What does costs additional to freight mean in a letter of credit transaction?
Understanding charges additional to freight in a letter of credit transaction.
If you are working with CIF, CFR, CIP, CPT trade terms under letters of credit you are likely to see a statement under field “47A: Additional Conditions” such as “Costs additional to freight is prohibited.” The logic behind these kinds of statements is to fix the freight cost by the issuing banks to the value that was indicated in the credit.
Normally letter of credit rules allow additional costs which may be shown on the transport documents such as multimodal transport documents or bills of lading. However issuing banks frequently disallow charges additional to freight by inserting a statement in the credits on this effect when the trade term is CFR, CIF, CIP or CPT.
Remember on FOB, FCA and EXW terms freight is payable at destination, so you will not be having any problem arising from prohibition of costs additional to freight. You need to look at the letter of credit text on DAT, DAP and DDP trade terms to determine whether costs additional to freight is prohibited or not.
47A: Additional Conditions:
1. Transport document bearing reference by stamp or otherwise costs additional to freight is prohibited.
2. Costs additional to freight are prohibited.
3. Costs additional to freight are not allowed.
What are the additional costs to freight?
According to the International Standard Banking Practice an indication of costs additional to freight can be shown on the transport documents by two ways:
• by express reference to additional costs
• by the use of trade terms which refer to costs associated with the loading or unloading of goods, such as, but not limited to,
o Free In (FI),
o Free Out (FO),
o Free In and Out (FIO) and
o Free In and Out Stowed (FIOS).
What happens if a letter of credit prohibits costs additional to freight?
According to the International Standard Banking Practice if a credit indicates that costs additional to freight are not acceptable, a transport document is not to indicate that costs additional to the freight have been or will be incurred.