Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (1999), pages 409-412. Reproduced with permission of the publisher, Kluwer Law International, The Hague.
§372 This article addresses a special type of transaction that may be illustrated as follows:
Example 68A. Middleman, in the U.K., owned a cargo of 1,000 bales of No. 1 long-staple cotton that had been shipped from India on June 1 for arrival in the U.K. on July 1. On June I5, Middleman informed Buyer that the cotton was en route and the parties agreed on a contract for the sale of the cotton to Buyer. Inspection of the goods on arrival showed that, during the ocean passage, the cotton had been damaged by sea-water. Who bears this risk?
Article 67(1) does not apply since the goods were not handed over to the carrier "for transmission to the buyer." The problem calls for a special provision:
"The risk in respect of goods sold in transit passes to the buyer from the time of the conclusion of the contract. 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. Nevertheless, if at the time of the conclusion of the contract of sale the seller knew or ought to have known that the goods had been lost or damaged and did not disclose this to the buyer, the loss or damage is at the risk of the seller."
§372.1 A. Debate and Compromise
The 1978 UNCITRAL draft (draft article 80) had no provision like the first sentence of Article 68: under the 1978 draft "the risk is assumed by the buyer from the time the goods were handed over to the carrier..." (like the second sentence of Article 68), followed by a provision on the effect of seller’s knowledge (like the third sentence of the present draft). [page 409]
In the First Committee of the 1980 Conference some delegates objected to the retroactive assumption of risk by the buyer; some stressed that this was unfair to buyers in developing countries and inconsistent with a recommendation by the Asian-African Legal Consultative Committee. Other delegates noted that the UNCITRAL draft was based on commercial practice that had been designed to avoid controversy over the time when transit damage occurred; the First Committee approved an amendment to clarify the draft and approved the provision. However, on review by the Conference Plenary the article did not receive the two-thirds majority that, at this stage, was required for approval, and the Plenary voted to reconsider the article. A group representing divergent views then developed a draft that received the necessary majority. The compromise provision added the first sentence making risk pass "from the time of the conclusion of the contract", and retained the next two sentences (in substance the UNCITRAL draft) for application when "the circumstances so indicate"—a provision that, as we shall see, has special application when the contract of sale calls for the transfer to the buyer of the policy of cargo insurance.
§372.2 B. "Circumstances" Invoking the Original Rule
As has been noted, the UNCITRAL draft making risk pass "from the time the goods were handed over to the carrier" was designed to avoid controversy over the time when transit loss occurred. This problem is less serious when damage results from an identifiable event—a fire, a storm at sea, a train wreck or a truck collision, but is difficult when damage results from water seepage, overheating or the like.
The parties can avoid this problem by an express agreement that risk passes either at the beginning or the end of the transit (Art. 6). In addition, Article 68 refers to "circumstances" that "indicate" that "the risk is assumed from the time the goods are handed over to the carrier." Suppose that in Example 68A the parties consummated the sale by transferring to [page 410] the buyer the standard package of documents covering the shipment, including a policy of insurance payable (e.g.) "to the order of the Assured," and endorsed by Middleman (the assured) to Buyer. The endorsement would make Buyer the only person who could claim under the policy and would clearly evidence an intent to transfer to Buyer the total risk of the voyage. This conclusion is aided by the fact that Article 68 refers to "circumstances" that "indicate" that the buyer assumed the risk; express agreement is not required. It would be difficult to find clearer indicative circumstances than taking over the seller’s policy of insurance. See also von Hoffmann, Dubrovnik Lectures 294.
Of course, the opportunity to press a claim under an insurance policy is not the equivalent of the receipt of sound goods. If the seller knew (or ought to have known) that the goods had been damaged he should have communicated this fact to the Buyer so the Buyer could decide whether to buy into such a situation. Under the last sentence of Article 68 if the seller fails to disclose the loss or damage "the loss or damage is at the risk of the seller".
Does this mean that the seller bears only the loss or damage it failed to disclose? This reading probably would have been required under UNCITRAL draft, which referred to "such loss or damage"; at the Conference this phrase was changed to "the loss or damage" which leaves the meaning open to interpretation. Nicholas, on the basis of a careful review of suggestive but inconclusive legislative history, concludes that when the seller fails to disclose loss or damage that had occurred before the making of the contract the seller would be liable not only for the loss or damage that the seller knew or should have known but also for all the damage that had occurred when the contract was made and for all subsequent damage "which is causally connected with the original damage". Nicholas noted that this interpretation "has the advantage of avoiding a splitting of the transit risks, with the attendant difficulties of proof...".
The present writer warmly supports this approach insofar as it supports holding transit loss on the seller but is doubtful about the basis and advisability of a "causally connected" limitation. As has been suggested, [page 411] under the final version of Article 68 the provision concerning the effect of seller’s knowledge relates only to the second sentence in which retroactive passing of risk depends on "circumstances" indicating that result—usually the transfer to the buyer of the shipping documents, including a policy of cargo insurance. Under these circumstances dividing the loss involves complications in sharing responsibility for salvage and in sharing claims under one policy of insurance. When a seller knows of the loss and does not disclose this to the buyer the seller’s conduct constitutes (or closely approximates) fraud; non-disclosure when the seller "ought to have known" of the loss is a serious breach of the seller obligations. Conduct of this character should not inflict on the buyer the complications of loss-sharing.
Under the Convention’s system of remedies the seller, at the very least, has committed a serious breach which, apart from the rules on risk, should empower the buyer (Arts. 25, 49(1)(a)) to avoid the contract—i.e., return of the goods (or bill of lading) and insurance policy to the seller in exchange for any part of the price the buyer has paid. See Art. 70 §§379-382, infra, preserving the buyer’s remedies for fundamental breach. (In practice this strong remedy could assist the buyer in negotiating an appropriate settlement with the seller.)
Comments: Grewal S., Comparative Study: CISG, UCC, British Sale of Goods Act, Sales during Transit, 14 Loyola L.A. Int. & Comp. L.J. 93–119 (1991); Schlechtriem, Com. (1998) 510–511 (Hager).[page 412]
FOOTNOTES: Chapter on Article 68
1. For development of the draft in UNCITRAL see V YB 48–49, 60, VIII YB 63, Docy. Hist. 194–195, 206, 356. See also the Secretariat Commentary on the UNCITRAL draft, O.R. 65 Docy. Hist. 455.
2. O.R. 403–406, Docy. Hist. 624–627. The First Committee deleted a confusing reference to documents controlling the goods. O.R. 404, Docy. Hist. 625.
3. Initial action by the Conference Plenary O.R. 21–215, Docy. Hist. 748–750. Final action by the Plenary: O.R. 215–218, 22–222, Docy. Hist. 750–753, 755–756 (the vote—26–12 with 9 abstentions). Similar to CISG 68: Finnish Sales Act (1987) Sec. 15.
4. For case law on this problem, see Benjamin §1696–1697 (risk as from shipment). See also 22 Colum. J. Transn. L. 575, 589.
5. See Roth, The Passing of Risk, AJCL Symposium 291, 298, commenting on the awkward consequences of splitting transit loss between the parties.
6. Nicholas, B-B Commentary §2.3, pp. 499–500, citing (O.R. 220–221, Docy. Hist. 755–756) the rejection in Plenary of a proposal to change "the loss or damage" to "that loss or damage, to conform to the UNCITRAL language "such loss or damage". The reason for the rejection was unclear; one point was that the change to "the loss", presumably made by the Drafting Committee, had changed the meaning of the UNCITRAL text; on the other hand, the French version was the equivalent of "the loss or damage".
7. As Nicholas, id., §2.4, p. 500 demonstrates, the third sentence on the seller’s failure of disclosure relates only to the second sentence on retroactive passing of risk. As we have seen, these two sentences were linked together in preparing the UNCITRAL draft. Moreover, as Nicholas points out, damage prior to shipment presents a problem of conformity of the goods (Arts. 35, 36(1), 66) rather than risk of loss.