Tariffs & Pricing in Liner Shipping

8/19/2019 Tariffs & Pricing in Liner Shipping

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Chapter 8

TARI FFS AND PRICING

8.1 TARIFFS AND FREIGHT RATES

8.1.1 troduction - The Basic Economics o !or"d Trade

Trade is a word meaning the exchange or 'barter' of two commodities, where each one is

owned by a separate party. One of the two will be a product that has been produced in

some way, e.g. manufactured or grown, and the other is generally some form of currency.

Before the advent of money as we now it today, goods were exchanged , a cow for grain,

a pig for cloth, and this was how the word barter came into being.

Today the #$a"ue# !which is not the same as #price#% of a commodity depends on the

need for the item. "eople are prepared to pay more for something which they need urgently

, this item therefore has 'value' for them. #anufacturers recognise this and will charge a

higher price, the amount of worth in currency terms.

The movement of goods around the world, therefore , depends on the demand for them by

customers or importers,who will range from governments to very small businesses.

$ountries need to export to earn foreign currency with which to buy necessary imports.

There is, however, another component in the scene, and this is the factor of #competition# &There are some goods, the vast ma%ority of which are produced by one country only, suchas &outh frican diamonds , and others, such as grain, which are produced in manycountries but exported only by a few, commanding a price decided by the producer .

#ost products have to compete with the same or similar goods from other sources, either in

the same country or from other countries. $ompetition is the method by which prices are

held down and manufacturers are forced to be more efficient.

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&hipping is simply another product, referred to as a 'service' as what is bought is not a ship,

but 'space'. &ervice industries are those that meet a need, such as accommodation , legal,

medical, travel, food and leisure pursuits. They meet what is nown as #Deri$ed demand#'

the demand for shipping is derived from the need to transport the goods.

(owever, as with virtually every form of trade, &hipowners are in competition with each

other for the goods, the cargoes , which move from country)to)country .

&hipowners are bound by the economic laws of supply and demand. *f too much is supplied

, the customer has to be tempted to buy the surplus by a reduction of the price, if there is ashortage the price goes up to reduce demand.

Too many ships chasing too few goods means that prices, freight rates, will fall as Owners

undercut each other to attract the client.

.+ #(he Frei)ht Rates

hile it is implicit, it should be stated what the 'freight rate' is intended to cover.


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*n the case of conventional cargo this is the sea transport from 'ship's rail to ship's rail'. *n

respect of container cargo it effectively excludes both the loading onto and discharge from

the ship, which are covered by the Terminal (andling $harge !T($-.

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hether goods are shipped brea)bul or in containers the rates charged have to reflect

the laws of supply and demand . The ma%or factor impinging on shipping today is that of

compet ition. &hipping $onferences were introduced to stabilise freight rates, and to

reduce the possibility of a ruinous 'under)cutting' of rates by an over)supply of Operators .

2ates are set after taing in various factors 4

Frei)ht *o"ume

The volume of freight moving between ports must be considered. large amount of cargo

will allow a regular operation , maing maximum use of ships and port facilities. &hips, to

earn revenue, must be moving, preferably with a full cargo.

The Amount and Nature o the Competition

The nowledge that there is a large cargo volume will attract Owners anxious to obtain a

share of the trade and the level of freight rates will be reflected accordingly .

om+ o Sca"e

This comes into effect with large, regular operations. The Owners can afford to employspecialist staff and do not have to hire the services of agencies .

erat in) Costs

These obviously are the ma%or consideration . "rofit is the result of deducting costs from

income.

The revenue, therefore , regardless of all other considerations has to cover4

3epreciation costs of vessels and e5uipment.

!b- $rew wages and other elements .

!c- Buner, water and stores costs.

!d- 2epair and maintenance costs.

"ort dues and charges, pilotage, tugs and agency costs.

*nsurance, "6* $lub costs.

!g- $ontainer and other e5uipment supply and repair costs.

!h- (ead and branch office staff and administration .

!i- #areting costs.

*f the revenue earned does not meet these, the Owner cannot survive.

char)es

*n addition to those above, there are other factors that have to be taen into account , andthe Tariffs have to include a &urcharge, or additional c s to cover additional expenses towhich the $arrier will be liable. These are4

!a- $urrency fluctuations , when the currency of a country involved in the service has

a 'floating' currency which causes the rate against the $arriers currency to vary.This could be at ports of call 'en route'. as well as at the discharge port. The

amount charged is a percentage of the tariff rate, and is referred to as a $urrency d%ustment 7actor, ,CAF%


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!b-Buner surcharges, which are caused by fluctuations in the price of oil arecharged similarly . They are called the Buner d%ustment 7actor !B7-.

!c- :ariations in any canal dues will eventually affect the rates.

!d- ar riss cause heavy rises to insurance premiums.

!e-"ort congestion, stries and delays cause the &hipowner additional dailycosts.

!f- 2ates are increased for livestoc, dangerous , valuable , heavy or extra longgoods to accommodate the extra expense of handling these commodities .

These items, being variable, are usually included in an addendum detailing the extra coststhat these items may incur and the $arrier would pass them on to the &hipper. The cost of the goods in the shops, or the products made by the goods will be increased to reflect theextra cost of sea carriage .

:.1.

4

,ith the development of 7; !7reit 'll ;inds- and .4


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!b Buner surcharges , which are caused by fluctuations in the price of oil are charged

similarly. They are called the Buner d%ustment 7actor !B7-.

:ariations in any canal dues will eventually affect the rates.

ar riss cause heavy rises to insurance premiums.

!e- "ort congestion , stries and delays cause the &hipowner additional dailycosts.

!f- 2ates are increased for livestoc , dangerous , valuable, heavy or extra longgoods to accommodate the extra expense of handling these commodities.

These items , being variable, are usually included in an addendum detailing the extra coststhat these items may incur and the $arrier would pass them on to the &hipper. The cost of the goods in the shops, or the products made by the goods will be increased to reflect theextra cost of sea carriage.

8.1.? 9 ference TariffsC.,D

ith the development of 7; !7rei..ht ll ;inds- and '/ump sum or BoErates the traditionalform of freight tariff has fallen into disuse in many trades. (owever, it is important to havean understanding of the structure and bacground of the traditional tariff which remains inuse in some important trades and certainly still influences the thining behind other tariff applications.

$onference /iner Tariff is a published list of char es a lica..F=g& trades where ?@ cubic feet is still used-. *f the cargo

occupies less than one cubic metre per tonne weight , the charge will be based on weight

G-, or 'deadweight' . *f more than one cubic metre then the charge is based on volume

used, measurement !#-. freight rate based on this formula is called a

weightAmeasurement rate !A#- and the unit is a 'freight tonne'. This is still the usual basis

of charging for /$/ and brea)bul cargo.

*f a crate with a volume of one cubic metre containing copper bars is compared with the

same crate containing table tennis balls then, although the same volume onboard the

ship is used, the weight and the value of the goods in the crate is vastly different. hen

loading crates containing copper ingots, the ship would be loaded to its mars long

before all the space was used. ach crate, therefore, has to achieve more revenue than

those containing the table tennis balls.

*f twice as many of the latter crates can be loaded, each can be carried at half the cost

of the heavier crates to achieve the same revenue. (owever. in this case the ship may

well not be loaded down to its full weight capability !mars-, and weight earning capacity

is lost.

The charges levied have to tae account of this factor , and the rates set offer a 'weight or measurement' !wAm- choice of which is at the $arrier's option. The &hipowner will therefore'mix)and)match' the rates to maximise earnings. The impact of weight against volume alsoapplies in container trades although in a slightly different way.

:aluable 9oods

These attract a surcharge to reflect the extra value and the potential increase in the $arriers

liability if that value is 'declared' on the Bill of /ading. They will usually be charged, irrespective

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of weight or volume , on an ' ad valorem' basis, ie the freight charge will be a percentage of

the declared value.


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yHf'ded :alue

The &hipowner also taes into account a factor called 'dded value'.

ll goods are carried from one country to another for two reasons4

1. They are needed and used by the *mporter or the importing country in the state theyarrive e.g. Tinned fruit, machinery, railway lines, cement, etc

I. they are used as raw materials for the manufacture of something which can be sold orused, e.g. rubber, grain, bauxite, iron ore.

2egardless of type, the imported item will be sold at a value either a little, or greatly morethan its value when loaded. The carriage by sea therefore 'adds value' to the commodity.

The same commodity may mae two %ourneys. The first, as a raw material, would be from

a non)manufacturing country to an industrialised country , and the second %ourney would be

onwards, as a manufactured item for sale elsewhere in the world.

The point of the theory of 'dded :alue' is that carriers recognise thisEfactor , and will ad%ust

the rates according to the amount the goods wilt rise in value after discharge . *n other

words , /iner Operators aim to charge 'what the traffic will stand'.

8.1.5

The $onferences set the amounts that members charge &hippers for carrying their cargo from

port)to)port or door)to)door, sub%ect to competition rules, in the case of containers. The tariff

would list in alphabetical order every commodity that the /ines might expect to carry in thattrade and the rate to be paid for each commodity would be listed on a or # or A# basis.

The idea of a commodity based tariff may seem even more difficult to grasp when thining

of containers. 9iven a container within certain weight limitations you can argue that what is

actually in the container is immaterial and this argument has gained momentum.

Taing advantage of the opportunities offered by independent /iner Operators, together with

changed business attitudes, &hippers have become unwilling to accept mandatory freight

tariffs. &ometimes playing one /ine off against the other &hippers, particularly those of

containerised goods, now negotiate their own freight rates to the stage where, in many

container trades, detailed commodity based freight tariffs have more or less fallen into disuse.

*n many trades /ines offer simplified commodity tariffs based on a I@' or ?@' container, with

surcharges applied for special e5uipment !reefers, flat racs, open tops etc-, plus out of

gauge, heavy, haJardous and high valued cargoes, but this will also be influenced by the

buying power of the particular &hipper. rate that is based on a 7$/ container is usually

called a Box 2ate and whether that rate is commodity related or not. hen the rate is not

commodity related and is applied to any type of cargo it is nown as a 7reight ll ;inds

!7;- rate.

9overnment *nfluence

9enerally, other than normal maret forces, there has been little outside interference with

the way rate levels were established and negotiation was left to the &hippers' $ouncils.

(owever, some 9overnments re5uire consultation and approval before permitting rate

increases while others have taen a stronger line. lthough both the >& and urope have

granted &hipping $onferences some exemption from their competition rules, they monitor

the $onference activity .

&ome 9overnments try to influence the rates, the amount of influence depending upon the

politics of the 9overnment concerned. The >& 9overnment re5uires that freight rates are

published so that there is no abuse of the $onference exemption from nti)trust legislation,


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but does not attempt to influence the actual level. &ome other 9overnments will try to

cause inward rates to be high, and outward rates low, to discourage imports in an effort to

improve

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the efficiency of national producers. xport side rates are ept down to encourage tradeoutwards in other instances.

Adustment Factors and .ther Surchar)es&

d%ustment factors, rate additionals and surcharges are various ways of compensating the$arrier for extra expenses it incurs because of changes in circumstances that were not

provided for when the main tariff was published.They may compensate for short)termchanges in international economic conditions, local geographic or labour problems or theseparation of a particular expense for reasons of transparency in pricing. These chargesmay be expressed as an additional rate per freight tonne or container , a percentageincrease or a lump sum.

*t should be noted that these ad%ustment factors are universally dislied by &hippers

because of the element of uncertainty that they introduce into freight rates. &hippers argue

that they are 'hedging' mechanisms to enable /ines to protect themselves against short run

variations in currency, buner prices etc.

#any large &hippers with sufficient negotiating power absolutely refuse to have their freightrates sub%ect to any surcharges .

er Adustment Factor ,BAF%

The price of crude oil on international marets is sub%ect to fluctuation and this applies

especially in periods of conflict. To allow for related fluctuation in buner prices it is

standard practice for $onferences to publish, as and when necessary, a B7 value,

applicable to their tariff. hen buner prices become sufficiently stable the B7 is

incorporated into the tariff rates.

enc+ Adustment Factor ,CAF% lmost all /iner tariffs have their charges 5uoted in >& dollars but the /ines will incur costs

in many different currencies. To allow for this a complex calculation is made from time)to)

time and a $7 notified to the trade as a surcharge on the freight. !Occasionally a negative

$7 is declared-. This $7 surcharge is 5uite separate from the tariff rules laying down

how a rate of exchange must be applied for paying freight in the local currency .

urchar)es

*f ports become very congested and vessels become sub%ect to unusual delay it is the

custom for a "ort $ongestion &urcharge to be declared. nother reason for a port

surcharge to be applied is if the port becomes insecure as regards the safety of the ship or the security of the cargo.

8&/&0 $1Pecia" Frei)ht Rates

#ost $ontainer /ines today apply Box 2ates, which have some relation to the value of

cargo. (ow this is done is discussed later. (owever, whatever rate structure is used by the

$arrier there will be some reductions made to meet special circumstances.

a- Proect Car)o&

&hipper who wishes to ship a large amount of cargo may be able to achieve a

reduction in price. This is certainly the case if a long)term civil engineering pro%ectcontract is expected.

$ivil engineering pro%ects, such as the construction of a hydro)electric dam with all

the generating and transmission e5uipment, are inevitably very complex with a

wide variety of materials coming from scores of &ub)contractors . &uch pro%ects

are also very competitive so that the $ontractor wants to mae his price as een

as possible with as few unnowns as can be achieved. To this end such a

$ontractor would endeavour to obtain not only a reduced rate of freight, but also a

simplified tariff structure so that even without precise specifications of all the cargo


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the $ontractor would be able to mae a fairly accurate estimate of the freighting

element in his costings.

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b- Specia" Commodit+ 2uotations ,SC2s%&

These are usually applied for by &hippers when an unusually high demand occursfor an already low)rated commodity or where the traffic might be lost to competitionfrom another region of the world able to produce or ship more cheaply. To do thebusiness at all the &hipper would need a specially low rate.

8&3 4.DERN FREIGHT TARIFFS AND PRICING

*n today's container trades the 5ump sum 6o7 rate has become the norm. box rate may

be lined to a simplified commodity tariff or to a particular client's cargo or it may be a FA

,Frei)ht A"" inds% rate where it is the same irrespective of the cargo. There are, however,

still a number of important commodity based trades such as ustraliaA0ew Kealand to

urope and &outh frica to urope trades where the tariffs still exhibit features of

commodity based tariffs .

*t is also important to understand the fundamentals of /iner tariff construction because all of the ma%or /iner carriers have pricing departments applying a high degree of both technical

sill and maret nowledge to the problem of maximising the freight contri6ution 9 while at

the same time increasing maret share. 0ote that it is contribution that is more important

than the )ross re$enue9 ie how much is left to pay for the operating costs of the vessel and

profit after the direct costs of handling that container have been taen into account.

*t is believed by some commentators that the battle for mar:et share is also one of the

most important influences in determining rate levels, while others would say that seasonal

changes and imbalances within particular ma%or trades , particularly the east ) west routes,

have a greater influence.

8&3&/ Pricin) Strate)+

*n most ma%or deep sea container trades the commodity tariff has been replaced by lumpsum per container rates that are not directly determined by the nature of the cargo. "umpsum or 6o7 rate is, as the name implies, a fixed amount payable for that container irrespective of its weight or the measurement of the contents. *t may still be lined to acommodity tariff or it may be determined by negotiation with the client bearing in mind hisvolume of business as well as the type of cargo. FA rate is also a lump sum but is notrelated in any way to the container contents. Often 7; rates are used for establishing

contracts with 0:O$s or 7orwarders.

(owever, 'what the traffic will bear' is still very much a part of the pricing e5uation ,

although no longer related only to the 'added valueEof transport to the cargo but to a range

of factors.

#any economists have attempted to apply economic modelling to the 5uestion of /iner

rates. "rofessor &turmey of >0$T3, some years ago, divided the rates in a commodity

tariff into five categories 4

The top Alpha rates were those charged for cargo with a very high value to weight ratio anda middling volume to weight ratio. ship fully loaded with such a cargo would be loaded toit's mars, full on space, and would mae a very handsome profit on the voyage.

Beta rates would be similar but lower so only a modest profit would accrue.

9amma rates would be reasonable but the volume to weight ratio would be unfavourable so

the ship would not be full both on weight and space.

Delta rates would cover all the direct costs of handling the cargo and the operating costs of

the vessel but offer little if any contribution to fixed costs and profit.


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Epsilon rates are so low that the only %ustification for carrying is that they mae a small

contribution to operating costs.

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These general principles are still applied today in container pricing. container being

carried on lump sum rate basis falls into one of these categories.

*t has been suggested that the shipping industry is now learning from and utilising some of the techni5ues that have been used in the air passenger industry. (ere 'epsilon' rate levelsare often used for high impact maret promotion, although in fact only a very few seats areavailable at that low price !and those are on limited flights at strange hours-. further

modest tranche of seats is available at 'delta ' rates. The main part of the aircraft is soldthrough tour Operators at 'gamma' rates. The top tiers are represented by premiumeconomy, business and first class fares.

pplying this to container pricing is somewhat different as a shipping line is not selling to

individual consumers who largely have a 'one)off flight re5uirement. The important /iner

customers will have both repetitive and volume business which has to be retained and

this has led to a more sophisticated approach. #any /iner sales or customer service staff

complain about the extensive information that the pricing or trade management

departments want before a special 5uote will be given or a service contract offered to a

particular client.

8.I.I "hysical "ricing 7actors

There are a number of physical factors that need to be taen into account in determining a

pricing policy.

eight

#any commodities such as chemicals , machinery , metal products, canned foodstuffs ,drins , semi)manufactured goods, etc can be stowed with more than II tonnes in a I@'container. #ost modern container ships have deadweight constraints due to stabilityfactors , they cannot carry too many heavy containers in the upper tier stows and have an

overall average space to deadweight ratio of about 14 tonnes per T> including the tare of

the container. A 'tare' being the cost of $arriage when goods and $ontainer are weighedtogether and an allowance mae for the weight of that container . "ricing may thereforefavour the lighter units. ?@ ' containers will be offered a rate of perhaps only 1.L times theI@' rate as they are restricted in terms of weight per T> as the all up weight on mostroutes cannot exceed about IL tonnes because of inland restrictions !ie only 1I.L tonnesper T>-. ?@' $ontainers are fre5uently much lighter than this because they are used toship the bulier cargoes .

(igh $ubes

These containers should and usually do carry a premium above the basic rate because

they are more costly and in limited supply. (owever, on certain legs of a route where there

is no great demand they may 5ualify for a cheaper rate because they are usually

'lightweight' or to assist in repositioning the special e5uipment.

3angerous $argoes

premium is applied to dangerous cargo because of the problems of ensuring proper handling, stowage and separation from other cargoes as well as liability factors .

&pecial 5uipment and Out of 9auge $argo

premium is applied to cover all types of special e5uipment. 0ot only is such e5uipmentmore expensive than 9" units, it incurs higher storage and repositioning costs because of limited demand or one way use.

8.I.+ 9eographical 7actors

The physical factors affect the individual container while the geographical factors relate tothe ports of call and the ship's schedule .

"ort $osts

The direct cost of the vessel's call at an individual port will vary due to three main factors 4


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. $ost of port dues and charges.

. $ost of services, particularly tugs and "ilots.

+. ase of access , such as where a long river passage is involved.

&o that it would seem reasonable for higher rates to be charged to expensive ports. *npractice this is not always possible in container trades but the overall impact of cost mightdetermine whether a port is included in the direct call schedule.

Feeder Costs

here a direct call is not made the additional handling cost of transhipment and the freight

cost incurred on the feeder vessel must be taen into account. The /ines' approach to this

will greatly depend on policy decisions about the overall importance of that port or country's

trade in terms of the /ines, or more often today the alliances' strategy. The essential

5uestion is whether a full recovery of the feeder additional is attempted or whether the

through rate is ept basically in line with the other direct call ports in the same range.

Trade Im6a"ances

These arise from both economic and geographic factors . n economy based on the export

of heavy metals, chemicals or semi)manufactured goods, and the import of mainly

consumer goods will create a substantial surplus of space on the outward leg and of weight

on the inward voyage.

&easonal crops will demand addit ional space only during their season, although this is

becoming less important with the development of long term storage permitting crops to be

held bac and released to the maret out of season.

8&3&; Commercia" Factors

*t has already been said that the large multi)national manufacturing company wants 'one

stop shopping' from a limited number of suppliers, in exchange for which they offer a

share of their world)wide distribution . They also expect to get the most advantageous

freight rates.

*o"ume and Ser$ice Contracts

The &hipper with larger volume has greater purchasing power and expects a lower rate. *n

the days of $onference commodity tariffs the mechanisms for dealing with this were slow,

clumsy and often ineffective as it usually meant reference to the /ine, secretariat and a

freight committee of members. Today business moves fast and customers expect rate

en5uiries to be dealt with in hours, not days. There is direct negotiation with the customer

and in many cases a service contract is established under which the &hipper 'guarantees' a

minimum volume to be shipped within a certain period, usually a year but sometimes a

shorter period. $onferences still arrange for service contract terms to be agreed among

members so that there is no internal battle over the conditions for these larger volumes . *n

the >&, trade , special rules apply to service contracts that must be filed with the 7#$, asare other freight rates. The >& Ocean &hipping 2eform ct 1 considerably relaxed the

regulation of ocean carriage freights and, in particular, permitted individual confidential

service contracts.

Trade Competition

The need for freight rate policies to provide assistance to exporters to be competit ive in

their marets was dealt with in discussing $onference tariffs, and this aspect still applies.

small rate reduction may enable the &hipper to match competition from another part of

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*n today's world there are also commercial distortions due to consumer preferences , suchas the large movement of 'designer' branded goods that owe more to fashionable demandthan 5uality , price or country of origin.

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&hipping $ompetition

7inally, the line must loo at the rates charged by its main competitors in the trade. Thisdoes not mean %ust following the cheapest , comparisons have to be made with the 5ualityof service in terms of transit time, fre5uency , reliability, standards and breadth of service . t the beginning of this chapter the battle for maret share was mentioned. 3uring the1@s this was a dominant feature of the maret as consortia and alliances were changed

and reformed. #any of the players were very concerned to retain their existing share of themaret or increase it to reflect the extra capacity they were putting into the trade . &uch afight for business caused substantial erosion of freight rates during that period, which eventhe strongest /ines were unable to avoid .

8.I.L Tariff dditional

$7, B7 and congestion charges may also be added to lump sum rates. number of other additional charges may also be due in addition to the rate. These were describedearlier in this $hapter .

8.I.M Tariff 2ules

*n any business it is important that when 5uotations are made the terms and conditionsunder which the service is undertaen or goods provided are made clear to the customer ./iner shipping is no exception. e have already seen that the BA/ is the evidence of thecontract and the terms and conditions of carriage are set out on the reverse. Therefore ,any freight 5uotation must mae it clear that it is sub%ect to the terms and conditions of that$arrier's BA/. (owever, in addition, there are a number of rules that are only related tomonetary aspects of the contract and which do not necessarily appear in the 8A/ conditions.

7or example, rules relate to4

The collection and return of the /ine's container and the financial penalties incurred in

respect of $ontainer detention, demurrage and 5uay rent."ayment of freight in currencies other than the tariff currency and how this will becalculated for both prepaid and collect freight.

"re and on carriage of containers under carrier haulage.

2e5uests from merchants for changes to the ultimate destination of the cargo.

3ocumentation and other additional charges .

7orward validity of rates and notice of changes.

7orward validity of surcharges and additionals and notice of changes .

8.I.N &tability of 7reight 2ates

$ompared with the tramp maret, $onference rates were stable , and did not react directlyto sudden maret fluctuations . &hips in the tramp marets are 'price taers' in that the rulesof supply and demand affect them directly and almost instantaneously . (owever, /inersare 'price maers' in that they determine and publish their rates in advance.

$onference rates would normally be altered, at most, four times a year and in manycases only once each year. "rices are almost invariably in >& dollars, which assistsstability . hen rates increase !decreases used to be rare-, the increase is generally'across the board'. This was nown as a 9eneral 2ate *ncrease !92*-.

s mentioned earlier , temporary increases via surcharges !congestion , $7, B7, ar

2is, etc- are made but even these were preceded by a reasonable amount of notice. &uchalterations in rates are not necessarily always upwards, movements in the foreignexchange marets can result in a 'negative $7'.

9eneral increases to the tariff were often the culmination of a very long series of discussions . &hippers ' $ouncils exist in almost every region and they fight hard to preventrate rises.

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LIN ER TRAOES

*ncreases are almost always due to increases in the cost of ship operation. 3uring the lasttwo decades, Owners have been reducing crew numbers and moving to cheaper registriesin desperate attempts to remain competitive. #any Operators have ceased to trade or havebeen absorbed into other companies . t the same time the new economies of scale arisingfrom larger vessels and alliances have created an even more competitive situation.

The collapse of $onference rate fixing in the last twenty years , routes, and extreme

imbalances in certain routes, have led to the rate reductions of recent years , followed by

more recent spectacular growth in some areas and to a 'price taing' philosophy in the

/iner Trades. 2ates have tended to be fixed for shorter periods and generally have shown

much less stability.

8.I.8 Additiona" Char)es

:-6u": car)o

ith only very rare exceptions, all /iner rates for brea)bul cargo are based upon the ship

paying for all the loading, stowing and discharging costs from crossing the ship's rail at

loading port to crossing the ship's rail at discharging port. *t is for the &hipper to present the

cargo and the $onsignee to tae it away from alongside .

*n practical terms, the &hipper usually delivers his cargo to the roadway side of a transit

shed and the Terminal Operator or "ort uthority will deliver it to the ship, with the reverse

happening at discharging port.

The line Operator will automatically boo the transit shed!s- as part of the arrangements for the

loadingAdischarging berth and it will be the ship's commandAstevedores who give instructions

to the labour in the shed to bring the cargo to the ship's side. (owever, the cost of the move

through the shed will be the responsibility of the &hipperA$onsignee respectively .

(ow the charge is actually levied will vary. *n many cases the Terminal Operator actually

bills the merchant direct. *n other cases all the charges are made to the /ine, which has toadd the cost to the freight account at loading port or mae a separate charge before

releasing the cargo at discharging port.

The names given to the charges vary from port)to)port although the name #carrier hau"a)e%& The same alternatives apply at the port of discharge for delivery of thecargo. *n the case of merchant haulage the /ine may mae a #"it on-"it o# charge to themerchant to cover the cost of handling the empty container at the storage depot. $arrier haulage charges usually include the cost of 'lift on)lift off' within the trucing rate and, incalculating the haulage rate, the /ine will also include some element of the cost of the trucreturning empty to its home base.


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1?8


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T2*77& 03 "2*$*09

hile road haulage accounts for the greatest volume of inland movement both rail and

barge may be cheaper and more appropriate alternatives . *n such cases there may be

alternative tariffs offered to the &hipper for using different modes of delivery. *t has to be

remembered when comparing such costs that unless the actual &hipperA$onsignees

premises has its own rail or waterway access there will still be a road movement involved.

*t has to be assumed that , in offering $arrier haulage, the Operator wishes at least to cover

his costs. (owever, in certain circumstances , partly for historic, partly for competitive

reasons, it may not be possible to do so.

"rior to containerisation of the deep sea routes services were often offered to and from

a variety of ports in a single country. To achieve the econom ies of scale, and because of

limited investment, port facilities to handle container ships tended to be concentrated in a

small number of ports. There were pressures that customers should not have to pay more

because &hipping /ines were choosing to divert their cargo through a single more distantport.

*n response to such pressure, the ma%ority of $onferences devised a system of inland

charges, so that the rate toAfrom the actual port of loadingAdischarge would be no greater

than the cost toAfrom the 'traditional ' port.

This approach to inland charges is referred to as #e?ua"isation# or #centra"isation# and in

many instances reflects a high degree of subsidy of inland costs. 0evertheless , the

Operator will have determined that it is more cost effective to subsidise the inland costs inthis way rather than mae additional ports of call, incurring additional port and buner costs

and extending the round voyage of the vessels.

&uch systems were introduced for these historic reasons and many Operators and

$onferences have since attempted to reduce the extent of e5ualisation to improve their cost

recovery on inland operations .

(owever, e5ualisation continues because of the need to meet competition from another

port in the same area !&outhampton , /ondon and 7elixstowe competing for cargo from any

part of the >;- or because a commercial decision has been made not to call at a port !or

country- that is served directly by a competitor .

ina" Hand"in) Char)e ,THC%

$ontainer freight rates do not usually include the cost of handling the container through the

export or import port terminal. n additional terminal handling charge is made to cover this

cost.

t the advent of containerisation most container tariffs' sea freight charges included the

cost of lifting the container on and off the vessel. Terminal handling charges were later

separated because there are several advantages4

*t helps to protect the cost recovery of this item by separating it from freight ratenegotiations

it enables the Operator to mae different and transparent charges for highcostAlow cost ports

increases in the charge can be more easily %ustified by direct reference to anyincreases introduced by the portAterminal , although attempts to produce a 'neutral

formula ' with &hippers' $ouncils were unsuccessful

additional facilities , e.g. for refrigerated cargo, can be covered by an additionalcharge.


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Terminal handling charges are normally levied per I@ ft or ?@ ft container, irrespectiveof commodity , unless the portAterminal levies additional charges for handling specificcommodities .

149


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5C5 Ser$ice Char)es

7rom the merchant's point of view the service provided by the /ine in the case of /$/ cargois virtually the same as for brea)bul cargo. The '7OBs' however, will be replaced by an/$/ service charge !normally be levied per 1,@@@ gsA1 m3} which aims to cover the cost of stuffing the cargo into the container and to contribute to the cost of moving the filled container to the ship's side.

Container Demurra)e and 2ua+ Rent*mporters are encouraged to clear their goods 5uicly but, in the case of delays in clearing

container traffic, the tardy importer may find two charges made. 7irst will be container

demurrage levied by the line according to the rates in the tariff.

$ontainer demurrage is often deliberately set at substantially more than the rate at whicha container could be rented. $ontrolling containers, having them in the right place at theright time and having the right stoc levels, is difficult enough without having to cater for thepossibility of some of them being out of circulation for indefinite periods. $onse5uently, asomewhat punitive rate is charged to discourage importers from using ship's containers astemporary warehouse space.

ln addit.ion to demurrage a charge is made by the Terminal Operator . either directly tothe importer or through the /ine, before the container is released, usually called Fuay 2ent. few days are always allowed free of charge but, on the expiry of that time , a dailycharge *s made. &ome terminals have a sliding scale with the charge becomingincreasingly punitive the longer the container remains on the 5uay. The punitive rate levelsare to avoid congestion on the terminal. *t is intended to be a transit, not a storage , area.

ContainerNehic"e detention

hen a container attends the &hipper's premises for stuffing or stripping a fixed time is allowed

for the cargo handling operation to tae place. round four hours is a typical maximum. *f this

time is exceeded a penalty charge per hour or part is applied. *f the delay is very prolonged t

his charge may also be increased to allow for driver's overnight accommodation . These time

limits are very critical in many countries because of strict restrictions on driver's woring

hours.

Documentation Char)es

On export cargo a 'documentation' or ' BA/' charge will be made for producing the BA /s

or aybills for the #erchant, as well as extra charges for any other documentary wor

undertaen such as consular documents , certificates of origin, customs etc. On import cargo

an 'import service charge' is made to cover the administrative costs of notices of arrival,

container delivery orders etc.

SE5F-ASSESS4ENT AND TEST [email protected]

ttempt the following and chec your answers from the text4

1. hat are B7 and $7, why are these charges made

I. *dentify the main physical and geographic factors that impact on pricing. +.

xplain how trade imbalances arise and their impact on freight rates.

xplain the terms 'carrier haulage' and 'merchant haulage' .

L. hat is the difference between container demurrage , detention and 5uay rent.

(aving completed $hapter ight attempt the following and submit your essay to your Tutor 4

'The application of 7; rates instead of $ommodity Box 2ates does not assist in

development of new trading opportunities.P 3iscuss whether or not this statement is true

and identify how freight rates and trade development might interact.

150


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Chapter

FINANCIA5 ASPECTS .F THE I4P.RTBEP.RT

B@SINESS

&/ [email protected]

.1.1 The E7chan)e o Goods

The buying and selling of goods , no matter what ind or where it is done, involves thecreation of a #contract# or agreement between two parties, one offering goods for sale andthe other offering something in exchange for those goods. *t does not matter how manyother gents become involved.

The contract created, therefore, binds the two parties together , and does not necessarily

have to be in writing . purchase in a shop is an example of a straightforward contract of

sale, although in many countries such a contract today involves certain other elements

re5uired by the &ale of 9oods legislation , such as refunds or replacement for faulty

goods.

Both sides of the contract have an obligation and, if either party fails to fulfill its obligation,there are remedies in law that can be taen to the $ourts if the matter is serious enough.ith both parties in the same country the legal remedies can be easily enforced . 0ormally,one party re5uires money and the other re5uires the commodity being offered in exchangefor the money.

ithin the >; this is simple, we can use credit cards, cash, che5ues or one of the various

forms of electronic transfer . &ale and purchase contracts or 'deals' are virtually

instantaneous in a shop, but tae a few days longer when goods are bought by mail order

for example .

The situation with international transactions , however, is rather different due essentially tothree factors4

i- The distances involved.

The large sums of money that often have to be passed from buyer to seller.

The difficulty in enforcing legal remedies in a different %urisdiction.

The term 'finance of international trade' embraces two distinct activities4

The arrangement of payments for imports and exports.

ii- "roviding the maximum conservation of cash)flow for one party or the other,providing the optimum conservation of cash)flow for both parties.

/iner Operators and their gents need to have an insight into some of the merchants'

problems regarding the financing of their trade to provide a supportive service.

emember that cargo shipping is a derived demand, so if the $arrier fails to satisfy the

erchant there is little point in running the service.


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/i02 T2'3&

.1.I The Transer o Funds rom Countr+ to Countr+

The ease with which money can be sent from one country to another varies considerably.

&ome countries have no barriers at all while others have extremely strict e7chan)e

contro"& The stringency of the control is usually a reflection of the balance of payments

weaness of the country concerned or the extent to which it operates a central economy .

here no controls are imposed,there are a variety of methods.The simplest of all is ache?ue or 6an:er#s drat drawn on the buyer's ban in the currency of his own country.

lthough this is the most straightforward for the payer, it creates some problems for thepayee. (is ban has to sell the currency in which the che5ue is drawn and credit thepayee's account deducting the charges which the ban will mae for providing this service.*n the case of a che5ue !rather than a baner's draft, which is reconed to be as good ascash- such funds will usually be credited 'with recourse' which means that the payee's banreserves the right to cancel the credit should there be any irregularity in the che5ue beinghonoured by the payer's ban.

more satisfactory method is for the payer's ban to effect a credit transer to the payee'sban. &uch a transfer may be done by any of the usual methods of communication ,including mail, cable, telex , fax or via computer lins. 0aturally, the charge the bansmae is commensurate with the speed of transfer demanded. One particular advantage of a credit transfer is that the payer can arrange to absorb all the charges even to the extentof stipulating the precise amount that should be credited to the payee's ban in his owncurrency.

This can be very important to an gent who re5uires payment for disbursement and naturally

wants the exact amount paid out on the ship's behalf.

.1.+ 4ethods o Pa+ment in Internationa" Trade

Qust how payment is to be effected will be an important part of the contract for the sale of the goods concerned. here the buyer and the seller are part of the same group of

companies , or when the two merchants are well nown to each other and have a high

degree of trust in each other, they can operate open account tradin) and the methods of

transfer mentioned in the previous section are perfectly ade5uate. There remains one

problem, when should payment be made

Both parties will wish to conserve their cash)flow to the maximum extent so that an ideal

method for the &hipper would be #cash


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1LI


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7*00$*/ &"$T& O7 T( *#"OTA8c"O2T B>&*0&&

&/&; Bi""s o E7chan)e

detailed study of this method of payment is beyond the scope of this $hapter but thoseworing in /iner Trades should be aware of their existence. *n simple terms, this method of payment is rather more secure than ordinary open account trading but not so protected asa 3ocumentary $redit.

*n essence a document is prepared that resembles a che5ue drafted on plain paper. hereit differs significantly from a che5ue is that, in most cases, it stipulates that payment is to bemade at some future date !e.g. @ days-.

The advantage of this method is that it permits both parties to conserve their cash flow to

the maximum . The buyer will not have his account debited until the @ days have expired

so that he could well have retailed the goods before having to pay for them. The seller may

choose either to wait the @ days and be credited with the full amount or !because Bills of

xchange are negotiable- may negotiate with a ban the sale of the bill at slightly less than

its face value !nown as discounting the bill-. ssuming the seller allowed for the

discounting charge when negotiating the sale of the goods, both parties can conserve their cash flow without penalising the other.

.1.L Documentar+ Credits

These are often referred to loosely as #5etters o Credit#9 but with a /etter of $redit one may

only have to identify oneself to draw from it. 3ocumentary $redit is so called because it

re5uires several documents to be presented to receive payment. The two expressions may

be treated as synonymous in a shipping context.

3ocumentary $redits are the most fre5uently used method of payment for long distancecommerce and, during the course of the sale negotiations, the seller must stipulate thatpayment shall be via a 'confirmed, irrevocable 3ocumentary $redit'.

#Conirmed# in this context means that a ban in the seller's country has to agree that even

if both the buyer and his ban become banrupt, the confirming ban will pay provided all the

stipulations are adhered to by the &eller.

#Irre$oca6"e# means that once opened the Buyer cannot cancel !revoe- the credit.

*t is sensible for the &eller to negotiate in detail with the Buyer to ensure that unnecessary

terms are not included in the credit with which it may be difficult for the &eller to comply.(aving reached agreement the Buyer arranges with his ban to open the credit and this is

transmitted to the confirming ban in the &eller's country.

hen the goods have been duly loaded the &eller gathers together all the documentsstipulated in the credit and presents them to the ban. The ban compares themmeticulously with the instructions sent by the issuing ban and it is this close scrutiny thatmay have an impact on the /ine Operator or gent.

The confirming ban has no discretion whatever . *t has to obey its instructions to the letter as the slightest variation between the confirming ban's instructions and the documents

presented by the &eller will result in payment being refused. ma%or /ondon ban hasstated that nearly 8@R of 3ocumentary $redits result in a refusal on first presentation.

*t will contribute nothing to the goodwill of the carrying /ine if the ban's refusal to pay

under a 3ocumentary $redit is due to a failure by the /iner Operator or gent to word the

BA/ in accordance with the &hipper's instruction.

&imilarly , anything endorsed on the face of the BA/ that remotely resembles a 'clause' mayresult in the ban refusing to pay. &ome examples of this have the appearance of becominga little ridiculous.


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153


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/*02 T23&

The confirming ban has no discretion because it is that total obedience to instructions thatprotects the Buyer. 7urthermore , that obedience has to be almost robotic to cope with thethousands of 3ocumentary $redits that have to be processed every day under the pressureof ship transit times becoming shorter and shorter . >$"M@@, &ection 1?, providesguidance for bans on examination of documents .

3espite this care, there have been some spectacular frauds with 3ocumentary $reditswhere the criminals have succeeded in producing apparently genuine documents for non)existent cargo even having been 'loaded' on a non)existent ship or a genuine ship whichwas on the other side of the world at the material time.

&ome people have been 5uic to blame the bans when such frauds have taen place

but if the ban had to include checing the whereabouts of every ship involved in every

3ocumentary $redit the cost would become prohibitive andAor the whole system would

grind to a halt. &hips are already tending to move more 5uicly than the paperwor .

hen 3ocumentary $redit frauds have been investigated the weaness is found to be

gullibility , ineptitude or collusion on the part of someone connected with the Buyer.

"erhaps the biggest mystery is why Buyers are still encouraged to have the credit insistingupon a set of three original BA/s and then 5uite rightly insisting upon all three being presentedby the &ellers to the confirming ban. ven if the Buyer wishes to endorse his title to thegoods to another, that endorsee will also want all three bills as there would be no secure titlewithout them.

These specific criticisms should not be taen as a suggestion that the bans are beingirresponsible, far from it. The vast ma%ority of the millions of 3ocumentary $redits overcomeany initial errors on the part of the &hippers and no better way of financing internationaltrade has been found as yet.

There is close liaison between the ma%or bans and the *nternational $hamber of

$ommerce !based in "aris- and it is the latter body that publishes, in several languages,

the invaluable boolet entitled #@niorm Customs and Practices or Documentar+

Credits#& This document is revised from time)to)timeD the current edition is number M, so

the abbreviated title is @CP0& The rules it embodies are now very widely adopted.

>$"M@@ stipulates the types of document recognised, which include Bills of /ading, &ea

aybills and #ulti)modal Transport 3ocuments !as well as others such as ir and 2oad

transport documents which do not concern this publication- . The re5uirement for 'shippedon board' BA/s is still an essential feature of the documentary system.

hen >$"M@@ came into effect in Quly I@@N the structure and numbered clauses werealtered to ensure documentary credits were more commercially friendly than before in>$"L@@. *t is recommended that you read through all clauses to become familiar with allarticles for international trade 6 related documents . *t is not the intention of this course togo through each article in detail but we would draw your attention to the following articleswhich are in plain nglish so the text is not repeated or further explained here but the detailof each needs to be read and understood.

rticle L ) 3ocuments v. 9oods, &ervices or"erformance . rticle 1? ) &tandard for xamination of

3ocuments.

rticle 1M ) 3iscrepant 3ocuments, aiver and

0otice. rticle 1N ) Original 3ocuments and $opies.

rticle 18 ) $ommercial *nvoice.

rticle 1 ) Transport 3ocument $overing at /east Two 3ifferent #odes of

Transport . rticle I@ ) Bill of /ading.


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1L?


31/43

7*00$*/ &"$T& OF T( IMPORT/ExPORT B>&*0&&

rticle I1 ) 0on)0egotiable &ea

aybill. rticle II ) $harter "arty Bill

of /ading.

rticle IM ) POn 3ecP, P&hipper's /oad and $ountP, P&aid by &hipper to $ontainP and

$harges dditional to 7reight. rticle IN ) $lean Transport 3ocuments.

rticle +? ) 3isclaimer on ffectiveness of 3ocuments .

ll of the above rticles are written in plain nglish so the text is not repeated or further explained here, but the detail of each needs to be read and understood.

The line or its gent must always recognise how important it is for the face of the BA / to

describe the goods in precisely the wording the &hipper re5uires. This does not mean,

of course, that clean BA/s should be issued regardless of the condition of the cargo, that

problem was dealt with in an earlier $hapter. *t is also important to ensure that the lengthy

cargo descriptions sometimes re5uired in /etters of $redit are not copied into the BA/ as

this may well include statements as to value that could affect the $arrier's liability under the

(ague0isby 2ules.

>nder >$"M@@ all letters of credits are now irrevocable !rticle +-, ie once it has beenopened the buyer cannot alter it in any way without the &eller's consent. 2evocable creditsare now excluded from >$"M@@. *t will certainly have an e7pir+ date after which itbecomes null and void. *t may also include stipulations about a "atest shipment date9which may be before the final expiry date.

There will always be occasions when &ellers encounter delays in manufacture and will be

arranging shipment very close to the final shipment date or expiry date of the credit. *t is

easy to visualise the frustration , possibly disaster, if the goods are on passage but the

credit has expired. The &hipper's money is tied up in the goods on their way to a distant

country while the only person who has title to the goods is there, at the loading port, with an

'order' B*/ but no immediate way to obtain payment. Qust as easily can one visualise the

strong bargaining position in which the Buyer now finds himself.

The lielihood is that a &hipper , finding himself in this unfortunate position, will see to

obtain from the /iner Operator or his gent , a B*/ that falls within the expiry date of thecredit. 5etter o Indemnit+ might even be offered in exchange for such a document ,which is nown as a pre)dated BA/.

There could be other reasons for seeing a pre)dated, or even a post)dated B*/. These

include a change in the price of a commodity where a higher profit could be gained by

proving that shipment had taen place on a different date to the correct one. Or the expiry

of an import or export licence might also lead to such a re5uest.

ll of these practices are fraudulent and a /iner Operator or his gent acceding to such

re5uests would be guilty of condoning the fraud and liable to possible criminal and civil

prosecution. The *nternational 9roup of "6* $lubs has also made it clear to members that

cover is withdrawn if the $arrier is guilty of such malpractices.

&/&0 !ho are the #4erchants#

The expression 'merchant' has been used extensively in this text and this may be a

convenient stage to ensure that you can identify and differentiate between all the many and

various peopleAentities falling under that general heading.

Shippers


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This is the first name and address to appear on a BA/ or aybill. &o self)evident is the

&hipper's role that there is a temptation to leave it at that. (owever, apart from being a very

important person to the /ine in mareting terms the &hipper is important legally. 2emind

1LL


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/*02 T23&

yourself of the three functions of the BA/ !two in the case of a aybill- and number two is'evidence of a contract'. 0o matter how simple the establishment of the contract is, %ust atelephone call in many cases, a contract needs two identifiable parties. The carrier is one,the &hipper is the other .

The &hipper may well not be the one who delivers the goods to the port. &ay the &hipper is

an export car dealer who would have negotiated the sale with the distant buyer. &uch adealer could well have purchased the car from the maers on a 7OB basis so that themanufacturer delivers it to the docs but does not appear on the BA/.

lthough the &hipper is important as the first party to the contract, he may disappear from

the scene very 5uicly. *f the sale is 7OB his %ob is finished as soon as the goods cross the

ship's rail and the ship becomes the custodian of the goods on the $onsignee 's behalf.

ven in a $*7 sale the &hipper will have been careful to ensure that the policy of insurance

is assignable to the $onsignee .

here the sale is covered by a 3ocumentary $redit, the BA/ will have been made out ToOrder' and it is important that the &hipper endorses the bill so that the title is available to

the ban as security for payment.

(owever, no matter how 5uicly the &hipper removes himself from the scene, it is he whowas the contracting party but the /iner BA/ permits him to assign by endorsement both thebenefits and the liabilities under that contract.

"roblems may arise especially if the /ine has given the &hipper credit, ie has delivered a'7reight "aid' BA/ against the promise of payment, not the actual money. *t is important toensure that the &hipper is indeed the one with whom the contract was made. &ometimes a

forwarder will show his name as the &hipper when he has no authority from the xporter todo so. $onversely , a 7orwarder may claim to be only an gent and will enter an exporter'sname in that box only for the /ine to discover that the xporter was under the impressionthat he had a contract with the 7orwarder not the /ine.

There is nothing basically wrong with a 7orwarder appearing as the &hipper , if that

7orwarder is a genuine 0:O$. *t is important to remember is to exercise care when

granting credit because once a BA/ is endorsed 'freight paid', the /ine has no lien on the

cargo but has an absolute obligation to deliver that cargo to the BA/ holder at the port of

discharge .

For


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7*0'0$*'/ &"$T& O7 T( *#"O2TAS"O2T B>&*0&&

N*.Cs and N*.CCs ,Non-*esse" .peratin) Car)oCommon Carrier%

The main difference between an 0:O$ and a 7orwarder who acts as a 7reight $ontractor

is one of approach. The 7orwarder, even though he loses the pure agency status through

taing on contractual commitments in his own right, tends to represent the xporter and

sees to handle all his cargo regardless of destination . The 0:O$ advertises himself as a

$ontractor to specific destinations !in law described as 'deemed to be the carrier though not

actually the $arrier'- and will also carry goods presented by other 7orwarders.

s the role of the 0:O$ has become more common in international trade there has been

an increasing need to identify more clearly who does what and who is responsible for

the carriage of goods. *ncreasingly government and intergovernmental organisations

have adopted two terms to separate the functions of the 0:O$ from those of the actual

$arrier.

Contractin) Carrier This is the term used to describe the party who maes the contract of carriage with the

merchant , ie the 0:O$ or, in some cases, a consortia or alliance member, issuing BA/s in

respect of cargo carried on another party's vessel. The contracting $arrier is responsible to

the #erchant for the proper performance of the contract and is the person against whom

any claim for loss or damage will be made. The contracting $arrier is the $arrier recognised

under >$"M@@.

Perormin) Carrier

This is the actual Owner or Operator of the vessel carrying the goods. *ts contractual

responsibility is to the 0:O$ or slot $harterer and not directly to the #erchant.

0:O$s are principally a product of the container trade especially when the /ines

themselves would rather not bother with /$/ cargo.

9enerally it is sufficient to refer simply to 0:O$s or even %ust 0:Os !0on :essel

Operators-. The extra '$ for 'common' is due principally to merican influence. >nder >&

law such operators who are offering their services to all comers are $ommon $arriers and

must be registered with the >& 7ederal #aritime $ommission and comply with Tariff filing

re5uirements and the >& Ocean &hipping 2eform ct in the same way as the /iner operating companies are re5uired to do. *n some trades the second '$ is still included to

denote non)vessel operating 'container ' $arriers.

Consi)nees and Endorsees

These are taen together because of the essential negotiability of a BA/, so that the named

$onsignee may well not tae delivery of the cargo because he has endorsed the BA/ and so

handed title to someone else.

The important point to watch is that if the BA/ is made out to a named $onsignee then hewill have to endorse the bill if someone different is going to collect the cargo. 2emember

there is no limit to the number of times a BA/ can be bought and sold so long as it is properly

endorsed each time.

Noti+ Part+

Often, especially when a 3ocumentary $redit is involved, there will only be the words 'Toorder' in the $onsignee box and below that will be the name and address of the 0otify"arty. >sually he is the actual $onsignee but cannot assume that role until payment hasbeen made and the Bill of /ading handed over by the ban which issued the /etter of $redit.

ou may as why mae out the BA/ 'to order', with the theoretical ris that it could fall intothe wrong hands hy not put the ban's name in as the $onsignee and let the banendorse the bill when payment has been made (owever, the ban only wants the BA/ as


36/43

security for payment, what it does not want are the liabilities of a $onsignee and will onlyreluctantly adopt that role if the intended $onsignee becomes banrupt.

1LN


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/*02 T2'3&

' 0otify "arty' has no legal status under a BA/ and, in fact, the /ine is under no obligation

to communicate with whoever is named in that box. ll /ines, however, tae good care to

do so for sensible commercial reasons.

&3 INTERNATI.NA5 C.NTRACTS .F SA5E - INC.TER4S*t is important that the /ine nows who will pay the freight and any additional charges .

ill the freight be paid by the &hipper, 'prepaid', or will it be paid by the $onsignee at

destination 'collect' *n some cases the &hipper may also wish to pay the $arrier haulage

at destination D in other cases he will only wish to hand over the cargo to the $arrier at his

factory and the pre)carriage and T($ at loading as well as at destination will be payable

by the $onsignee .

The terms of the sale between the &hipper !seller- and the $onsignee !buyer- will

determine who pays which items. *t must be clearly understood that these terms relate tothe sale of the goods and not to the contract of carriage.

There are many standard terms of sale in everyday use and in order to ensure these terms

are universally understood , the *nternational $hamber of $ommerce publish an agreed

set of definitions called "ncoterms9 the current edition is lncoterms I@@@ . Outlines the

main lncoterms used in /iner Trade cargo are set out below. These are a guide to the

Buyers' and &ellers' responsibilities under the individual contracts. list of *0$OT2#&

with brief definitions appears in Appendi7 / but readers should also refer if possible to

the *nternational $hamber of $ommerce publication *0$OT2#& I@@@ for further details

of the other terms.

E! - E7 !or:s

>nder these terms it is the responsibility of the Buyer to collect the cargo from the &hippers

premises . *t follows from this that it is the Buyers responsibility to arrange for all transport

from the &ellers premises to the ultimate destination. This also often means that all freight

and charges including pre)carriage and T($ !or 7OBs for brea)bul cargo- will be payable

at destination.

F.B - Free on BoardOne of the most popular *nternational &ales $ontracts is the 7OB form. The &eller has

responsibility to present the goods for loading over the ship's rail or in the case of container

traffic to the Terminal. They then become the Buyer's problem. 7reight and insurance,

being concerned with matters after loading, are the responsibility of the Buyer.

The Buyer is under a duty to nominate the port at which the goods are to be loaded. (e isalso responsible for nominating the vessel so from the point of view of mareting a /iner service it is the Buyer who controls the cargo and has to be persuaded to use a particular /ine. This nomination must be made within the time specified in the contract. *f thenomination is ineffective for some reason, the Buyer may renominate provided always that

the contract time period has not expired. The Buyer usually boos the space on the vesselhe has nominated.

Once the nomination has been made, it is the &eller's duty to deliver the goods for loading.

2is will pass at the same time, and the price will become payable. &ometimes the passing

of property will be delayed. 7or example , if the transfer of the Bill of /ading is delayed, for it

is that document which signifies the transfer of ownership.

*t is for the Buyer to arrange his own insurance, although the &eller must give the Buyer

sufficient information to enable him to effect the insurance. *f the &eller fails to give the

information, the ris will remain on the &eller.


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7*0'0$*'/ '&"$T& Of Tl)* *#"O2TAS"O2 T B>&*0&&

&3&/ CIF ,Cost9 Insurance and Frei)ht% and CFR ,Cost and Frei)ht%

$*7 is still the most popular form of *nternational &ales $ontract. s its name implies, it

involves the &eller in the arrangement of the carriage, the insurance as well as the

provision of the goods. The price of goods $*7 will obviously be considerably higher than

goods 7OB. The contract is based on the discharge port rather than the load port.

The &eller is under an obligation to ship goods of the contract description, in accordance

with any further stipulations in the contract of sale as to time, place, etc.

(e must arrange a contract of carriage on the usual conditions for the trade in 5uestion.

&imilarly, he must arrange an assignable insurance for reasonable value on the usual terms

for the trade in 5uestion .

(e must then prepare an invoice for the goods which he is selling in accordance with any

stipulations in the contract of sale.

7inally, the &eller must tender all the relevant documents to the Buyer, his gent or his

ban. The relevant documents are the *nvoice, the Bill of /ading and the "olicy of

*nsurance.

The Buyer must accept the documents and pay the price. (e may refuse to accept the

documents if they are not in accordance with the contract, though they may be re)tendered

by the &eller in a satisfactory condition within the contract period. "roperty passes when the

documents are transferred . 2is, however, and this should be specifically noted, is

deemed to have passed at the moment of shipment. *f anything has happened to the goods

during the voyage , the Buyer will be protected as he will receive the insurance policy when

the documents are transferred.

*t should be noted that the transfer of the document is, in law, the transfer of the goods, soeven if the goods are lost, the sale can be performed by the transfer of the documents. The$*7 contract has been %udicially described as a 'contract for the sale of goods performed bythe sale of documents '. This is an apt description .

The $72 contract excludes the re5uirement for the &hipper to arrange *nsurance and the

buyer taes on this responsibility, otherwise the terms follow $*7.

D.@ - De"i$ered Dut+ @npaid

This is the opposite of S. The &eller is responsible for delivering the cargo to the

Buyer's premises at destination. The &eller is therefore responsible for both pre and on)

carriage , as well as sea freight and insurance. The buyer is, however, responsible for the

import customs clearance of the goods and the payment of any import duty or tax. There is

a further term 33" !3elivered 3uty "aid- when the &eller also taes this responsibility.

"ncoterms and com6ined transport*t might be considered that the two terms S and 3O> would be those best suited,particularly to 7$/ house)to)house traffic as these terms provide for one party to beresponsible for the whole of the transport arrangement. There are reasons why 7OB and$*7 are still the more popular.

i- Tradition still plays a part and even today the legacy of brea)bul shipping with thetransfer of goods at the ship's rail lingers on.

ii- *t is often more convenient for the &eller to have control of the pre)carriage, hecan deliver to the port when it best suits him. (e also can ensure that export

customs formalities are properly complied with including recovery of any exporttax refunds or :T rebates.


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iii- *t may also be more convenient for the Buyer to have control of the delivery to hispremises including the option of delaying the cargo at the terminal or *$3 if it suits him.&imilarly he has control of how and when he clears $ustoms and pays tax and duty.

iv-*n some countries with strong exchange control rules it is not permitted to pay for preor on)carriage in another country .

SE5F-ASSESS4ENT AND TEST [email protected]

ttempt the following and chec your answers from the text4

1. hat is 'open account' trading

I. hy is a 3ocumentary $redit often preferred to open account trading

+. hat does 'irrevocable' mean when applied to 3ocumentary $redits

?. . hen might a &hipper be advised to use a &ea aybill rather than a Bill of

/ading L. hat is the main difference between a freight forwarder and an

0:O$

M. hy does a ban prefer not to be shown as the $onsignee in a Bill of /ading

N. 3oes a notify party have any 'rights' under an order Bill of /ading

8. hat ris does a $arrier run if it gives a 'freight paid' Bill of /ading to a &hipper withoutactually getting the cash

. hen does the responsibility for the cargo pass from &eiler to Buyer under the following*0$OT2#&4 S, 3O>, 7OB, $72

(aving completed $hapter 0ine attempt the following and submit your essay to your Tutor4

$omment upon all the stages a $ombined Transport Bill of /ading drawn 'to order' will gothrough from starting as a blan form until finishing as 'accomplished ' in the /iner Operator's files .

10


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Tariffs & Pricing in Liner Shipping

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Transcript of Tariffs & Pricing in Liner Shipping