Incoterms®, letter of credit, transferable, ICC 500, Uniform Customs and Practices for Documentary Credits, Free Carrier (FCA), Free on Board (FOB), customs clearance
Letter of Credit Payment
Martha, a U.S. wholesaler of sporting goods, closed a sale to a customer in Toronto, Canada. She requested the Toronto company to open a letter of credit in her favor. She also instructed them to designate the letter of credit as transferable, enabling Martha to transfer her rights to the letter of credit to another party.
Upon receipt of the letter of credit issued by a bank in Toronto, Martha requested our bank to transfer it to the supplier in Korea. The rules for transferring a letter of credit exist in the ICC Brochure 600, Uniform Customs and Practices for Documentary Credits, Article 38. It states that the transferring bank can transfer the letter of credit only on the terms and conditions specified in the original letter of credit, with only a few specifically identified exceptions.
A Contradiction with the Incoterm® Rule
The letter of credit required presentation of a rail waybill showing goods shipped from Vancouver to Toronto. The Incoterms® rule, Free Carrier (FCA) Vancouver, required the beneficiary of the letter of credit to place the goods on the rail car in Vancouver with freight payable by the buyer, as agreed to by Martha and her customer in Vancouver.
When we asked about the Incoterms® rules, Martha replied that the supplier in Korea had agreed to the Incoterms® rule, Free on Board (FOB) Korea for her purchase. We explained that we could only transfer the letter of credit with the FCA Vancouver Incoterms® rule, which would make the supplier in Korea responsible for all risks and costs (including customs clearance in Canada) to place the goods on the rail car in Vancouver, whereas the FOB Korea term only required them to put the goods on board a ship at a Korean port. We assumed the supplier would likely find this unacceptable.
The Inability to Agree on the Incoterm® Rule Killed the Deal
Apparently Martha’s enthusiasm to close the deal clouded her judgment of the practicality of the transaction. She adamantly insisted we transfer the letter of credit with the FCA term. While we could technically prepare the transfer, we knew it wouldn’t work until the supplier amended the original letter of credit to read FOB Korea, or her Korean supplier agreed to accept the term FCA Vancouver. Her attempts proved unsuccessful and the deal died on the vine.
In her case, the transferable letter of credit would only work if all parties agreed to the same Incoterms® rule. Since the rules for transferring letters of credit are rigid and do not allow for changing the original terms, she should have considered other payment terms. In Martha’s case, since she apparently did not have the capital or the ability to absorb risk inherent with other payment terms, she could not find a solution to make the terms of the transferable letter of credit workable.