer (consignee) refuses to take the goods from the carrier, it would be in breach of Articles B4 and B8 of the CPT Incoterms® 2010 rule and the carrier should contact the seller (shipper) for further instructions. Such refusal may result in consequences such as the risk and costs passing to the buyer under the contract of sale and:

1. the carrier claiming for the charges of maintaining the goods and for the compensation of the damages caused by the delay;
2. a reduction of the carrier’s responsibility of the care of the goods;
3. a change or even preclusion of the carrier’s obligation of performance;
4. the conferral of remedies for the carrier such as deposing of goods and other remedies.

Who shall pay the price for transport?

The carrier acts on the basis of a contract of carriage entered into with the CPT seller. Therefore, it is for the seller (usually also the consignor or shipper) to pay the price for transport to the named place of destination.

Together with the claim against the CPT seller being the contractual shipper, the carrier may, subject to its precise legal quality and the law applicable to the contract of carriage, have a lien and right of retention for the price of transport and additional charges due against the consignee (CPT buyer).

What additional costs can be added to the price for transport?

Upon agreeing on a price of transportation, the CPT seller and the carrier are well advised to stipulate clearly in the contract of carriage which transport costs (loading, stuffing, trimming, strapping, dunnaging, discharging, security warnings, port duties, documents,…) are included in that transport price and which are not.

Costs that are caused by circumstances beyond the reasonable control of the carrier and contractual penalties (e.g. demurrage, detention, waiting hours, …) will not be included in that (pre)agreed price of transport.

The main rule under CPT is that the seller must contract on ‘usual terms’ at its own expense for the carriage of the goods to the named place of destination. What ‘usual terms’ are may vary but it is currently well established that only such additional costs (‘surcharges’) that are unforeseen, such as those arising from stranding, collision, strikes, governmental commands, or bad weather conditions are not included. These are at the expense of the CPT buyer.⁵ Outside of such clear cases, it is sometimes difficult to verify which costs are in accordance with usual transport terms.

It can be generally stated that the price of transport (freight prepaid by the seller) should include all ordinary transport costs up to the destination. This includes the costs of handling, storage, and transshipment, as well any charges made by port authorities during the transportation. The seller is obliged to contract for carriage by a usual route in a means of transportation of the type normally used for the type of goods sold. As much as it is evident that this means of transportation must be fit to carry the goods to the destination safely, the seller must contract with a carrier who is capable of anticipating ordinary cost items during the transportation and including them in the prepaid freight. Currency and bunkering adjustments valid at the moment of departure⁶ are to be included in the freight and are at the expense of the CPT seller.

Parties are well advised to specify in the contract of sale what specific additional costs will be borne by the seller and what costs by the buyer. The CPT seller should negotiate with its carrier accordingly to avoid dispute.

Buyers should be wary of using the C family of rules. They are complex and should be used only where the buyer has a full understanding of them.

Is there a variable part to the price for transport (i.e. ‘adjustment factors’)?

Upon agreeing on a price of transportation, the CPT seller and the carrier are well advised to stipulate whether any price adjustment is permitted.

The contract of carriage may sometimes provide for a retroactive adjustment to the ordinary freight payable. These adjustments come in many different forms, such as the Bunker Adjustment Factor (BAF),⁷ the Currency Adjustment Factor (CAF),⁸ as well as other charges such as International Ship and Port Security (ISPS),⁹ war/pirate-risk, congestion, etc. Such adjustments will not be included in the price originally agreed for the transportation but will typically be calculated at the time the goods are handed to the carrier. All such transport price adjustments are to be paid by the CPT seller.

When is the price for transport payable?

The CPT seller and the carrier must agree on the payment of freight in a manner so that the buyer can immediately receive the goods on arrival without having to pay any costs that were included in the contract of carriage.

Regardless of what the transport contract provides with respect to the timing of the payment of freight, the CPT seller always has an obligation to the buyer to pay the transport price and any of the adjustments added at the time the goods are handed to the carrier, as discussed in question 5.

If the price for the transportation agreed between the seller and the carrier includes unloading or further handling after unloading, those costs must also be paid by the seller. The contract of carriage may provide for these or other additional costs to become payable upon or after arrival of the goods as agreed with the carrier.

How are the goods to be packaged?

Unless the seller and buyer agree otherwise, the goods must be packaged in a manner ‘appropriate for their transport’. ‘Appropriate for their transport’ is not equal to ‘reasonable’ or ‘usual’ but refers to a fitness for the purpose of transportation. This comprises qualities such as ‘apt’, ‘becoming’, ‘befitting’, ‘belonging’, ‘right’, ‘suitable’, and to this purpose, verifiable by the carrier.

As the CPT seller knows the destination of the goods and selects the transportation mode, it is supposed to choose a packaging not only ‘appropriate’ for the means of transportation used to collect the goods at its premises (most commonly road transportation), but for the entire transport route.

Unless the goods are handed over to the carrier in a container or otherwise not verifiable by the carrier, the party best placed to examine whether packaging is appropriate for transport of the goods is the carrier. Whether the carrier is obliged to verify the packaging of the goods depends on the contractual obligations of the carrier under the contract of carriage and the applicable law.

The indication on the transport document ‘unpacked’ does not automatically mean that the goods have not been ‘appropriately’ packed for their transport. It may be ‘usual for the particular trade to transport the type of goods sold unpackaged’ (some agricultural goods, mineral products, breakbulk, …).

Is the seller or the buyer responsible for customs clearance?

When selling goods leaving for a destination outside of the customs territory, it is up to the seller to carry out all customs formalities necessary for the export of the goods from the place of delivery (‘ship from place’)¹⁰ at its own risk and expense. This includes any export license or other official authorization that may be required.

Transit clearances after departure from the place of shipment that are not included in the contract of carriage are to be executed at the buyer’s risk and expense. The buyer will also have to carry out customs clearance for the import of the goods at the named destination.

The parties must provide assistance to each other in obtaining any documents and information, including security-related information, needed for the export, transport and import of the goods.

As the place of receipt by the carrier (seller’s premises, terminal) in a CPT sale may well be situated within the country of export, the seller should agree with the carrier on obligations under the contract of carriage to provide it with all the information regarding the export of the goods it may need for, e.g., taxation or reporting purposes.

For customs valuation purposes, the seller is advised to instruct the carrier to split up the price of transportation into ‘inland’ and ‘international’ transport costs.

To avoid inconsistency, the seller should agree on terms and conditions in the contract of carriage with the carrier in line with the assignment of obligations of the seller and the buyer regarding customs clearance under the CPT Incoterms® rule.

Who is responsible for stowage and cargo securing?

The Incoterms® 2010 rules do not deal with the parties’ obligations for stowage and cargo securing and therefore, whenever relevant, the parties are advised to deal with this in the sale contract.

Whether the obligation of the CPT seller to hand over the goods to its carrier requires the goods to be loaded, and whether this ‘loading’ includes stowage and cargo securing, will depend on the transport contract.

When the goods are to be delivered to the carrier at the seller’s premises, the seller will usually have to stow the goods (in a container, on a truck) for the loading process to be accomplished.

What sort of transport document should be issued by the carrier?

The CPT Incoterms® 2010 rule stipulates that the seller must provide the buyer, at its own expense, with the usual transport document[s] for transport contracted to the named place of destination. This transport document must cover the contract goods and be dated within the period agreed for shipment. If agreed or customary, the document must also enable the buyer to claim the goods from the carrier at the named place of destination and enable the buyer to sell the goods in transit by the transfer of the document to a subsequent buyer or by notification to the carrier. When such a transport document is issued in negotiable form and in several originals, a full set of originals must be presented to the buyer.

The carriage contracted by the CPT seller should cover the entire transport under a single contract, from the selected point of pickup all the way until the goods are presented to the buyer at the agreed place of destination. However, the carrier (which may be a freight forwarder) contracted by the seller may subcontract parts of its obligation to other (actual) carriers (road – air – sea – rail). If this is the case, several transport documents may be issued during the carriage: one from the place of delivery to the named place of destination by a freight forwarder¹¹ and several subsequent by each actual carrier contracted by the freight forwarder. These documents are not given by the forwarder to either the seller or the buyer as they evidence the forwarder’s arrangements only.

Most international transport conventions require the contracted carrier to deliver a specific transport document or cargo receipt, such as an Air Waybill (AWB), Bill of Lading (B/L), Road Consignment Note (CMR) to the consignor/shipper in respect of cargo received for carriage. That transport document serves both as proof that goods have been taken into the custody of the carrier at the place of delivery for carriage to the named place of destination, and as the place to note any reservations about the goods.¹² This transport document might be used in a way that only the holder of the transport document is entitled to claim the goods (such as with a negotiable Bill of Lading).

It is common that upon departure the (first) carrier issues a transport document of the customary kind. Specifically, the document should record whether the goods have been loaded and secured by the seller or the carrier. Moreover, the document should identify by name the party that handed over the goods to the carrier and contracted for carriage (the CPT seller) and the consignee (which may be the next actual carrier in the chain or the CPT buyer). The transport document should record the apparent condition of the goods at the point where they are received by the (first) carrier. If the goods are received in one or more sealed transport units such as containers, it is sufficient that the carrier confirms the visible condition of the transport unit or units. The document should be visibly and unequivocally dated and signed.

Unless obviously unnecessary, the document should include a clear undertaking to make the goods available to the consignee, subject to presentation of one original in the case of a negotiable transport document.

If the seller asks the carrier to arrange for customs documents (invoices, packing lists, certificates of origin,…) the carrier is not obliged to do so, unless the carrier is a freight forwarder having undertaken to carry out such tasks. Whenever the carrier accepts this request, particular attention should be paid to these documents which are very much formalized, in particular to the mode of transport, the goods, the applicable law and regulations and the status of the transport buyer and the carrier.

Note: In a CPT sale the seller makes the contract of carriage to the named destination but the goods are already delivered to the buyer when they are handed to the carrier at departure. Any damage to the goods during transit will be at the buyer’s risk. For this reason, the buyer has a strong and legitimate interest in ensuring that carriage is arranged in a manner that gives the buyer a direct line of communication to a single carrier upon which it can claim and receive compensation for any loss or damage that occurs during transit.

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