DDP- Doesn’t Deserve Policy

A friend of mine who is the Risk manager in a very large corporate group having interests in infrastructure among others, called me recently with a query. Prior to his joining, his company had entered into a contract with a Singapore-based entity ( a channelizing agency) which would be procuring all the capital equipment for the client’s project in India and invoicing them in their name.The terms of sale in all cases was agreed as DDP ( Delivered Duty Paid). Nothing wrong with that. The Indian client had purchased a marine cargo policy in his name in India from an Indian insurer for covering these transit movements for the specified project. Further, after the contracts had been signed, the Singapore entity felt that payment of customs duty in India by them ( to fulfill DDP terms) could be cumbersome and hence requested the Indian buyer to pay the customs duty in India, even though the formalities would be performed by the Singapore-based seller. Subsequent to the payment & clearance, the Indian buyer was to send a Debit Note to the Singapore-based seller to the extent of the customs duty paid.

My friend sensed something was amiss but was not exactly able to lay his finger on the same, as his area of expertise was Property & Engineering insurance. He was aware of the operation of the DDP Incoterm and was more worried that should a loss occur during the inland transit leg after the payment of customs duty, will the insurer reimburse the customs duty to the Indian buyer while paying the claim on cargo to the overseas seller.

I asked him if the Singapore-based entity was a wholly-owned subsidiary of the Indian buyer and if it could be treated as an Indian interest abroad. The answer was NO, it was a third party. Then had to point out that leaving aside the customs duty payments done by the Indian buyer, the policy issued in India was not worth the piece of paper it was typed upon. My friend was listening intently. I reiterated the rules of the DDP incoterm .

The seller must deliver the goods by placing them at the
disposal of the buyer on the arriving means of transport
ready for unloading at the agreed point, if any, at the named
place of destination or by procuring the goods so delivered.
In either case the seller must deliver the goods on the agreed
date or within the agreed period.

The seller bears all risks of loss of or damage to the goods
until they have been delivered.

Where applicable, the seller must carry out and pay for all
export/transit/import clearance formalities required by the
countries of export, transit and import, such as:
• export/transit/import licence;
• security clearance for export/transit/import;
• pre-shipment inspection; and
• any other official authorisation.

The seller has no obligation to the buyer to make a contract
of insurance.The buyer too has no obligation to the seller
to make a contract of insurance.

My first suggestion was to have the contract amended to make it DPU (Delivered at Place Unloaded) so that the Indian buyer can take care of the import formalities including payment of customs duty. Was told it would not be possible to change the contract terms now as it had been frozen and involved billions of rupees. Next suggestion, or rather a statement was that the policy taken by his company in its name in India had no relevance. Should there be a loss/damage to the cargo, the risk as per DDP vests with the seller and the buyer will not be at a loss. Asked him to get a confirmation in writing from his Indian insurer,(stating all these facts) that claims if any will be settled in favour of the overseas seller in foreign currency. After a lot of follow-up, the insurer responded saying that probably they would not be in a position to settle claims with the overseas seller in foreign currency and that the policy was in the name of the buyer.

What next, asked my friend. You must get the policy taken by you cancelled ‘ab initio’ and ask the seller to arrange for cargo insurance to protect the cargo, though under DDP, it is not obligatory on the seller’s part to arrange insurance. The Singapore seller was informed and the Indian coprorate used its muscle to check for cover in the Singapore market to help the seller. Premium rates were three-fold. The Indian management was aghast. That will increase our project costs substantially, they lamented. Ultimately they saw the underlying reasoning. 1) The policy taken by them in India would not have responded in case of a loss. 2) The seller did not have an insurance and hence the cargo would have moved without any insurance. 3) Had there been a big loss, no doubt it would have hit the seller, but it could have delayed the buyer’s project too. 4) More important, if the seller had gone bust because of the huge loss, the Indian buyer may have had to resort to time-consuming and costly civil litigation to make the seller comply with their contractual obligations.

My friend called up a fortnight later to say that the management had been convinced and the seller had arranged cargo insurance for this project from Singapore at a little more than double the Indian premium rate.

A classic case where the Indian buyer, the overseas seller, the broker & the Indian insurer seemed oblivious to the huge gap in understanding and coverage or was it a case of getting blinded by the low premium rate in India and missing out the basic, critical aspects.