Drafting International Sales Contract to Avoid Force Majeure Issues Due to Import Bans on Genetically Modified Crops
INTRODUCTION
United States’ sellers and exporters of agricultural goods containing genetically modified traits often face the risk of a trade ban imposed by the importing nation on the goods.[1] Despite the exponential growth in products derived from biotechnology, many countries maintain bans on genetically modified organisms due to higher health and safety risks.[2] One such recent case concerned MIR162, a genetically modified trait in corn that was unexpectedly banned by China, causing major disruptions to U.S. exports of animal feed containing MIR162 and resulting in billions of dollars in losses.[3] China’s trade ban has spawned numerous lawsuits in the U.S. dealing with the repercussions of the trade ban.[4]
Although trade bans for health and safety reasons can be lawful under the rules of the multilateral trading regime of the World Trade Organization,[5] such restrictions can create major problems for the U.S. exporter who has already entered into a sales contract that is impacted by the trade ban. In the worst case scenario, U.S. exporters have entered into sales contracts for the goods and the trade restriction is imposed after the U.S. exporters have already shipped the goods and while they are in transit to the importing nation. The buyer in the importing nation claims that it is unable to accept delivery of the goods citing the import trade ban and argues that it is excused from performing the contract due to force majeure. The seller may find itself in the unfortunate situation of having the goods loaded on board a vessel that has traveled to the port of the buyer but with a recalcitrant buyer who contends it is unable to accept delivery and refuses to provide payment. The seller now has goods in a foreign port that cannot be unloaded and must now be diverted to a third country market, usually at a considerable loss. Aside from this scenario, any trade restriction that is threatened or imposed on goods that are being actively bought and sold through multiple sales contracts as part of a robust and ongoing international trading relationship between two nations creates uncertainty, risk, and potential losses for the traders. These risks are especially acute for U.S. sellers of leading agricultural exports such as soybeans ($25.7 billion in 2020), corn ($9.2 billion), and pork ($7.7 billion) that are sold to countries around the world, with China as the leading market for each product.[6]
These scenarios describe some of the issues that arose as a result of the trade ban imposed by China, from 2013 to 2014, on the importation of Distiller’s Dried Grains with Solubles (DDGS), which is a corn byproduct from ethanol production that is commonly used in high protein animal feed.[7] China is a heavy buyer of DDGS, accounting for half of all global DDGS imports.[8] In November 2013, China announced a zero tolerance policy for MIR162, a biotechnology enhanced trait in corn seeds; this policy resulted in a total import ban on MIR162.[9] MIR162 was invented by Syngenta, a Swiss agrichemical company in the business of using agricultural science and technology to enhance crops and seeds.[10] Syngenta produced genetically modified corn seeds; China subsequently detected MIR162 in DDGS, derived from corn crops, leading to a series of trade disruptions for shipments of DDGS from the United States caused by testing delays, diversion, and rejection of cargo.[11] Towards the end of 2013, China resumed imports of DDGS, but in June 2014, it imposed new stringent testing requirements for detecting MIR162 in DDGS that led to a new series of trade disruptions. Finally on December 11, 2014, China finally approved MIR162; however, the disruptive effects of the trade ban continued into 2015.[12] Estimates of U.S. trade losses—as a result of trade disruptions because of China’s ban on MIR162—range from $1 billion to $2.9 billion for 2013-2014, and $1.2 billion to $3.5 billion for 2014-2015.[13]
The losses from the Chinese trade embargo spawned two different types of litigation in the United States. Farmers food processing companies, like Archer Daniels Midland, and other exporters brought numerous lawsuits in U.S. courts against Syngenta for releasing corn seed with MIR162, without obtaining prior approval from China, which is a major market.[14] Many cases of this type have been consolidated for multidistrict litigation in Syngenta AG MIR162 Corn Litigation that is currently pending in the federal district court in Kansas.[15] A second series of disputes involved breach of contract claims by U.S. exporters against individual Chinese buyers who refused to pay for and accept delivery of DDGS as a result of China’s trade ban.[16] The Chinese buyers asserted the defense that China’s ban on imports of DDGS made acceptance of the DDGS impossible due to force majeure.[17] The buyers argued that the trade ban excused their non-performance of the sales contract.[18] These cases are also still being litigated.[19]
This Article focuses on the issues raised by the second set of cases and examines how U.S. sellers and exporters should draft their sales contracts to avoid claims of force majeure due to unexpected trade bans. Although the discussion below refers to the MIR162 and DDGS trade ban issued by China, the same principles discussed below are applicable to avoid the harmful effects on sellers of trade bans issued by any country.
LEGAL REGIMES FOR INTERNATIONAL SALES CONTRACTS
A. THE CISG, UCC, AND PRC CONTRACT LAW
The contracts between the U.S. sellers of DDGS and Chinese buyers were international sales contracts, i.e. contracts where the seller and buyer are located in different nations. For such contracts, a basic issue that arises at the outset is which substantive law of contracts should govern the sales contract. In international sales contracts, there are generally three possible legal regimes for these contracts: The law of the seller’s nation, the law of the buyer’s nation, and the United Nations Convention for Contracts for the International Sale of Goods (CISG), an international treaty.[20]
Most modern sales contracts contain a choice of law clause designating the applicable law; otherwise, the choice of law would have to be decided by a court or arbitration tribunal through a complex and time consuming analysis using choice of law principles.[21] In the case of the DDGS contracts involving U.S. sellers, the choice of law clause generally designated U.S. law, including the Uniform Commercial Code (UCC), reflecting the preference that many U.S. lawyers have for the UCC over foreign legal regimes for contract disputes.[22]
The analysis that follows this Article will explain how a contract can be drafted to protect the seller from force majeure issues created by import restrictions using the CISG and related regimes. As this Article will explain, the same result can probably be achieved through the UCC and the People’s Republic of China (PRC) contract law, but both of these regimes contain ambiguities and gaps that could undermine the protection of the seller.[23] By contrast, the CISG and related regimes are more expansive, precise, and detailed than both the UCC and PRC law in providing protection for the seller.[24]
The CISG was drafted and promulgated by United Nations Commission on International Trade Law (UNICTRAL) to provide a uniform contract law for the international sale of goods in light of prevailing international commercial usage and practice.[25] In many cases, the seller has a preference for its own national law and the buyer has a preference for its national law.[26] The CISG was designed to be a uniform neutral law consistent with international commercial practice that would be acceptable to both the seller and buyer.[27] The CISG was opened for signature on April 11, 1980 and entered in force on January 1, 1988.[28] Currently, the CISG has 94 contracting states, including the United States, China, Germany, Japan, and most other leading industrialized nations of the world.[29]
The CISG automatically applies to contracts for the international sale of goods between sellers and buyers from contracting states unless one of the parties opts out of the CISG.[30] In the DDGS contracts, the choice of law provision designating the UCC is effective to opt out of the CISG and to apply the UCC instead.[31] Parties that wish to have the CISG govern their contracts do not need to opt into the CISG.[32]
A second legal regime that is often used in conjunction with the CISG for international sales contracts is the International Commercial Incoterms (Incoterms) promulgated by the International Chamber of Commerce (ICC) located in Paris, France.[33] The ICC consists of national chambers of commerce that have promulgated different versions of Incoterms since 1936 with the latest version of Incoterms issued in 2020.[34] Incoterms is not a law, but is a lexicon of commercial terms that the parties can adopt by contract.[35] Incoterms is an agreed upon and uniform set of definitions for the most common commercial terms that have been used in international commerce among western nations for hundreds of years.[36] These terms, such as FOB (Free on Board) and CIF (Cost, Insurance, and Freight), cover steps in the delivery and transport of the goods from the seller to the buyer that must occur in every sales transaction in international trade.[37]
These terms are useful in international trade because the terms specify where delivery of the goods is to occur and which party has the duty to pay for the shipment or transport of the goods, the duty to arrange for a contract of carriage, and the duty to provide insurance for the goods.[38] Every international sales transaction involves some or all of these steps.[39] Incoterms operates to supplement the law of contracts governing the sales contract by defining the commercial terms specified in the contract.[40] Without the use of these terms, which party has the responsibility for each of these steps might have to be negotiated for each new contract, a time consuming process. As commercial terms such as FOB and CFR have different meanings in different countries, Incoterms serves the crucial function of providing an agreed upon set of definitions for the parties.[41] Otherwise, disputes over the meaning of commercial terms might have to be resolved by litigation.
B. THE DOCUMENTARY SALE
Defenses asserted by the buyer based on force majeure are the most effective when the sales contract calls for the delivery of the goods by the seller to the buyer in China and for the payment by the buyer against the tender of the goods by the seller. In that case, the buyer can assert that the MIR162 decrees ban the entry of the goods into China making delivery by the seller and acceptance by the buyer impossible. If the buyer cannot accept delivery of the goods, the buyer is excused from paying the purchase price.
To avoid such force majeure defenses, the seller should draft the contract so that its delivery obligation and the buyer’s payment obligation are not affected by trade bans issued by the importing nation. The seller can do so by providing for delivery of the goods to be completed in the United States and for payment by the buyer against the tender of a set of documents rather than the goods. The seller can accomplish this result by using the documentary sale.
The documentary sale is often used in international trade to mitigate risks when the seller and buyer are located in different nations and when the goods must be transported over long distances to the buyer.[42] The risk to the seller is that the goods travel long distances only to be rejected after inspection by the buyer. To mitigate these risks, the parties agree that payment by the buyer to the seller must occur upon the delivery of documents to the buyer by the seller and not upon delivery of the goods. The seller will obtain all of these documents necessary for payment only after the seller has loaded the goods on board a carrier for shipment to the buyer:
Under . . . the documentary sale, delivery of the documents constitutes a symbolic delivery of the goods, and payment is then to occur upon delivery of the documents. The seller delivers a set of predetermined documents to the buyer, and the buyer inspects the documents and then makes payment to the seller. Having obtained the documents, the buyer now has legal control of the goods and can obtain physical possession of the goods at the port of importation from the carrier by presenting the documents to the carrier.[43]
The set of documents that the seller must submit to the buyer for payment are specified in the sales contract.[44] Among the documents that the seller must submit to the buyer is a document of title, usually a negotiable bill of lading, which represents title to and control of the goods.[45] The seller will obtain the bill of lading from the ocean carrier once the seller loads the goods on board.[46] The captain will then issue a negotiable bill of lading to the seller.[47] The negotiable bill of lading, a document of title, will enable the buyer to obtain possession of the goods from the carrier.[48] The buyer submits the negotiable bill of lading to the captain of the vessel when it arrives at the port of debarkation.[49] Once the buyer presents the bill of lading, the captain must accept the bill, which triggers a legal duty to hand over the goods to the buyer.[50] If the buyer is not the ultimate consumer, the buyer can also sell the goods while they are en route by transferring the negotiable bill of lading to a purchaser.[51]
The U.S. seller can adopt a documentary sale by using common commercial terms such as FOB or CFR. These terms as defined in Incoterms indicate that the sale is a documentary sale with payment against documents.[52] The seller need to do no more than to designate the sale as, for example, a CFR transaction for the contract to take on the characteristics of a documentary sale with payment against documents as discussed above.
1. Delivery of the Goods
Each sales contract requires the seller to deliver the goods to the buyer. What constitutes “delivery” in international commerce, however, is determined by the terms of the contract and the governing law. CISG Article 31 sets forth the seller’s delivery obligation as follows:
If the seller is not bound to deliver the goods at any other particular place, his obligation to deliver consists:
(a) if the contract of sale involves carriage of the goods – in handing over the goods to the first carrier for transmission to the buyer . . . . [53]
International sales contracts invariably involve carriage or transport of the goods; under the CISG, the seller’s delivery obligation requires the seller to hand over the goods to the first carrier, usually an ocean vessel or ship.[54] Under the CISG, in the absence of a different term in the sales contract, once the seller has delivered the goods to the first carrier, the seller has completed its delivery obligation to the buyer.[55]
The seller’s delivery obligation and the buyer’s duty of acceptance is further defined by Incoterms. Common commercial terms used today are FOB, CFR and CIF.[56] In all of these transactions the delivery obligation remains the same. For example, under Incoterms CFR:
A2 Delivery: The seller must deliver the goods either by placing them on board the vessel or by procuring the goods so delivered. In either case, the seller must deliver the goods on the agreed date or within the agreed period and in the manner customary in the port.[57]
The seller satisfies its delivery obligation under the CISG and Incoterms by delivering the goods into the custody of the carrier (or by purchasing the goods from a third party who has delivered them into the custody of the carrier). At this point, the buyer must accept delivery:
B2 Taking Delivery: The buyer must take delivery of the goods when they have been delivered under A2 and receive them from the carrier at the named port of destination.[58]
For U.S. sellers and exporters, the delivery obligation is usually satisfied in the United States because the carrier is an ocean vessel docked in a U.S. port ready to depart on its ocean voyage to the port of the buyer. Thus, under the CISG and Incoterms, the seller usually completes its delivery obligation to the buyer through actions that occur entirely in the United States.
2. Payment
Upon the seller’s delivery of the goods into the custody of the carrier, the carrier will give the seller a negotiable bill of lading for the goods.[59] Under a documentary sale, the negotiable bill of lading is the key document that the seller must submit to the buyer for payment because the negotiable bill of lading is a document of title entitling the buyer, the bearer of the bill properly endorsed, to obtain possession of the goods from the carrier.[60] The bill of lading is the legal equivalent of the goods that the seller submits to the buyer in exchange for payment.[61] With the negotiable bill of lading in hand and other documents, such as a commercial invoice issued by the seller, the seller now has all of the documents required by the sales contract that are needed for submission to the buyer and for receiving payment.[62]
The seller can now submit the documents to the buyer while the vessel is en route and the buyer must pay the purchase price in exchange for the documents.[63] When the seller presents the documents to the buyer, the buyer must accept the documents and make payment. The UCC makes this duty of the buyer clear:
Under the term C.I.F. or C. & F. unless otherwise agreed the buyer must make payment against tender of the required documents and the seller may not tender nor the buyer demand delivery of the goods in substitution for the documents.[64]
3. Transfer of Title and Risk of Loss
The seller bears the risk of loss to the goods before delivery is completed but the risk of loss is transferred to the buyer as soon as the seller completes delivery:
A3 Transfer of Risks: The seller bears all risks of loss of or damage to the goods until they have been delivered in accordance with A2.[65]
B3 Transfer of Risks: The buyer bears all risk of loss of or damage to the goods from the time they have been delivered under A2.[66]
As soon as the seller has delivered the goods into the custody of the carrier, risk of loss for the goods is transferred from the seller to the buyer. As title also accompanies risk of loss, the delivery of the goods by the seller into the custody of the carrier also transfers title to the buyer.[67] Both title and risk of loss are with the buyer as soon as the seller completes its delivery obligation or shortly thereafter.[68]
In the case of the DDGS shipments, this means that if the seller has completed its delivery obligation before China issued its ban on MIR162, the buyer suffers the risk of loss. If the seller completes its delivery after China has issued MIR162, then title and risk of loss for the trade ban has been transferred from the seller to the buyer. In either case, under a documentary sale, the Chinese buyer bears the risk of loss for the MIR162 trade restrictions. In other words, under a CFR contract with payment against documents, the buyer assumes the risk for unexpected trade ban decrees issued by the PRC government. This result, reached under the CISG and Incoterms, is also consistent with results under the UCC[69]and PRC contract law.[70]
4. The Effect of China’s Trade Ban on the Documentary Sale
If the parties use a documentary sale as set forth above, import ban decrees issued by a foreign government, such as China’s MIR162 decrees, have no effect on the performance of the sales contract by the seller and the buyer. Despite the import ban, the seller can complete all of the steps necessary to receive payment, all of which occur in the United States, and the buyer can complete payment to the seller. All of these steps occur using documents. The PRC decrees do not prevent the seller from performing its delivery obligations or the buyer from performing its duty to make payment against the presentation of documents.
This was the result reached by the arbitration tribunal in POET Nutrition, Inc. v. AFEC Commodities (Services and Solutions), Inc.[71] On March 3, 2014, AFEC Commodities executed nine contracts with POET Nutrition to purchase 59,000 tons of DDGS to be delivered to Midwest Bulk Transport in Joliet, Illinois, which would then ship the DDGS to China.[72] AFEC accepted deliveries under three contracts but refused to accept delivery under the remaining six contracts.[73] AFEC argued that China’s import ban on the DDGS containing MIR162 constituted force majeure that excused AFEC from performing on the remaining contracts.[74] The NGFA arbitration tribunal rejected this argument:
The shipment required under the express terms of the contracts was to take place in the city of Joliet, Illinois. There was no indication in the contracts that AFEC's performance under the contracts was dependent upon policies of the Chinese government. The arbitrators determined that AFEC had accepted the risk of this action by the Chinese government in this trade. Indeed, it appeared that the parties were aware—or should have been aware—of at least the potential risks arising out of import restrictions imposed by the Chinese government. AFEC was accountable for management and control of those risks under the contracts. The policy imposed by the Chinese government did not negate the express purpose of these contracts or otherwise excuse AFEC's performance under the contracts.[75]
POET Nutrition did not explicitly discuss the documentary sale but its result is based upon and is consistent with the analysis set forth in this Article. The PRC decrees prohibited the importation of MIR162 but these decrees had no effect on the performance of a CFR contract, a documentary sale that requires payment against the submission of documents. Under a documentary sale, such as a CFR contract, the seller has a duty to deliver the goods to the carrier in the United States. In POET Nutrition, the seller made delivery in Joliet, Illinois to the freight forwarder, Midwest Bulk Transport, which is the agent that handles shipments for the buyer.
Nothing in the MIR162 decrees prevents the seller from completing this delivery. Once the seller submits the documents to the buyer, the buyer has an obligation to make payment to the seller. Nothing in the MIR162 decree prevents the buyer from paying the seller. The buyer’s primary concern is that it now has the shipment of DDGS that will not be permitted entry into China. However, the risk of loss passed from the seller to the buyer upon delivery of the goods to the carrier and the buyer must now bear the risk of loss for the DDGS. Most likely, the DDGS will have to be resold outside of China at a loss. By accepting a CFR and the documentary sale, the buyer accepted the risk of loss for unexpected trade bans issued by China. If the buyer did not wish to accept the risk of loss then the buyer should have negotiated a provision in the contract explicitly allocating the risk of loss for government import bans on the seller.
CONCLUSION
United States’ sellers and exporters of agricultural goods can mitigate the risks of unexpected trade bans by drafting their international sales contracts to assume the form of a documentary sale. The risks of trade bans are most acute for producers of agricultural goods that contained genetically modified traits. Despite the growth of these products, their risks of suffering trade bans due to increased concerns over health and safety remain high. Mitigating these risks can be done by using one of the common commercial forms for the delivery and shipment of the goods, such as CFR or CIF.
Any decrees of a foreign government banning or restricting the import of the goods that are the subject of a documentary sale have no effect on the performance of these contracts by either the seller or the buyer. These contracts call for delivery by the seller to the first carrier and for payment against documents. Performance of such contracts by the seller can occur entirely in the United States. The seller delivers the goods to the first carrier, usually at a port in the United States, and receives the documents necessary to obtain payment by the buyer. The seller submits the documents to the buyer or the buyer’s agent in the United States who has a duty to pay the purchase price to the seller. Under a CFR contract, the seller must tender the documents for payment and cannot tender the goods instead. The buyer must make payment against the tender of the documents and cannot seek to pay against the tender of the goods instead.
Such contracts place the risk of loss caused by unexpected government import bans on the buyer. In cases involving a pending or threatened trade ban, a sophisticated buyer might negotiate for a different allocation of the risk of loss in the sales contract, but this Article has focused on drafting contracts to protect the rights of U.S. sellers and exporters. In the absence of a different allocation of the risk of loss, U.S. sellers and exporters are protected against unexpected import bans if they use the documentary sale that calls for payment by the buyer against the submission of documents by the seller.
Daniel C.K. Chow earned his BA and JD at Yale University and currently serves as the Frank E. and Virginia H. Bazler Chair in Business Law at The Ohio State University Michael E. Moritz College of Law. Professor Chow teaches courses relating to international trade law, international business transactions, international intellectual property, and the law of China. His areas of expertise include cyberlaw and cybersecurity, intellectual property, patent law, and privacy. Professor Chow has written numerous books and articles in these areas, including leading casebooks such as International Business Transactions (3d edition 2015, Aspen), International Trade Law (2nd edition 2012, Aspen), and International Intellectual Property (2d edition 2012, West).
Professor Chow would like to extend his thanks to Matt Cooper, a Moritz Reference Librarian, for his helpful assistance on this article.
[1] See Crystal Turnbull, Morten Lillemo and Trine A.K. Hvoslef-Eide, Global Regulation of Genetically Modified Crops Amid the Gene Edited Crop Boom – A Review, Frontiers in Plant Sci. (Feb. 24, 2021), https://www.frontiersin.org/articles/10.3389/fpls.2021.630396/full (discussing trade bans).
[2] See id.
[3] See id.
[4] See, e.g., Syngenta AG MIR162 Corn Litigation, U.S. District Court of Kan., https://ksd.uscourts.gov/index.php/mdlcase/syngenta-ag-mir162-corn-litigation/ (pending multidistrict litigation); Hawkeye Gold, LLC v. China Nat’l Materials Indus. Imp. & Exp. Corp., No. 4:16-CV-0355-REL-SBJ (D. Iowa filed June 23, 2016) (pending case); POET Nutrition, Inc. v. AFEC Commodities (Servs. & Sols.), Inc., Nat’l Grain & Feed Ass’n, No. 2737 (Feb. 15, 2017) (Meyers, Hall, Augspurger, Arbs.), award confirmed in Memorandum Opinion, POET Nutrition, Inc. v. AFEC Commodities (Servs. & Sols.), Inc., No. 4:17-cv-04063 (D. S.D. Oct. 4, 2017), ECF No. 13 [hereinafter POET Nutrition]; The Delong Co., Inc. v. Non-Metals, Inc., Nat’l Grain & Feed Ass’n No. 2735 (Feb. 15, 2017) (Meyers, Hall, Augspurger, Arbs.).
[5] Trade bans due to health and safety concerns are permitted by Article XX, the General Exceptions Provision, of the World Trade Organization (WTO) General Agreement on Tariffs and Trade (1994). Article XX(b) permits import restrictions when “necessary to protect human, animal or plant life or health.” The trade ban must satisfy the necessity requirement of Article XX(b) and other requirements set forth in the introductory paragraph of Article XX. Both the United States and China are members of the WTO.
[6] See 2020 U.S. Ag Exports Second Highest on Record, Led by Soybeans, Corn and Pork to China, Farm Policy News (Apr. 7, 2021), https://farmpolicynews.illinois.edu/2021/04/2020-u-s-ag-exports-second-highest-on-record-led-by-soybeans-corn-and-pork-to-china/.
[7] See National Grain and Feed Association, MIR162: How Chinese Fee Grain Imports Have Changed Since Trade Disruption, Nat’l Grain & Feed Ass’n (Aug. 7, 2014), https://www.ngfa.org/newsletter/mir-162-how-chinese-feed-grain-imports-have-changed-since-trade-disruption/ [hereinafter NGFA].
[8] See USDA Foreign Agricultural Service, China: Agricultural Biotechnology Annual, U.S. Dept. of Agriculture Foreign Agricultural Service, Dec. 31, 2014, at 6.
[9] See NGFA, supra note 7.
[10] See generally Sygenta Group, https://www.syngenta.com/en/innovation-agriculture.
[11] See NGFA, supra note 7.
[12] See id.
[13] See id.
[14] See William B. Chaney et al., Syngenta Corn Litigation, Tex. A&M AgriLife Extension, https://agrilifeextension.tamu.edu/library/agricultural-law/syngenta-corn-litigation/.
[15] See supra note 4.
[16] See id.
[17] See Hawkeye Gold, supra note 4, Defendant Sonoma’s Answer, Case 4:16-cv-00355-SBJ, filed Sept. 3, 2021 at 6 (asserting doctrines of force majeure, frustration of purpose, impossibility, impracticability due to China’s regulatory changes that prevented enforcement and execution of the contract).
[18] See id.
[19] See Hawkeye Gold, supra note 4 (pending litigation in federal district court).
[20] See United Nations Convention on Contracts for the International Sale of Goods, S. Treaty Doc. No. 9, 98th Cong., 1st Sess. 22 (1983), 19 I.I.M. 67, reprinted in 15 U.S.C. App. 52 (1997); see also Daniel C.K. Chow & Thomas J. Schoenbaum, International Business Transactions 621 (4th ed. 2020) (stating that the three sources of law include: seller’s nation, buyer’s nation, and international treaty).
[21] See Chow & Schoenbaum, supra note 20, at 184.
[22] See id. at 190.
[23] For example, the UCC does not contain a complete list of commercial terms used in transport of the goods. The UCC only includes the terms FOB, FAS, CIF and CFR although there are a total of 11 terms, including such terms as EXW (Ex Works) or FCA (Free Carrier) that are used in international commerce. See Incoterms 2020. The UCC also does not deal with many situations that can arise in transport of the goods, such as the frequent situation where the goods arrive at the dock but the vessel is not temporarily available due to lateness, mistake, or circumstances. The issue of how the goods should be handled, such as where the goods must be stored and who (the seller or buyer) bears the risk of loss if the goods are stolen or destroyed while in storage is not dealt with under the UCC. This situation and others are covered under Incoterms. See, e.g., Incoterms 2020 FOB, B3. For example, the massive chemical explosion in the port of Tianjin, China in 2015 destroyed shipping containers at the port waiting to be loaded on board ships and resulting in total economic losses of over $1 billion. See Tianjin Chemical Blast: China Jails 49 for Disaster, BBC News Asia (Nov. 9, 2016), https://www.bbc.com/news/world-asia-china-37927158. Neither the UCC nor PRC law deals explicitly with the risk of loss for the cargos in the containers waiting to be loaded on board ships, although this issue is covered by Incoterms. PRC law does not contain any mention of any of the commercial terms, such as FOB, CIF, CFR. If these terms are used in a contract governed by PRC law then any disagreements over the meaning of these terms may have to be litigated.
[24] See id.
[25] See Chow & Schoenbaum, supra note 20, at 185.
[26] See id.at 31.
[27] See id. at 190, 191–92 (discussing attempts by the United States to have the UCC apply instead of the CISG).
[28] See id. at 185.
[29] See CISG: Table of Contracting States, Inst. of Int’l Commercial L., https://iicl.law.pace.edu/cisg/page/cisg-table-contracting-states (stating that there are 94 contracting states as of Sept. 24, 2020).
[30] See CISG, supra note 21, art. 1 (providing guidelines for automatic application), 6 (providing opt out provision).
[31] See CISG, supra note 21, art. 6.
[32] See CISG, supra note 21, art. 1.
[33] See Chow & Schoenbaum, supra note 20, at 31.
[34] See id. at 79.
[35] See id.
[36] See Terms of Trade: Uniform Commercial Code and Incoterms 2020, Int’l Trade Blog (Mar. 27, 2017), https://www.shippingsolutions.com/blog/terms-of-trade-uniform-commercial-code-and-incoterms-2020 (“These terms have been in use for hundreds of years. They were developed by traders as a shorthand way of expressing the parties’ rights and obligations with respect to the shipping or transportation of goods being bought and sold.”). The terms were used by western traders so they are relatively new to countries such as China. See id.
[37] See Chow & Schoenbaum, supra note 20, at 79.
[38] See id.
[39] See id.
[40] See id.
[41] See id.
[42] See id. at 63–64.
[43] See id. at 63.
[44] See, e.g., Hawkeye Gold, supra note 4, First Amended Compl., Case 4:16-cv-00355-SBJ, filed Sept. 3, 2021, Ex. A (sales contract specifying documents required to be submitted by seller for payment).
[45] See Chow & Schoenbaum, supra note 20, at 72. By contrast to a negotiable bill of lading, a straight bill of lading is not a document of title, but is a receipt. See id. The negotiable bill of lading is made “To the order of shipper” (i.e. the seller) and is traditionally printed on yellow paper. See id. The seller endorses the bill of lading to the buyer by filling in the name of the buyer under the blank space under “To the order of shipper.” See id. After endorsement, the seller then delivers the bill of lading to the buyer. See id. All documentary sales transactions use a negotiable bill of lading or other document of title. See id.
[46] See id.
[47] See id.
[48] See id.
[49] See id.
[50] See id. at 72–73.
[51] See id. at 73.
[52] See Incoterms 2020, supra note 23, CIF, A6 (listing the transport document delivered by seller).
[53] See CISG, supra note 21, art. 31.
[54] Ocean carriage is the dominant form of transport of goods in international trade due to cost and efficiency. See Chow & Schoenbaum, supra note 20, at 105.
[55] See CISG, supra note 21, art. 31.
[56] These are the three out of four commercial terms contained in the UCC Article 2, §§ 2-319, 2-320, 2-321; the UCC does not include the other seven terms specified in Incoterms.
[57] See Incoterms 2020, supra note 23, CFR, A2.
[58] See Incoterms 2020, supra note 23, CFR, B2.
[59] See Chow & Schoenbaum, supra note 20, at 72.
[60] See id.
[61] See id.
[62] See id. at 69.
[63] See Incoterms 2020, supra note 23, CFR, A1, B1.
[64] See U.C.C. § 2-320(4).
[65] See Incoterms 2020, supra note 23, CFR, A3.
[66] See Incoterms 2020, supra note 23, CFR, B3.
[67] See Chow & Schoenbaum, supra note 20, at 80.
[68] See id. When the seller submits the negotiable bill of lading to the buyer, the bill of lading, a document of title, completes the transfer of title from the seller to the buyer.
[69] Under U.C.C. § 2-320 (“C.I.F.and C. & F. terms” in contracts), the seller satisfies its delivery obligation by loading the goods on board the first carrier. In exchange for the goods, the seller obtained a negotiable bill of lading necessary for retrieving the goods from the vessel at the port of destination. The seller submits all of the bill of lading and other document for payment to the buyer. As soon as the buyer receives the documents, the buyer must pay the purchase price under U.C.C. § 2-320(4) (“Under the term C.I.F. or C. & F. unless otherwise agreed the buyer must make payment against tender of the required documents and the seller may not tender nor the buyer demand delivery of the goods in substitution for the documents.”). In return for payment, the buyer receives the negotiable bill of lading and other documents. When the vessel arrives, the buyer delivers the negotiable bill of lading to the captain of the vessel. The captain must then release the goods to the buyer. As soon as the seller delivered the goods into the custody of the carrier title and risk of loss passed from the seller to the buyer. U.C.C. §2-401 (holding that the seller’s delivery of goods results in passing of title to buyer); U.C.C. §2-509 (holding that the risk of loss passes from seller to buyer upon completion of delivery of goods to carrier).
[70] Under the Civil Code of the People’s Republic of China [PRC Code] (effective Jan. 1, 2021), the risk of loss for the goods passes from the seller to the buyer as soon as the seller delivers the goods into the custody of the carrier. See PRC Code art. 604 (explaining that the risk of loss passes from the seller to the buyer upon delivery), art. 605 (explaining that the buyer bears risk of loss after the seller has delivered goods to carrier in accordance with the sales agreement). The PRC Code replaced the PRC Contract Law as of Jan. 1, 2021. PRC law does not contain definitions of commercial terms such as CFR, CIF, and FOB.
[71] See POET Nutrition, supra, note 4.
[72] See id. at 1.
[73] See id.
[74] See id. at 2.
[75] See id. at 3–4.
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