Delivery now takes place upon completion of the main carriage – but what documents can the letter of credit call for? A bill of lading can serve as evidence of despatch of the goods, but not as evidence of arrival at the named place. The “D” rules – DDP, DAT/DPU, DAP – present different problems. One formulation specifies alternative documents that may serve in the absence of a bill of lading – for example, a freight forwarder’s receipt.įCA, FOB, FAS: Suggested clauses for the letter of credit Where there are compelling reasons to use FCA or FOB, there may be workarounds through special wording in the letter of credit. Without a bill of lading, the seller cannot make a compliant presentation and will not get paid. If the letter of credit calls for a bill of lading, then we have a situation where the buyer may be in a position to frustrate the transaction – perhaps by cancelling the carriage contract! Let’s start with FCA and FOB, where the seller hands the goods over to the carrier, or loads the goods on board, but the buyer arranges the carriage. Implications of using other Incoterms rules So the seller must deal with the insurance claim – something that the CIP rule was designed to avoid in this situation – or must depend on the goodwill of the buyer to take care of this. The seller is contractually “off risk”, but will not get paid under the letter of credit. The container is never loaded, so an on-board bill of lading is not issued. However let us assume that the letter of credit calls for a bill of lading with an on-board notation, and that there is an accident to the container in the container yard. The Incoterms rule is CIP, so risk passes to the buyer once the container has been taken in charge by the carrier. However it should be noted that with some “C” rules, the alignment of the Incoterms rule with the letter of credit may not be perfect.Ĭonsider this scenario. Why does this arrangement work well for both buyer and seller? In effect, the carrier takes the role of an independent third party, trusted to take charge of the goods at the beginning of the journey and to release them to the holder of the bill of lading at their destination. This is widely accepted as evidence that the goods have been despatched and are in transit. The bill of lading may also carry an on-board notation, indicating that the goods have been loaded onto the vessel at a given time and place. The bill of lading will evidence that freight has been paid by the seller, and also serves as a receipt for the goods that have been taken in charge by the carrier. Typically the carrier gives the seller a bill of lading, which serves as a document for control of the goods. It follows that the only Incoterms rules that work well with letters of credit are the “C” rules – CIF, CFR, CIP, CPT. Ideally, “delivery”, as defined by the agreed Incoterms rule, should be aligned with the presentation of compliant documents to the bank, because it is this event that triggers payment by the bank. Why the “C” rules work best with letters of credit 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. 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.Ī 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. How to align the letter of credit with the Incoterms rule
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