International Sale of Goods

Introduction
International sales’ contract’s has familiar elements of a domestic sale of goods contract. An
International dimension may mean that seller needs a different standard of terms and conditions than
from domestic sales. The domestic terms and conditions cannot be used precisely because the buyer is in
another country. Solicitors may come across similar problems in agency and distribution agreements
which often involve sales to other countries.

Distinction between international and domestic sales

1. Governing law and jurisdiction – parties will need to decide which party’s courts will have
jurisdiction over any dispute that crop up, and which countries law should be used to solve a
dispute.
2. Increased distance – sea or air transport, goods will take longer to arrive, more chance of damage
and transport costs are higher. More important to think who will bear those costs.
3. Payment problems – how to obtain payment from a foreign country, and the increased distance
creates a problem. Even in a domestic sale it can be hard to reconcile the conflicting interests of
the parties, ideally sellers would like payment in advance to help with cash flow Buyers will
want a credit period, delaying credit for the goods until they get payment from their own
customers. The longer the goods take to transport, the longer the gap between the parties wishes.
Also issue of trust, seller will not want to part with goods, until they have been paid, especially
given the cost of transport, as may be difficult to get the goods back at all once they are abroad.
On the other hand the buyer will not want to pay, until he has received the goods safe and sound.
4. Retention of title – solution of this problem in domestic sales, seller retains title in the goods
until they are paid for. Not a practical solution for international sales, as the owner of the goods
if decided by the law of the country where they are situated. Once the goods are in the buyers
country, the English rules to retention of title wont apply and drafting a successful retention of
title clause would mean taking legal advice in each of the countries in which the seller is likely to
sell there goods. Even if the clause was legally effective, there would be so many practical
problems of getting the goods back, and relying on retention of title would probably not be a
viable option.
5. UCTA 1977 – s26 – argument for the seller – provides that the act does not apply to international
sales; this means that it may be easier to exclude the seller’s liability in an international sale.

Jurisdictions and Choice of law

Which countries courts have:
1. Choice of jurisdiction
2. Choice of law

Two separate questions, not uncommon in a contractual dispute for the courts of one country, to have to
apply the law of another. This is not easy, there are difficulties, and may have to obtain expert evidence
on the foreign law from foreign lawyers. Can be expensive and is a risk that the courts won’t get it right.

1. Choice of Jurisdiction
The parties may be nervous for aspects of a dispute to be litigated in a foreign court and probably in a
foreign language. On other hand there may be advantages for suing the other party in their home
jurisdiction as it could be easier to enforce the judgement there.

So what decides the court of jurisdiction?

• Regulation 44/2001 EC

Where the defendant has domiciled in an EU member state, Reg. 44/2001 applies, this generally allows
the parties to decide which country will have jurisdiction. This Reg. also determines jurisdiction
between the different parts of the United Kingdom, England and Wales, Scotland and Northern Ireland.
Similar rules apply to Switzerland and Norway which are outside the European Union but part of the
EFTA (European Free Trade Association).

2. What law will those courts apply?

Where the courts of an EU here a dispute, this is determined by the Rome Convention. The UK brought
this into force by the Contracts (Applicable Law) Act 1990. Once again these rules often allow the
parties to choose there own law, parties are often free to choose the law and the court which are to apply
the contract. Generally it is a good idea to have the same jurisdiction and court to avoid one countries
court having to apply another countries law.

Transport Arrangements
In an International sale, goods have to be transported further and this is going to cost more, and brings a
greater risk of damage. So the parties are going to have to think who is going to bear the cost of
transport and the risk of damage. If the Seller is on risk and the goods are destroyed the seller will have
to replace them. Otherwise it will fail to perform its side of the contract. If the Buyer is on risk and the
goods are destroyed then the buyer will still have to pay for them. Bearing all this in mind, the parties
also need to agree whether any of the parties should insure any of the goods. They could draft individual
terms in there contract to cover all these points, but this would be time consuming, and there will always
be the danger that they might get it wrong.

To make it easier buyers and sellers often use standard terms, the best known of these are called
‘incoterms’ are published by the international chamber of commerce. All the parties have to say in there
contract is which set of incoterms are set to apply. It is important to realise that incoterms are not
complete contracts; they don’t deal with payment, or the passing of ownership.

So what do they cover?

• Determine who will arrange and pay for the main legs if the journey, simple sale three stages;
1. To Port of sellers country
2. Loaded onto ship, and delivered to a port of the buyer’s country – the freight, the contract
with the shipping company if often called the freight contract.
3. On arrival they are then unloaded and put on another lorry/ train and transported to the
buyer’s premises.
• Incoterms do not cover air transport, which raises different issues, e.g. because transport times
are shorter, there are standard terms for air cargo but they are not in incoterms and not covered in
I-tutorial.
• For carriage by sea the incoterms arrangement chosen by the parties will determine;
 1. Who pays for and arranges each leg of the journey.
2. Which party bears the risk of damage for each leg?
3. which party arranges and pays for insurance for each leg
4. which party must obtain import and export clearance (only issue of outside EU non- EU sales)
5. What documents must the seller provide to the buyer – the buyer will need the document to
claim the goods from the shipping company when the goods arrive at the destination. May be
other documents too such as an insurance policy.

How do Incoterms works?

No fewer than 13 different sets of incoterms contractual arrangements exist, divided into 4 distinct
groups. We focus on four groups to see how they work, the key to understanding the different groups is
working out where the cut off point for liability comes in each case, normally this is the point at which
legal delivery of the goods takes place, and as a general rule the seller will be responsible for everything
up to the point of the cut off point and the buyer will be liable for everything after that. There are a few
exceptions. The incoterms arrangements are complex, and the International chamber of commerce
publishes guidance to incoterms which explains the different arrangements in more detail. There are also
simple explanations on its website. (Resources section print).

Four Groups of Incoterms – Groups E and D

1. Group E: Only one arrangement in this group - EXW or ‘Ex Works’

This is the arrangement which imposes the greater obligation on the buyer, and the least on the seller, on
the sellers point of view an EXW arrangement is almost the same as a domestic terms for sales at least
where transport is concerned.

The buyer takes delivery of the seller’s goods at the seller’s premises. This is the cut off point.
Cut off point = seller’s premises.

Risk passes to the buyer who is also responsible for all the transport arrangements, so it is up to the
buyer to decide whether or not to insure the goods for the journey.

2. Group D: ‘Arrival Group’

This group places the greater burden on the seller and the least burden on the buyer. The seller has to
deliver the goods to a point in the buyer’s country. The place of delivery point depends on the set of
terms chosen, and represents the cut off point – where the seller’s responsibilities end.

5 different variations:

1. DDU = Delivered Duty Unpaid – seller does not have to pay import duty, exception to general
rule that seller is responsible for everything up to the cut off point.
2. DDP = Delivered Duty Paid

In both these arrangements, seller has to deliver the goods to the buyer’s premises, so this is the cut off
point.
 3. DES = Delivered ex Ship – the point of delivery and the cut off point is on board ship in the port
of the buyers country. Buyer will have to unload the goods and is responsible for everything
from that point.
4. DEQ = Delivered Ex Quay – similar to DES except that the seller has to unload the goods. They
are delivered to the buyer on the quayside un-cleared by customs. This means that the buyer is
responsible for any import clearance.
5. DAF = Delivered at Frontier, for goods transported by land rather than by sea.

None of the group D arrangements impose a duty to insure the goods but in practice the seller will insure
the goods for all eventualities up to the cut of point, when its contractual obligations (therefore its risks)
generally ceases.

Incoterms Groups F and C

Share a number of features and are the most commonly encountered in practice.

Group F = Main Carriage Unpaid

The cut off point of the seller’s liability comes at the port in the sellers country before goods even start
there journey by sea. The exact cut off point varies with the arrangement chosen.

FAS = Free Alongside – seller has to make the goods available for loading at the quayside.
- Cut off point = quayside is where sellers liability ceases, although goods clear customs before they
reach the quayside. Any export clearances are the seller’s responsibility. Everything that happens after is
the buyer’s liability. Buyer under no obligation to insure but often does so because goods are at there
risk and at this stage it has no recourse against the seller if the goods are accidently damaged.

FOB = Free on Board – most common arrangement

Delivery and the cut off point comes at the point when the goods are loaded over the ships rail in the
seller’s country. So this means that the seller is responsible for the loading costs, everything after that is
down to the buyer.

The rule that the cut off point comes as the goods have crossed the ships rail has led to some interesting
case law. In difficult situation the goods can swing back and forth before they are finally lowered onto
the deck. If the goods are damaged in the process the parties need to know whether the risk can pass
from seller to buyer. This comes down to one question - Have they crossed the rail when they were
damaged?

Group C = Main Carriage Paid

Similar to Fob in that the cut off point and delivery is over the ships rail in the seller’s country. However
In departure from the other arrangements the seller has obligations after the cut off point. These further
obligations arise in both types of C group terms; CIF and CFR.

CIF – Cost, Insurance, Freight: seller agrees to arrange and pay for the freight contract and insurance.
- One of most popular incoterms arrangements as well as FOB.

CFR – Cost and Freight - slightly less onerous on the seller – cost and freight: seller agrees to arrange
and pay for fright but NOT the insurance.
Multi Model Transport
Increasingly significant where the goods are containerised. Goods are loaded into the container at the
carrier’s depot at the seller’s country, the carrier then transports the container to the depot in the buyer’s
country, where goods are unloaded from container for delivery at the buyer’s premises.

The containerised transport is dealt with in a single carriage contract covering all stages, the road and
rail transport in each country, loading onto the country and the sea crossing, and the unloading at the
other end. This multi model transport has special sets of incoterms. One of which is in group F and the
other two which are in group C.

However the cut off point is the same for all three, the carrier’s depot in the seller’s country.

Group F –
FCA = Free Carrier – The seller delivers the goods to the carriers depot in his own country, the goods
are cleared for export before they reach the depot so export clearance is part of the seller’s
responsibilities. The buyer then comes responsible for everything after that. Although not obliged to do
so the buyer will insure the goods from this point.

Group C –
CPT = Carriage Paid to
The practical arrangements work in the same way as an FCA except the significant legal difference in
that the seller agrees to arrange and pay for the containerised transport all the way to the buyer’s depot
in the buyer’s country. Is the multi model equivalent to CFR.

CIP = Carriage and Insurance Paid

Here the seller agrees to arrange and pay for insurance as well as containerised transport to the foreign
depot.

FOB and CIF arrangements

FOB CIF
Sea Carriage Buyer Seller
Insurance Nobody Seller
Transport to ship Seller Seller
Loading unto ship Seller Seller
Unloading from the ship Buyer Buyer
Export clearance Seller Seller
Import clearance Buyer Buyer

Use of documents to trigger payments

Distance of buyer and seller can create problems with timing and trust. Buyer will not want to part with
its money until the goods have arrived to him safely, and this can take some time. Meanwhile the seller’s
cash flow would suffer; therefore the parties need a way round this timing problem. Usual solution is to
agree to payment against documents.

What does this involved?

All types of documents are issued when the goods are transported e.g. documents which enable the
buyer to collect the goods from the ship, and insurance policies, and documents travel much quicker
than the goods. Once the seller has shipped the goods, he can send the documents straight off to the
buyer in proof that the goods have been shipped, and the buyer knows it is everything necessary to
collect the goods.

The buyer is now in a position to pay the seller, even though the goods are still somewhere on route. In
practice this exchange of documents and money usually takes place within the international banking
system. The documents are sent to the buyers bank which checks that they are in order. The bank then
sends the money onto the seller and the documents onto the buyer

Which documents must the seller provide?

- depends on what the arrangements are between the parties.
- If the parties have used incoterms, the chosen incoterms arrangement will specify what documents are
required. At the very least there will have to be;
• Invoice
• Evidence of title
• Documents to take delivery
• Insurance policy, import and export clearances.

Apart from the incoterms specifications, the parties can also elcect the seller to provide specific
documents. E.g. If concern about the condition of the goods they can be inspected before they are
shipped.

Bill of Lading:
Useful all in one document which serves as;
• Contract with shipping company and whoever arranges the freight
• Title document
• Proof of delivery to shipping company.

Bills of Exchange
Agreements of paying to documents answers some of the problems to a seller but it does not provide the
buyer with a credit period nor does it help the problem of international payment but here the bill of
exchange does. The drawor makes instruction for the drawee to make payment to the third person (a
payee). In a simple situation the drawor id the buyer the drawee is the bank and the payee

Documentary Credits