1 Chapter 11 Transportation I. Text Materials Trade Terms Sales contracts involving transportation customarily contain abbreviated terms describing the time and place where the buyer is to take delivery. The trade terms may also define a variety of other matters, including the time and place of payment, the price, the time when the risk of loss shifts from the seller to the buyer, and the costs of freight and insurance. Virtually all domestic laws allow the parties to define the terms themselves, or to incorporate definitions from foreign legislation or from a specific set of private rules. The United Nations Convention on Contracts for the International Sale of Goods similarly allows parties to incorporate trade terms of their choosing. The most widely used private trade terms are those published by the International Chamber of Commerce (ICC). Called Incoterms, they are well known throughout the world, and their use in international sales is encouraged by trade councils, courts, and international lawyers. First published in 1936, they are revised every 10 years—the current version is Incoterms 2010. Parties who adopt the Incoterms, or any other trade terms, should make sure they express their desire clearly. Parties should also refrain from casually adopting any particular set of terms. Parties should be wary about making additions or varying the meaning of any particular term, except to the extent that it is allowed by the rules they adopt or by judicial decision. The parties’ failure to use any trade term at all can also produce unexpected results. Courts are then left to divine the parties’ intent and to decide the case based on local commercial practice. Case 11-1: St. Paul Guardian Insurance Company v. Neuromed Medical Systems & Support, GmbH United States District Court for the Southern District of New York, 2002. Facts: Shared Imaging, a U.S. company, purchased an MRI system from Neuromed, a German company, for delivery CIF New York Seaport. The contract also provided that Neuromed would maintain title to the system until full payment was made. When the MRI system arrived at Shared Imaging’s facility in Illinois, it was damaged. Two insurance companies paid Shared Imaging for the damages and then sued Neuromed to recover what they had paid. The insurance companies allege that Neuromed is liable under the CIF term. Neuromed contends that the CIF term is inapplicable, that it is not liable, and it moves to dismiss. Issue: Did the parties intend for their shipping term to be the CIF Incoterm? Holding: Yes. Law: (1) The United States and Germany are both parties to CISG. (2) CISG Art. 9(2) provides that the parties are bound by accepted usages of trade. (3) According to the German courts, the CISG usage of trade rule requires that “CIF” be interpreted as meaning the CIF Incoterm. (4) The time for passage of title does not affect the meaning of the CIF term, as both the Incoterms and the CISG look to passage of risk and ignore passage of title. Explanation: (1) This is an international sale governed by CISG. (2/3) The Incoterms provide the accepted definition of shipping terms according to the usage of the shipping trade. (4) Although the parties provided that title would not pass until after payment in full was made, this does not affect the applicability of the CIF Incoterm as 2 both the Incoterms and the CISG define the term in relationship to passage of risk and ignore passage of title. Order: Motion to dismiss is denied. A Note on the Incoterms – The Incoterms 1990 revision made several significant modifications to the earlier terms, reflecting changes both in technology and in shipping practices that occurred during the 1980s. According to the ICC, “The main reason for the 1990 revision of Incoterms was the desire to adapt terms to the increasing use of electronic data interchange (EDI).” The second major reason for the revision stemmed “from transportation techniques, particularly the unitization of cargo in containers, multimodal transport, and roll-on roll-off traffic with road vehicles and railway wagons in ‘short sea’ maritime transport.” Older terms that applied to peculiar modes of land and air transport—such as free on rail (FOR), free on truck (FOT), and FOB airport—were eliminated and the free carrier term was expanded. Incoterms 2010 is classified into only two groups. The first group can be applied to any mode(s) of transportation and includes Ex Works (EXW), Free Carrier (FCA), Carriage Paid To (CPT), Carriage and Insurance Paid (CIP), Delivered at Terminal (DAT), Delivered at Place (DAP), and Delivered Duty Paid (DDP). The second group can only be applied to sea and inland waterway transportation and includes Free Alongside Ship (FAS), Free On Board (FOB), Cost and Freight (CFR), and Cost, Insurance and Freight (CIF). Incoterms 2010 also formally defined delivery as the point in the transaction where the risk of loss or damage to the goods is transferred from the seller to the buyer. “Free” Terms – “Free” means that the seller has an obligation to deliver the goods to a named place for transfer to a carrier. National laws sometimes treat the “free” terms as interchangeable, so it is important for contracting parties to identify not only the term but also the set of rules that applies to their particular transaction. FOB—Free on Board – It is a maritime trade term, and in most of the world its use remains limited to seaborne commerce. The FOB (port of shipment) contract requires a seller to deliver goods on board a vessel that is to be designated by the buyer in a manner customary at the particular port. The essence of an FOB contract is the notion that a seller is responsible for getting goods on board a ship designated by a buyer. The seller continues to be responsible for the goods even after the buyer’s chosen ship takes control of the goods at the end of its cargo boom and begins to hoist the goods off the dock. The seller may remain responsible for the goods even after they are loaded onto the ship if they remain unidentified to the buyer’s contract. FAS—Free Alongside Ship – The term “free alongside” or “free alongside ship” requires the seller to deliver goods to a named port alongside a vessel to be designated by the buyer and in a manner customary to the particular port. “Alongside” has traditionally meant that the goods must be within reach of a ship’s lifting tackle. This may, as a consequence, require that the seller hire lighters to take the goods out to a ship in ports where this is the practice. The requirements of an FAS term are the same as those of an FOB contract. The seller’s responsibilities end upon delivery of the goods alongside. CIF—Cost, Insurance, and Freight – The most important and most commonly used shipping term is cost, insurance, and freight. A CIF contract requires the seller to arrange for the carriage of goods by sea to a port of destination and to turn over to the 3 buyer the documents necessary to obtain the goods from the carrier or to assert a claim against an insurer if the goods are lost or damaged. The three documents that the seller (as a minimum) has to provide—the invoice, the insurance policy, and the bill of lading—represent the three elements of the contract: cost, insurance, and freight. The seller’s obligations are complete when the documents are tendered to the buyer. At that time, the buyer is obliged to pay the agreed-upon price. The CIF term is preferred by buyers because it means that they have little to do with the goods until the goods arrive at a port of destination in their country. A CIF price quote also allows buyers to compare prices from suppliers around the world without having to take into consideration differing freight rates, since the seller pays the freight and insurance. CFR—Cost and Freight – The cost and freight (port of destination) term is the same as the CIF term except that the seller does not have to procure marine insurance against the risk of loss or damage to the goods during transit. Because the insurance required under a CIF contract only has to cover minimum conditions, buyers wishing to purchase more extensive policies will want to use a CFR contract. Case 11-2: Phillips Puerto Rico Core, Inc. v. Tradax Petroleum, Ltd. United States, Court of Appeals, Second Circuit, 1985. Facts: Phillips agreed to buy 25-30,000 tons of naphtha from Tradax for shipment from Algeria to Guayama, Puerto Rico. The contract incorporated the Incoterms 1980 C & F trade term and a force majeure clause. The seller, Tradax, proposed that the naphtha be shipped on an integrated tug barge named the Oxy Trader. Phillips, on determining that the Oxy Trader would fit in its Puerto Rico berth and was available at the correct time, agreed. En route the Coast Guard detained the Oxy Trader at Gibraltar. Tradax received word that the Oxy Trader might have a latent defect and might not be allowed to proceed. Tradax relayed this information to Phillips. Phillips responded by saying that it was declaring force majeure and that it would cancel the contract if delivery were not made within 30 days. Tradax responded that under a C & F contract, its responsibility ended at the time of shipment. Tradax then presented the shipping documents to Phillips and demanded payment. Phillips refused and Tradax brought suit. Issue: (1) Did the risk of loss pass to the buyer at the time of shipment? (2) Could the buyer invoke force majeure? Holding: (1) Yes.