I have received several emails and inquiries relating to the previous two columns about the terms of sale based on the former provisions of Article 2 of the UCC and the Incoterms published by the International Chamber of Commerce. Some of those questions were about the use of "modifiers," that is, additional language added to the base terms of "F.O.B. Origin" and "F.O.B. Destination."
Even though the terms "FOB Origin" and "FOB Destination" define the payment obligation, it is common practice to add a "freight payment term," e.g., "prepaid" or "collect." It is so common that some may think that it is necessary to include "prepaid" or "collect" or some other freight payment term in order to have a complete term of sale. This is not so• unless the parties wish to modify their obligations beyond those that apply when using just "FOB Origin" or "FOB Destination." Former Article 2 of the UCC did not define the terms "prepaid" or "collect." One place the terms "prepaid" and "collect" are defined is the National Motor Freight Classification (NMFC), published by the National Motor Freight Traffic Association, Inc. (NMFTA), a non-profit trade association. Item 110 of the Classification contains the following definitions: Section 5 (a) A "prepaid shipment" is one on which the charges for transportation service rendered at the request of the consignor, including charges for any accessorial services performed at the request of the consignor, are to be paid by the consignor. Section 5 (b) A "collect shipment" is one on which the charges for transportation service, including accessorial services rendered at the request of the consignee, or requested by the consignor for the consignee, are to be paid for by the consignee.
Prepaid does not mean "paid in advance" nor does "collect" mean "C.O.D." Rather, these terms are designations in a truck bill of lading to indicate who has primary liability to the carrier for its charges, i.e., the consignor if "prepaid" or the consignee if "collect." Although the definitions of the NMFC legally control a shipment only when the motor carrier participates in the NMFC, in actual practice today the terms "prepaid" and "collect" are widely used for shipments not technically subject to the NMFC.
The term "FOB Origin, Freight Collect" has the same effect as the term "FOB Origin" under the UCC. (See "The F.O.B. Term of Sale, Part I: Just the Basics" in the May-June 2010 issue of PARCEL.) However, the term "FOB Origin, Freight Prepaid" reverses the effect of the term "FOB Origin" with respect to who will be responsible for paying the carrier. Title and the risk of loss would still pass from seller to buyer at the point of origin.
It is very important to keep in mind that there is a distinction between who will be paying the carrier and who is ultimately responsible for the freight charges, e.g., by reimbursing or crediting the other party for the amount that it paid the carrier (either the actual amount or one including "handling"). Thus, when we were talking about the seller's payment of the freight charges when using "FOB Origin, Freight Prepaid," we were talking about payment to the carrier, not who will ultimately bear the cost.
This need to distinguish is because there are two contracts involved; one is the bill of lading contract between the carrier, consignor and consignee and the other is the sales order or purchase agreement between the seller (consignor) and the buyer (consignee). If the bill of lading says "Prepaid," the seller will be the one who pays the carrier pursuant to the bill of lading contract and the buyer may or may not have to reimburse the seller depending upon the terms of the deal between them.
A similar analysis would hold true for the use of the terms "FOB Destination, Freight Prepaid" and "FOB Destination, Freight Collect." The term "FOB Destination, Freight Prepaid" has the same effect as the term "FOB Destination" under the UCC. That is, using "FOB Destination" creates a "destination contract" wherein the seller pays the carrier its charges for transporting the goods. In actuality, the buyer is still bearing the cost of the freight charges as the seller has presumably factored in the cost of transportation when it quotes a "delivered price."
However, the term "FOB Destination, Freight Collect" reverses the effect of the term "FOB Destination" with respect to the obligation to pay the carrier its freight charges. Under an "FOB Destination, Freight Collect" term of sale the buyer has the responsibility for payment of the freight charges to the carrier. Title and the risk of loss would still pass from seller to buyer at the point of destination.
All for now!
Brent Wm. Primus, J.D., is the CEO of Primus Law Office, P.A., the Senior Editor of transportlawtexts, inc., and is the co-author of the text U.S. Domestic Terms of Sale and Incoterms 2000 and Uniform Commercial Code vs. Incoterms 2000. Your questions are welcome at brent@transportlawtexts.com.
