International sale of goods in Dominican Republic
International sale of goods contracts in Dominican Republic and elsewhere are also called ”documentary sale” transactions. The purpose of presenting the documentary transaction is to illustrate not only what is happening but also, why it is done in a particular manner.
There are several factors to consider in an international sale of goods transaction. Below we present a few of them:
for the seller the primary risk is of not getting paid after shipping the goods
• the buyer will not want to pay unless the goods have arrived or at least have been shipped
• the buyer will also worry whether the goods meet the quality and quantity requirements of the contract, so he might want to inspect the goods before payment
• Currency fluctuation risk must be mitigated by specifying the currency to be uses for payment in the contract and
• the seller might prefer a creditor located in his jurisdiction and subject to its legal system in order to secure payment
• Determination or agreeing on the law governing the contract or if a treaty or multilateral convention is applicable (CISG, UCC, UCP, COGSA, INCOTERMS)
The documentary sales transaction is made of several different interrelated contracts. The three most important of these contracts are: (1) the sales contract between the buyer and seller, (2) the letter of credit contract between the buyer’s bank and the seller, and (3) the bill of lading contract between seller and the carrier.
Every documentary sale transaction must be accompanied by requisite documents such as commercial invoice, packing list, export declaration, certificate of origin and according to the transaction, may require including other documents required by the purchaser to comply with the customs laws of its country and also to verify the conditions or quality of the goods.
1. The sales contract
The initial contact made is a letter or message from the buyer requesting the seller a price quotation, but in the case of an international sales transaction the buyer will request a proforma invoice which will state the cost of each of the components of the international sale, such as the payment and shipping terms (eg. FOB, FAS, C&F, CIF), including the method of handling insurance while the goods are in transit.
After receipt of the proforma invoice and the buyer decides to buy the sellers’ goods, the buyer then sends the seller a “Purchase Order Form”, which may or may not contain a large amount of print clauses set forth in the back different from the proforma invoice, and creating the possibility of a “battle of the forms” problem.
The seller will then send the buyer an Acknowledge form, which repeats the terms of the Purchase Order, and which may or may not contain a large amount of print clauses set forth in the back with the possibility of creating the possibility of a “battle of the forms” problem.
2. The Letter of Credit
The letter of credit is an instrument that assures that the seller will be paid upon shipment of the goods, as long as he can demonstrate to a bank through appropriate documents that it has shipped the goods.
A letter of credit is another contract, a promise by the buyers bank which runs directly to the seller that the buyer’s bank will pay the sales contract amount to the seller, if the seller produces the documents required by the sales contract which evidences that the seller has shipped the goods required by the sales contract.
The letters of credit may be revocable or irrevocable, but in a documentary sales transaction it is understood that an irrevocable one is required.
A confirmed letter of credit includes a promise from the buyers bank to the seller that buyer’s bank will pay the contract amount to seller if seller produces the required documents evidencing shipment of the goods.
To obtain a letter of credit the buyer goes to his bank and requests it to issue a letter of credit in favor of the seller. The buyer will also provide the bank with a copy of its purchase order or the proforma invoice so that the bank will know what documents are required by the sales contract.
Then the buyer’s bank contacts the seller’s correspondent bank advising the latter that it has opened a letter of credit in favor of the seller and of the details of the (irrevocable) letter of credit contract.
The sellers bank then contacts the seller who can now ship the goods without having being paid, but is only at risk if any of the parties fail financially or refuse to perform, being the seller able to procure enforcement against his own bank in the courts of his own jurisdiction.
3. The Bill of Lading
When the cargo vessel arrives to the port, the goods are loaded on board and the carrier then issues a Bill of Lading” covering them.
The Bill of Lading (B/L) is the contract between the shipper (or seller) and the carrier and it must conform to the requirements of the letter of credit. The Bill of lading describes the goods, markings and weight of the crates or containers as directed by the shipper’s letter of instructions.
Carrier promises to takes the goods to the named destination, and the shipper promises to pay the carriers fees. If the freight is “pre-paid”, the shipper will have paid before shipment; if it is “collect”, the buyer is to pay before receiving delivery of the goods.
If the bill of lading (B/L) is non- negotiable, the carrier promises to deliver the goods only to the person named as a consignee in the bill of lading, or to a person named by the consignee. If the bill of lading is negotiable the carrier promises to deliver the goods only to the person who is in possession of the bill of lading, properly endorsed.
A negotiable bill of lading, possession of the bill itself is equivalent of control of the goods and the carrier may not deliver the goods without first obtaining the surrender of the bill of lading.
It should be understood that a sales of goods transaction made through a letter of credit requires a negotiable bill of lading.
If the sales contract is CIF the seller will also need to procure insurance coverage for the goods during their transportation, and attack an “insurance certificate” or evidence of the contracting of such insurance to the documents.
The advantage of a documentary sale transaction (over other methods of payment) is that the goods are represented by the bill of lading utilized to finance the transaction, which serves as a link between the moment of loading the goods onto the vessel and the moment in which the payment against the presentation of such documents is made.
This method minimizes the risks that, without its use or an established business relationship, the parties will need to assume in an international sale of goods transaction.
On the other hand, the analysis of the agreements and the documentation required in an international sale of goods transaction, will allow for the prevention of problems and resolving the doubts that may originate as a result of the international trade activities of our businesses.
Please consult Arthur & Castillo Lawyers (AC LAW) on issues related to international sale of goods in Dominican Republic.
Note: This is not legal advice: it is intended to provide information of general interest about current legal issues. Arthur & Castillo, SRL. © 2019. All rights reserved.