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Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. CHAPTER 5 The Documentary Sale and Terms Of Trade.

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Presentation on theme: "Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. CHAPTER 5 The Documentary Sale and Terms Of Trade."— Presentation transcript:

1 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. CHAPTER 5 The Documentary Sale and Terms Of Trade

2 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 2 Transaction Risk Negotiate terms. Allocate risk: moving goods and money. Fix performance obligation and responsibilities. Fix price. Make sure understanding is reflected in contract.

3 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 3 International risks are similar to risks in domestic transactions. Payment risk. Delivery risk. Quality risk. Transaction Risk

4 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 4 The Documentary Sale Japanese Importer American Exporter International Collecting Bank Exporter’s U.S. Bank (Remitting Bank) Sales Contract CIF Japanese Port Documents Against Payment A A. Sales contract calls for documentary sale B B. Documents prepared - export license obtained - goods delivered to Ship/Vessel C C. Negotiable bill of lading, insurance policy, certificates of origin, invoice with draft attached presented to Exporter’s U.S. Bank (remitting bank) D D. Documents forwarded for collection through International Banking system E E. Documents presented to Importer for negotiation and payment G G. Ship releases goods to Importer and makes entry SHIP / VESSEL F. Payment remitted and exporter’s account credited F F

5 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 5 The Documentary Sale 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.

6 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 6 The Documentary Sale 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?

7 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 7 Stages in Documentary Transaction Seller’s bank forwards to collecting bank in buyer’s country. Documents released when buyer pays 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).

8 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 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 which we will discuss later

9 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 9 Bill 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).

10 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 10 Rights of Purchasers of Documents of Title Good-Faith Purchasers of Documents of Title: Special protection for purchasers who take by negotiation. They take free of 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. If not a good-faith purchaser, then you only take the rights of a transferee.

11 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 11 Banque 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?

12 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 12 Banque de Depots v. Ferroligas No. The party that controls the documents controls the goods. What recourse does the Swiss bank have?

13 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 13 Carrier’s Liability for Misdelivery Order instruments must be delivered and indorsed. Carrier must deliver goods only to the holder of the bill of lading (otherwise liable for misdelivery).

14 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 14 Importance of Negotiability to Trade Negotiability of bill of lading is critical to international trade. As the BOL is bought and sold, so are the goods it represents. Permits merchants to buy/sell products while they are on route.

15 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 15 Documentary Collection: Payment Against Documents Separation of goods and documents facilitates trade Controlling documents means you control the goods

16 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 16 CIF Contracts 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. Shipment contract: CIF= cost, ins. and freight included in price; risk of loss passes when goods cross ship’s rail at port of shipment.

17 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 17 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?

18 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 18 Biddell Brothers v. E. Clemens Horst Co. 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

19 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 19 Basse and Selve v. Bank of Australasia Basse and Selve 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?

20 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 20 Measuring Damages for Breach of the Documentary Sale Damages measured by the difference between the contract price and the market price of the goods at the port of shipment on that date.

21 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 21 Types of Ocean Bills of Lading Clean Bills of Lading. Onboard bills of Lading. Received for shipment Bills of Lading. Straight Bills of Lading.

22 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 22 Other Types of Transport Documents Air Waybills. Forwarder’s Bill of Lading. Multimodal Transport Documents.

23 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 23 Electronic Data Exchange Shipping data is now being transmitted electronically which has several advantages: –Lets parties track goods that are in transit and make adjustments en route. –Seller gets paid electronically (faster). –Eliminates need to prepare multiple copies of documents.

24 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 24 Allocating Shipping Responsibilities and the Risk of Loss Shipment Contracts- risk passes when goods are given to the first carrier. Presumption of shipment contract if not specified. Destination Contracts- risk passes when goods are given to buyer at destination point.

25 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 25 Risk of Loss Under CISG Articles 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.

26 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 26 Trade Terms and Interpretation Incoterms: –“E” – places lowest amount of responsibility on the seller. –“F”– Seller is required to deliver the goods to the designated point of departure “free” of expense or risk to buyer. –“C”– Seller is responsible for certain costs after the goods have been delivered to the carrier. –“D”– is a “destination” contract – seller has a great responsibility. FOB and CIF. –Be wary of customizing trade terms- this only adds to confusion.

27 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 27 St. Paul Guardian Ins. Co v. Neuromed Medical Systems, 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.

28 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 28 St. Paul Guardian Ins. Co v. Neuromed Medical Systems, 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?

29 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 29 St. Paul Guardian Ins. Co v. Neuromed Medical Systems, 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.

30 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 30 Modification of Trade Terms Modification usually arises in CIF contract cases. General rules: – If the additional terms do not contradict the agreed- upon terms, then the agreement is enforceable. –If the additional terms do contradict the agreed-upon terms, it can destroy the CIF terms. See the Kumar Corp. v. Nopal Lines, Ltd. case.


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