FOB with Freight Prepaid

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Rothmans's picture
Rothmans
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Hello all,

Thank you very much for your replies. To make it be simple, i would like to re-write the question as below: 

Field 45 : F.O.B.
Field 46 : Full set clean on board Ocean B/L made out to order of issuing bank and notify applicant with full address
Field 47: not mentioned whether 'Freight Collect' or 'Freight Prepaid'

B/L presented with 'Freight Prepaid'

Is the discrepancy - 'B/L marked with 'Freight Prepaid' conflict with Terms of Delivery' valid?

Pls disregard below: 'It's a common practice that middleman use different Terms of Delivery between his vendor (CFR) and the ultimate buyer (FOB) when placing orders. And now, LC Field 45A: FOB Chittagong; LC Field 46A: 'Full set clean on board ocean bill of lading .... (Neither 'Freight Collect' or 'Freight Prepaid' to be marked) Documents received by us: Invoice (FOB Chittagong as per LC) and B/L marked with 'Freight Prepaid' evidencing shipment from Chittagong to Gothenburg Is it a discrepancy? Any UCP Article and/or ISBP support?'

Thanks

phill doran
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Joined: 02/10/2009
no text (done to move topic up forum)

cheers

phill doran

one hill at a time, please

nhduc.dng
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Joined: 06/14/2007
FOB FREIGHT PREPAID

Hi all,

For your reference I quoted herebelow  a thread of discussions on the same topic in DC-PRO Discussion Forum  in August 2002:

QUOTE

- From T.O.Lee (Canada):

In ISBP, ICC Document 470/951rev3, under paragraph 100, it states:

"For example, the fact that a bill of lading may indicate that freight has been prepaid under an EXW, FAS or FOB Incoterms is not, in itself, reason for refusal, unless the credit requires the document to be marked freight collect".

We welcome opinions from bankers and particularly non-bankers for such ICC opinion.

www.tolee.com

- From Jeremy Smith (UK):

Gentlemen,

I attended a seminar, on 2 Nov 99, organised by ICC UK -to 'launch' Incoterms 2000- and chaired by Prof Charles Debattista, Chairman of the Incoterms 2000 International Drafting Group. The learned Prof made the point that the “Incoterms do provide a good template of standard default [the word ‘default’ is italicised in his notes] terms”. In other words, just like UCP, the provisions of Incoterms 2000 apply unless the relevant contract provides contrary provisions. Therefore, it is quite possible that the buyer & seller have agreed a contract on an ‘EXW, FAS or FOB’ basis (however illogical this may appear), but that the seller will pay the freight. We as bankers cannot speculate on the particular terms of the underlying contract. Also, I cannot see the buyer will have suffered any obvious harm if the seller has paid the freight.

Given the high level of discrepancies documents suffer, I would have thought anything that is likely to increase levels of compliance would be welcome, particularly by any parties that have the beneficiary’s interest at heart.

Jeremy  

 

- From T.O.Lee (Canada):

Jeremy,

PURPOSE OF INCOTERMS

You regard that it is OK for a DC to specify FOB and yet the parties may make the freight payable by the seller. This is destroying the very purpose for the creation of Incoterms – to standardise the rights and obligations of the sellers and the buyers based on harmonized trade practices from different trades to reduce confusions and trade disputes.

MORE CONFUSIONS AND DISPUTES BY ABUSES IN USE OF INCOTERMS

In your case (using “FOB” where the freight is agreed by the parties to be paid by the seller) you are simply trying to do the opposite – to increase the disputes amongst parties by bringing in more confusions. Although this is however good news for consultants like Laurence and us, we do not wish to increase our business by such unethical means. Incoterms allow parties to modify the standard rights and obligations but not to such an extent to create more confusions and disputes.

USA DEFINITIONS OF TRADE TERMS NOW REPLACED BY INCOTERMS

In the US Definitions of Trade Terms, we may do have six kinds of FOB – which is also known as “FOB everywhere”. But due to the confusions it could create amongst the parties, now US Definition of Trade Terms is replaced by Incoterms in USA. As an UK banker, you appear to re-open the Pandora Box.

BUYER MAY HAVE TO PAY 5% MORE IN JEREMY TYPE OF FOB

You regard FOB with freight paid by seller is advantageous to the buyer/applicant. Hence you conclude that it should not be rated as a discrepancy. This statement leads us to think that that you may not have actual trading experience and never practice MBWA.

Your statement is incorrect. With deeper thoughts, by buying with FOB with freight paid by the seller gives no advantage to the buyer at all! Why?

One Chinese word of wisdom says: “A seller will not make mistakes in selling. Only a buyer does”. That means even if the seller agrees to pay freight in FOB, he loses nothing as in his FOB calculation, he should have already added the fright on, and maybe also topping it up with 5% to accommodate any future freight increase due to CAF (not to mean C&F but to mean Currency Adjustment Factor) and BAF (Bunker Adjustment Factor). So the buyer may end up paying 5% more than the situation that he was to pay the fright by himself. I often made such 5% accommodations when I was in import export business. Sellers seldom make mistakes in pricing although they make a lot of discrepancies in their presented documents.

WHAT ABOUT CIF WITH FREIGHT PAID BY BUYER?

On the reverse situation, what about if the DC calls for CIF where the BL shows freight collect? Is this a discrepancy since the buyer may have to pay double freight, if the seller is shrew enough?

We strongly advise bankers to acquire more knowledge on transport and insurance in order to broaden their visions and to determine discrepancies more accurately and confidently.

Those who wish to go in more depth on this issue may read our comments to ICC Banking Commission now posted in our website.

www.tolee.com

 

- From Laurance A.J. Bacon (Ireland):

Jeremy,

although it is true that there are 13 standard Incoterms, there is provision for customising these to suit any contractually agreed terms and conditions. This is a point often missed on those who infrequently use these terms or only have experience of the standard terms. So, for example, it may be possible to contract on FOB terms, but with the buyer responsible for export documentation. This does not change the essential nature of FOB, but if the parties were to agree FOB with the buyer to pay freight, this DOES change the essential nature of FOB & it would therefore be inappropriate to use the term in this way.

To permit this as acceptable under UCP is sending out the wrong message to those who would use Incoterms. We would therefore be saying that any Incoterm is acceptable to denote any contractual terms & conditions. Bearing in mind that the DC checker will not see the contract specifying the agreed terms, what can he/she use to verify compliance with the requested term in the DC ? Unless the DC specifies otherwise, if a standard Incoterm is mentioned, that is the standard by which the document checker should check the documentation. Otherwise what is the point of trying to agree on standard terms ?
One part of ICC is saying that Incoterms is a worldwide standard for contractual terms, but another part of ICC is saying that we should pay no heed to any such standard. Are we trying to portray the ICC as a schizoid organisation ?

Laurence  

 

- From Abdulkader Bazara (Saudi Arabia):

It is quite common with some importers to request for an FOB credit but require the bill of lading be marked "FREIGHT PREPAID".

We see in the application a clause similar to the following.

"Bill of lading to be marked FREIGHT PREPAID as per special agreement with beneficiary" OR

“Bill of lading to be marked Freight Prepaid, freight charges are payable to beneficiary outside the terms and conditions of the credit”

or

“Bill of lading to be marked Freight Prepaid, freight charges are payable in addition to LC value against actual freight invoice not exceeding ………………………”

UNQUOTE

Best regards,

Nguyen Huu Duc

P/S:

My respected experts: T.O. Lee, Jeremy Smith, Laurance A.J. Bacon and Abdulkader Bazara, I’m sorry for not asking for your permission.

phill doran
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Joined: 02/10/2009
FOB "Freight Prepaid"

Hello

As mentioned below by Pan, it is a very big assumption to read "FOB" only as an Incoterm. Personally, I have always felt that a bank would be calling for a customs valuation term and NOT a commercial term in the first place i.e. Commercial terms do not bind parties because they are stated on Commercial Invoices, but rather because they are stated in sales contracts (Whereas a customs valuation term will ALWAYS be required on a commercial invoice - because that is what a ‘commercial' invoice is for: it isn't necessarily always a demand for payment, but it is ALWAYS a document required by commerce in its interface with the destination country's customs authorities. The customs authorities need to either statistically or financially (or both) assess the cargo using the valuation points ‘ex works' (note, NOT EXW - that's an Incoterm) FOB (or FAS for bulk) C&F (again, not CFR, that's an Incoterm) or CIF if insurance is allowed in the statistic and so on.

Accordingly - an FCA contract (using Incoterms) may have an ‘ex works' commercial invoice - or an FAS or FOB commercial invoice. Equally, a C&F commercial invoice may arise in a CFR or DES contract. Hence also the FOB price in airfreight for an FCA contract - it is dangerous if we only read "FOB" as the seafreight Incoterm)

As a bank deals in documents and not cargo, why would the bank be interested in the sales contract? I have had a long-standing question here: http://letterofcreditforum.com/content/credits-v-contracts on this point and I would welcome your respected thoughts...

 I am under the impression that the ISBP uses the expression "trade term" and not 'commercial term' anyway - a rather ambiguous phrase 'trade term' - it may or may not be a reference to ‘commercial' terms exclusively or it may involve other trade-related terms.

The Uniform Commercial Code in the US - which itself is only a ‘snap shot' of globally common practice and is not exclusive or peculiar to the US as such - has examples of the commercial term "FOB" where the seller would pay the freight in the country of origin.

If the credit calls for "FOB" to be stated on the commercial invoice and for the transport document to be marked "freight prepaid" and that is what is evidenced by the documents, then I see no discrepancy.

cheers

phill doran

one hill at a time, please

mikese
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Joined: 03/30/2009
I used some movers to ship a

I used some movers to ship a bunch of stuff across country rather then a normal freight company.

Peter M
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Joined: 09/02/2008
How the heck does this work????????????

If you have a supplier in India selling to the middleman on a CFR basis and the Ultimate buyer is in Sweden and he is buying on an FOB basis it is impossible for this transaction to happen if the shipment is direct.

The Swedish buyer would nominate a vessel and make it available in India for loading - they would then also be responsible for paying the freight.  However, the supplier in India is already contracted to provide their own vessel and also pay the freight - I fail to see how this can be common practice.

When will common sense enter the world of middle-men and traders? ALWAYS buy and sell on the same Incoterm.  I wholeheartedly agree with Frammi that this practice is incompetent

venkat
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Joined: 08/12/2007
FOB with Freight Prepaid is not a discrepancy

Hi All,

Inco term is FOB, and LC is silent on Freight prepaid or Freight collect. Then we can accept BL showing Frieght Prepaid. The reason is under Inco term FOB 2000, seller responsibility ends when he kept goods on board. It does not state Fright has to be paid by Applicant(or Buyer). So Seller can the pay the freight or any third party can pay. This is not the same case with CFR or CIF, Here Seller is responsible for Freight, If BL showing Freight collect under this CFR then that would be a discrepancy.

Hope above answers your question.

Regards,

Venkat.Velupalli

Rothmans's picture
Rothmans
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Joined: 01/15/2009
NO OBLIGATION

hello Peter M.

But if irrespective of the 'so-called' practice and when

Field 45 : F.O.B.
Field 46 : Full set clean on board Ocean B/L made out to order of issuing bank and notify applicant with full address
Field 47: not mentioned whether 'Freight Collect' or 'Freight Prepaid'

B/L presented with 'Freight Prepaid'

Is the discrepancy - 'B/L marked with 'Freight Prepaid' conflict with Terms of Delivery' valid?

I just go through Incoterms 2000 for FOB (Port of Shipment), and find

The seller's obligation
A3 Contracts of carriage and insurance
a) Contract of carriage: No obligation (Refer to Introduction paragraph 10)

The buyer's obligation
B3 Contracts of carriage and insurance
a) Contract of carriage: The buyer must contract at his own expense for the carriage of the goods from the named port of shipment.

Para. 10 about The expression NO OBLIGATION - 'As appears the expression "the seller must" and "the buyer must" Incoterms are only concerned with the obligations which the parties owe to eahc other. The words "no obligation" have therefore been inserted whenever one party does not owe an obligation to the other party."
http://www.docstoc.com/docs/1379090/Incoterms-2000-English-only

How about the situation of 'Freight has been prepaid by the buyer to the nominated forwarder and thus 'Freight Prepaid' marked on the B/L' sound non-sense/non-practice/non-exist?

Anyway, thank you for your comment

Peter M
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Joined: 09/02/2008
Incoterms

Hi Rothmans - yes, if the Incoterm in the L/C was FOB and the L/C was silent as to what the bill of lading should show, then a B/L that states "freight prepaid" would be inconsistent with the invoice and therefore (at least in my bank) a discrepancy.

With regards to no obligation, you are right that the buyer and seller have contracted to certain terms as defined in Incoterms 2000 and therefore on an FOB shipment the seller has no obligation to the buyer to arrange or pay for the freight.  If the underlying contract allows for pre-payment of the freight by the buyer prior to issuance of the bill of lading THEN THE L/C SHOULD MENTION THIS - if it is stated in the additional conditions that "bill of lading showing freight pre-paid is acceptable, notwithstanding Incoterm" then we don't have a problem.

 

Frammi
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Joined: 08/17/2007
Common practice, but incompetent practice, too!!!

Whether you farewell is mainly a question how the relevant doc checker sees the case . 

IMHO it is a contradiction between the B/L and the invoice thus also creating a discrepancy. But as long as the nominated /issuing bank and/or applicant do not raise the discrepancy it would be fine.

If not,    y o u    would have to reason why it should be okay.

   -Each long journey starts with a small step-

Best regards

Frammi

venkat
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Joined: 08/12/2007
Neither UCP or ISBP speaks about Inco terms

 

Hi All,

Neither UCP nor ISBP speaks about Inco terms, IF Inco term is FOB, transport document must evidence the Freight collect. As long as LC is silent on this. Whatever presented we can accept.At times I have seen few LCs with FOB, additional conditions says Freight prepaid also acceptable.

As we deal with documents only, If LC says nothing about Freight prepaid or Freight collect. We can accept.

Correct me If am wrong,

Regards,

Venkat.Velupalli

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