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

2. Contracts 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

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

4. Definitions 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

5. Bill 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

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

7. Stages 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)

8. Documentary 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)

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

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

11. Purchasers 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

12. Types 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

13. Risk 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

14. Trade 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

15. 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

16. 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.

17. 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.

18. 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.

19. Measurement 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

20. 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

21. Basic 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

22. Banque 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

23. Biddell 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

24. Basse & 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.

25. 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

26. 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

27. Web Sites http://www.forwarderlaw.com http://www.cisg.law.pace.edu