Who pays what charges in a sea freight shipment

sales contractIn 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 sets of charges to different entities..

Not just for newcomers to the business of exporting and importing, this question sometimes perplexes many already in the business..

In this article I dissect this process to explain who pays what charges in sea freight shipment..

So who pays what charges in a 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..

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Enter Incoterms®

Incoterms

Reference to an Incoterms® rule in a contract of sale defines the parties obligations and reduces the risk of legal complications..

Since its creation by the ICC in 1936, Incoterms® rules has become a globally accepted contractual standard and has also become an integral part of trade..

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 governing law..

There are 11 Incoterms® rules in the 2010 edition and each of them has different points at which cost and risk passes..

 

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 between the buyer and seller..

 

RULESSELLERBUYER
RULES FOR ALL MODES OF TRANSPORT
EXW All charges upto placing goods at buyer’s disposal for pick upAll charges from loading from seller’s warehouse
FCA All charges upto delivery to the Carrier and point mutually agreed between the buyer and seller, including customs clearance at originAll charges from agreed point of handover to Carrier excluding customs clearance at origin
CPTAll charges upto delivery to the point mutually agreed between the buyer and seller, excluding insurance and customs clearance at destinationAll charges past the agreed point of delivery including customs clearance at destination, transportation 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 originAll charges past the agreed point of delivery including customs clearance at destination, transportation and any insurance past the delivery point
DAT All charges upto delivery to the terminal mutually agreed between the buyer and seller, ready for pick up, excluding customs clearance at destinationAll charges from delivery from the terminal including customs clearance at destination
DAP All charges upto delivery to the point past the terminal, mutually agreed between the buyer and seller, ready for pick up, excluding customs clearanceAll charges from delivery from the point past the terminal mutually agreed between the buyer and seller, including customs clearance
DDP All charges right upto delivery to the point mutually agreed between the buyer and seller including customs clearance, duties, VATAll 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 originAll charges from cargo on shore including cargo loading costs at origin
FOB All charges upto loading on board the ship generally nominated by the buyer, including customs clearance at origin, including cargo loading costsAll 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 insuranceAll 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, including insuranceAll 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® 2010 book available from the ICC Bookstore.. Or if you rather wait, the Incoterms® 2020 rules are scheduled to be launched on the 25th of September 2019..

 

Who physically pays the money

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..

Basically who should the shipping line send the invoices to as in a lot of cases, the shipping line doesn’t know, see or have access to the actual seller and buyer..

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 freight rates 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 freight 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..

 

Key Points

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..

 

Conclusion

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 sale 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.. 🙂

 

 


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16 thoughts on “Who pays what charges in a sea freight shipment”

  1. Hi Hariesh,

    Under the FOB term, the seller is supposed to be responsible for loading, but with a roro vessel for example, the shipping line arranges for the goods to be driven on board the vessel, and this cost is included in the freight charges paid by the buyer.

    Another example would be a break bulk vessel, the vessel sometimes/often uses its own cranes to load the cargo, so again this cost is included in the freight charges paid by the buyer.

  2. Can someone pls explain me about ESD charges ?
    If we contracted with FOB terms, we need to pay ESD charges to shipping line ?

  3. We have an FOB transaction with the seller. The seller charters the barge under F.I.O. terms. who is responsible to pay for the wharfage and dockage to the private jetty.
    1) THC has been paid to the commercial port operator
    2) Freight has been paid to the Barge operator

    Thank you

  4. Can someone please explain to me the relationship of “Container inbalance charge” and the shipper / port of origin?

  5. Noted that it was mentioned that under FCA terms the “Customs Release” is arranged by buyer. It is not a rule, right? the customs clearance is mutually agreed. I have noted in China no exporters pay that.

    • Hi Paulo, I am not seeing where it is mentioned that customs release is arranged by buyer in FCA.. In FCA, seller must take care of export clearance and buyer must take care of import clearance at destination..

  6. Zuzana, the carrier may not release any cargo to any party without the production of an original B/L, even if all the charges have been paid. Whoever releases cargo without the production of the original B/L can be held liable for the value of the goods. This practise of releasing goods without production of the necessary documents is pointed out by the P & I Clubs every year with the warning that the liable party will not be covered under their liability policies should they fail to follow correct procedures.
    Provided you are within the prescription period you must hand the matter over to attorneys to issue summons against the liable party.

  7. Think that yr CFR and CIF split definition is wrong, seller pays all the way to the CFR named place. However seller risk ends when goods are placed on board the ship at port of origin. CPT and CIP on the other hand seller risk ends when goods are handed over to the first carrier (for precarriage)

  8. Hello,
    You are right about one thing. The carrier will not care about anything. I have had a shipment going from Brazil. I made a booking from our US office. Released all containers to the shipper for loading, handled all documentation. The shipper just hired his local agent for export customs clearance.
    Original B/L was issued and I was about to print it in our office. Once paid by shipper the O/F and our freight forwarding charges, I would have send him the Original B/L.
    The shipper by passed us, paid for the o/f in local office for the carrier in person and they have released the containers to them even I have instructed carrier, that I will print originals and will send them to the shipper once he will pay us.
    We never got paid, carrier said that the law says they have to release the cargo after the payment. So the Freight Forwarder is not anyhow covered to get paid. The carrier will never help the F.F. to get paid.
    Carrier will not release the cargo until they get paid, but when it comes to F.F., no one cares.
    You should issue this to me ” a big problem”(gap) in the shipping industry.
    Thank you for all your articles.

  9. Good article, but you do not say what BCO is – do you mean Beneficial Cargo Owner, and if so, is this usually the importer? More on destination terminal handling charges would be useful

    • Hi Roger, if you hover over the first reference to BCO, it says Beneficial Cargo Owner.. BCO refers to a cargo owner who could be a direct exporter, direct importer, seller or buyer.. Noted about the THC..

  10. Hi, Under FOB you mention that the buyer is responsible for loading costs at port of origin. This is incorrect. The seller is responsible for all costs involved in the loading and stowage of the cargo onboard the vessel nominated by the buyer. The rule states that the seller is to pay the loading costs, Free on Board, but shall not be liable for the ocean freight and any surcharges relating thereto. Responsibility, cost and risk passes once goods are loaded on board.

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