Freight prepaid bill of lading. In the carriage of goods by sea, freight is payable when the carrier delivers the goods to the consignee at the agreed destination.
Payment of freight and delivery are normally coexistent. Freight is not payable if the vessel and/or the goods are lost before delivery. Under English law the freight is earned on delivery and is normally fully payable without any deduction or set-off even though there may be claims against the carrier. Freight may be withheld if the loss or damage to the goods is so severe that the goods are no longer the goods that were loaded, for example, a cargo of cement that had solidified. The goods have lost their identity or are in unrecognisable condition. Freight may still be payable even in the latter situation if the contract of carriage contains the clause “Freight non-returnable, ship and/or cargo lost or not lost”.
United States law does permit a set-off against freight for cargo claims. Although the shipper is primarily liable to pay freight, the consignee also becomes liable when he accepts delivery of the goods. If the bill of lading is claused “freight prepaid” this does not relieve the consignee from the responsibility to pay the freight. The clause means that the shipper, who obtained the original bill of lading, simply undertakes to pay the freight.
As is provided in the “Uniform Customs and Practice” (UCP 1983), Art. 31(b) and (c) make reference to this nature of a clause on a bill of lading:
“(b) If a credit stipulates that the transport document has to indicate that freight has been paid or prepaid, banks will accept a transport document on which words clearly indicating payment or prepayment of freight appear by stamp or otherwise, or on which payment of freight is indicated by other means.
(c)The words ‘freight prepayable’ or ‘freight to be prepaid’ or words of similar effect, if appearing on transport documents, will not be accepted as constituting evidence of the payment of freight.”
Under United States law, “freight prepaid” means that the carrier must attempt to obtain the freight from the shipper rather than from the consignee (C.P. Ships v. Les Industries Lyon, 1983) and does not mean that the freight has actually been paid in advance. The words “freight prepaid” are common in bills of lading issued by carriers because this format is demanded by the shippers. The words are traditional and do not indicate that the freight has actually been paid. This form of bill of lading is especially common where freight forwarders’ services are used. The shipper is still responsible for payment of the freight. However, if the shipper has paid the freight to the freight forwarder who has not paid it to the carrier, the shipper may not be required to pay the freight again to the carrier.
A “freight prepaid” bill of lading is not the same as a bill of lading where the freight is actually required to be paid in advance of the delivery of the cargo at the agreed destination. Such a requirement may be met in a contract of carriage and is very common in liner services.
Problems for shipowners can arise where the vessel is under a time charter, the charterer obtains freight in advance and then refuses to continue to pay the hire and the owner is left without a remedy. In The A 1ev, 1989, the time charterers required the owner to issue “freight prepaid” bills of lading. The owners did so. The charterers then became bankrupt and could not pay the hire. The owners had no choice but to continue the voyage under the contract of carriage contained in the bills of lading and deliver the cargo, despite not being paid their hire. The owners attempted to obtain a contribution from the cargo receivers. The latter refused because they had already paid the freight to the charterers. The owners finally threatened to discharge the cargo before the discharging port and possibly sell it unless the receivers agreed to pay the port and discharging costs. The receivers agreed, being left with no other choice.
The vessel arrived at the discharging port and commenced discharge. The receivers then had the vessel arrested, claiming that their agreement had been obtained under duress. The local court decided in favour of the receivers. The shipowners paid the damages and obtained the release of their vessel. Because the agreement between the receivers and the owners was subject to English law the owners brought an action against the receivers in an English court. The judge in the English court also found against the shipowners because the agreement was obtained under duress. The eventual result was that the shipowners had to bear all the costs of the carriage, including the port and discharging costs.
In Australia, in The AES Express, 1990, the vessel was on time charter and freight prepaid bills of lading were issued by the charterers. The voyage was meant to be from Norfolk, United States, to Auckland, New Zealand and then Sydney and Melbourne in Australia. During the voyage, the charterers ceased operations. The shipowners withdrew the vessel from the time charter. The vessel continued her voyage directly to Melbourne without advising the cargo interest that the vessel was withdrawn from the charter. The owners claimed an amount from the cargo interests which was equivalent to the freight which had already been paid by the shippers to the charterers. The judge decided that the cargo interest was entitled to have the goods delivered at the destination agreed in the bill of lading issued by the charterers. Owing to the withdrawal of the vessel, the shipowners assumed the charterer’s obligations to deliver the cargo. If the freight for the cargo had already been paid, the owners were not entitled to receive freight from another party, the cargo receivers. The freight would been payable on delivery but in this situation it had already been paid.