Understand how trading conditions and insurance can limit the financial risk for freight forwarders.
Overview of freight forwarders’ responsibilities
Freight forwarders provide transport solutions to businesses wanting to send packages, crates and containers from one country to another.
Forwarders act on behalf of importers and exporters to get their client’s goods to their destination on time and in good condition. This means booking cargo with shipping lines, airlines, rail or road carriers. Some freight forwarders have their own road transport and may carry the goods themselves.
A forwarder’s other responsibilities include preparing and checking bills of carriage, arranging insurance, ensuring the lowest possible customs charges are levied and, where necessary, arranging storage.
This guide shows how trading conditions and insurance are used to limit the financial risk for forwarders. It also explains international trade finance and international commercial terms.
Trading conditions and limiting liability for freight forwarders
All businesses are subject to a wide range of statutory regulations, for example employment law, health and safety, public liability and accounting standards. There are also legal issues which specifically affect freight forwarders and their customers.
The role of the freight forwarder is to make arrangements which enable goods to travel from seller to buyer. This often involves a journey of several thousand miles, using more than one mode of transport.
There must have been a sale and contract agreed between a seller and buyer for the supply of goods before a freight forwarder is needed. Many of the elements of this contract impact directly on the nature and detail of the contract eventually agreed between the forwarder and their client, which could be the seller or buyer of the goods.
To make sure the client and the forwarder fully understand, and agree on their responsibilities in the transportation process, the client must be made aware of the forwarder’s trading conditions. This needs to be done before details of the contract are agreed, ideally at the quotation stage.
Trading conditions establish the circumstances under which any service is provided and usually include limiting the forwarder’s liability in the event of a claim against them. Failure to do this could leave the forwarder with unlimited liability, which could prove costly.
Trading conditions also:
- make sure the client knows their goods are not automatically insured
- provide safeguards to help make sure the forwarder is paid once the job is done
- protect the forwarder if the client fails to fully disclose the contents of a consignment, eg hazardous material or goods of an exceptionally high value
For information about packing goods and transporting hazardous material, see the guide on Freight forwarding: moving goods.
Forwarders who are members of the British International Freight Association (BIFA) will often base their contract on the BIFA 2005 Standard Trading Conditions. These conditions are for the exclusive use of BIFA members and a forwarder must join BIFA before they are allowed to use them. This is an easier and cheaper option than paying a solicitor to draft separate conditions for each contract. You can download the 2005 Standard Trading Conditions from the BIFA website (registration required).
Despite being able to limit liability, the freight forwarder still has some level of responsibility for loss and damage to goods.
All transport is subject to national and international laws, and each mode has its own legal regulations that limit the liability of the carrier. These conventions play a similar role to trading conditions.
Freight agents: avoiding the risk of Customs Civil Penalties when arranging exports
Freight agents act as third parties in arranging exports on behalf of exporters. These agents are advised to ask for certain information from the exporter so they do not face the risk of Customs Civil Penalties (CCPs). CCPs could apply because freight agents, as representatives of exporters, also hold responsibility for the accuracy of information in documents and/or the authenticity of documents attached to a shipment.
For more information on CCPs, see the page on an overview of customs civil penalties.
HM Revenue and Customs (HMRC) recommend that freight agents should routinely request the following information from exporters:
- their UK Economic Operator Registration and Identification (EORI) number (this used to be TURN) for use in box 2 of the declaration - see the guide on the Economic Operator Registration and Identification (EORI) Scheme
- details of whom the goods are to be consigned to, their name and address in full
- a commercial reference that can be incorporated into the Declaration Unique Consignment Reference (DUCR) to assist with the export audit trail
- details of where the goods are to be exported, ie country of final destination
- shipping or flight details (if known)
- correct value of goods and correct currency code
- the Commodity Code if known, and a clear and unambiguous description of the goods, their quantity, marks and numbers
- any reference numbers already issued by HMRC, for example Inward Processing Relief, Outward Processing Relief authorisations or previous declarations should also be provided
If the goods have been imported, or are later to be re-imported to a Customs Relief, you need to know so that the correct export procedure code (CPC) can be applied. If an incorrect CPC is used, it can lead to any customs relief on duty and VAT granted at import, being liable for payment/repayment by the exporter or yourselves. If the appropriate CPC is known, then this should be quoted on the export papers supplied by yourselves yet, as specialists, you may still wish to verify that the code quoted is correct.
After checking all the information provided by the exporter, you should also:
- Where a UK EORI number is not provided, confirm that the exporter is not registered and give consideration to the correct procedure to be used for the goods - ie is the export a private export or, if commercial, should the exporter first get an EORI number? Incorrect use of PR or UNREG terms may restrict your clients’ ability to zero rate their goods for VAT purposes.
- Check that the destination is a third country and not a EU member state. Many exporters are unaware of which countries are members of the EU and look to their agents to confirm whether the goods qualify for export.
- Ensure that an item is entered for each Commodity and not bulked for convenience.
- Ensure that a declaration is made for each exporter and not bulked for convenience sake (unless approved to do so within Memorandum of Understanding (MoU) approved procedures). Where identity of the exporter cannot be confirmed, VAT zero rating may be affected. For more information on using an MoU, see the guide on International Trade Fast Parcel Operators.
- When receiving details from your customers, please use any DUCR provided. If a DUCR is not provided then the guidance in the tariff should be followed. In the air environment, air waybill (AWB) numbers are often used in the latter part of the DUCR yet in other freight areas it is helpful, for audit purposes, to use exporters commercial reference(s).
Owing to the increased use of official electronic records by HMRC, they strongly recommend that, to help exporters, the actual DUCR or Master Unique Consignment Reference (MUCR) used or the CHIEF Export Entry Reference (EPU, Entry Number and Date) is notified to your clients. HMRC need to be able to trace the shipment through the traders’ records to enable them to help verify claims for VAT zero rating on exports.
Many shipments are notified via inventory booking references so these are also worth confirming with port loaders. Where goods have been consolidated, the higher level MUCR should always be used.
For general information on the sector, see our section for freight forwarders.
The importance of insurance for freight forwarders
When a freight forwarder is entrusted with someone elses goods, they become legally responsible for taking all the necessary steps to protect and preserve that consignment. This means the forwarder is liable to the owner for any subsequent damage or loss.
The forwarder is legally entitled to limit the amount they are liable for, provided that these trading conditions have been agreed in advance.
Where goods are lost or damaged, it is possible that someone, during the transportation, has been negligent. If there has been negligence, there is likely to be a demand for compensation. The damage or loss might not have been the fault of the forwarder, but if it was caused by someone the forwarder is responsible for, for example a subcontractor, they will be liable as if it were.
Forwarding is not just about handling cargo, much of it is about using and providing information. For example, forwarders should know:
- when a certain ship is due to leave
- a country’s import regulations
- the current rate of duty for a particular product
If forwarders get this information wrong, and a client relying on its accuracy suffers a loss, the forwarder could be liable. They can use their trading conditions to limit the amount of compensation they will be liable for in the event of such mistakes.
To protect themselves against risks, forwarders can take out insurance to help cover any compensation they may become liable for.
Types of insurance for freight forwarders
Liability and marine insurance are the two important types of cover for freight forwarders to consider. Forwarders must have public liability insurance - like any other business - and employer’s liability insurance, if they have staff. It’s also advisable to insure any premises owned, along with their contents.
All freight forwarders should have liability insurance cover. This offers protection from the types of compensation claims outlined further down in this guide.
Policies are available from a wide range of brokers, although a specialist insurance broker with experience of the relevant insurance policies is advisable for freight forwarders. Liability insurance does not insure the goods themselves - this is usually the responsibility of the buyer or seller.
This covers the loss or damage of goods being transported internationally. Marine insurance policies also cover air, road and rail transport.
Because freight forwarders and carriers are entitled to limit their liability, owners of goods who don’t insure them during international transport will only be entitled to a fraction of the goods’ real value. Many freight forwarders carry their own marine insurance policies so that when requested by their customer they can provide it as an added value service.
International trade finance
Freight forwarders play a crucial role in making sure the seller receives payment from the buyer.
For example, if the terms of payment are cash on delivery, it could be the forwarder’s responsibility to ensure that this money is collected when the goods are delivered. In other cases, the forwarder can help payment by ensuring the correct documents are in the right place at the right time.
Sellers can often be trading with buyers thousands of miles away whose financial stability is unknown. Because of this, international financial institutions have developed specialist procedures that allow exporters to do business safely - knowing they will be paid on time and in full.
Forwarders must understand these processes so that their provision of well ordered and accurate documents help the smooth, swift and secure transport of the goods, and ensure that payment is unhindered.
Letters of credits/documentary credits
One of the best-known payment processes is a letter of credit - also known as a documentary credit - which provides security to both the seller and the buyer through the international banking system.
The rules governing documentary credits are set out in the publication Uniform Customs and Practice for Documentary Credits (UCP) 600, which is drawn up by the International Chamber of Commerce (ICC).
Among the many benefits of the UCP is the standardisation of its terms and conditions. International trading and banking sectors need assurances that the terms are easily recognised and accepted in all parts of the world for all methods of trading.
A copy of the current version of the UCP can be bought from the ICC and should be read by all freight forwarders. You can buy a copy of UCP 600 on the ICC website.
For more information on the documentation involved in international trade, see the related guide on freight forwarding - moving goods.
Managing the risks of freight forwarding
Freight forwarders have within their care - or control - goods and documents owned by third parties that often represent large sums of money. This means good risk management is important in running a successful forwarding business.
Freight forwarders can limit their liability and cover some of the risks with insurance policies. It can be easy to invalidate the benefits of limited liability through carelessness or ignorance. Also, some risks are uninsurable - for example losses caused by terrorism.
Risks can never be eliminated completely, but with good practices and training, they can be minimised to acceptable levels. This reduces the likelihood of unwanted claims that could severely reduce profits.
It is important that forwarders bring their trading conditions to the attention of the customer before the contract is concluded. Failure to do so could prejudice insurance cover and invalidate the protections of limited liability.
Other areas of the business where a forwarder needs to establish clear procedures - which are understood by any staff involved - include:
- getting written instructions from customers
- controls over the issue and release of documents
- managing subcontractors - ideally involving written contracts
- handling dangerous goods - for more information, see the guide on freight forwarding - moving goods
- cargo security
- insurance claims
International Commercial Terms for freight forwarders - Incoterms
A freight forwarder’s business relies on goods being sold - this must have taken place before the freight forwarder gets involved. Hopefully, the seller and buyer will have entered into a contract that makes it clear who’s responsible for the cost of moving the goods and any other charges that arise from this process.
A set of international sales terms have been devised by the the ICC to remove the uncertainties of different interpretations of terms in different countries. These terms, which are used to divide transaction costs and responsibilities between buyer and seller, are known as Incoterms.
Whilst these Incoterms help to resolve many disputed interpretations, it is usually left to the freight forwarder to interpret them. For this reason, every forwarder must have a clear understanding of the application and interpretation of Incoterms to be able to give advice to customers.
It’s important to understand that Incoterms only cover the contract of sale between the seller and the buyer - setting out responsibilities and obligations of both parties over the delivery of the goods. Incoterms do not apply to the contract of carriage - a common assumption which can cause confusion.
Another misconception is that Incoterms are completely definitive and cover all the duties of the parties. This is not the case - very often the seller and the buyer have to agree who will pay what of any additional costs incurred.
There are 13 approved Incoterms. These range from ‘Ex Works’ - where the buyer is responsible for the costs in the entire transport chain - to ‘Delivered Duty Paid’ - where the seller is responsible for all these costs.
Despite the use of Incoterms, there are still differing interpretations or practices that exist in some parts of the world. Some Incoterms have been designed for particular modes of transport, eg ‘Cost, Insurance and Freight’ is intended for use solely when goods are transported by sea.
A copy of the latest version of ‘Incoterms 2000’ is available from the ICC and is recommended reading for all freight forwarders.
BIFA Enquiry Line
020 8844 2266
Freight forwarding industry information on the BIFA website
Standard Trading Conditions 2005 from the BIFA website (registration required)
Excise wrongdoing penalties from 1 April 2010 on the HMRC website
UCP 600 copies for purchase on the ICC website
Legislation, cases, claims and issues relevant to freight forwarders on the Forwarder Law website