Documentary Sale and Terms
of Trade
Chapter 5
© 2002 West/Thomson Learning
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Contracts as a way to
manage risk
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Negotiate terms to fit specific transaction
Allocate risk - moving goods and money
Fix performance obligation and
responsibilities
Fix price and quality
Make sure understanding is reflected in
contract
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Where is the the risk in an
international transaction?
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Payment risk
Delivery risk
Quality risk
Differences from domestic transaction?
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Definitions
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Documentary Sale:
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Buyer is required to pay upon presentation of
NEGOTIABLE DOCUMENT OF TITLE by seller
Document of title: evidences ownership of
goods: dock receipts, warehouse receipts and bills
of lading
Documents transfer ownership of goods, while
goods may stay with bailee
Negotiability: ability of document to be
transferred legally from one party to another in
return for value
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Bill of Lading
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A document of title issued by a carrier to a
shipper upon receiving goods for transport;
also serves as receipt for goods delivered and
contract of carriage
Negotiable bills must be either to order or to
bearer (but bearer instruments not used in
international transactions)
Order instruments must be delivered and
endorsed
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Documentary Collection:
Payment against documents
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Separation of goods and documents
facilitates trade and payment
Control of documents gives control of
goods
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Stages in Documentary
transaction
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Seller gives goods to
Carrier and gets bill of
lading
Seller endorses bill of
lading and gives it to
bank with other
required documents
(insurance,certificate of
origin or inspection,
documentary draft)
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Documentary draft
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Facilitates payment
Negotiable order to pay made out by
seller
Drawn on buyer, payable to the seller
May be used with letters of credit
(discussed in Ch. 7)
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The Documentary Sale
G
Japanese
Importer
B
A
Sales Contract
CIF Japanese Port
Documents Against Payment
E
Collecting
Bank
American
Exporter
C
F
D
F
Exporter’s 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 exporter’s account credited
G. Importer claims goods and makes entry
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Stages
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Seller’s bank forwards documents to
collecting bank in buyer’s country
Documents released to buyer when
buyer pays
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Purchasers of Bills of lading
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Special protection for purchasers who take bills
of lading by negotiation -- they take possession
free from any adverse claims
“Good faith purchaser” is one who purchases
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for value (not to settle debt)
in good faith and without notice of antecedent claim
in the ordinary course of business
Purchaser not in good faith only takes rights of
transferee
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Protects rightful owner
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Types of Contracts:
Shipment and Destination
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Shipment Contract: Contract calls for seller
to ship goods by carrier, but not to deliver
goods to named location
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Most common in international trade
Presumption in favor of shipment
Risk of loss passes when goods handed to carrier
Destination Contract: Contract calls for seller
to deliver goods to particular destination
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Greater responsibility on seller
Risk passes when goods tendered to buyer at
destination
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Risk of loss under contracts
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Shipment contract:
risk passes when
goods are given to
the first carrier
Presumption of
shipment contract if
not specified
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Destination contract:
risk passes when
goods are given to
buyer at destination
point
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Trade Terms -- INCOTERMS
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Responsibilities of buyer and seller need
to be negotiated.
Trade terms used as a short hand for
assigned responsibilities and allocating
when the risk passes from one party to
another.
Incoterms 2010 replace Incoterms 2000
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INCOTerms 2010: E Terms
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EXW – Ex works: The seller's only
responsibility is to make the goods available
at the named place. The buyer bears full
costs of moving the goods from there to
destination. Risk shifts to buyer when goods
made available by seller at named location.
Use for all modes of transport
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INCOTerms 2010: F Terms
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FCA – Free carrier: The seller delivers the goods, cleared for
export, to the carrier selected by the buyer. The seller loads the
goods if the carrier pickup is at seller's premises. Buyer then
bears costs of moving the goods to destination. Risk shifts to
buyer when goods delivered to carrier. Use for all modes of
transport.
*FAS – Free alongside ship: The seller delivers the goods to
the ship in origin port. Buyer then bears all transport costs. Risk
shifts to buyer when goods delivered alongside ship. Use only
for ocean transport.
*FOB – Free on board: The seller delivers the goods on
board the ship and clears the goods for export. Buyer then
bears all transport costs. Risk shifts to buyer when goods are
on ship. Use only for ocean transport.
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INCOTerms 2010: C Terms
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*CFR – Cost & freight: The seller clears the goods for export
and pays the costs of moving the goods to destination. Risk
shifts to buyer when goods are on ship. Use only for ocean
transport.
*CIF – Cost, insurance & freight: The seller clears the
goods for export and pays the costs of moving the goods to the
port of destination. Risk shifts to buyer when goods are on ship.
Seller must purchase cargo insurance; buyer can claim on
policy. Use only for ocean transport.
CPT – Carriage paid to: The seller pays for moving the goods
to destination. Risk shifts to buyer when goods are transferred
to the first carrier. Buyer must procure own insurance. Use for
all modes.
CIP – Carriage & insurance paid to: The seller pays for
moving the goods to destination. Risk shifts to buyer when
goods are transferred to the first carrier. Seller must purchase
cargo insurance; buyer can claim on policy. Use for all modes.
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INCOTerms 2010: D Terms
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DAP – Delivered at place: Seller transports goods to
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DAT – Delivered at terminal: Seller pays for transport
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DDP – Delivered duty paid: Seller delivers goods -
named destination. Seller pays transport costs. Risk shifts
when goods delivered to buyer at destination. Use for all
modes of transport.
to destination terminal and unloading. Risk shifts when goods
delivered at terminal. Use for all modes of transport.
cleared for import - to buyer at destination. Seller bears costs
and risks of moving goods to destination, including customs
duties and taxes. Risk shifts to buyer when goods delivered at
specified location. Use for all modes.
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Measurement of damages in
CIF contract
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Seaver v. Lindsay : U.S. rule: damages
measured by the market price of the
goods at the port of shipment on that
date
Sharpe & Co. v. Nosawa & Co.: English
rule: damages measured at date and
location of delivery
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Electronic Data Interchange
(EDI)
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Trade documents filed electronically
Faster transmission; parties can track goods
and adjust documents as necessary; reduce
preparation of multiple copies
Security issues:
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Digital signature laws should help
Unauthorized access problem
Liability issues
Lack of standardization for electronic documents
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Basic concepts
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Negotiate explicit terms: price and clear
responsibilities of parties
Reference clear set of trade terms; avoid
attempts to “customize” terms
General presumption that contract is a
shipment contract
Parties may create destination contract
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more expensive
parties may feel extra expense worthwhile
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Banque de Depots v.
Ferroligas
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Facts: Bank gets court order to seize Bozel’s calcium
silicon in La. to settle debt owed by Bozel
 Documents for the calcium silicon were held by
other banks.
Issue: Is bank that seized the goods without the
documents of title entitled to them for payment of
money owed?
Decision: No.
Reasons:
 The party that controls the documents controls
the goods.
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Legal “capture” of documents prerequisite to
seizure of goods
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Biddell Brothers v. Clemens
Horst
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Facts: CIF contract for sale of hops to be shipped to
London
 Buyer insisted on right to inspect goods before
payment
 Seller insisted on payment upon presentation of
documents
 Seller refuses to ship; buyer sues
Issue: Has buyer right to inspect the goods before
payment?
Decision: Not under standard CIF contract
Reasons: Buyer obligated to pay upon presentation of
the documents
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Basse & Selve v. Bank of
Australasia
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Facts: B&S purchased ore from O
 Bank negotiated documents on B&S behalf
 Contract required certificate of analysis from H
 O submitted phony samples
 B&S sued Bank to recover payment on bill of lading
Issue: Is Bank responsible for inspection of ore?
Decision: No; Bank has no duty to inspect
Reasons: Bank not obligated to look beyond apparentlyregular documents.
 Certificate here appeared to be in order and the bank
properly paid on documents.
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St. Paul Guardian Ins. V. Neuromed
Medical Systems (S.D.N.Y. 2002)
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Facts: CIF contract for sale of MRI, shipped from
Germany to NY, then buyer to arrange transport to Ill.,
contract governed by German law
 MRI loaded on ship in good condition
 MRI was damaged when arrived in Ill.
 Buyer claims on insurance, insurer sues seller
Issue: Should CIF term be interpreted under Incoterms?
Decision: Apply Incoterms – CIF means risk of loss
passes when delivered to carrier at port of shipment
Reasons: CISG applies, Art. 9(2) says contract
incorporates usage known or should be known to parties
and regularly observed in international trade
 CIF interpreted under Incoterms without specifc
reference
 CISG, Art. 67(1) – passage of risk and transfer of title
needn’t occur at same time
 Terms here don’t modify CIF term of contract
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Kumar Corp. v. Nopal Lines, Ltd. (Fla
Dst. Ct. App. 1985)
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Facts: K sold tv sets to N in Venezuela
 CIF contract for delivery to Maracaibo
 K agreed to let N pay after goods sold
 K delivers goods to freight forwarder; K didn’t take
out insurance policy as required
 Goods stolen; K sues freight forwarder and carrier
Issue: Does K have interest in goods to allow it to sue?
Decision: Yes, despite CIF contract
Reasons: Agreement here as to payment here means
not true CIF contract
 Even if CIF contract, failure to get insurance means K
self-insures; so K has interest sufficient to sue
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Web Sites
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http://www.forwarderlaw.com
http://www.cisg.law.pace.edu
http://www.iccwbo.org
http://www.jus.uio.no/lm/icc.incoterms.
1990/index.html
http://www.silkweb.bc.ca/portview/
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