Rules On The Passing Of Risk Under The CISG: An Overview

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Rules On The Passing Of Risk Under The CISG: An Overview

Rules on the passing of risk are regulated in articles from 66 to 70 of the CISG. Briefly, article 66 governs the legal consequences of the transfer of risk which states that the buyer has the price-risk once the risk concerning such goods has transferred to him, with an exception of loss or damage caused by ‘an act or omission of the seller’.[1] Meanwhile, the impacts of seller’s fundamental breach of contract on the passing of risk assessment are stipulated in article 70 of the Convention. However, the three main pillars of rules of passing of risk under the CISG are presented in articles 67-69 which specific the moment risk is passed in typical situations in international trade.

Generally, the Convention ties the risk passing to the passing of the possession of goods. This approach thus separates the passing of risk under the CISG from the transfer of property which is the primary theory in the SGA. In terms of the passing of property, it is worth noting that the CISG does not address issues concerning how and when the property of goods is passed. Instead, this issue will be left to the applicable domestic law.[2]

Article 69 CISG is considered the general rule to allocate the risk under the Convention’s approach.[3] Accordingly, with transactions falling outside the meaning of articles 67 and 68, the risk is transferred from the seller to the buyer when the buyer takes delivery of goods. In the case the buyer fails to take the goods over in accordance with the contract, risk is passed at the time contract goods are placed at the buyer’s disposal.[4] What is not mentioned in the later is whether the seller has to send notice to the buyer about the readiness of goods. Nonetheless, it is believed that the Convention does not impose this duty on the seller.[5]

The first specific situation is passing of risk in a contract involving carriage of goods governed by article 67 CISG. The article splits risk during transit differently in two situations. Firstly, where the agreement does not require the goods have to be handed over at an appointed place, the risk passes from the time sold goods are taken over by the first carrier.[6]  Secondly, if a particular place appears as a delivery condition, the seller is released from the risk only when the goods are delivered to the carrier at such a place.[7] However, the passing of risk will not occur until the goods are identified to the sale contract.[8] In both the cases, the role of the carrier is significant. Thus, it is worth noting that the mentioned carrier must be an independent one. That means if the carrier is a seller’s person, the risk still remains with this party.[9] Moreover, splitting the risk based on a carrier also gives raise practical concerns. Indeed, it will be very difficult for parties to determine exactly whether the goods suffer losses and damages before or after they are taken over by the carrier.[10] Importantly, the third sentence of Article 67(1) CISG also rejects the possibility to mistakenly overlap between the transfer of documents and physical delivery of goods. Indeed, the fact that documents controlling the disposition of the goods were retained by the seller does not impact the time of passing of the risk. Instead, the transfer of documents will only determine the issue of payment of price.[11]

The other important situation governed by the CISG is the sale contract concluded at the time the goods have been already in transit. In this case, the risk, in principle, transfers to the buyer at the moment of the conclusion of the sale contract with an exception mentioned in Article 68.[12] That means the passing of risk in afloat sale is retroactive. In this case, it is understandable that the risk cannot pass to the buyer at the time of taking delivery of the goods by the first carrier like Article 67 since the buyer is only identified during the carriage of goods. Although the identification of goods is not mentioned in Article 68, it is argued that, for passing risk to the buyer, the goods must be clearly identified.[13] One may argue that rules of risk passing concerning goods sold during transit, especially its retrospective effect, are ambitious. The reason is that its retroactive allocation of risk is not clearly defined in some circumstances. For example, Bridge indicates that Article 68 CISG keeps silent about the cases where the agreed trade term stipulates the different moment of passing of risk, such as at the time goods arrive at their destination.[14]

However, the aforementioned exception is that the risk will be retroactively distributed to the buyer from the moment of handing over goods to the first carrier where ‘the circumstances so indicate’.[15] In other words, the buyer will bear all losses of contract goods even prior to the conclusion of the sale contract. The problem is the ambiguous meaning of ‘circumstances’ the article refers to. It seems that the ‘circumstances’ are not equal to ‘trade term’ because of the choice of language of this article.[16] Instead, this term should be construed  as indicating the implied intentions of contracting parties.[17] The common situation of this case is the transfer of insurance from the seller to the buyer by an endorsement.[18] The transfer makes the buyer the subject who is entitled to claim under the insurance policy. Thus, it obviously expresses an intention to pass the risk of the voyage.[19]

Notably, even in the case of having fundamental breach of contract committed by the seller, the passing of risk is still not affected.[20] It should be noted that the fundamental breaches within the meaning of the Article 70 must not be in themselves the reasons of losses or damages due to the exclusion of an act or omission of the seller as stated in Article 66 CISG. The fundamental breach in this article may be, for example, the delivery of non-conforming goods.

 

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This article is for general information only and is not a substitute for legal advice.

 

[1] United Nations Convention on Contracts for the International Sale of Goods (adopted 11 April 1980, entered into force 1 January 1988) 1489 U.N.T.S. 3 (CISG) art 66.

[2] Hayward, Zeller and Andersen (n 3) 619.

[3] Alazemi (n 4) 8.

[4] CISG, art 69.1.

[5] Andersen, Schroeter and Kritzer (n 7) 77–105.

[6] CISG, art 67.1.

[7] CISG, art 67.1.

[8] CISG, art 67.2.

[9] Manuel Gustin, ‘Passing of Risk and Impossibility of Performance under the CISG’ (2001) 3 International Business Law Journal 379, 382.

[10] ibid 383.

[11] Harold J Berman and Monica Ladd, ‘Risk of Loss or Damage in Documentary Transactions under the Convention on the International Sale of Goods’ (1988) 21 Cornell International Law Journal 423, 328–329.

[12] CISG, art 68.

[13] Gustin (n 21) 385.

[14] Hayward, Zeller and Andersen (n 3) 637.

[15] CISG, art 68.

[16] Berman and Ladd (n 23) 430.

[17] Peter Schlechtriem and Petra Butler, UN Law on International Sales (Springer Berlin Heidelberg 2009) 169.

[18] ibid.

[19] Valioti (n 10) 16.

[20] CISG, art 70.