What Happens If a Letter of Credit Calls For a Wrong Incoterms?

What happens if a wrong Incoterms indicated in a MT700 swift message text?

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Daily practice shows us that Incoterms are not used in a correct way as per ICC rules.

Exporters and importers frequently use wrong incoterms in their sales contracts.

These kinds of mistakes would be very evident, especially when the parties decide to use a trade term with an unsuitable mode of transport.

On today’s post I try to explain the consequences of using a wrong incoterms under a letter of credit transaction.

Understanding the 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.

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 TERMINAL,
  • DAP 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.
incoterms 2010 classification
Incoterms 2010 Classification

But what happens if a letter of credit calls for a wrong incoterms such as FOB Singapore Changi Airport Incoterms 2010 or CIF Tokyo Airport Incoterms 2010?

According to ICC Banking Commission the exporter must fulfill the conditions stated in the letter of credit.

Even if a wrong Incoterms has been used in the letter of credit, the exporter should use this wrong trade term without making any corrections, otherwise issuing banks will refuse his presentation and he may be having difficulties to receive his payment under L/C.

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.