Incoterms and Conditions

Q: I need your expertise in the application of Incoterms on a bill of lading.

We’re a post-auditor. Our client notates the bill of lading with Free Carrier, (Client) Factory. Nevertheless, the carrier is billing our client, the shipper.

I have submitted overcharge claims to the carrier stating that our client shouldn’t have paid these freight bills. The notation is synonymous with Freight Collect. The carriers take issue with that because it doesn’t plainly say “prepaid, collect, or third party” and that’s all they can go on when billing charges.

Another issue is Ex Works, (Client) Factory. Same scenario.

Are these bills of lading notated properly, or should they have “collect” added to the notation, for the carriers’ sake?

 

A: The bills of lading are annotated correctly as to the parties’ terms of sale. Whether they’re annotated correctly as to the parties’ intentions regarding payment of freight charges is another matter, and one I can’t resolve with certainty.

As you correctly point out, Incoterms definitions seem to indicate that responsibility for freight charges under these designations would rest with the buyer — the consignee.

“Free Carrier, (your client’s name) Factory” says the seller’s (shipper’s) obligation is completed when the goods are delivered into the carrier’s possession at its factory. “Ex works” with the name of your client’s facility actually goes a step beyond, indicating the seller’s (shipper’s) obligation ends when the goods are made available for pickup at its facility, before they’re even picked up by the carrier.

But Incoterms aren’t written in stone; they can, at the parties’ discretion, be modified or adjusted by agreement between them. The stated terms are construed only as identifying the point where title is deemed to pass from buyer to seller, and the parties are always free to agree that, notwithstanding those terms, the seller — your client — also will be responsible for the carrier’s charges.

Would that be an unusual situation? Yes, but not an unheard-of one. I can think of circumstances where the parties might come to such an agreement for a variety of reasons, and it’s possible your client’s situation falls in that category.

The standard-form bill of lading has a preprinted section for indicating who’s supposed to pay the carrier’s charges. Generally speaking, the default is for the shipper to be primarily responsible. If the parties’ intent is for somebody else to bear that responsibility — either the consignee or a third party — the shipper is to mark the appropriate box in that section; and absent any such marking, the carrier correctly bills the shipper.

So what’s happening here? Well, one of two things: (a), the seller and buyer have indeed agreed that the seller will pay carrier charges irrespective of the fact that the goods have changed hands when (or before) the carrier takes possession of them, or (b) your client, the seller, is doing the bills of lading wrong.

It’s not up to the carrier to decode the Incoterms and try to mastermind the situation. The B/L is telling it whom to bill, and it’s following that direction. In addition, I might point out that your client appears to be paying those bills tamely without question, which tends to reinforce the possibility that case (a) above applies.

And given that the B/L is the contract of carriage, and thus the sole agreement to which the carrier is a party, I think your suggestion that the carrier is somehow billing incorrectly is misguided. Your investigation of this set of facts ought to begin with your client, not the carrier.

If your client has indeed been paying the bills incorrectly, its recourse lies with its buyer(s) and not the carrier(s). You can scarcely demand that the carrier reimburse your client and seek its money belatedly from the buyer (consignee) when that’s not what the B/Ls said.

And in that case, the solution for the future is simple: Educate your client on how to properly state shipping terms on a B/L.

On the other hand, maybe it’s you who’ll receive the education if you learn that the buyer and seller have agreed between themselves that the seller (shipper) will pay the carrier’s bill. Either way, this is a matter in which you can lay no fault on the carrier, nor have you a valid overcharge claim against it. Incoterms relate to the transfer of title between buyer and seller; they’re not binding on any other party, including the carrier.

Consultant, author and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at 5201 Whippoorwill Lane, Johns Island, S.C. 29455; phone, 843-559-1277; e-mail, BarrettTrn@aol.com. Contact him to order the most recent 351-page compiled edition of past Q&A columns, published in 2010.

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