Outline of Crossborder business transactions contracts

I. The International Sale of Goods
A. Topic 2: The Letter of Credit Transaction Done Right
1. Several risks involved for both buyer and seller on the international level International rules designed to lessen risks
2. International Chamber of Commerce: International Rules for the Interpretation of Trade Terms (INCOTERMS)
a. Special language of commercial terms developed to assign the foreseeable risks of the transaction as clearly as possible in the contracts involved
b. Examples: F.A.S, C.I.F., non-negotiable bill of lading, negotiable draft
3. Documentary Transaction: Designed to avoid large and uncertain risks by creating devices which break them down into many small and measurable risks. Example: Letter of credit is a device to assure that seller will be paid upon shipment of the goods
a. Three major parts to documentary transaction
i. The sale contract between buyer and seller
ii. The letter of credit contract between buyer’s bank and seller
iii. The bill of lading between seller and the carrier
b. The Sale Contract
i. Form 1: Letter sent from buyer to seller requesting a price quotation. Could be request for pro-forma invoice and could detail sales terms that buyer prefers
ii. Form 2: Pro-forma invoice from seller to buyer. Form includes several price options for buyer.
§ F.O.B.: Free on board, meaning the buyer only pays for the price of the goods and the cost of crating them. Buyer is responsible for costs and risk of shipping from seller’s facilities. In this situation buyer bears cost/risk of freight/insurance as soon as goods leave seller’s factory.
§ F.A.S.: Free alongside ship, meaning that the price invoiced or quoted by a seller includes all charges only up to the ship at the port of departure. The buyer is responsible for loading and all subsequent charges. In this situation buyer bears cost/risk of freight/insurance from point of departure.
§ C.I.F.: Cost, insurance, freight, meaning that the price invoiced or quoted by a seller includes insurance and all other charges up to the named port of destination. In this situation seller bears cost/risk of freight/insurance.
§ C & F: Cost and freight, meaning that the price invoiced or quoted by a seller for a shipment does not include insurance charges, but includes all expenses up to a named port of destination. In this situation seller bears cost/risk of freight.
iii. Form 3: Purchase order sent from buyer to seller which duplicates the pricing in the seller’s pro-forma invoice. If purchase order has terms on back, then a battle of the forms can arise between the buyer’s terms and the seller’s terms. Note battle of the forms issues arising if purchase order differs from pro-forma
iv. Form 4: Order acknowledgement. Again, battle of the forms issues if it differs from purchase order.
a. The Letter of Credit: Written commitment to pay, by a buyer’s (called the issuing bank) to the seller’s bank (called the accepting bank, negotiating bank, or paying bank). A promise by buyer’s bank that it will pay the sales contract amount if seller produces the documents required by the sales contract which evidence that seller has shipped the goods (i.e. bill of lading)
i. Payment through the letter of credit device assures seller of payment as long as it can demonstrate that it has shipped the goods to buyer (through appropriate documents)
ii. Can be either revocable or irrevocable
iii. Confirmed letter of credit: Includes a promise from seller’s bank to seller that seller’s bank will pay the contract amount to seller if seller produces the required documents evidencing shipment of the goods
iv. Buyer will obtain letter of credit with its local bank in favor of the seller. Buyer’s bank will then contact seller’s bank and tell them about the letter of credit. If it is a confirmed letter of credit, seller’s bank will contact seller and pay the seller in local currency once seller has proved that it has shipped the goods.
v. Irrevocable or revocable. Usually, once opened, Issuing Bank must pay upon presentation and obligation cannot be cancelled.
b. Seller Ships the Goods: Seller must manufacture, pack, and ship goods after it receives letter of credit
i. Bill of Lading: Document issued by a carrier, or its agent, to the shipper as a contract of carriage of goods. It is also a receipt for cargo accepted for transportation, and must be presented for taking delivery at the destination.
· It serves as a proof of ownership (title) of the cargo, and may be issued either in a negotiable or non-negotiable form. In negotiable form, it is commonly used in letter of credit transactions, and may be bought, sold, or traded; or used as security for borrowing money. Non-negotiable bill of lading means only the consignee can receive the goods. Negotiable means anyone who owns the bill of lading can receive the goods (ownership of the bill of lading equivalent to ownership of the goods)
· Prepaid: Freight paid by seller to carrier
· Collect: Buyer pays carrier before receiving shipment
· Seller gets insurance as well if the contract is C.I.F.
· The bill of lading is both the proof of shipment of the goods and the method of obtaining possession of the goods from the carrier.
· The bill of lading must 1) control ownership of the goods themselves, 2) conform to the sales contract, especially in its description of the goods
· A non-negotiable bill of lading is not appropriate in a documentary transaction such as this because it means that only the cosigneee can have control over the goods.
· The negotiable bill of lading is appropriate because it allows the seller to maintain an interest in the goods until buyer has paid against the document
c. Payment of Seller
i. Draft: A negotiable instrument that is used in most cases to provide payment under the letter of credit
ii. Seller submits a draft once the goods have been shipped in order to get paid. Draft is similar to a personal check.
iii. In the draft, the seller (drawer) draws on buyer’s bank (the drawee), ordering buyer’s bank to pay seller itself (payee) from funds in the buyer’s account
iv. When the goods arrive, the buyer uses the negotiable bill of lading, properly endorsed to it, to obtain the goods from the carrier
· Buyer has already paid for goods long before they arrived, that is how it has possession of bill of lading
· If buyer’s bank was not sure if buyer could pay for the goods it would hold onto the bill of lading so as to have control over the goods.
v. If the contract stated “payment against documents” this would mean that buyer would have to pay for the goods before inspecting them (this is common in F.A.S, C&F, C.I.F. terms but is not found in F.O.B. contracts)
d. Seller’s Risks: If the seller ships goods to a foreign buyer without setting up a full documentary transaction, including a letter of credit, he has shipped goods for which he has not yet been paid.
i. To prevent against the possibility of the dishonor of the draft and rejection of the goods by the buyer, the letter of credit is used.
ii. In the letter of credit (just another contract) the buyer’s bank directly promises to seller that it will pay drafts accompanied by stated documents. The banks promise is a direct obligation of the bank to the seller, so regardless of what action the buyer takes, the bank MUST pay the seller if seller presents the proper documents. The buyer’s bank thus also has a contract with the buyer that he will reimburse the bank.
iii. The requirement that the buyer provide a letter of credit is a term of the sales contract which must be separately bargained for and stated. Not enough to say payment against the documents. The letter of credit term should specify not only the bank, but also precisely what documents are required for payment.
iv. The seller may also seek to have a confirmation of payment from his local bank as an additional safeguard to getting paid. He will thus require a confirmed letter of credit which will allow seller to get paid directly from his local bank if he presents the proper documents
v. Thus seller has separate promises from a local bank, a foreign bank, and the buyer that each will pay seller upon presentation of the required documents.
e. Buyer’s Risks: The buyer has some protection in that he doesn’t have to pay until presented with the proper documents and that the documents purport to evidence the shipment of the goods described in them. But six major risks still exist for the buyer:
i. The goods could be lost or stolen
ii. The carrier could stow the goods or operate so negligently that they are damaged in transit
iii. The goods shipped could be non-conforming to the contract.
iv. The Bills of Lading could be forged and no goods were ever shipped
v. Stolen Bills of Lading and drafts
vi. A transmitting bank can become insolvent while in possession of the bill of lading, before it reaches the buyer, and before the draft is paid
B. Topic 3: The Sale Agreement Formation (Problem 4.1A)
1. Two key questions when approaching a sale between parties in different countries:
a. Are the issues governed by the law of country A or country B? (Which choice of law rules will be used?)
b. What are the substantive contract formation rules in the battle of the forms situation under that governing law? (What substantive law is chosen by the applicable rules?)
2. The Traditional Analysis: Conflicts of Law
a. How do you know which law applies? First look to contract, if not stipulated then look to choice of laws.
b. Choice of laws only becomes an issue if both countries are not a party to the UN Convention on Contracts for the International Sale of Goods (CISG). If both countries are not a party to CISG then either US law will decide choice of law (in which case UCC and Restatement of Contracts apply) or Euro law will decide (in which case Rome Convention will apply)
i. Parties may choose the law which they wish to govern their contract relationship, as long as the law chosen is that of a place which has a substantial relationship to the parties and to the international business transaction
c. CISG Choice of Law
i. Drafted by UNCITRAL (The United Nations Commission on International trade law : governs sales contracts for all applicable contracts unless the parties to the contract have expressly opted out of the convention
ii. As federal law it preempts article 2 of the UCC where it is applicable
· US declared reservation under Article 95 that the US is not bound by Article 1(1)(b) which holds that if one party is a contracting state and another is not, if choice of law leads to the application of the contracting state’s laws then CISG governs
US joined CISG because it didn’t want to deal with choice of law analysis so as long there is no choice of law analysis then CISG will be used
But if choice of law analysis has to be used and it points to American law then American law will be used (UCC)
iii. Applicability
· Article 1: requires that a sale of goods contract be both international and also bear a stated relation to a contracting state before the contact can be governed by the convention. Transaction must be between parties whose places of business are in different states.
· Article 10(a): If multiple locations exist, one having closest relation to contract and its performance is the place of business
o Parties should state in contract which office of each party they believe to have the closest relationship to the contract in order to avoid problems with determining if CISG applies to transaction

Author: admin

Author: admin

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Bills of Lading, International trade law, country.