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Terms Surrounding the Transportation Processes That Have Significant Impact on How Business is Conducted and Where Responsibility is Assigned

The Issue

Freight terms, terms of sale/purchase, freight prepaid and collect and FOB are terms that are continually being misused and misunderstood.  In many instances the necessary and appropriate terms to establish a position are left un-stated on the belief that a stated term takes the place of one that is silent.  Where silence does speak, we are left to the mercy of interpretation. 

The purposes of this white paper are to address these conditions and to provide the reader with insight, shared definitions and appropriate application.   

Definitions

In order to benefit from this white paper, it is necessary that a mutuality of understanding be achieved.  In this connection, the following definitions will be used throughout this and subsequent discussions.

Freight Terms identify the party responsible for the payment of freight and are usually expressed as: prepaid or collect with the following nuances: prepaid to a stated location and collect beyond or third party or pre-pay and add.  While there are other subtleties, these examples will suffice.   

Prepaid means that the shipper owns the freight payment responsibility.

Collect means that the consignee owns the freight payment responsibility.

Prepaid/Collect Beyond means that the shipper or consignor owns the prepayment portion with the balance of the freight charge being the responsibility of the consignee

Third Party establishes that a party neither the consignor nor consignee owns the payment processing function. The legal payment obligation may or may not belong to the third party and the assignment of the legal responsibility is  determined from the parties identified on the Bill of Lading Contract.  Simply put, unless the payment party is a party to the Bill of Lading contract, they have no legal obligation for payment.  “Third Party” is typically invoked when there is an outsourced payment service to handle the freight payment function.

Pre-pay and Add typically means that the shipper advances the freight charges to the carrier and then bills the beneficial owner of the freight for an amount approximating or equal to the actual freight charges.

Terms of Sale/Purchase identify the passage of title and are typically expressed as “FOB, stated point or place”.  In their most simple and usual expression they appear as FOB Origin or FOB destination. 

 FOB Origin means that title to the merchandise passes at time and place of pick-up.

FOB Destination means that title to the merchandise passes at time and place of delivery.

Associated Documents

Bills of Lading convey freight terms and act both as a contract for carriage and receipt for the freight. 

A Uniform or Straight or Short Form Bills of Lading are reasonably similar and for the most part interchangeable.  The Short Form Bill of Lading is identical to the Straight or Uniform, except that the Short Form does not have the contractual terms and conditions printed thereon, but makes reference to and embraces those terms and conditions printed on the Straight or Uniform Bill of Lading.  Contrary to popular belief, the Short Form has nothing to do with size.

The Bills of Lading, described above, are made up of, at least, three (3) parts:  Original, Shipping Order and Memorandum (there can be multiple copies of the Memorandum).  The Original is retained by the shipper (consignor), the Shipping Order is taken by the carrier (used for billing, interlining and records maintenance) and the Memorandum is supposed to be forwarded to the consignee.  Other uses of the Memorandum could be for duplicate payment control (although this is extremely ineffective and establishes a false sense of security), or for various departmental uses.

Order Notify Bills of Lading are negotiable and act in a similar fashion with Letters of Credit

Sales/Purchase Orders convey, amongst other things, the passage of title.   

These documents are, in all instances, considered to be legal instruments and they can either be negotiable or non-negotiable. 

These documents contain the conditions of sale or purchase and unlike the Bill of Lading are not necessarily standard.  They do however contain similar conditions and in all cases must identify the time and place where title passes, if not properly and clearly stated elsewhere.

Discussion

In many instances the necessary and appropriate terms to establish a position are left un-stated on the belief that a stated term takes the place of one that is silent.  Where silence does speak, we are left to the mercy of interpretation.  As an example, if the Terms of Sale/Purchase are silent, and the respective Freight Terms are prepaid, it is constructively deemed that title passes at time and place of delivery.  This rebuttable presumption is reached on the basis that the shipper is maintaining care of the shipment until delivery is accomplished and that the invoice value is enhanced to the extent of the freight charges.  This position is supported by virtue of the shippers’ willingness to pay the freight through delivery.  At this point, it should be clear that interpretation can be dangerous and controvert the desired meaning. 

Another area that is generally overlooked with respect to the passage of title is the imposition of sales or uses taxes.  This is critically important and for the naïve, can amount to significant future expense.

Passage of Title is the controlling factor with respect to the “beneficial owner of the freight” regarding the handling of loss and damage claims.  Additionally, it is the determining factor is establishing the, “formula of damages”.

Sales/Uses Taxes are imposed based upon where the sale occurred.  In this regard, if your Terms of Sale/Purchase are stated as FOB Factory, title passing at the factory will incur those taxes imposed (if such tax exists) by the governmental agency responsible for that specific geographical area.  Astute businesses people determine, as one of the critical cost/competitive assessment criteria  the best location for title to pass.  Unfortunately, the writer as seen, far too many times, where passage of title was treated lightly and that a tremendous tax burden was building over many years.  

Continuation

Please consider this white paper as a beginning in this subject area, succeeding white papers will address common issues and address them with common solutions.  We encourage our readers to direct any specific questions or comments to papers@transportgistics.com .

Disclaimer

The information presented above represents the opinion of the author and not necessarily the opinion of TransportGistics, Inc. nor is it presented as a legal position.

All content copyright by TransportGistics, Inc. All rights are reserved. The authors of the articles retain the copyright to their articles. No material may be reproduced electronically or in print without the express written permission from TransportGistics, Inc. or the individual authors (papers@transportgistics.com)

Additional Resources

Harvesting the Benefits of Correct Terms Usage