We are going to have deal of around 5 Million with a buyer on LC at Sight. The buyer wants to take material on FOB basis and he would charter the bulk vessel himself. We just need to load the material on to the vessel. The problem is that I am confused how and which documents shall be negotiated on FOB terms with LC at Sight? I mean if all loading is done on FOB basis then since he would charter the vessel so what security we would have for the Cargo since we would not have the BL? What documents we should ask them to call in the LC? I was suggesting to buyer that payment under LC should be settled when 2/3 of the material is loaded on the vessel? Is there any better term I can put? My main worry is to make sure the payment is secured and before the vessel completely loads I should have the money.
Please let me know how this transaction should be handled?
Provided you present the conforming documents under the LC, you should expect to get paid, and your retaining title to the goods would then be of secondary importance.
Depending on the pre-agreed terms, the FOB contract may or may not require presentation of B/Ls under the LC. In your case, this is unlikely, and you will therefore need to ensure that the documents to trigger payment under the LC , are under your control. In lieu of a transport document, you could consider some kind of FCR (Freight Forwarder's Certificate of Receipt), i.e you could agree that the buyer should nominate a freight forwarder to whom you would deliver the consignment, in exchange for a signed FCR. This could then be a document called for under the the LC to release payment.
This would effectively make the sale an FCA contract (if we are talking Incoterms) and the buyer's main objection to this might be that they (in the country of destination) lack the mechanism to pay for the landside operations in the country of loading. If this was the case, the buyer may well agree to an FCA contract with an "FOB" disbursement by the seller i.e. the seller hands over to the carrier and pays the landside operational costs.
This would also protect the seller in that - as beneficiary - they are triggering payment though documents and actions they can better control. Left as an "FOB" contract, the beneficiary's right to be paid is linked to a document they have no control over - e.g. if there is a dock strike, the beneficiary will not be paid (because there will be no loading). However, in a dock strike, an FCA handover contract can still be achieved etc.
In the use and abuse of sales contracts, it is quite normal for a buyer to link the seller's rights to a document they (the seller) have no control over. Note too that calling for a bill of lading in an FOB contract is equally common as it draws the seller into the contract with the carrier (as ‘shipper') which is exactly what the seller is trying to avoid. If the buyer defaults on the freight payment in this example, (or is carrying insufficient insurance in the event of a General Average), the shipper will be called to settle the costs. It is for this reason that the Incoterm FOB does not place the burden on the seller to come up with a bill of lading - certainly not at the seller's risk. Again, by calling for a bill when a bill is not required, the buyer is serving their interests alone and prejudicing the seller.
Equally then, in an FCA arrangement, the seller is always cautioned to accept the transport document from the carrier "as agents for (naming the buyer)" and not in their own name as principal, failing which, they should seek to amend the credit to call for some form of neutral document such as a mate's receipt.
one hill at a time, please
Yes, you're quite right.
I intended to to link the requirement for an FCR document to that of an amended FCA contract.
The problem arises when the incorporation of a specific shipment term (I hesitate to use the term "incoterm") is intended to reflect the division of costs rather than the division of responsibilities relating to carriage.
Thank you for your comments: that is my point entirely
In the case at hand, the commercial invoice would still bear the customs valuation symbol "FOB" as that is the correct term for the cost-distribution. The credit would remain unchanged and still make use of the ‘trade term' FOB - I do not believe credits actually use the phrase ‘commercial term' for this very point.
The fact that a mate's receipt is inconstant with the commercial term FOB should be neither here nor there from the bank's point of view. Unless the bank is acting as the seller or buyer, it should not really concern itself with the private commercial term used by the seller and buyer (neither of whom are party to the credit - i.e. the ‘seller' and ‘buyer' stand at law as separate entities to the ‘beneficiary' and ‘applicant', assuming the ‘applicant' has any status in the credit at all).
The coordination of costs and documents is the province of the sales agreement - the credit must just reflect the parties' intentions accordingly.
Assuming the parties agree to the seller disbursing the origin landside charges to "FOB", the only change the credit would require is in the use of the receipt rather than the bill. The principal changes will come about in the sales contract terms and conditions.
Your continued thoughts are really appreciated.
one hill at a time, please