978-1285427041 Chapter 5

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CHAPTER 5

THE DOCUMENTARY SALE AND TERMS OF TRADE

CASES IN THIS CHAPTER

Banque de Depots v. Ferroligas

Lite-On Peripherals, Inc. v. Burlington Air Express, Inc.

Biddell Brothers v. E. Clemens Horst Co.

Basse and Selve v. Bank of Australasia

St. Paul Guardian Ins. Co. v. Neuromed Medical Systems & Support, GmbH

Kumar Corp. v. Nopal Lines, Ltd.

TEACHING SUMMARY

International contracts must also address the exchange of goods for money, transportation of

these goods, title, and risk of loss. Documentary sales are a common method for transmitting

title to goods and, through a negotiable instrument, creating an obligation to pay. The essential

document for cross-border trade is the bill of lading. Described as the key that permits the

holder to unlock the door to where the goods are held, the bill of lading is a receipt for the goods

shipped, the contract of carriage, and title to the goods. Although these documents are also

used in domestic sales, their use is much less common, as domestic trading partners are in a

superior position to ascertain the credit standing, integrity, and reputation of one another.

Foreign trading partners must also contemplate responsibility for delivery and the passing of risk

of loss for goods. Often, abbreviations are used to describe the time and place of delivery,

financial responsibility for delivery, and the passing of risk. Although similar terms, such as FOB

and CIF, are used in the United States, INCOTERMS, an international convention, defines these

terms globally. Consequently, international and domestic shipping terms may look identical but

have different meanings.

Over the last decade, however, documentary sales have declined in popularity. B2B exchanges

via the Internet have remodeled international trade. Traditionally, international trade was burdened

by divergent country rules and the limited number of credit institutions able to intermediate these

dealings. Letters of credit are now being customized for the Internet, increasing the efficiency

and security of cross-border trade. Intermediary companies are providing on-line letters of credit

for B2B transactions. These permit buyers and sellers to apply for, negotiate, and obtain letters

of credit on-line in real time. A bank continues its traditional role as a financier/ collection agent.

CASES AND QUESTIONS

Banque de Depots v. Ferroligas

permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Chapter 5: The Documentary Sale and Terms of Trade

1. Why did the court not permit Banque de Depots to seize the cargo Bozel shipped?

2. What are the policy reasons for not allowing a creditor, such as Banque de Depots, to

seize cargo that is being shipped to a buyer under a bill of lading?

3. What are the expectations of a good faith purchaser of a bill of lading?

Supplemental Internet Activity

The court, here, did not rely on the UCC but on Louisiana state law. Have students

peruse the UCC posted at the Legal Information Institute’s Web site at

http://www.law.cornell.edu/ucc/ucc.table.html. Ask them to find the particular potions of

the UCC that would address this issue, apply the UCC law, and compare and contrast

the UCC outcome with that under Louisiana law.

Lite-On Peripherals, Inc. v. Burlington Air Express, Inc.

1. Why did the court not permit Burlington to diverge from the terms of the bill of lading?

2. What are the policy reasons for not allowing a carrier, such as Burlington, to disregard

the terms of a bill of lading?

3. When combined with the opinion in Banque de Depots v. Ferroligas, what does this case tell

you about the legal nature and effect of the bill of lading to trade?

Biddell Brothers (Buyer) v. E. Clemens Horst Co. (Seller)

1. Why did the court rule that the buyer was not entitled to inspect the goods prior to paying

for them?

2. What assurance did the buyer have that conforming goods were actually shipped?

3. What terms could the buyer have negotiated in the contract to assure that the goods

shipped would be as ordered?

4. Assume that the documents arrive well ahead of the ocean cargo and that they were

purchased by the buyer. A day later, the ship and cargo go down at sea. Assuming that

the carrier was not at fault, what is the buyer’s recourse?

5. In a CIF contract, which party assumes the risk of changes in the cost of ocean freight

after the signing of the contract but before shipment?

Basse and Selve v. Bank of Australasia

1. Why do buyers in international transactions often use inspection firms?

2. If the seller fails to provide an inspection certificate as required in the contract, can the

buyer refuse to accept the documents?

3. Give examples of industries or products that would benefit from the following: health

certificates, ingredients certificate, fumigation certificate, inspection certificate, certificate

of chemical analysis, certificate of quantity of weight, social compliance audit certificate.

Chapter 5: The Documentary Sale and Terms of Trade

St. Paul Guardian Ins. Co. v. Neuromed Medical Systems & Support, GmbH

1. If the contract stated that it was governed by the laws of Germany, why did the court

apply the law of the CISG?

Kumar Corp. v. Nopal Lines, Ltd.

1. In what way did the wording of the contract contradict the CIF term?

2. If the court said that the parties may vary the terms of their contract to meet their own

requirements, why did the court not recognize the contradictory wording?

3. Assume that a seller fails to procure insurance on a shipment as required by contract

and that the shipment is lost at sea. As between buyer and seller, which party will bear

the loss?

ANSWERS TO QUESTIONS AND CASE PROBLEMS

1. Answer: In Barclay’s Bank, Ltd. v. Commissioners of Customs and Excise, the

court ruled for the bank. The bill of lading effectively transferred title in the property to the bank,

thus putting the property beyond the reach of Bruitrix’s creditors. Lord Justice Diplock stated, “In

Chapter 5: The Documentary Sale and Terms of Trade

doing so. In those circumstances it seems to me beyond argument that the bills of lading were at

2. Answer: This focuses on the responsibilities of buyer and seller under a CIF sales

contract. The court held that Colorado’s responsibility was to properly ship, not necessarily to

deliver, and, therefore, that the risks of the voyage rest with the buyer in India. The court also

3. Answer: The court determined that this was a shipping contract, consistent with

4. Answer: A force majeure clause in a sales contract does not operate to relieve the

buyer from paying on the documents under a C & F or CIF contract. The court stated that “We

5. Answer: Under INCOTERMS, F.O.B means that the risk of loss passes when the

Chapter 5: The Documentary Sale and Terms of Trade

6. Answer: The court held this was a shipment contract. The plaintiff-buyer Pestana,

a resident of Mexico, entered into a contract with defendant-seller Karinol, a Florida export

“Please send the merchandise in cardboard boxes duly strapped with metal bands via

air parcel post to Chetumal. Documents to Banco de Commercio De Quintano Roo S.A.”

The goods were lost in shipment before they reached the buyer. Florida UCC allows for either a

shipment or a destination contract. A shipment contract is the normal contract when a seller

7. Answer: The appellate court affirmed the district court’s judgment in favor of the

8. Answer: In a CFR contact, the risk of loss passes once the goods pass over the

MANAGERIAL IMPLICATIONS

This chapter shows the importance of documents in the international sale of goods. International

business managers should be familiar with essential trade terms and how they are used as they

will be found in all significant contracts and associated documents. Differences with the UCC

should be noted by students wrongly assuming the UCC terms will apply internationally.

In preparing an invoice, students may need ocean freight and insurance costs, ground

transportation costs, port charges, customs fees, forwarder’s fees, and communications

expenses. These are available from local sources, such as freight forwarders, inter-modal terminal

operators, steamship representatives, bankers, and export management consultants, as well as

on-line.

ETHICAL CONSIDERATIONS______________________________________________

permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

use.

Chapter 5: The Documentary Sale and Terms of Trade

The answer to this question calls for an opinion by students. In formulating their opinions and

contemplating options, students should review the materials relating to delivery risk, specifically,

the risk to the buyer that the seller will fail to ship the goods as called for in the contract. The

TEACHING SUGGESTION / COOPERATIVE LEARNING ACTIVITY

Like Chapter 4 (contracts), this chapter provides an excellent opportunity for experiential

education. Students, working alone or in groups, can draft the documents necessary for a

documentary sale, such as a bill of lading, and write contracts (or rewrite contracts they had

negotiated under Chapter 4) to include shipping terms. Ideally, groups can negotiate with one

another in drafting contracts that include shipping, delivery, and loss terms.

Supplemental Case: Miller v. Race , England, Court of King’s Bench (1758), English Reports,

vo. 97, p. 398 (stolen bearer paper, i.e., bill of exchange or promissory note). Finney purchased

a note, payable to bearer and drawn on the bank of England. He attempted to mail it to

Odenharty, but it was stolen. The next day, Miller, not implicated in the theft, came in possession

of the note. Finney then applied to the Bank of England to stop payment on the note (due to the

robbery) and the bank agreed. Consequently, when Miller presented the note for payment,

Race (a ban clerk) refused payment. Miller brought this action to compel payment by the bank

and was successful.

1. What is bearer paper?

2. When would a bill of exchange be bearer paper?

3. Why, then, was the bank obligated to pay?