CHAPTER 5
The Documentary Sale and
Terms Of Trade
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a part of South-Western Cengage Learning.
Transaction 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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Transaction Risk
• International risks are similar to risks in
domestic transactions.
• Payment risk.
• Delivery risk.
• Quality risk.
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The Documentary Sale
G
SHIP / VESSEL
Japanese
Importer
A
Sales Contract
CIF Japanese Port
Documents Against Payment
E
F
International
Collecting
Bank
D
F
B
American
Exporter
C
Exporter’s U.S.
Bank
(Remitting Bank)
A. Sales contract calls for documentary sale
B. Documents prepared - export license obtained - goods delivered to Ship/Vessel
C. Negotiable bill of lading, insurance policy, certificates of origin, invoice with
draft attached presented to Exporter’s U.S. Bank (remitting bank)
D. Documents forwarded for collection through International Banking system
E. Documents presented to Importer for negotiation and payment
F. Payment remitted and exporter’s account credited
G. Ship releases goods to Importer and makes entry
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The Documentary Sale
• 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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The Documentary Sale
• 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?
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Stages in Documentary Transaction
• Seller’s bank forwards to collecting bank in buyer’s
country.
• Documents released when buyer pays 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).
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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
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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).
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Rights of Purchasers of
Documents of Title
• Good-Faith Purchasers of Documents of Title:
Special protection for purchasers who take by
negotiation. They take free of any adverse
claims. “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.
• If not a good-faith purchaser, then you only take
the rights of a transferee.
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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?
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Banque de Depots v. Ferroligas
• No. The party that controls the documents
controls the goods.
• What recourse does the Swiss bank have?
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Carrier’s Liability for Misdelivery
• 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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Importance of Negotiability to Trade
• Negotiability of bill of lading is critical to
international trade.
• As the BOL is bought and sold, so are the goods
it represents.
• Permits merchants to buy/sell products while
they are on route.
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Documentary Collection:
Payment Against Documents
• Separation of goods and documents facilitates
trade
• Controlling documents means you control the
goods
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CIF Contracts
• 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.
• 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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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?
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Biddell Brothers v.
E. Clemens Horst Co.
• 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
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Basse and Selve 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?
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Measuring Damages for Breach
of the Documentary Sale
• Damages measured by the difference between
the contract price and the market price of the
goods at the port of shipment on that date.
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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.
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Other Types of Transport Documents
• Air Waybills.
• Forwarder’s Bill of Lading.
• Multimodal Transport Documents.
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Electronic Data Exchange
• Shipping data is now being transmitted
electronically which has several advantages:
– Lets parties track goods that are in transit and make
adjustments en route.
– Seller gets paid electronically (faster).
– Eliminates need to prepare multiple copies of
documents.
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Allocating Shipping Responsibilities
and the Risk of Loss
• Shipment Contractsrisk passes when
goods are given to
the first carrier.
• Presumption of
shipment contract if
not specified.
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• Destination
Contracts- risk
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.
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Trade Terms and Interpretation
• Incoterms:
– “E” – places lowest amount of responsibility on the seller.
– “F”– Seller is required to deliver the goods to the designated
point of departure “free” of expense or risk to buyer.
– “C”– Seller is responsible for certain costs after the goods have
been delivered to the carrier.
– “D”– is a “destination” contract – seller has a great responsibility.
• FOB and CIF.
– Be wary of customizing trade terms- this only adds to confusion.
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St. Paul Guardian Ins. Co v.
Neuromed Medical Systems, 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.
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St. Paul Guardian Ins. Co v.
Neuromed Medical Systems, 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?
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St. Paul Guardian Ins. Co v.
Neuromed Medical Systems, 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.
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Modification of Trade Terms
• Modification usually arises in CIF contract cases.
• General rules:
– If the additional terms do not contradict the agreedupon terms, then the agreement is enforceable.
– If the additional terms do contradict the agreed-upon
terms, it can destroy the CIF terms.
• See the Kumar Corp. v. Nopal Lines, Ltd. case.
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