1

Documentary Sale and Terms of Trade

Documentary Sale and Terms of Trade

Chapter 5

© 2002 West Educational Publishing Company© 2005 West Legal Studies in Business/Thomson Learning

2

Contracts as a way to manage risk

Contracts as a way to manage risk

• Negotiate terms

• Allocate risk: moving goods and money

• Fix performance obligation and responsibilities

• Fix price

• Make sure understanding is reflected in contract

3

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

• Similar in domestic transaction

• Payment risk

• Delivery risk

• Quality risk

4

DefinitionDefinition

• Documentary Sale:– Buyer is required to pay upon presentation of

NEGOTIABLE DOCUMENT OF TITLE by seller

– Document of title= evidences ownership e.g. dock receipts, warehouse receipts and bills of lading

– Ownership of goods passes with the documents, goods may stay with bailee

5

DefinitionDefinition

• Negotiability= legally transferred from one to another in return for value

• In the U.S. bills of lading governed by The Federal Bills of Lading Act and the Uniform Commercial Code.

• Why is negotiability so important to trade?

6

Bill of LadingBill of Lading• A document of title issued by a carrier to a

shipper upon receiving goods for transport• Negotiable bills must be to order or to

bearer (but bearer instruments not used in international transactions)

• Order instruments must be delivered and indorsed

• Carrier must deliver goods only to the holder of the bill of lading (otherwise liable for misdelivery)

7

Documentary Collection:Payment against documents

Documentary Collection:Payment against documents

• Separation of goods and documents facilitates trade

• Controlling documents means you control the goods

8

Stages in Documentary Transaction

Stages in Documentary Transaction

• Seller gives goods to carrier and gets bill of lading

• seller indorses bill of lading and gives to bank with other documents (insurance, certificate of origin, documentary draft)

9

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 which we will discuss later

10

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

C

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

11

StagesStages

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

• Documents released when buyer pays

12

Rights of PurchasersRights of Purchasers

• Special protection for purchasers who take by negotiation. They take free of any adverse claims. These are also called “good-faith purchasers.”

13

Rights of PurchasersRights of Purchasers

• “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

14

If you are not a good faith purchaser, then you only take the

rights of a transferee.

• Who does this protect?

15

Banque de Depots v. FerroligasBanque de Depots v. Ferroligas

Facts: Bank gets order seizing Bozel’s silicon in LA. Because Bozel owed money but the documents for the silicon were held by other banks.

Issue: Is the Swiss bank that seized the goods without the documents of title entitled to them for payment of money owed?

16

Banque de Depots v. Ferroligas

• No. The party that controls the documents controls the goods.

• What recourse does the Swiss bank have?

17

Trade TermsTrade Terms

• Responsibilities of buyer and seller need to be negotiated. Trade terms can be used as a short hand for assigned responsibilities and allocating when the risk passes from one party to another.

18

Types of Contracts:Shipment and Destination

Types of Contracts:Shipment and Destination

• Shipment contract: CIF= cost, ins. and freight included in price; risk of loss passes when goods cross ship’s rail at port of shipment

19

Biddell Brothers v. Clemens Horst

Biddell Brothers v. Clemens Horst

• Under CIF contract buyer has no right to inspect the goods before payment

• obligation to pay upon presentation of the documents

• buyer wanted to inspect prior to payment even though it was a CIF contract

• Held for seller, the buyer is obligated to pay upon presentation of the documents

20

Documentary Sale protects Buyer and Seller

Documentary Sale protects Buyer and Seller

• Risks for both?

21

Certificates of Inspection to Protect Buyer and Bank’s Responsibility

Certificates of Inspection to Protect Buyer and Bank’s Responsibility

• Basse v. Bank of Australia: Plaintiff specified that bill of lading must include a certificate of analysis by Dr. Helms. The seller submitted phony samples of ore and the Dr. submitted a certificate. The plaintiff sued the bank for paying on the bill of lading.

• Issue: Did the bank breach its duty by not discovering the fraud in transaction?

22

Basse v. Bank of Australasia Basse v. Bank of Australasia

• No, the bank is only obligated to look at the face of the documents. The certificate was in order and the bank properly paid.

• What recourse does the buyer have?

23

Measurement of damages in CIF contract

Measurement of damages in CIF contract

• damages measured by the market price of the goods at the port of shipment on that date

24

Types of Ocean Bills of LadingTypes of Ocean Bills of Lading

• Clean bills of lading

• Onboard bills of Lading

• Received for shipment bills of lading

• Straight bills of lading

25

Other Types of Transport Documents

Other Types of Transport Documents

• Air Waybills

• Forwarder’s Bill of Lading

• Multimodal Transport Documents

26

Risk of lossRisk of loss

• 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

27

Risk of Loss under CISGRisk of Loss under CISG

• Articles 66-70

• If the contract calls for the goods to be handed to a carrier at a particular place, then the risk passes to a buyer at that place.

• However, if seller just has to ship, then risk passes to buyer when goods are handed to the first carrier.

28

Trade TermsTrade Terms

• Incoterms

• E, F, C, D

• Be wary of customizing trade terms- this only adds to confusion

29

St. Paul Guardian Ins. Co v Neuromed, GmbH

• Shared Imaging signed a contract with Neuromed (German co.) to buy an MRI machine. Contract included “CIF New York Seaport”, the buyer will arrange and pay customs clearance as well as transport to Calumet City. There was also a statement that the system belonged to Neuromed until they received payment. Payment was to be made in Calumet City, Illinois. Choice of law was German law.

30

St. Paul Guardian Ins. Co v Neuromed, GmbH

• When the machine arrived in Illinois it was damaged. Shared filed a claim with the insurance company which filed this action. Neuromed claims it is not liable under German law.

• Issue: Did the risk of loss pass to the buyer when Neuromed delivered the machine to the first carrier?

31

St. Paul Guardian Ins. Co v Neuromed, GmbH

• Holding: Yes. The Court determined that German law applied and that would be the CISG. Under the CISG, Incoterms would apply. The terms of the contract did not modify the CIF clause. The court noted that there was a difference between passing of title and the passing of the risk of loss. In this case the risk of loss passed to the buyer at the port of shipment.

32

Pestana v. KarinolPestana v. Karinol

• Please send merchandise to Chetumal…Goods lost in transit. Buyer sued for refund of purchase price. Judgment for seller. Buyer appeals.

• Issue: Does the “send to..” provision create a destination contract such that the risk of loss does not pass from the seller until the goods arrive?

33

Pestana v. KarinolPestana v. Karinol

• No. “Send to” without more does not create a destination contract,

34

Basic conceptsBasic concepts

• Presumption is a shipment contract

• Negotiate and price responsibilities accordingly

• You can have a destination contract but it will be expensive, but maybe worth it. They are becoming more common.

• Be explicit, reference clear set of terms

35

Basic ConceptsBasic Concepts

• Attempts to customize trade terms only adds to confusion