INTERNATIONAL BUSINESS OUTLINE
§ The Basic Transaction – (Problem 4.0)
o Basic Diagram
§ If buyer has given money & goods arrive damaged?
· Recourse against carrier or insurer. But doesn’t solve problem of defective goods.
§ Buyer wants inspection certificate from 3rd party.
· Typically good idea b/c they usually specialize & are cheap – reduce risk greatly.
· Wants it done at port of shipment b/c there’s no BOL yet so no payment against docs.
o Basically, buyer has not yet paid so no loss.
o Also, buyer gets to know what the goods should look like.
o REMEMBER – Should always have procedure w/ inspector to confirm goods are in compliance. Otherwise, could end up accepting by payment for bad goods.
§ Ex. El Cid computers (4.5) – Inspection certificates were forged.
§ Inspector Risk
· Jurisdiction, not enough $.
o Steps to Transaction
1. Buyer/Seller est. sales K
2. Buyer obtains LOC from his bank
3. Bank requires K to pay in surrender of docs.
4. Seller gets confirmation of LOC from his bank. (Prefer a reputable bank)
· Confirmation more impt. than guarantee b/c that’s only a promise to pay when all others go insolvent.
5. Seller delivers to carrier
6. Inspection of goods — gives inspection certificate to buyer
7. Obtain insurance certificate for goods
8. Goods put on ship & carrier issues BOL
9. Seller gets BOL
10. Seller’s bank gives $, bank gets documents
11. Bank sends all impt. docs to Buyer’s bank, incl. BOL
12. Buyer bank pays for docs.
13. Buyer bank asks buyer to pay against docs
14. Buyer must pay Bank
15. Buyer trades BOL for goods when ship arrives
· Open the box at the dock & inspect!!!
§ Bill of Lading
o Typically want BOL to be negotiable, b/c it makes it not only a receipt but also the right to pick up the goods.
§ Non-negotiable: it could never be transferred. Beneficial, however, b/c losing it is really no risk.
· Carrier agrees to send to designated consignee and liable if sent to anyone else.
§ Negotiable good for LOC when banks are involved.
· Always issue “to order”!! (“To bearer” is like a blank check.)
· By controlling the document, seller can maintain interest in the goods until buyer has paid.
§ Never want one BOL for 2 separate orders — Neither party will want to pay for it, as two parties can’t possess one BOL.
o Unusual Types
§ Sea waybill- receipt for goods and serves as a evidence of the terms of the K (non-negotiable though, can’t use it as title) – type of bill of lading
§ Multimodal transport bill of lading- different from a normal bill of lading b/c refers to at least two modes of transport (not actual title)
§ Electronic bill of lading- new future of bills of lading
o Buyer wants insurance on the goods. BUT holder of BOL should be beneficiary on the insurance b/c if it gets sunk & buyer hasn’t paid, then someone gets screwed.
§ Thus, BOL holder needs right to sue the carrier if goods dropped.
§ Bank will want insurance certificate required in K in advance.
o Many transactions will just involve one bank. That is a risk, however, if it’s not a large intl bank.
§ The Private Contract
A. International vs. Domestic Transactions
1. Higher risk
a. payment
b. quality
c. quantity
d. currency fluctuation
e. political interruptions
2. Cultural differences
3. Legal differences
a. intern’l sales regulation of bills of lading for US use Federal Bills of Lading Act, 49 USCA § 80101-16
b. regulation of Ks with carriers use COGSA, 46 USCA § 1300-1315
§ COGSA limits carrier liability to $500 per unit. So, its always safe to have insurance in case damage is not due to carrier’s negligence OR carrier is insolvent.
§ INCOTERMS say that insurance is not required for C.I.F Ks.
c. Federal BOL Act applies when goods are shipped from US to foreign state.
§ This act is default. Parties can K around it.
§ Under the act, transferors have warranty implied BUT is the bank an intermediary or transferor?
o Ex. (4.5 – Forged transaction)
o In standard case, bank is just an intermediary. Here, Bank was in the chain of title (BOL for $), so likely a transferor.
§ Moreover, UCC governed that case b/c it was totally outside the US.
§ Bank would argue contrary intention makes them exempt from the warranty.
· But seller’s bank ought to have risk b/c they are closer to seller than buyer.
d. Berisford Metals v. S/S Salvador
§ Stuff went missing. Carrier shipped an empty container when the bill of lading said it should weigh 1 ton. Carrier tries to hide behind COGSA and say that they are only liable for 500 per package.
o (H) COGSA limited liability only applies to damage that occurs during the shipment.
§ Want the carrier to be on the hook for misdescription (because the bill of lading is so important)
o $500 dollars only applies to damage occurring during transit.
4. Risk reduction
a. foreseeable risks assigned
b. large risk broken into smaller manageable risk
B. The Sales Contract
1. Letter from buyer – requesting proforma invoice
2. Proforma invoice – gives pricing options (FOB, FAS, CIF, C&F)
3. Purchase Order – considered offer or acceptance, battle of forms may result
4. Order acknowledgment form (optional)
5. Letter of credit
6. Seller ships
a. “freight forwarder” – handles details of shipping
b. goods transported to carriers pier
• prepaid – seller pays before shipment
• collect – buyer pays before receipt
c. carrier issues:
i. dock receipt
ii. bill of lading
• non-negotiable- carrier delivers only to person on bill of lading
• negotiable- carrier delivers to person with bill of lading (required by letter of credit)
d. sight draft
C. Contracts for the International Sale of Goods (CISG)
1. Covers – the formation of contracts for the sale of goods
2. Excludes:
a. goods for personal use bought at auctions from foreclosures
b. securities
c. ships, aircraft
d. electricity
e. transactions only incidentally invoking goods
3. Applicability (Art. I)
a. applies to K parties whose places of business are in 2 different states
b. applies if both countries have signed
c. choice of laws (US opted out of this)
d. individual parties may opt out (Art 95)
4. General
a. began in 1980, took 8 years for 10 countries to ratify
b. clearly written, heavy on common law
c. 44 countries have signed
d. gives rights & obligations of the buyer & seller
e. does not cover problems of title or product liability
D. Commercial Terms (INCOTERMS)
1. FOB – free on board
a. Seller’s obligations
i. provide goods and commercial invoice conforming to K of sale
ii. provide export clearance (license, taxes, fees)
iii. deliver goods on board vessel at port named by buyer
iv. responsible for goods until over ship rail, doesn’t have to K for shipment or insure
v. risk transferred once goods pass ship’s rail
vi. seller must obtain all export license, etc. for export of goods
vii. Costs to seller:
§ all costs until goods pass rail
§ customs formalities ß anything having to do with export
viii. Must provide proof of delivery to buyer (bill of lading)
b. Buyer’s obligations
i. pay K price
ii. contract for carriage of goods and give seller notice
iii. obtain import license and authorization
iv. assume risks and cost relating to goods from ship’s rail, though insurance not required
v. take proof of delivery and/or delivery of goods
c. Types of FOB Ks:
i. Classic
• buyer nominates ship
• seller places goods on board under K of carriage by sea for buyer’s account
• seller receives bill of lading and gives to buyer
• either arranges insurance, but for buyer’s account
ii. FOB K w/ additional services
• seller arranges shipping & insurance for account of buyer
• seller nominates ship, gets carrier, puts goods on ship, transfers bill of lading to buyer
iii. FOB K (buyer K’ing w/ carrier)
• buyer Ks w/ carrier through agent (forwarder)
• buyer nominates ship
• seller places goods on board
• bill of lading goes directly to buyer
1) FOB place of shipment – seller ship the goods and bear the expense/risk of putting them with the carrier (doesn’t have to worry about the arriving) ß obligation ends when the goods pass the rail
2) FOB place of destination – seller ships the goods at his own expense/risk and bears that burden until they arrive
3) FOB vessel – buyer names the vessel and seller bears expense and risk of transport to the vessel.
2. CIF K – (cost, insurance, freight)
a. Seller’s obligation
the rule that the issuing bank’s obligation to pay the beneficiary under the letter of credit is independent of any disputes arising out of the underlying business contract between the account party and the beneficiary.
1. No substantial performance – documents tendered must strictly conform to LOC
2. Principle of Independence – letter of credit is separate from the actual transaction of the goods
3. Procedure
a. LOC requested by buyer in favor of seller (irrevocable if documentary trans)
b. proforma invoice or purchase order provided so bank knows requirements
c. “advice of credit” obtained by buyer if LOC not confirmed
d. governed by UCC § 5-102(c)
e. costs about 1% of principal amount per year, cheaper if large amount or regular customer
4. Potential problems w/ LOCs
f. buyer’s bank might pay when documents are not those specified
g. buyer’s bank might not pay when documents are those specified
h. parties may argue over whether documents conform
i. buyer’s bank may know seller breached by sending non-conforming goods before it pays against the documents, but will be forced to pay b/c of principle of independence
5. Types of LOCs – revocable, sight, time, general (transferable), special (limits transfers), fixed(becomes exhausted when full amount is drawn, or after expiration of time), revolving (usually used in construction)
6. Cases
a. JH Rayner v. Hamrbro’s bank (Peanuts; bill of lading did not match LOC) (Strict Compliance)
i. LOCs separate from transaction
ii. banks do not have to know what people in the industry know
iii. if bill of lading and LOC does not match, bank does not have to pay
b. Marine Midland v. Banco del Pais (Truckers bill of lading did not say goods were “on board the trucks”)
i. express conditions in LOC will be strictly enforced
c. Hanil v. PT Bank Negara
i. LOC states Sung JIN and BOL states Sung Jun.
ii. (H) this discrepancy is sufficient and bank doesn’t have to pay ß typographical error
d. Banker’s Trust v. Bank of India (Bank took too long to accept documents)
i. reasonable time has only 2 components:
1. time for bank to examine docs
2. time for bank to decide to accept or reject
ii. bank must determine to accept or reject on basis of documents alone
*note: UCP – Like the incoterms for LOCs. Not a binding law but many parties will use it to govern
their transactions.
o It gives 7 days total for bank to reject
o If there is discrepancy, bank may contact AP for possible waiver
o AP bears all risk of mechanical or clerical error as against issuer
*note: Basic principle of LOC is the documents
o IB not responsible for underlying transaction
o all parties deal w/ documents, not transaction
o strict construction of docs
o reasonable time
o modifications of UCC & UCP follow case law
7. Problem 5.1
j. Claim for misidentification of goods (LOC supposed to say LCD but says ICD) ß claim is that the documents don’t conform due to telex misprint. What can we do about it?
o Article 16 UCP says Banks assume no liability for errors in transmission of description of goods.
o We have a letter of credit (but it says ICD) but once buyer bank sees ICD they refuse to pay on the docs.
