COMMERCIAL LAW – RB20
NOTES
LECTURE 1 – INTRODUCTION
WHO BEARS THE RISK IF SOMETHING HAPPENS TO THE GOODS?
Example: Goods might be in China, an as a Seller how I can be sure you are going to
pay, and the goods arrive safely?
COMMERCIAL LAW HAS COME WITH SOLUTIONS TO THESE PROBLEMS:
Special service providers (Transport): Carrier has no interest in the goods. He
promises to transport the goods from one place to another. Example: Freight
(remuneration of the Carrier, which is what he earns to bring the goods to the
Buyer or Consignee). The Carrier holds the risk from the Buyer/Seller, depending
on the INCOTERMS they have included in the Contract of Carriage.
What happens if it is not fault of Buyer/Seller? One of them will have to
accept to bear with that risk. Example: Fault of the Carrier.
Who shall perform first, Seller or Buyer? As a Seller or Buyer how can you
be sure that the other Party will perform? Bill of Lading is a very special
document that allows you to control the goods. If you control that piece of paper
and it is under your domain, you control the goods.
How to control the goods during transport? Seller can control the goods with
the Bill of Lading and will be sure that the Carrier will not give the goods to
anybody.
Who bears the risk of transport damage? Carrier may not be liable in full. As a
merchant the risk of transport is on him.
What if the Carrier is not liable? Insurance Contract (Cargo Insurance) would
cover this loss by the underwriters. In order for the insurance to really help the
transaction, was the possibility to be represented as a certificate.
1
, Insurers want to know who to pay to. Insurers are willing, in return of a premium,
to pay the damages from the premium collected. Insurance certificate to order or
bearer can pass with B/L in return for payment. Example: Cargo insurer covers
risk of cargo damage in return for premium.
Insurance is usually on behalf of the Seller. Insurance takes the form that can
benefit either of the Parties (whose risk is the goods at).
How to ensure simultaneous exchange of documents (control over goods)
and payment? Another service provider (not the owner of the goods (it’s the
Buyer and the Seller), nor transport the goods, not insure the goods) Bank plays
a role in this problem. The Bank has a crucial role to facilitate the payment
procedure. Has two models depending on who instruct the Bank:
o Seller instruct the Bank (CAD or Documents Exchange): Please collect the
money for me. In that case, the document that the Seller has received and
present it to the Buyer because he is another country and use another
Bank that is in the country where the Buyer is. So, then the Buyer can pay
the Bank for the documents. In that moment, we have a perfect exchange
for the goods and the money because the document represents the
goods. The Bank will request a fee from your margin as a Seller.
What if the Buyer doesn´t have the money? Buyer needs a loan to finance
commercial transaction. Some solutions:
o Letter of Credit (L/C) opened by the Buyer (instructed by): The Bank gets
involved and lend money to the Buyer to purchase the goods to the Seller.
This means that the Bank does something more. The Buyer will have to
pay the Bank before he obtains the goods. The opening Bank (Issuing
Bank) will also by issuing that Letter of Credit (L/C) to the benefit of the
Seller, will give certainty of payment to the Seller. The Seller knows that if
he presents the right documents to the Bank, the Bank is going to pay
him.
Banks only pays in context of trusted Banks. There is an element of trust
there and give access when you need it. A Bank gives a guarantee to the
Seller; then, the Bank will give the money to the Seller and trust the
transaction a little bit more. A Bank opening a Letter of Credit (L/C), might
involve other Banks in the transaction (i.e., Bank situated in the country of
the Seller to facilitate the transaction. In that case, the Seller will only have
to go to that particular Bank).
2
, o CAD + L/C: Documentary sales allows goods to be bought, sold, delivered
and paid for during transit. Allows a string of sales Contracts (often on
standard terms) in relation to commodities.
SALE OF GOODS
Example: SALE + TRANSPORT + B/L + INSURANCE + L/C
SALE CONTRACT
Contains trade terms. These trade terms are known as INCOTERMS 2020.
CHARACTERISTICS/TERMS:
Commodities: The raw material that is loaded in big quantities.
Freedom of Contract: Generally, no mandatory law applicable.
Internationality: Parties are situated in different countries that may be under
Civil and/or Common Law. Also, the goods can be even in different countries
from the companies’ place of establishment. Therefore, you have to anticipate
this in advance given the internationality of the transaction. For example, it may
be difficult to enforce an outcome from an International Court.
Goods description: What a Party sale, must be precise. To make sure you
receive what you pay as a Buyer (what you are entitle to).
Conformity: What the Buyer receives is what he is entitle to. Goods are in
conformity with the Sale Contract.
Delivery: Delivery in the context of Sale Contract is when the Seller presents the
goods to the Buyer. You establish that depending on the will of the Parties.
Rejection: As a Buyer you can say you terminate the Contract, if the goods are
not under the Sale Contract was supposed to obtain. You might claim damages
or full rejection of the goods.
Passing of Risk and Ownership: It matters of what point and which is the
Contractual relation that Is activated at the moment of the loss or event. This is
related to the INCOTERMS agreed by the Parties to be used in the Sale Contract
(i.e., risk allocation under INCOTERMS). The ownership is related to a specified
object, which is to be anticipated and place it in the Contract as a clause (transfer
of rights).
Allocation of Costs: For example, under INCOTERMS.
DOCUMENTS:
Without a document the goods can worth nothing. They cannot easily be replaced.
Examples:
- Commercial Invoice
3
, - Certificates of Origin, health, quality, etc
- Bill of Lading (B/L)
- Charter Party (C/P)
- Letter of Indemnity (LOI)
- Letter of Undertaking (LOU) or guarantee
- Insurance Certificate
- Bill of Exchange (BoE)
- Documents of Title
- Order and bearer documents
- Electronic Data Interchange (EDI)
PAYMENT PROCEDURES:
- Cash Against Documents (CAD)
- Letter of Credit (L/C)
- UCP 600
- Strict Compliance Rule
- Factoring: Someone will undertake your payment (buy your debts) in
exchange of a fee.
- Bank Guarantees: Example: Performance Bond. Important instrument.
INSURANCE:
- Insurance Contract
- Insurance cover: E.g., “Port-to port” or “warehouse to warehouse”
EXPORT/IMPORT RELATED:
- Customs clearance: Who is responsible or pay export/import duties?
- Government intervention: Certificate of origin, tax treaties
IMPORTANCE OF LEGAL CERTAINTY:
For merchants (know where you stand): Fair price; fair trade; reasonable allocation of
risks and costs. To have legal certainty to foresee if it’s a commercial deal and lead to a
profit.
Also, it prevents commercial disputes from arising and if they arise anyway, it makes
them easier (and cheaper) to resolve:
N.B Prices at commodity markets (may) fluctuate (heavily).
How to achieve legal certainty?
Problems are manifold: Geographical distance; Language barriers; Cultural differences;
Conflicting interests; Political developments; Trade wars; Hostilities breaking out;
4
NOTES
LECTURE 1 – INTRODUCTION
WHO BEARS THE RISK IF SOMETHING HAPPENS TO THE GOODS?
Example: Goods might be in China, an as a Seller how I can be sure you are going to
pay, and the goods arrive safely?
COMMERCIAL LAW HAS COME WITH SOLUTIONS TO THESE PROBLEMS:
Special service providers (Transport): Carrier has no interest in the goods. He
promises to transport the goods from one place to another. Example: Freight
(remuneration of the Carrier, which is what he earns to bring the goods to the
Buyer or Consignee). The Carrier holds the risk from the Buyer/Seller, depending
on the INCOTERMS they have included in the Contract of Carriage.
What happens if it is not fault of Buyer/Seller? One of them will have to
accept to bear with that risk. Example: Fault of the Carrier.
Who shall perform first, Seller or Buyer? As a Seller or Buyer how can you
be sure that the other Party will perform? Bill of Lading is a very special
document that allows you to control the goods. If you control that piece of paper
and it is under your domain, you control the goods.
How to control the goods during transport? Seller can control the goods with
the Bill of Lading and will be sure that the Carrier will not give the goods to
anybody.
Who bears the risk of transport damage? Carrier may not be liable in full. As a
merchant the risk of transport is on him.
What if the Carrier is not liable? Insurance Contract (Cargo Insurance) would
cover this loss by the underwriters. In order for the insurance to really help the
transaction, was the possibility to be represented as a certificate.
1
, Insurers want to know who to pay to. Insurers are willing, in return of a premium,
to pay the damages from the premium collected. Insurance certificate to order or
bearer can pass with B/L in return for payment. Example: Cargo insurer covers
risk of cargo damage in return for premium.
Insurance is usually on behalf of the Seller. Insurance takes the form that can
benefit either of the Parties (whose risk is the goods at).
How to ensure simultaneous exchange of documents (control over goods)
and payment? Another service provider (not the owner of the goods (it’s the
Buyer and the Seller), nor transport the goods, not insure the goods) Bank plays
a role in this problem. The Bank has a crucial role to facilitate the payment
procedure. Has two models depending on who instruct the Bank:
o Seller instruct the Bank (CAD or Documents Exchange): Please collect the
money for me. In that case, the document that the Seller has received and
present it to the Buyer because he is another country and use another
Bank that is in the country where the Buyer is. So, then the Buyer can pay
the Bank for the documents. In that moment, we have a perfect exchange
for the goods and the money because the document represents the
goods. The Bank will request a fee from your margin as a Seller.
What if the Buyer doesn´t have the money? Buyer needs a loan to finance
commercial transaction. Some solutions:
o Letter of Credit (L/C) opened by the Buyer (instructed by): The Bank gets
involved and lend money to the Buyer to purchase the goods to the Seller.
This means that the Bank does something more. The Buyer will have to
pay the Bank before he obtains the goods. The opening Bank (Issuing
Bank) will also by issuing that Letter of Credit (L/C) to the benefit of the
Seller, will give certainty of payment to the Seller. The Seller knows that if
he presents the right documents to the Bank, the Bank is going to pay
him.
Banks only pays in context of trusted Banks. There is an element of trust
there and give access when you need it. A Bank gives a guarantee to the
Seller; then, the Bank will give the money to the Seller and trust the
transaction a little bit more. A Bank opening a Letter of Credit (L/C), might
involve other Banks in the transaction (i.e., Bank situated in the country of
the Seller to facilitate the transaction. In that case, the Seller will only have
to go to that particular Bank).
2
, o CAD + L/C: Documentary sales allows goods to be bought, sold, delivered
and paid for during transit. Allows a string of sales Contracts (often on
standard terms) in relation to commodities.
SALE OF GOODS
Example: SALE + TRANSPORT + B/L + INSURANCE + L/C
SALE CONTRACT
Contains trade terms. These trade terms are known as INCOTERMS 2020.
CHARACTERISTICS/TERMS:
Commodities: The raw material that is loaded in big quantities.
Freedom of Contract: Generally, no mandatory law applicable.
Internationality: Parties are situated in different countries that may be under
Civil and/or Common Law. Also, the goods can be even in different countries
from the companies’ place of establishment. Therefore, you have to anticipate
this in advance given the internationality of the transaction. For example, it may
be difficult to enforce an outcome from an International Court.
Goods description: What a Party sale, must be precise. To make sure you
receive what you pay as a Buyer (what you are entitle to).
Conformity: What the Buyer receives is what he is entitle to. Goods are in
conformity with the Sale Contract.
Delivery: Delivery in the context of Sale Contract is when the Seller presents the
goods to the Buyer. You establish that depending on the will of the Parties.
Rejection: As a Buyer you can say you terminate the Contract, if the goods are
not under the Sale Contract was supposed to obtain. You might claim damages
or full rejection of the goods.
Passing of Risk and Ownership: It matters of what point and which is the
Contractual relation that Is activated at the moment of the loss or event. This is
related to the INCOTERMS agreed by the Parties to be used in the Sale Contract
(i.e., risk allocation under INCOTERMS). The ownership is related to a specified
object, which is to be anticipated and place it in the Contract as a clause (transfer
of rights).
Allocation of Costs: For example, under INCOTERMS.
DOCUMENTS:
Without a document the goods can worth nothing. They cannot easily be replaced.
Examples:
- Commercial Invoice
3
, - Certificates of Origin, health, quality, etc
- Bill of Lading (B/L)
- Charter Party (C/P)
- Letter of Indemnity (LOI)
- Letter of Undertaking (LOU) or guarantee
- Insurance Certificate
- Bill of Exchange (BoE)
- Documents of Title
- Order and bearer documents
- Electronic Data Interchange (EDI)
PAYMENT PROCEDURES:
- Cash Against Documents (CAD)
- Letter of Credit (L/C)
- UCP 600
- Strict Compliance Rule
- Factoring: Someone will undertake your payment (buy your debts) in
exchange of a fee.
- Bank Guarantees: Example: Performance Bond. Important instrument.
INSURANCE:
- Insurance Contract
- Insurance cover: E.g., “Port-to port” or “warehouse to warehouse”
EXPORT/IMPORT RELATED:
- Customs clearance: Who is responsible or pay export/import duties?
- Government intervention: Certificate of origin, tax treaties
IMPORTANCE OF LEGAL CERTAINTY:
For merchants (know where you stand): Fair price; fair trade; reasonable allocation of
risks and costs. To have legal certainty to foresee if it’s a commercial deal and lead to a
profit.
Also, it prevents commercial disputes from arising and if they arise anyway, it makes
them easier (and cheaper) to resolve:
N.B Prices at commodity markets (may) fluctuate (heavily).
How to achieve legal certainty?
Problems are manifold: Geographical distance; Language barriers; Cultural differences;
Conflicting interests; Political developments; Trade wars; Hostilities breaking out;
4
