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

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

2. Programme • 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

3. Introduction • 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

4. 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

5. Domestic law – Danish Sale of goods act • 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)

6. 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)

7. Domestic law – Danish Sale of goods act • 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

8. Domestic law – CISG • 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

9. Incoterms – Background • 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

10. Incoterms – Background • 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)

11. What is regulated by INCOTERMS? • 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?

12. What is not regulated by INCOTERMS • 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

13. How are INCOTERMS agreed? • 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

14. 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?

15. How are INCOTERMS agreed? • 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”

16. INCOTERMS - overview • 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

17. INCOTERMS - overview

18. INCOTERMS - overview (F-clauses)

19. INCOTERMS - overview (C-clauses)

20. INCOTERMS - overview (D-clauses)

21. obligation to insure • 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

22. 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)

23. obligation to insure • …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

24. Right to insure • 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?

25. Choice of delivery clause and insurance • 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?

26. 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

27. Choice of delivery clause and insurance • 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

28. Choice of delivery clause and insurance • …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

29. Choice of delivery clause and insurance • 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

30. Choice of delivery clause and insurance • …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

31. Choice of delivery clause and insurance • 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)

32. Choice of delivery clause and insurance • 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

33. QUESTIONS?