Terms such as “Freight Prepaid and Charged Back,” “Freight Prepaid and Add,” “Freight Collect and Allowed” and other payment term modifiers are not defined in either the Uniform Commercial Code (UCC) or the National Motor Freight Classification (NMFC). Rather, they originate from industry practice and custom and have never been codified into law. 

The phrases “F.O.B. Origin, Freight Prepaid and Charged Back” and “F.O.B. Origin, Freight Prepaid and Add” mean that the seller pays the freight charges to the carrier but then collects from the buyer by adding the amount to the seller’s invoice. 
Similarly, the phrase “F.O.B. Destination, Freight Collect and Allowed” means that the freight charges are paid to the carrier by the buyer who then deducts the amount paid for the freight from the seller’s invoice. The term “F.O.B. Destination, Freight Prepaid & Add” means that the freight charges are paid to the carrier by the seller, who then adds the amount paid to the carrier to the seller’s invoice. 

Care must be exercised by a seller when prepaying and adding freight charges to the invoice to the buyer to avoid violating state laws prohibiting deceptive or fraudulent business practices. A seller would be susceptible to such a charge if it adds to an invoice more than it actually paid the carrier. Such a practice is colloquially referred to as “marking-up the freight.” Similarly, a buyer would be in violation of such a state law if it were to misrepresent to the seller the amount the buyer actually paid to the carrier. 

While a thorough discussion of this issue is beyond the scope of this column, an example of such a violation of a state law would be when either the buyer or seller submits the carrier’s original invoice for freight charges to the other party, but then later receives an “off-bill discount” from the carrier. An example of such an “off-bill discount” would be when the carrier issues a credit based on a volume incentive which cannot be determined until the end of a given period of time. Such a credit effectively retroactively lowers the freight charges for all shipments subject to the volume incentive. As between the carrier and its customer, such discounts are perfectly legitimate. What is not legitimate is for one party to a sales transaction to misrepresent or artificially inflate the amount (i.e. by failing to include the discount) that it tells the other party it paid for freight charges.

Having said that, there are perfectly legitimate reasons why the party paying the freight may be entitled to an extra amount. For instance, the party paying the carrier may be in a position to obtain much lower rates based on higher volumes of freight than the other party could negotiate for themselves. Additionally, the party who negotiated the rates, arranged for the carriage and paid the freight bills no doubt incurred administrative costs to do so. There is nothing inherently unlawful about marking up freight charges; it just must be done in a non-deceptive manner. 

A similar analysis applies when a seller quotes a product at a given price plus “shipping.” If the seller is “marking up the freight,” this would be a deceptive trade practice. In this situation, the problem is easily resolved by using the phrase “shipping and handling.”

Accordingly, if one party to a sales transaction wants to be paid something more than the amount paid to the carrier, an agreement needs to be reached with the other party. For example, the parties could agree in a separate writing that the term “freight” means “the freight charges actually paid to the carrier plus 20%” or “the freight charges actually paid to the carrier plus $20.” Failure to have such an agreement exposes the party “marking-up the freight” to both civil and criminal liability.

All for now!

Brent Wm. Primus, J.D., is the CEO of Primus Law Office, P.A., the Senior Editor of transportlawtexts, inc., and is the co-author of the text U.S. Domestic Terms of Sale and Incoterms 2000 and Uniform Commercial Code vs. Incoterms 2000. Previous columns, including those of William J. Augello, may be found in the “Content Library” on the PARCEL website (www.PARCELindustry.com). Your questions are welcome at brent@transportlawtexts.com