A Primer on Shipping Mohamad Haj Hasan

Delivery of Goods

When a buyer orders goods from a seller, the delivery and shipment of goods can be made in
one of a variety of ways, based on what has been agreed on in advance between both parties:

1. Ex-works (XW)

This means that the seller delivers the goods to their factory or warehouse doors only. The
buyer must handle the cost of pick up from the seller’s location as well as the loading costs.
The goods are technically in the ownership of the buyer upon pick-up.

2. Freight On Truck (FOT)

This means that the seller handles the delivery ex-works as well as the cost of loading the
goods on the buyer’s truck. The goods are technically in the ownership of the buyer upon
loading.

3. Freight On Board Free-in (FOBFI)

This means that the seller will handle the transport of the goods all the way to the origin port
dock. The buyer must then handle all port charges plus the cost of loading the goods on the
ship. The goods are technically in the ownership of the buyer upon off-loading onto the
origin port dock.

4. Freight On Board (FOB)

This means that the seller handles the delivery of the goods until they are loaded onto the
ship at the port of origin. Once the goods are loaded onto the ship at the port of origin and a
clean Bill Of Lading (BOL) – which are documents that prove that the goods were loaded
onto the ship and are in good condition – is issued, then the goods are technically in the
ownership of the buyer.

5. Cost & Freight Free-out (C&FFO)

This means that the seller pays for shipping charges (i.e. the cost of renting a container) and
makes sure that the goods are delivered all the way to the final destination port, but keeps
the goods on board the ship. The buyer handles port charges and off-loading charges at the
destination port dock. Once the goods are loaded onto the ship at the port of origin and a
clean BOL is issued, then the goods are technically in the ownership of the buyer.

6. Cost & Freight Liner Terms (C&FLT)

This means that the seller will send the goods from their factory or warehouses all the way
to the dock of the final destination port (including shipping charges and the handling of off-
loading the goods onto the final destination port). The buyer, however, pays the port fees at
the final destination port. Once the goods are loaded onto the ship at the port of origin and a
clean BOL is issued, then the goods are technically in the ownership of the buyer.

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7. Cost Insurance and Freight (CIF)

This is exactly like C&F Liner Terms in addition to the seller paying for and handling the
insurance of the goods. It is worth noting that in Jordan, the buyer must take out insurance
from a Jordanian firm. Therefore buyers in Jordan never use CIF as a delivery method.

8. Warehouse-to-Warehouse (W2W)

This is an end-to-end delivery solution by the seller, including the clearing of customs at the
destination port and the transport of the goods to the buyer’s final destination. The buyer, of
course, must pay the customs fee on the goods. It is worth noting that this is a very
expensive delivery method and this is the delivery method of parcel carriers like DHL and
Aramex.

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Figure 1. Different Methods of Delivery

It is worth noting as a point of reference that the current renting price (circa 2008) of a 20-cubic-
meter (or 20-ton, whichever is greater) container from the US to Jordan (Aqaba port) is
approximately $3,000. This is the Free-in/Free-out price (i.e. the loading at the port of origin and
the off-loading at the destination port are additional costs). The renting price of a 40-cubic-meter
(or 40-ton, whichever is greater) is approximately $4,500.

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Payment Terms

When a buyer orders goods from a seller, the payment for the goods can be made in one of a
variety of ways, based on what has been agreed on in advance between both parties:

1. Site Letter of Credit (LC)

This is issued based on certain terms that both parties (buyer and seller) agree on. An LC is
essentially a guarantee from the buyer’s bank to pay the seller the full amount for the goods
once they are “delivered” to the buyer. As discussed previously, transfer of ownership
usually occurs when the goods are loaded onto the ship at the port of origin (and sometimes
even before that, depending on the delivery method). Goods are considered “delivered” to
the buyer when the seller provides their local banking counterparty to the LC a legalized
invoice for the goods (legalized by their local Chamber of Commerce), approximately four
copies of the original clean BOL (which is proof that the goods are on the ship and are in
good condition) and a legalized certificate of origin (legalized by their local Chamber of
Commerce). An LC can also have a number of terms written in that both parties have
agreed to. If all the previously mentioned papers are available and all the LC terms are met
then the bank pays the seller immediately.

2. Deferred LC

This is exactly the same as an LC except that, instead of paying immediately, the bank pays
the seller after a certain number of days according to the terms of the LC. There is room for
some “loophole” manipulation on the part of the buyer that can be a risk to the seller. For
example, the buyer can intentionally request “ciment” incorrectly in the LC terms and the
seller would state that what was shipped is “cement”. When it comes time to pay, the buyer
would then refuse based on the fact that the terms were not met and would hold the seller’s
goods hostage for a lower price.

3. Advanced Payment (Wholly or Partially)

This means that the buyer opens an LC for the full amount of the goods but pays the seller a
certain percentage (e.g. 30%) immediately upon the issue of a bank guarantee from the
seller’s end for the same amount (i.e. 30%). The bank guarantee will expire when the seller
submits correct shipping documents (as above) to the bank and then the normal terms of
the LC are adopted to pay for the remaining amount (in this case, 70%).

4. Cash Against Documents (CAD)

This means that there is more trust between the two parties than with an LC. In this case,
the seller ships everything and submits the documents (as above) to their bank, which then
sends the documents to the buyer’s bank. The buyer does not pay the seller immediately in
this case, but the buyer also does not get the documents to clear the goods out of customs
at the port of destination either. If the buyer wants the documents (and the goods to clear
customs), then they must pay their bank, which in turns pays the seller’s bank. The main risk
here for the seller, when compared to an LC, is that the buyer can deny the shipment, not
pay and hold the goods hostage in order to negotiate a better price. The advantage is that
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both parties save on the LC fees, which can range from 0.25% to 2.00% of the total price of
the goods per 3-month term. Also, the buyer sometimes has to put up between 0% and
100% collateral in order to open the LC, and therefore these costs will be saved as well.
This type of payment is sometimes accompanied by a down payment (e.g. 20%) that
protects the seller and allows them to resell the goods to another buyer at the port of
destination for a discount if a disagreement occurs.

5. 100% Post-paid

If the seller trusts the buyer a lot, the seller would invoice the buyer to pay after sending the
goods based on complete trust.

6. 100% Pre-paid

If the seller does not trust the buyer at all, the seller would request that the buyer pay the
entire amount for the goods in advance.

Figure 2. Different Methods of Payment

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Clearing Customs

The customs clearing process for the buyer of goods is a straightforward multi-step process:

1. The buyer’s contact details are given to the shipping agent (e.g. Maersk) by the seller.

2. Once the goods arrive at the destination port, the shipping agent contacts the buyer and
informs them of the arrival of the goods. The shipping agent requests certain payments:

a. Agency fees.

b. If the shipping fees are not pre-paid, then the buyer must pay the freight charges
payable (if it is mentioned on the BOL that the buyer will do so) plus 5%
commission to the agent.

c. Port fees, including stevedoring, porterage and lighterage fees.

Depending on the delivery terms, the buyer may pay some or all of these fees.

3. The buyer requests a delivery order from the shipping agent (which the buyers needs,
along with some other paper work, to clear customs). The shipping agent in turn
requests the original BOL in order to give the buyer the delivery order.

4. The buyer obtains the original BOL from their bank if payment was made by LC. The
buyer may have obtained the original BOL directly from the seller if payment was
arranged some other way. If the buyer is in possession of the original BOL, it means that
they have paid all their debts in one way or another. Once the buyer has the original
BOL, they then give it to their clearing agent (along with any shipping agent fees
payable) to finish everything with the shipping agent on their behalf.

5. The shipping agent then gives the clearing agent the delivery order in addition to all
documents necessary for clearing customs. It is worth to note that the buyer always pays
VAT on the cost of the goods including the customs paid.

6. The clearing agent pays customs (which the buyers pays back later) and loads the
goods onto a truck to send them to the buyer’s final destination. The buyer pays the
clearing agent a fee (which is a standard fee from Aqaba to Amman) for all their work
that includes clearing, loading, transporting to final destination and transporting the
empty container back to the port to give back to the shipping agent.

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Figure 3. Clearing Goods from Customs

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