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IBT Fall 2006

Professor Brand

INTERNATIONAL BUSINESS TRANSACTIONS

I. Introduction

Timeline of International Commercial Law

Turn of 12th cent.

Maritime laws recorded in tablets in Mediterranean

late 1600s

King’s courts in UK claim jurisdiction over commercial law

1874

Unsuccessful attempt at codified private intl law in the Netherlands

1892

South American Conference on Private International Law

1893

First Hague Conference on Private International Law

1926

UNIDROIT established by League of Nations

  • Uniform laws on sale of goods and commercial contracts in 1964, 1994

1966

UNCITRAL established by UN General Assembly

  • Created CISG in 1980, effective 1988

1975

Inter-American Conference on Private International Law (CIDIP)

  • Transaction lawyer must identify, eliminate or reduce risks that occur due to:

      • Communication

      • Transportation

      • Regulation

      • fluctuation

  • Types of protection from risk:

    • Institutional (national and international laws)

      • US has 43 Friendship, Commerce & Navigation (FCN) Treaties; bilateral investment treaties

      • in TOPCO case, recourse to international law in contract provided protection

    • Purchased (OPIC or Export-Import Bank insurance; Letter of credit)

      • Revere Copper case

    • Negotiated (e.g. choice of law clause in contract)

II. Export-Import Transaction

A. Export-Import Contract

  • Typical stages:

    1. Seller delivers goods to carrier

    2. Carrier gives seller bill of lading

    3. S delivers bill of lading to Buyer

    4. B pays S

    5. B gives Carrier bill of lading

    6. C delivers goods to B

  • Documents in sales transaction:

    • Sales contract – lists goods, price, estimated freight, insurance and customs clearance charges

    • Letter of credit – lists documents seller must present to draw on account

    • Commercial invoice – lists price-delivery term, goods (description & quantity) destination, price, all fees

    • Bill of lading

    • Insurance Policy or certificate

    • Draft – prepared by seller, check written to seller which draws on letter of credit indicating amount to be paid to seller

Incoterms 2000

Shipment Contracts:

1. ExWorks – S places goods at B’s disposal at the factory/S’s premises

    • Buyer is both exporter and importer, responsible for freight, insurance, etc.

2. Free Alongside Ship (FAS) – S delivers goods to quay; provides export license

    • this does create export-import contract

    • Risk passes when goods are placed alongside vessel

    • so if war breaks out and delivery costs rise, B assumes extra cost

3. Free on Board (FOB) – S delivers goods on board vessel and obtains export docs

    • Risk passes when goods pass over ship’s rail

    • ONLY applies to sea-going vessels

4. Free Carrier (FCA) – exactly like FOB term, but for non-sea transport

5. CIF – S delivers goods on board vessel, pays freight & insurance

    • Risk passes when goods pass over ship’s rail; ONLY sea-going vessels

    • So if war breaks out and delivery costs rise, S absorbs extra cost

6. Carriage & Insurance Paid (CIP) – exactly like CIF, but for non-sea transport

    • Risk passes when goods are placed in custody of carrier

7. Cost & Freight (CFR) – S delivers goods on board and pays freight; B pays insurance

    • Risk passes when goods pass over ship’s rail

8. Carriage Paid To (CPT) – exactly like CFR, but for non-sea transport

Destination Contracts:

9. Delivered at Frontier (DAF) – S places goods at B’s disposal at frontier

    • S responsible for discharging goods from vessel; B handles import docs

    • Designed for rail transport, but appropriate for ships and other forms

10. Delivered Ex Ship (DES) – S delivers goods on board and pays freight & insurance

    • Risk passes when goods are on board ship when ship reaches “usual unloading point”

    • Only for sea transport

11. Delivered Ex Quay (DEQ) – S delivers goods on board, pays freight & insurance

    • Risk passes when goods are placed at B’s disposal on quay; B is importer

12. Delivered Duty Paid (DDP) – S does everything; risk passes when goods are placed at B’s disposal

B. Documentary Sales Transaction

Biddell Brothers v. E. Clemens Horst Co. (UK 1911)

  • In a CIF contract, payment is due on delivery – delivery of documents rather than goods

  • B’s obligation to pay arises when S has fully performed – in CIF contract, S has fully performed after delivering goods to carrier, paying for freight, buying insurance, and sending bill of lading to B

    • Property in goods passes when B has bill of lading

    • If goods are non-conforming, B can sue for breach of contract

  • Majority in lower court cited common law ability to inspect goods before paying, holding B could pay on actual or constructive delivery

    • House of Lords relied on Kennedy dissent, which looked to English Sale of Goods Act

  • Under UCC, payment is also required on delivery of documents

    • § 2-320 for CIF; § 2-319 for FOB and FAS

  • Under CISG, most likely the same outcome (although UK isn’t a party)

    • § 58 says if B isn’t bound to pay at a set time, he must pay for either goods or docs

    • Subsection (3) says B can inspect before paying, UNLESS procedures indicate otherwise

      • CIF contract arguably indicates otherwise

    • Article 7 (2) allows principles of private international law to fill gaps

    • Article 9 deals with usage of trade

  • How could B protect himself against non-conforming goods?

    • Require 3rd party inspector to provide certificate of quality

    • Write other provisions into contract (payment upon inspection)

    • Require sample sent in advance

Importance of document of title

The Julia (UK 1949)

Facts: Seller loads 1,200 tons of rye onto ship, obtains bill of lading, THEN makes CIF contract

for 500 tons. B pays on receiving invoice and delivery order (b/c bill of lading wasn’t appropriate here) which had to be signed and presented to various intermediaries before goods would be delivered. War breaks out and S redirects ship to Lisbon, sells rye there for lower price. B sues for breach of contract (failure of consideration), S says contract was frustrated.

Rules: English Sale of Goods Act (contract made on London Corn Trade Assoc form)

App: A document of title doesn’t have to be a bill of lading, but in this case, B never received

a real document of title. What they received didn’t entitle them to possession of goods. If the delivery order could have been presented directly to captain in exchange for goods, it would have been a valid document of title. In this case, it offered neither actual nor symbolic delivery.

Con: Buyer gets a full refund, because this was a destination contract rather than a CIF

contract, and there was a total failure of consideration.

  • Under CISG, Articles 67 (2) and 68 apply

  • UCC § 2-401 (2) title passes to B at time and place where S completes performance with reference to physical delivery of goods, even though document of title is delivered at a different time

    • (b) if contract requires delivery at destination, title passes on tender there

    • So consideration would have failed here, too

C. Consequences of Non-Performance

1. Excuse for Non-Performance

  • ESGA § 32(2): if seller doesn’t make reasonable arrangements to deliver and goods are lost, buyer can refuse to pay or get damages from seller

  • UCC § 2-615: delay or non-delivery is not a breach if performance has been made impracticable by the occurrence of a contingency which was a basic assumption on which contract was made

    • Comment 4: increased cost alone doesn’t excuse; severe shortage of raw materials or supplies due to war, etc. can be an excuse

  • UCC § 2-616: Buyer may terminate or modify contract if seller notifies him of delay

  • CISG Art. 79: no liability for 1) impediment 2) beyond party’s control 3) that he couldn’t reasonably have been expected to take into account when K was made and 4) couldn’t have overcome or avoided

  • Tsakiroglou & Co. v. Noblee Thorl (HoL 1962) - breach of contract where occupation of Suez Canal caused seller to cancel CIF contract instead of shipping through Cape of Good Hope, even though it was 7,000 miles more (court uses ESGA)

    • Doctrine of frustration should be used in limited circumstances – not in cases like this where performance was merely not profitable

    • No reason to conclude that delivery through Suez Canal was an implied term in the CIF contract

  • Incoterms say sellers must contract “by the usual route”

    • As a CIF K, seller has already allocated for the risk by buying insurance and paying for freight

  • Czarnikow v. Rolimpex (1979) – acts of government were a force majeure that excused performance where Polish govt rescinded sugar seller’s export license and prohibited export of sugar

  • Berman strict construction approach: if parties want to be protected, they must write it into the contract

    • missing terms shouldn’t be read into contract pursuant to liberalized excuse policy – most transactions have already allocated the risk, even if not expressly

    • parties make contracts with open eyes and don’t need the protection of a liberal excuse policy

    • when parties are from different legal systems, it’s better to rely on the contract

  • Schlegel liberal excuse: parties often use form contracts that don’t allocate risk, and they expect judges to be reasonable in dealing with terms they omitted

    • Narrow excuse policy keeps people out of international business

    • Most arbitrators prefer this approach

2. Damages for Breach

  • Civil law looks to equity first, then to damages – Volkswagen case

  • UCC § 2-708: seller’s damages – market price at time and place for tender

  • UCC § 2-713: buyer’s damages - market price at time buyer learned of breach, at “place of tender” – market in which buyer would have obtained cover

  • ESGA Art. 50: seller’s damages – when goods should have been accepted

  • ESGA Art. 51: buyer’s damages – when goods should have been delivered

  • CISG Art. 76: market price at time of avoidance, at place where delivery of goods should have been made

  • Seaver v. Lindsay Light Co. (NY 1922) – in CIF London contract (from Chicago), damages determined by price of goods in the location where seller’s performance was due – here it was Chicago, where goods should have been given to carrier

    • Buyer argued it should have been at the same time but London price

3. Remedy for Breach

  • Sharpe & Co. v. Nosawa & Co. (1917 KB) – breach occurred when bill of lading/documents should have arrived, because it’s on that date that Ps would have learned of breach and purchased substitute goods

    • This case was under ESGA – under CISG, it might have been determined by when goods would have arrived

  • Seller should have required a letter of credit to determine where and when delivery occurred and performance was completed

  • Cargill (10th Cir. 1977) – damages measured at time performance is due, not when B learns of anticipatory repudiation

UNCISG

  • When does it apply?

    • Art 1: parties whose places of business are in 2 different states and (a) they are contracting states, OR (b) rules of private intl law lead to application of law of a contracting state

      • Although UK isn’t a party to CISG, CISG might govern contract between it and another state

      • US has made an Art. 95 declaration not to be bound to Art. 1(b), preferring UCC

      • Good choice of law clause: “This K is governed by the CISG, to be supplemented by the PA UCC.”

    • Art. 6: parties can exclude application by explicit statement: “This K is governed by PA law and not the CISG.” Otherwise, the CISG is part of PA law.

    • Art 10: if party has more than one place of business, place is that which has closest relation to contract or its performance

    • Art. 2: CISG doesn’t apply to:

  • goods for personal use

  • goods bought by auction

  • good bought on authority of law

  • stocks, shares, securities

  • ships, aircraft

  • electricity

  • Contract interpretation

    • Art. 8 (3): Parole Evidence Rule; reference to negotiations and practices which parties have established permissible

    • Art. 9: prior dealings and usage of trade relevant

    • Art. 11: no Statute of Frauds

      • Art. 96: contracting state with SOF can declare that Art. 11 doesn’t apply where any party has his place of business in that state

    • Art. 18(2): oral offer must be accepted immediately (unless circumstances indicate otherwise)

  • Contract formation

    • Art. 14(1): Proposal is an offer if it indicates intent to be bound, indicates goods, and expressly or implicitly fixes or makes provision for determining quantity and price.

    • Mail Box Rule: Art 15 (1) – offer effective when it reaches offeree; Art. 16 (1) offer revoked when revocation reaches offeree before offeree mails acceptance

      • Art. 17: offer terminated when rejection reaches offeror

      • Art. 18: acceptance effective when it reaches offeror

  • Battle of the forms

    • Art. 19 (1): Reply that purports to be acceptance but contains additions, limitations or modifications is a counter-offer;

    • Art. 19(2) if different terms don’t materially alter terms of offer, then it’s an acceptance

      • Art. 19 (3): material terms relate to price, payment, quality and quantity of goods, place and time of delivery, extent of other party’s liability to the other or settlement of dispute.

  • Gap-Filling

    • Art. 7 (2): Questions not settled by UNCISG are settled by the law applicable by virtue of rules of private international law/

    • Art. 9: reference to prior dealings and usage of trade.

    • Art. 55: When valid contract does not specify price then price generally charged at time of contract conclusion is implied.

  • Remedies.

    • Art. 46: Specific Performance (limited by Art. 28); substitute goods; damages

      • For damages, you must prove fundamental breach and notice of avoidance

    • Art. 49: avoidance (if there’s a fundamental breach)

    • Art. 50: reduced price

  • Delchi v. Rotorex (2d Cir. 1995) – fundamental breach due to deliver of non-conforming goods justified damages of lost profits, expense of trying to fix product, cost of expediting replacement goods from 3rd party, cost of storage for rejected goods

  • CISG applied b/c no choice of law clause

    • Art. 35(2): goods don’t conform if they don’t match sample

    • Art. 74: damages are losses suffered from breach

  • American court decisions used to fill gaps

Letter of Credit Transaction

  • Documentary Drafts – exporter or rep. presents invoice w/ shipping documents attached to importer requesting payment of sum on presentation of draft (sight draft) or at particular time in future (time draft).

    • Clean draft – no shipping documents attached to draft

    • UCC § 3-104: must contain unconditional promise or order to pay sum to be valid

  • Letter of credit protects seller against nonpayment and jurisdictional hassles

    • If buyer refuses to pay, its bank is a surety

    • After K is formed, B applies to bank for credit

      • Bank investigates solvency, market for goods

      • Asks seller’s bank to notify seller of open credit

Seller’s bank

(notifying bank)

(confirming/advising)

Buyer’s bank

(issuing/opening bank)

  • Confirmed LOC – seller’s bank is obligated to pay, even if buyer breaches

  • revocable LOC – opening bank can modify or cancel credit

    • under confirmed, irrevocable letter of credit, seller has virtually no credit risk

  • LOC is assignable if it expressly states

    • S can also get second letter of credit drawing on first, prime LOC

  • Standby LOC – Buyer gets LOC to ensure Seller’s performance (e.g. in a construction contract); non-performance lets B collect

    • Idea is that if contract is performed properly, B will never draw on it

  • UCP - Uniform Customs & Practice for Documentary Credit (only applies if parties choose)

    • Art. 3: separate contract rule

    • Art. 6: if LOC doesn’t indicate whether it’s revocable or irrevocable, presumption that it is irrevocable

      • Art. 8: if LOC is revoked, issuing bank must reimburse another bank that has paid

      • Art. 9(d): irrevocable LOC can’t be amended or canceled w/o agreement between parties

    • Art. 7: advising bank “shall take reasonable care to check the apparent authenticity of the Credit which it advises.”

    • Art. 8: if LOC isn’t confirmed, nominating bank has no liability

      • Art. 14: if confirmed, issuing bank MUST PAY confirming bank that has paid

    • Art. 13: Strict compliance: docs that don’t appear on their face to conform don’t comply (bank has 7 days to examine)

  • UCC is similar, but it favors buyers & sellers, where UCP favors banks

    • § 5-301: separate contract rule

    • § 5-106: presumption of irrevocability

      • LOC expires after 1 year or after 5 years if perpetual

    • § 5-108: issuer must honor presentation that appears on its face to strictly comply with terms of LOC – strict compliance rather than substantial adopted

      • Issuer shall observe standard practice of financial institutions

        • Not responsible for usage of a particular trade (see comment 10)

        • Judge determines what’s standard practice

      • Can dishonor for fraud or forgery

        • Bank has “reasonable time” to examine documents (comm. 2)

      • Issuer not responsible for underlying contract

    • § 5-109: Fraud & forgery – issuer shall honor presentation if made by a holder in due course

      • Can dishonor acting in good faith

      • Court can enjoin bank from honoring it

    • § 5-111: Remedies

  • Separate contract rule

  • Urquhart Lindsay v. Eastern Bank, Ltd. – Buyer told issuing bank not to pay increase in price, despite the fact that K and LOC provided for such an increase

    • It was an irrevocable LOC, and bank didn’t have a legal choice to deny payment

  • Maurice O’Meara v. National Park Bank of NY – absent provision in the LOC, bank didn’t have the right to inspect goods before paying beneficiary

  • Exception for fraud (common law)

  • Sztejn v. Henry Schroeder Banking – “where the seller’s fraud has been called to the bank’s attention before the drafts and documents have been presented for payment, the principle of the independence of the bank’s obligation under the LOC should not be extended to protect the unscrupulous seller.”

    • Buyer sues its own bank to enjoin it from paying; court applies common law

  • United Bank v. Cambridge Sporting Goods – where fraud occurs, confirming bank that has already paid is entitled to payment if it is a holder in due course (no notice of fraud)

  • Rockwell Intl. Systems v. Citibank (2d Cir. 1983) – fraud exception applies to standby LOCs if party wanting to collect is holder in due course

  • No explicit fraud exception in UCP – NY has interpreted one

    • Some courts say separate contract rule is inviolate, w/ no fraud exceptions

    • CA rejected UCC provision authorizing a court to enjoin payment on LOC



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