Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (1999), pages 394-397. Reproduced with permission of the publisher, Kluwer Law International, The Hague.
§360 Article 36(1), supra at §241, laid down the basic and possibly self-evident principle that questions concerning conformity of the goods to the contract are determined as of the time when risk passes to the buyer; deterioration prior to that time is the responsibility of the seller. Article 66 is a corollary of that proposition.
"Loss of or damage to the goods after the risk has passed to the buyer does not discharge him from his obligation to pay the price, unless the loss or damage is due to an act or omission of the seller."
§361 A. Destruction of the Goods and the Duty to Pay
Example 66A. A contract called for Seller to send 10 bales of No. 1 quality cotton to Buyer; the terms were F.O.B. Seller’s city. Buyer agreed to pay in exchange for shipping documents that were to be presented after arrival of the goods. The F.O.B. term (alternatively, the Convention’s rules on risk—Art. 67(1)) placed transit risks on the buyer. Seller loaded the 10 bales of No. 1 quality but during carriage the cotton was so charred by fire as to be worthless. Buyer exercised his right to inspect the goods before payment (Art. 58(3)) and refused to pay for the goods because they were not "No. 1" quality as required by the contract.
Article 36(1), supra at §241, answers the buyer’s contention that the goods were not "No. 1" quality; the goods did conform to the contract when the risk of loss passed to the buyer. And Article 66 states, in effect, that the damage or destruction of the goods after risk passed to the buyer does not relieve the buyer of his obligation to pay the price. [page 394]
A buyer who is asked to pay for goods that have been destroyed (Example 66A) may well feel that something has gone terribly wrong and wonder whether the Convention’s general provision on excuse (Art. 79 §423, infra) might apply. These are two answers to the buyer’s query about relief based on general principles of exemption (excuse).
The first is that any general rule on excuse is excluded by the specific rule of Article 66. This article deals narrowly and solely with the effect of "loss of...the goods" after risk has passed to the buyer, and provides that when this occurs the buyer must pay the price. At first glance the result may seem harsh but the result responds to pragmatic considerations. It is feasible and customary for transit loss to be covered by insurance. Moreover, loss or damage is usually discovered at the end of the carriage; the buyer usually is in a better position than the seller to assess the damage, make a claim against the insurer and salvage the usable goods. A second and equally compelling answer calls for examination of the Convention’s provision on exemption (or excuse) in Article 79, §§423–435, infra. In brief, Article 79 provides exemption only when performance is prevented by an "impediment beyond [the party’s] control"; no impediment prevents payment of the price. A more substantive answer is that exemption does not apply when a party could "have avoided or overcome [the impediment] or its consequences"; it is possible (and customary) for a party bearing transit risk to "overcome" the "consequences" by insurance.
§362 B. Damage Due to Seller’s Act or Omission
Under the last clause of Article 66, even after risk has passed to the buyer the seller is responsible for loss or damage that is due to its "act of omission."
Example 66B. A contract called for Seller to ship 5,000 pounds of No. 1 quality rice in new hemp bags "F.O.B. Seller’s City." The contract term (alternatively, the Convention’s rules on risk—Art. 67(1)) places transit risk on Buyer. Seller shipped 100 bags of No. 1 quality rice but [page 395] one of the bags was old and so weak that it broke open during transit and the rice was lost.
Did the fact that the seller broke its contract by failing to pack all of the rice in new bags prevent transit risk from passing to the buyer? As we shall see, under Article 70, infra at §380, the answer is No if we assume (as seems plausible) that the use of one second-hand bag did not constitute a "fundamental breach of contract." See also Nicholas, B-B Commentary §1.2. (This point becomes especially important when casualty to the goods results from a cause unrelated to a defect in the goods. See infra at §380.)
We may now return to Example 66B. Although risk of casualty to the goods had passed to Buyer, Article 66 makes Seller responsible for the loss of the bag of rice that resulted from Seller’s breach of contract. A similar example suggested by Nicholas, B-B Commentary §1.2: Seller loads fruit or other perishable goods that conform with the contract. Seller, however, is in breach of contract by delaying the shipment; because of the delay the goods deteriorate. Under these circumstances, as in Example 66A, Seller is responsible for the loss during transit that results from the breach of contract.
One may ask: What rules or standards decide what "acts or omissions" will make the seller responsible for loss or damage after risk has passed to the buyer? See Sevón, Lausanne Colloq. 196–197 and notes 13–16. Example 66B presented no difficulty for the damage resulted from the seller’s breach of contract. This example also illustrated the linkage between "act" and "omission": It would be difficult to decide whether the loss of the rice resulted from an "act" (shipment in an old, weak bag) or an "omission" (failure to ship in new bags). The linking of these two concepts and the nebulous dimensions of "omission" show that the seller’s liability must be derived from the violation of some binding standard.
To avoid the vagaries and inappropriateness for international trade of scraps of domestic law (Art. 7(1)), the primary standard for the parties’ obligations should be (Arts. 30 & 53) the requirements established by "the contract and this Convention", including (Art. 9) the parties’ practices and trade usage. However, UNCITRAL in 1977 rejected a proposal to amend Article 66 (then draft article 64) to limit the "act or omission" to a breach of contract (VIII YB 63, para. 531, Docy. Hist. 356). Sevón, supra, at 196; Nicholas, B-B Commentary §2.2 This decision not to restrict the scope of Article 66 seems wise since the seller, by a wrongful seizure of the goods or abuse of legal process, might cause damage to the goods under circumstances [page 396] that might not constitute a breach of contract. The standard established by the phrase "act or omission" is considered more fully in connection with the use of this phrase in Article 82, §448 infra.
Decision: S’s Failure to Provide Protection during Shipment. CHINA: ARB., Int. Ec. & Tr. Arbn. Comm. (CIETAC) (1995). S and B contracted for S to ship jasminal CIF to NY. B warned S that jasminal would be destroyed by heat, must be stored in a cool place and sent to NY by a direct line. Evidence showed that, instead of a direct line, S shipped via Hong Kong, and that cool storage was not provided. On arrival in NY, most of the jasminal had melted. S was held liable for the loss to B. UNILEX D.1995–36.
See Law YB of China (Peking) 1995, p. 922–26; Schlechtriem, Com. (1998) 500–505 (Hager). See also Art. 67 at §362, infra.[page 397]
FOOTNOTES: Chapter on Article 66
1. This article is the same as Art. 78 of the 1978 Draft, and is substantially the same as ULIS 96. At the Diplomatic Conference the rules on risk of loss in the 1978 Draft (Arts. 78–82) were moved from the very end of the sales provisions to this earlier position between Chapters III and V; this change was designed to emphasize the close relation between risk of loss and the obligation of the parties to perform their contract (Chs. II and III), as contrasted with the remedies for non-performance (Ch. V); O.R. 401–402, Docy. Hist. 622–623.
2. The general rule of Art. 58(1) that the buyer "is not bound to pay the price" until the seller places the goods at the buyer’s disposal is subject to the more specific provision of Art. 66 on risk of loss. Of course, the contract can reverse the Convention’s rules on risk (Art. 6) but a term calling for payment in exchange for documents or goods would normally be intended to deal with the time and manner of payment rather than risk.
3. Similar principles apply to claims against the carrier. However, when carriage is by sea the narrow and limited responsibility of ocean carriers under the Hague Rules (1924) makes insurance especially important. But cf. the U.N. Convention on the Carriage of Goods by Sea ("Hamburg Rules", 1978) ACL UNCITRAL Symposium 353–448 (text of Convention at 421); W. Tetley, Marine Cargo Claims (2d ed. 1987).
4. Cf. (U.K.) SGA (1893 & 1979) 20(2): Atiyah 250.