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International Sales Contracts: Common Myths And Misconceptions, Part III

It seems that U.S. parties tend to misunderstand, or simply fail to consider, the legal implications of entering into international sales transactions. We have sometimes seen this evidenced by parties using the same form of purchase order (or sales confirmation) for both domestic and offshore dealings, without realizing the differences that might exist between the two types of transactions. Following is the third installment in a multi-part series that is intended to set the facts straight on several myths, misconceptions and potential traps involving international sales.

Myth #3:  We utilize INCOTERMS to address all aspects necessary to convey the goods.  At the outset it should be understood that INCOTERMS are not law but rather a set of standard trading terms for use in cross-border sales transactions. INCOTERMS 2000 do a very good job of specifying the parties’ rights and obligations on a variety of sales aspects such as delivery, insurance, risk of loss, customs formalities, transport documentation, and the allocation of various other costs and responsibilities associated with the sale. INCOTERMS do not, however, dictate the point at which legal title to the goods is transferred from the seller to the buyer.

In some instances legal title will follow the bill of lading, but that does not occur when non-negotiable documents are involved. Since INCOTERMS do not specify the point of title transfer, it is wise to set that out in the sales contract. Otherwise, the transfer of title will be determined under the relevant governing law, which can result in disagreement between the parties or other unintended consequences. For instance, legal ownership can affect a party’s rights to bring suit for nonpayment, reject goods, recover rejected goods, assert warranty claims, enforce property rights against third parties, and claim tax credit. Ownership can also affect a party’s responsibilities with respect to national security measures that might arise during the import/export process. Transfer of legal title should therefore be specified in international sales transactions even when INCOTERMS are being used.

Next Up:  Can international and foreign sales laws be avoided by specifying that state law will govern?