Do FCA transactions and Letters of Credit play nicely together?

Meet our writer. Written by our resident freight forwarding and shipping expert. Bob Ronai→

Assuming we are looking at the normal type of Letter of Credit (LC) with the latest shipment date, port/airport of loading, port or airport of destination and requirement to present an onboard Bill of Lading (B/L) or an Air Waybill (AWB), then the answer is “NO”.

A2 in FCA has two options for delivery, effectively:

a.) at the seller’s premises, loaded on the buyer’s/carrier’s truck, or
b.) at the terminal not unloaded from the seller’s truck.

There is no obligation whatsoever for the seller to make any further arrangements with the buyer’s carrier as to when, from where, to where and on what the goods are shipped. While the seller is the exporter for customs purposes, it is not the shipper.

But B6 says the buyer, if agreed in the contract, must instruct its carrier to issue a B/L to the seller. An interesting concept this, the only time in the 2020 rules that the buyer can arrange for their carrier, not a party to the sales contract, to do something, and if that carrier doesn’t do it or makes a mess of it, then the seller has no comeback on the buyer.

Anyway, why even have this provision, when the seller and buyer can agree on anything in their contracts anyway? It is just nonsense. But let’s see how we can try to make it work somehow…

I suggest/recommend that in such a case the seller inserts into the sales contract certain specifics which are actually outside of the FCA rule:

1. State a latest shipment date of at least 14 days, better still 21 days, after the contractual delivery date.

2. State a broad-based port or airport of loading, for example “any European port/airport” instead of naming say “Koper” or “Zagreb.”

3. State a provision that in addition to B6 the buyer is responsible to ensure that their carrier follows the seller’s instructions regarding the B/L, including wording required by the LC, and that the carrier must provide the seller with the B/L or AWB within say 5 days maximum after shipment.

4. State that no responsibility attaches to the seller if these three provisions are not achieved and remind the buyer that as per the provisions that A2 still applies to contractual delivery and B1 still obliges the buyer to pay the agreed price.

5. State that if the seller is unable to comply with the terms of the LC because of the buyer’s failure to ensure points 1, 2 and 3, that payment is due immediately upon demand by the seller.

Yes, it’s messy, and I’ll be happy to read other suggestions from members of this group.

Reader’s comment:

I always discourage using FCA in LC transactions. As the seller is not the contracting party for the freight forwarder. Thus the freight forwarder has no obligations to follow the instructions of the seller for specific instructions for the BL. If the forwarder refuses to enter a specific consignee or notify party, or by all means refuses to put the LC number on the LC, the seller will end up with a non-compliant document in your LC. With all consequences that come from that.

Bob’s response:

Should a seller even give instructions at all to the buyer’s forwarder when that contractual link does not exist? Failure to show an LC number though, even if the LC requires it, is not a discrepancy as ruled by the ICC Banking Commission regularly over the years.

Reader’s comment:

I agree that this is a very messy solution. I think that in this case, if the seller indeed wants to insert all these provisions in the contract, that it is a better idea to renegotiate the contract and that seller and buyer try to agree on a CPT or CIP Incoterms rule.

This makes more sense when working with an LC since the seller pulls the strings? He controls the moment of delivery and is able to produce all the documents needed for the LC. If the LC does not contain any mishaps in this respect. But that is another problem…

Bob’s response:

In some cases the seller does not want to get involved in logistics, or the buyer might be consolidating various cargos into an FCL or there may well be other reasons and scenarios justifying FCA.

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