Charges that are applicable for a shipment can be classified as
- Ocean related charges
- Landside charges
Who pays for these charges depends entirely on the terms of shipment agreed between the buyer and seller.. Majority of the buyers and sellers use the Incoterms or International Commercial terms which are a series of pre-defined commercial terms published by the International Chamber of Commerce to decide on what each others responsibilities and liabilities are in terms of this trade..
For example on the CIF (Cost Insurance Freight) terms of sale which is one of the most common terms of sale, the shipper is responsible for the payment of freight to the carrier.. However, there could be a split in who pays these charges to the shipping line.. In a lot of the cases, the actual exporter or the shipper pays the Ocean Freight quantum of the charges which could include the Freight, BAF, ISPS, Oncarriage if any – basically all Ocean related charges whereas their Clearing Agent or Freight Forwarder will pay the landside charges such as THC, Bill of Lading Fee, Service Fees etc (of course to be claimed from the shipper)..
In the case of an FOB (Free on Board) shipment, the shipper is responsible for all charges upto FOB at the named port.. Here again, the shipper might directly pay the charges to the line or his Clearing Agent or Forwarding Agent will pay for it.. Charges covered under FOB charges may be (but not restricted to) as below :
- THC
- Bill of Lading Fee
- Service Fee
- Pre-Carriage if any organised by the carrier
In the case of Ex-Works, the buyer takes over from the shippers premises which means he is liable for all costs from pick up of the cargo at the shippers premises..
Irrespective of the case, it is very important that there is a clear understanding between the carrier and the client as to who pays what and where before the shipment takes place so that there is no ambiguity..
Generally, the shipping lines do not concern themselves with the Incoterms agreed between the buyer and seller and they expect that the Ocean and Landside charges are paid to them by the party that they have entered into a contract with.. It is in the carriers best interest to check whether these charges are Prepaid or Collect BEFORE the shipment takes place as there maybe some cases where Freight Collect is NOT accepted at certain destinations by the carrier due to foreign exchange regulations and such..
Have you had any unique or interesting experiences (or nightmares) relating to payment or receiving of freight charges whether you are a shipper or agent or shipping line..?? Do share..
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Hi, not necessarily. I agree that this has been an age old practice before IT innovations to identify what freight is outstanding and how, when and where to collect. But this is only for the freight collection and representation on the bill of lading.
My question was more related to the invoicing, and is there any specific reason why different charges have to be categorised as prepaid or collect ?
With regards to the cargo release process, even if the bill of lading is tagged freight prepaid, it doesn’t mean that all charges related to that shipment has been paid. However the terms and condtions on a bill of lading says otherwise..
Isn’t that quite a bit confusing ?
Cheers
Hi Adhish, not sure what is not clear on the “terms of payment”.. There has to be a classification of what charges are Prepaid and what is Collect.. This is the only way the shipping line will know what charges have been collected where.. This prepaid and collect term is an important part of the bill of lading and cargo release process..
Well, this one doesn’t still provide clarity on the “terms of payment” application. Why has it been an industry practice to classify the different charges into Prepaid / Collect all this while ? Is it just to distinguish for the Bill of LAding clause as to what terms the Ocean Freight is agreed between the client and the carrier ?
Thanks to clarify
Hi Tauqeer, under FOB terms, seller is responsible for ALL charges up until the cargo is shipped on board.. These charges can start with transportation from the sellers warehouse and end with the THC at the load port and will cover all charges in between including cargo dues (wharfage), customs clearance etc, ships agents service fee, bill of lading fee (well this bill of lading is under argument still – see http://shippingandfreightresource.com/2011/01/14/under-fob-terms-who-should-bear-the-charges-for-issuance-of-bl-shipper-or-consignee/)..
The seller may or may not use a forwarder to do these activities as some sellers have their own in-house division to handle all these activities..
If there is a forwarder involved and he provides services on behalf of the buyer, those charges will be on behalf of the buyer – example if the buyer arranges with his forwarder to test or sample the cargo, that will be on his account and not on the sellers account (unless it is expressly agreed between seller and buyer)..
in case of FOB shipment, what kind of service charges shipper will pay to nominated forwarder as forwarder provides services on behalf of consignee, so he should collect service charges from consignee.
Thanks Eike.. I generally post a new article every Wednesday.. You can subscribe to receive this as and when updated.. Its free..
Hey, good article and thank you for it. I was relatively new to this business when I moved to Saudi Arabia and I was looking for resources likes this one. Makes it easier to improve yourself step by step if you get an interesting article every some days.