THE DOCUMENTARY SALE AND TERMS OF TRADE

Chapter Five

Transaction RisksDocuments of sale and terms of trade help

to reduce transaction risks inherent in international sale of goods transactions.

Definition of transaction risk: the risks facing the buyer and seller when they move goods and money in an international sales transaction.

It is a function of time, distance, culture, differing legal systems and communications difficulties.

The Documentary Sale

“This is a type of contract for the sale of goods in which possession and ownership of goods are transferred from seller to buyer through negotiation and delivery of a negotiable document of title issued by an ocean carrier [bailee].” (page 163)Key terms to understand: bailment, negotiable, and due negotiable

TermsBAILMENT – a legal relationship involving the

separation of ownership and possession of personal property where the bailor (typically the owner of property) entrusts property to another (the bailee) according to the instructions of the bailor.

NEGOTIABLE DOCUMENT OF TITLE – a document that contemplates that it is to enter the stream of commerce and which has the potential to give the ultimate holder greater protection when it comes to getting the goods than a holder of a non-negotiable one.

Some Basic Business Law Contract Principles

A basic concept of contract law is that an assignee stands in the shoes of his or her assignor. What does that mean? It means that a transferee of a contract right has no greater right to getting paid than the transferor had. So, if there was a reason the person obligated under the contract did not have to perform for the transferor (assignor), then that person does not have to perform for the transferee (assignee) either. That does not make assignees (like banks) comfortable.

Article 3 UCC & Holder in Due Course StatusTo get around that problem, Article 3 of the UCC

(Negotiable Instrument law) allows for greater protection for transferees/assignees of negotiable instruments than under the common law of contracts. First, the instrument must be in negotiable form. Second, it must be duly negotiated (by delivery alone for bearer instruments, or by delivery and endorsement for order instruments]. Third, the holder [transferee] must be a holder in due course (someone who gave value for it and took it in good faith, without knowledge of any defects].

GOOD FAITH PURCHASERS OF DOCUMENTS OF TITLE

A holder by due negotiation (or good faith purchaser for value) is one who purchases a negotiable document for value (not the same as consideration under contract law), in good faith, and in the ordinary course of business. Such a holder not only takes title to the document and to the goods it symbolizes, but that holder acquires potentially greater rights in the documents and goods than the transferor had.

Documentary Collections (Letters of Credit)Letters of credit are a common way to assure

collection of payment in international sales transactions. In essence, it uses 2 banks, one for the buyer and one for the seller to act as a type of escrow agent (typical in real estate sales). This is covered more thoroughly in Chapter 7. Compare Exhibit 5.2 (page 168) to Exhibit 7.2 (page 234).

The documentary collection described in Chapter 5 is much less secure than the irrevocable letter of credit approach.

The irrevocable letter of credit is not a contract between the beneficiary (seller) and the issuing bank, but it can be analogized to a cashier’s check.

Ocean Bills of Lading1. Review the sample bill of lading in Exhibit 5.1

(page 165).2. The bill of lading is issued by the carrier (i.e.

freighter) to a shipper when the goods are transferred to the carrier. If issued when the goods are aboard ship (preferred) it is an on-board bill. If issued when they are on the dock, it is “received-for-shipment.”

3. The purposes of the bill of lading:1. As a receipt for the goods received – describes the

goods and any damage that is observed, if no damage then it is a “clean bill” vs. “foul,” but a clean bill is not a guarantee

2. As a shipping contract between the shipper and the carrier

3. As a document of title to the goods (unless it is a “straight” bill of lading, or “sea waybill”)

Air WaybillsMost air transport of goods are handled by air

waybills issued by air carriers. Again, they are not negotiable.

They are like writing a check that says “Pay to John Smith,” rather than “Pay to the Order of John Smith.” In the first case it is not in negotiable form, the second is. The bank can pay the second check to anyone in proper (duly negotiated) possession of it, but must only pay John Smith in the first case.

In the air waybill, the carrier must make delivery to the consignee named in the waybill.

Why would ocean shipments use negotiable documents, but not air?

Shipping Terms and INCOTERMSWhat do FOB, CIF, DDP, etc, mean?Who pays for the costs associated with shipping

the goods?How long is the seller responsible for the goods?When does the risk of loss shift to the buyer?What is a shipment (or departure) contract?What is a destination (or arrival) contact?What are Incoterms? (see pages 178 -185 & Exhibit

5.5)See the Mulvaney & Cavaliere article on Incoterms.

Trade Terms CIF Contracts (Maritime Transactions)1. CIF stands for cost, insurance and freight. The

seller tenders a bill of lading to the buyer (in exchange for payment) along with providing marine insurance on the goods and prepay the freight charges to the port of destination.

2. Risk of loss during transit is assigned to the seller until the goods reach their destination.

Freight Forwarders are Essential to Export Newbies

Here are some links to some freight forwarders in Houston, Texas

http://www.worldfreighthouston.com/

http://gonavishoustontx.com/

These were the first two forwarders that came up in my Google search.