Document

INTERNATIONAL BUSINESS TRANSACTIONS

FORMATION OF THE CONTRACT Module 2.1

UNCCISG is a Convention which governs contracts for the sale of goods between parties who have businesses in states that have adopted the Convention. It applies to the formation of contracts of sale and the rights and obligations of buyer and seller.

Per Article 1, the Convention applies to situations where:

(i) involves sale of goods

(ii) the parties have places of businesses in different states

(iii) the states concerned are contracting states

(iv) private international law determines that the law of a contracting state will apply

( 1 )Applicable Law

( 2 )Formation of a

Contract

(a) What is it?

Per The Convention, a contract does not have to be in writing or evidenced in writing ( unless a contracting state has made a declaration under Article 96 requiring contracts to be in writing).

United Nations Convention on Contracts for the International Sale of Goods 1980 (UNCCISG)

It is possible for an offer to be accepted even if there are some deviations from the terms of the offer provided that these are not material but only minor changes (otherwise will constitute a counter-offer)

Per Article 14 , an offer is a proposal for concluding a contract addressed to one or more specific persons which is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance.

A "sufficiently definite" offer is one which:

(i) indicates the goods in question

(ii) makes provision for price and quantity of the goods

(b) Required form?

(a) When?

(i)Definition

(b) What does the convention apply to?

A contract for the international sale of goods is concluded when acceptance of an offer becomes effective (d) Acceptance

(i)Small

deviations from offer

Per Article 22, Acceptance may be withdrawn by the offeree if the withdrawal reaches the offeror before or at any time as the acceptance would become effective.

This is a rejection of the offer. In effect, it appears to be an acceptance but, in fact, contains additions, limitations or other modifications to the terms of the offer. (as to price, quantity, time/place of delivery etc.)

Acceptance is not effective when it does not reach the offeror within the time frame specified by him (if any) or (if no time period is specified) within a reasonable time, or if the offer was oral and not accepted immediately (unless words used to the contrary. eg. "let me know by Wednesday").

NOTE: A period of time for acceptance fixed by the offeror.

Per Article 18, an acceptance becomes effective when indication of assent reaches the offeror (NOTE: reaching rules are the same as those for offers)

Late acceptance is considered effective if :offeror tells offeree

offeror notifies offeree accordingly

late acceptance attributable to abnormal circumstances (provided offeror has not told or notified offeree that offeror believes offer has lapsed)

(v)Effectiveness of

Acceptance

( 4 )What is meant by "sale of goods" for the purposes of the Convention.

It is

A contract between buyer and seller whereby the seller transfers or agrees to transfer the ownership or title to goods to a buyer for a price.

goods auctioned

goods bought on execution of or by an authority of law

stocks, shares, investment securities, negotiable instruments, money

ships, vessels, hovercraft, aircraft

electricity

It is NOT

It is NOT

The supply of services

Contract where main obligation of the seller is the supply of labour

Manufacturing contract where buyer provides substantial part of materials

( 3 )Place of Business

If a party has more than one place of business and these businesses are located in different states, then the relevant place of business will be that which is most closely connected with the contract. (Article 10)

If a Party does not have a place of business, then his habitual residence will be regarded as the relevant place.

Place of business determines applicability of the Convention. It is possible that a company has many places of business in various countries. Each such country may :

(i) be a contracting party to the Convention.

(ii) decide that by virtue of its national law, the Convention will apply although not a party to it.

(iii) not apply the Convention at all.

Why important?

(c) Offer

(ii)Effectiveness

of offer

(iii)Termination of

offer

If one party to the contract is in a contracting state and the other is not, but the parties agree that the applicable law will be that of the contracting state, then the Convention would be operative in relation to the contract in question.

i.e.

(ii)Withdrawal

(iii)

Counter offer

(iv)Definition

i.e.

it is made orally to him ( Article 24 )

it is delivered to him personally at his business or mailing address ( Article 24 )

(if no business or mailing address) it is delivered to him personally at his habitual residence ( Article 24 )

An offer may come to an end in 3 ways :

1. withdrawal As the offeror no longer wishes to be bound in contract, he changes his mind and withdraws the offer before or at the same time as the offer reaches the offeree. NOTE: An irrevocable offer can be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer.

2. revocation As the offeror no longer wishes to be bound in contract, he changes his mind and revokes the offer before the offeree has sent his acceptance (thus revocation occurs after the offer has been received and the offeree is still considering the offer) NOTE: (i) If it is reasonable for the offeror to assume that the offer was irrevocable, then offer cannot be revoked (eg. previous dealings with irrevocable offers) (ii) If offer is "irrevocable" then the offer cannot be revoked

3. rejection Where the offeree does not accept the offer (expressly or by implication) and rejection reaches the offeror. (when purported acceptance contains additions, limitations or other modifications to the offer, this is a counter-offer which, in essence, rejects the offer and terminates same).

Per Article 15 , an offer becomes effective when it reaches the offeree

Per Article 18, acceptance is a statement made by the offeree or other conduct of the offeree, that indicates assent to an offer.

NOTE: silence and inactivity cannot amount to acceptance. Only a statement or an act can constitute acceptance.)

INTERNATIONAL BUSINESS TRANSACTIONS OBLIGATIONS OF THE SELLER

Module 2.2

Per Article 33 , delivery by the seller must be effected :

(i) on the date specified in the contract. - or -(ii) within the period specified in the contract - or -(iii) within a reasonable time of the contract being formed, if no date is specified in the contract.

Where the seller delivers goods earlier than required then :

(i) buyer may take or refuse delivery.

(ii) Seller may deliver or repair lack of conformity until the time the goods should have been delivered (provided there is no unreasonable expense or inconvenience to the buyer).

"reasonable" ?This will depend on factors such as perishability, method of shipment, production time, availability of raw materials etc.

( 1 )Seller's obligation to

Deliver.


deliver goods in Conformity with

contract.


deliver goods free from 3rd party claims.

(i) Per Article 31 of the Convention (UNCCISG), if the place of delivery is specified by the contract then the goods must be delivered by the seller to the buyer at the specified place.

a) Where contracts do not involve carriage and the goods are specified or identified.

If the contract does not involve carriage and the goods are either :

(i) specific goods (which are recognised as the goods to be sold at the time the contract is made) or

(ii) identified goods from specific stock (which although not specific goods, are part of a larger specific stock of goods)

then if the parties know that the goods are in a particular place when the contract is made, the seller's obligation is to place the goods at the buyer's disposal at that place.

b) Other Cases.

Seller's obligation is to place the goods at the buyers disposal at the place where the seller had his place of business when the contract was made.

c) Where contracts involve carriage.

This is where the contract requires the seller to transport the goods to the buyer. Per Article 31 , the seller's obligation is to hand over the goods to the first carrier for transportation to the buyer (a carrier is responsible for transporting goods to the buyer or another carrier, as the case may be).

NOTE Per Article 32 , if the contract involves carriage :

the seller must clearly identify goods to the contract when he hands the goods over to the carrier (e.g. marking, documents etc.).

the seller's chosen method of transport must be reasonable having regard to usual mode of transport for the goods in question. (unless otherwise stated in the contract), the seller must provide the buyer with all the particulars to enable the buyer to insure the goods while in transit.

The seller is not liable for lack of conformity if at the time the contract was made the buyer knew or could not have been unaware that the goods did not conform.

Goods must be of the quantity, quality, description and packaging requirements specified in the contract. In the absence of any such particulars in the contract, then, per Article 35 , the following conformity requirements must be met :

(i) The goods must be fit for the purpose for which goods of the same description would ordinarily be used.

(ii) The goods must be fit for any particular purpose expressly or implicitly made known to the seller at the time of the formation of the contract (unless buyer did not rely on, or it was unreasonable to rely on, the sellers skill and judgement).

In CLOUT Case No.84 a German company bought New Zealand mussels from a Swiss company, but did not make the Swiss company aware of their special requirements (specific purpose) that the mussels should contain a cadmium level which did not exceed the German statutory limit. There was thus no lack of conformity here, as the level of cadmium was in line with the regulations of both Switzerland and New Zealand.

(iii) The goods must possess the quantities of any sample or model held out by the buyer to the seller.

(iv) The goods must be contained or packaged in a manner usual for such goods, or otherwise in a manner adequate to preserve and protect the goods.

Per Article 38 , the buyer must inspect the goods to ensure conformity :

as soon as is soonest practicable

(if carriage involved) as soon as goods arrive at destination

(if goods are to be re-directed / immediately dispatched on by the buyer and the seller knows about this) when the goods arrive at the new destination

NOTE: The seller cannot rely on Article 38 to relieve him of responsibility for lack of conformity if it relates to facts which he knew or could not have been unaware of, and which he did not disclose to the buyer.

Per Article 39 , the buyer will lose the right to rely on a lack of conformity of the goods if he does not give notice to the seller within a 'reasonable time' after he has discovered it.(Note: if the buyer does not give notice within two years of receiving the goods, his right to rely on lack of conformity will be lost)( unless the contract terms or any guarantee there under states otherwise). NOTE: The seller cannot rely on Article 39 to relieve him of responsibility for lack of conformity if it relates to facts which he knew or could not have been unaware, and which he did not disclose to the buyer.

Per Article 36 , the seller is liable for lack of conformity in the goods when :

(i) it exists at the time that risk passes to the buyer (even if it becomes apparent later)

(ii) it occurs after the risk has passed to the buyer and it is due to a breach of the seller's obligations.

(b)Buyer's duty to examine goods for conformity.

(f)No obligation by the seller to conform.

(c)Buyer's loss of right to rely on

lack of conformity.

(e)When is the seller liable for lack of

conformity?

(a)Handing over

Documents

Free from 3rd party claims

Per Article 34 if contract requires documents to be handed to the buyer by the seller, these must be handed over at the time and place specified in the contract. If the seller hands documents over before time and these do not comply with the contract, then the seller may correct same before the specified time (unless unreasonable expense to the buyer).

Seller’s Obligation Per Article 85 , the seller is obliged to take the necessary reasonable steps to preserve the condition of the goods in the following circumstances:

i) where the buyer has delayed in accepting the goodsi) where the buyer has delayed in accepting the goods

ii) where payment and delivery of the goods are to be simultaneous and the goods are under the seller’s control

ii) where payment and delivery of the goods are to be simultaneous and the

Seller’s Options Per Article 87 , should the seller be obliged to preserve the goods, he may elect to:

a) place the goods in a 3rd party’s warehouse at the reasonable expense of the buyer

a) place the goods in a 3rd party’s warehouse at the reasonable expense of the

b) sell the goods to a 3rd party if the buyer has unreasonably delayed in taking possession of the goods, or paying the price thereof or cost of preserving same.

b) sell the goods to a 3rd party if the buyer has unreasonably delayed in taking

(d)Preserving the Goods

i.e.

(ii) If the contract between buyer and seller does not specify place of delivery, then the UNCCISG implicitly incorporates the applicable terms into the contract.

(a)What is

Conformity?

(b)Time of Delivery

(c)Early

Delivery

(d)Place of Delivery

Per Article 41 , the seller must deliver goods that are free from any right or claim of a 3rd party unless :

buyer agreed to take goods subject to right/claim

buyer knew or could not have been unaware (should have known) of the right or claim

the right or claim results from the seller's compliance with technical drawings, designs, formulae or other such specifications provided by the buyer

NOTE: The buyer loses the right to take goods free from 3rd party claim/right when the buyer fails to notify the seller specifying nature of 3rd party right/claim within a reasonable time after the buyer became aware of, or should have been aware of the 3rd party right/claim.

But:This does not apply if the seller is already aware of the 3rd party claim (so no need for buyer to give notice).


BUYER’S REMEDIES FOR BREACH OF CONTRACT BY SELLER

Module 2.3

Fundamental breach of contract by the seller occurs where (i) the buyer is substantially deprived of what he is entitled to expect under the contract and (ii) the result of the breach is foreseeable.

(a)Meaning of

Breach

(c)Remedy of Damages

Breach by seller occurs when the seller fails to perform any of his obligations under the contract or UNCCISG (Convention).

This “common” remedy will be dealt with in Seller's Remedies for Breach of Contract by Buyer.

Releases both parties from their obligations under the contract subject to remedy of damages.

(f)Remedies for

Seller’s Deviations in Delivery

If the seller delivers the goods early then per Article 52 , the buyer may :

(i) take delivery or

(ii) refuse to take delivery at that time (until the operative delivery date).

Early Delivery

If the seller delivers excess goods then per Article 52 , the buyer may : (i) take delivery of some or all of the excess at the contract rate

or (ii) refuse to take the excess.

Extra/Excess Delivery

(g)Remedy of Avoidance

These “common” remedies will be dealt with in Seller's Remedies for Breach of Contract by Buyer

(d)Remedy of

Performance

Per Article 48 , and subject to the buyer’s remedy of avoidance, the seller may, even after the date of delivery, remedy his own failure to perform provided: i) there is no unreasonable delay

ii) it does not put the buyer to unreasonable expense

Per Article 47 , the buyer may set an additional period of time for the contract to be performed. But: Should this happen, the buyer cannot resort to another remedy for breach in this additional time period.

The buyer cannot require performance by the seller if the buyer has already resorted to a remedy that is inconsistent with performance (e.g. if buyer has avoided the contract).

Per Article 46 , the buyer may require performance of the contract by the seller. But: Under Article 28 , the court need not issue an order of specific performance against any party unless it would do so in domestic cases under the law of its own contracting state.

(b)Remedies for anticipatory

breach of contract and breach of instalment contracts

(ii)Additional Time for

Performance

If the goods do not conform to the contract or convention, the buyer can require the seller to: (i) deliver substitute goods (but only if the breach of the term was fundamental, the buyer has inspected the goods within a reasonable time and the buyer has given the seller notice of lack of conformity. ) (ii) repair the goods (if lack of conformity is slight, the request to repair is reasonable, the buyer has inspected the goods within a reasonable time, and has given the seller notice of lack of conformity).

Per Article 50 , if the goods do not conform with requirements, the buyer is entitled to reduce the price in proportion to the lack of conformity (unless the seller corrects the lack of conformity or the buyer refuses to accept correction.)

(e)Remedy of

Reduction of the Price

Effect of Avoidancein contract of carriage seller fails to deliver goods to first carrier

seller’s failure to supply goods fit for purpose

eg.

See Obligations of the Seller.

(i)Other

Remedy

(iv)Lack of

Conformity of Goods

(iv)Seller may Remedy Breach

The buyer may declare the contract avoided (and thereby be excused of his contractual obligations) in the following situations: i) seller’s failure to perform is a fundamental breach (Article 49). ii) non-delivery of goods by seller or his failure to deliver goods during

additional time period fixed by the buyer (Article 49). ii) non-delivery of goods by seller or his failure to deliver goods during

iii) late delivery by the seller (if the buyer avoids the contract within a reasonable

time after he knows goods have been delivered. (Article 48).iii) late delivery by the seller (if the buyer avoids the contract within a reasonable

Note: Per Article 24 , a declaration of avoidance by one party is effective only if made by notice to the other party.


OBLIGATIONS OF THE BUYER

Module 2.4

Per Article 53 , the buyer is obliged to pay the price for the goods as per contract and the Convention (as the case may be)

Per Article 54 the buyer must take whatever steps may be appropriate to comply with relevant formalities to enable payments to be made.

( 1 )Payment

( 2 )Taking Delivery

Price will be paid at a place specified by the contract, failing which the following Convention rules will be applicable: i) Price is payable at the seller’s place of business ii) (if payment is to be effected when goods or associated documents are handed over to the buyer) price is payable at the place where goods or documents are handed over.

Price is to be paid at the time specified in the contract, failing which the following Convention rules will be applicable: i) Price is payable when the seller places goods or documents at the buyer’s disposal. i) Price is payable when the seller places goods or documents at the buyer’s disposal. ii) Seller may make payment a condition of handing over goods.ii) Seller may make payment a condition of handing over goods. iii) If the contract includes carriage, the seller may despatch the goods on condition that they will

not be released unless payment is made.iii) If the contract includes carriage, the seller may despatch the goods on condition that they will

iv) Buyer has the right to examine goods before he makes payment.iv) Buyer has the right to examine goods before he makes payment. (Refer CLOUT Case No. 25 where court held Spanish buyer had to pay price at French seller’s premises)

Per Article 60 , the buyer’s obligation to take delivery involves the following:

Per Article 60 , the buyer’s obligation to take

i) Do all acts that could reasonably be

expected of him so that the seller can effect delivery

i) Do all acts that could reasonably be

ii) Taking over the goods in question.

Buyer’s Obligation

(c)Payment Formalities

by Buyer

(d)Place Where Price is to be

Paid

(e)Time When Price is to be Paid

In CLOUT Case No. 106 an Austrian buyer purchased chinchilla pelts from a German Seller. Rejecting the buyer’s claim that the pelts were of a lower quality (thus justifying non-payment of price) the court held that although the price was not specified in the contract, it was deemed to have been fixed with reference to the current market price and should be paid accordingly. In CLOUT Case No. 139 the Court reached a different conclusion to Case No. 106 because the operative contract provided that specific agreement about price was needed so the current market price was not applicable here.

Cases in point

( 3 )Preserving the Goods

Per Article 86 the buyer must take the necessary reasonable steps to preserve the condition of the goods in the following circumstances: i) where the buyer has received goods and proposes to reject them ii) where the buyer has actually rejected goods in accordance with UNCCISG (Convention) and proposes to keep them until his reasonable expenses have been reimbursed by the seller.

(a)Buyer’s

Obligation

Per Article 87 , should the buyer be obliged to preserve goods as above, he may elect to:

a) place goods in a 3rd party’s warehouse at the reasonable expense of the seller b) sell the goods to a 3rd party if the seller has unreasonably delayed in taking possession of the goods or paying the cost of preserving these.

(b)Buyer’s Options

(b)Buyers

Obligation

(b)Determining Price

Price will be fixed according to the contract, failing which the following Convention rules will be applicable :

i) the buyer and seller, by implication will be deemed to have made reference to the price generally charged in similar circumstances.

ii) in the event that price is fixed according to weight, then it is the net weight which will be considered.


SELLER’S REMEDIES FOR BREACH OF

CONTRACT BY BUYER Module 2.5

Breach by the buyer occurs when the buyer fails to perform any of his obligations under the contract or UNCCISG (Convention).

(a)Meaning of

Breach

Fundamental breach of contract by the buyer occurs where; (i) the seller is substantially deprived of what he is entitled to expect under the contract and(ii) the result of the breach is foreseeable

Per Article 74 , this is a monetary sum equal to the loss suffered by the injured party (including loss of profit) in consequence of the breach.

(e)Remedy of

Performance

(h)Remedy of Damages

(d)Remedy for Breach of Instalment Contract

(b)Remedy for Anticipatory

Breach

A contract may stipulate that delivery by seller is to be in instalments or that payment by the buyer is to be in instalments. The position per Article 78 is as follows:

i) if a party fails to perform (by way of a fundamental breach) in relation to an instalment, the innocent party can avoid the contract with regard to that particular instalment.

i) if a party fails to perform (by way of a fundamental breach) in relation to an instalment, the innocent

ii) if a party fails to perform in relation to an instalment and the innocent party has reasonable grounds to believe that the other party will be in fundamental breach of future instalments, he can avoid the entire contract.

ii) if a party fails to perform in relation to an instalment and the innocent party has reasonable grounds

iii) If a party fails to perform in relation to a delivery instalment, he can avoid in respect of past and/or future deliveries provided deliveries are interdependent and could not be utilised for the purposes both parties were aware of at the commencement of the contract.

iii) If a party fails to perform in relation to a delivery instalment, he can avoid in respect of past

This is an important remedy and the injured party (whether he is the buyer or the seller) is always at liberty to claim damages despite any other claims he may institute under the Convention.

definition

If a contract has been avoided by the seller and the seller has resold the goods in a reasonable manner and within a reasonable time (or if avoided by the buyer and the buyer has in a reasonable manner and within a reasonable time bought replacement goods) the seller (or the buyer if this is the case) may claim damages which will represent the difference between the contract price and the price in the substitute transaction.

(c)Remedy of

Interest

Per Article 78 , if a party fails to pay the price or any other sum in arrears, the injured party may claim interest, on the balance as provided by applicable law.

Additional Time for PerformanceNote: The seller cannot apply any other remedy for breach during this period although he can claim damages for delayed performance. Per Article 63 , the seller may fix an additional time period for the buyer to perform his obligations. This period must be of reasonable duration.

Per Article 62 , the seller has the right to require the buyer to:

i) take delivery (accept the goods) i) take delivery (accept the goods)

ii) make payment ii) make payment

iii) perform his other obligationsiii) perform his other obligations

(f)Remedy of

Producing Goods to Seller’s own specification

(g)Remedy of Avoidance

Effect of Avoidance Avoidance releases both parties from their obligations under the contract subject to the remedy of damages.

The seller may declare the contract avoided (and thereby be excused of his contractual obligations in the following situations: (i) where the buyer’s failure to perform is a fundamental breach of contract ( Article 64 )

or(ii)(a) where the buyer does not accept the goods in the additional time period allowed by the seller

and/or (b) where the buyer does not pay for the goods in the additional time period allowed by seller

or(iii) where the buyer declares that he will not accept the goods and pay for them in the additional time period fixed by the seller.

A contract may stipulate that the buyer is required to specify details of the goods required. If the buyer fails to do so by the agreed date (or within a reasonable time following the seller’s request) the seller may make the specification of the goods, having regard to buyer’s known needs, provided:

i) the seller informs buyer of the specification details i) the seller informs buyer of the specification details

ii) the seller sets a reasonable time within which the buyer can amend the specification ii) the seller sets a reasonable time within which the buyer can amend the specification Note: If the buyer does not respond in making a different specification, then the seller’s specification will be binding.

Per Article 74 , the amount of damages may not exceed the loss which the party in breach foresaw (or should have foreseen) at the time of the contract being formed.

Anticipatory breach occurs where one party informs the other party, either expressly or by implication, that he does not intend to perform his obligations or it becomes apparent that he will not perform a substantial part of his obligation. Per Article 71 , the Convention provides that the injured party may suspend the performance of his obligations under the contract if it is evident that the other party will not perform its obligations due to:

i) a serious deficiency in his ability to perform or his creditworthiness.i) a serious deficiency in his ability to perform or his creditworthiness.

ii) his conduct in preparing to perform or in performing the contract.ii) his conduct in preparing to perform or in performing the contract. If an injured party suspends performance of his obligations, he:

i) must give notice to the other party and lift the suspension if the latter gives satisfactory assurance of his willingness or ability to perform.

i) must give notice to the other party and lift the suspension if the latter gives satisfactory assurance of his

ii) (in the case of an injured seller) may prevent the buyer obtaining the goods if he has dispatched them.ii) (in the case of an injured seller) may prevent the buyer obtaining the goods if he has dispatched them. Per Article 72 , where the anticipatory breech is a fundamental breach , the injured party may:

i) declare the contract avoidedi) declare the contract avoided

ii) give reasonable notice to the other party that contract is avoided (time permitting)ii) give reasonable notice to the other party that contract is avoided (time permitting)


INCOTERMSModule 2.6

What is the Significance of Incoterms?

Incoterms address the following key aspects of international trade transactions: i) Carriage costs – who bears these? (included in contract price?)

ii) Risk – who bears this for damage to goods?

iii) Insurance – who pays this? (included in contract price?)

iv) Ownership – when does property in the goods pass?

v) Risk – where does it pass ?

vi) Customs Duties – who pays? (included in contract price?)

vii) Customs Documents – who is responsible?

What are Incoterms?

( 1 ) - ‘E’ Terms -

“DEPARTURE TERMS”

FAS

FCA

This represents Free Carrier. The seller discharges his obligations when he delivers the goods for export and delivers them to a carrier, named by the buyer, at a named point (delivery may be effected to an agent and not necessarily a carrier).

This represents Free Alongside Ship . The seller discharges his delivery obligation when the goods have been placed alongside the ship at the port. The buyer is then responsible for getting them on the ship and bears the risk from the moment goods are alongside ship (buyer must be able to arrange export formalities).

FOB

This represents Free on Board whereby the seller discharges his delivery obligation when the goods are put over the ship’s rail at the specified port of shipment. The seller is not responsible for carriage or insurance once he has loaded goods on the ship but he must arrange for export licenses at his expense and bear risk/expense for the goods until loaded on the vessel.

EXWThis represents ex works whereby seller makes goods available to the buyer at his place of work.

This represents Delivered ex Ship whereby seller makes the goods available to the buyer on the ship at the destination. Because the buyer assumes responsibility over the goods before they are unloaded from the ship, the seller is not obliged to clear goods for import at destination.

An abbreviation for International Contract Terms They are standard contract terms (trade definitions) that are often used in international sales contracts and published by the International Chamber of Commerce.

There are 4 Categories of incoterms, namely: E terms, F terms, C terms and D terms and each term starts with the first letter of the category it falls in (e.g. FOB falls in F term category).

( 2 )- 'F’ Terms -

“MAIN CARRIAGE UNPAID” TERMS

( 4 )- ‘D’ Terms - “ARRIVAL”

TERMS

DES

This represents Delivered at Frontier. The seller clears for export and delivers the goods, as arranged, to a place before the customs post of the next country (mainly applicable to road transport).

DAF

This represents Delivered ex quay (duty paid) whereby the seller makes the goods available to the buyer on the quay in the importing country. Clearance for importation is the seller’s responsibility.

DEQ

This represents Delivered Duty Unpaid whereby the seller makes the goods available to the buyer at a specified place in the country of import. The seller is not obliged to pay duties, taxes and other charges in the importing country.

DDUThis represents Delivered Duty Paid. It is essentially the same as DDU with the additional requirement that the seller is obliged to pay duties and taxes in the importing country. This is effectively a complete contrast to the EXW incoterm and imposes minimum requirements on buyer and maximum obligations on seller.

DDP

( 3 )- ‘C’ Terms -

“MAIN CARRIAGE PAID” TERMS

This represents Cost, Insurance and Freight . Whilst it resembles CFR, the seller must additionally take responsibility for effecting marine insurance (minimum cover representing the contract value + 10%). Should the buyer require more comprehensive cover he should make appropriate arrangements.

CIFThis represents Cost of Freight whereby the seller pays for all costs and carriage (freight) to take the goods to their destination. However, the risk passes to the buyer once the goods have passed over the ship’s rail. It is the seller’s responsibility to clear the goods for export whilst the buyer is obliged to arrange and pay for marine insurance.

CFR

This represents Carriage Paid To . Seller clears goods for export and pays for carriage to the named destination. The risk for the goods will pass to the buyer when goods arrive at the relevant destination.

CPT

This represents Carriage and Insurance Paid To . It is essentially the same as CPT with the additional requirement that the seller is obliged to pay for insurance of the goods during the carriage process. After goods reach destination, the buyer assumes responsibility for import duties, taxes and other costs.

CIP


RISKModule 2.7

An important matter for parties to an international business transaction is the question of when risk passes from the seller to the buyer as this will determine responsibility for loss or damage to the contract goods. Furthermore, risk will indicate which party will have an insurable interest for the purpose of claiming under the relevant (insurance) policy.

[A] Importance of Risk

[C] When does Risk Pass?

The issue of when risk passes depends on which one of the following 3 categories is applicable:

1) Contract includes carriage1) Contract includes carriage

2) Contract does not include carriage2) Contract does not include carriage

3) Contract is for goods sold in transit. 3) Contract is for goods sold in transit.

[B] Significance of ICC

Incoterms

The ICC Incoterms dealt with in Module 2.6 are relevant in determining when risk passes

Per Article 67 , the following applies in relation to the passing of risk.

i) If the contract specifies the place at which the seller is to hand over the goods to the first carrier, the risk passes to the buyer when the goods are given to the first carrier at the place specified.

i) If the contract specifies the place at which the

ii) If the contract does not specify a place where

the seller is to hand over the goods to the buyer, the risk passes to the buyer when the goods are given to the first carrier.

ii) If the contract does not specify a place where

But !!But !!

In either case (i) or (ii) above , risk will not pass to the buyer if the goods are not clearly identified to the contract (e.g. by markings, shipping documents or other means)

[D] Risk and Non-Conformity

If the goods do not conform (refer Module 2.2) and this is not noticed until after risk has passed to the seller, then the seller is still responsible for non-conformity if he does not discharge his obligations.

Per Article 69 , risk passes to the buyer when:

i) The buyer takes over the goods.i) The buyer takes over the goods.

ii) The goods are placed at the buyer’s disposal but the buyer is in breach of contract in failing to collect these goods.

ii) The goods are placed at the buyer’s disposal but the buyer is in breach of contract in failing

iii) (in circumstances where the buyer is obliged to collect or take over the goods at a location other than the seller’s place of business). Delivery is due and the buyer is aware that the goods are placed at his disposal at that location.

iii) (in circumstances where the buyer is obliged to collect or take over the goods at a location

But !!

In each case (i) (ii) (iii) above, risk will not pass to the buyer if the goods are not clearly identified to the contract. (e.g. by markings, shipping documents or other means)

( 2 ) Contract NOT Involving Carriage

It may be that a transaction for the sale of goods may be entered into when such goods are in transit and in the process of being transported from one point to another (e.g. factory to storage warehouse). In these circumstances, the issue of risk will be determined in accordance with Article 68 , as follows:

i) risk passes to the buyer when the contract is concludedi) risk passes to the buyer when the contract is concludedii) where circumstances so indicate (by agreement between

the parties) that risk passes to the buyer when the goods were given over to the carrier who issues the documents relevant to the transportation contract

ii) where circumstances so indicate (by agreement between

iii) in the event that at the time of sale , the goods were, to the knowledge of the seller , either lost or damaged, (and this was not disclosed to the buyer) and the risk shall remain with the seller and shall not pass to the buyer.

iii) in the event that at the time of sale , the goods were, to the

( 1 )Contract Involving

Carriage

( 3 )Goods Sold in

Transit

example

In an FAS contract the seller discharges his delivery obligation when the goods have been placed alongside the ship at the port. The risk then passes to the buyer , who would, for example, be responsible for the goods if the ship sank.

INTERNATIONAL BUSINESS TRANSACTIONS BILLS OF LADING

Module 2.8

The bill of lading constitutes a receipt for the goods by the ship-owner.

Three Purposes of Bill of Lading

General Types of Bills of Lading

The bill of lading is a document of title (ownership) to the goods. In effect, it represents the goods in transit so that a holder of this document has constructive possession of the consignment. Thus, delivery of the bill will constitute constructive delivery of the goods.

In respect of a negotiable bill of lading, the person who legally owns the bill of lading also owns the goods and has the right to re-route the shipment of these goods. Negotiable bills of lading are issued to the shipper’s order (i.e. seller’s order) as opposed to a named consignee (specified recipient) (the buyer). In such a case, the carrier will hold the consignment until it has received the original bill of lading (that has been endorsed by the shipper) (seller) which has been presented by the seller to the bank for payment.

A bill of lading is a document issued by the carrier to the shipper (delivery agent) which acknowledges that the carrier has received the shipment of goods and that they have been placed on board a certain specified vessel which is scheduled to go to a certain specified destination.

Negotiable

Evidence of Contract of Carriage

Document of Title to Goods

Importance of Bill of Lading

It will be recalled from Module 2.7, that in relation to the passing of risk , in the absence of anything to the contrary, risk passes to the buyer when the goods pass to the carrier.

The bill of lading, is thus, in effect, evidence of when risk passes to the buyer

Risk

It will be recalled from Module 2.2 , that the seller is under an obligation to hand over relevant documents to the buyer.

Thus, the seller must make the bill of lading available to the buyer.

Definition

Formal Receipt by Ship-owner for the Goods

The bill of lading is evidence of the contract of carriage between the shipper and the carrier.

THE ARDENNES (1951)Under an oral agreement between the shipper and the carrier, the consignment was to be shipped from the port of loading directly to the port of destination. Despite this, the carrier did not take a direct route and as a consequence there was a delay in shipment. The carrier argued that under the terms of the bill of lading there was no requirement to ship directly to destination (contrary to the terms of the oral agreement)

HELD –The oral agreement could be referred to in evidence because the bill of lading itself was mere evidence of the contract between the shipper and carrier.

A case in point

In respect of a non-negotiable bill of lading, the carrier is obliged to deliver the goods to a recipient/consignee named in the bill of lading.

(Note: All airway bills are non-negotiable)

Non-Negotiable

Specific Types of Bills of Lading

Ocean Bill

Airway Bill

An airway bill is a contract for the domestic or international carriage of goods by air from one specified location to another.

An ocean bill of lading is a Contract for the shipment of goods from a seller/exporter in one country to a specified destination/port of discharge in another country. Inland Bill

An inland bill of lading is a Contract pertaining to the transportation of goods overland to the seller’s international carrier. Example: The inland transportation from seller’s premises ex-works to port of loading.

Through Bill

A through bill of lading is a contract that incorporates both the inland and ocean/marine (international) transport from one location to another.

Seller’s Obligation to hand over Documents

INTERNATIONAL BUSINESS

TRANSACTIONS METHODS OF PAYMENT

BANK TRANSFER (CREDIT TRANSFER)

Module 2.9

(i) A sender will only be bound by the payment order if the sender issued it himself or it was issued by someone duly authorised by the sender.

( 1 )Buyer who

Issues Payment Order

____________Originator is issuer of first payment order

( 2 )Sending Bank

The main responsibility of the sender is to reimburse the receiving bank for the payment order when the receiving bank accepts it.

Model Law on International Credit TransfersArticle 2 of the UN Commission on International Trade Law (UNCITRAL) defines a credit transfer as “the series of operations, beginning with the ORIGINATOR’S PAYMENT ORDER” made for the purpose of placing funds at the disposal of a BENEFICIARY . The term “payment order” includes any payment order issued by the ORIGINATOR’S BANK or any INTERMEDIARY BANK intended to carry out the originator’s payment order. The Convention only applies where the sending bank and the receiving bank are in different states (branches of a bank in different states are considered by Convention as separate banks.)

( 5 )Beneficiary (Seller) Completion of

Transfer

Definition

iii) The sender cannot be bound under (ii) (a) and (b) if the authentication procedure agreed as between the sending and receiving bank cannot be regarded as commercially reasonable.

iii) The sender cannot be bound under (ii) (a)

( 3 )Receiving Bank

Acceptance of Payment Order

Per Article 72 , the Receiving Bank "accepts" a payment order in the following manner :

i) issuing payment order to beneficiary banki) issuing payment order to beneficiary bank

ii) by receiving payment orderii) by receiving payment order

iii) debiting the sender’s account at the receiving bank for the value of the payment order

iii) debiting the sender’s account at the receiving bank for the value

iv) giving notification of intention to debit sender’s accountiv) giving notification of intention to debit sender’s account

v) omitting to notify that it does not accept the payment order within the time limit of one banking day from receiving payment order

v) omitting to notify that it does not accept the payment order within

Execution of Payment Order

After "acceptance" (see above), the Receiving Bank "executes" a payment order in the following manner :

i) making funds available to the beneficiary (e.g. by crediting his account) ( Article 10 )

i) making funds available to the beneficiary (e.g. by crediting

ii) issuing a payment order to that beneficiary’s bank to make funds available to beneficiary ( Article 8 )

ii) issuing a payment order to that beneficiary’s bank to

What if this person (a) was not authorised to issue payment order? or (b) forged the payment order?

Article 5 of the Model Law provides for 3 preventative measures in this respect :

When does the senders obligation to pay the receiving bank arise? ( Article 5 )

Receiving bank will be reimbursed by the sender ( Article 2 , Model Law)

Reimbursmentof funds

A payment order is in the form of an unconditional instruction by “sender” to a “receiving bank” to place at the “ beneficiary’s” disposal a specific sum of money. Note: Per Article 2 , Model Law, this instruction by sender must not state that the payment is to be effected at the beneficiary’s request (i.e. the seller’s request )

institutionto pay

Per Article 19 , a credit transfer is completed when the beneficiary’s bank accepts a payment order for the beneficiary’s benefit (so that it is essentially now a private banking matter between the beneficiary and his bank).

(ii) A purported sender is legally committed if:a) the payment order is governed by authentication procedures established between the recovering bank and sending bank

andb) the recovering bank has implemented such authentication procedure

A) if the sender has a separate account at the receiving bank and the receiving bank debits this account, then the sender’s obligation to pay the receiving bank arises when such debit is made

A) if the sender has a separate account at the receiving bank and the receiving bank debits this account, then the sender’s obligation to pay the receiving bank arises when

B) in the event that the sender is a bank and (a) above is not applicable, then the sender’s obligation to reimburse the receiving bank arises:B) in the event that the sender is a bank and (a) above is not applicable, then the sender’s obligation to reimburse the receiving bank arises: a)(i) when the sender has caused a credit to be entered on account of the receiving bank and this credit is used by the receiving banka)(i) when the sender has caused a credit to be entered on account of the receiving bank and this credit is used by the receiving bank - or - - or - (ii) (if the credit is not used) on the banking day following the day on which the receiving bank’s account was credited, and the receiving bank is aware of this (ii) (if the credit is not used) on the banking day following the day on which the receiving bank’s account was credited, and the receiving bank is aware of this - or -b)(i) when the sender has credited the receiving bank’s account with a third bank and this credit is used by the receiving bankb)(i) when the sender has credited the receiving bank’s account with a third bank and this credit is used by the receiving bank - or –(ii) (if the credit is not used) on the banking day, following the day on which the receiving bank’s account was credited, and the receiving bank is aware of this.

(C) When final settlement is made in favour of the receiving bank at a central bank at which the receiving bank operates an account.(C) When final settlement is made in favour of the receiving bank at a central bank at which the receiving bank operates an account. (D) When final settlement is made in favour of the receiving bank in accordance with the applicable rules.(D) When final settlement is made in favour of the receiving bank in accordance with the applicable rules.

Article 2 of the Model Law refers to either of these as the “SENDER”

( 4 )

Beneficiary’s Bank

INTERNATIONAL BUSINESS

TRANSACTIONS METHODS OF PAYMENT

BILLS OF EXCHANGE Module 2.10

The drawee is not liable on a bill until he accepts it. Once the drawee has accepted the bill in writing (signature) he will be an ACCEPTOR and from this point he will be regarded as the principal debtor liable to pay on the bill (as opposed to the drawer) ( Article 40 ).

( 1 )DRAWEE

This is the party (usually a bank) on whom the bill

is drawn and who is instructed to make the

actual payment.

( 2 )DRAWER

This is the person

making the payment (the buyer) who draws

up the bill.

Per Article 41 , an acceptance must be written on the front or on the back of the bill + the signature of the drawee + the word “accepted” (or similar word). Alternative the drawee’s signature will suffice.

ConventionThe applicable law is the UN Convention on International Bills of Exchange and International Promisory Notes which renders the following definitions:

Holder has rights to the instrument unless:Note: A “holder” is a person who holds the bill (payee, drawer or drawee, as the case may be).

i) he obtained it knowing of 3rd party claimi) he obtained it knowing of 3rd party claim

ii) he obtained same fraudulentlyii) he obtained same fraudulently

iii) he stole itiii) he stole it

( 3 )PAYEE

The person to whom the bill is payable (the seller) and in whose favour the

drawer is effecting payment.

Per Article 10 , if an instrument is payable to two or more payees in the alternative, it is payable to any one of them who possesses same unless the instrument clearly stipulates that it is payable to all of them collectively.

Note:

Per Article 38 , the drawer undertakes that if the bill is dishonoured because of non-acceptance or non-payment, they will pay the holder or any endorses who pay the bill.

DefinitionWritten instrument containing an unconditional promise by the maker, undertaking that he will pay a specific sum of money to the payee (or to his order) which is payable on demand or at a specific time, is dated and signed by the maker.

Promisory Note

DefinitionWritten instrument containing an unconditional promise by the maker, undertaking that he will pay a specific sum of money to the payee (or to his order) which is payable on demand or at a specific time, is dated and signed by the maker.

Bill of Exchange

When International Bill?Article 2 provides that a Bill of Exchange is international if it specifies at least two of the following places, indicating that they are located in different states:

i) the place where the bill is drawni) the place where the bill is drawn

ii) the place next to the signature of the drawerii) the place next to the signature of the drawer

iii) the place next to the name of the draweeiii) the place next to the name of the drawee

iv) the place next to the name of the payeeiv) the place next to the name of the payee

v) the place of paymentv) the place of payment HOWEVER:

????

Interpretation Issuesi) amount payable is deemed definitei) amount payable is deemed definite

ii) in case of discrepancy, the amount in words will prevail over sum stated in figures

ii) in case of discrepancy, the amount in words will

iii) when no currency is stated, that of the state where payment is to be made, will apply

iii) when no currency is stated, that of the state where

iv) interest runs from instrument dateiv) interest runs from instrument date

v) interest is payable at specified ratev) interest is payable at specified rate

vi) interest may be fixed or variablevi) interest may be fixed or variable

vii) instrument is payable on demand if so stated or if no specific time is mentioned

vii) instrument is payable on demand if so stated or if

viii) instrument is payable at a definite time if it states that it is payable on or after a specific date

viii) instrument is payable at a definite time if it states

( 4 )ENDORSEE

The person to whom the bill is transferred so that

he becomes the beneficiary of the bill.

An endorsement must be: i) unconditional

ii) for whole amount

iii) considered to arise in order indicated on instrument

The instrument may be transferred by: i) endorsement written on it, signed and delivered to endorse

ii) delivery only if the last endorsement is in blank

A bill cannot be transferred if the bill (or endorsement on it) states: i) not negotiable

ii) not transferable

iii) not to order

iv) payee only

A person who transfers an instrument implicitly represents that: i) it is of good quality

ii) there is nothing to affect transferees right to payment


METHODS OF PAYMENT: LETTERS OF CREDIT

Module 2.11

( 2 )Security for Parties to Transaction

Ensures that if relevant documents are presented to the bank, the seller will obtain payment.

( 1 )Definition

a) Security for Seller

(6) The advising bank agrees to deal with the credit under mutually agreed terms with the issuing bank.

(6) The advising bank agrees to deal with the

(7) Advising bank notifies the seller that a letter of

credit has been established in the seller’s favour.

(7) Advising bank notifies the seller that a letter of

(10) The advising bank examines the documents to

ensure compliance with the letter of credit and if they are in order, the seller is paid via the seller’s bank.

(10) The advising bank examines the documents to

(11) The advising bank sends documents to the

issuing bank.(11) The advising bank sends documents to the

A letter of credit is a method of payment in international trade.

(1) The parties agree the terms of their contract for the international sale of goods (a term of which requires payment by a letter of credit).

(1) The parties agree the terms of their

(3) The letter of credit is issued by the issuing bank at the request of the buyer. In effect, this constitutes a guarantee by the issuing bank to the seller (payee/beneficiary) that if the seller complies with the stipulated documentary requirements, payment will be made to the seller accordingly.

(3) The letter of credit is issued by the issuing

(12) Issuing bank checks. The documents

sent by the advising bank and if correct, the issuing bank will pay the advising bank.

(12) Issuing bank checks. The documents

(13) The issuing bank will furnish the buyer

with the documents thereby enabling the buyer to secure the consignment of goods from the carrier.

(13) The issuing bank will furnish the buyer

( 3 )Types of Letters of

Credit

This is an additional confirmation by the advising bank (for a fee) that payment will be effected to the seller (even in the event of non payment by the issuing bank or buyer) subject to production of the relevant documents by the seller.

Confirmed

The advising bank simply confirms that the letter of credit’s authenticity/validity (the advising bank does not guarantee payment even in the event of non-payment by the issuing bank or buyer).

Unconfirmed

The buyer is at liberty to amend or cancel the letter of credit at any time before payment is effected, without notice to the seller and without the seller’s consent. Understandably, this is not common as it leaves the seller exposed to arbitrary action by the buyer which may render him unprotected.

Revocable

Irrevocable

Ensures that the relevant documents are examined to verify that they have been submitted by the seller.

b) Security for Buyer

In the event that an alternative less secure method of payment has been agreed between buyer and seller, a standby letter of credit may be issued as a “fallback” in case the less secure alternative method of payment fails.

Standby

Where a buyer and seller have regular business dealings involving repeat shipments of goods, this is a practical method of maintaining a letter of credit open at all times, (thereby avoiding separate issues on each occasion of shipment), in which case it will revolve in one of the following ways.

Revolving

The seller is authorised to utilise the buyer’s credit as security so that the seller himself can in turn establish a second letter of credit, (in his capacity as buyer) in favour of the seller’s original supplier of the goods in question.

Back-to-Back

The seller has the right to request that the paying bank effects payment to a 3rd party that is not party to the original contract, e.g. to the person or entity which originally supplied the seller before the seller in turn supplied the buyer.

Transferable

Time-revolving until such time as the stipulated level of credit is exhausted.

Value-revolving whereby the same value is used/activated for each separate repeat shipment.

Seller’s/Payee’s/Beneficiary’s Bank(Correspondent Bank – Advising or Confirming Bank.

Seller/Payee Beneficiary

(8) The seller ships the goods to the buyer.(8) The seller ships the goods to the buyer. (9) The various documents required by the

letter of credit (e.g. invoice, bill of lading) are duly presented by the seller to the advising bank.

(9) The various documents required by the

(4) The letter of credit is sent to the seller’s advising bank by the buyer’s bank (issuer)

(4) The letter of credit is sent to the seller’s

andthe buyer’s bank (issuer) requests the seller’s bank to advise the credit to the seller.

(5) The issuing bank may ask the advising

bank to “confirm” the credit in terms of guaranteeing payment over and above the payment guarantee given by the issuing bank.

(5) The issuing bank may ask the advising

Buyer’s Bank (Issuer or Issuing Bank)

Buyer (the Applicant)

(2) Buyer applies to his bank for a letter of credit to be established in favour of the seller.

LETTER OF CREDIT PROCEDURE IN NUMBERED CHRONOLOGICAL SEQUENCE

The letter of credit may only be amended or cancelled by prior agreement of all parties concerned – buyer, seller and participating banks. Note: Unless otherwise specified, a letter of credit will be deemed to be irrevocable (Article 6(c) of the ICC Uniform Customs and Practice for Documentary Credits)


LETTERS OF COMFORTModule 2.12

A letter of comfort may be regarded as a type of non legally binding guarantee which is effectively a gentleman’s agreement. It is typically given to a bank by a parent company to “secure” a loan given by a bank to a parent company’s subsidiary. The letter of comfort normally incorporates an undertaking/declaration by the parent company that it will, as a matter of policy, support its subsidiary and thereby ensure that the subsidiary will not default in its obligations to repay its loan to the bank.

KLEINNORT BENSON LTD v MALAYSIA MINING CORPORATION BERHAD (1989)A parent company P agreed to issue a letter of comfort to bank B as security for a loan facility given by B to P’s subsidiary S. The letter of comfort included the following undertaking by P. “It is our policy to ensure that the business of S is at all times in a position to meet its liabilities to you”. HELD - The letter of comfort was not legally binding and simply conveyed a

statement of intention (it was drawn up in such a way so as not to include a statement as to future conduct).

HELD - The letter of comfort was not legally binding and simply conveyed a

NOTE: Much would depend, on the wording and a court’s interpretation of any

undertaking. A deciding factor is the presence or absence of “consideration” and an “intention to create legal relations”. In the case of CHEMCO LEASING v REDIFFUSIION (1987) the court concluded that there was a legally binding document.

NOTE: Much would depend, on the wording and a court’s interpretation of any

A case in point:

Unlike a formal guarantee, and as previously stated, assurances of this nature by a parent company have not been viewed as a contractually binding obligation to pay its subsidiary’s debt (in the event of the subsidiary’s default). They are rather considered as mere statements of fact which do not have the force of law. Thus, not surprisingly, promises given in a letter of comfort are likely to carry more weight in the eyes of a corporate lender if the parent company’s commercial reputation and integrity is beyond question.