November 10, 2021

Ask Dennis - November 2021

Q:  You recently advised me to use the Incoterm ‘CIP” for a quote for 3 pallets of dried fruit to Korea. I asked my freight forwarder for that, and she said it was incorrect. She said “it was generally understood” that CIF was the appropriate Incoterm to use. It was suggested that you get your facts straight.  

A:  Ouch, that was painful. As they say, “that is so wrong on so many levels”. I take some umbrage with using a term “generally understood” in international trade. Generally understood by whom? That sounds dangerous to me having seen it cause problems in action so many times, as recently as late October 2021, with the dreaded “FOB”.  Incoterms are not laws and not mandatory but have been designed for specific assignments of responsibility for procedures and payments. No one is making you use them, and you can use them incorrectly, I guess as long as your mistakes are generally understood.

One needs to read the Incoterms carefully and never make assumptions, since what is generally understood means both parties are on the same page and that is difficult without an agreement in writing. In addition, that is why the GRAS or “generally recognized as safe” has no meaning in other countries while used liberally in the U.S. It takes certifications and documentation from an authorized body, such as a Federal or State Government official to allow food products to clear into other countries.

So, let’s break it down and compare the terms so all the readers can understand them. Also feel free to share this with your forwarder; it might help perspective moving ahead. While similar, the two Incoterms carry important differences. We will analyze these from the perspective of mode of transport, marine restricted versus intermodal containerized cargo, obligation of transport, transfer of risk and marine cargo insurance clauses.

Incoterms 2020

Incoterms 2020 have four distinct groups, E (origin), F (per-main carriage), C (main carriage paid) and D (delivered).

Group E – Departure:   EXW – Ex Works 

Group F - Main Carriage Unpaid:   FCA – Free Carrier (named place of delivery), FAS – Free Along Side Ship (named port of shipment), FOB – Free on Board (named port of shipment)

Group C - Main Carriage Paid:   CPT – Carriage Paid To (named place of destination), CIP – Carriage & Insurance Paid (named place of destination), CFR – Cost & Freight (named port of import), CIF – Cost, and Insurance and Freight (named port of import)

Group D – Arrival:   DAP – Delivered at Place (named place of destination), DPU – Delivered at Place Unloaded (named place of destination), DDP – Delivered Duty Paid (named place of destination)

Group-C Incoterms allow the seller to control the cargo and initially pay for freight and handling and sometimes cargo insurance without adding to the transfer of risk and most experienced exporters will often prefer them.

CIF Cost, Insurance & Freight Incoterms 2020 has long been one of the most used Incoterms in international trade. The reasons are simple. It is one of the oldest Incoterms, one of the original rules published by the “ICC” or International Chamber of Commerce in its first publication of the Incoterms in 1936, therefore it is widely known by traders around the world.  And given that about 90% of global trade ships by sea freight, most maritime Incoterms are still usually widely used. Back in 1980 the ICC introduced Incoterm CIP, which similar to CIF but designed to accommodate new methods of intermodal containerized shipping, which was still relatively new at the time. It is also how you are shipping your dried fruit to Korea.   

Mode of Transport

The Incoterms 2020 states that CIF is “marine restricted” and should be used only for inland waterway or ocean freight, whereas CIP can be used with any mode of transport (inland waterway, ocean freight road, railway, or air freight). You can see this in the way the two Incoterms are written: CIF Cost, Insurance & Freight (named port of destination). CIP Carriage & Insurance Paid To (named place of destination). Accordingly, if you use CIF, you are to state the specific port where the goods are going to be shipped, whereas if you use CIP you can state whatever place you want at destination: it can be a seaport (loaded or unloaded from vessel), an airport, a container freight station, depot, warehouse and so on.

This is the definition of “intermodal” or “combined transport” shipments, including containerization. Your shipment is being quoted as part of a consolidation in a 20’ container, which means it is indeed an intermodal shipment. CIF is not recommended for intermodal shipments, but for bulk shipments on a container less vessel, or one that might be combined. CIP is recommended for intermodal shipments as it provides flexibility as to the ultimate destination beyond the port of import if necessary.

Marine Restricted Versus Containerized Cargo

The original Incoterms were not designed with intermodal containers in mind. They did not exist yet. So, the ones most people recognize since they have been around the longest, FOB, FCA and CIF were left to cover bulk transport which is to say not in a container, not by air cargo, truck, or rail. Just sea freight and inland waterway such as barge transport. While not being mandatory, CIF should not be used in case of containerized cargo, whereas that is well possible under CIP. That is the recommendation of the ICC.

Transport Obligations

Another difference between the two terms is with obligation of transport. The difference in the wording of “port” and “place” makes a significant difference in case of transport obligations. In fact, port means that the seller’s transport obligations must be fulfilled up to the port destination. In case of place, it means that the parties can agree to any place at destination where the seller must deliver the goods to.

Therefore, in case of CIF, the seller’s transport obligations end necessarily at the port of destination. With CIP, they can end anywhere at destination, including the buyer’s premises. The recommendations are to be very specific about the named place when using CIP because of the utility, but clearly for food products in an intermodal container, the ICC designed CIP to be used instead of CIF.

Transfer of Risk

With CIF and CIP both being Group-C Incoterms, in both cases the transfer of risk takes place in the seller’s country of origin. The risk shifts from the seller to the buyer when the goods are places on the carrier for shipment. Now, in the case of CIF this is pretty straightforward: being a maritime Incoterm, the carrier must be the ship at the port of origin.

With CIP this becomes a bit more nuanced. Who is the carrier on an intermodal shipment which might take two or more carriers to get to the named place at destination? Using air cargo as an example, one may need to determine who the carrier is, whether it is the truck that picks up the freight, one or more aircraft or even airlines.  To provide clarity on the matter the ICC has specified that the risk shifts from the seller to the buyer when the goods are placed on the first carrier that in this case would be the truck that comes to pick up the cargo at the seller’s facility.

Marine Cargo Insurance

Another important difference between CIF and CIP regards the marine cargo insurance coverage for the goods.  Both these Incoterms refer to the Institute Cargo Clauses, but the minimum insurance coverage required by the two is widely different: CIF requires Institute Cargo Clauses (C): this is the least comprehensive insurance coverage, and essentially covers nothing more than general average. CIP requires Institute Cargo Clauses (A): this is the most comprehensive insurance coverage, as it covers all risks. It does cost more, but with food products it is deemed necessary since they are both valuable and slight more fragile than ball bearings or steel poles.

With CIF, there is an assumption that the goods may not be worth as much since they most often would not be containerized. Since the seller is only obligated to purchase the minimum amount of insurance coverage to transport the shipment to the destination, the buyer should consider arranging additional coverage that protects the shipment from all risks. Otherwise, the buyer may have to bear huge losses if the shipment is damaged or lost through some adverse event that is not covered by the minimal insurance coverage provided by the seller.

In addition to that, the insurance coverage under CIF is in effect until arrival at the port and not after. Other coverage would be required. But with CIP insurance coverage can end wherever it is specified in the policy, which means from warehouse to warehouse, or far beyond just the arrival at the port.

Summary

Indeed, CIF is a frequently used Incoterm, and entrenched in trader’s practices, and will likely continue to be very popular. But it is not recommended for intermodal container shipping; instead, it is more appropriate for bulk freight. Your three pallets of dried fruit would ship by container. They are also being consolidated which means the quote you get is for the container to be unloaded and de-vanned at the container freight station in Korea, also known as “CFS”. This means you cannot quote to the port of import since the container is offloaded and unloaded as part of the freight consolidation price.

However, CIP represents a more modern and flexible alternative. Even with a full container the recommendation is quoting “CIP port of import, loaded on board vessel.” You can name any place for delivery using CIP which is more in line with modern intermodal trade, whereas CIF can only be delivered at the port of import.  While the two Incoterms are similar in nature, as you can see here there are significant differences between. Since CIP is more updated, it should be preferred to CIF in most circumstances. That is not “generally understood” as you put it, these are all facts and as mentioned, cannot be relearned. For more information on the subject, you can check out What's New? Incoterms 2020, Food Export’s recorded webinar, and also Module 6 – “Use International Terms of Sale”.