2Contracts as a way to manage risk Negotiate terms to fit specific transactionAllocate risk - moving goods and moneyFix performance obligation and responsibilitiesFix price and qualityMake sure understanding is reflected in contract
3Where is the the risk in an international transaction? Payment riskDelivery riskQuality riskDifferences from domestic transaction?
4Definitions Documentary Sale: Buyer is required to pay upon presentation of NEGOTIABLE DOCUMENT OF TITLE by sellerDocument of title: evidences ownership of goods: dock receipts, warehouse receipts and bills of ladingDocuments transfer ownership of goods, while goods may stay with baileeNegotiability: ability of document to be transferred legally from one party to another in return for value
5Bill of LadingA 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 carriageNegotiable bills must be either to order or to bearer (but bearer instruments not used in international transactions)Order instruments must be delivered and endorsed
6Documentary Collection: Payment against documents Separation of goods and documents facilitates trade and paymentControl of documents gives control of goods
7Stages in Documentary transaction Seller gives goods to Carrier and gets bill of ladingSeller endorses bill of lading and gives it to bank with other required documents (insurance,certificate of origin or inspection, documentary draft)
8Documentary draft Facilitates payment Negotiable order to pay made out by sellerDrawn on buyer, payable to the sellerMay be used with letters of credit (discussed in Ch. 7)
9Sales Contract CIF Japanese Port Documents Against Payment The Documentary SaleBB. Documents prepared - export license obtained - goods delivered to carrierGG. Importer claims goods and makes entryAmerican ExporterJapanese ImporterSales Contract CIF Japanese Port Documents Against PaymentAA. Sales contract calls for documentary saleFF. Payment remitted and exporter’s account creditedCFC. Negotiable bill of lading, insurance policy, certificates of origin, invoice with draft attached presented to remitting bankEE. Documents presented for negotiation on paymentExporter’s U.S. Bank (Remitting Bank)Collecting BankDD. Documents forwarded for collection through International banking system
10StagesSeller’s bank forwards documents to collecting bank in buyer’s countryDocuments released to buyer when buyer pays
11Purchasers 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 purchasesfor value (not to settle debt)in good faith and without notice of antecedent claimin the ordinary course of businessPurchaser not in good faith only takes rights of transfereeProtects rightful owner
12Types of Contracts: Shipment and Destination Shipment Contract: Contract calls for seller to ship goods by carrier, but not to deliver goods to named locationMost common in international tradePresumption in favor of shipmentRisk of loss passes when goods handed to carrierDestination Contract: Contract calls for seller to deliver goods to particular destinationGreater responsibility on sellerRisk passes when goods tendered to buyer at destination
13Risk of loss under contracts Shipment contract: risk passes when goods are given to the first carrierPresumption of shipment contract if not specifiedDestination contract: risk passes when goods are given to buyer at destination point
14Trade 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
15INCOTerms 2010: E TermsEXW – 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
16INCOTerms 2010: F TermsFCA – 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.
17INCOTerms 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.
18INCOTerms 2010: D TermsDAP – 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.
19Measurement 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 dateSharpe & Co. v. Nosawa & Co.: English rule: damages measured at date and location of delivery
20Electronic Data Interchange (EDI) Trade documents filed electronicallyFaster transmission; parties can track goods and adjust documents as necessary; reduce preparation of multiple copiesSecurity issues:Digital signature laws should helpUnauthorized access problemLiability issuesLack of standardization for electronic documents
21Basic conceptsNegotiate explicit terms: price and clear responsibilities of partiesReference clear set of trade terms; avoid attempts to “customize” termsGeneral presumption that contract is a shipment contractParties may create destination contractmore expensiveparties may feel extra expense worthwhile
22Banque de Depots v. Ferroligas Facts: Bank gets court order to seize Bozel’s calcium silicon in La. to settle debt owed by BozelDocuments 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
23Biddell Brothers v. Clemens Horst Facts: CIF contract for sale of hops to be shipped to LondonBuyer insisted on right to inspect goods before paymentSeller insisted on payment upon presentation of documentsSeller refuses to ship; buyer suesIssue: Has buyer right to inspect the goods before payment?Decision: Not under standard CIF contractReasons: Buyer obligated to pay upon presentation of the documents
24Basse & Selve v. Bank of Australasia Facts: B&S purchased ore from OBank negotiated documents on B&S behalfContract required certificate of analysis from HO submitted phony samplesB&S sued Bank to recover payment on bill of ladingIssue: Is Bank responsible for inspection of ore?Decision: No; Bank has no duty to inspectReasons: Bank not obligated to look beyond apparently-regular documents.Certificate here appeared to be in order and the bank properly paid on documents.
25St. 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 lawMRI loaded on ship in good conditionMRI was damaged when arrived in Ill.Buyer claims on insurance, insurer sues sellerIssue: Should CIF term be interpreted under Incoterms?Decision: Apply Incoterms – CIF means risk of loss passes when delivered to carrier at port of shipmentReasons: CISG applies, Art. 9(2) says contract incorporates usage known or should be known to parties and regularly observed in international tradeCIF interpreted under Incoterms without specifc referenceCISG, Art. 67(1) – passage of risk and transfer of title needn’t occur at same timeTerms here don’t modify CIF term of contract
26Kumar Corp. v. Nopal Lines, Ltd. (Fla Dst. Ct. App. 1985) Facts: K sold tv sets to N in VenezuelaCIF contract for delivery to MaracaiboK agreed to let N pay after goods soldK delivers goods to freight forwarder; K didn’t take out insurance policy as requiredGoods stolen; K sues freight forwarder and carrierIssue: Does K have interest in goods to allow it to sue?Decision: Yes, despite CIF contractReasons: Agreement here as to payment here means not true CIF contractEven if CIF contract, failure to get insurance means K self-insures; so K has interest sufficient to sue