international sales differ from or sales made within one country

7/28/2019 International Sales Differ From Or Sales Made Within One Country

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International sales differ from ordinary sales made within one country. In international

sales apart from the requirement to make provision for transport, the problem of having to

trust a stranger in a foreign country introduces a very different dynamic. The buyer is

likely to be unknown to the seller and seller also may be unknown to the buyer. The buyer

resides in a foreign country. The seller and the buyer seldom trade on a regular basis. Theseller does not know if the buyer is able and willing to pay for the goods.

The seller therefore by shipping the goods to the overseas buyer, takes a big risk since the

buyer may go bankrupt or refuse to pay. And the seller can’t recover the goods easily for

non-payment. The best solution for the seller is to insist on full pro-forma payment, that is

payment in advance, before shipping. This is an excellent solution regarding cash flow but,

the problem is that buyers rarely accept such a solution.

On the other hand, the seller is an unknown person to the buyer. And the buyer becomes

wary that if he pays for the goods pro-forma, will the goods be shipped? Even if the goods

are shipped, do the goods accord with their description? Furthermore, even if both

questions above are answered in affirmative, still the buyer ties up his capital for the entire

period of shipment which is bad for cash flow. The best solution for the buyer is for him to

pay for the goods only after inspecting them on their arrival but, the seller also would be

unlikely to accept such a solution.

Therefore, there is a clear conflict between the seller ’s and the buyer’s interests in

international trade transactions. The buyer is unlikely to be prepared to extend credit to the

seller, and the seller likewise is unlikely to dispatch the goods for shipment.

To this antagonism there are four measures which have been imposed to solve the problem.These include the introduction of documents such as Bill of Lading, letters of credit, and

bills of exchange, as well as the operation of bank guarantees in the international trade

transactions. The bill of lading has somehow helped to provide a mechanism that seeks to

reconcile this conflict. The bill of lading is issued by the carrier, who may be a charterer or

a ship-owner. It evidences the receipt of the goods by the carrier from the seller for

shipment. Once the goods are loaded on board the ship, the carrier usually issues a shipped

bill of lading which gives assurance to the buyer that the goods now are in transit.

Furthermore, the bill of lading act as the memorandum of the contract of carriage and it

incorporates all the terms of the contract of sale agreed to between the buyer and the seller prior to the issuance of the bill of lading. It also provides general description of the goods,

the subject matter of the sale contract, to enable the buyer to be confident that the goods

shipped conform to the contract.

Moreover, the bill of lading is used as a document of title to the goods. Once the buyer

receives the original bill of lading, he is entitled to deal with the goods as he pleases



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including mortgaging them, or even selling them while they are in transit because he has

become the owner of the goods although they are still not in his physical possession.

The carrier also will only deliver the goods to the person who produces the bill of lading.

Even if the true owner of the goods, if he does not produce the bill of lading, the carrier is

entitled to refuse delivering of the goods to him or her. 1 This protects the interests of both

the seller and the buyer from unscrupulous persons.

Another important measure was the introduction of documentary letters of credit as the

mode of payment. The contract of sale between the buyer and the seller may stipulate

payment by Banker’s Documentary Credit. The advantage of documentary credits for the

seller is that he looks to a reputable bank for a guarantee for payment of the purchase price.

The issuing bank (usually the bank in the buyer’s country) takes the risk of the buyer’s

bankruptcy.

In these arrangements, the buyer instructs the issuing bank regarding the credit. Theissuing bank instructs the confirming bank. The confirming bank deals directly with the

seller. The seller tenders transport documents to confirming bank. The confirming bank

pays the seller. The issuing bank pays the confirming bank and reclaims the money in turn

from the buyer. These arrangements at least assure the seller to receive payment of the

purchase price; hence he can confidently dispatch the goods for shipment.

Also the buyer gain in that, once the issuing bank has paid the money to the confirming

bank, the buyer receives the shipping documents conforming to the terms of the letters of

credit, such as the bill of lading and other related transport documents in exchange for a

Trust Receipt. The bill of lading and such other documents enables the buyer to resell thegoods. The buyer can resell the goods even before paying for them. The bank on the other

hand is protected by the Trust Receipt. These arrangements also assure the buyer that he

will receive the goods which he has ordered from the seller.

Another measure is the introduction of the bills of exchange. This is an instrument

normally used in international commerce to effect payment. A bill of exchange is simply

an order written by an exporter (seller) instructing an importer (buyer) or its agent to pay a

specified amount of money at a specified time. Thus, it is the exporter’s formal demand for

payment from the importer . If properly drawn, the bill of exchange can become negotiable

instruments. When it is accepted by a bank, it becomes a bankers’ acceptance. As such it isthe unconditional promise of that bank to make payment on the draft when it matures.

Therefore, this arrangement protects the interests of both parties, that is the seller and the

buyer.

1This was held in Sze Hai Tong Bank v. Rambler Cycle Co. Ltd , (1959) AC 576, and Trucks & Spares Ltd v.

Maritime Agencies (southamton) Ltd , (1951)2 AllER 982



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Another measure was the introduction of bank guarantees. A bank guarantee is normally an

absolute undertaking by the bank to pay if the conditions for payment are satisfied. The

bank guarantee may be procured by the buyer or by the seller. If they are procured by the

buyer their aim is to secure the payment of the price to the seller, and if they are secured bythe seller their aim is to secure the buyer if he has a claim for damages against the seller for

non-delivery of the goods, defective delivery of the goods, or any other cases of non-

performance.

In Siporex Trade S.A. v. Banque Indosuez,2 the court said inter alia, on the guarantee for

purchase price, that the bank guarantee is not a general performance guarantee but only a

guarantee of a limited performance, that is, of payment of the purchase price. Therefore,

the bank guarantees provide an assurance for the seller to receive the purchase price, and

for the buyer to receive delivery of the goods.

The weaknesses of these measures on the other hand include that, for the bill of lading, it is

just evidencing the contract which has already been concluded between the ship-owner and

the shipper prior to the issuance of the bill of lading. Thus, the oral stipulation between the

parties can override the terms of the contract contained in the bill of lading. In Ardennes

(cargo owners) v. Ardennes (ship-owners)3, Lord Goddard CJ, said inter alia that, a bill of

lading is not in itself a contract between the ship-owner and the shipper of goods, though it

has been said to be excellent evidence of its terms. This means that the bill of lading is not

binding as between the parties to the contract.

Furthermore, the bill of lading is only signed by one party, the ship-owner, and handed by

him to the shipper usually after the goods have been put on board. Therefore, the ship-

owner is likely to forge the bill of lading without the knowledge of the shipper to the

detriment of the overseas buyer, because the shipper will escape liability for not being

privy to the forgery.

The weakness of the bill of exchange is that, there is more likelihood of forgery in the bill

of exchange and once it becomes in the possession of the holder in due course, the drawee

bank is required to pay if other conditions are fulfilled regardless of whether the bill is a

forgery bill or not. On the other hand, there is no assurance on the part of the buyer that the

goods will arrive.

The weakness of documentary letters of credit on the other hand is that, the letters of credit

are separate transactions from the sales contract on which they may be based, and banks

2 (1986) 2 Lloyd’s Rep. 146

3(1951)1 KB 55, or (1950)2 AllER 517



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are in no way concerned with or bound by sales contract.4

Thus, all parties concerned deal

with documents and not with goods.5

This means that if the beneficiary of a letter of credit

present to the confirming bank transport documents which appears correct on their face,

though in reality they have been forged, the bank is bound to pay the beneficiary although

he has not shipped the goods or shipped them not in conformity with the contract. This iswhat is called the autonomy principle of documentary letters of credit.

This principle therefore affects the interests of the buyer, because the seller is likely to

forged the documents and ship the goods which does not conform to the terms of the sale

contract. Sometimes the seller can ship rubbish instead of goods ordered by the buyer, or

fail totally to ship the goods to the buyer, but still he can receive payment of the purchase

price.

Also the weakness of the bank guarantee is that the bank guarantee is normally an absolute

undertaking by the bank to pay if the conditions for payment are satisfied. In this respect it

is similar to a banker’s confirmed letter of credit. 6 And the principle of autonomy of the

letters of credit applies mutatis mutandis to the bank guarantees. Thus, the weakness of the

bank guarantee is similar to that of documentary letters of credit.

Therefore, despite all these weaknesses, the above explained measures has to the great

extent helped to balance the interests of the sellers and buyers in international trade

transactions, and give confidence to both of them to perform their contractual obligations

without any fear of loss.

4Art. 3 of Uniform customs and Practice for Documentary Credits (UCPDC 500)

5Ibid. Art. 4

6 Edward Owen Engineering Ltd v. Barclays Bank International Ltd, (1978)QB 159

international sales differ from or sales made within one country

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