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

2. 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

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

4. 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

5. 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?

6. 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)

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

8. 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)

9. 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

10. 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

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

12. 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.”

13. 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

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

15. 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?

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

17. 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.

18. 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

19. 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

20. Documentary Sale protects Buyer and Seller
Risks for both?

21. 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?

22. 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?

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

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

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

26. 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

27. 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.

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

29. 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.

30. 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?

31. 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.

32. 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?

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

34. 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

35. Basic Concepts
Attempts to customize trade terms only adds to confusion