Documentary Sale and Terms of Trade Chapter 5 © 2005 West Legal Studies in Business/Thomson Learning © 2002 West Educational Publishing Company

Contracts as a way to manage risk Negotiate terms Allocate risk: moving goods and money Fix performance obligation and responsibilities Fix price Make sure understanding is reflected in contract

Where is the the risk in an international transaction? Similar in domestic transaction Payment risk Delivery risk Quality risk

Definition 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

Definition 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?

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) Order instruments must be delivered and indorsed Carrier must deliver goods only to the holder of the bill of lading (otherwise liable for misdelivery)

Documentary Collection: Payment against documents Separation of goods and documents facilitates trade Controlling documents means you control the goods

Stages in Documentary Transaction 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)

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

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 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

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

Rights of Purchasers Special protection for purchasers who take by negotiation. They take free of any adverse claims. These are also called “good-faith purchasers.”

Rights of Purchasers “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 you are not a good faith purchaser, then you only take the rights of a transferee. Who does this protect?

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?

Banque de Depots v. Ferroligas No. The party that controls the documents controls the goods. What recourse does the Swiss bank have?

Trade Terms 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.

Types of Contracts: Shipment and Destination Shipment contract: CIF= cost, ins. and freight included in price; risk of loss passes when goods cross ship’s rail at port of shipment

Biddell Brothers v. Clemens Horst 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

Documentary Sale protects Buyer and Seller Risks for both?

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?

Basse 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?

Measurement of damages in CIF contract damages measured by the market price of the goods at the port of shipment on that date

Types of Ocean Bills of Lading Clean bills of lading Onboard bills of Lading Received for shipment bills of lading Straight bills of lading

Other Types of Transport Documents Air Waybills Forwarder’s Bill of Lading Multimodal Transport Documents

Risk of loss 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

Risk of Loss under CISG Articles 66-70 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.

Trade Terms Incoterms E, F, C, D Be wary of customizing trade terms- this only adds to confusion

St. Paul Guardian Ins. Co v Neuromed, 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.

St. Paul Guardian Ins. Co v Neuromed, 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?

St. Paul Guardian Ins. Co v Neuromed, 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.

Pestana v. Karinol Please send merchandise to Chetumal…Goods lost in transit. Buyer sued for refund of purchase price. Judgment for seller. Buyer appeals. Issue: Does the “send to..” provision create a destination contract such that the risk of loss does not pass from the seller until the goods arrive?

Pestana v. Karinol No. “Send to” without more does not create a destination contract,

Basic concepts Presumption is a shipment contract Negotiate and price responsibilities accordingly You can have a destination contract but it will be expensive, but maybe worth it. They are becoming more common. Be explicit, reference clear set of terms

Basic Concepts Attempts to customize trade terms only adds to confusion