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Documentary Sale and Terms of TradeDocumentary Sale and Terms of Trade

Chapter 5

© 2002 West/Thomson Learning

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Contracts as a way to manage riskContracts as a way to manage risk

Negotiate terms to fit specific transaction

Allocate risk - moving goods and money Fix performance obligation and

responsibilities Fix price and quality Make sure understanding is reflected in

contract

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Where is the the risk in an international transaction?Where is the the risk in an international transaction?

Payment risk Delivery risk Quality risk Differences from domestic

transaction?

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DefinitionsDefinitions

Documentary Sale: Buyer is required to pay upon presentation

of NEGOTIABLE DOCUMENT OF TITLE by seller

Document of title: evidences ownership of goods: dock receipts, warehouse receipts and bills of lading

Documents transfer ownership of goods, while goods may stay with bailee

Negotiability: ability of document to be transferred legally from one party to another in return for value

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Bill of LadingBill of Lading

A document of title issued by a carrier to a shipper upon receiving goods for transport; also serves as receipt for goods delivered and contract of carriage

Negotiable bills must be either to order or to bearer (but bearer instruments not used in international transactions)

Order instruments must be delivered and endorsed

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Documentary Collection:Payment against documents

Documentary Collection:Payment against documents

Separation of goods and documents facilitates trade and payment

Control of documents gives control of goods

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Stages in Documentary transactionStages in Documentary transaction

Seller gives goods to Carrier and gets bill of lading

Seller endorses bill of lading and gives it to bank with other required documents (insurance,certificate of origin or inspection, documentary draft)

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Documentary draftDocumentary draft

Facilitates payment Negotiable order to pay made out

by seller Drawn on buyer, payable to the

seller May be used with letters of credit

(discussed in Ch. 7)

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The Documentary SaleThe Documentary Sale

JapaneseImporter

American Exporter

CollectingBank

Exporter’s U.S. Bank

(Remitting Bank)

Sales ContractCIF Japanese Port

Documents Against Payment

A

A. Sales contract calls for documentary sale

B

B. Documents prepared - export license obtained - goods delivered to carrier

C

F

C. Negotiable bill of lading, insurance policy, certificates of origin, invoice withdraft attached presented to remitting bank

D

D. Documents forwarded for collection through International banking system

E

E. Documents presented for negotiation on payment

F

F. Payment remitted and exporter’s account credited

G

G. Importer claims goods and makes entry

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StagesStages

Seller’s bank forwards documents to collecting bank in buyer’s country

Documents released to buyer when buyer pays

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Purchasers of Bills of ladingPurchasers of Bills of lading

Special protection for purchasers who take bills of lading by negotiation -- they take possession free from any adverse claims

“Good faith purchaser” is one who purchases for value (not to settle debt) in good faith and without notice of

antecedent claim in the ordinary course of business

Purchaser not in good faith only takes rights of transferee Protects rightful owner

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Types of Contracts:Shipment and DestinationTypes of Contracts:Shipment and Destination

Shipment Contract: Contract calls for seller to ship goods by carrier, but not to deliver goods to named location Most common in international trade Presumption in favor of shipment Risk of loss passes when goods handed to

carrier Destination Contract: Contract calls for

seller to deliver goods to particular destination Greater responsibility on seller Risk passes when goods tendered to buyer

at destination

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Risk of loss under contractsRisk of loss under contracts

Shipment contract: risk passes when goods are given to the first carrier

Presumption of shipment contract if not specified

Destination contract: risk passes when goods are given to buyer at destination point

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Trade Terms -- INCOTERMSTrade Terms -- INCOTERMS

Responsibilities of buyer and seller need to be negotiated.

Trade terms used as a short hand for assigned responsibilities and allocating when the risk passes from one party to another.

Incoterms 2010 replace Incoterms 2000

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INCOTerms 2010: E Terms

EXW – Ex works: The seller's only responsibility is to make the goods available at the named place. The buyer bears full costs of moving the goods from there to destination. Risk shifts to buyer when goods made available by seller at named location. Use for all modes of transport

 

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INCOTerms 2010: F Terms FCA – Free carrier: The seller delivers the goods,

cleared for export, to the carrier selected by the buyer. The seller loads the goods if the carrier pickup is at seller's premises. Buyer then bears costs of moving the goods to destination. Risk shifts to buyer when goods delivered to carrier. Use for all modes of transport.

*FAS – Free alongside ship: The seller delivers the goods to the ship in origin port. Buyer then bears all transport costs. Risk shifts to buyer when goods delivered alongside ship. Use only for ocean transport.

*FOB – Free on board: The seller delivers the goods on board the ship and clears the goods for export. Buyer then bears all transport costs. Risk shifts to buyer

when goods are on ship. Use only for ocean transport.

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INCOTerms 2010: C Terms *CFR – Cost & freight: The seller clears the goods for

export and pays the costs of moving the goods to destination. Risk shifts to buyer when goods are on ship. Use only for ocean transport.

*CIF – Cost, insurance & freight: The seller clears the goods for export and pays the costs of moving the goods to the port of destination. Risk shifts to buyer when goods are on ship. Seller must purchase cargo insurance; buyer can claim on policy. Use only for ocean transport.

CPT – Carriage paid to: The seller pays for moving the goods to destination. Risk shifts to buyer when goods are transferred to the first carrier. Buyer must procure own insurance. Use for all modes.

CIP – Carriage & insurance paid to: The seller pays for moving the goods to destination. Risk shifts to buyer when goods are transferred to the first carrier. Seller must purchase cargo insurance; buyer can claim on policy. Use for all modes.

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INCOTerms 2010: D Terms

DAP – Delivered at place: Seller transports goods to named destination. Seller pays transport costs. Risk shifts when goods delivered to buyer at destination. Use for all modes of transport.

DAT – Delivered at terminal: Seller pays for transport to destination terminal and unloading. Risk shifts when goods delivered at terminal. Use for all modes of transport.

DDP – Delivered duty paid: Seller delivers goods - cleared for import - to buyer at destination. Seller bears costs and risks of moving goods to destination, including customs duties and taxes. Risk shifts to buyer when goods delivered at specified location. Use for all modes.

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Measurement of damages in CIF contractMeasurement of damages in CIF contract

Seaver v. Lindsay : U.S. rule: damages measured by the market price of the goods at the port of shipment on that date

Sharpe & Co. v. Nosawa & Co.: English rule: damages measured at date and location of delivery

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Electronic Data Interchange (EDI)

Trade documents filed electronically Faster transmission; parties can track

goods and adjust documents as necessary; reduce preparation of multiple copies

Security issues: Digital signature laws should help Unauthorized access problem Liability issues Lack of standardization for electronic

documents

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Basic conceptsBasic concepts

Negotiate explicit terms: price and clear responsibilities of parties

Reference clear set of trade terms; avoid attempts to “customize” terms

General presumption that contract is a shipment contract

Parties may create destination contract more expensive parties may feel extra expense worthwhile

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Banque de Depots v. FerroligasBanque de Depots v. Ferroligas Facts: Bank gets court order to seize Bozel’s

calcium silicon in La. to settle debt owed by Bozel Documents for the calcium silicon were held

by other banks. Issue: Is bank that seized the goods without

the documents of title entitled to them for payment of money owed?

Decision: No. Reasons:

The party that controls the documents controls the goods.

Legal “capture” of documents prerequisite to seizure of goods

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Biddell Brothers v. Clemens HorstBiddell Brothers v. Clemens Horst

Facts: CIF contract for sale of hops to be shipped to London Buyer insisted on right to inspect goods before

payment Seller insisted on payment upon presentation of

documents Seller refuses to ship; buyer sues

Issue: Has buyer right to inspect the goods before payment?

Decision: Not under standard CIF contract Reasons: Buyer obligated to pay upon

presentation of the documents

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Basse & Selve v. Bank of AustralasiaBasse & Selve v. Bank of Australasia

Facts: B&S purchased ore from O Bank negotiated documents on B&S behalf Contract required certificate of analysis from H O submitted phony samples B&S sued Bank to recover payment on bill of

lading Issue: Is Bank responsible for inspection of ore? Decision: No; Bank has no duty to inspect Reasons: Bank not obligated to look beyond

apparently-regular documents. Certificate here appeared to be in order and the

bank properly paid on documents.

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St. Paul Guardian Ins. V. Neuromed Medical Systems (S.D.N.Y. 2002)

St. Paul Guardian Ins. V. Neuromed Medical Systems (S.D.N.Y. 2002)

Facts: CIF contract for sale of MRI, shipped from Germany to NY, then buyer to arrange transport to Ill., contract governed by German law

MRI loaded on ship in good condition MRI was damaged when arrived in Ill. Buyer claims on insurance, insurer sues seller

Issue: Should CIF term be interpreted under Incoterms?

Decision: Apply Incoterms – CIF means risk of loss passes when delivered to carrier at port of shipment

Reasons: CISG applies, Art. 9(2) says contract incorporates usage known or should be known to parties and regularly observed in international trade

CIF interpreted under Incoterms without specifc reference

CISG, Art. 67(1) – passage of risk and transfer of title needn’t occur at same time

Terms here don’t modify CIF term of contract

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Kumar Corp. v. Nopal Lines, Ltd. (Fla Dst. Ct. App. 1985) Facts: K sold tv sets to N in Venezuela

CIF contract for delivery to Maracaibo K agreed to let N pay after goods sold K delivers goods to freight forwarder; K didn’t

take out insurance policy as required Goods stolen; K sues freight forwarder and

carrier Issue: Does K have interest in goods to allow it

to sue? Decision: Yes, despite CIF contract Reasons: Agreement here as to payment here

means not true CIF contract Even if CIF contract, failure to get insurance

means K self-insures; so K has interest sufficient to sue

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Web Sites http://www.forwarderlaw.com http://www.cisg.law.pace.edu http://www.iccwbo.org http://www.jus.uio.no/lm/icc.incoter

ms.1990/index.html http://www.silkweb.bc.ca/portview/