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Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (1999), pages 398-408. Reproduced with permission of the publisher, Kluwer Law International, The Hague.

Article 67

Risk When the Contract Involves Carriage

A. Risk and the Contract
B. The Convention and Transit Risk
      (1) The Basic Rule: Underlying Considerations
            (a) Domestic Law
            (b) Commercial Practice
      (2) Response to Current Practices
            (a) Loading "On Board" or Delivery to Carrier
            (b) "High-tech" Goods and Contract Drafting
      (3) Other Applications of Article 67(1)
            (a) Use of Seller's Own Transport
            (b) Transport by Successive Carriers
                  (i) Transport to a "Particular Place" Named in the Contract
                  (ii) Transshipment
            (c) Minor Deviations and Risk
      (4) Retention of Documents Controlling Disposal of the Goods
      (5) Identification of Goods to the Contract
            (a) Undivided shares of fungible goods

§363 A. Risk and the Contract

Nearly all international sales call for carriage of the goods but the type of transport reflects varying geographical settings, types of goods and needs of the parties. In recent decades transport arrangements have been profoundly influenced by the "container revolution" which, in turn, has encouraged multimodal transport in which the container is sealed at an inland point and carried to (or near) the buyer by a series of different modes of transport such as truck, rail, and ship. However, the parties to even an international sale sometimes can use simple one-stage transport by trucks operated by the seller, the buyer or an independent carrier. Bulk goods (e.g., grain, ores, oil) often move from port to port in ships chartered by one of the parties. Before or after an international carriage local transport often will be needed to take the goods from the seller’s warehouse to a rail terminal or to an ocean carrier’s warehouse or dock and may also be needed when the goods reach a point near the buyer. This local transport may be handled by the trucks of the seller or buyer or by transport agencies engaged by or affiliated with one of the parties.

No statute can adequately define when risk passes in all these circumstances, any more than a statute can define the characteristics and quality of the goods. Fortunately, the parties to an international sale usually appreciate this fact and provide in the contract for the point at which risk passes. This may be done by an explicit provision on risk, or by referring (e.g.) to Incoterms (1990) and its definition of a specified trade term—"Ex works," "FCA": Free Carrier (...named place)—in Incoterms 1990 applicable to all modes of transport, including intermodal, and replacing the more specialized terms FOR (rail) and FOT (truck); "FAS"; "CIF" etc. As we have seen (Art. 6, §§74–76, supra), contract provisions prevail over rules of the Convention.[1] [page 398]

§364 B. The Convention and Transit Risk

The Convention’s general rule on risk in transit is stated in Article 67; in brief, when the goods are handed over to the carrier risk passes to the buyer.

Article 67 [2]

"(1) 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.

"(2) Nevertheless, the risk does not pass to the buyer 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."

Article 67 and Article 69 (§§373-378, infra) need to be read together since situations not governed by Article 67 fall automatically into Article 69.[3] One will note that Article 67 states rules on the transfer of risk only for cases where the seller "hands over" goods to a "carrier". Contractual arrangements that are not governed by Article 67 and therefore are governed by Article 69 include: (1) The buyer is to come for the goods; Article 67(1) does not apply since the seller does not hand over the goods to a "carrier" but to the buyer. (2) Article 67(1) is also inapplicable when the seller, instead of "handing over" the goods to a "carrier", transports the goods to the buyer in the seller’s own vehicles (§369.1, infra). The point at which risk passes in these cases is discussed in connection with Article 69, §§373-378, infra.[page 399]

§365 (1) The Basic Rule: Underlying Considerations

Article 67 reflects the dominant approach of domestic law and commercial practice to risk of loss during carriage.

§366 (a) Domestic Law

The approach to transit risk in the Convention is similar to that of the (USA) Uniform Commercial Code:

Section 2–509. Risk of Loss in the Absence of Breach

"(1) Where the contract requires or authorizes the seller to ship the goods by carrier

(a) if it does not require him to deliver them at a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier even though the shipment is under reservation (Section 2–505);"

Other rules of domestic law also operate from the baseline that, unless the parties agree to the contrary, transit risks fall on the buyer.

§367 (b) Commercial Practice

There are practical considerations that support these norms. As has been noted (§361, supra), damage during carriage usually is discovered only when the goods reach the buyer. In international transactions the seller is likely to be far from the damaged goods; the buyer is in a better position to assess the damage and to make a claim against the carrier or the insurer. In many transactions, before the seller ships the buyer will arrange for the issuance (or confirmation) of a letter of credit by a bank near the seller. The seller, in exchange for the payment, will surrender a negotiable bill of lading and an insurance policy which the bank will forward to the buyer. The buyer will have these documents in hand when he examines the goods and discovers the damage—facts that make it particularly efficient for the buyer to deal with the damage claim.[4]

Standard trade definitions respond to these considerations. Under the traditional "C.I.F." term, although the seller is responsible for the cost of carriage to the stated destination the buyer bears transit risks. Similarly, under the Incoterms (1990) definition "CPT," Carriage Paid to...(named place of destination)," the buyer bears all risks for goods after they are "delivered into the custody of the...first carrier" (A4, B5). And under the important definition, "CIP", "Carriage and Insurance paid to...(named place of destination)"—a quotation that also responds to modern transport practices such as containerization, and is expected to [page 400] be used in place of the older quotations—the buyer must bear all risks of the goods from the time they have been delivered "into the custody of the...first carrier..." (A4, B5).

§368 (2) Response to Current Practices

§368.1 (a) Loading "On Board" or Delivery to Carrier

Under some of the older trade definitions (F.O.B., C & F, C.I.F.) risk passes only when the goods are put "on board" or "pass the ship’s rail"; on the other hand, as we have just seen, modern trade definitions make risk pass when the goods are delivered into the "custody" or "charge" of the carrier. Article 67 follows the more recent practice in providing that risk passes when the goods are "handed over" to the carrier.[5] When the carrier is in a position to accept custody prior to loading it is difficult to determine whether damage discovered at destination occurred before, during or after loading. In some cases, as when the seller has facilities for dockside loading (e.g., grains or other bulk commodities) the seller will not "hand over" the goods to the carrier until they enter the ship’s hold; when the seller delivers the goods to an intermediary at the port or to a port authority it will be especially important for the contract to specify the point at which risk passes.

Decisions:  (1) CHINA. Xiamen Int. People’s Court, 5 September 1994. S (Hong Kong) contracted to ship fish powder to B (China), C&F, B to obtain risk insurance. The contract called for fish powder free of living insects. B claimed that the fish powder on arrival contained many living insects. S produced inspection certificates showing no living insects at loading. S prevailed. UNILEX :D.1994-21.1.  (2) ARGENTINA, Cam. Nac. de Apel en lo. Com., 47448, 31 October 1995. S contracted to sell and ship (C&F) dried mushrooms to B. B obtained an insurance policy covering transportation risks. B claimed defects caused deterioration during transit. However, no error by S was proved. Risk fell on B. UNILEX D. 28.1.1, CLOUT 191.  (3) MEX. ARB: COMPROMEX, M/21/95, 29 April 1996 (also noted under Article 35, supra). Shipment of canned fruit, by Argentine seller (S) (by Chilean intermediary), to Mexican buyer. Goods arrived damaged. Transit damage fell on S, since the canned fruit was defective at shipment. UNILEX D.1996-3.5  (4) GER OLG Karlsruhe, 15 U 29/92, 20 November 1992. S contracted to send goods to B "franco [page 401] domicile" ("frei haus"). B claimed loss in transport and non-delivery. Held: The above terms placed risk on S—a derogation (Art. 6) from Arts. 31(a) and 67(1). UNILEX D.1992–28. [Also see Art. 66, supra.]

Comments on Risk: DeVries, H., Passing of Risk, 17 Eur. Trans. L. 495–528 (1982); Goodfriend, D.E., 22 Colum. J. Trans. L. 575–606 (1984); Feltham, J.D., CIF, FOB & CISG, 34 JBL (London, 1991) 413–425; Murray, D.E., CISG and 1990 Incoterms, 23 U. Miami Inter-Am. L. Rev. 93–131 (1991); Schlechtriem, Com. (1998) 505–508 (Hager).

§368.2 (b) "Hi-tech" Goods and Contract Drafting

The practical considerations that led to the general rules placing transit risk on the buyer are strongest in sales of goods that the buyer can salvage or repair. Only the parties are in a position to decide whether these prevailing rules of domestic law on which Article 67 is based are appropriate for their contract: all that is feasible here is to raise a caveat as to whether the Convention’s norm is appropriate for high-technology equipment that only the seller can repair or adjust. In such cases the parties may wish to consider whether it would be efficient to provide that, after arrival of the equipment, the parties will supervise a test run for a specified period and the seller will have the responsibility to see that the equipment is in working order.[6] Fortunately, the Convention (Art. 6) gives the parties a free hand for fine-tuning to meet their needs.

§369 (3) Other Applications of Article 67(1)

As was noted briefly at §364, Article 67(1) provides for transfer of risk only when the seller "hands over" the goods to a "carrier". We can now deal with the application of Article 67(1) to specific situations.[page 402]

§369.1 (a) Use of Seller’s Own Transport

Does Article 67(1) apply when in the sales contract the seller engages to transport the goods to the buyer in the seller’s own trucks or other transport vehicles? In some contracts this intent will be expressed by language such as "We are quoting you a delivered price and engage to deliver the goods to your place of business in our own transport vehicles". When the seller agrees to deliver the goods but an understanding as to risk is not made clear by the contract, including the parties’ practices or trade usage, the issue in terms of Article 67(1) is this: "When the seller loads the goods in its own trucks does the seller "hand over" the goods to a "carrier"?[page 403]

The answer is No. "Hand over" is used deliberately here and at many places in the Convention to denote a transfer of possession. This does not occur when the seller employs its own means of transport.[7]

There are practical reasons for holding risk on the seller when it is also the transporter, for damage at this stage is likely to generate a claim that the seller failed to exercise due care; litigation and related transaction costs are reduced by the Convention’s rule that the seller does not perform its contractual obligation to deliver conforming goods (Arts. 31(a), 35, 36(1)) until the seller has completed its own duties with respect to the goods. Moreover, when the seller engages to deliver the goods in its own transport facilities the price will normally reflect the cost of transportation, including the cost of insuring the vehicles and their contents—a risk that can be underwritten most efficiently for the operator of the vehicles.

The approach of Article 69(1) is consistent with that of Incoterms (1990). As was noted at §367, the important modern trade term "Carriage Paid to...(named place of destination)" "CPT" transfers risk to the buyer when the goods are delivered "into the charge of the carrier" which is defined as follows: "‘Carrier’ means any person who in a contract of a carriage" undertakes to perform or procure the carriage.[8] The emphasized language referring to a "contract of carriage" of course excludes carriage in the seller’s own facilities. The Incoterms Guide noted that a "carrier" would include an enterprise (including a freight forwarder) that does not own or operate transport equipment if the enterprise "undertakes a liability for the transport as a so-called contract carrier."

In sum: When the seller engages to deliver the goods in its own transport facilities, Article 69(1) does not apply and transit risk remains on the seller. Consequently, transfer of risk is governed by Article 69. As we shall see, under Article 69(2) risk passes when (in brief) "the goods are placed at [the buyer’s] disposal" at the place where the buyer "is bound to take over the goods" (§377, infra).

§369.2 (b) Transport by Successive Carriers

We now face problems of risk in two specialized situations.

(i) Transport to a "Particular Place" Named in the Contract.

. The first sentence of Article 67(1) commences as follows: "If the contract of sale involves carriage of the goods and the seller is not bound to hand them over to a particular place...". This exception to the scope of the first sentence leads into the second sentence: "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". What situations are governed by these provisions?

Example 67A. A contract between Seller, located in the inland French city of Lyon, and Buyer, of New York City, states: "Seller will deliver the goods to the North Star Line in Marseille". The goods are damaged during transport to Marseille either (a) in Seller’s own trucks or (b) in the trucks of a transport company engaged by Seller.

In either case Seller is responsible for transit damage between Lyon and Marseille; under the second sentence of Article 67(1) risk does not pass "until the goods are handed over to the carrier" at the "particular place" designated in the contract. True, in alternative (b), this result is inconsistent with the general principle of Article 67 that the buyer bears transport risks. However on this point (as so often) the statute reflects a judgment as to the probable intent of the contract term designating a "particular place" for handing over the goods.[9] If a contrary intent as to risk had been expressed in the contract that, of course, would govern. Indeed, if a modular container is to be packed and sealed in Lyon the seller [page 404] would be well advised to propose a contract provision stating that risk passes to the buyer in Lyon when the container is sealed.

(ii) Transshipment

Example 67A illustrated a contract in which (Art. 67(1), second sentence) "the seller is bound to hand the goods over to a carrier at a particular place" and the seller engaged a carrier to take the goods to the designated place. It is important to distinguish this case from contracts that do not designate a "particular place" when two carriers are used to carry the goods from the seller to the buyer.

Example 67B. A contract between Seller in Savannah (on the south-east coast of the U.S.A.) called for shipment to Buyer in Le Havre (on the north coast of France). The contract failed to designate the point for transfer of risk, or designate the route for shipment. (This omission is abnormal but could occur; when shipping arrangements are left open, under Article 32(2), §214 supra, the seller "must make such contracts as are necessary for carriage to the place fixed by means of transportation appropriate in the circumstances...".) Seller found that no carrier operated between Savannah and Le Havre and, following standard practice, arranged for transport by Carrier A from Savannah to New York, and for Carrier A to deliver the goods to Carrier B for carriage to Le Havre. Inspection in Le Havre showed that the goods had been damaged in transit.

In this case risk of loss passed to the buyer when the goods (Art. 67(1), first sentence) were "handed over to the first carrier for transmission to the buyer...". The exception to this rule that controlled Example 67A does not apply since the seller was not "bound" to "hand over" the goods to a carrier at any place other than at the seller’s port city of Savannah. The result is driven home by the statement in the first sentence that risk passes when the goods are handed over to the "first carrier." The Convention thus rejects the view that in sales requiring two carriers risk does not pass until the goods are delivered to the second carrier. Such splitting of transit risks is inconsistent with modern practices for multimodal transport and presents practical problems of determining where the damage occurred.[10] The parties may, by agreement, split transit risks but this is not the norm provided by the Convention.

§369.3 (c) Minor Deviations and Risk

The first sentence of Article 67(1) closes with [page 405] the phrase, "for transmission to the buyer in accordance with the contract of sale." Suppose that the goods or the arrangements for shipment deviate from the contract in some minor respect: Does this make risk of loss remain on the seller? The answer is controlled by Article 70, §§379-383, infra, which provides that the rules on risk in articles 67, 68 and 69 yield to the remedies given "the buyer on account of fundamental breach"—in short, the rules on risk are not overturned by minor deviations that do not satisfy the standards of Article 25. The phrase in Article 67(1) "for transmission to the buyer in accordance with the contract of sale" consequently imposes the condition that the contract authorized the seller to ship. See Ont. L. Ref. Com., Sales I 269–70. The buyer, of course, may recover for the loss that results from the seller’s deviation from the contract: Arts. 45(1) and 74; see also Art. 66 and Example 66B, §362 supra.

§370 (4) Retention of Documents Controlling Disposal of the Goods

Paragraph (1) closes with this important provision: "The fact that the seller is authorized to retain documents controlling disposition of the goods does not affect the passage of the risk." This rule is useful to avoid unintended upset of the basic rule on risk and is consistent with commercial practice. In arranging for a documentary transfer the parties are concerned with payment of the price rather than damage in transit. Moreover, the contract may call for payment in exchange for documents at a time when the goods are on the way—on a truck or railcar, or on a ship in mid-ocean. In many situations (e.g., water seepage, shifting of cargo) it would be impossible to determine when the damage occurred; a rule that makes risk pass when the documents are handed over is difficult to apply.[11]

The (U.S.A.) Uniform Commercial Code 2–509(1)(a) responds to these policies: Risk passes to the buyer when the goods are delivered to the carrier "even though the shipment is under reservation (Section 2–505)." The (U.K.) Sale of Goods Act (1893) is to the contrary: The rule quoted above (§18 Rule 5(2)) on "appropriation" (and thus the transfer of "property" and risk) is inapplicable when the seller "reserves the right of disposal." This provision, with its overtones of the "property" approach, has led to litigation and uncertainty; representatives from the countries that have adopted this rule of the Sale of Goods Act did not press for its [page 406] use in the Convention. Article 67(1) and UCC 2–509(1)(a) were followed on this point in the Ontario draft Revised Sale of Goods Act §7.8, Ont. L. Ref. Com., Sales III 45–46 and in the Draft Uniform Sale of Goods Act §7.8(1) approved by the Uniform Law Conference of Canada, Proceedings (1981) 275–276.

§371 (5) Identification of Goods to the Contract

Paragraph (2) states that risk does not pass to the buyer "until the goods are clearly identified to the contract." The concluding language "whether by markings on the goods, by shipping documents, by notice given to the buyer or otherwise" shows that a wide range of acts will suffice to provide the necessary identification. The goods are usually identified with a specified buyer even when the carrier issues a negotiable bill of lading made out to the order of the seller; in such a bill of lading the buyer or his bank or other agent is usually identified as the party to be "notified" on arrival of the goods. In any event, the invoice or correspondence will usually link the shipment with the buyer. The identification requirement is designed to prevent a seller from claiming falsely, after goods have suffered casualty, that these were the goods purchased by the buyer. Any identification that would forestall this abuse should be sufficient under paragraph (2).[12]

The question may arise: Is notification to the buyer necessary for "identification"? The range of alternative means for identification listed in the above language of paragraph (2), and the closing phrase "by notice given to the buyer or otherwise" shows that notice is only one means of identifying goods to the contract. This is fortunate since it may not be practical to notify the buyer of the shipment until after the goods are on their way. A common cause of transit damage is seepage of water into the cargo hold; in many cases it would be difficult to establish whether damage occurred before or after the giving of notice. Even if there is no indication in the shipping documents and no markings on the goods, the place stated for off-delivery and the relationship between the type and [page 407] quantity of the goods and the contract description will usually leave no doubt of their "identification" to this contract under Article 67(2).[13]

(a) Undivided shares of fungible goods

In discussing the scope of the Convention (Art. 2 at §56.3, supra) we saw that the Convention applies to an important type of transaction—contracts for the sale of fungible goods (e.g., grade #2 heating oil) in terms of quantities or shares of the contents of an identified "bulk"—e.g., the tanker North Star sailing June 1; oil tank #17. Can these contracts satisfy the "identification" requirement of Article 67(2)? Cf. Art. 69(3), §378, infra.

When the "bulk" is not identified the answer is No. The first step in solving risk problems requires one to answer the question: Risk in what? This question, however, can be answered when the parties agree on a sale to Buyer A of one-half of the No. 2 heating oil loaded on the tanker North Star and the sale of the other half to Party B. (Such a contract would normally state the price per unit (e.g., barrel) and the approximate total quantity). If the contract provides that risk in transit falls equally on Buyer A and Buyer B, nothing in the Convention invalidates the agreement.[14] Because of the complications inherent in such arrangements the requirement of Article 67 that the goods be "clearly identified" indicates that the buyers should not be held to have agreed to loss sharing in an identified bulk unless this result is clearly indicated by the contract.[page 408]

FOOTNOTES: Chapter on Article 67

1. The grounds on which a standard trade term may be used in interpreting the contract were discussed under Art. 9 at §115. The reasons why the Convention did not attempt to define commercial terms are discussed in Honnold, ULIS: The Hague Convention of 1964, 30 Law & Contemp. Pr. 326, 339–341 (1965). General Conditions (ECE) for Potatoes, for Fresh Fruit and Vegetables and for Dry and Dried Fruit state separate rules on risk for different trade terms, which the parties must select. The publication ECE Contracts for the Sale of Cereals uses separate forms for the different trade terms, and "C.I.F. (maritime)" provides eight different contracts for this trade term. UN Pub. 1957. II. E/Mim. 21. See: ICC, Legal guide to Incorterms (1990).

2. Article 67 of the Convention is based on Article 79 of the 1978 Draft, but with significant redrafting in both paragraphs. The basic rule on passage of risk in paragraph (1) of Article 67 is similar to the result under ULIS 19(2) and 97(1); paragraph (2) is similar to ULIS 19(3).

3. Article 69 applies to "cases not within Articles 67 and 68". Article 68, §§372 infra, deals with a special situation that, for purposes of orientation, can be put to one side.

4. See Roth, The Passing of Risk, AJCL UNCITRAL Symposium 291 at 296, Honnold, supra n. 1, at 338. Contra: von Hoffman, Dubrovnik Lectures 287.

5. Ramberg, Incoterms 1980, Transnational Law: Bielefeld Colloq. 137, 147 (unsuitability of the "ship’s rail"); Honnold, Uniform Law and Uniform Trade Terms, id. 161, 165.

6. See Ramberg, supra n.7, at 140. Contractual arrangements can take many forms, including bank guarantees for payment (or repayment) based on the results of the test run. See Horn, Transnational Law: Bielefeld Colloq. 275. The present writer in Parker Colloq. Ch. 8, at 8–4 to 8–8 discussed some of the considerations that influenced UNCITRAL’s choice among (1) following the prevailing rule of domestic law and of 1964 ULIS; (2) reversing the prevailing rules and (3) Attempting to carve out an exception for "high-technology" or some other category of goods. Alternative (3) had to be rejected to meet the requirements of clarity in drafting while alternative (2), overturning the prevailing pattern of domestic law, would have led to difficulties in many lines of trade and might have jeopardized world-wide adoption.

7. Accord: Nicholas, B-B Commentary 490, §2.2; Finnish Sales Act (1987) Secs. 7, 13.

8. See Ramberg, supra n.7, at 14–146, 387, 409 (definition of "carrier"). See also: 1978 United Nations Convention on the Carriage of Goods by Sea ("Hamburg Rules"), Art. 1(1); Incoterms Guide (1980) p. 30.

9. The language of Article 67(1) under discussion and its application to Example 67A are consistent with Incoterms 1990: FREE CARRIER...(named place). See Ramberg, supra n. 7, at 145 and 409 (definition of term). Language in the first edition of this work could be construed to suggest a different conclusion. Professor Nicholas, B-B Commentary 491–492, clearly analyzed the problem and cited legislative history that supports his view and that suggested above in connection with Example 67A. See VIII YB 63, Docy. Hist. 356, Secretariat Comm. (draft Article 79) O.R. 64 Docy. Hist. 454 (paras. 6–7).

10. U.N. Convention on International Multimodal Transport of Goods (Geneva, 24 May 1980). See Mankabady, Int. Contract L. & Fin. Rev. V. 2, 233 (1981).

11. For the reasons underlying CISG 67(1) See S-G Rep. III YB 34–35, Docy. Hist. 76–77.

12. Stricter rules for identification in Art. 79 of the Draft Convention were relaxed by an amendment approved at the Diplomatic Conference. O.R. 402, Docy. Hist. 623. In ULIS 19(3) a somewhat similar rule was drafted in terms of "appropriation" to the contract. This concept was alien to many legal systems and carried "property" overtones; to avoid these problems the concept of "identification" was used in CISG 32(1) and 67(2). See S-G Rep., V YB 92, Docy. Hist. 171, para. 84.

13. Article 32(1) on "notice of the consignment" relates to seller’s contractual duties; breach of these duties can lead to a damage claim (Arts. 45(1), 74). However, failure to comply with each contractual duty specified in Articles 30–44 does not shift the risk of loss. See Article 70, §§379-383, infra.

14. The loss may be allocated in various ways: (1) The quantity the seller must deliver may be defined in terms of "outturn" meaning that the seller would bear the loss at sea; (2) The buyers would pay for the quantity loaded and would share (subject to insurance coverage) the loss during transit. See, generally, Benjamin §§119, 1546–1557, Atiyah 25–26, 321–322 (resistance to part ownership).

Pace Law School Institute of International Commercial Law - Last updated February 25, 2005
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