CFR TERM, CHARTER PARTY BILLS OF LADING, AND FREIGHT NOTATIONS: DOES “FREIGHT PAYABLE” CREATE A PROBLEM?

Lading (CPBL), and freight notations on the bill of lading.

If a credit is issued under CFR terms, should the bill of lading necessarily indicate “Freight Prepaid”? And if the LC instead requires “Freight Payable as per Charter Party”, would that create a discrepancy or inconsistency with the stated Incoterm?

This Q&A discusses the difference between documentary compliance under UCP 600 and the commercial obligations arising from Incoterms.

QUESTION

Dear Mr. Old Man,

We are issuing a documentary credit under CFR Kandla Port, India.

However, in field 46A we require:

Clean on Board Ocean Bill of Lading marked “Freight Payable as per Charter Party”.

My questions are:

1. Should the wording instead be “Freight Prepaid as per Charter Party”?
2. If the bill of lading is marked “Freight Payable”, is this inconsistent with the CFR Incoterm?
3. Is there any reference in UCP 600 or ISBP dealing with this issue?

Thank you.

Ravindra

_________

ANSWER

Dear Ravindra,

Thank you for your question.

This question touches on the distinction between documentary credit practice and the commercial obligations arising under Incoterms.

In practice, where the sale contract is on CFR or CIF terms, documentary credits frequently require presentation of a bill of lading marked “Freight Prepaid”, reflecting the seller’s obligation to arrange and pay the freight to the named port of destination.

It is also common for credits involving bulk cargo shipments to permit presentation of a Charter Party Bill of Lading (CPBL).

In your case, the critical issue is that banks examine documents against the terms and conditions of the credit, not against the Incoterms rule incorporated in the sales contract.

Therefore, if the credit expressly requires a bill of lading showing:

“Freight Payable as per Charter Party”

then banks will determine compliance based on that requirement. A bill of lading bearing the required notation would not become discrepant merely because the credit also states CFR Kandla Port, India.

The legal basis for this approach can be found in UCP 600 Article 5, which provides that banks deal with documents and not with goods, services, or performance to which the documents may relate.

Consequently, from a documentary credit perspective, an LC may contain a requirement that appears inconsistent with the underlying commercial arrangement, and banks are not expected to reconcile such inconsistencies unless they affect compliance with the credit terms.

As for UCP 600 and ISBP, neither contains a provision requiring a bill of lading under a CFR or CIF credit to be marked “Freight Prepaid”. The determining factor remains the wording of the credit itself.

That said, from a commercial standpoint, a requirement for a bill of lading marked “Freight Payable” may appear inconsistent with the seller’s freight obligations under the CFR rule. For that reason, applicants and issuing banks should ensure that the credit wording accurately reflects the intended commercial arrangement and the realities of the charter party transaction.

Conclusion

From a documentary credit perspective:

• Banks will examine the bill of lading against the LC requirement.
• “Freight Payable as per Charter Party” is acceptable if that is what the credit requires.
• UCP 600 and ISBP do not require a CFR or CIF bill of lading to be marked “Freight Prepaid”.

From a commercial perspective:

• A “Freight Payable” notation may appear inconsistent with the seller’s obligations under CFR.
• The parties should ensure that the LC wording reflects their intended freight arrangement under the charter party.

Best regards,

Mr. Old Man