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Published in Galston & Smit ed., International Sales: The United Nations Convention on Contracts for the International Sale of Goods, Matthew Bender (1984), Ch. 8, pages 8-1 to 8-15. Reproduction authorized by Juris Publishing.

Risk of Loss

by John O. Honnold

§ 8.01 Introduction
           [1] Types of Choices
           [2] Diverse Settings
           [3] The Contract; Practices and Usage
§ 8.02 Casualty During Carriage
           [1] The Basic Choice
   [a] Precedent from Domestic Law and Commercial Practice
   [b] Policy Considerations as to Risk Allocation
   [c] Contract Counseling
   [d] Legislative Technique
         [i] Barriers to Innovation
         [ii] Fine Tuning v. Simplicity
           [2] Marginal Problems of Risk in Transit
   [a] Handing Over to the First Carrier
   [b] Transshipment or Through-Shipment Arranged by the Seller
   [c] Seller's Retention of Bill of Lading
   [d] Sale of Goods That Are Already in Transit
§ 8.03 The Buyer is To Send for the Goods
§ 8.04 The Effect of Breach on Risk of Loss
§ 8.05 Conclusion

§ 8.01 Introduction

I should like to examine the Convention's rules on risk of loss in terms of legislative choices. These choices were of two types.

     [1] Types of Choices

One type of choice was presented by competing considerations of legislative policy in allocating risk between sellers and buyers. A second type of choice involved questions of legislative technique -- demands for simplicity contending with claims for delicate adjustment to meet the wide range of settings for international trade.

     [2] Diverse Settings

In approaching both issues -- allocation of risks and legislative technique -- it may be useful to remind ourselves of the wide range of settings in which casualty to the goods can occur. Casualties such as fire or theft can occur while the seller is holding the goods pending the arrival of the buyer's trucks or delivery of the goods to a carrier. When a carrier is involved, casualty can occur during a local haul to a long-range carrier; after the goods are delivered to the initial carrier but before they are loaded on rail-car or ship; during transshipment between rail and ocean carriers or between successive ocean carriers; after the goods arrive in buyer's city but before the buyer takes them over; thereafter during buyer's inspection and testing; after the buyer notifies the seller that the buyer will not keep the goods and before the seller takes them from the buyer.

We could have taken an even more tedious tour through the thicket in which risk problems lurk, but this may be enough, for now, to set the scene for examining some of the legislator's choices as to policy and legislative technique. [page 8-2]

     [3] The Contract; Practices and Usage

Of course, none of these problems can arise when the parties have the foresight to solve the problem in their contract -- either by plain, blunt words or when risk passes to the buyer, or by incorporating a prefabricated solution in a standard contract or in a trade term as defined by Incoterms. And even when the contract gives no explicit solution, the matter may be settled by the practices established by the parties or by trade usage. These solutions are available under Article 9 of the Convention, which corresponds to UCC 1-205. In all of these cases, the Convention (Art. 6) gives international force to choices made by the parties; here, as elsewhere, the Convention bows to the old-fashioned principle of liberty of contract. [page 8-3]

§ 8.02 Casualty During Carriage

     [1] The Basic Choice

Sometimes it is worthwhile to re-examine ideas that are taken for granted. One who does this risks very little: merely boredom or being compelled to drink the hemlock. So I dare to start with this question: In the common situation where the parties assume that the seller will dispatch goods by carrier but say nothing about risk in transit, who should bear that risk?

[a] Precedent from Domestic Law and Commercial Practice

In preparing the Convention, the basic rule was probably foreordained by the weight of precedent from national law and commercial practice. The regime of the United Kingdom's Sale of Goods Act (a vast domain on which the sun never sets), the Scandinavian Uniform Sales Laws, the civil law rules that I have been able to find, the Uniform Commercial Code and the 1964 Hague Sales Convention (ULIS) all lay down the general rule that transit risk falls on the buyer.[1] The same is true of the standard trade definitions, such as Incoterms (1980), for the most widely used quotations, even those in which the seller's price includes the freight -- "C.I.F.", "C&F", "Freight and Carriage paid (to Buyer's city)."[2] Such is the rule of the Convention; under Article 67 " ... risk passes to the buyer when the [page 8-4] goods are handed over to the first carrier ... ."[3]

[b] Policy Considerations as to Risk Allocation

I believe that these norms reflect several practical considerations: Damage during carriage usually is discovered only when the goods reach the buyer. In international transactions the seller is likely to be far from the damaged goods; the buyer is in a better position to assess the damage and to make a claim against the carrier or the insurer. In many transactions, before the seller ships the buyer will arrange for the issuance (or confirmation) of a letter of credit by a bank near the seller. The seller, in exchange for the payment, will surrender a negotiable bill of lading and an insurance policy which the bank will forward to the buyer. The buyer will have these documents in hand when he examines the goods and discovers the damage -- facts that will make it particularly efficient for the buyer to deal with the damage claim. In addition, where a seller must send goods to destinations that are both near and far, the added burdens and insurance costs for the remote sales would either complicate the seller's price quotations or deprive some buyers of their natural advantages of nearness to supply.

These considerations would seem to make further discussion unnecessary but for this nagging question: Could it be that these norms reflect patterns of an earlier day when raw materials were the dominant subject of international commerce? When bales of jute or hemp are damaged by sea-water, the buyer can sort out and salvage or dispose of the damaged goods. Do the same principles apply to high-technology equipment? When complex equipment is damaged in transit, repair may call for replacement parts and for techniques that only the seller can supply. Moreover, control of transit damage for delicate machinery depends heavily [page 8-5] on the adequacy of the seller's packing and packaging. For such sales, a strong case can be made for placing the responsibility for transit damage on the seller.

[c] Contract Counseling

Certainly I would advise a buyer to try to persuade the seller to take responsibility for repair or replacement of high-technology equipment that is damaged in transit. And, as "counsel to the situation," I would advise sellers to accommodate such requests in exchange for concessions from the buyer, such as protection from claims for consequential damages.

Does it follow that the Convention should have laid down a general rule that sellers bear transit risks? Alternatively, should the drafters have provided that sellers bear transit risk with respect to specified types of goods?

[d] Legislative Technique

These questions force us to move from our first theme, underlying policy considerations concerning risk, to our second theme -- problems of legislative technique and drafting.

[i] Barriers to Innovation

A proposal to reverse the widely-accepted norm that buyers bear transit risks would not have been useful for two reasons, one short and one long. The short answer is that the "proposal, after time-wasting discussion, would have been rejected for a compelling reason not related to the intrinsic "scientific" merits of the proposal: Such a break with widely established legal patterns would have jeopardized ratification -- a delicate and difficult enterprise under the most favorable conditions.

Even when only one legislature must be satisfied, draftsmen [page 8-6] in this field have chosen discretion as the better part of valor. Chalmers reported that, in preparing the 1893 Sale of Goods Act, he followed advice that Parliamentary acceptance depended on his reproducing "as exactly as possible the existing law."[4] Even if one feels, from the safety of the sidelines a century later, that he was a bit too cautious in preserving some of the casuistic distinctions generated by case-law development of the preceding century, Chalmers would have been quixotic to charge with bright new ideas against deeply-entrenched rules. Even in this rebellious new world, those preparing commercial laws have moved with caution. This was true of Crawford's work in converting the United Kingdom's Bill of Exchange Act into our Negotiable Instruments Law and of Williston's work in converting the Sale of Goods Act into our Uniform Sales Act.

Was our Uniform Commercial Code an exception? Its most radical and successful part, Article 9 on Secured Transactions, proves that legal techniques can become so rotten that they are ripe for revolution; the results were not radically different from what prior legislation and case-law had tried to achieve -- although with little success. Similarly, the radical spots in Article 2 on Sales involved conceptions rather than results, and the remaining six articles (Articles 3 through 8) stayed very close to shore. Even so, a faint suspicion of innovation in Article 5 on Letters of Credit lost that Article for three states, including New York.[5]

Such is the conservatism demanded for codification in one country; the problem is scarcely easier in drafting for world-wide unification. [page 8-7]

This, I said, would be the short answer to proposals to reverse the generally-accepted rule on risk in transit. Perhaps you will forgive me if I spare you the long answer, and merely refer to the above-mentioned reasons for placing transit risk on the buyer in the case, at least, of goods other than high-technology items which only the seller can repair.

[ii] Fine Tuning v. Simplicity

Even if we assume that it would not have been prudent to reverse the general rule on transit risk, we face a second problem: Should UNCITRAL have carved out an exception for high-technology goods? Unhappily, such a proposal would have run afoul of another principle of legislative technique: the need for simplicity and clarity. This principle, important for domestic legislation, is vital for international legislation that must run the gantlet of translation into a multitude of national languages.

Let me draw again on experience in domestic law-making. The brilliant drafters of UCC Article 9 initially tried for separate rules for different classes of commodities -- before they moved to a simpler, more unified approach.[6] And, in my view, some of the more troublesome aspects of the Sales Article are spots where attachment to the neat distinctions that are part of the "common-law tradition" cluttered and rigidified the text.[7] Out of mercy for you, or perhaps from cowardice, I am burying examples in a footnote.[8] [page 8-8]

     [2] Marginal Problems of Risk in Transit

[a] Handing Over to the First Carrier

Although international sales often involve ocean transport, you will find no reference in the Convention to the passage of risk when the goods cross the ship's rail or are loaded on board, distinctions hallowed by the definitions of terms such as "C.I.F." and "C&F."[9] The risk rules in these grand old terms hark back to an early day before containerization became the norm. Under the Incoterms definitions for "Freight or Carriage Paid to ... (named point of destination)," and the new 1980 term "Free Carrier ... (named point)," risk passes when the goods are delivered to the carrier, an approach that avoids the obvious awkwardness of having risk pass after the carrier has had the goods for a while.[10] Of course, the parties can arrange for risk to pass at the "ship's rail" or when the goods come on board, but one could not seriously consider using these tests in a modern statute.

[b] Transshipment or Through-Shipment Arranged by the Seller

As we have just seen, both the Convention (Art. 67(1)) and modern trade terms make risk pass on delivery to the first carrier. The problem assumes increasing importance as containerization encourages arrangements for multimodal transport, as by truck, rail and ship.

There is one problem that can reduce the legislative draftsman to despair: How can one sort out the various varieties of local transport, often by truck, that get the goods to the local rail siding or port?

One point, at least, is clear: under the UCC and the [page 8-9] Convention, risk does not pass to the buyer when the seller loads the goods on his own trucks for delivery to the rail or ocean carrier. The seller does not "hand over" the goods. when he loads his own truck, and those trucks are not a "carrier."[11] But the fog closes in under both domestic and international legislation when the parties. are mute about the seller's use, for example, of a trucking company to get the goods to a rail or ocean carrier. Happily, in most cases the seller does not quote delivered prices, with the result that the parties need to identify the point from which the buyer becomes responsible for the cost of transport. Such an identification, in a quotation such as "Free on Rail," will locate the point from which the buyer is responsible for both risk and transport costs, and less stylized references to the seller's duties concerning dispatch of the goods will locate the point at which "carriage" and transfer of risk occur. But, regardless of whether the Convention or domestic law applies, the parties will be well advised under any legal system to face and solve -- in plain, clear, blunt words -- the question of risk during preliminary transport by truck.

Suppose that the contract provides that the seller will deliver the goods in Sellersville to Carrier A for transport to an intermediate point X where Carrier A will deliver the goods to Carrier B for transport to Buyersville. Under the Convention does risk pass only when Carrier A delivers the goods to Carrier B? With emphasis, the answer is "no." The seller's instruction to Carrier A to deliver them to Carrier B clearly does not invoke the exception in Article 67(1) for cases where the seller is "bound to hand [the goods] over at a particular place" for this would nullify the Convention's basic rule that risk passes on delivery to the "first" carrier -- a rule specially designed for transshipment between carriers. Of course, the parties can agree that risk will pass at an intermediate point, but this is not the norm [page 8-10] provided by the Convention. And I believe that a court should find rather clear contract language before it concludes that the parties agreed to transfer risk during the course of transport; the parties should not be expected to inflict on themselves the difficulties of ascertaining when damage occurred during carriage.[12]

     [c] Seller's Retention of Bill of Lading

Often the contract permits the seller to ship under a negotiable bill of lading and retain this document during part or all of the carriage until the seller exchanges the document for the price. One might think that a contract that calls for surrender of control of the goods in exchange for the price would be a contract for delayed "handing over" or "delivery" of the goods, and that risk would pass only when the seller hands the documents to the buyer. Indeed, this is the norm stated in the Sale of Goods Act.[13] However, this approach can transfer risk in mid-ocean, and create awkward problems of proof: Did the water seep into the packages before or after the documents were handed over to the buyer? Consequently, this approach was rejected by both the UCC and the Convention. In the admirably blunt words of Article 67(1): "The fact that the seller is authorized to retain documents controlling the disposition of the goods does not affect the passage of the risk."[14] [page 8-11]

     [d] Sale of Goods That Are Already in Transit

I am sorry to report that in one situation risk of loss may pass while the goods are in the course of transit: when a contract of sale is made while the goods are in transit. At the Diplomatic Conference, Article 68 was amended, to make risk pass at the time of contracting, at the insistence of delegates who thought that relating the passing of risk retroactively to the dispatch of the goods might disadvantage developing countries.

Fortunately, Article 68 recognizes that a sale of goods already in transit may include the delivery of documents, including a negotiable policy of marine insurance, and that transfer of the insurance policy implies that the buyer takes over responsibility for the entire shipment, including unknown transit damage that occurred before the sale. However, no thoughtful buyer would leave this question to inference; this special type of transaction calls for an explicit provision on the passage of risk. And this advice is fully applicable even when the UCC applies.[15] [page 8-12]

§ 8.03 The Buyer Is To Send for the Goods

When the seller and buyer are near each other -- Buffalo and Toronto -- the contract may call for the buyer to send his trucks for the goods. In these cases, in the blunt, translatable language of Article 69(1), "the risk passes to the buyer when he takes over the goods, or if he does not do so in due time, from the time when the goods are placed at his disposal and he commits a breach of contract by failing to take delivery."

The UCC (2-509(3)) is similar in approach and result. Both the Convention and the UCC reject the norm of English case law and the Sale of Goods Act that "property," and therefore risk, shifts to the buyer at the time of contracting, even though the parties agreed that the buyer would take possession at a later date.[16] On the other hand, the UCC and the Convention respond to the view that the risk of casualty should be allocated to the party who is in the better position to care for the goods and to cover the risk by insurance. If the seller asks the buyer to pay for goods that burned while they were held by the seller, the buyer is likely to claim that the loss was a result of the seller's failure to exercise due care; settling or litigating such claims involves expense and uncertainty for both parties. Moreover, cost-efficient insurance rating calls for information as to the conditions of storage -- for example, whether the building is made of metal or wood and whether it is equipped with an automatic sprinkler. Consequently, it is customary to carry insurance for "building and contents"; the policy usually covers goods that await delivery since the seller cannot be sure he will be paid, particularly if the goods are destroyed.[17] [page 8-13]

§ 8.04 The Effect of Breach on Risk of Loss

As you will learn shortly from Professor Jacob Ziegel, the Convention does not empower buyers to "avoid the contract" or reject for trivial breaches by the seller. At this stage in the program it is not feasible to explore in detail the interplay between the Convention's rules on risk of loss and avoidance of the contract. Perhaps you will let me shorten Article 70 into two propositions. First, if the seller's shipment of goods is so seriously deficient as to justify the buyer in avoiding the contract, the buyer retains the right to avoid when the defective goods are made worse by damage in transit. Secondly, a corollary of the first proposition: If the seller's breach is not sufficiently serious to justify avoidance of the contract, this minor breach does not make the seller bear transit loss that under the contract was allocated to the buyer.

Perhaps I have a slightly better chance of escaping with this truncated statement if I mention that the Convention's approach is the same as UCC 2-501(1), and bury in a footnote a difference between the two regimes when the buyer, unaccountably, chooses to accept the doubly deficient goods.[18] [page 8-14]

§ 8.05 Conclusion

A worried friend asked Einstein: "Why can we make such great advances in science and not in international relations?" His answer: "Science is easier than politics."

Politics rarely dominated legislative work in UNCITRAL. But this review of some of the choices that were encountered in framing rules on risk of loss remind us that solutions derived from pure legal science had to take account of human (or engineering) factors -- resistance to radical change, preference for simplicity.

Could a human activity such as reaching agreement on legislation (whether foreign or domestic) ever be anything better than an interesting mixture of science and art? [page 8-15]


FOOTNOTES

1. (U.K.) Sale of Goods Act (1893 & 1979) (hereinafter SGA) 18 (Rule 5(2)), 20; UCC 2-509(1)(a); Swedish Sales Act 10; Israeli Sales Law 22(b); German (GDR) Int. Comm. Contracts Act 51(2); German (FRG) Civil Code 446(1), 447(1); ULIS 19(2), 97(1).

2. Incoterms 1980 (International Chamber of Commerce, Pub. No. 350, Paris 1980); Ramberg, Incoterms 1980, in Horn & Schmitthoff (eds.), Transnational Law of International Commercial Transactions 137 (1982).

3. Other parts of Article 67 will be quoted and analyzed infra notes 11-12.

4. M. D. Chalmers, Sale of Goods Act: Introduction to the First Edition (1894).

5. New York added a subsection (4) to UCC 5-102 that excluded Article 5 whenever (as is usual) the letter of credit "is subject in whole or in part" to ICC's Uniform Customs and Practice for Commercial Documentary Credits. Accord: Missouri and Alabama. For bitter criticism see Report No. 2 of the Permanent Editorial Board for the U.C.C. 95-100 (1964), quoted in J. Honnold, Sales and Sales Financing 313-315 (4th ed. 1976).

6. 1 G. Gilmore, Security Interests in Personal Property § 9.2 at pp. 290-294 (1965).

7. For one example see the discussion of UCC 2-509 infra note 12.

8. Other points at which I feel that Article 2 strained a bit hard for factual or emphemeral distinctions include: UCC 2-314(1)(b) ("fair average quality" for "fungible" goods) and Comment 7: "fair average" as "directly appropriate to agricultural bulk products"; UCC 2-316(2) and (3) (statutory rules on the contractual effect of specified words); UCC 2-319-2-324 (statutory definitions of trade terms).

9. Incoterms 1980, supra note 2; UCC 2-320(2)(b).

10. See Ramberg, supra note 2, at 147.

11. See J. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention § 368 at p. 374 (1982).

12. Under UCC 2-509(1)(a) the basic rule on passage of transit risk is subject to an exception when the contract requires the seller "to deliver [the goods] at a particular destination." This language, like the exceptions to the basic rule of Article 67(1), can lead to confusion and unintended undermining of the general rule unless it is construed narrowly to refer to contract provisions that are understood to imply that transit risk remains with the seller. It would be less confusing simply to say "unless the contract provides otherwise," or to rely on the general rule (UCC 1-102(3); CISG 6) that contract terms control.

13. SGA 18, Rule 5(2), 19. See Benjamin's Sale of Goods §§ 383-388, 1503-1508, 1832-1835 (A.G. Guest, ed., 2nd ed. 1981).

14. UCC 2-509(1)(a): risk passes "even though the shipment is under reservation (Section 2-505)." This rule, under both the UCC and the Convention, is limited to carriage of goods. Where goods are held in storage, handing over the goods by transfer of a bill of lading will transfer risk of loss. UCC 2-509(2)(a); CISG 69.

15. The risk provisions of the UCC do not address the sale of goods already in transit. Comment 2 to UCC 2-509 states that "[t]he underlying reason of [2-509(1)] does not require that the shipment be made after contracting," and states that risk will not pass before identification, which may occur after shipment, but that "aside from special agreement, the risk will not pass retroactively to the time of shipment in such a case." However, it is difficult to find a statutory basis for deciding these and other problems that arise when goods are sold during transit.

16. SGA 18 (Rule 1), 20; USA 19 (Rule 1), 22; Tarling v. Baxter, 6 B. & C. 360 (K.B. 1827); Benjamin op. cit. supra note 13, at § 404; Report of Secretary-General, paras. 70-88, 5 UNCITRAL Yearbook 80, 90-93 (1974).

17. The Convention did not follow the rule of UCC 2-510(3) that in effect gives the repudiating buyer who delays delivery of the goods the benefit of the seller's insurance.

18. Under UCC 2-510(1), when the buyer had the right to reject the goods "the risk of loss remains on the seller until cure or acceptance." Under the Convention, if the buyer chooses to accept the defective tender, the contract's allocation to him of transit risk is not upset; the buyer must look to the carrier or to insurance for reimbursement for the transit damage. Of course, the buyer has a claim against the seller for the seller's breach. Where the goods are doubly defective because of the seller's fundamental breach and further damage in transit, one would expect most buyers to throw the defective goods back on the buyer by declaring the contract avoided. See Honnold, op. cit. supra note 11, at §§ 380-382.


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