3. INTRODUCTION - I
Where is the the risk in an international transaction?
Payment risk (creditworthiness, exchange control regulations)
Delivery risk
Quality risk
Differences from domestic transaction?
Hard to get information on each party
Communication is harder
Customs are different
Don’t want to end up in a court in a foreign country
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4. INTRODUCTION - II
Fundamental Problem: seller fears relinquishing control over its goods before payment,
while buyer fears making payment before obtaining possession of the goods.
Seller wants to have legal title to goods until getting paid or at least assurance of payment
Buyer doesn’t want to pay until receiving the goods or receiving title to the goods.
Documentary Transaction alleviates the seller’s risk of not being paid or the buyer’s risk of
not receiving the goods. How?
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6. THE BASIC STRUCTURE – I
Transnational transactions involve a set of contracts including:
The sales contract;
The freight contract for carriage by sea or air;
A marine or air insurance contract, covering risks of loss or damage to the goods in transit; and
A letter of credit, providing for the payment arrangements
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7. THE BASIC STRUCTURE – II
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S
E
L
L
E
R
B
U
Y
E
R
Carrier
Delivery of goods
1
Receives bill of lading
2
Delivery of bill of lading and other documents
3
Payment of purchase price
4
Provides bill of lading
5
Delivery of goods
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8. THE BASIC STRUCTURE – III
The Documentary Sales Transaction converts the Sale of Goods Contract into a sale
of documents contract.
Buyer contracts to buy documents and the seller promises to provide conforming documents to the
buyer while goods are in transit. => The seller physically delivers documents, not goods, to the buyer
Buyer can use documents to conduct additional transactions
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9. THE DOCUMENTS – I
1. The sales contract
The underlying contract between the seller (exporter) and the buyer (importer).
Covers all necessary information to complete transactions in terms of performance, payment,
description of goods and third parties.
It may be a single document or a series of documents representing correspondence between the
parties (for instance, a pro forrna invoice prepared by the seller and a formal purchase order from
the buyer).
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10. THE DOCUMENTS – II
2. The Letter of Credit
It is a letter addressed to the seller
written and signed by buyer’s bank
promising to honor seller’s drafts.
Bank substitutes its own Commitment
Seller must conform to terms (lists the documents that must be presented by the seller in order to ''draw" on the letter of credit and
thus receive payment).
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11. THE DOCUMENTS – III
2. The Letter of Credit
Types of L/C
Irrevocable vs. Revocable: irrevocable l/c can not be canceled or modified unless all parties agree
Confirmed vs. Unconfirmed: if confirmed the exporter’s bank is obligated to honor drafts if for some reason issuing bank can not
or will not pay
Revolving vs. nonrevolving: nonrevolving l/c are valid for only one transaction
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12. THE DOCUMENTS – IV
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Buyer
(Importer)
Seller
(Exporter)
Importer’s Bank
(Issuing Bank)
Exporter’s Bank
(Correspondent
Bank)
Contract of Sale
1
Delivery of Goods
5
Request to
provide
credit
2
Documents &
Claim for
Payment
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Documents Presented to issuing Bank
7
Documents
Presented
6
Letter of
Credit
Delivered
4
Payment
9
Credit Sent to Correspondent Bank
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13. THE DOCUMENTS – V
3. Commercial Invoice
Purpose:
1. Lists full details of goods shipped
2. Names of importer/exporter given
3. Identifies payment terms
4. List charges for transport and insurance.
prepared and signed by the seller; often accompanied by a packing list that itemizes the material in
each individual package being shipped.
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14. THE DOCUMENTS – VI
4. Bill of Lading
Issued by common carrier to exporter when the goods are delivered to the carrier
Three main purposes:
1. receipt (carrier has received merchandise)
2. contract (lists responsibilities of carrier)
3. document of title (used to obtain payment or promise of payment before goods are released to importer)
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15. THE DOCUMENTS – VII
5. Insurance Policy or Certificate
Insurance Certificate stating type and amount of coverage
Two Categories:
Marine: transport by sea
Air: transport by air
All shipments insured today.
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16. THE DOCUMENTS – VIII
6. Other documents
Consular Invoice: invoice from country of departure.
Certificate of Origin: origin of export item.
Certificate of Inspection: specification of goods shipped
Shipper’s Export Document: allows host country to keep statistics on exports.
Export License: license to export
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18. THE ICC INCOTERMS – I
Background
In modern commerce, a series of terms have come to be used to describe (in an abbreviated manner)
elaborate conditions relating to delivery, title, transfer of risk, liability and other pertinent matters.
These are known as “TERMS OF TRADE.”
Principal among these are those of the ICC’s “International Commercial Terms, Incoterms for short.
Intended to reduce uncertainties arising from different interpretations of trade terms in different
jurisdictions.
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19. THE ICC INCOTERMS – II
Incoterms are distinguished based on the manner each allocates to the following duties and
liabilities between a buyer and a seller:
Licenses, authorizations and formalities;
Contract of carriage and insurance;
Delivery;
Transfer of risk;
Division of costs; and
Checking, packaging and marking.
Incoterms 2010 replace Incoterms 2000
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20. THE ICC INCOTERMS – III
The E-term:
1. EXW – Ex works
It is a departure contract as it represents minimum obligation of the seller.
Seller’s duty is to make the goods available at his premises, i.e. delivery at home or at the seller’s
warehouse.
Buyer is responsible for all the cost of delivery.
Risk shifts to buyer when goods made available by seller at named location. Use for all modes of
transport
Most convenient to the seller.
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21. THE ICC INCOTERMS – IV
The F-terms:
1. 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.
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22. THE ICC INCOTERMS – V
The F-terms:
2. 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.
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23. THE ICC INCOTERMS – VI
The F-terms:
3. 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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24. THE ICC INCOTERMS – VII
The C-terms:
1. 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.
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25. THE ICC INCOTERMS – VIII
The C-terms:
2. 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.
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26. THE ICC INCOTERMS – IX
The C-terms:
3. 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.
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27. THE ICC INCOTERMS – X
The C-terms:
4. 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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28. THE ICC INCOTERMS – XI
The D-terms:
1. DAP – Delivered at place:
Seller transports goods to named destination.
Seller pays transport costs.
Risk shifts when goods delivered to buyer at destination.
Use for all modes of transport.
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29. THE ICC INCOTERMS – XII
The D-terms:
2. DAT – Delivered at terminal:
Seller pays for transport to destination terminal and unloading.
Risk shifts when goods delivered at terminal.
Use for all modes of transport.
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30. THE ICC INCOTERMS – XIII
The D-terms:
3. 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.
Use for all modes.
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33. THE ICC INCOTERMS – XV
Biddell Brothers v. Clemens Horst
Facts:
Seller (U.S.) (brewing hops); Buyer (England).
Contract terms: ”C.I.F. to London, Liverpool, or Hull”, ”Terms net cash.”
Buyer refused to pay against documents because they wanted a sample and seller refused to send samples.
Buyer stated that they will only pay against goods. Seller argues that a third party (i.e. S.F. Merchant Exchange) provided buyer
with a certificate of quality.
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34. THE ICC INCOTERMS – XV
Biddell Brothers v. Clemens Horst
Facts:
Buyer does not trust the S.F. Merchant Exchange. Seller refuses to ship the goods arguing that the buyer breached because they
refused to accept the goods.
Buyer believes that they have a CIF contract and so they can decide whether they want to accept goods and pay or accept
documents and pay.
Seller argues that in a CIF contract you must pay against documents and that this is a “terms net cash”, meaning that payment
must be made against documents.
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35. THE ICC INCOTERMS – XV
Biddell Brothers v. Clemens Horst
Issue: Must the buyer make payments against documents or against delivery of goods or either?
Holding:
It does not make any sense to give the buyer the choice of “symbolic delivery” or “actual delivery”.
By using a negotiable bill of lading, which you must, and if the negotiable bill of lading is something of
value (i.e. title to the goods) and the seller delivered the bill of lading, but the buyer asks for delivery
of goods, then the seller would be performing/paying twice (a. delivery of bill of lading and b.
delivery of goods).
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36. THE ICC INCOTERMS – XV
Biddell Brothers v. Clemens Horst
Reasoning:
Rule: If it is a CIF contract, the buyers have to pay against documents
The fact that CIF was used does not make “payment against delivery” but the fact that there was
a bill of lading and they said CIF made “payment against delivery” an option.
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37. THE ICC INCOTERMS – XVI
The Julia
Facts:
Seller loads 1,200 tons of rye onto ship, obtains negotiable bill of lading made out to the order of “Belgian Grain” – the seller’s
agent
THEN makes CIF contract for 500 tons to Boernbord.
B will pay on receiving invoice and delivery order (b/c bill of lading wasn’t appropriate here since only part of the cargo is sold)
which had to be signed and presented to various intermediaries before goods would be delivered and receive insurance.
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38. THE ICC INCOTERMS – XVI
The Julia
What was supposed to happen:
Shipment arrives at port
Buyer hands over the delivery order plus a check for freight charges to its own cargo agent (Carga).
Carga gives the check for the freight charges and the delivery order to the seller’s sales agent (Belgian Grain).
Belgian Grain notes that the freight charges have been paid and hands the delivery order to the seller’s cargo superintendent
(Van Bree).
Van Bree issues an order to its workers to release the goods to the buyer.
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39. THE ICC INCOTERMS – XVI
The Julia
What actually happened?
War breaks out and S redirects ship to Lisbon,
S sells rye there for lower price.
B sues for breach of contract (failure of consideration)
S says contract was frustrated.
Issue: Can the buyer recover the purchase price in a CIF K?
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40. THE ICC INCOTERMS – XVI
The Julia
Holding:
The contract called for a delivery order which was neither issued by the carrier (or his agent), nor attorned to by him. It was not
therefore a c.i.f. contract at all, but an ex-ship contract.
That being so, there was no performance by the seller. There was a total failure of consideration, and the buyer could recover.
Had this contract been what it purported to be, a normal c.i.f. contract, the buyer would have failed.
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41. THE ICC INCOTERMS – XVII
Note that:
The scope of application of Incoterms is limited only to matters concerning the duties and obligations of
sellers and buyers to a contract of sale;
Of the three contracts in IBT – the Contract of Sale, the Carriage Contract, and the Letter of Credit -
Incoterms are directly relevant only to the first of these and only in certain respects;
Incoterms are NOT intended as a type of law of contracts; they are intended only to clarify which
party has to perform the various tasks necessary for the delivery of goods under the contract of sale
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