SHIPPING AND DOCUMENTATION
The Role of Freight Forwarders
The freight forwarder:
- advises the exporter on the most economical choice of transportation and the best way to pack and ship the cargo to minimize cost and prevent damage,
- Books for air, ocean, or land transportation (or intermodal movement of cargo) and arranges for pickup, transportation, and delivery of the goods.
- The forwarder also ensures that the goods are properly packed and labeled and documentation requirements are met so the cargo is cleared at the port of destination. When a letter of credit is used, the forwarder ensures that it is strictly complied with to enable the exporter to receive payment.
Thus, the advantage of a forwarder goes far beyond moving freight. Forwarders help shippers and consignees by tracking and tracing cargo. They can also negotiate better rates with carriers because they can purchase space on airlines or ships at wholesale prices. The wide array of services they provide also helps shippers save time and money.
Today, it is generally estimated that over 90 percent of export firms use the services of an international freight forwarder. Most of the forwarding activity is still concentrated in ocean shipping, although some diversification into air and land transportation has occurred.
A forwarder is distinguishable from a non–vessel–operating common carrier (NVOCC). NVOCCs are international ocean carriers that do not operate their own vessels. They fulfill the role of the shipper with respect to carriers and that of a carrier with respect to shippers. Typical NVOCCs will guarantee a steamship line a certain amount of freight per week or month and purchase the necessary space on a wholesale basis for shipment of cargo to and from a given port. They publish their own tariffs and receive and consolidate cargo of different shippers for transportation to the same port. They issue bills of lading to acknowledge receipt of cargoes for shipment. Unlike NVOCCs, freight forwarders do not publish their own tariff and consolidate small shipments. Forwarders use the services of NVOCCs and facilitate the movement of cargo without operating as carriers. NVOCCs are often owned by freight forwarders or large transportation companies.
A forwarder also differs from a customs broker in that the latter deals with the clearing of imports through customs, whereas a forwarder facilitates the transportation of exports. The broker is licensed by the Treasury Department; while the forwarder is licensed by the Federal Maritime Commission (FMC).
Importers are required to comply with the domestic labeling laws. Imports must comply with the labeling laws of the importing country. Labeling requirements are imposed in many countries to assure proper handling or to identify shipments. Exporters need to be aware of certain labeling requirements in order to avoid unnecessary delays in shipping:
The cartons or containers to be shipped must be labeled with: shipper’s mark, or purchase order number, country of origin, weight in both pounds and kilograms, the number of packages, handling instructions, final destination and port of entry and whether the package contains hazardous material. Markings should appear on three faces of the container. It is also advisable to repeat the instructions in the language of the country of destination.
Under the U.S. Clean Air Act (amended in 1990), all products containing ozone depleting substances are required to be labeled. More detailed and specific regulations can be obtained from freight forwarders since they keep track of changing labeling laws in various countries.
Merchandise should be packed in strong containers, adequately sealed and filed with the weight evenly distributed. Goods should be packed on pallets if possible, to ensure greater ease in handling and should be made of moisture resistant material. Packing must be done in a manner as to assure safe arrival of the merchandise and facilitate its handling in transit and place of destination. Insufficient packing not only results in delay in the delivery of the goods but will also entitle the customer to reject the goods or claim damages. Export products must be packed to comply with the laws of the importing country. For example, Australia and New Zealand prohibit the use of straw or rice husk as packaging materials. The United Nations has adopted standards for packaging hazardous materials and provides for training of personnel, use of internationally accepted standards and certain other conditions. Freight forwarders and marine insurance companies can advise on packaging.
The air waybill is a contract of carriage between the shipper and air carrier. It is issued by the air carrier and serves as a receipt for the shipper. When the shipper gives the cargo to a freight consolidator or forwarder for transportation, the air waybill is obtained from the consolidator or forwarder. Air waybills are nonnegotiable and cannot be issued as a collection instrument. Air waybills are not particular to a given airline and can be from any other airline that participates in the carriage.
Bill of Exchange (Draft)
A bill of exchange is an unconditional written order by one party (the drawer) that orders a second party (the debtor or drawee) to pay a certain sum of money to the drawer (creditor) or designated third party. In many cases, the drawee is the overseas buyer and the drawer/payee is the exporter. When a draft is payable at a designated future date, it is a time draft. If it is payable on sight, it is a demand or sight draft.
Bill of Lading (B/L)
A bill of lading is a contract of carriage between the shipper and the steamship company (carrier). It certifies ownership and receipt of goods by the carrier for shipment. It is issued by the carrier to the shipper. A straight bill of lading is issued when the consignment is made directly to the overseas customer. Such a bill of lading is not negotiable. An order bill of lading is negotiable, that is, it can be bought, sold, or traded. In cases in which the exporter is not certain about payment, the/she can consign the bill of lading to the order of the shipper and endorse it to the buyer on payment of the purchase price. When payment is not a problem, the bill of lading can be endorsed to the consignee.
Clean / Claused bill of lading
The bill of lading form is normally filled out in advance by the shipper. The carrier will check the goods loaded on the ship to ensure that they comply with the goods listed (quantity, condition etc.) on the bill of lading. If all appears proper, the carrier will issue a clean bill of lading certifying that the goods have been properly loaded on board the ship. However, if there is a discrepancy between the goods loaded and the goods listed on the bill, the carrier will issue a claused bill of lading to the shipper. Such bill of lading is normally unacceptable to third parties including the buyer under a c.i.f contract or bank that is expected to pay under documentary credit on receipt of the bill of lading and other documents.
Inland Bill of Lading
An inland bill of lading is a bill of lading issued by the railway carrier or trucking firm certifying carriage of goods from the place where the exporter is located to the point of exit for shipment overseas. This document is issued by exporters to consign goods to a freight forwarder who will transport the goods by rail to an airport, seaport, or truck for shipment.
Through Bill of Lading
A through bill of lading is used for intermodal transportation, that is, when different modes of transportation are used. The first carrier will issue a through bill of lading and is generally responsible for the delivery of the cargo to the final destination.
Certain nations require a consular invoice for customs, statistical, and other purposes. It must be obtained from the consulate of the country to which the goods are being shipped and usually must be prepared in the language of that country.
Certificate of Origin
A certificate of origin is required by certain countries to enable them to determine whether the product is eligible for preferential duty treatment. It is a statement as to the origin of the export product and usually is obtained from local chambers of commerce.
Some purchasers and countries may require a certificate attesting to the specifications of the goods shipped, usually performed by a third party. Such requirements are usually stated in the contract and quotation. Inspection certificates are generally requested for certain commodities with grade designations, machinery, equipment, and so forth.
When the exporter provides insurance, it is necessary to furnish an insurance certificate that states the type, terms, and amount of insurance coverage. The certificates are negotiable and must be endorsed before presentation to the bank.
A commercial invoice is a bill for the merchandise from the seller to the buyer. It should include basic information about the transaction: description of the goods, delivery and payment terms, order date, and number. The overseas buyer needs the commercial invoice to clear goods from customs, prove ownership, and arrange payment. Governments in importing countries also use commercial invoices to determine the value of the merchandise for assessment of customs duties.
This receipt is used to transfer accountability when the export item is moved by the domestic carrier to the port of embarkation and left with the international carrier for export. The international carrier or agent issues it after delivery of the goods at the carrier’s dock or warehouse. A similar document, when issued upon receipt of cargo by a chartered vessel, is called a mate’s receipt.
Destination Control Statement (DCS)
This statement appears on the commercial invoice, bill of lading, air waybill, and shipper’s export declaration. It is intended to notify the carrier and other parties that the item may only be exported to certain destinations.
Shipper’s Export Declaration (SED)
A shipper’s export declaration (SED) is issued to control certain exports and to compile trade data. It is required for shipments valued at more than $2,500. Carriers and exporters are also required to declare dangerous cargo.
Pro Forma Invoice
A pro forma invoice is a provisional invoice sent to the prospective buyer, usually in response to the latter’s request for a price quotation. A quotation usually describes the product, states the price at a specific delivery point, time of shipment, and the terms of payment. A pro forma invoice is also needed by the buyer to obtain a foreign exchange or import permit. Quotations on such invoices are subject to change without notice partly because there is a lag between the time when the quotation is prepared and when the shipment is made to the overseas customer.
Export Packing List
An export packing list itemizes the material in each individual package and indicates the type of package (e.g., box, carton). It shows weights and measurements for each package. It is used by customs in the exporting and importing countries to check the cargo and by the exporter to ascertain the total cargo weight, the volume, and shipment of the correct merchandise. The packing list should be either included in the package or attached to the outside of a package in a waterproof envelope marked “packing list enclosed.”
A detailed summary of the total cargo of a vessel (by each loading port) for customs purposes. It covers condition of the cargo, and summarizes heavy lifts and their location.
Video: Export Documentation
Carriage of Goods by Sea
International transportation of cargo by sea is governed by various conventions. The Hague Rules of 1924 have won a certain measure of global support. The U.S. law on the carriage of goods by sea is based on the Hague Rules. Subsequent modifications have been made to the Hague Rules (the Hague–Visby Rules, 1968), which are now in force in most of Western Europe, Japan, Singapore, Australia, and Canada. In 1978, the United Nations Commission on International Trade Law (UNCITRAL) was given the task of drafting a new convention to balance the interests of carriers and shippers. Although the Hague–Visby Rules were intended to rectify the pro-carrier inclination of the Hague Rules, many developing countries felt that the Hague–Visby rules did not go far enough in addressing the legitimate concerns of cargo owners or shippers. In view of the widespread acceptance of the Hague Rules, it is important to briefly examine some of their central features
Scope of Application. The application of the rules depends on the place of issuance of the bill of lading; that is, the rules apply to all bills of lading issued in any of the contracting states. If the parties agree to incorporate any one of the previous rules in their contract, such rules will govern the contract of carriage even when the countries where the parties reside subscribe to different rules. However, this will not be allowed if the parties are required to apply certain rules adopted by their countries. These rules apply only to bill of lading (B/L).
The Carrier’s Duties Under B/L. A carrier transporting goods under a B/L is required to exercise “due diligence’’ in (1) making the ship seaworthy; (2) properly manning, equipping, and supplying the ship; (3) making the ship (holds, refrigerating chambers, etc.) fit and safe for reception, carriage, and preservation of the goods; and (4) properly and carefully loading, handling, stowing, carrying, and discharging the goods.Whenever loss or damage has resulted from unseaworthiness, the burden of proving the exercise of due diligence falls on the carrier. When different modes of transportation are used, the issuer of the bill of lading undertakes to deliver the cargo to the final destination. In the event of loss or damage to merchandise, liability is determined according to the law relative to the mode of transportation at fault for the loss. If the means of loss is not determinable, it will be assumed to have occurred during the sea voyage.
Basis of Carrier’s Liability and Exemptions. The carrier’s liability applies to loss of or damage to the goods. It does not extend to delays in the delivery of the merchandise. The rules exempt carriers from liability that arises from actions of the servants of the carrier (master, pilot, etc.) in the management of the shipment, fire and accidents, acts of God, acts of war, civil war, insufficient packing, inherent defects in the goods, and other causes that are not the actual fault of the carrier. That loss or damage to the goods falls within one of these exemptions does not automatically absolve the carrier from liability if the damage/loss could have been prevented by the carrier’s exercise of due diligence in carrying out its duties.
Period of responsibility. The period of responsibility begins from the time the goods are loaded and extends to the time they are discharged from the ship.
Limitations of action. All claims against the carrier must be brought within one year after the actual or supposed date of delivery of the goods. This means that lapse of time discharges the carrier and the ship from all liability in respect to loss or damage. The Hague Rules also stipulate that notice of claim be made in writing before or at the time of removal of the goods.
Limits of liability. The maximum limitation of liability is $500 per package. Under the Hague-Visby rules, it is $1000 per package. In most cases, a container is considered as one package, and the carrier’s liability is limited to $500. To ensure the application of liability limits to their agents and employees, carriers add the “Himalaya Clause’’ to their bills of lading. The clause entitles such agents and employees the protection of the Hague Rules. Exporters can, however, obtain full protection against loss or damage by paying an excess value charge or by taking out an insurance policy from an independent source .
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The primary purpose of insurance in the context of foreign trade is to reduce the financial burden of losses arising from the movement of goods over long distances. In export trade, it is usual to arrange an extended marine insurance to cover not only the ocean voyage but also other means of transport that are used to deliver the goods to the overseas buyer. There are five essential elements to an insurance contract: a) the insured must have an insurable interest i.e. a financial interest based on some legal right in the preservation of the property. The insured must prove the extent of the insurable interest to collect and recovery is limited by the insured’s interest at the time of loss, b) the insured is subjected to risk of loss of that interest by the occurrence of certain specified perils, c) the insurer assumes the risk of loss d) this assumption is part of a general scheme to distribute the actual loss among a large group of persons bearing similar risks, and e) as a consideration, the insured pays a premium to a general insurance fund . Since insurance is a contract of indemnity, a person may not collect more than the actual loss in the event of damage caused by an insured peril. An export firm, for example, is not permitted to receive payment from the carrier for damages for the loss of cargo and also recover for the same loss from the insurer. On paying the exporter’s claim, the insurer stands in the position of the exporter (insured party) to claim from the carrier or other parties who are responsible for occasioning the loss or damage. This means that the insurer is subrogated to all the rights of the insured after having indemnified the latter for its loss. This is generally described as the principle of subrogation. Another point to consider is whether an exporter as an insured party can assign the policy to the overseas customer. It appears that assignment is generally allowed insofar as there is an agreement to transfer the policy with the merchandise to the buyer and that the seller has an insurable interest during the time when the assignment is made.
Marine policy is the most important type of insurance in the field of international trade. This is because a) ocean shipping remains the predominant form of transport for large cargo, b) marine insurance is the most traditional and highly developed branch of insurance. All other policies such as aviation and inland carriage are largely based on principles of marine insurance. Practices and policies are also more standardized across countries in the area of marine insurance than insurance of goods carried by land or air.
Term of policy
Cargo policies may be written for a single trip or shipment (voyage policy), for a specified period, usually one year (time policy) or for an indefinite period i.e. effective until canceled by the insured or insurer (open policy). The majority of cargo policies are written on open contracts. Under the latter policy, shipments are reported to the underwriter as they are made and premium is paid monthly based on the shipment actually made. The time policy differs from the open-contract not just in terms of the term of the policy but also with respect to the premium payment method. Under the time policy, a premium deposit is made based on estimated future shipment and adjustments are later made by comparing the estimates with the actual shipment. Another version of open policy is one that is generally available to exporters/importers with larger shipments. It covers most of the shipper’s needs and has certain deductibles (blanket policy). Under a blanket policy, the insured is not required to advise the insurer of the individual shipments and that one premium covers all shipments.
Types of policies
There are two general types of marine cargo insurance policies:
- Perils only policy: This policy generally covers extraordinary and unusual perils that are not expected during a voyage. The standard perils only policy covers loss or damage to cargo attributable to fire or explosion, stranding, sinking, collision of vessel, general average sacrifice, and so on. An essential feature of such policy is that underwriters indemnify for losses that are attributable to expressly enumerated perils. The burden is on the cargo owner to show that the loss was due to one of the listed perils.
Export-import companies have the option of purchasing additional coverage (to include risk of water damage, rust or contamination of cargo from oil, etc) or take all risks policy that provides broader coverage.
- All risks policy: The all risks policy provides the broadest level of coverage except those that are expressly excluded in the policy.
In the case of all risks policy, the burden to prove that the loss was due to an excluded clause rests with the underwriter. Additional coverage can be provided through an endorsement on the existing all risks policy or through a separate war risk policy.
Extent of coverage for cargo loss/damage
Marine insurance policies generally specify the extent of coverage provided under the policy. Levels of cargo coverage fall into two broad categories: with average (WA) and free of particular average (FPA). This indicates whether the policy covers less than total losses (WA) or only total losses (FPA). WA covers total as well as partial losses. Most WA policies limit coverage to those losses that exceed 3 percent of the value of the goods. A standard WA coverage may read:
This policy provides protection against partial losses by sea perils if the damage amounts to 3% or more of the value of the shipment. If the vessel is stranded, sunk…, the percentage requirement is waived and the losses are recovered in full.
Free of particular average (FPA) provides limited coverage. This clause provides that in addition to total losses, partial losses from certain specified risks such as stranding or fire are recoverable. A standard FPA clause reads:
“Free of particular average (unless general) or unless the vessel or craft be stranded, sunk, burnt, on fire or in collision with another vessel.”
Exporters that sell on credit and use terms of sale where the buyer is responsible for insurance (FAS, FOB, and so on) should consider taking out contingency insurance for the benefits of the overseas buyer in case the latter’s insurance becomes inadequate to cover the loss. By paying a small premium for such insurance, the exporter creates a favorable condition for the buyer to pay for the shipment. Contingency insurance is supplementary to the policy taken out by the overseas buyer and recovery is not made under the policy unless the buyer’s policy is inadequate to cover the loss.
Marine cargo insurance covers only the period when the goods are on the ship. The marine extension (warehouse to warehouse clause) extends the standard marine coverage to the period before the loading of the goods and the period between off loading and delivery to the consignee.
Insurance policy versus certificates
An insurance company may issue an insurance policy (policy) or a certificate. If the insurer issues only policies, an application must be completed by the insured for each shipment and delivered to the insurer or agent before a policy is prepared and sent to the former. This can be time consuming. However, in the case of certificates, the insurer provides a pad of insurance certificates to the exporter or importer, and a copy of the completed certificate (with details of goods, destination, type and amount of insurance required etc.) is mailed to the insurance company whenever a shipment is made. Certificates save time and facilitate a more efficient operation of international business transactions.
Open policies for import/export shipments are often reported by using declaration forms which require the completion of certain particulars such as points of shipment and destination, description of units, amount of insurance, etc. When full information is not available at the time a declaration is made, a provisional report may be submitted to the insurance agent (this is closed when value is finally known). They are prepared by the assured and forwarded daily, weekly or as shipments are made. The premium is billed monthly based on the schedule of rates provided in the policy.
Insurance policies or certificates are often used in the case of exports since the exporter must provide evidence of insurance to banks, customers, or other parties in order to permit the collection of claims abroad. Besides what is often included in declarations, policies/certificates, include additional information such as names of beneficiary (usually assured or “order”) thus making the instrument negotiable upon endorsement by the assured. Whether the policy/certificate is prepared by the assured, freight forwarder or agent, it is important to describe the shipment in sufficient detail.