Documentary Sale and INCOTERMS

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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
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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
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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. In India, it is governed by India carriage of Goods by Sea Act, 1925

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)
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Role of B/L
B/L evolved from a receipt issued by a carrier upon shipment to a key document in international trade. Receipt = evidence of shipment Contract = tersms of contract with carrier Doct. Of title = key to the warehouse, constructive possession of goods
Enables delivery of goods by tender of the doct. Provides security

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 endorses 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

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The Documentary Sale

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Japanese Importer

B A
Sales Contract CIF Japanese Port Documents Against Payment

American Exporter

E
Collecting Bank

C F

D C

Exporters U.S. Bank (Remitting Bank)

A. Sales contract calls for documentary sale B. Documents prepared - export license obtained - goods delivered to carrier C. Negotiable bill of lading, insurance policy, certificates of origin, invoice with draft attached presented to remitting bank D. Documents forwarded for collection through International banking system E. Documents presented for negotiation on payment F. Payment remitted and exporters account credited 11 G. Importer claims goods and makes entry

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. 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

Banque de Depots v. Ferroligas

Types of Contracts: Shipment and Destination

Shipment contract: CIF= cost, ins. and freight included in price; risk of loss passes when goods cross ships rail at port of shipment

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Measurement of damages in CIF contract

damages measured by the market price of the goods at the port of shipment on that date
Basse v. Bank of Australia

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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 Forwarders Bill of Lading Multimodal Transport Documents

Risk of loss

Shipment contractrisk passes when goods are given to the first carrier Presumption of shipment contract if not specified

Destination contractrisk passes when goods are given to buyer at destination point

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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)

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 A universally recognized set of definitions of international trade terms developed by the International Chamber of Commerce (ICC) in Paris, France First edition 1936

Trade Terms (INCOTERMS) cont.,

They determine
The place/point of delivery of goods When the risk of loss/damage in transit is transferred The distribution of costs The responsibility regarding carriage , insurance, documentation

INCOTERMS do not determine the transfer of property which depends on the agreement of the parties and on national law applicable to the contract .
property is not intended to

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 St. Paul Guardian Ins. Co v Neuromed, GmbH Pestana v. Karinol
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Web Sites
http://www.forwarderlaw.com http://www.cisg.law.pace.edu http://www.iccwbo.org http://wwwjime.open.ac.uk/2004/16/demo/Incoterms/i ndex.htm