1. DOCUMENTARY SALE AND
TERMS OF TRADE
© 2002 West/Thomson Learning www.StudsPlanet.com

2. CONTRACTS AS A WAY TO
MANAGE RISK
• 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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3. WHERE IS THE THE RISK IN AN
INTERNATIONAL TRANSACTION?
• Payment risk
• Delivery risk
• Quality risk
• Differences from domestic transaction?
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4. DEFINITIONS
• Documentary Sale:
• 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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5. BILL OF LADING
• 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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6. DOCUMENTARY COLLECTION:
PAYMENT AGAINST DOCUMENTS
• Separation of goods and documents facilitates
trade and payment
• Control of documents gives control of goods
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7. STAGES IN DOCUMENTARY
TRANSACTION
• 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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8. 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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9. THE DOCUMENTARY SALE
Japanese
Importer
American
Exporter
Collecting
Bank
Exporter’s U.S.
Bank
(Remitting Bank)
Sales Contract
CIF 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
F
C. Negotiable bill of lading, insurance policy, certificates of origin, invoice with
draft 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
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10. STAGES
• Seller’s bank forwards documents to collecting
bank in buyer’s country
• Documents released to buyer when buyer pays
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11. PURCHASERS OF BILLS OF LADING
• 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
• 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
• Protects rightful owner
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12. TYPES OF CONTRACTS:
SHIPMENT AND DESTINATION
• Shipment Contract: Contract calls for seller
to ship goods by carrier, but not to deliver
goods to named location
• 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
• Greater responsibility on seller
• Risk passes when goods tendered to buyer at
destination
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13. RISK OF LOSS UNDER CONTRACTS
• 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
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14. TRADE TERMS
• 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.
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15. TRADE TERMS: E TERMS
• EXW – Ex works: The seller's only
responsibility is to make the goods
available at the seller's premises. 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.
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16. TRADE TERMS: F TERMS
• 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.
• 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.
• 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
cross ship’s rail.
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17. TRADE TERMS: C TERMS
• 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 cross ship’s rail.
• 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 cross ship’s rail.
Seller must purchase cargo insurance; buyer can claim on
policy.
• 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.
• 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.
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18. TRADE TERMS: D TERMS (#1)
• DAF – Delivered at frontier: Seller transports goods to
“frontier” point in destination country. Buyer pays freight
from frontier point. Risk shifts when goods handed to
buyer at frontier point.
• DES – Delivered ex ship: Seller transports goods to
destination port. Buyer pays costs of unloading ship. Risk
shifts to buyer when goods ready for unloading by buyer.
• DEQ – Delivered ex quay: Seller delivers the goods -
not cleared for import - to the buyer at the port of
destination. Seller bears costs and risks of moving the
goods to port. Buyer clears goods for import and pays
customs clearance costs and duties. Risk shifts to buyer
when goods placed on dock.
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19. TRADE TERMS: D TERMS (#2)
• DDU – Delivered duty unpaid: Seller delivers goods -
not cleared for import - to buyer at destination.
Seller bears costs and risks of moving goods to
destination. Risk shifts to buyer when goods
delivered at specified location.
• DDP – Delivered duty paid: Seller delivers goods -
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
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20. MEASUREMENT OF DAMAGES IN CIF
CONTRACT
• 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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21. ELECTRONIC DATA
INTERCHANGE (EDI)
• Trade documents filed electronically
• Faster transmission; parties can track goods
and adjust documents as necessary; reduce
preparation of multiple copies
• Security issues:
• Digital signature laws should help
• Unauthorized access problem
• Liability issues
• Lack of standardization for electronic documents
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22. BASIC CONCEPTS
• 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
• more expensive
• parties may feel extra expense worthwhile
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23. BANQUE DE DEPOTS V. FERROLIGAS
• 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.
• Legal “capture” of documents prerequisite to
seizure of goods
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24. BIDDELL BROTHERS V. CLEMENS
HORST
• 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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25. BASSE & SELVE V. BANK OF
AUSTRALASIA
• 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 apparently-
regular documents.
• Certificate here appeared to be in order and the bank
properly paid on documents.
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26. ST. PAUL GUARDIAN INS. V.
NEUROMED MEDICAL SYSTEMS
(S.D.N.Y. 2002)
• 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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27. KUMAR CORP. V. NOPAL LINES, LTD. (FLA
DST. CT. APP. 1985)
• 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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28. WEB SITES
• 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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