Back-to-Back LC: Must Incoterms Be the Same?

Intro
In back-to-back LC transactions, questions about Incoterms often come not from the rules—but from the bank’s sense of risk. This case is a good example: what is legally allowed, and what is operationally wise, are not always the same thing.

Question

Hello Sir,

We are doing back-to-back LC and our shipment is under charter party.
Import is on FOB basis and export is on CFR FO.

Now the bank is saying that Incoterms should be the same.
Is it possible, and which Incoterm is best to keep the same for both import and export?

Mohammed

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Answer

Dear Mohammed,

Thank you for your question.

Yes, it is possible—and in most back-to-back LC structures, it is quite normal—for the import and export legs to use different Incoterms.

A back-to-back LC transaction is fundamentally different from a transferable LC under UCP 600 Article 38.

In a transferable LC, the second beneficiary must work within almost identical terms and conditions of the original credit, except for the limited adjustments allowed (e.g. amount, unit price, expiry, etc.).

By contrast, a back-to-back LC involves two completely separate credits:

• One LC issued by the ultimate buyer (export LC)
• One LC issued by the intermediary’s bank in favour of the supplier (import LC)

Because they are separate instruments, there is no rule under UCP 600 that requires the Incoterms to be the same in both LCs.

 Additional practical considerations

1. Choice of Incoterms

From a purely operational perspective, aligning Incoterms can help reduce risk.

• If the export LC is CFR, it is often safer for the import LC to also be CFR, so that transport obligations are consistent and potential discrepancies are minimised—particularly those arising from the Bill of Lading (e.g. ports of loading/discharge and freight arrangements matching the master LC).
• If the import LC is FOB while the export LC is CFR, you (as intermediary) will need to arrange freight. In such cases:
  • You may need to handle switch Bills of Lading; and
  • If the ports differ between the two LCs, the structure may resemble a temporary import/re-export transaction, with added logistical and documentary complexity.

2. Bank’s position on issuing the back-to-back LC

Your bank may decline to issue the back-to-back LC if:

• It is not willing to rely on or discount the proceeds of the export (master) LC to fund payment under the import LC; or
• Your company does not have sufficient financial capacity to cover payment under the import LC independently.

In addition, since your shipment is under a charter party, extra care is needed with the Bill of Lading, as this is often where discrepancies arise in back-to-back structures.

In short, Incoterms do not need to be the same—but misalignment without proper control over shipment and documents is where problems usually begin.

I hope this helps you look at the issue from both angles:
what the rules allow—and what the bank is really concerned about.

Best regards,
Mr. Old Man