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September 17, 2019

Transfer of Risk On International Sales

International Trade Law

A. INTRODUCTION 

When goods are accidentally lost or damaged during an international sales contract is being performed, the question is; who shall bear this loss? Is it the seller, the buyer or the carrier?

United Nations Convention on Contracts for the International Sale of Goods 1980 (“CISG”) is a United Nations treaty that provides applicable laws for sales of goods between companies located in different countries. Since the companies are not performing only domestic sale contracts but do much of international sale contracts also, it is inevitable to comply with the unification rules of CISG.

CISG has became a part of Turkish legislation as of August 1st, 2011. Turkey’s accession to CISG creates an important common legal framework for sales transactions between Turkey and other contracting countries.

Incoterms, developed by the International Chamber of Commerce, is a set of rules that contracts may incorporate to specify parties’ respective rights and obligations as to transportation and delivery of goods. Hence, an international sales contract may be subject to CISG and may incorporate Incoterms.

Determining the risk transfer while drafting an international sales contract requires the knowledge on CISG provisions and also Incoterms, since they are in need to be embraced together.

B. TRANSFER OF RISK WITHIN INCOTERMS 2010

All international trade transactions have different characteristics and features and these features usually depend on international trade terms. These international trade terms were standardised by The International Chamber of Commerce (ICC), and called “INCOTERMS”. The traders must take Incoterms; such as the most common terms“FOB”, “CIF” and “Ex-Ship”; into consideration whilst deciding on the transportation of goods, since it is the easiest and most common in international contracts.

i. FOB Contracts

FOB (Free on Board) contract is used within each type of transport systems such as carriage of goods by rail, road, or air and also sales which include sea-waterway delivery methods. The principle of the FOB contract is that property and risk passes to the buyer, who bears all the other costs, when the goods cross the ship’s rail.

ii. CIF Contracts

The transfer of risk in CIF (Costs, Insurance and Freight) contracts is conditioned to transfer of property.[1] The risk of loss of or damage to the goods passes when the goods are on board the vessel. However, the seller must contract for and pay the costs and freight necessary to bring the goods to the destination. The seller is also responsible for insuring to cover the risk of loss or damage during carriage.

iii. Ex Ship Contracts

Ex-ship contract was also the part of INCOTERMS 2000 before removed by INCOTERMS 2010.  A main difference is that Ex-Ship contract is finalized when the actual delivery is done to the buyer, and other methods of delivery are not accepted even though they are accepted in other trade terms such as CIF.[2] Due to the importance of actual delivery, risk and property do not pass to the buyer until the goods are stated as available in delivery at port of discharge. Here, the buyer has no right over the goods until the actual delivery is developed.[3]

C. THE BASIC RULES OF CISG ON TRANSFER OF RISK

The CISG regulates transfer of risk between Articles 66 and 70 which ensure the moment of transfer of risk at the the delivery as a main rule. CISG provisions on the passage of risk can be applied to the contracts only should the parties did not make any previous express or implied arrangement on the issue.

General rule is that; when the risk passes to the buyer the buyer is obliged to pay the price even if the goods were never received, on the contrary, in case the goods were lost or destroyed before the risk was transferred to the buyer, the reponsibility of the loss remains on the seller. However, CISG detailed the possible disagreements and regulated the transfer of risk in many levels.

The first rule is ensured within Article 66 of CISG which basically indicates that buyer must fulfill its obligation to pay the price. However, in case the seller has caused any loss or damage by an act or neglect, the buyer has the right not to make the payment. Although the provision seems like it is against the seller, in pratice, sellers usually work with carriers. Hence, should the damage is caused by the carrier and the risk of loss has passed to the buyer, buyer may be faced with an obligation to pay, even though the goods are delivered to them properly.

As per Article 67 of CISG, should the parties does not agree for the goods to be handed over at a particular place, then the risk passes to the buyer when goods are handed over to the first carrier and if the particular place was indicated within the contract, then the risk passes when the goods are delivered at that specific place.

Article 67 also regulates the identification of the goods. In other words, the risk passes to the buyer when distinction is made, otherwise the seller is responsible for the risk of loss or damage.

Article 68 of CISG regulates the goods sold in transit; which means the goods which were kept in a ship, train or truck. The first sentence of the aforementioned article states the the rule that the risk passes to the buyer from the moment that the contract is concluded. Then it amends the rule in case the goods are sold in transit and the risk passes at the moment the goods are loaded on ship. The question is whether the buyer is obliged to bear the risk and responsibility of the payment in case the goods are defected after the shipment? In such case, the buyer may need to find the answer within Incoterms or sales contract which shall supersede the aforesaid rule.

Accordingly with CISG provisons, when the buyer receives the goods from the seller’s place, the risk passes to the buyer from the time he takes over the goods. Subsequently, for instance, if the cargos are placed at the buyer’s disposal and he delays or fails to take delivery in due time, he thus breaches a contract by not taking them over; however, the risk passes to him at that moment.[4] If the place of delivery is not the seller’s premises, then Article 69 shall be taken into account. In case the seller hands over the goods (i) at the buyer’s premises, or (ii) at a specified place or to a specified carrier; the risk passes to the buyer when the delivery date is due and the goods are placed at the buyer’s disposal.[5] Here, the seller should do all necessaries to enable the buyer take delivery. Also, the buyer should be aware that the goods are at his disposal.

Article 70 of CISG declares that Articles 67, 68 and 69 do not impair the remedies that the buyer has in the event of the fundamental breach of the contract done by the seller. Hence, in case the lack of conformity of goods the buyer shall terminate the contract. In this case, risk goes back to the seller retroactively.[6]

D. CONCLUSION

CISG and Incoterms become more of an issue together since CISG deals with a sale contract whilist Incoterms usually involve transportation rather than the contract. Incoterms do not regulate the situation where the loss or damage, that occurred after the risk, had passed, which is caused by the act or omission on the part of the seller as regulated under CISG. However, while Incoterms are not enough to determine the risk conditions favourable, CISG provisions may also turn especially against to the seller.

By this reason, detailing the transfer of risk in sales contracts is of the utmost importance. Therefore, it is advisible to refer to both Incoterms and CISG in contracts cautiously in order to stay in a safer zone.

 

Başak Bektimur, Associate

 

[1] J.C.T. Chuah, Law of International Trade: Cross-Border Commercial Transactions (5th edition, Sweet&Maxwell,2013) 4-062.

[2] J.C.T. Chuah, Law of International Trade: Cross-Border Commercial Transactions (5th edition, Sweet&Maxwell,2013) 2-025

[3] Yangtsze Indurance Association vs Lukmanjee

[4] CISG 1980

[5] R. Adisornmongkon, Passing of Risk in International Sale Contracts under the CISG 114

[6] R. Adisornmongkon, Passing of Risk in International Sale Contracts under the CISG 116

 

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