# CIP Incoterms: Who Is Liable for Container Damage?

**Client Question:** We import CIP. Why are we held liable for container damages, and not the seller who loaded the container? **Answer:** When a party contracts with a sea carrier, they do so as the ‘merchant’, a title that the carrier defines very broadly, and although the shipper or consignee will at some point generally take this role, the label can attach to other parties as well, sometimes simultaneously. Again generally, the party booking with the carrier joins the contract through that action, and in so doing the shipper becomes the merchant. We can anticipate that, later, a second party joins the carrier’s contract by applying for release of the cargo. It is through this second action that they put themselves forward as the consignee, and in so doing they are also gathered under the umbrella definition of merchant. (Clearly, if they do not take this step, if they abandon the cargo, then they do not join the contract.) Stowage-related equipment damage (if any) is the liability of the ‘merchant’. Commercial terms only regulate certain aspects of the private sales contract between the Seller and Buyer. The terms of that contract have no bearing on the merchant’s position and, equally, they do not influence, guide or bind the carrier. Remember that the change of names is crucially important: the shipper is not the seller, just as the consignee is not the buyer. Regardless that these parties are engaged in the seemingly parallel contracts of sale and transport, the two contracts remain unconnected and discrete. Should the buyer incur costs as the merchant they might have recourse to the seller for this loss in their parallel role as buyer, but the buyer could not, for example, use this private recourse as a defence against the carrier’s claim. Any privileges or rights that the buyer gains in the sale contract cannot transfer to the consignee/merchant, the party separately bound by the terms and conditions of the transport contract with the carrier. In the relationship between the seller and buyer, be conscious of the limited scope of Incoterms Rules. If you refer to a copy of Incoterms 2010 at page 11, and the very last few lines of the introduction, you will note how the drafting committee of Incoterms Rules distance the terms from any aspect of stowage, including container stowage liabilities, deferring to the actual sales contract as the arbiter in such matters. This position is so commonplace that it is not elaborated upon further in Incoterms 2020. Accordingly, if an incorporated term or clause in the sale contract allocated the risk and cost of container damages in transit to the seller, then, should such a cost arise, the buyer would have perfect recourse against the seller through the contract mechanism. Conversely, if the sales contract was silent on the subject of who has this particular liability, then the general principle is that the buyer would be liable. I say general as there really is no definitive position, and it is common that an absence or omission in any contract creates fertile grounds for dispute. But even a buyer with clear rights of recourse can be stifled in any practical counter-claim against the seller if payment for the underlying goods has already been made, which, coincidentally, is often the position of the buyer in a C-prefixed sale, such contracts being traditionally aligned to prepaid or bank-guaranteed payment terms. Thus, even if the sale contract gave the buyer the right to recover from the seller, the right alone may not be enough if the buyer has no commercial leverage to enforce the right, having lost control of the payment. (Obviously, there may be commercial considerations, with respect to future dealings, that empower the buyer.) It is sound counsel to advise prudent buyers to avoid buying on CIP (Carriage and Insurance Paid to) terms. Regardless of how inappropriate CIF (Cost, Insurance and Freight) is claimed to be for containerised traffic, this ‘inappropriateness’ is a true statement only for the seller, not the buyer. In a CIF contract, the seller at least has to load the cargo on board a vessel. In a CIP contract the seller merely needs to hand control over to a party who may be able to move the cargo. The CIP buyer’s risks therefore are increasing (as the seller’s decrease). This is not sinister but simply the contractual position that the buyer must make peace with. Of course, it is never good practice for the buyer to buy CIF either. It is rarely ever in the buyer’s interest to let the seller take insurance cover when the seller has no insurable interest to motivate the purchase of adequate cover against the buyer’s risks. In this, CFR (Cost and Freight) is better than CIF. In the context of the initial question, CFR also allows the buyer an opportunity to add the risk of container damages to their insurance cover (for a suitably adjusted premium), although this additional feature is not always available. The buyer is advised to be guided by their underwriter or broker in this regard, considering the cost-risk benefits when such cover is an option, or positioning themselves for the risk when it is not. But as in any C-prefix contract, the CFR buyer is only buying documents evidencing some stage of despatch. Whether the physical cargo arrives is neither here nor there; physical handover or delivery of the ordered goods is not part of the C-prefixed seller’s undertaking. The C-prefix buyer only buys documents, and with them the ‘hope’ of receiving the contract goods that the documents, on their face, appear to refer to. The documents alone are not a guarantee of the physical delivery, condition or existence of the cargo. It is logical then to conclude that no C-prefix contract is ever in the buyer’s interest. In comparison, a D-prefixed contract makes the seller responsible to deliver the actual ordered goods at the destination place, in sound condition and on time, rather than just surrendering the documents evidencing their dispatch. Further, the D-prefixed seller is also liable for any additional charges that may arise in the execution of the supply chain, which would, for example, perfect the buyer’s counter-claim for the costs for container damages should they arise (but again noting that the change of term will not protect the merchant/consignee from the carrier’s initial claim against them.) The added bonus is that as D-prefixed contracts are linked to the arrival of the goods, they are normally conducted with the buyer having open account (unsecured credit) facilities with the seller. However, as commercial terms do not dictate payment conditions this structure is not guaranteed, merely common. But when it does prove to be the case, it follows that the relaxed payment terms give the buyer leverage to deduct any surprise costs they may incur as consignee (such as container damages), provided that the commercial terms or contract allow them the right to avoid the particular risk and cost in the first place. In summary: the merchant is responsible for container damages. It is on the carrier to decide which party they will hold primarily accountable in that role. If the merchant is also the buyer, the buyer’s recourse to the seller (if any) is a matter of the private contract terms between them. Having rights in a dispute is a good thing, but financial leverage is profoundly more immediate and impactful for the party wishing to enforce such rights, this being true regardless of the commercial term employed. Contracts are wonderful, but money is wonderfuller…Source: Freight Training