International Trade Contracts in Sale of Goods

1. Commercial Law UNIT 6 Sale of Goods in which there is a Foreign Element Slides by Seyram Kawor Kazoo

2. Topics Covered • Different types of contracts for the sale of Goods in International Trade • Duties of Seller and Buyer in C.I.F. Contracts • Payment in International Trade • Duties of the Seller and the Bank • The United Nations Convention on Contracts for the International Sale of Goods

3. Different types of contracts for the sale of Goods in International Trade International trade is a trade between countries, individuals and firms across national borders. The environment in international trade is not the same as those in domestic trade. Most businesses are going international to expand sales, increase profitability, diversify their products and find new markets. What then are the contracts in this trade?

4. The Sale of Goods Act and International Trade Ss 59 and 65 of the Sale of Goods Act, 1962 makes provisions for the following types of contract that involve the sale of goods across borders. C.I.F. – Cost, Insurance and Freight F.O.B. – Free On Board C&F – Cost and Freight F.O.R. – Free On Rail F.A.S. – Free Alongside

5. The Sale of Goods Act and International Trade In international trade, goods sold across national borders are in large quantities and are mostly likely to be shipped. The goods are collected from the sellers place of business and sent to the port. Sellers place of Business Railway Company‘s Collecting vehicle Train Station & Loaded onto Train Port & Loaded onto Ship

6. Export License In most international trade, licenses are needed to export goods from one country to the other. The parties in any export trade need to state the person who has the responsibility to obtain the license. There are different responsibilities of the buyer and the seller at specific points of the journey for the different types of contracts.

7. Free On Rail In this contract, the buyer must inform the seller the destination of the goods. If a license is needed to send goods out of the country the seller must assist the buyer to obtain one.

8. Free On Rail The seller has to ensure that the goods are loaded onto the railway’s collecting vehicle. The seller must inform the buyer that the goods have been loaded unto the collecting vehicle and this can be done buy giving an invoice or advice note. As soon as the goods are given to the railway company, risk passes to the buyer hence the buyer must arrange for a carrier.

9. Free Alongside (F.A.S.) In this contract, the buyer must nominate the ship and give the seller adequate notice of his nomination of a ship. The seller’s duty to place the goods, at his own expense, alongside a ship nominated by the buyer. The loading is the buyer’s responsibility. Property and risk pass to the buyer as soon as the goods are placed alongside the ship.

10. Cost, Insurance, Freight (C.I.F.) This is perhaps the most important of the export contract for the sale of goods. It is basically a contract for the sale of goods by the delivery of shipping documents of the goods.

11. Free On Board (F.O.B.) In this contract the buyer nominates the ship that will carry the goods. The buyer is also responsible for obtaining the import license.

12. Duties of the Seller and Buyer in C.I.F. Contracts C.I.F. Contract is a contract for the sale of goods by tendering of the shipping documents. S.64 of Act 137 posits that proper shipping documents means: • The seller’s invoice for the goods; • Bills of lading which acknowledges that the goods have been shipped and contains no reservation as to the apparent good order and condition of the goods; • Insurance policies, certificates. • A packing list

13. Duties of the Seller in a C.I.F. Contract It is the seller’s duty to organize the shipping of the goods and to insure them while on board the ship. The seller must also tender the relevant shipping documents to the buyer. These must be done with the agreed time and if no time is fixed, within a reasonable time.

14. Duties of the Seller in a C.I.F. Contract S.60(1)(a) provides that in a C.I.F. Contract, unless a contrary intention appears, it is the duty of the seller to obtain any necessary export license. S.61(a) states that the seller is bound at his own expense, to ship the goods during the agreed period, if any, to the port agreed upon or to acquire goods afloat which have been so shipped.

15. Duties of the Seller in a C.I.F. Contract S.61(b) stipulates that the seller is bound, at his own expense, to effect on the goods an insurance of the type normal for goods and a voyage of the kind in question. S.61(c) posits that the seller is bound to transfer to the buyer, proper shipping documents in accordance with the terms of the contract.

16. Duties of the Buyer in a C.I.F. Contract S.60(1)(b) provides that it is the duty of the buyer to obtain any necessary import license. S.61(d) postulates that the buyer is bound to take up proper shipping documents and on doing so, to pay the price in accordance with the terms of the contract.

17. Duties of the Buyer in a C.I.F. Contract S.61(e) provides that the goods are deemed to be delivered to the buyer and the property therein accordingly passes to the buyer, on the transfer to her/him of the bill of lading. S61(f) states that the risk in the goods also passes to the buyer when they are shipped or acquired afloat. Property and risk passes when the parties intent it to pass.

18. Duties of the Seller & Buyer in a F.O.B. Contract In F.O.B. Contracts goods are delivered free on board a ship. With such contracts, it is the buyer’s obligation to arrange insurance and carriage of the goods. The seller must place the goods on a ship designated by the buyer.

19. Duties of the Seller & Buyer S.62(a) provides that the buyer is entitled and bound to nominate a ship to the seller calling during the agreed period, if any at the agreed time or where the buyer has an option, one of the agreed ports, and ready and willing to carry the goods. S.(62)(b) stipulates that the seller is bound, at his own expense, to have the goods loaded on the ship nominated by the buyer. This implies that if the buyer tells the seller the ship which should carry the goods, the seller bears the cost of loading the goods onto the ship. seyramkawor@gmail.com

20. Duties of the Seller & Buyer S.60(2)(a) provides that in an F.O.B. Contract, unless a contrary intention appears, where the buyer is resident in the country from which the shipment is to be made, it is the duty of the buyer to obtain the necessary export license.

21. Duties of the Seller & Buyer S.60(2)(b) provides that in any other case, it is the duty of the seller to obtain any necessary export license.

22. Duties of the Seller & Buyer S.60(2)(c) states that it is the duty of the buyer to obtain any necessary import license. The price that is quoted by the seller does not cover freight and insurance, these are the responsibilities of the buyer.

23. Nomination of Ship It is the buyer’s duty to nominate a ship and as soon as the ship is nominated, the buyer must pay the seller for the price of the goods. Failure to nominate would still make the buyer liable for the price of the goods. The consequences of the failure to nominate a ship must be expressly stated.

24. Passing of Property and Risk In F.O.B contracts delivery of goods is completed once the goods have been put on board the ship. Property in the goods is deemed to have passed at this time. If the goods are damaged or lost the loss falls on the buyer.

25. Passing of Property and Risk Generally property passes at the same time as risk. If the goods remain unascertained, the risk passes before the property passes to the buyer.

26. Terms of C.I.F. and F.O.B. Contract Contractual terms are grouped into conditions, warranties and innominate terms. S.65 of Act 137 postulates that in a C.I.F. & F.O.B. Contract, all duties imposed on a buyer and seller under this part are unless a contrary intention appears in a contract, conditions and not warranties.

27. Payment in International Trade Sellers generally require payments are concurrent on delivery of the goods. That as soon as the goods are delivered, payment must be done. The buyer may also wish to obtain the goods, resell them and make payment. How is this done in international trade?

28. Bill of Exchange This is a mode of paying in international trade. A bill of exchange is a type of negotiable instrument. A negotiable instrument provides a convenient and secured method of payment. It is useful if payment is to be done at a future date or to a third person. It is a substitute for actual currency.

29. Bill of Exchange A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person or bearer.

30. Bankers Commercial Credit or Letters of Credit The Bankers Commercial Credit was designed to remove the risk of buyers default. It has a great advantage to the buyer. Banker’s Commercial Credit is also known as Letter of Credit.

31. Bankers Commercial Credit or Letters of Credit A letter of credit is a document provided, example, for the exporter by the importer so that the exporter can draw his draft upon a bank. It usually states the period within which it can be drawn, the maximum amount, and refers to documents accompanying it.

32. Bankers Commercial Credit or Letters of Credit S.63(a) states that the credit must be opened not later than the earliest date on which the seller may ship the goods, or where the date of shipment is to be fixed by the buyer, not later than the earliest date on which the seller may require to ship the goods.

33. Buyer and Issuing Bank When the seller states which bank he requires, the buyer will request his bank to open letters of credit in his favour. The buyer signs a document indicating the type of credit he requires, the amount and the details of the document which the seller would have to give the bank, if the seller wants to take advantage of the letter of credit.

34. Buyer and Issuing Bank The documents contain: • An undertaking by the buyer to reimburse the bank • A statement to the effect that the bank can retain the documents until such time that the buyer has paid the principal, interest, commission and any other charges connected with the letter of credit. • A statement giving the bank the power to sell the documents in order to realize the security.

35. Issuing & Corresponding Banks The issuing bank is the bank in the buyers country, and this is the bank that appoints a bank in the seller’s country to transact any business with the seller. The bank appointed by the issuing bank is called the intermediary or corresponding bank. And the relationship between these two banks is that of principal and agent.

36. Issuing & Corresponding Banks The intermediary bank is entitled to be indemnified by the issuing bank if it acts according to the instructions of the issuing bank. The final stage of communication between the two banks to the seller that a credit has been opened in its favour. It will also indicate the terms of the credit.

37. Revocable Letters of Credit This is where the bank merely informs the seller that that it has authority to accept and pay bills of exchange on his behalf. It does not promise to do so. The bank can unilaterally cancel the credit any time, without any notice to the seller.

38. Irrevocable Letters of Credit This is where the bank undertakes to honour the seller’s draft as long as the seller fulfils his obligation under the terms of the contract. The buyer cannot also cancel his instructions.

39. Confirmed Letters of Credit Under the confirm irrevocable letters of credit, the corresponding bank promises to be personally liable to the seller.

40. Unconfirmed Letters of Credit Under unconfirmed irrevocable letters of credit, the corresponding bank is merely an agent of the issuing bank. If the issuing bank defaults, the seller has to go through the trouble of suing the issuing bank in the buyer’s country. This could be expensive, hence, sellers prefer confirmed letters of credit.

41. Duties of the Seller and the Corresponding bank and delivery of goods to the Buyer A seller who wants to claim a letter of credit opened to him must tender documents corresponding exactly to those specified in the letter of credit. How then can a seller claim the credit opened on his behalf?

42. Duties of the Seller S(63)(b) provides that where in a C.I.F. & F.O.B. Contract the price is to be paid by means of letter of credit opened at a bank to be nominated by the seller, then in the absence of a contrary intention, as against the buyer, the seller is only entitled to draw against the credit on presentation to the bank of proper shipping documents.

43. Duties of the Seller Where a corresponding bank accepts documents that do not fit the description that is stated in the letters of credit, he cannot claim payment from the issuing bank or from the buyer.

44. Duties of the Seller Documents given to the buyer under a C.I.F. Contract should be the same documents given to the bank advancing the credit and the bank insist on receiving a clean bill of lading indicating that the goods were shipped in good condition.

45. Duties of the Seller There are sometimes when goods are shipped in a defective state but are given clean bill of lading or the documents are found to be forgeries, the bank which has paid the seller has the right to claim monies paid to the seller and refuse to pay if it knows the documents are fraudulently prepared.

46. Duty of Bank A bank which has issued an irrevocable letter of credit, is bound to honour it. If the bank refuses to honour it, the seller can claim damages from the bank. The damages will not be confined to just the debt and the accumulated interest that the bank has agreed to pay but also on loss of profit if within the reasonable contemplation of the parties.

47. The Bank as a Pledgee The buyer must reimburse the issuing bank in accordance with the terms of the contract. The bank can hold the bill of lading until the buyer redeems the security. The bank has authority to sell the document if the buyer defaults payment. The bank can also release the document in exchange for a letter of trust, so that after selling the buyer can pay.

48. Factoring Sometimes, instead of the seller dealing with a bank, he may assign the goods to a factor – a finance house. The factor will pay the seller and charge a commission for his services. The buyer will then receive the goods and upon sale, pay the factor.

49. Carriage of Goods An important document in carriage of goods is the bill of lading. A bill of lading is a document used in foreign trade, signed by the ship-owner, master or other agent, stating that goods have been shipped on a named ship, and setting out the terms on which they have been delivered by the ship-owner. It acts as a document of title.

50. Carriage of Goods The bill of lading is likely to be used by the buyer and his creditor. Consequently, it is essential that it should be accurate. Anyone who negligently issues a bill of lading on goods which have not been shipped can be liable for the tort of negligence.