Reproduced with the permission of the author
 

ENGLISH SUMMARY

Commercial trade over the course of history has been a fundamental operation of human nature. Peoples from different geographical positions sought to improve their financial worth via the establishment of trade networks. This work will examine risk allocation ("passage of risk") in international commercial contracts with special emphasis placed on a comparative analysis of the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 11 April 1980), ("Convention"), the International Chamber of Commerce Rules for the Interpretation of Trade Terms ("Incoterms"), and the Uniform Commercial Code ("UCC").

This paper will expose the salient points by dividing the work into two main parts. The first part of the work is categorized as the descriptive, in that it will analyse the legislative roots of the subject matter. In the second part, the thesis will be examined by reviewing in detail, the method of interaction between the Convention, Incoterms and the UCC concerning risk allocation.

The concept of risk allocation in international commercial contracts breaches the question of who will bear the ultimate responsibility for goods that are either damaged or lost in transit. It is feasible and customary that transit losses be covered by a form of insurance. Moreover, loss of or damage to goods is generally revealed only at the end of the line; as a rule the buyer is usually in a superior position than the seller to determine the damage, undertake the appropriate steps for a claim with the insurance company and salvage the remaining goods. This issue breaches the question of payment and the responsibility of the buyer to support the goods irrespective of loss attributed to third parties. These issues will resinate throughout the document and form the basis of our examination.

Basically, risk allocation is dependant on the election of choice of law by the contracting parties. The rules the parties elect will in advance provide solid answers to these and other difficult questions. What is conclusive subsequent to our examination, is that the risk allocation provisions under the above-mentioned documents are distinct entities in law.

Finally, it may be stated with some certainty, that employing the Convention supplemented with Incoterms or documents such as the UCC can if properly incorporated, provide a positive force in the determination of risk allocation in the construction of international commercial contracts.

Key Words: Transfer of risk-Incoterms-UCC-Convention

RÉSUMÉ

Au cours de l'histoire, les échanges commerciaux ont toujours été une opération fondamentale pour la nature humaine. Des gens de différents sites géographiques ont voulu améliorer leur situation financière en établissant des liens d'échange.

La présente étude traite du transfert du risque dans les contrats de commerce international. Une attention particulière sera portée sur une analyse comparative entre la Convention de l'Organisation des Nations-Unies sur le contrat de vente internationale de marchandises (Vienne, le 11 avril 1980), ("Convention"), la Chambre de Commerce International, les Règles d'interprétation en matière d'échange ("Incoterms"), et le Uniform Commercial Code ("UCC").

Nous effectuerons, dans la première partie du travail, une analyse des origines du commerce international. En seconde partie, nous verrons en détail la méthode d'interaction entre la Convention, les Incoterms et le UCC relativement au transfert de risque.

Le concept de transfert du risque dans les contrats de commerce international amène l'épineuse question de savoir qui supportera l'ultime responsabilité pour les biens endommagés ou perdus en transit. Il est de coutume que les pertes subies lors du transport sont couvertes par une forme d'assurance. D'ailleurs, la perte ou les dommages aux biens se constate généralement en bout de ligne; selon l'usage, l'acheteur est placé dans une position supérieure au vendeur pour évaluer les dommages, entreprendre les mesures appropriées pour réclamer les indemnités à la compagnie d'assurance et sauver les biens restants. Ce dénouement amène à traiter du paiement et de la responsabilité de l'acheteur et de la responsabilité de l'acheteur face à la perte des biens due à une tierce partie. Ces constatations reviendront tout au long de l'exposé et serviront de base à notre analyse.

A la base, le transfert de risque est dépendant du choix des parties contractantes du régime de droit applicable. Le choix des règles applicables amènera des réponses judicieuses à ces constatations et autres difficultés.

C'est avec l'avènement incontournable de la réduction des barrières physiques face aux échanges et aux développements en communication et en transport, que la notion de l'interaction mondiale prend toute sa signification. Cette situation a multiplié la demande d'une réglementation de nature internationale qui puise sa source dans le droit commercial. L'harmonisation du droit simplifiera l'échange entre les gens résidant aux quatre coins du monde, et fera bénéficier non seulement les marchands, mais aussi les personnes qu'elles emploient et la communauté qui soutient leur commerce.

En regard de notre analyse des dispositions de la Convention, des Incoterms et du UCC, il apparaît évident que ces documents sont distincts en droit. La diversité de ces documents est amplement illustrée dans leur histoire. Malgré leurs différences, chacun peut jouer un rôle en prévenant les marchands du transfert de risque. Tout au long de cet essai, nous avons démontré comment ces documents étaient inter-reliés en étant employés sous une forme ou une autre dans un effort conjoint à l'intérieur d'un cadre de travail en matière contractuelle. A titre d'exemple, un contrat de vente intervenu entre un acheteur allemand et un vendeur canadien pourrait logiquement incorporer la Convention pour les questions de forme, tout en choisissant judicieusement un terme provenant des Incoterms pour régler la question du transfert de risque.

Malgré la possibilité que ces documents puissent jouer un rôle majeur, il est nécessaire d'identifier les questions litigieuses. Un examen minutieux de la Convention peut, par exemple, révéler des lacunes dans les dispositions du transfert de risque. Plus particulièrement, les dispositions de la convention en regard du transfert de risque pour les ventes en gros sont très déficientes et sont plus nuisibles que constructives. Ceci est illustré par l'article 68 concernant le transfert de risque préalablement aux biens étant ventilés. Bien que la forme de cet article ait été calquée sur le système britannique, une récente législation en Angleterre a surmonté cette difficulté. D'un autre côté, les changements en droit anglais ne sont pas reflétés dans la Convention, quoi qu'il en soit, nous croyons que les juristes éviteraient la Convention à ce stade. Ceci explique la recommandation de l'auteur d'utiliser une clause "out-turn" dans ce genre de vente. Cette approche fait consensus dans la communauté juridique.

Réciproquement, la Convention comme document de droit international est assez impressionnante, en ce qu'elle a acquis une reconnaissance sans équivoque. Il est important de rappeler que dans sa conception, la Convention est en théorie censée être dépourvue de tendances nationales. Au fond, elle est construite comme une entité embryonnaire auto-suffisante, avec ses propres méthodes pour résoudre les problèmes, sans bénéficier de sources externes. Pour ces raisons, elle doit être reconnue pour ses accomplissements. Quoi qu'il en soit, un point important à considérer est le temps attribué à la discussion de ce document dans les classes et des corridors des facultés de droit et les cercles académiques. Il est vrai qu'il existe une tendance à agrandir la reconnaissance universelle. En dépit de sa plus grande reconnaissance, pour que du droit international de cette nature puisse s'épanouir, il a besoin d'une évolution constante pour que les étudiants puissent l'étudier et ainsi appliquer leurs connaissances à la pratique du droit. C'est en conservant ceci à l'esprit que l'auteur espère qu'un examen attentif des dispositions concernant le transfert de risque prouvera leur entité.

Subséquemment, il est aussi approprié de mentionner que, malgré l'utilisation fréquente des Incoterms, penser que ce document est générateur d'obligations est erroné. En employant les Incoterms il est possible de déterminer le transfert de risque et le prix coûtant. Cependant, se baser sur ce document afin d'expliquer d'autres issues ne sont pas recommandables. Il est à noter que les Incoterms vivent dans un vide créé par une autre forme de droit. Les parties devraient éviter de chercher leurs solutions dans l'existence d'Incoterms. Ceci étant dit, il est également clair que les dispositions sur le transfert de risque ont été mises à l'épreuve et sont largement utilisées. Leur popularité réside dans l'économie de temps que peuvent sauver la plupart des hommes d'affaires ne bénéficiant pas du luxe de pouvoir dépenser leur énergie à composer des clauses détaillées concernant le transfert de risque. L'emploi de termes d'échanges reconnus internationalement est d'un grand secours et permet aux gens du monde entier d'attribuer la même définition à un terme sans tenir compte de leur culture ni de leurs connaissances juridiques.

Il est important de noter que durant ce travail, nous avons examiné deux documents de nature internationale et un autre de nature purement locale. De ce point de vue, le but de l'examen du UCC n'est pas clairement illogique. Les dispositions sur le transfert de risque contenues dans le UCC ont été utilisées à titre de modèle d'espèce pour la Convention. Plus spécifiquement, les dispositions du UCC sur le transfert de risque sont cohérentes et claires dans leur construction et il n'existerait pas d'alternative acceptable pour la Convention. Comme pour sa contre-partie dans les Incoterms, les dispositions du UCC sont détaillées, évitant ainsi une rédaction longue et pénible. Il devrait être noté que les termes d'échange du UCC ne sont pas grandement unifiés dans leur interprétation comme le sont ceux des Incoterms. Quoi qu'il en soit, ils sont en vigueur dans 49 des 50 états des Etats-Unis.

La croissance dans le commerce peut être en partie attribuée à la Convention, aux Incoterms, et au UCC, parce que ces règles favorisent la sécurité dans le cadre de la Loi. Généralement, le vendeur est préoccupé par le paiement tandis que l'acheteur se soucie de recevoir sa marchandise en bon état. En utilisant ces règles, ceci donne aux marchands que les règles du jeu sont équitables et que les solutions sont déjà connues et abordables. Le transfert de risque préoccupe toutes les parties dans un contrat d'envergure internationale et doit être traité à l'avance par mesure d'efficacité. L'utilisation des documents précités amène l'établissement d'une stabilisation des opérations.

Finalement, l'on peut avancer avec certitude que l'utilisation de la Convention, avec l'ajout des Incoterms ou de documents tel que le UCC, peut, si proprement invoqués, apporter une force positive dans la détermination du transfert de risque. Ainsi, l'auteur espère avoir apporté au lecteur les informations adéquates pour une analyse plus complète du transfert de risque d'un vendeur à un acheteur lors des contrats de commerce international dans les traditions des anciennes lois marchandes.

Mots-clés: Transfert de risque - Incoterms - UCC - Convention.
 

SUMMARY ENGLISH
SUMMARY FRENCH
TABLE OF CONTENTS
LIST OF ABBREVIATIONS
INTRODUCTION
 

Chapter One-The Vienna Convention
 

Chapter One- Comparing Risk Allocation under the Incoterms and the Convention
 

LIST OF ABBREVIATIONS
 

Commission	United Nations Commission of International Trade Law (UNCITRAL).
Convention	United Nations Convention on Contracts for the International Sale of Goods
	(Vienna, April 11, 1980).
1983 Convention	Convention on Agency in the International Sale of Goods (Geneva, February
	17 1983) in: Diplomatic Conference for the Adoption of the Unidroit Draft
	Convention on Agency in the International Sale of Goods (Geneva, January
	31 - February 17, 1983), Acts and Proceedings in: Uniform Law Review
	1983, I-II, 156-176.
First Committee	First Committee of the United Nations Conference on Contracts for the
	International Sale of Goods (Vienna March 10 - April 11, 1980), which
	prepared Articles 1-88.
1964 Hague Convention	Diplomatic Conference on the Unification of Law governing the
	International Sale of Goods (The Hague, April 2-25, 1964)
1964 Hague Conference	Records and Documents of the Diplomatic Conference on the Unification
	of Law governing the International Sale of Goods (The Hague, April 2-25,
	1964), 2 vol., ed. by the Ministry of Justice of the Netherlands, the Hague,
	1966.
Incoterms	International Rules for the Interpretation of Trade Terms, International
	Chamber of Commerce, Publ. No.460.
ICC	International Chamber of Commerce.
Official Records	United Nations Conference on Contracts for the International Sale of Goods
	(Vienna, March 10 - April 11, 1980), Official Records, New York, 1981.
1980 Rome Convention	Convention on the Law Applicable to Contractual Obligations
	(Rome, June 19 1980) in Official Journal of the European Communities,
	Luxembourg, European Communities Publications, 1. 266 of 19 June, 1980.
Sales Draft	Draft Convention on the International Sale of Goods, as approved by the
	United Nations Commission on International Trade Law at its tenth session,
	in Yearbook VIII (1977), New York, 1978, 5.
Second Committee	Second Committee of the United Nations Conference on Contracts for the
	International Sale of Goods (Vienna, 10 March - April 11, 1980), which
	prepared Articles 89-101.
Secretariat's Commentary	Commentary on the Draft Convention on Contracts for the International Sale
	of Goods, prepared by the United Nations Secretariat (in: Official Records,
	14-66).
ULF	Uniform Law in the Formation of Contracts for the International Sale of
	Goods, annexed to the Conventions Relating to a Uniform Law on the
	Formation of Contracts in the International Sale of Goods, adopted by the
	1964 Hague Conference (in: 1964 Hague Conference Records, I, 349-354).
ULIS	Uniform Law on International Sale of Goods, annexed to the Convention
	Relating to a Uniform Law on the International Sale of Goods, adopted by
	the 1964 Hague Conference (in: 1964 Hague Conference Records, I, 333-348).
ULVC	Draft of Law for the Unification of Certain Rules Relating to Validity of
	Contracts of International Sale of Goods, approved by the Governing
	Council of Unidroit in 1972 (in: Uniform Law Review, 1973, I, 61-69).
Uncitral	United Nations Commission on International Trade Law, established by the
	General Assembly of the United Nations with resolution 2205 (XXI) of 17
	December 1966 (in: Yearbook I (1968-70), New York, 1971, 65-66).
Uncitral Draft Convention	Draft Convention on Contracts for the International Sale of Goods as
	approved by the United Nations commission on International Trade Law at
	its eleventh session (1978) (in: Yearbook IX (1978), New York, 1981, 14).
Unidroit	International Institute for the Unification of Private Law (Intergovernmental
	Organization founded in 1926 with headquarters in Rome and grouping
	together 52 Member States).
Vienna Conference	United Nations Conference on Contracts for the International Sale of Goods
	(Vienna, March 10 - April 11, 1980).
Working Group	Working Group on the International Sale of Goods, set up by Uncitral at its
	second session, on March 26, 1969 (in: Yearbook I (1968-70), New York, 1971, 189).
Yearbook	United Nations Commission on International Trade Law Yearbook, New York,
	United Nations Publication.

Introduction

The unwritten rules of commerce dictated that with the progressive increase in trade, global merchants would be required to establish effective and efficient rules to govern their relations with their foreign brethren. Merchants concerned with issues such as passing of risk from seller to buyer, payment, loss and theft sought to develop coherent rules.[5] These rules developed with time, experience and financial necessity of the milieu.

Uniform law for international sales has an extended history and must be examined to understand the present legal paradigm.[6] It would appear that international trade law has gone through three distinct stages. We may categorize the first stage as the mediaeval lex mercatoria, which is defined as "a period where universally they applied accepted rules."[7]

We have categorized the second successive stage as the fusion into municipal law of the various national States that came after the feudal construction of mediaeval society. This is amply illustrated via the adoption in the French Republic of the Code de commerce in 1807, [8] and the German adoption of the Allgemeine Handelsgesetzbuch of 1861. [9]

The third stage in this extended history is contemporary and requires some extended study as it provides the foundation for this work. This stage is categorized by the development of commercial custom, commercial credit and unification of trade law in areas such as transportation, arbitration and the like.

The modern introduction to this stage begins in 1930 with the International Institute for the Unification of Private Law.[10] This body undertook a prepatory work for the eventual drafting of a uniform law on the international sales of goods. The eminent German jurist Ernst Rabel would promulgate this prepatory work. He suggested that a comprehensive study be undertaken and as a result, the work was transferred to a committee for study.[11]

This body,[12] working under the auspices of the League of Nations, [13] undertook to draft a document that could serve as a uniform guide for the international merchant. Finally, some four years later in 1934 the committee submitted a draft version to the League of Nations for member states' commentary. Unfortunately, due to the outbreak of the Second World War, the committee was unable to finish its work.

In 1951 after the war, the Dutch called a diplomatic conference [14] to finish the work started by Unidroit. The goal of this conference was to decide the most appropriate method of finishing the work previously started and see the work through to a successful conclusion. The conference decided to appoint a new committee to study previous works and draft a new document.

The committee produced two drafts. One in 1956[15] that was circulated to the various participants for commentary. Due to the numerous and diverse comments the committee produced another draft in 1963.[16] The 1963 draft was to form the basis for another diplomatic conference in 1964 at the Hague. Concurrently, Unidroit prepared a distinct draft uniform law for the formation of international sales contracts.[17]

The Hague Conference [18] was attended by twenty-eight states, with four other states sending members and six international organizations sending observers. On the conference table were two international documents ready for ratification. On one hand, there was the Uniform Law of International Sales, [19] and on the other, the Uniform Law on the Formation of Contracts for the International Sales of Goods.[20]

These two instruments were opened for signatures on July 1, 1964. The Hague Sales Convention entered force on August 18, 1972.[21] The Hague Formation of Contracts Convention entered force on August 23, 1972.

In 1966 [22] the United Nations General Assembly[23] created the United Nations Commission on International Trade Law.[24] UNCITRAL's task was to promote [ . . . ]

"The progressive harmonization and the unification of the law of international trade by, among other ways, preparing or promoting the adoption of new international conventions, model laws and uniform laws and promoting the codification and wider acceptance of international trade terms, provisions, customs and practices."[25]

The first task of UNCITRAL was to learn the position of the various member states of the United Nations and other agencies which may be affected by the Hague Conventions of 1964. The General-Secretary through its offices, sent a questionnaire to the member states, they then submitted the replies and analysis to the second session of UNCITRAL in 1969. Because of the foregoing, UNCITRAL created a working group composed of representatives of fourteen member states, whose task was to determine [ . . . ]

"Which modifications of the existing texts might render them capable of wider acceptance by countries of different legal, social and economic systems, or whether it will be necessary to elaborate a new text for the same purpose." [26]

Following a protracted examination of the ULIS and ULF, the working group concluded that as formulated the Hague Conventions could not be adequately enforced nor could they command wider acceptance. In part, the working group was concerned that the Hague Conference that adopted the ULIS and ULF was not attended by sufficient representatives composing a group of global ideas. More specifically, the developing nations and the socialist states were not widely represented.[27]

A second concern of the working group was the construction of the ULIS. It was their determination that the Convention was constructed in a complex and abstract fashion. This drafting method could result in incorrect application and render the document useless.

Thirdly, the ULIS seemed more of a document tailored for regional application than international trade. A clear example of this, was the omission of the Convention to examine the overseas shipment of goods.

Finally, the application and breadth of the Conventions were considered too large and omitted to take into account the conflict of laws rules in its construction.

In 1977 at UNCITRAL's tenth session, it adopted the Draft Convention on the International Sale of Goods after the alterations and modifications of the working group.[28] Likewise, in 1978 at the eleventh session, the Commission adopted the Rules on the Formation of Contracts for the International sale of Goods. The Commission decided to blend as one the Convention emanating from the tenth session and the subsequent rules, into a unified draft document-The Convention on Contracts for the International Sale of Goods. This combined document would lay the foundation for the United Nations Sales Convention.

The United Nations Conference on Contracts for the International Sale of Goods was held in Vienna, Austria, from March 10 to April 11, 1980. The conference was held in the Hofburg and was attended by sixty-two nations and eight international organizations.[29] A marked departure from previous attempts, the Vienna Conference included nations from all levels of the political and economic spectrum. The Convention was drafted in six official languages[30] and carries the same legal force.

The crux of the work was prepared by two committees. The first committee prepared articles 1-88. The second committee prepared articles 89-101. At the end of the conference, the two texts prepared by the respective committees were voted on in a plenary article by article. Under the rules of the conference, each article needed to be approved by two-thirds majority. [31]Finally, the requisite amount of member states adopted the Convention to be ratified.[32]

The Convention is concerned only with contracts for the sales of goods of an international nature. The Convention is limited in four aspects: First, as previously stated, it governs only international sales; Secondly, it is applicable only to commercial sale of goods; Thirdly, it does not apply to specific questions that are frequently discussed in sales transactions; Finally, the parties may at their desire exclude the Convention.

The creation of global legislation is no simple task, and brings into question fundamental principals surrounding the nation-state. Clearly, having universal legislation that usurps local laws contravenes the mandate of the United Nations and that of the Commission. It is however suggested [33] that this Convention can aid states in improving their national law by ensuring that international law is better reflected in national legislation.

A key feature of the Convention is its multinational construction and wide international acceptance as a document of international trade. This is by far a great achievement in that the Convention could find common ground on the issue of international contracts. One aspect that eased this wider acceptance was the Convention's ability to draw on existing international customs and usages between the parties. Forthcoming sections will analyse at length the Convention and put things in perspective.

We may conclude that the Convention, despite many problems,[34] is in fact and in law revolutionary. This document is a comprehensive leap forward in the creation and stabilization of an international sales law. In the same light we should not neglect the importance of the UCC and the Incoterms as similar documents.

The advent of the modern form of Incoterms and risk allocation has its roots in a long history and tradition of law. We may trace the origins of trade terms back to the later part of the eighteenth century. Historically, business persons sought to create coherent rules to govern their relations and help determine risk allocation in advance. These terms will be reviewed and examined later on in the larger context of this work.

Finally, in the same regard, the UCC has a long tradition in the United States as a unifying document of law that helped to create a more stable legal system among the competing states. Its relevance as a document of national and international repute will be examined with regard to its risk of loss provisions.

The genesis of the merchant law spawned the development of what we have come to accept today in the legal community as international commercial law. This topic of law developed through foundations laid by merchants' and would be passed to the legislative bodies of the respective merchants' own governments. Many efforts have been made to promote greater uniformity in the international sales of goods via the implementation of standard rules for world merchants. It is with this in mind, that the author will continue in the ancient traditions of the global merchants and attempt to clarify the rules that presently govern the passage of risk from seller to buyer in international commercial contracts.

Passage of risk from seller to buyer in international commercial contracts breaches the question of who will bear the ultimate responsibility. It is feasible and customary that transit losses be covered by a form of insurance. Moreover, loss of or damage to goods is generally revealed only at the end of the line; as a rule the buyer is usually in a superior position than the seller to determine the damage, undertake the appropriate steps for a claim with the insurance company and salvage the remaining goods. This issue breaches the question of payment and the responsibility of the buyer to support the goods irrespective of loss attributed to third parties. Likewise, issues such as force majeure are important considerations that affect buyers and sellers when goods travel great distances. One need only imagine the negative results of a natural disaster on the goods being transported. For example perils of the sea are beyond the control of all parties but have a direct bearing on how the respective obligations of the parties will be carried out. It is these and similar situations that confuse and greatly accentuate the issue of risk allocation in international commercial contracts.

This work will focus on clarifying this issue by dividing the work into two main parts with various Chapters. The first part of the work may be categorized as the descriptive in that we will analyse the legislative roots of this subject matter. In this part the Convention will be examined, giving the reader a brief overview of the terms covered and a detailed examination of the relevant provisions related to the allocation of risk. Following this outlay, the origins of the Incoterms will be exposed and a cursory overview of their function detailed. Finally, this part will examine the origins of the UCC and specifically review the provisions regarding risk allocation.

In part two, the author will develop the main thesis by examining and comparing in detail, the method of interaction between the Convention, Incoterms and the UCC concerning risk allocation. As a result of the foregoing, the author will draw to a focus the elements discovered during the comparative analysis by exposing areas in which the Convention, Incoterms and the UCC may pose a risk of incompatibility in their use.

Finally, the author will conclude with closing remarks regarding this work and the prospects for the future.
 

I. General

A. Applicable Law[35]

This section will briefly examine the Convention and its various articles. Though it is not the focus of this work to examine every article of the Convention comprehensively, this section will nonetheless efficiently expose the workings of the Convention. This will be done by highlighting the salient features and areas of contention. Likewise, in subsequent sections, various articles will be examined in detail as they have a direct bearing on the thesis of this work.

Article one [36] of the Convention provides the basic rules for ascertaining if the Convention is applicable to a contract of sale of goods and to its formation.[37] The basic premise of this article is that the buyer and the seller must have their place of business in different states.[38] Likewise, if a party to a contract has multiple places of business, the place of business with the closest ties to the contract and its performance will prevail.

When the sale of goods among the parties takes place in different states, the Convention will help reduce the search for a forum with the most convenient law. Second, it will reduce the need to resort to private international law, and third it will provide a modern international law for the parties.[39]

Further paragraphs (1)(a)(b)[40] stipulates that even if the parties have their place of business in different states,.[41] the Convention will only apply if: (1) the states where the parties come from are Contracting States and (2) the rules of private international law lead to the application of the law of a Contracting State. [42]

At the Diplomatic Conference several representatives suggested that (1)(b)[43] be deleted. It was their opinion that this provision may lead to confusion. The rules of private international law may lead to the application of one state's national law for formation and another state's laws for performance. From these issues a compromise was struck and as a consequence, Article 95 was added: [...]

"Any state may declare at the time of the deposit of its instrument of ratification, acceptance, approval or accession that it will not be bound by subparagraph(1)(b) of article 1 of this Convention."

Ultimately this provision can if enacted by the Contracting State limit the Convention and make applicable the domestic law of that Contracting State.

B. Scope of the Convention [44]

Article two enumerates six specific categories that do not fall within the scope of the Convention. These six categories are divided into two groups, paragraphs (a)-(c) are grounded in the type of transaction while, paragraphs (d)-(f) are grounded in the nature of the goods.[45]

This article has its legislative roots in Article 5 ULIS, in all actuality the fundamental change has been the elimination of reference to certain respects of instalment contracts in the Convention. Likewise, the Convention specifically excluded consumer sales from its application.

The drafters of Article(2)(a) were aware of national legislation concerning consumer protection. It was therefore agreed that the Convention would steer away from this area. Likewise, due to the various definitions that could arise under different legal systems, it was deemed unnecessary to include this type of element in the Convention.

The main reason for excluding auction sales (2)(b) from the Convention is based on the complexity of the sale itself. This type of commercial sale is rarely straightforward and may involve many offers and acceptances. As such, the drafters elected to avoid basic application problems and leave this type of sale to national legislation.

Under Article (2)(c) the Convention specifically excludes sales on execution or by authority of law. The drafters excluded this type of sale from its application because of the nature of the sale. Conceivably, there may be the potential for conflict.

The 1964 Hague Conventions and UNCITRAL were of agreement that transactions of securities, shares, monies and the like should be excluded from the application of the Convention. Article (2)(d) is the present reflection of the previous legislation.

The 1964 Hague Conventions specifically excluded sales and registration of vessels, ships, aircraft from its application.[46] The Convention's Article (2)(e) also excludes electricity from its scope of application.

C. General Provisions

The Convention attempts to avoid its application when the object of the contract is the supply of labour or when the party who orders goods, supplies a substantial part of the materials necessary for the manufacture of the contract's object.[47] This issue can be a problem and is well illustrated in the existing case law.

As an illustration of the later, we refer to the Supreme Court of Austria [48] which was seized with a case involving an Austrian company who ordered brooms from a Yugoslavian manufacturer. According to the terms of the contract the Austrian company (buyer) was to provide materials to the Yugoslavian manufacturer (seller) for the production of the brooms. The Court concluded that in this situation the Convention could not apply, relying on article 3(1)(2) the Court believed the buyer had supplied a substantial part of the materials necessary for the production of the goods. In essence, the Yugoslavian seller was furnishing labour and services and not goods.

Article 7(1) states that interpretation of the Convention must take into consideration the international character and the need to promote uniformity in its application and the observance of good faith in international trade. The ULIS did not have a similar provision, therefore making the Convention unique in its construction.

The notion of good faith[49] is clearly a broad and a multi dimensional concept that may be reasonably difficult for a court to interpret while examining the Convention. Nonetheless, the good faith principle can help in many fashions. This provision is flexible in that it will allow a court to enforce these rules under the guise of practicality.

Over rigidity can in all likelihood render ineffective a document of this scope and nature. This provision will enable the courts to avoid rigid interpretation that would ultimately result in inequitable decisions, and could lend to the move back to national law. [50] The drafters of the Convention also believed that this provision would help foster a better atmosphere for people to conduct their business affairs in an international setting.[51]

The Convention and the Uniform Laws are different in the way they resolve matters not expressly covered by their provisions. The ULIS at article 17 states as follows: "questions concerning matters governed by it and which are not expressly settled therein shall be settled in conformity with the general principles on which it is based."

The Convention differs in that Article 7(2), adds that in absence of such principles, those questions are to be settled "in conformity with the law applicable by virtue of the rules of private international law."[52] In essence, this allows courts to fill gaps in the Convention with national laws.[53] This aspect has been dealt with by courts and serves to illustrate the need for a broad but comprehensive interpretation.

The method of determining the application and of the Convention is illustrated in the Internationales Schiedsgericht der Bundeskammer der gewerblichen Wirtschaft-Wien Court,[54] (15 June 1994) the Arbitrator was seized with a matter between an Austrian Seller and German Buyer, who concluded a contract for the sale of rolled metal sheets "F.O.B. Hamburg." The Arbitrator had to determine the method of determining a claim for damages made by the Seller for lack of payment. The Seller made a claim for interest and the Arbitrator had to determine the applicable interest rate. The Arbitrator held, that since interest rates were within the scope of the Convention but not expressly settled by the Convention, the issue should be settled in conformity with the general principles on which the Convention is based (hence Article 7(2)). The Arbitrator found that compensation was a matter found in the Convention, referring to Articles 74 and 78, and that general relations between merchants requires interest from the Buyer due to delayed payment, because the Seller would resort to bank credit to finance late payment at the interest rate commonly practised in their own country.

The Convention also contains provisions regarding the conduct of the parties. Article 8(1)(2) and (3) allows the past conduct of the parties to be a relevant focus for interpreting the contract. [55] In this sense Article 8 allows communications between the parties to be used in defining the obligations of the parties to a contract. This article is also applicable to questions of interpretation that stem from a contract when the contract gives rise following an exchange of communications.[56]

[MCC-Marble Ceramic Center, Inc. v. Ceramic Nuova D'Agostino S.P.A. [57] illustrates judicial reliance upon Article 8, in this case, in lieu of the otherwise applicable UCC parol evidence rule.]

The Convention differs greatly from the ULIS in its treatment of usage among the parties. Article 9(1) and (2) of the ULIS states that parties [ . . . ] shall be bound by any usage which they have expressly or impliedly made applicable to their contract and by any practices which they have established between themselves; by usages which reasonable persons in the same situation as the parties usually consider to be applicable to their conduct.

The ULIS also provides that "where expressions, provisions or forms of contract commonly used in commercial practice are employed, they shall be interpreted according to the meaning usually given to them in trade concerned."

Article 9 of the ULIS has been criticised, for the provisions that the parties shall be bound by usages which reasonable persons in the same situation usually consider to be applicable.[58]

The Convention is different in that Article 9 has steered from the criticism of the ULIS, by binding parties to usage to which they have agreed either through their negotiations or by their dealings. Likewise, under the Convention's article 9, [59] parties will have impliedly made applicable to their contract or its formation any usage which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular area.

In the Civil Court of Basel-Stadt Switzerland[60] the Court was seized with an Austrian seller and Swiss buyer who concluded a contract for the sale of fibre. The Austrian argued, that the contract was concluded based on an order sent by the Swiss buyer, which the Austrian confirmed in writing. The tribunal concluded, that the confirmation letter sent by the Austrian and the lack of response by the Swiss buyer, constituted a usage as to the formation of contracts in the sense of Article 9(1) of the Convention. In other words, the parties had impliedly made that usage applicable to their contract since they knew or ought to have known the binding nature of the confirmation sent by the Austrian under their respective national laws. Likewise, at the time of the incident, there was no other rules or usage governing the sale of fibre. Finally, the tribunal concluded that the correspondence exchange, namely the confirmation, was a consistent practice that the parties had established among themselves and therefore, became binding pursuant to Article 9(2) of the Convention.

D. Formation of the Contract

The Convention's Article 11 and the ULIS's Article 15 are both similar in that a contract need not be concluded or evidenced in writing and is not subject to any other form requirement. According to the Convention, parties may adduce any mode of proof for a contract of sale, this would necessarily include witnesses, writings or the like.

The Convention allows, through its Article 96, for Contracting States whose national laws require that contracts be evidenced in writing to make a declaration of reservation according to article 12, to the point that the provisions of Article 11, article 29, or Part II of the Convention that deal with the issue of contract need not be in writing.[61]

The Hague Conventions are not dissimilar to the Convention concerning the concept of an offer. The Convention's Article 14(1) defines an offer as:

"A proposal for concluding a contract, addressed to one or more specific persons, which is sufficiently definite and which indicates the intention of the offeror to be bound in case of acceptance."

An offer is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provisions for determining the quantity or price.[62] Further, Article 14(2) is clear that a proposal other than one addressed to one or more specific persons is considered as an invitation to negotiate and not an offer.

In United Technologies International inc. Pratt and Whitney Commercial Engine Business v. Magyar Legi Kozlekedesi Vallalat(Malev Hungarian Airlines)[63], involved an American Plaintiff aircraft engines' manufacturer and a Hungarian manufacturer of Tupolev aircraft. The two parties entered into extensive negotiations, which resulted in the American manufacturer offering different types of engines without quoting a precise price. From the negotiations, the Hungarian manufacturer ordered a type of engine offered by the American during the negotiations.

The Court had to determine whether this transaction was considered a valid contract. In first instance, the Court believed a valid contract had been concluded, because the offer indicated the goods and made provisions for ascertaining price and quantity but this was reserved on appeal.[64]

The rules regarding revocation of an offer are contained in Articles 16(1) of the Convention and 5(2) of the ULF. These two documents both acknowledge the right to revoke an offer anytime, subject to certain terms. The ULF is clear in that article 5(2) does not allow an offer to be revoked if the revocation is not made in good faith. Likewise, an offer cannot be revoked if the offer has a fixed time for acceptance or there is a statement to the effect that the offer is not revocable.

The Convention's article 16(2)(a) and (b) states that an offer cannot be revoked if there is a fixed time for acceptance or otherwise, that the offer is irrevocable.[65] Furthermore, Article 17 of the Convention provides that an offer, even if it is irrevocable, is cancelled when rejection reaches the offerer.

Article 18(1) of the Convention defines the concept of acceptance"a statement made by, or other conduct of, the offeree which indicates assent to an offer."The ULF [66] does not define acceptance. However, it states that acceptance consists "of a declaration communicated by any means whatsoever to the offeror."

Article 18(2) of the Convention states that "acceptance takes effect when it reaches the offeror." Therefore, should an acceptance not reach the offeror, it will have no binding effect on the offeror if he does not reach it within the time allotted to respond, and if no time is set, then within a reasonable time. Under the Convention, an oral offer must be accepted immediately, unless stipulated otherwise. As such, where the acceptance is manifested in an act, said act must be performed within the same period. Article 18(3) provides that "such acts are effective even without notice to the offeror." Likewise, it is made explicit that the acceptance is effective at the moment the act is performed.[67]

Article 20 of the Convention governs the period of acceptance "the date of the letter is the date shown on it; if no date is shown, it is the date on the envelope. In the case of an offer made by instantaneous means of communication, the period runs from the moment it reaches the offeree." Further, Article 20(2) provides that an acceptance that cannot be delivered because the last day is a holiday or non-business day then, the period is extended to the next business day. Article 21(1) of the Convention provides that a late acceptance is not effective unless, the offeror informs the offeree that it is effective.

The general rule both under the Convention [68] and the ULF is that an offeree must accept the offer as it stands. Therefore, if the offeree alters or adds to the offer, he is not accepting but rather counter offering. Under 19(2) of the Convention, requires offerer to respond to an acceptance that contains additional terms which do not materially alter the terms. If the offeror does not object, without undue delay to the discrepancy or gives notice to that effect the offer is considered accepted. Article 19(3) gives various examples of some types of changes that would amount to a material change.[69]

E. Rights and duties of the buyer and seller

The seller's obligations are covered by Article 30 of the Convention. The Convention is comprehensive as it covers all aspects of the Seller's obligation under a contract. The Seller is bound to deliver the goods, and relinquish any documents relating to the transfer of property.

Article 35(1) of the Convention requires the Seller to deliver the goods which are of the quantity, quality and description required pursuant to the contract. Likewise, the goods must be packaged in the manner specified by the contract. Except where otherwise agreed, the goods do not conform with the contract unless they are fit for the purpose for which the goods of the same description would ordinarily be used [70]; are fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller's skill and judgment;[71] possess the qualities of the goods which the seller has held out to the buyer as a sample or model;[72] and are contained or packaged in the manner, in a way to preserve adequately and protect the goods.[73] However, the seller is not liable for any lack of conformity if at the time of the conclusion of the contract the buyer knew or could not have been unaware of such lack of conformity.[74]

The Convention [75] stipulates that the buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it. This is mitigated by the saving that the buyer may still reduce the price according to article 50 of the Convention on the buyer may claim damages, saving loss of profit, if he has a reasonable excuse for his failure to give the required notification. It must also be remembered that the buyer will lose his right to rely on the lack of conformity, if he does not give the seller notice at least within a period of two years from the date which the goods were handed over to the buyer, unless that time is contrary to a time contractually guaranteed upon.

Under the Convention the buyer may rely and avail himself of four remedies, namely: specific performance, avoidance, damages and reduction of price. One fundamental rule is that the buyer may require the seller to perform his obligations via specific performance.[76] Article 46(1) enumerates the terms for specific performance. Under this provision the buyer may not avail himself of specific performance where he has resorted to a remedy which is inconsistent with this requirement, such as avoidance or reduction of price. Likewise, the buyer may obtain damages in addition to specific performance to compensate him for any additional loss sustained from the sellers delay in performance.

Under the Convention the buyer's right to claim substitution of defective goods and the right to declare avoidance in cases of a nonconformity have been restricted. The Convention does not recognize ipso facto avoidance but redefines the concept in light of fundamental breach. In essence the Convention recognises two types of breaches: breach of contract by the buyer including fundamental breach.

Article 46(2) of the Convention states that if the goods do not conform with the contract the buyer may require delivery of substitute goods if the lack of conformity constitutes a fundamental breach and a request for substitute goods is made either with notice of a nonconformity under Article 39 or within reasonable time afterwards. As well, the buyer may require the seller under Article 46(3) to remedy the lack of conformity by repair, unless this is unreasonable having regard to all the circumstances, but request for repair must be made either with notice given under Article 39 or within a reasonable time afterwards.

The application of specific performance is restricted by Article 28, which states that a court does not have to order specific performance if it would not do so in similar cases governed by domestic law.[77]

The Convention allows the buyer under Article 49(1) to declare the contract avoided if the seller has committed a fundamental breach of contract or failed to deliver within a reasonable time. The Convention defines fundamental breach in Article 25 as one which "results in substantial detriment to the other party unless the party in breach did not foresee and had no reason to foresee such result."

In order to declare a contract avoided the Convention requires the availing party to follow a set procedure. Under Article 49(1), when the grounds established under 49(2)(a) and (b) are satisfied, and the buyer wishes the contract avoided, he must make a declaration of avoidance. Under the Convention the buyer loses his right to avoid the contract unless he makes his declaration within a reasonable time after he has become aware that delivery has been made in cases where the seller has delivered the goods and in respect of any other than late delivery, within a reasonable time after he knew or ought to have known of the breach.

In a decision of the Oberlandesgericht Frankfurt a.M. the Defendant, a German Company, refused to pay for shoes purchased from the Italian Plaintiff. The buyer relied on the ground that the shoes were not delivered according to the contract and the goods did not conform to the contract. The Court concluded that the German buyer was not legally entitled to declare the contract avoided and refuse to pay the contract price, as it had failed to set a time limit within which the seller was bound to deliver and failed to establish that the seller had committed a fundamental breach(articles 49(1) and 81(1)). The defendant failed to specify if the shoes were just below the contract standard and hence the defendant could either have claimed reduction in price or claim damages, not avoidance or were the shoes unfit for sale and therefore a fundamental breach.[78]

In a decision of the Austrian Court of Appeal at Innsbruck[79] a Danish Exporter of flowers, contracted with an Austrian buyer for a shipment of garden flowers. The Austrian buyer refused to pay the price for part of the shipment arguing that the seller had breached his commitment resulting in a fundamental breach of contract since part of the shipped flowers did not bloom through the end of the summer.

The Court of first instance rejected the buyer's argument on the ground that he failed to prove that the seller had guaranteed that the flowers would bloom through the entire summer, or that a fundamental breach had been committed because of the situation (Articles 36 and 49(1)). The Court also concluded that even if the buyer had ample grounds to avoid he waived this recourse by failing to provide the seller reasonable notice after discovering the defect (Article 39(1)).

On appeal the Court confirmed the lower Court decision and stated that the buyer failed to establish that the seller had breached a guarantee or committed a fundamental breach of contract.

Under the Convention[80] where the goods do not conform with the contract, the buyer may avail himself of a price reduction. This is not dependant on whether or not the price has already been paid. The buyer may reduce the price by the same proportion as the value of the goods delivered at the time of delivery bears to the value that conforming goods would have had then. Article 48 of the Convention, subject to Article 49, allow the seller after the delivery date a right to remedy his failure at his own expense. If he can do so without unreasonable delay and without causing the buyer unreasonable inconvenience or uncertainty of reimbursement by the seller of expenses advanced by the buyer.

The buyer has two main obligations, he must pay the price and take delivery of the goods as required by the contract and the provisions of the Convention. These requirements are covered by Article 53 and 55 of the Convention. The buyer's obligation is limited in that he is not obliged to do all such acts as are necessary in order to enable the seller to hand over the goods.

The seller may under Article 64(1) of the Convention declare the contract avoided if the failure by the buyer to perform any of his obligations amounts to a fundamental breach. The seller may fix an additional, reasonable period for the buyer to perform his obligations. If the buyer does not within such additional periods perform his obligations to pay the price or take delivery of the goods, or if he declares that he will not do so within such period, the seller may declare the contract avoided.[81]

Under the Convention the contract is avoided because of the buyer's breach only if the seller declares the contract avoided.[82]

F. Common Obligations of the seller and the Buyer

Article 71(1)(a) and (b) of the Convention allows a party to suspend the performance of his obligations. This may be done, after the conclusion of the contract, if it becomes apparent that the other party will not perform a substantial part of his obligations because of a serious deficiency either in his ability to perform or in his creditworthiness, or his conduct in preparing to perform or in performing the contract.

The party wishing to suspend his performance must give notice immediately to the other party and must continue with performance if the other party provides adequate assurances of his performance.[83]

Article 74 of the Convention helps determine the calculation of damages. In the Convention loss is determined by a sum equal to the loss, including loss of profit, suffered by a party in consequence of breach.[84] Damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters which he then knew, or ought to have known, as a possible consequence of the breach of contract. The Convention uses the terms foresaw which could mean that the foreseeability test is both subjective and objective. All relevant circumstances must clearly be taken into consideration. The Convention provides where a breach consists of delay in payment of price, the seller will be entitled to interest without prejudice to any claim for damages.[85]

Delchi Carrier, SpA v. Rotorex Corp.[86] involved an American manufacturer of compressors for air conditioners, who agreed to sell 10,800 compressors to an Italian manufacturer of air conditioners. The terms of the contract called for three shipments of the compressors. The first shipment was made. While the second shipment was en route, the Italian buyer found that the first shipment of air compressors did not conform to the contract. As such, the buyer rejected the shipment, undertook to store the compressors at the port of entry and attempted to resolve the matter of the nonconformity with the seller. After attempts to resolve the matter was unsuccessful, the buyer sued demanding damages for breach of contract pursuant to article 74 of the Convention.[87]

In the case where a contract is avoided and a substitute transaction is carried out. Article 75 of the Convention allows a party claiming damages may obtain the difference between the contract price and the price under the substitute transaction and any further damages recoverable under the general principle. In the case where there is no substitute transaction, Article 76(1) of the Convention, establishes the rule that damages will be equal to the difference between the contract price and the current price and the current price at the time when the party obtaining damages first had the right to declare the contract avoided. Article 76(2) of the Convention defines current price as the price prevailing at the place where the delivery of the goods should have been made or, if there was no current price, at that place or another place which serves as a reasonable substitute, making the allowance for differences in the cost of transporting the goods.

The Convention requires the parties to mitigate their damages.[88] Should a party fail to do so the party in breach may claim a reduction in the damages of the amount by which the loss should have been mitigated.

Article 79(1) of the Convention deals with the issue of when a party may be exempted from liability for failure to perform his obligations if he is unable to perform due to circumstances beyond his control.[89] The Convention allows a party to evade liability for damages if he proves that the failure was due to any impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.

Article 79(2) of the Convention states that if a failure to perform is due to the failure of a third person whom he engaged to perform the whole or a part of the contract, the defaulting party is exempt from liability for damages only if two conditions are fulfilled: first, he must himself be exempt under the conditions mentioned above and, second, the third person must also be so exempt.

Further, these exemptions only apply for the duration of the impediment.[90] The Convention [91] provides that when a party who fails to perform because of an impediment, he must give notice to the other party of the impediment and its effect. If the notice is not received within a reasonable time after the party in default knew, or ought to have known, of the impediment, he is liable for damages resulting from such non-receipt. Further, the Convention [92] does not limit either party from exercising any other right other than to claim damages.

Article 81(1) of the Convention provides that avoidance of the contract releases the parties from their respective obligations under it, subject to any damages which may be due. This article provides that avoidance does not affect any provisions of the contract for the settling of disputes or governing respective rights and obligations of the parties upon avoidance of the contract. Likewise, Article 81(2) provides that a party that has performed the contract, either wholly or in part, may claim restitution of what he has supplied or paid; if both parties are bound to make restitution, they must do so concurrently.

Under Articles 82(1) [93] and (2) of the Convention, making restitution of the goods in the condition in which he received them is impossible for the buyer, he loses the right to declare the contract avoided. However, this does not apply if:
 

In the case where a buyer receives goods but intends to reject them, Article 86(2) of the Convention provides that the buyer must take possession of them on behalf of the seller, if he can do so without unreasonable inconvenience and expense.

In the case where a party is obliged to preserve the goods pursuant to Article 87 of the Convention, he may deposit them in a warehouse of a third person at the expense of the other party if the expense incurred is reasonable.

In a decision of The Cantonal Court of Vaud [94] a Swiss buyer of machinery applied for provisional measures requesting the seller, a German, to deposit in the warehouse of a third party a device retained by the German in its premises. This device was requisite for the operation of machinery delivered to the Swiss buyer but not fully paid for. In its defence, the seller invoked article 87 of the Convention, stating that the buyer should be responsible for the costs of the deposit in the third party warehouse of a said device. The Court applied the Convention, but held that since the Cantonal rules of procedure applied it was not bound by the Convention on the matter of expenses of the deposit, since the Convention only applied to substantive law and not procedure.

Likewise, Article 88(1) states that a party who has an obligation to preserve the goods may sell them where there has been an unreasonable delay by the party in paying the cost of preservation. The preserving party must first give notice of his intention to sell the preserved goods. The obligation to resell stems from Article 88(2) where the goods are subject to loss or rapid deterioration and where their preservation would involve unreasonable expense. Once the goods are sold, Article 88(3) allows the seller of the preserved goods to retain out of the proceeds of the sale an amount equal to the reasonable expenses of preserving and selling of them, but he must account to the other party for the balance.
 

II. Risk Allocation under the Convention

A. Passage of Risk

Passage of risk is one classical topic of sales law.[95] It is by far one of the most pressing concerns of a party to an international sales contract. The Convention undertook a new and dynamic approach to the passing of risk that differed substantially from conventional wisdom.

The Convention in its construction does not define trade terms which generally enumerate when risk is passed from seller to buyer (ie: FOB, CIF & DDP). Normally, such terms are employed in order to delineate the responsible party for damage during transit. In other words they are used to ascribe responsibility.[96] This section will examine the relevant provisions of the Convention that deal with the transfer of risk in a contract. More specifically, this section will clarify the Convention's position vis á vis the passage of risk.

Damage to goods may happen in several settings, for example they may be destroyed on the seller's premises, during loading or upon arrival at the buyer's premises. One may find reference to the passage of risk in Chapter IV of the Convention entitled "Passing of Risk" which encompasses five distinct articles [97] that deal directly with this issue. The fundamental question is whether the buyer or the seller bears the risk of loss. It is conceivable that insurance will cover most losses that occur in international sales. It is however important to detect when risk has passed so that either the buyer or the seller may press the claim with the insurer.[98]

Even more striking and relevant is when the parties have not obtained any insurance for the international transaction. The issue of passing of risk then becomes crucial to determine which of the parties shall bear the cost of the loss of goods.

Often, during the normal course of business parties to an international contract, will in advance determine the allocation of risk by including in their agreement commonly used trade terms. These trade terms [99] will prevail over the Convention. Therefore, as will be shown, the time of delivery generally determines the passage of risk (For example Germany, Scandinavian countries and more specifically under the U.C.C.) [100]

In the following pages we shall examine how the Convention deals with the passage of risk in various scenarios. This examination will entail a detailed analysis of each of the provisions and a commentary.

B. Payment of Price and Risk

Article 66 [101] is based on Article 96 of the ULIS [102] and was not intended to alter the substance of the ULIS text. Due to the fact that risk can have several meanings, definitions are important. In the Convention, the word risk is employed in a narrower and conservative manner. It attempts to limit the scope by determining who is responsible for the casualty to the goods which is not from an act or omission of the other party.[103]

In essence this means that risk passes to the buyer at a certain moment during the transaction and that the buyer must bear all the risk at that point. The Convention is clear that the buyer must perform his obligations pursuant to the contract even though the object of the contract is lost or damaged. Secondly, the buyer has no rights against the seller arising out of any nonperformance by the seller, which is attributed to the loss or damage of the object of the contract. In reality, damage or destruction to the goods subsequent to a passage of risk does not relive the buyer from paying the price. This is consistent with the provisions of Article 58(1) of the Convention.[104]

In the case where during transit goods have been damaged or destroyed, the question most often asked is whether the rules governing excuses under the Convention apply? This may be responded to in two answers. First, the general provisions of Article 66 specifically excludes the use of excuses. The construction of Article 66 requires the buyer to pay the price except when the damage or loss is as a result of an act or omission of the seller. In this case, the seller is responsible for the loss or damage to the goods when they are as a result of his act or omission. The following illustration amply illustrates this scenario:
 

In the second hypothesis, one may view the provisions governing excuse as found in Article 79. The practical implications of this type of risk allocation are that the buyer must (a) pay the price, (b) take delivery, and (c) is barred from asserting any remedy set out in the Convention for breach of contract in as far as it is connected to the loss in question. This provision only applies when the impediment is beyond the party's control. Therefore, when a party could have avoided the impediment the provision does not apply.

One key problem with this provision is what constitutes loss or damage arising after the risk has passed to the buyer? We may seek guidance on this issue by referring to Article 36 of the Convention, which states the opposite of article 66. In essence Article 36 holds the seller responsible for the lack of conformity that existed at the time the risk passed. This article also provides some guidance about what constitutes lack of conformity.

As an associated aspect of Article 66 the buyer is entitled to any benefit or increase which is accrued on the goods after risk has passed to him. This is consistent with the general rule that benefits should go with the burdens. [105]

Determining when risk passes is crucial for many reasons, it will determine which of the parties shall pursue an insurance claim or arrange for the salvage of the goods. These rules are further discussed in Articles 67 to 69.

C. Carriage of Goods[106]

The passage of risk is one of the areas in the Convention that differs from the ULIS. The ULIS provisions on risk were predicated on risk passing when the seller has discharged his primary obligation and validates it by undertaking the technical concept of delivery.[107] Article 19(1) ULIS defined delivery as [ . . . ]
 

Nearly all international contracts involve to one degree or another the carriage of goods to the buyer.[110] The modern trend of container transport has revolutionized shipping of goods. It is also unreasonable to think that one statute can conclusively define when risk passes.

The concept of "contract of sale involving carriage of goods" is previously mentioned in article 31(a). It is clear from the Convention that the obligation to deliver the goods at a particular place is the exception which has to be specifically agreed upon by the parties in advance.

Let us suppose for the moment that the Seller is obliged under the contract to deliver the goods to the Buyer. Let us then suppose that the Seller employs his own trucks to deliver the goods to the Buyer inside another country. Can one assume that this contract of sale involves carriage? If so does the risk pass from the Seller to the Buyer when he loads his own trucks? The answer to both situations is no. Article 67 makes it clear that the transfer of risk only occurs when the goods are handed over to a carrier.

The concept of a carrier in the Convention is consistent with the Incoterms (1990) Free Carrier. Under this term the seller's own facilities are excluded. Likewise, risk in the goods is transferred when the goods are delivered into the charge of the carrier which is defined as: [...]

"Carrier means any person who, in a contract of carriage undertakes to perform or to procure the performance of carriage by rail, road, sea, air, inland waterway or by a combination of such modes."

The Convention's basic rule is that risk passes when the seller hands over the goods to the first carrier. Under traditional terms risk allocation usually takes place when goods pass the ship's rail or are delivered on board. [111] Under the Convention risk passes when the goods are handed over to the carrier for transmission to the buyer. This general rule is limited by the exception where the seller is "bound to hand them over at a particular place." In the Convention employing the word "place" and not "destination" is present because "destination" usually refers to the locality at which the goods ended their journey. In turn "place" is more general and could include intermediate localities. Therefore, if the seller is bound to hand over the goods to a specific carrier at a specific place, risk does not pass until the goods are handed over to that carrier in that place. [112]

The fact that the seller retains any document concerning the disposition of the goods does not affect the passing of risk. Under the Convention this rule becomes practical because it is in tune with the general accepted practices of commerce.

Finally, passing of risk does not take place "until the goods are clearly identified to the contract" whether "by markings on the goods, by shipping documents, by notice given to the buyer or otherwise." This means that unmarked and undivided shares of fungible goods, cannot transfer risk from seller to buyer without meeting the specifications of the text. The identification process is designed to prevent a seller from claiming falsely, after goods have suffered casualty, that these were the goods purchased by the buyer. Hence any identification alleviates abuse. The logic behind this provision is as was mentioned above, that the buyer is usually better placed to support a claim against the damaged goods as he is better able to salvage the remaining goods and make an insurance claim.

D. Goods Sold in Transit[113]

The issue of goods sold in transit was a point of controversy during its drafting.[114] The 1978 Draft stated: "The risk in respect of goods sold in transit is assumed by the buyer from the time the goods were handed over to the carrier who issued the documents controlling their disposition. However, if at the time of the conclusion of the contract the seller knew or ought to have known that the goods had been lost or damaged and he has not disclosed such fact to the buyer, such loss or damage is at the risk of the seller."This Article [115] caused the delegates of the developing nations to voice their uneasiness with risk passing retroactively to the buyer.[116]

The First Committee approved an amended version in order to provide clarity and address the concerns of developing nations.[117] On review by the Plenary, the requisite 2/3 vote was not obtained, and it voted to reconsider the article. Subsequent to this vote, a working group constructed a compromise article. This provision added the first sentence making risk pass from the time of the conclusion of the contract and then retained the preceding two sentences of the 1978 Draft for application when the circumstances so indicate. [118]

Notwithstanding changes to this provision, criticism of Article 68 has been widespread. A striking example of this criticism is the commentary of Mr. Rognlien, the delegate to the Vienna Conference from Norway: [...]
 

This provision eliminates the retroactive passing of risk and eliminates the added risk to the buyer. Unless "the circumstance so indicate", the allocation of risk is not retroactive. A contract involving goods sold in transit is retroactive when the seller provides marine insurance against the loss of the goods. Otherwise, there are very few scenarios where a buyer of goods in transit would assume retroactive responsibility.

What can be argued is that this provision does not require goods to be individualized before risk is allocated in transit sales. This may be adduced by the reading of the Convention itself. It is clear from Article 67(2) and 69(3) that individualisation is required for risk allocation. However, clearly absent from Article 68 is the requirement for individualisation. The loose construction of Article 68 creates some doubt as to its drafting, but suggests that had the drafters true intent. We may state with some authority that the drafting of Article 68 is consistent with the interpretation provided by the English Courts before 1992. Under section 1 of the English Bill of Lading Act of 1855,[121] rights under the contract of affreightment are transferred only to a person to whom the property in the goods passes upon or by reason of endorsement. The basic problem is that when there is a buyer of a parcel of undivided bulk, he does not obtain title until the goods are apportioned.[122] Hence, the buyer of undivided bulk is burdened with risk but not with the property in the goods. Clearly, this situation affects the right of the buyer take action against the carrier for recovery of loss of or damage to the goods.

To provide some further clarity on this issue, the bill of lading and its role in risk allocation must be examined. This approach will naturally leads to an explanation why there has been a legislative change in England as of September 1992. The role of the bill of lading ("bill") in the allocation of risk is relevant when ascertaining which party bears the loss of or the damage to the goods.[123]

It would be well advised to begin our inquiry with a definition: "A bill of lading is a document which is signed by the shipowner or his agent acknowledging that goods have been shipped on board a particular vessel which is bound for a particular destination and stating terms on which the goods so received are to be carried."[124] The ocean bill of lading may be considered the most common form of a marine contract. [125] The primary purpose of the bill is as a document of title. [126] This is confirmed by the case of Biddell Brothers v. E. Clements Horst Co., which clearly enunciated that "the bill of lading in law and in fact represents the goods" and that this instrument functions as a "symbolic delivery of the cargo."[127] Its inception may be traced to the fourteenth century where it was initially known as the bill of loading.

The bill is clearly a symbol of the goods during transit. When goods are loaded aboard a vessel, a bill is signed by one party and issued following the departure of the ship.[128] The bill is not the contract but rather a superior method of evidence. In other words the bill acts as a standard form contract which the parties may modify.[129]

As was previously mentioned, the bill of lading is a document of title. This is consistent with Article 1(b) of the Hague Rules.[130] It is often suggested that the bill of lading is a negotiable instrument in that it may be transferred from person to person. This notion seems to be in tune with the notion that the bill is a document of title and may allow ownership in goods to be transferred as well.[131]

In all actuality, the endorsement of the bill does not transfer ownership in the goods nor by the delivery of the goods but by the contract of sale that governs the operation itself. This is consistent with the case of Sewell v. Burdick [132] in which Lord Bramwell clearly stated that: [...]
 

In Sterns and Vickers 120,000 gallons of white spirit, being part of a larger quantity contained in a tank belonging to the storage company was handed over for delivery. After the quantity purchased being severed from the bulk, the spirit had deteriorated in quality. The Court was called upon to decide whether property in the undivided portion of the larger bulk had passed or not? In essence, the Court concluded that irrespective of whether the property in the undivided portion of the larger bulk had passed or not, when the delivery was accepted, the risk had passed to the buyer and as such the loss must be borne by him.

The basic problem in the above case law illustration, is that the buyer of undivided bulk must bear the responsibility of loss against the goods, but on the same hand he is not entitled to sue the carrier directly for such loss. The state of law was such, that the buyer needed the seller to either sue the carrier directly because property remained with him or assign the claim to the buyer. It is logical that the seller whom they have already paid need not concern himself with these situations. In the Aliakmon [135] the House of Lords concluded that the c.i.f. or c. and f. buyer, to whom the risk had passed, could not bring an action in negligence against the carrier.[136]

The Aliakmon case clearly enunciated that property in the goods is not relevant when dealing with risk allocation. However, the notion of ascertainment of goods is well reflected in the British Sales of Goods Act 1979, which requires ascertainment of the goods, prior to property in them can pass to the buyer. In undivided bulk sales, the ascertainment process usually does not take place until the goods arrive at the destination and the appropriate amount is separated from the bulk and delivered to the endorsee.[137] This interpretation is confirmed by The Delfini.[138] Here the Court suggested that in a similar scenario it was not necessary for property in the goods to pass simultaneously with the endorsement. However, it was necessary when it did pass on ascertainment that there is a casual link with the previous endorsement. Hence, when bulk goods were lost in transit, the endorsee would have no remedy under the contract, because he did not acquire property in the goods.

After almost a century, on September 16, 1992 The Carriage of Goods by Sea Act, 1992 [139] drafted by the Law Commission came into force. This new legislation was part and parcel of many years of trial and error and replaced the Bills of Lading Act, 1855.[140] This new English legislation states as follows: First, title to sue is now vested in the lawful holder of a bill of lading, the consignee identified in a sea waybill or the person entitled to delivery under a ship's delivery order, irrespective of whether or not they are owners of the goods covered by the document.[141] Second, they define the lawful holder of a bill of lading as a person in possession of the bill in good faith who is either: (a) identified in the bill as consignee, or (b) an endorsee of the bill, or (c) a person who would have fallen within categories a) or b) if he had come into possession of the bill before it ceased to be a document of title.[142]

In essence the bill of lading has the following results because of this Act: (a) the holder of a bill of lading controls the goods during transit. (b) The holder of the bill of lading according to section 2(1) the Carriage of Goods by Sea Act 1992, allows the 'lawful holder' of the bill of lading to sue, irrespective whether or not title to the goods has passed to him. As such the holder has standing to sue as if he were an original party. (c) The holder becomes subject to the liabilities pursuant to the contract when he demands delivery. (d) Finally, the holder is lawfully entitled to delivery of the goods upon presentation of the bill.[143] In essence this legislative situation reverses Sterns v. Vickers and the Aliakmon by the allowing the buyer to sue the carrier as if he were an original party to the contract of transport.

Like its English counterpart,[144] rules governing bills of lading may be found in The Canadian Bills of Lading Act.[145] This Act details the rights and obligations of a holder of a bill of lading. Pursuant to Article 2 "every consignee of goods named in a bill of lading, and every endorsee of a bill of lading to whom the property in the goods therein mentioned passes on or by reason of the consignment or endorsement, has and is vested with all rights of action and is subject to all liabilities in respect of the goods as if the contract contained in the bill of lading had been made with himself."Therefore, a person who is not originally party to the contract of transport becomes an interested person and has available to him all legal recourses when the bill of lading has been assigned. One may deduce after reading Article 2 that ascertainment is not required for risk allocation. This approach is consistent with the British interpretation and leads to the natural understanding that undivided bulk need not to be apportioned for risk allocation.

What is conclusive about the state of Canadian legislation is that Article 2 of The Canadian Bills of lading Act.[146] requires property in the goods to sue the carrier. In essence, this situation is estoppel for the buyer, in that action against the carrier, for loss of or damage to goods without an assignment by the seller is legally impossible. What then is the future for this legal situation? Why has the law not changed? Unfortunately, there remain more questions than answers.

D. Residual Clauses and Risk[147]

We may amply describe Article 69 as the residual rules regarding the passing of risk. Under paragraph (1) risk passes to the buyer when the goods are available for delivery but the buyer has failed to pick them up.[148] This situation envisions a contract that requires the buyer to arrange for the pick up of the goods from the seller's place of business.

Under paragraph (2), the Convention qualifies the rule where the buyer is "bound to take over the goods at a place other than a place of business of the seller." This generally involves the buyer having to pick up the goods at a warehouse or other place designated by the seller. We illustrate this situation in the following scenario:
 

We know that Article 69 requires good to be individualized before risk allocation occurs. This approach is consistent with the wording of Article 67(2). However, undivided shares of fungible goods is poorly dealt with in Article 68 that deals with goods sold in transit. Textually it is possible that risk allocation may take place even when bulk goods are not apportioned. The Convention is vague, in that it provides no solution on the method of apportioning the loss between multiple buyers of undivided shares of fungible goods.

However, some authors suggest, that in a similar scenario loss may be divided on a prorated division to adduce the loss of each party. [149] Article 69(3) of the Convention makes it clear that "goods are considered not to be placed at the disposal of the buyer until they are clearly identified to the contract. "It has also been put forward that where identification of the goods is for all intensive purposes inseparable from taking of delivery, the goods may be considered adequately identified when the seller simplifies the taking of delivery.[150]

The provisions of the Convention are deficient in dealing with sales of this nature. We recommend that buyers involved in this type of scenario undertake preventive measures. One solution is that buyers incorporate out-turn clauses in their contracts, which are generally employed in the oil trade. This type of clause makes the buyer responsible for only the goods that he actually receives at the end of the line.[151] Adding this clause, would alter the moment when risk passes from the seller to the buyer. When employing an out-turn clause in a contract, the CIF term should be considered incompatible as it would transfer the risk to the buyer.[152]

E. Fundamental Breach and Risk[153]

Article 70 is applicable when during the contractual period "the seller has committed a fundamental breach of contract." How does the seller's fundamental breach effect the risk of loss provisons? We shall examine this aspect in the following pages. However, prior to engaging the larger debate, one may ask the larger question as to the definition of fundamental breach? The idea of fundamental breach is aptly illustrated through the following situation:
 

Under this provision when the seller commits a fundamental breach, the buyer may also invoke his right to require the delivery of substitute goods. According to Article 46(2), in case of fundamental breach, the buyer can require delivery of substitute goods.

The purpose of examining latent defects with regards to risk allocation is only relevant when the defect is of quality and nature that could be considered a fundamental breach. Let us consider the following scenario:
 

Chapter Two- International Chamber of Commerce Rules

I. General [154]

A. Early History of Trade Terms

This section will briefly review the origins of the International Chamber of Commerce, Rules for the Interpretation of Trade Terms.[155] It seems that to know where one is going one should have any idea where one came from. It is my belief, that the same maxim holds true to the subject at hand. Therefore, it is appropriate that some pages are allocated to tracing the historical roots of trade terms. Consequently of the later, the reader will gain greater appreciation of the workings of the Incoterms in subsequent sections of this work.

International trade terms are designed to define the method of delivery of goods sold. [156] The International Chamber of Commerce[157] has been a catalyst for the unification of terms used in contracts of foreign trade. In 1936 the ICC published a set of international rules for the interpretation of trade terms approved by the Congress of Berlin in 1935.

The origins of these commercial terms reflected commercial usage developed over time via abstract state practices that were progressively created to delineate the responsibilities of parties to a contract that involved the carriage of goods. [158] The harmonisation of trade terms was born out of the need to insure standard interpretation of commercial terms, which would be free of divergent national interpretation. This divergence was an obstacle to the development of international trade and explains why the ICC attempted to normalize trade terms through a unified code of commonly used terms.

The common trade terms of Free on Board ("FOB") and Cost Insurance and Freight ("CIF") helped regulate international commercial sales for well over a century.[159] It is unclear as to the exact origins of these terms however. I shall attempt to provide some historical background on the origins of two commonly used terms to show the evolution of the modern trade terms employed in international commerce.[160]

The FOB term is one of the very first [161] terms to regulate international sales, as previously mentioned. One may trace its origins through the annuls of case law to the nineteenth century.[162] To understand the development of the FOB term one need necessarily comprehend the shipping practices at the time of its inception.

In the period ending the late eighteenth century and early nineteenth centuries, before the creation of modern shipping techniques, the commercial milieu was lacking such items as the bill of lading or the telegraph in the commercial field.[163] During this period, merchants would charter vessels for individual adventures, and would assume all risks involved. It would be common for the merchant to accompany his vessel on many ports of call, and to supervise the purchase of various goods. The merchant would place orders for merchandise and have them delivered to his vessel for inspection and final approval. It is plausible that the FOB term had its origins in this type of activity. Likewise, it seems coherent why under a FOB term the buyer is considered the shipper.

In the historical case of Cowas-Jee v. Thompson [164] we are left with the impression by Lord Brougham as to the true essence of the FOB contract. [. . .]

"It is proved beyond all doubt, indeed it is not denied, that when goods are sold in London free on board,"the cost of shipping them falls on the seller, but the buyer is considered as the shipper."

This was confirmed some years later in Perras v. Grace[165] by Judge Caroll who clearly stated:

"The contract of sale FOB appears to have had its origin in cases where the sold goods were to be sent to the buyer by water. In such cases it was understood that it was for the buyer to see that a ship was available to the seller."

With time and a modernisation of shipping, trade practices evolved in consequence thereof. The arrival of the telegraph, the postal system and the steamship had a positive impact on the development of international trade. During this period the Bills of Lading Act of 1855 [166] was adopted. As commerce expanded and developed, the use of standardized trade terms became ever more prevalent in international sales.[167]

As previously mentioned above, the CIF term evolved in stride with commerce itself.[168] The term itself was initially "c.f.& i."and meant that the buyer no longer had to act as shipper. In fact because of the buyer's inability under this term to inspect the goods, payment too would be deferred to a later time.[169] This term required the seller to obtain insurance to protect his financial interests. As is logical under this term, the buyer was greatly advantaged, in that he was not required to arrange delivery and could simultaneously benefit from liberal forms of payment. It is conceivable why the CIF terms rapidly overtook the FOB term in popularity and usage.

In Ross T. Smyth & Co. Ltd. V. T.B. Baily, Son & Co.[170] Lord Wright clearly stated the predominance of the CIF contract: [. . .]

"Which is more widely and more frequently in use than any other contract used for the purposes of seaborne commerce. An enormous number of transactions, in value amounting to untold sums, are carried out every year under c.i.f. contracts."

Before developing the modern history of trade terms, it is noteworthy that the historical development of these terms will in essence act as the foundation for the modern creation of commonly used trade terms.

B. Modern development of Incoterms

The origins of Incoterms can be divided into two distinct historical periods. The first period of 1920 to 1976 is dominated by the codification of existing trade terms. The second historical stage appears to have its beginning in 1977 with the creation of modern commercial terms. This second historical stage is presently in effect.

The development of Incoterms is traceable back to the days after the First World War.[171] This situation was predicated on the inability of the international community to delineate the respective duties of buyers and sellers in an international contract. At the first congress of the ICC held in Paris (1920) the members agreed to establish a working group to examine the situation. The working group, composed of member states, undertook an immense comparative research on the issues submitted by the congress. Sometime afterwards, a report was prepared for the congress to review and approve.

Following the creation of the initial terms in 1928, the ICC published the first commercial terms.[172] The commercial terms of 1928 were composed of six trade terms and consisted of an elaborate explanation of the various terms and their interpretation. These terms were explained in a way that clarified possible contradictions, as they were the sums of more than thirty countries' input. These trade terms were unique in the for the first time establishment of international rules. The obligations of a buyer and seller were predetermined according to uniform commercial terms.

However, the ICC decided in 1936 to publish for the practitioner of international commerce a set of rules governing trade terms. These terms would be known as Incoterms [173] and would help standardize and create uniformity of international trade terms.

Some ten years after the first introduction of the Incoterms, the ICC updated their 1936 trade terms. They introduced this revision at the ICC congress held in Vienna in 1953.[174] This new te