The International Sale of Goods: The Classic IBT

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The International Sale of Goods The Classic
IBT
http//faculty.law.ubc.ca/affolder/
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Hypothetical 1

• A French computer distributor calls a Vancouver
  computer manufacturer and asks for the best price
  on a model x.
• The Vancouver supplier orally quotes 5000 each,
  FOB Montreal. The salesperson states that the
  company relies on INCOTERMS 2000 to define FOB.
• - with this shorthand the French purchaser knows
  the sale terms, incl. Risk of loss that otherwise
  would have to be spelled out in a contract.

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What does this mean?

• FOB (Free on Board) tells the buyer that the
  seller will deliver the goods (at its expense) to
  the carrier at Montreal.
• FOB tells the buyer that it will have to contract
  for the carriage of the goods and that it has
  risk of loss from the time the goods are on board.

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It also means

• FOB tells the buyer that the seller will arrange
  for all export licenses from Canada and that the
  seller will have to pay for all import licenses
  into France.
• INCOTERMS are a set of rules for interpreting
  trade terms drafted by the ICC in 1936 (latest
  revision 1990).

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The Next Step

• Based on this information, the buyer can
  calculate the profitability of the price offered
  taking into account the additional costs that are
  implicated by the use of the FOB-Montreal term.
  Buyer then agrees to take 100 computers if she
  gets a 5 discount for prompt payment.

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And then

• Seller responds ok but only if you pay by
  irrevocable letter of credit. Buyer thinks it
  over and sends a faxed purchase order for 100
  model xs _at_ 5000, subject to 5 discount,
  payable by irrevocable letter of credit. At the
  bottom of the form she adds all disputes to be
  resolved by ICC arbitration.

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The contract

• The Seller doesnt respond but begins to build
  the computers. Later, Seller sends its bank
  details to the buyer for a L/C with an estimated
  shipping date.
• Can the French buyer get out at this stage?

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Filanto, S.p.A v. Chilewich (p. 299)

• Is there a valid agreement in writing
  specifying Moscow arbitration here?
• What is defendant Chilewichs argument?
• What is plaintiff Filantos argument?
• Whats more convincing?

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The CISG (Vienna Convention)

• CISG has been ratified by 58 countries, and
  governs all contracts between parties with places
  of business in different nations, so long as both
  countries are signatories to the Convention, and
  the parties have not expressly excluded its
  application.
• Implemented in Canada and all provinces (1991).

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The CISG (Vienna Convention)

• Presumptive application makes parties think about
  applicable law.
• Neutral and distinct from national law so avoid
  power inequalities.
• Avoids need to prove and apply foreign law in
  domestic courts.

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Financing the Transaction Letters of Credit

• Typically used in transnational sales where the
  seller and buyer are unrelated.

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The Letter of Credit

• Buyer will go to its bank and request it to open
  an irrevocable L/C in favour of seller.
• This is a contract between the buyer and its bank
  whereby the bank agrees to pay the seller the
  contract purchase price if the seller presents
  the required documentation to the bank or its
  agent.
• The buyer in turn agrees that if the bank pays
  the seller pursuant to the L/C the buyer will
  reimburse the bank.

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Letter of Credit Structure
Seller
Buyer
Issuing Bank
Confirming Bank
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The contracts (buyer issuing bank)

• 1. The contract between the buyer and its bank
  will be governed presumably by the law of the
  country where both are located (unless they agree
  otherwise).
• The contract between the buyer and its bank will
  provide in detail what documents the seller must
  present before its paid.

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The contracts (Issuing bank-Confirming bank)

• The issuing bank will send a L/C to the bank
  where the seller is located and ask them to
  confirm the letter of credit to promise to pay
  the seller upon presentation of the conforming
  documents.
• This contract between banks is almost always
  governed by the UCP 500 (the Uniform Customs and
  Practices for Documentary Credits). In Canada
  this must be spelled out.

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Enforcing Letters of Credit

• When can banks refuse to effect payment under a
  letter of credit?
• The letter of credit is independent of the
  primary contract of sale between the buyer and
  seller. The issuing bank agrees to pay upon
  presentation of documents, not goods. This rule
  is necessary to preserve the efficiency of credit
  as an instrument for the financing of trade.
• Sztejn v. Schroder Banking Corporation (1941)

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The Shipping of Goods

• Usually freight forwarders are used to arrange
  transportation, insurance, port and terminal
  fees.
• Key document is the bill of lading which will be
  issued by the ocean carrier essentially a
  receipt.
• Bill of lading is a contract between the shipper
  and the carrier governed by international
  conventions and domestic statutes limiting the
  liability of carriers (Bill of Lading Act, RSC
  1985, c. B-5).

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Drafting Issues

• The Recitals
• common in North American contracts but not
  elsewhere
• If the CISG applies, a number of its terms relate
  to the state of the parties knowledge at the time
  of the agreement.
• For e.g., if the seller knows or ought to have
  known the use to which the buyer intends for the
  goods, the CISG will imply a warranty to that
  effect.
• How should Seller/ Buyer address this in the
  recitals?

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Language

• Versions in different languages do not
  necessarily have the same meaning
• Also specify the language of all correspondence,
  meetings and arbitrations
• Avoid defense of lack of notice of proceedings as
  did not understand the language

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Entire Agreement Clauses

• When is the written agreement the final word in
  the negotiations?
• North American approach the parol evidence
  rule excludes oral statements which are
  inconsistent with the written agreement.
• In Europe, oral statements can modify a written
  agreement.

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Entire Agreement Clauses

• Boilerplate clause the written agreement is the
  entire agreement, and it cannot be modified
  except in writing signed by both parties.
• CISG may not respect this boilerplate as it
  requires due consideration to all relevant
  circumstances of the case, including the
  negotiations, any practices which parties have
  established between themselves, usages, and any
  subsequent conduct of the parties.

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Force Majeure

• 3 issues
• what occurrences are permissible to excuse
  nonperformance
• What occurrences are not acceptable
• What happens when the force majeure event occurs.

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Force Majeure

• Seller wants to avoid any obligation to perform
  if an extra expense is to be incurred. Simple
  clause that excludes only its obligation to
  perform, and not the buyer.
• Buyer wants at least a mutual force majeure, and
  must carefully think about what events will
  qualify.

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Liquidated Damages and Penalty Clauses

• What happens when one party doesnt live up to
  its side of the deal?
• - if this isnt negotiated, it may be left to
  judicial actions for damages, and the
  uncertainties and delays of legal process.

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The Drafting Exercise

• French Buyer
• Canadian Seller
• Contract for 100 Computers model x.
• Price 5000 each (minus 5 )
• FOB Montreal
• Incoterms 2000 to determine FOB