When it comes to contracts, we all need to be on the same page

By Dr. James R. Giermanski -- Logistics Management, 1/1/2001

International cargo movements typically involve three contracts: the contract of sale, the contract of carriage, and the contract of payment. Unfortunately, few people understand the relationships between these contracts. If they did, they could avoid many costly problems.

The contract of sale is the legal agreement between the buyer and the seller. This contract specifies the terms of sale, which for international sales are the International Commercial Terms (Incoterms). Which of the 13 Incoterms is used is decided by negotiation between buyer and seller.

Problems can arise if the carrier is not informed of the terms of sale. Take the example of a Mexican buyer and a U.S. seller who agree to use the Incoterm "DAF" (Deliveredat Frontier) for a shipment to Monterrey, Mexico. Under DAF, liability shifts from the seller to the buyer at the border, and delivery of the merchandise may take place at a border city such as Laredo, Texas. But carriers often issue a through bill of lading (B/L) to the Mexican destination, creating an inconsistency between the carrier's obligation under its contract of carriage and what the buyer and seller agreed to do under their contract of sale.

In a case like this, who would assume the risk if the U.S. rail or motor carrier should lose the cargo in Mexico? Under the term DAF, any loss occurring in Mexico on the way to the destination in Monterrey would be the Mexican buyer's problem. Under the Carmack Amendment, though, a carrier that issues a door-to-door through bill is responsible to the shipper (seller) all the way to the destination in Mexico. The seller is therefore exposed to unexpected costs that could well wipe out its profit.

The contract of payment - often a documentary credit or letter of credit - is also connected to both the contract of sale and the contract of carriage. Letters of credit specify that a"clean transport document" is required for the seller to obtain payment. They also usually specify that an "order" bill of lading be used as a document of title - in effect, whoever owns the bill of lading owns the merchandise. But the carrier that issues that document is rarely aware that a letter of credit is involved, even though the bill of lading is critical to the success of the sale. A mistake by the carrier on the B/L can be costly to the shipper.

Such failure to coordinate all parties involved appears to be very common. Gary Nichols, director of business development at truckload carrier CFI, believes that most logistics managers fail to understand the impact of Incoterms. Furthermore, he says, the real problem lies within corporate organizations, where sales departments execute deals, often without considering issues of product payment, cargo or insurance liability, or responsibility for paying forwarders' fees or customs duties. "The shipping order is released," he says, "and the logistics staff is unaware of what has happened."

Shippers can take some simple steps to avoid confusion and litigation. First, buyers and sellers should use the guidelines set forth in the publication Incoterms 2000, which sets out the 13 Incoterms and clearly specifies where delivery takes place and where the costs and liability for each party begin and end. Second, carriers should be made aware of the terms of sale and what their obligations are under those terms. Third, carriers must train salespeople so they can negotiate contracts of carriage that are appropriate to the sales terms. Finally, shippers and carriers must fully understand the role of the bill of lading as part of the payment contract. In short, contractual coordination - among buyers, sellers, and carriers - is the linchpin to a successful international sale.

Dr. Giermanski is professor and director of International Business Studies atBelmont Abbey College in Belmont, N.C. He has frequently written, commented,and testified on issues affecting international logistics in North America. Phone: (704) 825-6218. E-mail: JimGiermanski@bac.edu .