The relationship of the Incoterms rules in documentary credits transaction

The relationship between the Incoterms rules and documentary credits is that they both play a crucial role in international trade transactions.

Incoterms rules, which are published by the International Chamber of Commerce (ICC), provide a standardized set of terms defining the rights and obligations of buyers and sellers in international contracts for the delivery of goods. These rules determine who is responsible for various costs, risks, and tasks associated with the transportation and delivery of goods.

On the other hand, documentary credits, also known as letters of credit, are financial instruments issued by banks that guarantee payment to the seller upon presentation of specified documents. Documentary credits provide security to both buyers and sellers by ensuring that payment will be made if certain conditions are met.

The relationship between Incoterms rules and documentary credits lies in their complementary nature. When negotiating an international sales contract, parties often refer to specific Incoterms rules to determine their respective responsibilities for shipping, insurance, customs clearance, etc. These agreed-upon terms then form the basis for issuing a documentary credit.

In this context, the parties should ensure that:

the instructions given by the buyer to the bank undertaking the documentary credit (the issuing) are fully compatible with the requirements under the contract of sale;
the seller is offered the opportunity in advance, and well before the handing over of the goods for carriage, to check the terms of the documentary credit;
any inconsistency between the requirements under the documentary credit and the requirements under the contract of sale is avoided, since the buyer may be in breach of the payment obligation if the seller cannot get paid under the documentary credit when the seller’s documents conform with the contract of sale; and
the buyer does not instruct the bank to pay against a transport document which does not control the disposition of the goods, and which would therefore not prevent the seller from sending the goods to someone else after the seller has been paid.

In summary, while Incoterms rules define contractual obligations related to the shipping and delivery of goods, documentary credits provide financial security by guaranteeing payment upon the presentation of specified documents. The use of both these tools helps facilitate smooth international trade transactions by clarifying responsibilities and providing financial protection to both buyers and sellers.

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