More on the Incoterms rules and letters of credit

How to align the letter of credit with the Incoterms rule

The letter of credit environment is by definition one of limited trust – sellers have concerns about getting paid, buyers want to be sure that the goods they ordered are supplied as per the contract, within the agreed timeframe etc.

A key principle of letter of credit usage is that all the documents called for should be ones that can be supplied by the seller (e.g. the commercial invoice) or whose issue is under the control of the seller – for example, the transport document, where the carrier takes instructions from the seller.

With the Incoterms rules FCA, FOB and FAS, the buyer is responsible for the main carriage, and so is in a position to interfere with the issue of the transport document that is called for by the letter of credit.   This will prevent the seller from presenting compliant documents and getting paid.

For the “F” rules a freight forwarder’s receipt may be acceptable instead of a transport document – though many buyers are not enthusiastic about them.

The “C” rules work best with letters of credit.  Other rules all present problems, but there may be workarounds.

See our “Practical Guide to the Incoterms 2020 rules” for more.