In any trade transaction, there are two parties – the buyer and the seller.. When it comes to a sea freight shipment, either one or both of them may end up paying different charges to different entities..
The question of who pays what charges in a sea freight shipment perplexes many people in the business whether you are new or already in the business..
In this article I dissect this question and explain who pays what charges in sea freight shipment..
The first place to look for an answer to this question is “the sales contract” between the buyer and seller..
A sales contract, apart from outlining the specification of the goods may also make reference to a key component and that is the Incoterms® Rules..
Reference to an Incoterms® rule in a contract of sale defines the parties obligations in terms of costs and risks and reduces ambiguity in the transaction..
Currently in its 9th version, the core function of Incoterms® rules is to
- Outline the obligations of the buyer and the seller in a trade transaction;
- Clarify when risk passes from the seller to the buyer under each of these rules;
- Outline how costs are allocated between the buyer and the seller;
It needs to be understood that Incoterms®:
- Is NOT the sales contract;
- Does not supersede the law governing the sales contract;
- Does not dictate where and to whom title to goods transfers;
- Does not address the price payable, the currency of transaction or credit terms
These items are expressly defined and outlined in the sales contract and by the law governing the contract..
There are 11 Incoterms® rules in the new Incoterms® 2020 edition released by the ICC in September 2019.. Each of them has different points at which cost and risk passes..
RULES FOR ANY MODE OR MODES OF TRANSPORT
- EXW – Ex Works
- FCA – Free Carrier
- CPT – Carriage Paid To
- CIP – Carriage and Insurance Paid To
- DAP – Delivered at Place
- DPU – Delivered at Place Unloaded
- DDP – Delivered Duty Paid
RULES FOR SEA AND INLAND WATERWAY TRANSPORT
- FAS – Free Alongside Ship
- FOB – Free On Board
- CFR – Cost and Freight
- CIF – Cost Insurance and Freight
Allocation of costs based on Incoterms® used
Depending on the Incoterms® used, the buyer or seller will be paying
- pre-carriage service providers including but not restricted to a transporter, freight forwarder, customs clearing agent, freight broker, inspection agencies, government authorities, port, customs, insurance companies and any other entity involved in the shipment
- carriage service providers such as a shipping line, NVOCC
- on-carriage service providers including but not restricted to a transporter, freight forwarder, customs clearing agent, freight broker, inspection agencies, government authorities, port, customs, insurance companies and any other entity involved in the shipment
Below is a synopsis of the various Incoterms® Rules showing who pays what charges between the buyer and seller..
RULES FOR ALL MODES OF TRANSPORT
|EXW||All charges upto placing goods at buyer’s disposal for pick up at the agreed point..Usually considered the safest Incoterms rule for a seller in terms of risks..||All charges from delivery by seller at the agreed point including export customs clearance and transportation..|
|FCA||All charges upto delivery to the Carrier and point mutually agreed between the buyer and seller, including customs clearance at origin..||All charges from the agreed point of handover to Carrier excluding customs clearance at origin and transportation..|
|CPT||All charges upto delivery to the point mutually agreed between the buyer and seller, excluding insurance, but including customs clearance at origin..||All charges from the agreed point of delivery including customs clearance at destination and insurance for the whole carriage..|
|CIP||All charges upto delivery to the point mutually agreed between the buyer and seller, including insurance and customs clearance at origin..||All charges from the agreed point of delivery including customs clearance at destination, transportation and any additional insurance past the delivery point..|
|DAP||All charges upto delivery to the point past the terminal, mutually agreed between the buyer and seller, ready for pick up, excluding customs clearance||All charges from delivery from the point past the terminal mutually agreed between the buyer and seller, including customs clearance|
|DPU||All charges upto delivery to a named point, mutually agreed between the buyer and seller, unloaded and placed at the disposal of the buyer..||All charges from unloading of the goods at the point mutually agreed between the buyer and seller including customs clearance at destination..|
|DDP||All charges right upto delivery to the point mutually agreed between the buyer and seller including export and import customs clearance, Duties, VAT..||All charges past the point of delivery mutually agreed between the buyer and seller..|
RULES FOR SEA AND INLAND WATERWAY TRANSPORT
|FAS||All charges upto delivery alongside the ship generally nominated by the buyer, including customs clearance at origin, excluding cargo loading costs at origin..||All charges from cargo alongside the ship including cargo loading costs at origin..|
|FOB||All charges upto loading on board the ship nominated by the buyer, including customs clearance at origin, including cargo loading costs..||All charges from the time cargo loaded on board the ship at origin..|
|CFR||All charges upto delivery to the named port of destination mutually agreed between the buyer and seller, including customs clearance at origin, excluding insurance..||All charges from the named port of destination including customs clearance at destination, transportation..|
|CIF||All charges upto delivery to the named port of destination mutually agreed between the buyer and seller, including customs clearance at origin and including the minimum required insurance..||All charges from the named port of destination including customs clearance at destination, transportation, excluding insurance..|
Please note above is just a guideline..
For a full and complete understanding, it is recommended that you go through the complete Incoterms® 2020 book which you can buy here..
To achieve a professional Certificate, you can buy the ICC Academy’s new online training course – the Incoterms® 2020 Certificate – developed by the educational arm of the ICC, the ICC Academy.. This course is the world’s only ICC-endorsed online training on the Incoterms® 2020 rules.
Who physically pays sea freight charges..??
While above is the commercial division of costs from a trade point of view based on Incoterms® between the buyer and seller, the other division that we need to look at is who actually pays the charges from a shipping line point of view..
In a lot of cases, the shipping line doesn’t know, see or have access to the actual seller and buyer so technically whoever receives the invoices from the shipping line based on the booking confirmation will be paying the charges physically to the shipping line..
Remember a seller, exporter, shipper on the origin side and a buyer, importer, consignee on the destination side may all be different people..
In a sea freight shipment, there could be a mixture of parties involved
- Contract party or contract owner – the entity that negotiates the sea freight charges with the shipping line – this could be the actual BCO or a freight forwarder acting on behalf of the BCO..
- Packing depot/warehouse – the entity who uses their facility to pack the cargo belonging to the BCO.. They could be contracted either by the booking party or the BCO..
- Transporter – the entity who will move the cargo and/or containers between the line’s depot, packing warehouse and port..
- Booking party – could be same or different from the contract party.. If different, usually it would be the agent of the BCO and this party takes care of all booking, operational and documentation related functions for the BCO..
In majority of the cases the shipping line deals mostly with the booking party for all booking, operational and documentation functions..
The shipping line also will look towards the booking party for payment and bill of lading instructions..
For ease of trade transactions, the contract party may end up paying the sea freight charges or and carriage related charges whereas the booking party may end up paying (on behalf of the BCO of course) the origin port and landside charges..
For example, the booking party may pay the line and other vendors all charges from packing the cargo into the container, inspection charges, customs clearance, cargo dues (wharfage), documentation charges, VGM, transportation to the port, THC at the load port, shipping line charges, bill of lading fees etc.. So basically all pre-carriage charges..
The contract party may pay the carriage related charges such as Ocean Freight, BAF, CAF, ISPS and any other applicable surcharges such as Hazardous Surcharge, Out of Gauge Surcharge, Overweight Surcharge based on the negotiated service contract..
Special attention must, therefore, be paid to the Freight Payable section usually in Part 4 of a bill of lading (my segmentation) and also to the Incoterms® addressed in the contract of sale..
Another important thing that must be understood is that there is no direct connection or link between Incoterms® and the shipping line..
Therefore the trade (buyer/seller and their agent) must NOT assume that by saying CIF Chittagong or FCA Freeport or EXW Ennore, the shipping line is going to charge them according to the Incoterms®..
There are several arguments between the trade and the shipping line along these lines..
If this distinction of who pays what charges for a sea freight shipment is not made clear right from the beginning – either at sales contract stage between buyer and seller or at booking stage between shipping line and booking party, there could be additional charges incurred along the way and someone will have to pay for it..
It won’t be pretty.. 🙂
This post has been updated to include revisions made in Incoterms® 2020..