The Risk In International Sales Transactions

Compare the rules as to passage of risk in international sales transactions under the Vienna Convention and the English common law.

Introduction

In 1980, the final version of the Convention of Contracts for the International Sale of Goods (CISG), also called Vienna Convention [1] , was agreed by United Nations of General Assembly to present a uniform law for international sale of goods. This convention, which was an accumulation of more than fifty years of work, has been in force since 1989 in several major trading countries throughout the world. [2] Nonetheless, the United Kingdom, which is one of the most important markets, has not yet ratified the Convention. One reason can be stated that the UK has had a legislation which has applied to both England and Scotland. It has been generally accepted that passing of risk rules have an important role in international sale transactions as they are helpful for determining the allocation of risk of damage or loss under a sale process. It can be said that the most problematic area occurs when multiple sales are in question; however, as Grewal states that the Convention fails to confer a clear solution to this matter. [3] The controversial area is still that the countries which have ratified the Convention, have been suffering from a lack of experiences as deep as British law scholars have had. As a result of this, the English Sale of Goods Act (SGA) [4] and its interpretations are still important for some dark areas of the CISG.

Unification of the rules for international sale of goods was the aim of the CISG. Thus, the Convention can be regarded as a kind of guide for merchant. Therefore, it should be stated that in case the CISG rules conflict with a contract details, the provisions of the contract will overcome. Further to that even the parties of the contract may eliminate the application of the Convention. [5] In that respect, it is said that the Convention has brought regulatory provisions to commercial law to clarify some areas of international sale of goods, which are still in doubt. One of those areas is the time of “passing of risk” from the seller to the buyer because of the odd nature of risk, which may have adverse consequences. Therefore, not only in almost all legislations there some rules to regulate the issue of risk but also parties generally put some particular provisions into their contracts to reduce the impact of risk which will probably occur in the future.

This paper compares Vienna Convention and English Sale of Goods Act in terms of the issue of passing of risk by giving special interest to similarities and differences between these two bodies of law. The first section of this essay will confer a brief definition of risk and a few different theories on the issue of passing of risk. In the second part the passage of risk rules under the CISG will be analysed. In third and last section the English Sale of Goods act and its approaches to the transfer of risk and an overall comparison will be given. Finally, the conclusion will cover a total evaluation of the Convention and English Sale of Act rules with regard to their applicability and effectiveness in the area of international transactions.

2. The definition of Risk and Different Approaches to Passage of Risk

It has always been possible that goods can be damaged by variety of factors. As already mentioned for international sales the problematic here is not what the causes of risk are, the question, at stake, has been when this risk passes to the buyer. As Cruz stated that it is a common question for all legal systems and it has resulted in creating different theories to find a proper solution for both sides of the contract. [6] Indeed, it is true that either with national legislation or with international conventions, law scholars have produced different approaches for the time of passing of risk.

Before explaining theories for transferring the risk, it seems to be essential to define the term of risk even if many of law systems do not give a place to the definition of this term in their legislations. Although there are a lot of meanings of “risk” one can be given from Roth’s point of view, according to this author, variety of situations can be the reason of risk in a sale contract such as physical damage or deterioration however these reasons should be done by accidently. [7] As also Professor Bridge explains that damages or loss must be “an act of God”. [8] It should be noted that the damage or loss must be accidently; otherwise, incidents caused by governments’ or one of the parties’ acts are not considered as the real risk which can be evaluated in the scope of this essay. Furthermore, economic risk, “which shows the value of goods in the market”, is also far away the risk that is regulated under the CISG and SGA.

It is true that there have been different theories and approaches on the issue of passing of risk; however, three of those are generally regarded as the most remarkable ones. [9] According to the first theory, the risk passes to the buyer with the time of conclusion of the contact. Cruz argues that this theory does not bring a practical solution because goods will be still under the control of the seller at the time of conclusion of the contract. [10] It can be said that although this theory removes the confusion of finding the exact time of transfer of risk, it to some extent which strengthens the buyer’s hand by giving the opportunity of claiming that the seller did not show the necessary precision after any damage had happened. The second theory, which is the approach of SGA, presupposes that the risk passes to the buyer with property. One criticism to this theory comes from….. The last theory, which reflects the CISG’s approaches, points out that the time of delivery by the seller is also the time of passing of risk to the buyer. Even if there are some deficient parts of the theory, it is argued that it is likely to be the most reasonably and fair theory. [11]

3. Passage of Risk under the Convention on Contract for the International Sale of Goods

During the process of transfer it is quite possible that goods might be affected by a range of damage or loss as a result of unexpected incidents. Therefore, rules which are dealing with passing of risk [12] are principally important in an international sale transaction; particularly, when the goods are shipped for long distances. Passages of risk’s rules are regulated in Chapter IV of Part III under the CISG. As earlier mentioned, the Convention confers optional provisions; consequently, parties are free to choose the law that they wish to apply to their international sale contract. [13] However, for interpretation of sale contracts, the Convention is still useful to know when the risk passes from the seller to buyer. [14]

It is the fact that the time of passing of risk bears some consequences for parties of a contract. On the one hand, if the risk is still at the seller and goods are perished or destructed, the seller can be kept as responsible for the damage. On the other hand, after the risk passes to the buyer, he has to fulfil his obligations such as payment, even if the goods are damaged. The Convention’s approach to the matter of passage of risk varies according to a few different conditions such as the type of sale and current situation of the goods. However, the CISG does not offer a redelivery opportunity to the buyer under its Articles of 66-70. As Violotti states that “the passing of risk of non-performance is regulated in Articles 31-36″. [15]

A. Risk of Loss under Article 66- 70 of the CISG

In case of accidental damage or loss after risk has passed, the most beneficial remedy for a buyer to whom the risk has been transferred is likely to be exceptions under the Articles 66-70 of the CISG since other remedies regulated under the Convention are not applicable for casual damages or loss. According to Bridge, a buyer might not have the rights compelled by the CISG because risk is not pointed out in other provisions of the CISG and the inherent nature and function of risk that it makes ineffective normal rules. [16] As a result of this, to better understand the approaches of the Convention to the doctrine of risk the Articles 66- 70 of the CISG should be carefully analysed.

Article 66 of the Convention briefly mentions the implications of the risk on the parties of a contract by saying that damage or loss of goods does not give the right to the buyer not to fulfil his obligations of payment [17]. In other words, the buyer to whom risk has passed is still obliged to accept damage goods and make the payment for them. As above mentioned as long as the loss or damage is accidental the buyer has to fulfil his obligations without having the right to claim that it is seller’s non-performance. It seems to be helpful to see reflection of this Article to case law. An Italian wine manufacturer (plaintiff) sued the German buyer (defendant) for payment of the price of bottles of wine since the defendant avoided paying for them. [18] The German buyer claimed that the goods were not suitable for use because of deterioration during the shipment. The goods were subject to “ex factory” delivery. The Regional Court held that the buyer had declared its refusal to pay on contract; therefore, the plaintiff was not entitled to ask for payment. Upon the appeal of the seller, the Higher Regional Court affirmed the decision of Court of First Instance by stating that it was non-performance of the seller in accordance with the Article 35(2) (d) CISG. Indeed, although the risk passed to the buyer, the Court considered that the seller was still responsible for the damage due to lack of preserving under Article 36(2) and 66 CISG.

The above case should be interpreted in a way with regard to the seller obligations under the CISG, which are providing the goods, preserving them and properly bringing them to the point of delivery. In this respect, it can be said that Article 66(2) of the CISG brings an exception to obligations of the buyer which is indeed that if the damage or loss occurs as a result of the seller’s mistake, omission or act, he will remain responsible for this loss or damage until successfully handing over the goods. Consequently, the buyer obligation to pay for the goods will be delayed when this exception applies. There are different approaches to explain the phrase of “act or omission of the seller”. [19] According to one of those, it is a breach of seller’s obligations under the CISG or their contract. [20] Proponents of another approach argue that it could be any behaviour of the seller which caused the damage or loss; therefore, it is difficult to say that such acts of the seller should be regarded as a breach of the CISG. Schlechtriem and Honnold, as supporters of this second view, state that any behaviours of the seller which resulted in the loss or damage should not be interpreted as a breach of obligations of the seller, it also might be unlawful behaviours under the tort law. [21]

Passing of Risk in Sales involving Carriage of the Goods

“If the contract of sale involves carriage of the goods and the seller is not bound to hand them over at a particular place, the risk passes to the buyer when the goods are handed over to the first carrier for Transmission to the buyer in accordance with the contract of sale. If the seller is bound to hand the goods over to a carrier at a particular place, the risk does not pass to the buyer until the goods are handed over to the carrier at that place. The fact that the seller is authorized to retain documents controlling the disposition of the goods does not affect the passage of the risk.” [22]

The CISG regulates the passing of risk rules in sales which involve carriage of goods under the article 67. Since most of international sale transactions involve carriage, the importance of this Article comes into question. Mainly interpretation of this Article gives us two distinctive points that have to be taken into consideration. First, as seen above, the decisive factor of the whole Article is the place where the risk passes to the buyer. If no any particular place is determined, the seller transfers the risk to the buyer by handing the goods over to the first carrier. If there is a particular place and a particular carrier form which the seller should dispatch the goods, the risk remains at the seller’s responsibility.

Although the basic rule is obvious, interpretation of this article arises some doubtful areas which should be briefly examined. One of those areas is that the status of the carrier should be independent and self-employed. According to Bianca and Bonell, the carrier should be a third party organization, since transmission made by parties is beyond the sphere of article 67(1) CISG. [23] Another argument on this article is whether a forwarding agent should be considered as a carrier. Schlechtriem states that it should be regarded as a first carrier, as long as the forwarding agent is an independent entity. [24]

The Goods Sold During the Transit Article 68 CISG

The Convention has followed a different approach from the basic rule to determine the time of passing of risk in the goods which have already been under the control of an independent carrier. According to the first sentence of the article 68 CISG, the risk passes to buyer at time of conclusion of the contract. The convention aimed to give dynamics to the trade life although there have been some practical problems due to the difficulty to find out the exact time in which the damage happened. After showing the main rule, it is worth saying that article 68 confers an exception once again:

“However, if the circumstances so indicate, the risk is assumed by the buyer from the time the goods were handed over to the carrier who issued the documents embodying the contract of carriage.” [25]

Article 67

Article 68

The first sentence of the Article 67 of the Convention, which can be regarded as a general provision for passing of risk, states that:

“If the contract of sale involves carriage of the goods and the seller is not bound to hand them over at a particular place, the risk passes to the buyer when the goods are handed over to the first carrier for transmission to the buyer in accordance with the contract of sale”. [26]

With regard to this article of the convention it can be interpreted that delivery is, to a certain extent, important to determine the time of the passing of risk. Unless otherwise agreed, the risk passes to the buyer when the seller dispatches the goods at any places. Moreover, in the second sentence of the Article 67 of the Convention states that if it is agreed that the seller has to hand over the good at a particular place and with a particular carrier; therefore, the risk will pass to the buyer when the goods are delivered to the carrier at that place. [27]

3. The British Sale of Goods Act

In English law, for example, the normal duty of a CIF seller to tender clean documents is suspended if the bill of lading is annotated to show damage done to the goods on board the vessel, prior to the issue of the bill of lading but after risk has been transferred to the buyer.(Michael p 3)