Everything You Need to Know about “Free On Board” Incoterm Agreements
CPT or Carriage Paid To is an incoterm definition used to explain that the cost of the goods includes everything required to bring the products to the agreed destination. The buyer is only responsible for import requirements and local delivery and unloading charges.
The liability of the shipment transfers once the goods are delivered to the first carrier, usually at the origin port. CPT can be used for all forms of transport and is similar to an FCA agreement; however, unlike FCA, the delivery point is not a defined location. While CPT is not a common Incoterm, there are unique situations where it can be used. This article will cover the responsibilities, advantages, and disadvantages, as well as help you understand when is the best time to use CPT.
CPT can be a confusing Incoterm because the buyer and seller must define two central locations, which are not always the most intuitive points. The two points which must be established under a CPT agreement are the delivery point and the destination.
Delivery is when the seller gives goods to their contracted carrier to transport the cargo to the buyer. This point is where the buyer’s risk begins. The seller is also obligated to cover the cost to ship the freight to the destination. While the cargo risk and responsibility has been transferred to the buyer, the seller is still responsible for fulfilling the shipment until it arrives at the agreed-upon destination.
Once the risk is handed over to the buyer, the buyer is obliged to pay the seller.
Under the CPT Incoterm, the seller is responsible for the following requirements.
The buyer is responsible for the following stages when purchasing under CPT Incoterms:
When shipping under CPT, and when the payment terms indicate the goods must be paid for at the destination, the buyer faces significantly less risk. The buyer’s significant advantages are that they are not required to pay for the products until the cargo arrives at the Agreed to Named Place. The seller is also responsible for supplying the buyer with the Bill of Lading, or Airway Bill, limiting the buyer’s responsibility for a large portion of the logistics process. The other advantage is that the buyer does not have to handle any export requirements or fees associated with the export. This component can be beneficial when shipping from countries where the buyer is uncertain of the local export requirements.
When an importer has an agent responsible for clearing the cargo once it arrives at the destination country, CPT can be useful, as it allows the buyer to control the DTHC and customs clearance. Most of the time, CPT will be helpful for bigger importers with agents in place and an understanding of how to negotiate the small components of a CPT agreement to ensure it is advantageous to them.
Buyer Pays Before They Know Where the Cargo Is
When shipping under CPT and using sea freight or air freight, CPT places a massive amount of risk on the buyer, as they are required to pay for the goods when in possession of the seller’s carrier. Because the transfer of risk occurs once the cargo reaches the destination (the destination is the seller’s appointed carrier), the buyer must pay for their products. Under most circumstances, the buyer never knows when the goods will be shipped, which is a significant risk.
Because the seller is the party contracting the carrier, they can request that the carrier issue a Bill of Lading or Airway Bill before the cargo ever moves locations. On top of this, unless the destination is detailed explicitly in the purchase contract, the buyer often does not know where or when that point is.
Buyer is Unaware Who the Carrier Is
Unless the name of the carrier is defined in the purchase contract, the buyer frequently has no idea who the carrier is transporting the cargo is. This can be problematic for multiple reasons, as the buyer must rely on the seller appointed carrier to move the shipment and assist with importing. While each of these points could be itemized on a purchase contract, there are enough unknown variables that make CPT significantly more challenging to reduce logistics risks for the buyer.
Transit Clearance is the Buyers Responsibility
In the event the cargo passes through a country, the transit clearance is a requirement for the buyer to organize, not the seller, because the goods have already been delivered to the buyer. This adds to the complexity when the buyer is unaware who the carrier is, or does not have an existing relationship with the seller appointed carrier.
Anytime You Change Carriers, CPT Becomes More Complicated
CPT virtually does not work for China Air Freight because multiple carriers are touching the cargo, which only increases the buyer’s separation. When shipping containers via China Sea Freight, problems can also arise with CPT because the cargo is paid for before the shipment ever leaves the origin country.
Letter of Credit Payment Terms Become Incredibly Complex
In a standard Letter of Credit (LC) payment, the credit terms indicate a port of loading and a port of destination. However, if the seller elects a single carrier to transport the cargo from the seller’s warehouse to the final destination, the Bill of Lading issued by the shipping line will almost always identify its origin as the seller’s warehouse and differ from the destination.
In most LC’s, there are provisions to define this; however, the risk continues when there is a delay with the shipment for reasons outside the seller’s control. While the seller did everything on their end to ensure that the goods were delivered to the destination defined on the LC if a delay happens, and the buyer’s bank does not understand the complexities of CPT, a violation of the Letter of Credit could prevent payment to the seller. Delays in LC’s are a costly, time-consuming process, requiring the of reissuing a new LC. All of this would need to occur while the cargo is safely waiting for the next available vessel.
Therefore, even where there is an excusable delay, and both the buyer and the seller accept the terms of the delay, the bank’s decision could further add to the complexity, thus increasing the delay and cost associated with the LC.
While CPT has its disadvantages, the Incoterm works rather well when transporting the cargo overland from one place to another. For example, in cross-border trade, where the seller organizes the shipment for their carrier to transport the goods across multiple countries, this Incoterm works surprisingly well for that specific situation.
Buyers purchasing from China and shipping to Australia, Europe, and North America are not advised to use CPT. In most instances, FOB is the ideal Incoterm for China originating shipments.
Buyers purchasing from China and trucking their cargo to a neighboring country could use CPT as an option; however, it is not a standard Incoterm used in Central and South East Asia.
There are instances where CPT could be beneficial if a buyer is shipping their cargo to Hong Kong, from Mainland China, and selling the cargo purchased from China locally, as CPT can work well for cross-border trade.
If you are looking for the best way to ship your cargo from China, get a shipping quote, and we will provide you with shipping quotations that can best meet your needs.
No. The buyer is required to purchase freight insurance, as it is not included in the terms of the contract in a CPT incoterm agreement.
While CIF and CPT may look similar, they are incredibly different. CIF is only viable of sea and inland waterway shipments and requires the seller to deliver the insured cargo to the port of destination. Under CPT, the seller does not need to purchase insurance, and can deliver to any agreed point, and is not bound to shipping via boat.
Under a DDP agreement, the seller must deliver the shipment to the agreed-upon destination, usually the buyer’s warehouse. Once the cargo arrives at this destination, the risk and ownership transfer. CPT transfers the risk earlier, once the cargo is delivered to the seller appointed carrier. DDP includes duty and import fees, whereas CPT does not.