Documentary Sale and Terms of Trade Chapter 5

Documentary Sale and Terms of Trade Chapter 5 © 2002 West/Thomson Learning 1

Contracts as a way to manage risk n n n 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 2

Where is the risk in an international transaction? n n Payment risk Delivery risk Quality risk Differences from domestic transaction? 3

Definitions n Documentary Sale: n n 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 4

Bill of Lading n n n 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 5

Documentary Collection: Payment against documents n n Separation of goods and documents facilitates trade and payment Control of documents gives control of goods 6

Stages in Documentary transaction n n 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) 7

Documentary draft n n 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) 8

The Documentary Sale G Japanese Importer B A Sales Contract CIF Japanese Port Documents Against Payment E Collecting Bank American Exporter C F D F Exporter’s U. S. Bank (Remitting Bank) A. Sales contract calls for documentary sale B. Documents prepared - export license obtained - goods delivered to carrier C. Negotiable bill of lading, insurance policy, certificates of origin, invoice with draft attached presented to remitting bank D. Documents forwarded for collection through International banking system E. Documents presented for negotiation on payment F. Payment remitted and exporter’s account credited G. Importer claims goods and makes entry 9

Stages n n Seller’s bank forwards documents to collecting bank in buyer’s country Documents released to buyer when buyer pays 10

Purchasers of Bills of lading n n 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 n n 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 n Protects rightful owner 11

Types of Contracts: Shipment and Destination n Shipment Contract: Contract calls for seller to ship goods by carrier, but not to deliver goods to named location n n 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 n n Greater responsibility on seller Risk passes when goods tendered to buyer at destination 12

Risk of loss under contracts n n Shipment contract: risk passes when goods are given to the first carrier Presumption of shipment contract if not specified n Destination contract: risk passes when goods are given to buyer at destination point 13

Trade Terms -- INCOTERMS n n n 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 14

INCOTerms 2010: E Terms n 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 15

INCOTerms 2010: F Terms n n n 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. 16

INCOTerms 2010: C Terms n n *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. 17

INCOTerms 2010: D Terms n DAP – Delivered at place: Seller transports goods to n DAT – Delivered at terminal: Seller pays for transport n DDP – Delivered duty paid: Seller delivers goods - named destination. Seller pays transport costs. Risk shifts when goods delivered to buyer at destination. Use for all modes of transport. to destination terminal and unloading. Risk shifts when goods delivered at terminal. Use for all modes of transport. 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. 18

Measurement of damages in CIF contract n n 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 19

Electronic Data Interchange (EDI) n n n Trade documents filed electronically Faster transmission; parties can track goods and adjust documents as necessary; reduce preparation of multiple copies Security issues: n n Digital signature laws should help Unauthorized access problem Liability issues Lack of standardization for electronic documents 20

Basic concepts n n 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 n n more expensive parties may feel extra expense worthwhile 21

Banque de Depots v. Ferroligas n n Facts: Bank gets court order to seize Bozel’s calcium silicon in La. to settle debt owed by Bozel n 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: n The party that controls the documents controls the goods. n Legal “capture” of documents prerequisite to seizure of goods 22

Biddell Brothers v. Clemens Horst n n Facts: CIF contract for sale of hops to be shipped to London n Buyer insisted on right to inspect goods before payment n Seller insisted on payment upon presentation of documents n 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 23

Basse & Selve v. Bank of Australasia n n Facts: B&S purchased ore from O n Bank negotiated documents on B&S behalf n Contract required certificate of analysis from H n O submitted phony samples n 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 apparentlyregular documents. n Certificate here appeared to be in order and the bank properly paid on documents. 24

St. Paul Guardian Ins. V. Neuromed Medical Systems (S. D. N. Y. 2002) n n Facts: CIF contract for sale of MRI, shipped from Germany to NY, then buyer to arrange transport to Ill. , contract governed by German law n MRI loaded on ship in good condition n MRI was damaged when arrived in Ill. n 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 n CIF interpreted under Incoterms without specifc reference n CISG, Art. 67(1) – passage of risk and transfer of title needn’t occur at same time n Terms here don’t modify CIF term of contract 25

Kumar Corp. v. Nopal Lines, Ltd. (Fla Dst. Ct. App. 1985) n n Facts: K sold tv sets to N in Venezuela n CIF contract for delivery to Maracaibo n K agreed to let N pay after goods sold n K delivers goods to freight forwarder; K didn’t take out insurance policy as required n 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 n Even if CIF contract, failure to get insurance means K self-insures; so K has interest sufficient to sue 26

Web Sites n n n http: //www. forwarderlaw. com http: //www. cisg. law. pace. edu http: //www. iccwbo. org http: //www. jus. uio. no/lm/icc. incoterms. 1990/index. html http: //www. silkweb. bc. ca/portview/ 27