Sea freight is a trillion-dollar industry that centers around buyers receiving goods and sellers receiving payment. The business is massive as shipping goods around continents by sea is cost-effective. Many carriers are ready to take your load. However, many regulations and documents are involved, and navigating them is as important as navigating the seas. So, whether booking LCL or FCL shipping, make sure you are up to speed with the Incoterm rules. The right choice of term can save your company time and money.
There are two ways to book overseas shipments. The first is best suited for shippers with Less than a Container Load (LCL) of goods and who would benefit from sharing space. The second is for shippers with enough merchandise for a Full Container Load (FCL) with a container being 20- or 40-feet.
LCL shippers who share space pay mostly for volume, while FCL shippers pay for a full container no matter how much space they use.
Shipping overseas involves many documents and meeting customs requirements at different ports worldwide. However, one stands out, and that is the Bill of Lading. A single Bill of Lading (Sea Waybill, BOL, B/L, BL) lists all goods within a container. This freight document is an agreement detailing the conditions of transport by sea. A single party owns the BOL, and it is paid based on the price of a full container, whether entirely full or not.
What is an Incoterm, and how does it relate to shipping and the BOL?
Incoterms® is an essential aspect of freight business negotiations as they lay out the responsibilities of the buyer and seller. Incoterms® comprise eleven universally accepted commercial terms issued by the International Chamber of Commerce (ICC). The terms define who pays for and manages shipment, documentation, customs clearance, insurance, and other logistics activities. The ICC created the terms in Paris in 1936, and they are revised regularly in line with changes in global trade. The latest version is the Incoterms 2020.
Before negotiating the sale contract, importers and exporters should consider which Incoterm serves them best to prevent unexpected costs and needless complications. Furthermore, choosing an Incoterm aligns everyone in the shipping procedure when various stakeholders are involved. These terms ensure the on-time payment of services, goods, and taxes while protecting buyers, carriers, and suppliers.
How does this relate to a BOL? A BOL is three documents in one:
Loading Receipt – a receipt handed at pickup to the seller as proof that the goods were handed over and in good condition unless a note states otherwise on the BOL at pickup.
Contract of Carriage (shipment contract) – the BOL includes the terms and conditions of the forwarder organizing the international transit. It limits their liability should something go wrong with the shipment. Technically, the contract starts when the seller accepts the forwarder’s freight quote and is evidence of that contract.
Document of Title – a BOL is proof of ownership, although a commercial invoice also serves this purpose. Buyers and sellers choose Incoterms (freight terms) to create their sales contracts for importing and exporting. The Incoterm listed on the commercial invoice indicates the point when goods change hands during shipment. Therefore, a BOL has become proof of ownership that the seller receives at pickup and the buyer needs for shipment release.
Whether importing, exporting, or both, it is essential to understand Incoterms and their interaction with the sales contract and underlying contracts (customs, insurance, shipping).
The most well-known Incoterms are FCA (Free Carrier), FOB (Free On Board), and EXW (Ex Works). The choice depends on one’s experience as a shipper, the type of goods shipped, and the connection with your supplier. One can use most Incoterms for any transport mode, except for FAS, FOB, CIF, and CFR, which are only used for sea freight.
Shipping Incoterms don’t cover breach of contract, property rights, or potential “force majeure” situations (unforeseeable circumstances that prevent contract fulfillment). Therefore, include these in the contract of sale. Likewise, only the C Incoterms assign responsibility for arranging insurance. Cargo insurance is, therefore, a separate cost for buyers.