This is the third article in a four-part series on Incoterms 2020, the universal trade terms used in global sales contracts to prevent misunderstandings between buyers and sellers. Today, we take a closer look at the Group C rules. 

Like all of the 11 Incoterms 2020 rules, the four that make up Group C—cost and freight (CFR), cost insurance freight (CIF), carriage paid to (CPT) and cost insurance paid to (CIP)—are designed to eliminate confusion over the roles and responsibilities of the buyer and seller in sales contracts.  

With the Group C Incoterms, the seller is responsible for arranging shipment and paying all costs up to the destination point. Which Group C terms you use in your export contracts depends on several factors, including:  

• the mode of transport for delivering your goods; and 
• whether insurance is required to protect the buyer from loss or damage to the goods while they’re en route to their final destination.  

“The first step in selecting an Incoterm is to assess your company’s acceptable risk levels, experience with international shipping and acceptable costs,” advises Greg Henderson, an Incoterms trainer with the International Chamber of Commerce (ICC), which drafted Incoterms 2020 in September 2019. 

“If your company couldn’t survive the loss of a shipment, then terms that limit or reduce risk are recommended. Terms, like C terms that transfer risk early, often at the seller’s location in Canada are best,” Henderson says. 

If you’re shipping your products by sea or inland waterway, you can use the cost and freight (CFR) or cost insurance freight (CIF) rules in your export contract. These rules are only applicable to goods being shipped in this manner.  

The exporter’s responsibilities under CFR include: 

• arrange and pay for the carriage of the goods to the agreed destination port; 
• deliver the goods and clear them for export; 
• load them onto the ship that will be transporting them to the destination port; and 
• provide the buyer with the documents they need to obtain the goods from the carrier. 

The exporter is responsible for the costs of carriage to the destination port. The risk of loss or damage to the goods passes to the buyer as soon as the products are onboard the vessel. With CFR, the exporter isn’t responsible for insuring the goods while they’re in transit to the destination port.  

This is a key difference between CFR and another closely related Group C term: Cost insurance and freight (CIF). With this term, the seller has all the same responsibilities as with CFR with one exception: CIF requires the seller to take out marine insurance to protect against the loss, damage, or destruction of the goods being shipped.  

Under CIF, the lowest level of insurance coverage defined in the institute cargo clauses is the default. As the exporter, you can still opt for a higher level of coverage if the buyer agrees to it. It’s important to emphasize that the insurance policy is purchased by the seller, but the beneficiary is the buyer. 

The two remaining Group C rules—carriage paid to (CPT) and carriage and insurance paid to (CIP)—apply to any mode of transport.  

Under CPT, the seller must:  

• clear the goods for export;
• deliver the goods to a carrier or another designated person; and
• make all the arrangements and pay all freight and other costs required to transport the goods to the agreed destination.

Delivery of the goods occurs when the exporter delivers them to the carrier. This is when the risk transfers from the exporter to the buyer. When multiple carriers are involved, the risk of loss or damage to the goods transfers to the buyer when the goods are delivered to the first carrier.  

If the goods are being transferred to an alternative delivery point, the buyer must ensure that this is detailed in the contract of sale. CPT doesn’t require the seller to insure the goods being transported, which has the potential to result in risk for the buyer. 

To mitigate this risk, the buyer could use the CIP rule instead of CPT. It’s similar to CPT, except the seller has to pay to insure the goods until they reach their destination and pay the freight. With this Incoterm, a higher level of insurance coverage compliant with the institute cargo clauses is required and the buyer is the beneficiary. 

Cargo insurance is different from Export Development Canada’s credit insurance. Our insurance covers the risk of non-payment, while cargo insurance covers the losses of the freight. 

Again, the lowest level of insurance coverage is the default. As the exporter, you can still opt for a higher level of coverage if the buyer agrees to it. It’s important to emphasize that the insurance policy is purchased by the seller, but the beneficiary is the buyer. 

Real-life example: A Canadian car parts exporter in Ontario is selling to an American buyer. The contract with the buyer includes the term “CPT Dallas, Texas, USA Incoterms 2020.” The seller hires a Canadian trucking company and arranges for it to take the goods to a cross-docking facility in Chicago. A second trucking company, based in the United States and contracted as well by the seller, is scheduled to receive the goods at the facility and then take them to Dallas.  

While the goods are inside the cross-docking facility, they’re damaged by a water leak and aren’t loaded onto the U.S. trucking company’s vehicle. The buyer isn’t aware of the involvement of the Canadian trucking company, or the cross-docking arrangement, and the sales contract doesn’t mention the transfer in Chicago.  

In this case, it’s the seller’s loss. Under the CPT rule, the seller pays the cost of carriage necessary to bring the goods to the named destination, delivers the goods and transfers the risk to the buyer by handing them over to the carrier contracted by the seller. But in this example, there are multiple carriers involved and the buyer and the seller failed to define the place of delivery in the contract.  

Normally, the risk would pass to the buyer when the seller has delivered the goods to the first carrier (the Canadian trucking company). But CPT Article A4 states that the seller must contract for the carriage of the goods “at the place of delivery to the named place of destination.” Since the first carrier wasn’t responsible for the carriage of the goods to the named destination, delivery would only have occurred when the goods were handed over to the U.S.-based trucking company contracted to take the goods to Dallas. Since delivery hadn’t yet occurred when the goods were damaged by the water leak, the seller is liable to the buyer. 

To avoid costly mistakes, Lora Rigutto Vigliatore, Partnership and Community lead for the Forum for International Trade Training (FITT), recommends “upskilling your staff or hiring a Certified International Trade Professional (CITP) to review all international contracts and ensure Incoterms are applied strategically and cost effectively for both inbound and outbound logistics.”

FITT is the global leader for international trade training and provides courses “to equip professionals with a solid understanding of international commercial terms and how they should be correctly and effectively used in contracts.”

For more information about the Group C rules and the other Incoterms, see  the official Incoterms rule book, or visit EDC’s Export Help Hub. The ICC has also created an Incoterms 2020 app, which gives you easy access to a wealth of practical information on your mobile device.