Passing of Risk under the International Sale of Goods

Articles 67 – 69 of the CISG:

govern the passing of risk, and the seller is liable for the damage or loss caused by any of his actions. Moreover, loss or damage caused due to an omission by the seller makes him liable to bear the risk. In such cases, the buyer is not required to pay the price of the goods. Part III of the Convention empowers the buyer to reject the delivery of goods that are damaged by an act of the seller and to claim compensation.

Articles 49 and 51:

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specify that the buyer can rescind the contract, under such circumstances, wholly or partially.

Article 46:

enables the buyer to demand a substitution of goods. Under Article 46 the buyer can demand repairs to damaged goods.

Article 50:

provides that the buyer can seek a reduction in the price of goods .

Article 67:

specifically deals with passing of risk in sale of goods that involve carriage of goods. This is because carriage of sales is an important aspect of the international businesses and contracts of sale of goods. Therefore, Article 67 provides the basis for the passing of risk in such contracts.

Carriage of goods involves the transportation of goods from one place to another through truck, train, ship or airplane. Goods will be transported from the seller to the buyer, and the seller takes an active part in choosing the mode of transport of the goods and fulfils the obligation of carriage under the contract. The passing of risk takes effect when the seller arranges transportation of the goods to the buyer. The contractual responsibility demands that the seller is to handover the goods duly complying with the contractual terms and conditions.

The first carrier or transporter is also a key player under the concept of first carrier. In contracts involving the carriage of goods, the seller has to handover such goods to the carrier. Here the first carrier, automatically become a third party. The seller cannot transfer the goods, on his own. Therefore, to effect the passing of risk to the buyer, there should be an independent transporter. It can be argued that if the seller engages his own personnel for transporting the goods to the buyer then the risk may not be transferred.

The fundamental rule relating to the passing of risk was established by Article 67 of the United Nations Convention on Contracts for the International Sale of Goods or the CISG. The principle of passing of risk constitutes a cardinal issue in determining risk, if the contract requires the seller to hand over the goods to the buyer. If the seller is not required to handover the goods at a particular place, then the risk passes to the buyer the moment the goods are handed over to the transporter, so as to deliver them to the buyer .

However, if the seller is required to handover the goods to a transporter at a particular place, till such time of handing over the goods to that particular transporter at that particular place, the risk lies wholly with the seller. Once the goods are handed over to the transporter at the specified place, the risk passes to the buyer. As such, the risk due to loss does not pass to the buyer unless there is clear identification of the goods mentioned in the contract.

Identification of goods include marking on the goods, shipping documents, serving notice to the buyer with regard to the goods, and any other means of identification . While interpreting Article 67 of the CISG, the courts; first, consider the effects of damage caused to goods or any deterioration of goods, after they were handed over to the transporter. In such incidents, the courts examine the liability of the buyer and the seller. Second, the courts take into consideration any additional contractual terms that can affect the proper application of Article 67.

Per se if the risk of loss passes to the buyer, in accordance with Article 67, then the seller will no longer be held liable for any damages caused to the goods in transit. There is no clarity about the meaning of first carrier in Article 67, and some experts contend that freight forwarder must come under the ambit of the term first carrier. If the seller hands over the goods to the freight forwarder, then the risk passes on to the seller the moment the goods have been handed over to freight forwarder.

In practical terms, the seller is liable till such time as he hands over the goods to the first carrier. After that the risk passes on to the buyer. However, such a split in the risk may give rise to further problems in international sale of goods contracts. Most experts claim that the split of transit risk is undesirable, because it poses a threat to the proof of risk, while establishing whether the damage occurred prior to passing of risk to the seller or after the passing of risk . Damage to goods in transit may occur due to unpredictable phenomena, such as overheating or seawater corrosion.

Such damage would be disclosed only at the end of the transportation and at the time of delivery, upon specific inspection of the goods by the buyer. At this juncture the first line of article 67 comes to the rescue of the seller. It attempts to eliminate the burden on the seller to bear the risk of transit. It imposes the burden of bearing the risk of transit on the buyer. The reason behind this rule is that the seller can no longer control the goods during their transportation. Therefore, the seller should not be expected to bear the risk for such goods.

The buyer will be in an advantageous position to physically examine the goods after having received them, and he can detect the defects and damages caused to the goods. Moreover, he can protect the goods, which are not completely damaged. As such, he can prove the damage to the insurance company on the spot, and prefer indemnification claims . The rule imposed by the second sentence of article 67 applies, only to contracts, in which the parties require the manner in which the goods have to be handed over or the specific place where they should be handed over.

The risk will not pass automatically, immediately after the goods are handed over to the first carrier in these contracts. If the goods are handed over to a carrier at a specific place as agreed upon by both the parties, the risk passes to the buyer. According the third sentence of article 67, even though the seller has some sort of access to the goods in transit and possesses documents to regulate the nature and tendency of the goods, the risk passes to the buyer.

The seller’s position and ability to control the character of the goods may not prevent the passing of risk to buyer. Therefore, the Convention attempted to differentiate between passing of risk and ownership in sale of goods contracts. The second paragraph of Article 67 requires that the goods must invariably be clearly identified to the contract, if the risk is to pass to the buyer. This obligation is included with an aim to protect the interests of the unsuspicious buyer against the unscrupulous behaviour of the seller.

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