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Published in J. Herbots editor / R. Blanpain general editor, International Encyclopaedia of Laws - Contracts, Suppl. 29 (December 2000) 1-192. Reproduced with permission of the publisher Kluwer Law International, The Hague.

[For more current case annotated texts by this author, see Bernstein & Lookofsky, Understanding the CISG in Europe, 2d ed. (2003) and Lookofsky, Understanding the CISG in the USA, 2d ed. (2004).]

excerpt from

The 1980 United Nations Convention on Contracts
for the International Sale of Goods

Joseph Lookofsky

Article 66
Passing of Risk

  1. Introduction
  2. Legal Effect of the Passing of Risk
  3. Use of Trade Terms (CIF, C&F, FOB, FAS, CPT, CIP, etc.)

I. Introduction

265. Chapter IV of CISG Part III (Articles 66-70) regulates the question of Passing of Risk, i.e., the question of which party is to bear the risk that the goods may be 'accidentally' damaged or lost.

Here as elsewhere, the Convention provides only supplementary (gap-filling) rules designed for cases where the contract itself does not otherwise provide. And it must be emphasized that many international contracts of sale will expressly resolve the question of risk by the incorporation of a simple trade term; in such event, the Convention risk-of-loss regime will be effectively displaced.[1]

1. See infra No. 267. See also supra No. 152

II. Legal Effect of the Passing of Risk

266. The Convention not only lays down the gap-filling rules which determine the point in time when the risk of loss passes from the seller to the buyer; by way of introduction, it also sets forth a basic proposition which helps define the legal effect of the passing of risk. Article 66 provides:

'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.'

It is a well-known fact of life that goods are sometimes damaged or destroyed by fire, storms, theft, vandalism, etc. During the period before the owner of certain [page 140] goods enters a contract to sell the same goods to another, it is obvious that owner (in possession) is the only logical candidate to bear the risk of accidental loss; so, if the goods are in fact lost, the loss must lie 'where it falls', i.e., with the owner in possession.

Nor will the mere fact that the seller enters an agreement to sell the goods ordinarily work to 'transfer' the risk of accidental loss.[1] At some point in time, however, after the seller has done what the contract requires - i.e., to 'deliver' the goods - the buyer must accept the fact that the risk of such losses has passed to him.

Note that the mere fact that the seller and/or the buyer are likely to carry insurance designed to protect against the economic consequences of the 'risks' discussed here does not dispense with the need to determine which of the two parties actually 'carries' the risk when a given loss occurs, in that one of the parties must bear the burden of asserting a claim against the insurer, suffer some depletion of current assets while waiting for settlement, etc.

The gap-filling determination of the precise point in time at which the risk passes from the seller to the buyer is the main purpose of Chapter IV of CISG Part III. The simple message in Article 66 is that once the risk has in fact passed, in accordance with the contract and the Convention, the buyer must pay the price agreed for the goods, and the rule applies even though the goods delivered are damaged beyond repair; indeed, once the risk has passed, the buyer must pay even if the goods never arrive. The explanation is simple: once the risk has passed to the buyer, the seller has done everything she ever promised to do, and the buyer must proceed to perform his part of the deal, intervening 'acts of God,' etc., notwithstanding.

If, on the other hand, the loss or damage suffered is due to an act or omission of the seller, the buyer need not pay, i.e., even if the 'risk' has passed in the technical sense.[2] Another way of stating this is that the ordinary rules regarding the passing of risk apply only to 'accidental' loss or damage: a figure of speech which covers both 'acts of God' and the acts of mortal third parties (thieves, vandals, etc.), but which does not cover the acts or omissions of the seller herself. Similarly, if the loss or damage is due to the buyer's own act or omission, he will be the one to bear this 'risk.'

1. For a limited exception, see Article 68 (infra No. 272).
2. This Article 66 rule stands in apparent contrast with the rule applicable in documentary sales (whereby the buyer must first pay against documents and then bring an action against the seller), but Article 66 is not concerned with documentary sales. See Berman, J. and Ladd, M., 'Risk of Loss or Damage in Documentary Transactions Under the Convention on the International Sale of Goods,' 21 Cornell International Law Journal 423, 427 (1988).

III. Use of Trade Terms (CIF, C&F, FoB, FaS, CPT, CIP, etc.)

267. The most important of the Convention's risk rules are those which regulate the passing of risk when the contract of sale involves carriage of the goods.[l] However, as a practical matter, even these rules are not likely to play a central rule in most real-life contracts for the international sale of goods. The reason for this lies in the fact that the parties may 'derogate from or vary the effect of any [page 141] [Convention] provisions,'[2] inter alia, the CISG provisions regarding the Passing of Risk. And although perhaps only a minority of international sales contracts set forth rules which would displace the Convention regime regarding, e.g. sales contract formation or remedies for sales contract breach, a very large percentage of such contracts contain trade terms (CIF, C&F, FoB, FaS, CPT, CIP, etc.) clearly designed to regulate the passing of risk.[3]

The International Chamber of Commerce, a federation composed of merchant organizations from around the world, has set forth a comprehensive set of definitions for the various trade terms (Incoterms) now in use.[4] In many international sales contracts, where the parties refer expressly to a particular trade term defined by the ICC, e.g. 'CIF (Incoterms),' the risk question will be defined by the official definition, simply because the definition has been incorporated into the contract by reference to the term. Even if the contract simply uses a common trade term (without referring specifically to Incoterms), its meaning will often be well known by virtue of widespread trade usage.[5]

In the case of more traditional trade terms, such as CIF, C&F, and FOB, the risk passes to the buyer when the goods are actually put 'on board' the vessel.[6] Under more modern terms designed especially for containerized transport, such as CPT [7] and CIP,[8] the buyer bears all risks at an even earlier point: from the time they are delivered into the custody of the first carrier.

1. Regarding Article 67, see infra No. 269 et seq.
2. Regarding Article 6, see supra No. 70 et seq.
3. Compare the judgment of Tribunale di Appelo di Lugano (Switzerland), 15 January 1998, reported [at <http://cisgw3.law.pace.edu/cases/980115s1.html> and] in UNILEX. In this case, since contract contained the Incoterm 'CIF', risk passed under that contract term when goods handed over to the carrier, so the court's reference to CISG Art. 67 seems out of place.
4. See the latest edition of the Incoterms (updated by the ICC at regular intervals). See also supra No. 152.
5. Regarding Article 9, see supra No. 87.
6. Or at least pass the 'ships rail.'
7. Carriage Paid to ... (named place of destination).
8. Carriage and Insurance paid to ... (named place of destination).

268. It is also important to note that, in practice, many international sales are 'documentary sales,' whereby the seller hands the goods over to a carrier and receives, in exchange, a bill of lading (or equivalent). The bill of lading, together with other relevant shipping documents, is then tendered to the buyer (or to the buyer's bank)[l] in return for payment of the price. If the contract is a 'shipment' contract,[2] the holder of the bill of lading normally bears the risk of loss or damage from the time the goods are placed on board; in the case of a 'destination' contract,[3] the risk remains with the seller until the carrier arrives at the destination. The CISG Convention, while recognizing documentary sales practices as a fact of commercial life, does not purport to define or regulate them. So any contractual gaps regarding documentary sales practices (hereunder: questions relating to payment against documents, insurance, etc.) will usually have to be filled in by the customs of the trade or by the otherwise applicable domestic law.[4]

1. For example, in a transaction financed by a letter of credit.
2. I.e. a contract of CIF, C&F, FoB vessel port of shipment, of FaS terms.
3. I.e. if the contract trade term is ex ship or free carrier point of destination. [page 142]
4. See generally Berman, J. and Ladd, M., op. cit. Regarding trade usages under Article 9, see supra No. 87 et seq.; regarding gaps and the applicable domestic law under Article 7(2), see supra No. 80.

Pace Law School Institute of International Commercial Law - Last updated April 5, 2005
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