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Documentary Sale and INCOTERMS

Documentary Sale and INCOTERMS

© 2002 West Educational Publishing Company

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Contracts as a way to manage risk

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?Where is the the risk in an international transaction?

• Similar in domestic transaction

• Payment risk

• Delivery risk

• Quality risk

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DefinitionDefinition

• 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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DefinitionDefinition

• 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

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Bill of LadingBill 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)

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

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Documentary Collection:Payment against documents

Documentary Collection:Payment against documents

• Separation of goods and documents facilitates trade

• Controlling documents means you control the goods

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Stages in Documentary TransactionStages 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)

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Documentary draftDocumentary 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 SaleThe Documentary Sale

JapaneseImporter

American Exporter

CollectingBank

Exporter’s U.S. Bank

(Remitting Bank)

Sales ContractCIF Japanese Port

Documents Against Payment

A

A. Sales contract calls for documentary sale

B

B. Documents prepared - export license obtained - goods delivered to carrier

C

C

C. Negotiable bill of lading, insurance policy, certificates of origin, invoice withdraft attached presented to remitting bank

D

D. Documents forwarded for collection through International banking system

E

E. Documents presented for negotiation on payment

F

F. Payment remitted and exporter’s account credited

G

G. Importer claims goods and makes entry

Rights of PurchasersRights 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

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Types of Contracts:Shipment and Destination

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

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Measurement of damages in CIF contract

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

Types of Ocean Bills of LadingTypes 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 DocumentsOther Types of Transport Documents

• Air Waybills

• Forwarder’s Bill of Lading

• Multimodal Transport Documents

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Risk of lossRisk 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 CISGRisk 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)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

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Basic conceptsBasic 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

Web Sites

• http://www.forwarderlaw.com

• http://www.cisg.law.pace.edu

• http://www.iccwbo.org

• http://www-jime.open.ac.uk/2004/16/demo/Incoterms/index.htm