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What happens if a letter of credit calls for a wrong Incoterms?











Incoterms are the short form of International Commercial Terms and they are published by Commercial Law and Practice Commission of ICC. Latest version of Incoterms rules are called Incoterms 2010 which has been in force since 01.01.2011.

Daily practice shows us that Incoterms are not used in a correct way as per ICC rules. Most of the time exporters and importers use wrong international commercial terms in their sales contracts. These kinds of mistakes would be very evident if parties decide to use a trade terms with an unsuitable mode of transport.    

According to Incoterms 2010 rules FAS FREE ALONGSIDE SHIP (... named port of shipment), FOB FREE ON BOARD (... named port of shipment), CFR COST AND FREIGHT (... named port of destination) and CIF COST, INSURANCE AND FREIGHT (... named port of destination) can only be used in a port-to-port sea transportation. 

Remaining 7 seven Incoterms, EXW EX WORKS (... named place), FCA FREE CARRIER (... named place), CPT CARRIAGE PAID TO (... named place of destination), CIP CARRIAGE AND INSURANCE PAID TO (... named place of destination), DAT DELIVERED AT TERMINALDAP DELIVERED AT PLACE and DDP DELIVERED DUTY PAID (... named place of destination) can be used in all modes of transport including port-to-port sea transportation. 

Table 2 : INCOTERMS 2010 Classification  
















But what happens if a letter of credit calls for a commercial invoice showing FOB Singapore Changi Airport Incoterms 2010 or CIF Tokyo Airport Incoterms 2010?

According to ICC Banking Commission exporters must fulfill the conditions stated in the letter of credit texts. Even if a wrong Incoterms has been used in a letter of credit exporters should use this wrong trade term without making any corrections, otherwise issuing banks will refuse their presentations and they may be having difficulties to receive their payments under L/Cs.

Example 1
Letter of credit : 
45A:  Description of Goods &/or Services
CRUSHING PLANT. AS PER PROFORMA INVOICE NO.:P-111-7 R02 DATED 03/07/2012 FOB Singapore Changi Airport Incoterms 2010
Commercial Invoice :
CRUSHING PLANT. AS PER PROFORMA INVOICE NO.:P-111-7 R02 DATED 03/07/2012 FCA Singapore Changi Airport Incoterms 2010
Reason for Discrepancy: Trade terms stated in the commercial invoice is not consistent with the letter of credit. 

Example 2
Letter of credit : 
45A:  Description of Goods &/or Services
6480CARTONS PREMIUM BRAND A10 CANNED PINEAPPLE CHUNKS IN NATURAL JUICE CIF NEWYORK PORT USA INCOTERMS 2000
Commercial Invoice :
6480CARTONS PREMIUM BRAND A10 CANNED PINEAPPLE CHUNKS IN NATURAL JUICE DAT NEWYORK PORT USA INCOTERMS 2010
Reason for Discrepancy: Trade terms stated in the commercial invoice is not consistent with the letter of credit. 




















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What happens if a wrong Incoterms indicated in a MT700 swift message text? 
Daily practice shows us that Incoterms are not used in a correct way as per ICC rules. Most of the time exporters and importers use wrong international commercial terms in their sales contracts. These kinds of mistakes would be very evident if parties decide to use a trade terms with an unsuitable mode of transport. 
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INCOTERMS 2010 Classification  



RULES FOR ANY MODE OR MODES OF TRANSPORT

EXW EX WORKS (... named place)
FCA FREE CARRIER (... named place)
CPT CARRIAGE PAID TO (... named place of destination)
CIP CARRIAGE AND INSURANCE PAID TO (... named place of destination)
DAT DELIVERED AT TERMINAL (new rules)
DAP DELIVERED AT PLACE (new rules)
DDP DELIVERED DUTY PAID (... named place of destination) 



RULES FOR SEA AND INLAND WATERWAY TRANSPORT 

FAS FREE ALONGSIDE SHIP (... named port of shipment)
FOB FREE ON BOARD (... named port of shipment)
CFR COST AND FREIGHT (... named port of destination)
CIF COST, INSURANCE AND FREIGHT (... named port of destination)

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