Payment of Freight

What it does

A freight clause under a voyage charter sets the rate of freight and, crucially, when it is earned and when it is payable. These are distinct questions: freight may be earned at a different point from when it must be paid, and the clause commonly provides that freight is deemed earned on shipment of the cargo, payable in advance, and is non-returnable whether or not the ship and cargo are lost.

The earned and payable terms allocate the risk of the voyage going wrong. If freight is earned on shipment and non-returnable, the owner keeps it even if the cargo is later lost, leaving the charterer or cargo interests to look to insurance. The clause is read with the lien, prepaid-versus-collect, and currency provisions, which between them determine how and when the owner is paid and what security it has if it is not.

Commercial effect

The freight terms decide who carries the risk of the cargo or voyage being lost after freight has accrued. An earned-on-shipment, non-returnable clause is favourable to the owner, securing its revenue regardless of what happens to the cargo, and shifting the loss risk onto the charterer and its insurers. The timing of payment, in advance or on delivery, affects cash flow and credit risk between the parties.

These provisions also interact with financing and documentation, since freight prepaid bills of lading represent that freight has been paid and let receivers take the cargo without further payment, while freight collect arrangements keep payment due at the far end. How the clause is structured therefore reaches beyond the two charter parties into the sale and banking chain that relies on the freight position being clear.

Owner's perspective

The owner generally wants freight deemed earned on shipment, payable in advance, and non-returnable, so that its revenue is secured as early as possible and is not at risk if the cargo or voyage is later lost. This gives the owner certainty of payment and cash flow up front, and it removes the risk that a casualty after loading deprives it of the freight it has effectively earned by undertaking the carriage.

The owner also wants the payment mechanics clear and backed by the lien, so that if freight is not paid when due it has security over the cargo. It is alert to the interaction with prepaid bills of lading, since issuing a freight prepaid bill before actually receiving the freight exposes it to releasing cargo without payment, and it manages that risk through the timing and documentation the clause sets up.

Charterer's perspective

The charterer is wary of an earned-on-shipment, non-returnable freight clause, because it means paying for carriage that may not be completed if the cargo is lost, so it ensures its insurance covers that exposure. It may seek to soften the terms, for example by tying more of the freight to delivery, though market practice often favours the owner on the earned and non-returnable points.

The charterer also focuses on the payment timing and on the documentation, since freight prepaid bills are usually needed for its sale and financing arrangements. It weighs the cash-flow effect of paying in advance against the commercial need for prepaid bills, and it negotiates the freight terms alongside the prepaid-versus-collect and lien provisions so that the whole payment structure fits its trade.

Negotiation points

• When freight is earned (on shipment or on delivery) and whether it is non-returnable.
• When freight is payable — in advance, on delivery, or in instalments.
• The interaction with freight prepaid versus collect bills of lading.
• The owner's lien and other security for unpaid freight.

Common variations

• Freight deemed earned on shipment, payable in advance, ship and cargo lost or not lost.
• Freight payable on delivery of the cargo at the discharge port.
• Freight split between an advance on shipment and a balance on delivery.
• Freight terms tied expressly to the issue of freight prepaid bills of lading.