- Is there a connection between Incoterms® and the shipping line..??
- Should Shipping Lines be concerned with Incoterms®..??
- How does Incoterms® affect the shipping line..??
These are a few of the questions raised by readers who have complained that their booking with the carrier was on FCA, FOB, CIF, etc, but the carrier refuses to show this commercial information on the bill of lading..
Let’s analyse the questions starting with the definition of Incoterms®.. The ICC (International Chamber of Commerce), defines Incoterms® as below :
Incoterms®
The Incoterms® rules are an internationally recognized standard used worldwide in international and domestic contracts for the sale of goods. First published in 1936, Incoterms® rules provide internationally accepted definitions and rules of interpretation for most common commercial terms.
The rules have been developed and maintained by experts and practitioners brought together by ICC and have become the standard in international business rules setting. They help traders avoid costly misunderstandings by clarifying the tasks, costs and risks involved in the delivery of goods from sellers to buyers. Incoterms® rules are recognized by UNCITRAL as the global standard for the interpretation of the most common terms in foreign trade.
As you can see from the explanation above, Incoterms® are an integral part (although not mandatory) of the sales contract between the seller and buyer..
So, technically and legally, there is no connection between Incoterms® rules and the shipping line, as these terms do not form part of any contract between a customer and the shipping line..
Remember that a sales contract and contract of carriage are two different things..
The sales contract incorporating Incoterms® is between a buyer and seller, whereas the contract of carriage is between the customer (either the buyer or the seller) and the shipping line.
However, in practical life, I have seen cases where clients ask a shipping line to quote “FOB Durban to CFR Shanghai” or to quote “DDP Shanghai”..
Although the carrier or contract of carriage has nothing to do with the Incoterms®, due to perceived obligations or in their enthusiasm to assist the client, some staff at the shipping line’s office may quote the client based on their request..
They do this without being aware of the implications of these terms and what they need to include/exclude in the quote, exposing themselves or the line to the possibility of submitting a wrong quotation, with a potential for disputes at a later stage over it..
For a container carrier, making reference to or quoting based on FOB Incoterms® rules could get complicated because the term FOB itself is not the right term to use for containerised shipments..
But the buyer/consignee are using it and requesting a quote on that basis because for them it relates to the fact that their costs start from the time the goods are on board in Durban..
FOB seems to have become an integral part of the container shipping industry who are still unwilling to forget FOB.. It has become like a part of the furniture, like a boilerplate, because it was an established term in the industry for a very long time, and continues to be used incorrectly for containerised shipments instead of the correct term, which is FCA (Free Carrier)..
The term Free Carrier (previously FRC, now FCA) was introduced in the 1980 version order to deal with this frequent case, but since people are creatures of habit, the usage of the term FOB continued..
FOB vs FOB
There is also a disconnect in what “customers” refer to as FOB and what “carriers” refer to as FOB..
Customers understand and refer to FOB as an Incoterms® rule where FOB = Free On Board, because in reality, for them, this is what it is..
The buyer bought the goods on FOB basis, meaning in simple terms, they agreed with the seller that they (the buyer) will only be responsible for costs from the time the goods are on board and not before..
For Carriers, FOB is more of a “business” term used in practice to classify cargo that is commercially controlled by consignees at a destination port (FOB) as opposed to cargo that is commercially controlled by shippers at the same location port (CIF)..
For a carrier, FOB = freight collect at the POD as opposed to CIF = freight prepaid at the POL..
Totally different meanings..
In the other example “DDP Shanghai”, if the carrier indicates in their quote that it is DDP Shanghai, then they would be expected to include all the charges up to DDP Shanghai, which includes customs clearance, duty, VAT, etc, which are generally beyond the scope of a carrier’s activity..
Therefore, carriers are very reluctant or even pedantic about showing commercial information on their bill of lading, especially if it includes references to Incoterms® and cargo value, as these are not under the control of the carriers..
The carrier doesn’t want to undertake the liabilities and risks that come with the commercial and Incoterms® information when it is not a part of their contract..
Here, “commercially controlled” refers to whoever agrees on the freight rate negotiations/payments with the shipping lines..
Have you come across any instances where the shipping line has been involved with Incoterms®..??
Article republished with some critical updates..
Hello Hariesh,
It’s always a great pleasure to read your super informative posts on logistics, which remain a source of unlimited learning and improvement for me. Thank you again a thousand times.
With your permission, I would like to make a modest contribution on this topic:
Your content is very clear and precise, and I agree with the principle; however, these points still need to be explored, in my humble opinion.
Although Incoterms do not directly govern the operations of shipping lines, they play a crucial role in defining the contractual responsibilities between the seller and the buyer. This, in turn, significantly influences how stakeholders interact with maritime carriers.
As a Shipping Manager, selecting the appropriate Incoterm is essential to optimize:
** Logistics costs
** Allocation of responsibilities
** Efficiency and fluidity of maritime transport operations
Incoterms have some crutial impact on the Relationship with Shipping Lines
Incoterms determine:
* Who selects the shipping line
* Who bears the freight costs
* Who manages logistical and documentary formalities
For example:
** Under FOB (Free On Board), the seller is responsible until the goods are loaded onto the vessel. The buyer therefore selects the shipping line.
** Under CFR (Cost and Freight) or CIF (Cost, Insurance and Freight), the seller covers the transport to the destination port and thus chooses the carrier.
We have also some operational Implications for Shipping Lines
Shipping lines must be informed of the applicable Incoterm to:
** Identify their main point of contact (seller or buyer)
** Manage transport documents such as the Bill of Lading
** Coordinate port calls, transshipments, and delivery schedules
As they may affect certain Incoterms :
* The type of maritime service required (FCL, LCL, express, etc.)
* Insurance arrangements, particularly under CIF
* Delivery timelines and potential penalties for delays
It is important to note that while shipping lines provide an ETA (Estimated Time of Arrival), they are only liable for delays when faults are clearly identified as being within their scope of responsibility.
I would always appreciate your insights on these points raised in order to improve myself.
Many many thanks again
Hello Joseph, thank you for your comments and your kind words.. Yes the points that you have raised are valid..
My post however, is not about these points most of which are required points between the buyer and seller.. My post is about the fact that technically and legally, there is no connection between Incoterms® rules and the shipping line, as these terms do not form part of any contract between a customer and the shipping line..
So the shipping line is NOT obligated to consider or use any of the Incoterms rules in their bookings, bills of lading or their documentation.. It is totally between the buyer and seller..
In terms of the point you mentioned below “We have also some operational Implications for Shipping Lines
Shipping lines must be informed of the applicable Incoterm to:
** Identify their main point of contact (seller or buyer)
** Manage transport documents such as the Bill of Lading
** Coordinate port calls, transshipments, and delivery schedules”
Shipping line will legally listen only to the party that they have the contract with.. Usually it will be the booking party, which could be the seller or buyer or their agents.. This party will be the main point of contact of the shipping line.. This the party that the shipping line liaises with in terms of release of booking, container, bills of lading, coordination etc.. This will happen irrespective of whether the shipping line knows the Incoterms used..
I regularly face challenges with shipping lines asking for the Incoterms, while we have multiples transactions and multiples Incoterms involved in 1 shipment. They should not ask and rather refer to the shipping instructions which includes freight payment terms. Despite our instructions, they refer to the incoterm to assign the freight payer and payable location which is incorrect.
Thanks for your comment Sebastien, I find it strange that carrier keeps asking you for Incoterms.. “Despite our instructions, they refer to the incoterm to assign the freight payer and payable location which is incorrect.” – this point is exactly what I have mentioned as well that Shipping lines should NOT be concerned with Incoterms and certainly not take FOB as Collect etc..
It is true that delivery terms are not directly indicated in BL.It is indicated as phrases like freight collected (FOB) or prepaid(CFR).so,there is connection and implications
It is possible for a shipment to be freight prepaid and delivery terms to be FOB as well. Take for example a scenario where origin agent pays for ocean freight. Freight collected and Freight prepaid cannot be used interchangeably with CFR and FOB because CFR and FOB are contractual terms between the buyer and seller which assign risks, costs and responsibility. Freight collect and freight prepaid are terms of payment between the buyer/seller and/or their agent depending on which incoterm was used.
It is true that incoterms ( delivery terms) are not found in any BL directly.
In the BL the phrase freight is collected imply, FOB shipment and collected at destination point.
Similarly, prepaid represent CFR shipment.So, delivery terms have relation where freight is to be collected.
Thank so much for sharing this valuable topic. keep it Up.
there should be no connections
I sale 1 x 20 ‘from the shipper place to be delivered under hook Port Dakar – Senegal – My customer was the consignee in Africa sales in EXWORKS
I initiated the operation after being paid freight, and the shipper was paid for his goods as well. Everyone was paid, and the consignee did not recover his container. What blocked it was customs fees that the consignee could not pay for lack of money.
The shipowner sent a copy letter by e-mail of a letter at the attention of the shipper to warn him of the daily parking charges and as a merchant of the bill of lading he invited him to resell the goods or return them.
The problem is that because everyone was paid, I sent the original 3 BLs to the consignee my customer by registered letter with acknowledgment of receipt, and signaled the sending of the recommended by mail the same as his shipment.
Given that we are not in possession of the BL we can not help the shipowner. On the shipowner’s letter it is stipulated that the shipper is in solidarity and may be subrogated to pay the costs incurred.
What are the risks involved…..
If the order is written CIF, yes. Shipping Line will need to know if you the Seller are supplying the insurance or if the carrier / forwarder will be supplying it.
Most lines use terms like CY – CY rather than proper incoterms. My employer cites CIF for such moves, meaning that THC and such are included in the cost of freight. The lines that I currently use do not use this term.
Incoterms are related to contract of sales, not contract of transport. This isn’t meaning that contract of transport isn’t impacted by Incoterms, just that contract of transport is a specific arrangement between seller and buyer, along the contract of sales.
One good example: Our company is running a solid LCL NVOCC dept. We are receiving import cargo from all over the world. It happens often, not every week but a couple of times monthly, that from specific origins, for a CIF basis shipment, supplier refused to pay for origin local charges and sometimes even for freight, so HBL is on collect basis with amounts to collect. This can be puzzling considering CIF incoterm definition, but it happens.
What we know about CIF is that it does not include local handling charges and custom clearance at destination port.
Hello Rafael,
Am also in LCL NVOCC business….am glad to share below.
A contract of sale is between a seller & a buyer hence a contract of carriage being one of the functions of a BL is an arrangement/agreement between shipping line and the customer(seller buyer) at time of booking either by an email or a call…
It also happens in LCL business the consignee does not interpret between a consolidator & the carrier.
FOB means the consignee controls the shipment at destination, CIF seller bears all the costs until port of destination excluding all local destination charges.
It happens carrier refuses to insert/indicate the incoterms on the BL a clear indication that line was not involved in sale contract….However if some charges are to be COLLECTED the consignee at destination will be advised by the LINE on same and cannot take cargo delivery unless complied….FAILURE to collect on behalf of the shipper….LINE will be responsible for the loss.
So there is a connection indirectly….to avoid loss of business and customer relations.
Great article Hariesh. Forwarders and SL use incoterms all the time, especially when quoting clients and in their own contracts with the customers. This a dangerous practice which adds to the customers confusion in the already treacherous world of incoterms which very few people (including seasoned professionals in international logistics) seem to be familiar with.
It is a fact that Shipping Lines indicate CIF and FOB terms in their Bills of Lading because of it is mandatory for their POL and POD agents to know whether the freight charges are “Prepaid” or “Collect”.