Topic 7 - International Sales Transactions Flashcards
1
Q
What is an FOB contract?
A
A Free on Board (FOB) contract requires the seller to deliver goods on board a vessel nominated by the buyer, with risk transferring upon shipment.
2
Q
What are the seller’s main duties in an FOB contract?
A
Deliver goods on board the vessel, ensure conformity to contract terms, obtain export clearance, and provide necessary documents.
3
Q
When does risk pass to the buyer in an FOB contract?
A
Risk passes once the goods are loaded onto the nominated vessel.
4
Q
Who is responsible for freight and insurance in an FOB contract?
A
The buyer is responsible for arranging and paying for freight and insurance.
5
Q
What is a CIF contract?
A
A Cost, Insurance, and Freight (CIF) contract requires the seller to arrange shipping, insurance, and freight to the destination port.
6
Q
When does risk transfer to the buyer in a CIF contract?
A
Risk transfers upon shipment, but the seller bears the cost of transport.
7
Q
What are the key documents in a CIF contract?
A
A bill of lading, insurance certificate, and commercial invoice.
8
Q
How do FOB and CIF contracts differ in terms of cost allocation?
A
In FOB, the buyer pays for freight and insurance, whereas in CIF, the seller includes these costs in the contract price.
9
Q
What is a “string transaction” in international sales?
A
A series of sales where the goods are resold multiple times while in transit, using negotiable documents.
10
Q
What case distinguished FOB from CIF contracts?
A
Pyrene v Scindia (1954).
11
Q
What is a bill of lading?
A
A document serving as a receipt, evidence of carriage, and a document of title.
12
Q
What functions does a bill of lading serve?
A
It acts as proof of shipment, a contract of carriage, and a negotiable instrument.
13
Q
What is strict compliance in documentary sales?
A
Documents must exactly conform to contract terms for banks to process payments.
14
Q
What case reinforced strict compliance in trade documents?
A
JH Rayner v Hambro Bank (1943).
15
Q
What is the importance of documentary compliance in CIF contracts?
A
The seller’s obligation is fulfilled by presenting correct documents, even if goods are lost at sea
16
Q
How does a seller retain control in a CIF sale?
A
By holding the bill of lading until payment is received.
17
Q
What happens if documents in a CIF sale do not match the contract?
A
The buyer may reject the documents and refuse payment.
18
Q
Why is a bill of lading crucial in financing?
A
It allows buyers to obtain goods and serves as collateral for bank credit.
19
Q
What does the Carriage of Goods by Sea Act 1992 regulate?
A
The rights of buyers to sue carriers when holding bills of lading.
20
Q
How do bills of lading facilitate “string sales”?
A
They allow goods to be traded while in transit.
21
Q
Why is financing important in international trade?
A
It reduces the risk that a seller will not receive payment and that a buyer will pay and not receive goods.
22
Q
What role do banks play in trade finance?
A
Banks facilitate risk reduction and provide the funds to finance trade.
23
Q
What international standard governs documentary credits?
A
UCP 600 (Uniform Customs and Practice for Documentary Credits).
24
Q
What risk does a seller face in international trade?
A
Non-payment by the buyer.
25
What risk does a buyer face in international trade?
Non-delivery or receiving defective goods.
26
What is the function of a trade guarantee?
It ensures payment to the seller even if the buyer defaults.
27
What are two common forms of trade finance?
Letters of credit and documentary collections.
28
What is the principle of autonomy in documentary credits?
The letter of credit is independent of the underlying sales contract.
29
How do banks ensure fairness in financing trade?
By focusing only on document compliance, not contract disputes.
30
What case confirmed the autonomy of letters of credit?
United City Merchants v Royal Bank of Canada (1983).
31
What is a documentary credit?
A payment mechanism where a bank guarantees payment to the seller upon presentation of conforming documents.
32
What are the steps in a documentary credit transaction?
Buyer requests a bank to issue credit → bank notifies seller → seller presents documents → bank verifies compliance → payment is made.
33
What is the difference between confirmed and unconfirmed credits?
Confirmed credits involve a second bank guaranteeing payment; unconfirmed credits do not.
34
What is an irrevocable letter of credit?
A credit that cannot be amended or canceled without the agreement of all parties.
35
Why do banks insist on strict compliance in letters of credit?
To maintain trust and avoid disputes over payment.
36
What is the fraud exception in documentary credits?
Banks may refuse payment if fraud is clearly proven.
37
What case established the fraud exception principle?
Edward Owen Engineering v Barclays Bank (1978).
38
What rule does UCP 600 Article 14 establish?
Banks may accept minor discrepancies that do not affect document validity.
39
How does UCP 600 affect strict compliance?
It slightly relaxes the requirement by allowing minor variations.
40
What is a standby letter of credit?
A credit that functions as a guarantee, only payable if the buyer defaults.
41
How do banks mitigate risk in documentary credits?
By only paying when documents strictly conform.
42
What are trade credit insurance policies?
Policies protecting exporters from buyer default.
43
What is a red clause letter of credit?
A credit that allows the seller to draw funds in advance of shipment.
44
Why do importers prefer letters of credit?
They ensure goods meet specifications before payment.
45
What is forfaiting in trade finance?
Selling trade receivables to a third party at a discount.
46
What is a bank guarantee in trade finance?
A promise by a bank to cover a buyer’s payment obligations.
47
What is the key legal principle behind trade finance?
The autonomy of financial instruments from the underlying contract.
48
What role do correspondent banks play in trade finance?
They facilitate transactions between banks in different countries.
49
What is open account trading?
A trade arrangement where the buyer pays after receiving the goods.
50
What is the main disadvantage of open account trading?
Higher risk of non-payment for the seller.
51
What are the two main ways to identify a sale as international in character?
First, by the movement of goods across national borders; second, by the location of the parties’ places of business in different states. The second approach is more widely accepted and is the basis of the CISG.
52
Why is the location-based test for international sales preferred over the goods-movement test?
Because it better reflects legal complexity—cross-border obligations, different legal systems, and enforcement challenges—even if the goods themselves do not move between countries.
53
What legal instrument plays a central role in defining international sales contracts and when does it apply?
The United Nations Convention on Contracts for the International Sale of Goods (CISG) applies when the parties have places of business in different contracting states, unless excluded.
54
What is the significance of Incoterms in international sale contracts?
Incoterms® 2020, when incorporated into a contract, standardize delivery obligations, allocation of costs, and risk transfer between seller and buyer. They support predictability and reduce disputes.
55
What legal challenge arises in the shift toward paperless trade, particularly regarding documents of title?
Under English law, electronic documents are not currently recognized as documents of title, which complicates their use in place of bills of lading for transferring possession or ownership.
56
What are the differences between dispatch contracts and arrival contracts in export sales?
In dispatch contracts, the seller’s responsibility ends when goods are handed over to the carrier; in arrival contracts, the seller must ensure goods reach a specified destination, bearing the transit risk.
57
Why does an export sale pose special legal risks to the seller?
Due to difficulty checking buyer credit, unfamiliar legal systems, enforcement abroad, currency fluctuations, political risk, and the complex logistics of cross-border transactions.
58
What are the main drivers behind the global trend toward electronic export procedures?
Cost reduction, process efficiency, speed, environmental concerns, and improved security—especially accelerated by technological advances and COVID-19 disruptions.
59
How can trade terms like “EXW” or “FOB” affect the delivery point and allocation of risk?
Trade terms can be both price terms and delivery terms. If the contract is silent, the quoted term determines the delivery point and thus the point at which risk transfers to the buyer.
60
What are the seller’s main duties in a strict f.o.b. contract?
To place conforming goods on board the buyer-nominated vessel at the named port of shipment within the contract period, and to provide documents enabling the buyer to obtain possession from the carrier (para 34.01).
61
Who is responsible for nominating the vessel in a strict f.o.b. contract, and what happens if they fail to do so in time?
The buyer is usually responsible. Failure to nominate in time can amount to repudiation, entitling the seller to terminate and claim damages (paras 34.04–34.05).
62
When can a buyer make a substitute nomination of a vessel in a strict f.o.b. contract?
If done in time and the new nomination is effective. However, the original nomination remains binding if the substitution fails (para 34.06).
63
Does s 32(3) of the Sale of Goods Act 1979 apply to f.o.b. contracts?
Yes. The seller must give notice enabling the buyer to insure the goods, but this duty is fulfilled if the buyer already has sufficient information (para 34.07).
64
When does property in the goods typically pass under a strict f.o.b. contract?
When the goods are placed on board the nominated vessel, unless the seller has reserved the right of disposal by retaining the bill of lading (paras 34.13–34.15).
65
At what point does risk pass to the buyer under a strict f.o.b. contract?
Risk passes on shipment, even if the seller has retained the bill of lading or property has not yet passed (para 34.16).
66
What is the significance of appropriation in f.o.b. and c.i.f. contracts?
Appropriation identifies the goods to the contract. Without it, the seller cannot tender valid shipping documents or transfer property (paras 34.25, 34.34, 34.36).
67
What documents must the seller tender under a c.i.f. contract?
A bill of lading evidencing shipment, a policy of insurance, and a commercial invoice (para 34.20(a)).
68
Who bears the risk of loss or damage to goods shipped under a c.i.f. contract?
The buyer bears the risk from the time of shipment, even if property has not passed (paras 34.30–34.31).
69
Can the buyer reject documents under a c.i.f. contract if they are nonconforming?
Yes. The buyer can reject defective documents and, if not cured in time, treat the contract as repudiated (para 34.26, 34.39).
70
Can a buyer reject the goods even if the c.i.f. documents are in order?
Yes, if the goods on arrival are not in conformity with the contract at the time of shipment (para 34.42).
71
What happens if the goods are lost after the buyer has accepted the documents in a c.i.f. sale?
The risk is on the buyer, who must seek redress from the insurer or carrier (para 34.32).
72
Can a buyer justify wrongful rejection of documents using a later-discovered defect in the goods?
No, under English law (Gill & Duffus SA v Berger & Co Inc (No 2), the buyer’s rejection of documents is final unless the seller has affirmed the contract and the goods are then rejected lawfully (paras 34.40–34.41). Lord Diplock’s analysis is open to objection; Goff LJ's view is preferred.
73
In what circumstances can a buyer recover full damages despite accepting nonconforming goods?
Where the defect in the documents was concealed, preventing the buyer from exercising the right to reject—e.g., as in Kwei Tek Chao (paras 34.43–34.44).
74
What are the seller’s main options when unsure of the buyer’s creditworthiness in international trade?
The seller may require advance payment, use a float held by the seller, or rely on third-party guarantees such as documentary credits or suretyships (35.01).
75
What is a documentary bill?
A bill of exchange accompanied by shipping documents, payable in exchange for those documents (35.04).
76
Why do sellers typically avoid sending shipping documents directly to buyers?
To prevent fraud and wrongful retention of title; sellers usually use banks to control document release upon payment (35.05–35.06).
77
What is the core purpose of a documentary credit?
To ensure that the seller receives payment from a bank regardless of disputes with the buyer (35.08).
78
What is the UCP, and which version is currently in use?
The Uniform Customs and Practice for Documentary Credits; UCP 600 is the current version since July 2007 (35.09).
79
How does a documentary credit differ from a standby credit?
A documentary credit entails a primary obligation by the issuing bank to pay on document presentation; a standby credit is invoked only on the buyer's default (35.09).
80
What is the benefit of eUCP?
It allows for electronic presentation of documents, improving efficiency and reducing discrepancies (35.10).
81
Who is the "issuing bank" in a documentary credit?
The bank that issues the credit at the buyer's request (35.12).
82
What is a “complying presentation” under UCP 600?
One that conforms to the terms of the credit, UCP rules, and standard banking practice (35.13).
83
Why might buyers resist using letters of credit?
Due to high banking costs and bureaucratic procedures; cheaper alternatives may exist (35.16).
84
What is the current trend regarding the use of letters of credit?
There has been a gradual global decline in use due to fintech innovations and other alternatives (35.17).
85
What are the main stages in opening a documentary credit?
Application by buyer, notification to seller, nomination of bank, and presentation of documents (35.18–35.24).
86
What is the difference between confirmed and unconfirmed credits?
Confirmed credits have a second bank guaranteeing payment; unconfirmed credits do not (35.23–35.24, 35.29).
87
What is a revocable credit?
A credit that can be canceled or amended by the issuing bank without notice to the seller (35.26).
88
What was the issue in Banco Santander SA v Bayfern Ltd?
Whether a confirming bank could recover payment after discovering fraud in a deferred credit without authority to negotiate early (35.30).
89
What is a deferred payment credit?
Under a deferred payment credit, payment is made not on presentation of documents or by acceptance of a draft but after expiry of a stated period from shipment or bill of lading date or from presentation (eg 60 days after sight), the documents being meanwhile released to the buyer.
90
What did UCP 600 change in response to Banco Santander?
Article 12(b) clarified that nominated banks may prepay or purchase deferred payment undertakings (35.31).
91
What is a negotiation credit?
A credit allowing a bank to purchase drafts/documents and present them in its own right (35.33–35.34).
92
What is the legal status of UCP 600 under English law?
It is a set of contractual terms, not binding unless incorporated into the contract (35.42–35.46).
93
What is the doctrine of autonomy in letters of credit?
Banks deal only with documents, not with the underlying sales contract or goods (35.52).
94
When can a bank refuse to honour a letter of credit despite document compliance?
When there is fraud, illegality, or a misrepresentation known to the bank (35.55–35.56).
95
Is the issuing bank acting as agent for the buyer in a credit transaction?
No, the bank acts as a principal with an independent obligation to the seller (35.58).
96
What is the strict compliance rule?
The presented documents must exactly match the credit terms; any discrepancy can invalidate payment (35.68–35.69).
97
What did the Bulgrains case demonstrate?
A: Even small discrepancies in names on documents can lead to rejection under strict compliance (35.68).
98
What is the effect of Article 14(d) and (e) of UCP 600 on strict compliance?
They soften the rule slightly by allowing general descriptions if there is no conflict (35.70).
99
What protection does Article 17(b) of UCP 600 give for document originality?
A document is treated as original if it appears to be signed or marked, unless it states it’s not original (35.65).
100
What is a negotiating credit?
A letter of credit that gives anyone purchasing the seller's drafts in good faith the right to demand payment from the issuing bank, or if the credit was confirmed, the confirming bank.
101
What are the main ways in which a seller may arrange for payment in international trade?
Options include advance payment, a float deposit, concurrent conditions (delivery/payment on shipment), credit arrangements, and third-party payment undertakings like guarantees or letters of credit. The third party's obligation may be primary (e.g., under a documentary credit) or secondary (e.g., suretyship). (35.01)
102
What forms can seller-provided credit take in international sales?
The seller may offer open account terms, payment by term bill of exchange, documentary credit, instalment payments (with or without reservation of title), or consignment where the buyer holds goods as bailee. (35.02)
103
What topics does G&M Chapter 35 focus on after introductory remarks?
The chapter primarily addresses documentary credits, then concludes with demand guarantees, performance bonds, standby credits, and mechanisms for raising finance by sellers and buyers.
104
What is a ‘documentary bill’ in international trade?
A documentary bill is a bill of exchange accompanied by shipping documents, requiring acceptance or payment in exchange for those documents—contrasted with a ‘clean’ bill, which has no accompanying documents. (35.04)
105
What are the consequences if a buyer retains a bill of lading without paying or accepting the bill of exchange?
The property in the goods does not pass; wrongful retention is conversion. If the buyer sells the goods, further conversion may occur, though the sub-buyer might obtain title via nemo dat exceptions (e.g., Factors Act or SGA 1979). (35.05)
106
How can the seller protect against buyer fraud in handling shipping documents?
The seller typically uses bank collection: the remitting bank sends documents to a collecting bank in the buyer’s country with instructions to release only on payment or acceptance, minimizing fraud risks. (35.06)
107
Why is a bill of exchange not fully secure for the seller?
Even if payment is to be made against documents, by that time the seller has already shipped goods. If the bill is dishonoured, the seller is left with the burden of recovering or reselling the goods. (35.07)
108
What is the primary purpose of a documentary credit?
To provide the seller with assurance of payment regardless of disputes under the sale contract, shifting the non-payment risk from seller to buyer via bank involvement. (35.08)
109
What is UCP 600 and why is it important?
UCP 600 is the ICC’s set of rules governing documentary credits. It replaced UCP 500 and, together with eUCP, governs the operation and presentation of documents in letter of credit transactions. (35.09)
110
What are the advantages of eUCP (electronic presentation)?
It simplifies and automates document presentation, reduces discrepancies, allows direct submission to issuing banks, and supports transition to a fully electronic trade environment. (35.10)
111
What role does the International Standard Banking Practice (ISBP) play?
ISBP complements UCP 600 by standardizing document examination practices, improving consistency in bank assessments of compliance. (35.11)
112
What is a documentary credit in legal terms?
It is a bank’s autonomous promise to pay the seller upon proper document presentation, independent of disputes in the underlying sale contract. (35.12)
113
How is the letter of credit independent of the sales contract?
The bank’s obligation exists regardless of buyer-seller disputes. It is purely documentary and arises solely under the terms of the credit. (35.13)
114
Why is this independence principle critical?
It ensures that the seller has a reliable and quick method of payment without being caught in disputes over performance of the sale contract. (35.14)
115
What is the buyer’s typical role in initiating a documentary credit?
A: The buyer requests its bank (the issuing bank) to open the credit in favor of the seller and agrees to reimburse the bank upon payment or negotiation.
