Outline of International business transactions law 2

International Business Transactions

Law’s Role in Globalization
– Role of the Contract
o types of activities that produce economic activity depends on structures of contract in one form or another.
o The contract may be simple or may be extremely complicated thing
o Contracts mean something only to the extend that they can be enforced someplace
– What contract aspects are enforceable?
– How do you make the contract enforceable?
– What is the jurisdiction that it is enforceable in?
– The contracts will not mean much without dealing with enforceability and jurisdiction

Government Enforcement v. Traditional Mechanism of Dispute Resolution
– How do you have a system of contracts in International Commerce?
– Do you use the government’s court system with their police power to enforce the contracts or do you use the historical model of merchant’s law?
– Lex Mercatoria
o deals with commercial transactions
o custom, commercial usages, ways of doing business
o informality by adjudication by merchants
o this is an academic construction that justifies theories of business transactions
o Positives of the Model it is flexible to the specific interests, motives, and types of problems that may be unique to a particular segment of the market. These characteristics have been built into the UCC
o Positives – These aspects have also been built into the use of Binding Arbitration/ ADR in industries. The industries themselves can arrange a means of adjudicating the disputes. To Bind the decisions of Arbitrators the judgments are often cycled back into the court and made enforceable by a court.
– Modern Freedom of Contract
o Modern Trend is to allow industries to set their own terms in the construction og their contracts.
o Questions
§ Whose law will be applied to the Contract? aka Choice of Law
§ Whose court?
· **These two questions may be different
· problems is this an efficient use of the court system?
· Being a hub for legal disputes may have create benefit for that city despite the costs. The legal hubs almost always offer a political stability and stable rule of laws. Having a secure legal system with fair and reasonable judges. Rules are rational and workable in contracts. The judges are sophisticated and understand business at a high level.
· International Business Centers are effectively renting out their legal and political stability to businesses
o This becomes a important national advantage for countries that are stable
o Most courts will leave the possibility open to try a case but it leaves the power of independent determination of jurisdiction. The court has a broad discretion to determine its jurisdiction make the final decision
o In a domestic contract can the parties choose all the terms of the contract?
§ Some contracts are unenforceable void in violation of public policy
§ Contracts of Adhesion unbalanced negotiations, non-negotiable terms, boiler-plate/ form contracts
o Predictability comes from long form contracts with prescribed outcomes, negotiated amongst parties
§ Court’s view – Sophisticated parties that preset their conditions has advantages that outweigh the disadvantages
§ Regulatory Regimes that affect contracts taxes, competition law (antitrust), environmental rules, securities, labor laws, trade restrictions (by International Organization or Nation),
· These are imposed on-top of the Contract Regime and don’t govern contracts specifically
o Are there any limitations that should be placed on the law of contracts itself?
o The biggest area of divergence with Contract Law is in the area of Remedies
§ Contract Law there is a general obligation to mitigate the damages, even if you are not offending party
§ International parties tend to dislike this type of discretionary policy to mitigate the damages
§ Civil Law Systems damages tend to award specific performance. Common law Systems tend to prefer monetary damages
§ Most international contracts have a liquidating damages clause that says that a party will pay a fixed level of damages in specific situations of breach
§ Common law Courts have problems with liquidating damages clauses that may be oppressive on one of the parties. The LDC must resemble the actual damages suffered.
o In general FOC rules balancing speed, predictability, with enforceability by a court system

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Topic 2 – The Basic Sales Transaction Done Right: Ch 4.0 Documentary Sales Transaction

I. Characteristic of the documentary sales transaction – reduces and allocates risks in the process
a. Dealing between unknowns & intermediaries
b. ICC INCO terms
c. Reduces large risk of dealing with unknowns
d. Several interlocking contracts
i. LC, BOL, PO, Sales Contract
ii. Payment against document
II. Forms (pg 52)
a. Requesting proforma invoice form #1
i. Requesting different delivery terms
1. F.A.S.: Free Along Side (e.g. FAS NY, origin port)
2. F.O.B.: Free On Board
3. C.I.F.: Cost Insurance and Freight (CIF Athens e.g. arriving port) shipment contract where the title passes onto the buyer upon shipment, not upon delivery, Pg 1029 fo supp.
4. C.F.: Cost Insurance and freight
b. Proforma Invoice form #2, Is it an offer?
i. Specifying price per diff. delivery terms
1. Which of the delivery term is better for the seller?
a. Depends on the needs of the seller, for example, if it wants to get paid asap, then it would prefer CIF since it is paid against the document
ii. Payment terms
1. e.g. confirmed irrevocable letter of credit
iii. Asking for LC
c. Purchase Order form #3
i. Is it an offer or and acceptance?
1. Is there a match between the terms?
2. Any additional terms? Counter offer?
ii. What is the significance of knowing for sure what document finalizes the contract?
1. In case of dispute, the finalized contract matters.
iii. Confirming LC
d. Letter of Credit – form #4
i. Whose form is it?
1. Buyer’s bank’s form guarantying the payment, commitment to the seller.
2. Corresponding and confirming back doing the confirmation of all the documents.
ii. Key element of the LC
1. We undertake to purchase all drafts drawn as above specified and accompanied by the required documents.
e. Shipper’s letter of instruction form #5
i. Who’s form? Shipper
ii. Freight Forwarder’s role
1. Processing the shipment at the port interacting with the carrier.
f. Commercial Invoice form #6
i. Seller’s
ii. Why is it part of the documents?
1. Bank’s interest – L.C. requires the document, list of shipment matching with the LC for the bank to match the documents
2. Carrier’s interest (ship)
a. Liability for carrying the goods
3. Buyer’s interest
a. Goods match
4. Insurance company
5. Customs- for inspection purpose
g. Note that international transaction ends at the buyer’s port
i. Moving from port of buyer to the buyer’s designated area is not included in the documentary transaction
h. When do the title/ responsibility passes over to the buyer?
i. Whenever the goods are on-board, when the BOL is issued by the carrier.
i. In case of the non-conforming goods?
i. Then consider as a breach of contracts, and then deal with the seller or to the courts
j. Bill of Lading form # 10
i. Carrier issues the form, and the risk turns over to the buyer
ii. Non-negotiable/ straight: general form of the deals when dealing with someone you trust
iii. Function of BOL
1. serves as a document of title to the goods
2. shipping contract saying what the carrier is going to do with the goods
3. Proof of shipment bailment carrier admitting receipt
iv. Explain carrier’s liability in fine prints
k. Insurance Certificate Form #11
i. Insurance company issues, paid by seller in this case of CIF
ii. Insuring the owner, the buyer at the time of the shipment, pg supp. 1019, UCC.
l. Sight Draft Form #12
i. Following the instruction of LOC received through the banking channels, get all the documents specified.
ii. Seller’s bank makes a presentment for payment to the buyer’s bank with the draft and the specified documents
m. Upon receiving of the documents and payment from the buyer’s bank to the seller’s bank, the most risk reside with the buyer’s bank.
i. Yet, because the buyer’s bank is in the best position to know the risk associated with the buyer, it can perceive the risk.

Topic 3 – The Sale Agreement Formation (Problem 4.1)

§ What forum will hear the dispute?
§ What law will the forum apply to determine the existence of K, K terms, and remedy upon breach
o To include a choice of law clause in a contract, one must first find both that a contract exists and that both parties are bound by it

US Court: UCC 1-105
I. First Fact Pattern issue Whether there is a valid K between the parties?
a. What forum will hear the case? US court
b. Choice of law? UCC/ Germany/ CISG?
i. Have the parties clearly chosen the law?
1. Choice of law to be applied given the UCC (1-105) and Restatement &6 and &188 authority
ii. In this case, the parties did not choose law. Applying the UCC principle, the state might apply the rest of the UCC principles.

II. Second Fact Pattern issue: UCC analysis
a. Valid K under UCC 2-207(1)?
i. The first fact pattern seems like a K
b. Are the additional terms “As Is,” which was not accepted by the counter party, part of the K? No.
i. UCC 2-207 (2) (b) applicable?
1. Generally additional terms are included between the merchants unless materially alters the K.
2. Because the additional terms “materially alter the original bargain,” the additional terms are dropped out.
c. Any warranty or Disclaimer of W under UCC?
i. Since additional terms are dropped out, the Implied Warranty applies which applies &2-314, 315 since it is a gap filler, a mandatory law
1. 2-314 applies as merchantability implied warranty
2. 2-315 not applicable since the seller has no reason to know the particular purpose of the purchase Fitness for particular use

III. What would be different between the UCC and the CL mirror image rule?
a. Under the CL, while mirror image rule kicks in and the additional term is a counteroffer, the counter offer is accepted by the conduct of Euro.
i. “The last shot doctrine” -only favors one party over the other.

German Court: Article 3
I. First Q? Choice of law issue
a. Applicable law?
i. Refer to the “ROME Convention”
ii. Refer to Article 3 of the convention for freedom of choice.
1. Since none elected by the parties
iii. Then the German Court would refer to the Article 4(2) of the convention as to the rule of choice of law in the absent of choice
1. The K is to be governed by the law of the country with which it is most closely connected.
2. Characteristic Performance means is the seller, pg 78.
a. Since the seller’s habitual residence is in Kansas, the applicable law of Kansas would apply
3. One criticism of the convention
a. Favors seller when the sellers are with the best position to know the risk associated with K
b. If the German applies the Kansas law, what terms would dictate in warranty terms?
i. “As is” is not included since it materially changes the K, thus the implied warranty applies to the contract per gap fillers
ii. Any other possibility other than using the Kansas law?
1. Article 4(5) – the Article 4(2) shall not apply in this case since the characteristic performance cannot be determined, and it appears that the K is more closely connected w. another country
a. Which could be German given the fact the items were used in Germany
c. If German law is applied, what are the possibilities of outcome?
i. Mirror image rule applied
ii. Additional terms are counter-offer
iii. Acceptance are accepted through expression and by performance
1. Silence is not an acceptance
iv. Average description and quality shall be applied
1. No defect only, a weak version of Warranty

II. *Over all solution of the transaction Advise your client
a. In case of Europe
i. Try to bring the suit in Kansas Law since the German law has a weaker version of warranty
b. In case of Universal (US)
i. Can the company include the “as is” provision in the K?
1. Universal prefers to be in German court, but Universal has asked for the Law of Kansas in the given fact
c. POINT
i. It turns out, with this kind of K, law of Kansas would be a worst result for Universal applying the gap filler
ii. The outcome for the Universal would be better in German law rather than Kansas, so an Attorney ‘s insight matters!

CISG -Convention on Int’l Sale of Goods
I. How do we determine the K is applied under the CISG? Article 1 (1)
a. Are the contracts contracting states or
b. The rules of private intl. law lead to the application of the law of a Contracting law
i. But this version has opted out this provision
II. Applicable to (3 elements to be applicable under the CISG)
a. Between parties
b. To contracts of sale of goods
c. whose places of business are in different states
III. What about the goods that are staying all the time? Is it applicable under the CISG?
a. Yes, disregard the location of the goods’ location, as long as the parties involved in the K are located in different states
IV. Since the UK is not a contracting party to CISG, will CISG apply?
a. No, since one party is not the contracting party, and the US has opted out the Article 1 (2)
b. Is there any way CISG could be applied between UK & Germany (seller)?
i. Article 1 (1) (b) no since UK is not a contracting party
1. The German court would apply the Rome convention (private intl. law), and would apply the German law which apply the CISG
a. CISG is the law of Germany here due to the substitution
2. Instead of applying German law, it would apply the CISG
a. Not applicable to US since US opted out
c. US & Germany or Germany & France – CISG
d. UK seller & German Buyer
i. Since the seller is British, generally German CISG would not be applicable, unless the Rome convention 4.5 applies (not clear characteristic in UK)
e. US seller and UK Buyer, in German court under Rome convention analysis
i. UCC applies since US is a contracting state
1. But the German court would not feel obligated to Article 1 (1) (b) since the US opted put the provision
f. UK court, French seller, and British Buyer
i. UK will not apply CISG
ii. But British court could use CISG for K in case the parties choose the CISG
g. *So under Universal seller, and Euro buyer, would CISG apply?
i. Article 1 (1) (a) would always apply either Kansas or German court
ii. CISG Article 19 there is no contract (under UCC, there was no K) under the first fact pattern
iii. Under the second fact pattern, Article 18, there is a K based on the conduct. Acceptance of conduct means ;
1. Under UCC, as-is is dropped out, and implied warranty applies
2. But under CISG Article 18, the Disclaimer of warranty would be part of the K including “As-Is”
h. Article 35 applies to the K in the present case
i. For adopting as is term of the contract, the warranty disclaimer of “as-is” that is related to the UCC
V. How would you advice to your company with parties in different locations to avoid complications due to different facts?
a. Advise on the preventive method, and suggest them to do perform preliminary market search in terms of the market and the conformity of the products in the particular market
i. Maybe it is not all about the litigation , but business as a whole for future market
ii. But to make certain that your products are adapted to the other products in the foreign markets

Agreements for the International Trading of Goods
I. Documentary Sale is a form of international sales of goods transaction. It is designed to deal with transactions between parties who do not know each other and do not have a reason to trust each other.
II. Use of Intermediary reduces risk of shipment of goods for buyer and payment (currency) for seller and cultural and legal system for both by allocating the risks to a party (i.e. bank) who can most easily manage the risks.
III. Problem 4.0: Basic Documentary Sale Done Right: Toys from NY to Greece
A. Sale of toys between Santa Claus Co. in NY and Alpha Co. in Athens, Greece, not having previous relationship with both sides concerned about whether the other side will act appropriately.
B. INCO-TERMS
1. FOB City: free on board
i. At the ship’s dock.
2. FAS City: free along side ship
i. To port of origin
3. CIF: cost, insurance and freight (most used in documentary sales)
i. To port of destination with insurance.
ii. Disadvantage: Seller bears cost of and fluctuation of freight and insurance charges
iii. Advantage to seller: Buyer has to pay when presented with documents (bill of lading), usually before goods arrive.
4. C & F: cost and freight
C. Documentary sale consists of many interrelated contract:
1. Sale Contract (buyer and seller)
2. Letter of Credit (buyer’s bank and seller)
3. Bill of Lading (seller and carrier)
D. Sales Contract (Battle of Forms may arise)
1. Initial Contact: Letter from Buyer Requesting Proforma Invoice: Solicitation
2. Form 2: Proforma Invoice: Santa Claus’s Offer – includes cost of each of the components of sale, incl. payment and shipment terms, insurance, etc.
i. Includes payment terms: ex. confirmed irrevocable letter of credit, payment against documents in US & in US currency.
3. Form 3: Purchase Order: Alpha’s Acceptance (ambiguity whether it is an acceptance or rejection of offer).
i. Buyer instructs its bank to open letter of credit through seller’s bank.
E. Letter of Credit
1. It is a promise by buyer’s bank to seller that it will pay the sales contract amount to the seller, if the seller produces the documents required by the sales contract which evidences that the seller has shipped the goods required by the sales contract.
2. Irrevocable v. revocable
3. Confirmed: promise from seller’s bank to seller that seller’s bank will pay contract amount to seller if seller produces required documents evidencing shipment of goods. (Promise from local bank before shipment of goods.)
4. Steps:
i. Buyer requests that its bank issues a LoC in favor of seller.
a. Bank investigates buyer’s credit; Buyer provides Purchase Order or Proforma Invoice.
ii. Buyer’s bank informs seller’s bank of LoC.
iii. If confirmed, seller’s bank will send seller a Confirmed Irrevocable LoC. If not confirmed, it will send seller an “Advice of Credit” notifying action taken by buyer’s bank.
a. Contractual obligation: “We confirm credit and thereby undertake to purchase all drafts drawn as above specified and accompanied by the required documents.”
b. Seller is at risk only if seller’s bank, buyer’s bank and buyer fail financially or refuse to perform. However, each refusal or failure is subject to laws.
iv. Payment against docs: payment received when seller performs its duties to bank.
F. Seller Ships the Goods
1. After Seller receives LoC, seller must crate and ship goods.
2. Freight forwarder: arranges freight when goods reach port of seller. FF tracks delivery. It is paid by seller.
3. Seller (shipper) sends to FF, all confirming to sales contract:
i. Packing List
ii. Shipper’s Export Declaration
iii. Certificate of Origin (required by government although not mentioned in LoC.)
4. Dock Receipt
i. Once FF has made arrangements, Seller will have goods transported to Carrier’s pier.
ii. Carrier’s clerk issues document which covers the goods until inside vessel.
5. Bill of Lading (document of bailment, transportation contract)
i. Once vessel arrives, goods are loaded on board and the Carrier issues a BoL to cover them.
ii. FF prepares BoL created by Carrier as directed by Shipper’s Letter of Instructions, thus conforming with LoC.
iii. BoL serves as contract between Carrier and Seller, whereby Carrier promises to take goods to named destination and Seller promises Carrier’s fee will be paid (by seller prepaid, or buyer on collect).
iv. Non-negotiable (straight): Carrier promises to deliver goods only to person named as consignee in BoL or to person named by consignee.
v. Negotiable: Carrier promises to deliver goods only to person in possession of BoL.
a. “Int’l BoL Not Negotiable Unless Consigned ‘To Order’”
vi. Can be transferable, serves as knowledge of receipt, carrier’s liability
vii. Clean on Board: no damage to cartons which are brought on board.
viii. BoL goes back to seller.
6. Insurance Certificate: states that all premiums are prepaid.
i. It is a necessary document for LoC if the sales contract is C.I.F. or if seller procures insurance to cover goods in transport to protect buyer.
G. Payment of Seller
1. Once BoL is obtained, Seller obtains payment by draft.
2. Seller’s Draft is the payment mechanism under which the LoC serves. The text of the LoC states that funds are “available by seller’s drafts on its buyer’s bank to be accompanied by appropriate documents.
3. A draft resembles a check form, where Seller draws on Buyer’s bank (as specified in LoC: “drafts on buyer’s bank” ) ordering Buyer’s bank to pay Seller itself from funds in Buyer’s account.
4. Seller’s bank has purchased the draft (confirmed), so seller is able to draft on buyer’s bank.
5. Paid immediately – on demand or sight payment – or paid at a time subsequent to the “presentment” of the draft. It provides a promise by the drawee to pay at the later time stated in the draft.
6. As the draft and documents are forwarded from seller to its bank to buyer’s bank to buyer, each of these parties will endorse the BoL to the next party. In return, the party will receive payment.
7. The final step is the buyer takes the endorsed BoL to the port and transfers it to the carrier in exchange for the buyer’s goods.
8. Form must be accompanied by
i. BOL
ii. Insurance certificate
iii. Packing List
iv. Commercial Invoice
v. Export Declaration

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Author: admin

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