Client Question:
May we adjust an accepted quote to account for an unexpected fuel surcharge? Do Incoterms allow for this?
Answer:
General Price Adjustment Clauses (GPACs) are a common feature of contracts and contract law. Often the mechanism simply allows for an escalation of price with the passage of time, an annual increase, say. On the other hand, escalation or hardship clauses apply only when particular circumstances change, such as an unexpected increase in the seller’s input costs, although the specific range of events that trigger the clause are as extensive as the law and the parties will allow.
But generally, an escalation clause would definitively allocate to one or other of the parties a fuel surcharge arising after the underlying sale contract was formed. (The matter might also be argued under the umbrella of a force majeure clause, if correctly worded. For although force majeure excuses non-performance, it does not automatically allow for price adjustment.) Regardless of how the opportunity to raise prices arises, the intention is that the seller will not profit from such an adjustment; the clause is there merely to maintain the seller’s original margin.
To the question: there are two positions to consider.
Firstly, if the carrier increases the cost of transport by means of an unexpected adjustment, then, in terms of the contract of carriage, which party is accountable for this increase?
Secondly, between the seller and buyer in the underlying sales contract, which party is liable for the increase in cost?
As a current example, an anticipated reduction of oil supplies has created an environment where carriers may be expected to introduce one or another emergency ‘adjustment factors’ to their tabled rates, which they may possibly even back-date to cargo not yet shipped or cargo shipped but not yet released.
Whether the carrier may introduce the surcharge and when they may introduce it will always be subject to any applicable law. Such a law may require the announcement of the future imposition of the surcharge (giving 30-days’ notice, for example), rather than its immediate application. This law would only apply locally, of course, and as with any commercial contract the carrier is also allowed to avail themselves to an escalation or hardship clause. Thus, if not restrained by law the carrier in extreme circumstances may impose an ‘emergency’ increase at any time during the journey.
The adjustment could involve a lump sum or a percentage calculation, but regardless of how it is calculated, who bears this increase? Generally, the carrier’s principal will bear the increase.
For simplicity’s sake I will refer to this party as the named shipper, but the devil is in the details as the carrier’s principal may be another party entirely. Commercially, if the increase is announced prior to the carrier receiving (or shipping) freight-prepaid cargo, then the adjustment is an immediate barrier; the party making the booking must pay or the carrier will not accept the cargo or ship it if it has been received. If, however, in a freight-prepaid model the increase is announced (and becomes applicable) after the freight has been settled, and after the carrier has shipped the cargo and prior to its release, then the ‘usual’ process is that the cargo is withheld from the consignee at destination until the full freight charge (including the adjustment) is paid. This withholding of cargo would automatically be the position in a freight-collect model.
In the unlikely event that the consignee abandoned their interest in the cargo, rather than pay the freight and/or any surcharge, the carrier would revert to Plan A, holding the shipper to account. (Practically, the destination carrier normally debits the consignee’s local agent, and, in the ordinary course of business, any disbursement made by the agent must be reimbursed to the agent by their principal, being the consignee or the importer, depending on which type of agent is involved – i.e. a freight agent versus a clearing agent.)
Unless both the consignee and shipper abandon their respective interests in the goods (in which case the carrier may exercise a lien on the goods and / or pursue legal action against either or both parties), we can generalise and say any surcharge introduced by the carrier will be settled by either the shipper or consignee, depending on the circumstance, and always the shipper by default.
How to allocate the knock-on liability for this surcharge between the seller and buyer is clear provided that the merchants have a written sales agreement that anticipates such a position, and that they are not trading incautiously with only a ‘purchase order’ or ‘confirmation of order’ or some other inferior commercial document. The sticking point is that, as a general proposition, most merchants are incautious and there will be no formal written contract between the seller and buyer. Often, even if there is, there will generally be no clarity on who has this adjustment liability, which should be addressed, as mentioned, through an escalation clause. But should there be a written agreement, albeit one lacking a guiding clause, then by default Incoterms Rules provides an answer.
It is of course important to note that neither the seller nor the buyer may use the position established through their private contract to deflect the claim by the carrier against the shipper or consignee, or for the importer to use the buyer’s contract terms to repudiate the reimbursement of incurred charges claimed by their agent. As always, the names are important – the rights and obligations of the seller, for example, are not those of the shipper.
For a brief period in each transaction, the transport contract and the sale contract run parallel, yet they never intersect, and clauses, rights and obligations arising in one cannot migrate to the other. This would be most evident in an F-prefixed sale, where Incoterms Rules direct that the seller has no obligation to contract with the carrier, and if they should, that they should do so “as agents for” a named party i.e. the buyer. But it is a common mistake of sellers in F-prefixed contracts to link payment to transport documents, and for the ill-informed seller to take the role of the shipper so as to secure those documents.
That Incoterms excuses the F-prefixed ‘seller’ any exposure to the carrier’s contract (and therefore any increased charges) will not protect the ‘shipper’ if the seller is naïve enough to have taken that role. (In an F-prefixed contract the correct application of Incoterms Rules would see the buyer or the buyer’s agent named as the shipper. As such, the buyer, as shipper or consignee, would be liable to the carrier for all original and any additional costs.
In the common but incorrect position of the F-prefixed seller acting as shipper, should they incur additional charges in that role, they may have the contractual right to recover these from the buyer. How they exercise and realise that right is another story.)
If correctly applied, however, we can be certain that in a C-prefixed or D-prefixed contract, regardless of when the surcharge is raised, it is borne by the seller. Again, this assumes that the parties have a written agreement to allow for Incoterms Rules, and that there is no escalation clause within that agreement which contradicts the default Incoterms position.
Thus: “May we adjust an accepted quote to account for an unexpected fuel surcharge?”
Yes, provided that the sale contract contains an applicable and enforceable escalation or price adjustment clause.
And: “Do Incoterms allow for this?”
Yes. If the contract is silent on the subject but brings C- or D-prefixed Incoterms Rules to bear on the parties, then the seller bears the cost. Incoterms Rules do not provide mechanisms for price adjustments between the seller and buyer.
Thus, in the absence of escalation or hardship clauses (or a force majeure clause properly drafted to cover input costs and not just impossibility), an agreed price in a contract formed under Incoterms Rules is fixed, even if the seller’s underlying input costs change. Should the buyer in their parallel but unconnected roles of consignee or importer incur an emergency fuel surcharge, the C- and D-prefixed Incoterms Rule will give them recourse to the seller for recovery, provided that the sales contract contains no contradictory clause. In E- or F-prefixed contracts, where the buyer is liable for the additional charges, the question should not arise. If it does, then it is unlikely that Incoterms Rules were correctly applied and thus they cannot be used to determine the outcome. It is a matter resolvable only through negotiation.
The commercial reality, of course, is that regardless of the above machinations, ultimately it is always the consumer that bears the consequences of things that go Trump in the night.
Source: Freight Training
