Cefor – Marine Insurance Education, Copenhagen 22-23 April 2014 Morten Schou Kierulff

KROMANN REUMERT CVR.NR. 62606711 REG.ADR.: SUNDKROGSGADE 5 DK-2100 KØBENHAVN Ø

Cefor – Marine Insurance Education, Copenhagen 22-23 April 2014

Morten Schou Kierulff

Introduction – delivery terms / the passing of risk

Applicable domestic law (Sale of Goods Act / CISG)

Incoterms

Right / obligation to insure

Choice of delivery terms and insurance

PROGRAMME

In connection with sale and purchase of goods where the goods are to be sent from the seller to the buyer it is important (not least to the insurer) to clarify who bears the risk of the goods during transport

The one who bears the risk must bear the loss suffered if the goods are lost or damaged during the transport and this is due to an accidental/fortuitous incident

If the goods are lost or damaged during the transport under circumstances which are coverable under a cargo insurance, then the party who bears the risk of the goods at the time when the loss or damage occurred is entitled to the insurance indemnity

INTRODUCTION

When does the risk pass from the seller to the buyer?

Applicable domestic law (in Denmark the Sale of Goods Act / CISG)

Incoterms

Remember! Incoterms only apply if agreed between the parties

INTRODUCTION

In Denmark, the Sale of Goods Act will apply (unless the parties have agreed otherwise) to:

Sale and purchase of goods in Denmark

Sale of goods from Denmark to countries that are not parties to CISG

Other sale and purchase situation where the parties have agreed that Danish law shall apply (and CISG is not relevant)

DOMESTIC LAW – DANISH SALE OF GOODS ACT

When does the risk pass from the seller to the buyer?

If there is no reference to Incoterms (or any other agreement between the parties about when the risk passes from the seller to the buyer), then the seller bears the risk of accidental loss or damage to the goods until delivery has taken place

Delivery takes place at the seller’s place of business (when the buyer collects the goods)

If the goods are to be sent by the seller to the buyer, delivery takes place when the goods are handed over to the first carrier (or pass the ship’s railing)


The Sale of Goods Act also contains provisions on when the risk passes if the parties have used certain delivery clauses:

Free onboard (FOB) (named port of shipment): Risk passes when the goods pass the ship’s railing

Freight free (cost and freight, C&F) (named destination): Risk passes when the goods are handed over to the first carrier or when the goods pass the ship’s railing

CIF (cost, insurance, freight) (named destination): Risk passes when the goods pass the ship’s railing

Delivered / free (franco) (named destination): Risk passes when the goods arrive at the named destination


CISG (Convention on Contracts for the International Sale of Goods) is part of Danish law

CISG will apply (unless the parties have agreed otherwise) when the sale and purchase is between parties that are domiciled in countries that have adopted CISG

The rules in CISG re. when the risk passes from the seller to the buyer are largely the same as the rules in the Sale of Goods Act

DOMESTIC LAW – CISG

A set of internationally acknowledged and standardised trade clauses

Published by the International Chamber of Commerce (ICC)

Incoterms 2010 replaced Incoterms 2000 as per 1 January 2011

Incoterms regulates a number of issues between the seller and the buyer relating to the sending of the goods, including when the risk of the goods pass from the seller to the buyer

INCOTERMS – BACKGROUND

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The objective is a uniform interpretation of sales and delivery clauses regardless of choice of law (i.e. to avoid interpretation doubts between countries)

When an Incoterms clause has been agreed then the question of when the risk passes from the seller to the buyer is regulated by the Incoterms clause instead of the domestic law that would otherwise have applied (in Denmark the Sale of Goods Act / CISG)

Remember! Not all issues relating to the sale and purchase are regulated by the Incoterms clause – certain issues will still be regulated by the applicable domestic law (in Denmark the Sale of Goods Act / CISG)

INCOTERMS – BACKGROUND

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Incoterms regulates certain rights and duties of the buyer and the seller in connection with transport in dispatch purchases:

When does the risk pass from seller to buyer?

When is delivery made?

Who arranges transport and insurance?

Who arranges for export / import permits?

Who pays certain costs?

WHAT IS REGULATED BY INCOTERMS?

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Incoterms do not regulate questions relating to

Price

Payment (when/how/against security/against documents)

Transfer of title

Demands in relation to means or method of transportation

Force majeure

Breach / bankruptcy

Rights and duties towards third parties

WHAT IS NOT REGULATED BY INCOTERMS

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In order for Incoterms to apply this must be agreed between the parties

This is a question of contract law / law of agreements and this varies from country to country

Therefore (also for this reason) it is important that the parties agree on jurisdiction and choice of law

HOW ARE INCOTERMS AGREED?

The choice of Incoterms clause should be stated in the sale and purchase agreement

Question! Is it enough to refer to an Incoterms clause in the general terms and conditions of either the seller or the buyer?

Is it enough to refer to an Incoterms clause in an order confirmation?


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An Incoterms clause only works if a place or port is designated (preferably as precisely as possible so there is no doubt)

It should also be stated that reference is made to Incoterms 2010

”EXW Copenhagen, Incoterms 2010”

”FOB Rotterdam, Incoterms 2010”

An Incoterms clause should not be used for means of transport that the clause is not designed for

“FOB Kastrup Airport”


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INCOTERMS - OVERVIEW

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There are 11 clauses, divided into 4 groups

E-clause

F-clauses

C-clauses

D-clauses

Some clauses can only be used for transport by sea whereas others can be used for any means of transport

Group EPlace wheretransport begins

EXW Ex Works (...named place)

Group FMain transport not paid

FCAFAS

FOB

Free Carrier (...named place)Free Alongside Ship (...designated port of shipment)

Free On Board (...designated port of shipment)

Group CMain transportpaid

CFR

CIF

CPT

CIP

Cost and Freight (..designated arrival port)

Cost, Insurance and Freight (...designated arrival port)

Carriage Paid To (...designated destination)

Carriage and Insurance Paid to (....designated destination)

Group DDestination

DAP

DAT

DDP

Delivered At Place (…designated arrival port or destination)Delivered at Terminal (…designated arrival port)

Delivered Duty Paid (...designated destination)

INCOTERMS - OVERVIEW

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FCA Free Carrier

(designate place of delivery)

FAS Free Alongside Ship (marine clause)

(designate port of shipment)

FOB Free on Board (marine clause)

(designate port of shipment)

Shipping agreement

Buyer's duty (seller has no duty unless buyer so requests or customary)

Costs to be paid by buyer.

As FCA As FCA

Insurance Neither seller's, nor buyer's duty (but seller must, at request, furnish information to be used by buyer in taking out insurance)

As FCA As FCA

Delivery Seller must deliver to the carrier designated by buyer (loaded)

Seller must deliver alongside ship in port of shipment

Seller must deliver on board ship in arrival port

Transfer of risk

Seller's risk until delivery

As FCA As FCA

Allocation of costs

Seller pays until delivery

As FCA As FCA

INCOTERMS - OVERVIEW (F-CLAUSES)

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CFR Cost & Freight (marine clause)

(designate arrival port)

CIF Cost, Insurance & Freight (marine clause)

(designate arrival port)

CPT Carriage Paid To

(designate destination)

CIP Carriage and Insurance Paid To


Shipping agreement

Seller's duty As CFR As CFR As CFR


Seller must take out insurance at minimum terms to cover buyer's risk

As CFR As CIF

Delivery Seller must deliver on board ship in port of shipment

As CFR Seller must deliver to the first carrier

As CPT

Transfer of risk


As CFR As CFR As CFR

Allocation of costs

Seller pays until arrival port

Seller pays until arrival port (including insurance)

Seller pays until destination

Seller pays until destination (including insurance)

INCOTERMS - OVERVIEW (C-CLAUSES)

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DAP Delivered at Place


DAT Delivered at Terminal

(designate terminal in port or place of arrival)

DDP Delivered Duty Paid


Shipping agreement

Seller's duty (but only until destination)

As DAP (but only until terminal)

As DAP


As DAP As DAP

Delivery Seller must deliver at destination (not unloaded from vehicle)

Seller must deliver at terminal (unloaded from vehicle)

As DAP

Transfer of risk


As DAP As DAP

Allocation of costs

Seller pays until destination (including costs for customs, duties, export fees)

As DAP (but including costs for unloading)

As DAP (but including import costs)

INCOTERMS - OVERVIEW (D-CLAUSES)

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Only the CIF and CIP clauses oblige the seller to take out cargo insurance

However, the seller is always obliged to provide the buyer with necessary information so that the buyer can take out insurance himself

OBLIGATION TO INSURE

Under the CIF and CIP clauses the seller is obliged to take out a cargo insurance which covers the buyer’s risk during transport (in CIF-sales, however only for the sea-transport)

The requirements for such insurance are described in Incoterms 2010 in detail and include:

Insurance on minimum terms – usually ICC (c) / BDB (but the buyer can demand that the seller takes out additional insurance coverage if the buyer will pay for it (all risk / war / strike))

Insurance in same currency as the sale- and purchase agreement and minimum 110 % of invoice value

In CIF-sales coverage only from port of shipment to port of delivery (no post-carriage cover)


…continued:

In CIP-sales coverage for the entire period from the goods are handed over to the first carrier until the last carrier has delivered the goods to the buyer at the named place of delivery

The insurance is taken out by the seller but the buyer is the insured party (third-party insurance). The buyer can demand that an insurance certificate is issued and handed over to the buyer at the same time as the goods are sent or when the purchase price is paid


If the sale is not on CIP or CIF-terms then the party who bears the risk of the goods during transport has the insurable interest (forsikringsrådigheden) and therefore also the option to insure his risk

Running insurance contracts (general / pauschal policies) usually stipulate that the insurance covers shipments where the policy holder has the insurable interest

When the seller or the buyer does not have a running insurance contract then it should be carefully considered who bears the risk of the goods during the transport, including pre-carriage and post-carriage

What about the pre-carriage in a FOB or CFR-sale?

What about the post-carriage in a CIF-sale?

RIGHT TO INSURE

The means of transport

Delivery clauses which are meant for sea transport (FAS, FOB, CFR and CIF) should not be used when other means of transport are included in the intended transport

If more than one sea transport is included then the place of delivery will normally be the first ship (regardless of whether this is a feeder ship)

What happens if there are no sea transports included but FAS, FOB, CFR and CIF has been agreed anyway?

CHOICE OF DELIVERY CLAUSE AND INSURANCE

The designated place or terminal

The parties should be careful in the description of the place or the terminal which is stated after the delivery clause

This is particularly important when there are several transport legs


Proof of where the damage has occurred

When the parties have used a delivery clause where delivery and passing of risk happens during the transport from the seller to the buyer (combined / successive transport) it can be difficult to prove where damage has occurred (and therefore who bears the risk) if the damage is not found until the goods arrive at the final destination

In such situations it is important that each carrier signs separate receipt for the goods so he can comment on any visible damage


…continued

Often it will be advisable for the seller in such combined / successive transports to simply choose another delivery clause where delivery and passing of risk happens when the goods are handed over to the first carrier (FCA, CPT or CIP)

Alternatively the seller can simply choose DAT, DAP or DDP where the seller then has the risk during the entire transport

In container transport where the seller has loaded and sealed the container the delivery clause should be chosen so delivery and passing of risk happens no later than the time when the goods are stuffed in the container


Economic risks

When the parties have used a delivery clause where delivery and passing of risk happens during the transport from the seller to the buyer this can put the seller in a difficult position if damage is found at that time

The buyer can then normally cancel the agreement or demand a discount or other compensation as a condition to accept the goods


…continued

On the other hand, if the goods are sold on credit then it can be an advantage for the seller to have the insurable interest because then the seller can ensure that proper insurance is taken out with a proper insurance company

If the goods are sold on credit and the buyer has not taken out insurance then the buyer will often not have any incentive to pay the purchase price even though he is legally obliged to


Insurance

It may be an advantage for a party to choose a delivery clause which means that he has the insurable interest himself. That allows this party to ensure that the goods are insured on proper terms and with a proper insurance company

The buyer should be particularly aware of the insurance in situations where the buyer has the risk but not the insurable interest (CIF or CIP). In this situation the seller chooses the insurance but in the buyer’s interest.

Here it might be an advantage to agree in the sale and purchase agreement any requirements for the insurance and/or the company (note that some countries have restrictive legislation for this)


Transport agreement

If a party is able to arrange and contract the transport himself and thereby ensure proper transport or discount it might be an advantage to choose a delivery clause whereby such party has to arrange the transport

This could also reduce the risk of damage

If a seller has sold on CIF-terms then (to save costs) the seller might choose to contract the transport as cheaply as possible which could increase the risk of damage or other problems


QUESTIONS?

Documents

Cefor – Marine Insurance Education, Copenhagen 22-23 April 2014 Morten Schou Kierulff