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PASSAGE OF RISK
Comments on passage of risk under national rules, under CISG, under Incoterms

EDITOR: Albert H. Kritzer

Passage of title vs. passage of risk

Passage of title and passage of risk may or may not coincide, depending upon the applicable law and the desires of the parties. The CISG and Incoterms are similar in the sense that both have rules on delivery and passage of risk. Under the CISG, the gap-filling law should be examined to determine the point at which title passes.

National rules on passage of risk

There are many different national rules on passage of risk.

"The time of delivery determines the passing of risk in the Austrian, German and Scandinavian laws of sale, and in the UCC, but it has no such critical significance in French law or in the English Sale of Goods Act . . . where risk is tied to the passing of property. And in Spanish law -- and thus the laws of some South American countries . . . risk passes on delivery in a mercantile sale, but generally as early as the formation of the contract in a private transaction. This distinction between commercial and non-commercial sales is found in a number of systems. Another dichotomy is between specific and unascertained goods; there are special provisions dealing with these in many laws of sale, but in Japanese law the specification of goods is a notion which provides the very foundation of the rules on risk."[1]

"According to Swedish law, risk passes . . . when the goods are 'taken in hand by someone who has undertaken to carry them . . .', where the goods are sent by ship . . . when they have 'passed the ship's rail'. . . . According to Israeli law, risk passes when goods are 'delivered to carrier' . . ."[2], etc., etc.

It would seem as though such different attention would present a major problem when traders from different nations contract with one another. It has not. The explanation is the widespread use of commonly understood and mutually acceptable international trade terms such as Incoterms.[3]

The CISG and Incoterms

The advent of the CISG should not lessen reliance on Incoterms. In a commentary on ULIS that fits the CISG equally well, André Tunc states:

"[The Uniform] Law contains no reference to the principal forms of maritime or land sales (f.o.b., c.i.f., etc.). The draftsmen of the Law considered that this was a matter which was not yet properly ready for unification by means of international convention. To have made provision for the principal forms of sale would, in the first place, have meant doubling the volume of a Law which was already long. Moreover, the rules applicable to the principal forms of sale are still varied and doubtful. It may be said that it is precisely in a situation of this kind that unification is useful. It, however, appears that in this field a process of convergence and unification by persuasion, basically the task undertaken by the International Chamber of Commerce, may be more beneficial to commerce, through the gradual and progressive character of the convergence which it brings about, than an immediate unification by way of international convention. In short, the draftsmen of the Uniform Law felt that the rules governing the principal forms of sale where still changing, constantly adapting themselves to practical needs, and that it was not proper to halt a process probably beneficial to commerce. Of course the Uniform Law can be revised. This revision will, however, require the operation of a rather clumsy procedure. In consequence, it seemed from every point of view that the International chamber of Commerce would play a more useful part in this field than a commission or Conference for Unification and that it was better suited to this role."[4]

The provisions on passage of risk in Chapter IV of CISG Part III thus have a limited practical utility.[5] "[W]here the parties have agreed no trade terms at all, the regulation under the CISG will apply. But these cases are rare."[6]

Lookofsky elaborates on the realities of sales contract life:

"The most important of the [CISG's] risk rules are those which regulate the passing of risk when the contract of sale involves carriage of the goods. . . . As a practical matter, however, even these rules are not likely to play a central role in most contracts actually drafted for the international sale of goods. So, before considering the workings of the Convention's gap-filling regime, some attention should be given to the realities of sales contract life.

"According to the general freedom-of-contract rule the parties may 'derogate from or vary the effect of any [Convention] provisions' . . . inter alia, the provisions in Chapter IV of CISG Part III regarding the Passing of Risk. And although perhaps only a minority of international sales contracts set forth rules which would displace the Convention regime regarding (e.g.) sales contract formation or remedies for sales contract breach, a very large percentage of such contracts contain trade terms (CIF, C&F, FOB, FAS, CPT, CIP, etc.) clearly designed to regulate the passing of risk.

"The International Chamber of Commerce, a federation composed of merchant organizations from around the world, has set forth a comprehensive set of definitions for the various trade terms (Incoterms) now in use. . . . In many international sales contracts, where the parties refer expressly to a particular trade term defined by the ICC, (e.g.) 'CIF Incoterms', the risk question will be defined by the official definition, simply because the definition has been incorporated into the contract by reference to the term. Even if the contract simply uses a common trade term (without referring specifically to Incoterms), its meaning will often be well known by virtue of widespread trade usage. . . ."[7]

He further states:

"It is also important to note that, in practice, many international sales are 'documentary sales', whereby the seller hands the goods over to a carrier and receives, in exchange, a bill of lading (or equivalent). This bill, together with other relevant documents, is then tendered to the buyer (or to the buyer's bank) . . . in return for payment of the price. If the contract is a 'shipment' contract . . . the holder of the bill of lading normally bears the risk of loss or damage from the time the goods are placed on board; in the case of a 'destination' contract . . . the risk remains with the seller until the carrier arrives at the destination. The CISG Convention, while recognizing documentary sales practices as a fact of commercial life, does not purport to define or regulate them, so in this particular respect, the Convention is not designed to function even as a gap-filling regime; any contractual gaps regarding documentary sales practices (hereunder: questions relating to payment against documents, insurance, etc.) will usually be filled by the customs of the trade or by the otherwise applicable national law. . . ."[8]


FOOTNOTES

1. P.M. Roth, The Passing of Risk, 27 American Journal of Comparative Law (1979) 272.

2. John O. Honnold, Uniform Law and Uniform Trade Terms, in: Horn & Schmitthoff eds., Transnational Law of International Commercial Transactions, Kluwer (1982) 164.

3. "A clear signal that the national civil law regulations . . . have not fully met the requirements in many countries for quite some time now, is sent by the fact that in practice a large part of [the] problems [under them] has been solved by relating to the Incoterms for more than 50 years." Fritz Enderlein & Dietrich Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods, Oceana (1992) 256.

4. André Tunc, 1 Hague Conference Records (1964) 363-364. Honnold adds to Tunc's explanation. Referring to "the need to modernize and revise detailed trade terms more frequently than the life-span one may expect from a basic international convention", he also identifies a "more fundamental" problem: the need to tailor contracts to individual needs in the face of an array of alternative approaches each of which requires detailed attention to technical issues presented; and a logical solution: reliance upon the Convention along with trade terms such as Incoterms. He states:

"The plans and understandings that underlie a contract need to be gathered from the language and setting of that very contract. . . . In routine transactions, drafting specific contract terms on [delivery and risk of loss] would delay the making and consummation of the contract. Detailed terms may be included in the parties' sale and purchase forms, but the terms in the two forms often fail to coincide and generate the intractable problems of the 'battle of the forms'. The use of Incoterms can speed agreement and avoid the hazard of divergent contract provisions. . . . Incoterms and the Convention play very different roles -- roles that support each other. Incoterms, properly invoked, can be very useful to define precisely some of the central steps that the parties should take. The Convention . . . gives general but useful answers to questions that the parties have not answered by contract provisions or by incorporating Incoterms. In addition, the Convention provides a way to avoid or resolve disputes in a wide range of situations, not mentioned in Incoterms, when a party fails to perform his duties under the contract." John O. Honnold, supra note 2 at 170-171.

5. "In practice, the agreement [of the parties] will spell out the seller's delivery obligations quite precisely by adopting an established shipment term (e.g., F.O.B., C.I.F.)." Jacob S. Ziegel, Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods, Toronto (July 1981) 81.

6. Fritz Enderlein & Dietrich Maskow, supra note 3 at 257.

7. Joseph Lookofsky, The United Nations Convention on Contracts for the International Sales of Goods, in: Blanpain, gen. ed., Encyclopaedia of Laws, Kluwer (1993) 112. Enderlein & Maskow are to the same effect, stating: "Without entering into detail as to their character, we wish to point out that in a case where the parties have agreed a customary delivery clause which is not further specified, it can be assumed that the interpretation given by the Incoterms is referred to . . . " Fritz Enderlein & Dietrich Maskow, supra note 3.

8. Joseph Lookofsky, id. at 113.


Pace Law School Institute of International Commercial Law - Last updated January 30, 2001
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