TO WHAT EXTENT DO THE INCOTERMS 2000 DETERMINE THE PASSING OF RISK IN A SALE CONTRACT ON SHIPMENT TERMS?

ANIEKAN IBORO UKPE ani_abasi@yahoo.com

ABSTRACT: For an appreciation of the multiple rights and responsibilities of the seller (the shipper), the buyer (the consignee), the cargo owner and the carrier, it is important to understand when property to goods passes under a contract of sale and in particular when risk in the goods passes. In a typical case, however, a cargo claimant or cargo defendant would rather be bothered by the question: At what moment does risk in the goods pass from the seller to the buyer or from the shipper to the consignee? Thus the concept of risk is delimitative of the parties responsibilities for loss of or damage to the goods at any particular time. Accordingly, if the goods are at the sellers risk, he must make good the loss if he is not to be in breach of his obligation under the sale contract. The buyer, on his part has to pay for the goods irrespective of their condition on receiving, if the goods were lost or damaged while at his risk. The International Commercial Terms (INCOTERMS) are standard shipping and delivery terms which basically delimit these obligations between buyers and sellers by providing a set of international rules for the interpretation of the most commonly used trade terms in foreign trade. In facilitating international commercial transactions, the principal functions of the INCOTERMS includes the elimination of uncertainties and differences in the interpretation of shipping and trade terms and the avoidance of disputes by eliminating the barriers caused by distance, language and local business customs. How well the INCOTERMS have managed to carry out these functions is the focus of this discourse. This paper is set out to identify the proper incidences of risk in an international sale contract with particular reference to the INCOTERMS 2000. It will engage in an analysis of some intrinsic issues in the transfer of risk as determined by the INCOTERMS, pointing out their inadequacies. The paper will basically attempt to show instances were risk will still lie with the seller notwithstanding the shipment of goods, contrary to the rule in shipment contracts.

Aniekan Ukpe, MCIArb, recently concluded his Masters Degree Programme at the Centre for Energy, Petroleum and Mineral Law & Policy, University of Dundee, where he obtained an LLM, International Business Transactions (Distinction). He is an Advocate and Solicitor of the Supreme Court of Nigeria.

TABLE OF CONTENTS Abbreviations 1. Introduction 2. What are INCOTERMS 3. INCOTERMS 2000 and the Incidences of Risk 3.1 FOB (Free on Board) 3.2 FAS (Free Alongside Ship).. 3.3 CFR (Cost and Freight). 3.4 CIF (Cost, Insurance and Freight). 3.5 The Risk Covered 4. The Passing of Risk in Sale Contracts on Shipment Terms 4.1 The Basic Rule 4.2 The Uniform Commercial Code 4.2.1 4.2.2 Shipment sales Destination sales 4 5 6 6 6 .7 7 .7 8 8 .9 .9 .9 10 11 12 12 13 14 15 16

4.3 The CISG 4.4 The Ship Rail Criterion 5. Incidences of Post-Shipment Risk 5.1 Loss Before Appropriation 5.2 Loss After Shipment But Before Contract 5.3 Sellers Failure to Provide Sufficient Information 5.4 Passing of Risk As From Shipment 6. Conclusion Bibliography

ABBREVIATIONS CFR CIF CISG FAS FOB INCOTERMS UCC Cost and Freight Cost, Insurance and Freight Convention for the International Sale of Goods Free Alongside Ship Free on Board International Commercial Terms Uniform Commercial Code

1.

INTRODUCTION

Generally, in a contract of carriage, the transfer of risk is a far more important consideration than the transfer of property although in some jurisdictions, property still remains an important criterion for the purposes of bringing a suit. 1 However, in a typical case, a cargo claimant or cargo defendant would rather be bothered by the question: At what moment does risk in the goods pass from the seller to the buyer or from the shipper to the consignee? 2 Thus the concept of risk is delimitative of the parties responsibilities for loss of or damage to the goods at any particular time. Accordingly, if the goods are at the sellers risk, he must make good the loss if he is not to be in breach of his obligation under the sale contract. The buyer, on his part has to pay for the goods irrespective of their condition on receiving, if the goods were lost or damaged while at his risk. 3 Thus the issue of the allocation of risk is a prime one that preoccupies both the seller and the buyer in an international sale contract with far reaching consequences, even on the contract of carriage. It is sometimes harsh and unfair consequences on the cause and outcome of such transactions makes it pertinent that a correct balance be struck in the allocation of risk in order to avoid confusion and possible litigation that could clog the wheel of international commerce.

This paper sets out to identify the proper incidences of risk in an international sale contract with particular reference to the INCOTERMS 2000. It will engage in an analysis of some intrinsic issues in the transfer of risk as determined by the INCOTERMS, pointing out their inadequacies. The paper will basically attempt to show instances were risk will still lie with the seller notwithstanding the shipment of goods, contrary to the rule in shipment contracts. 4 In addressing the practical problems that could result from a mechanical application of that rule, this discourse will engage in some analysis of the provisions of the English Sale of Goods Act, the Convention for the International Sale of Goods (CISG) and the Uniform Commercial Code (UCC). It will review relevant jurisprudence on the subject and rely on judicial authorities to sustain its position that the INCOTERMS, though largely successful in achieving its purpose, could better be adapted.

See Leigh and Sullivan Ltd v Aliakmon Shipping Co. Ltd (1986) 2 Lloyds Rep. 1, HL. Tetley, W., Sale of Goods The Passing of Title and Risk A Resume, p.1, available at http://www.mcgill.ca/files/maritimelaw/ch7.pdf (last visited 24 April 2007). 3 See Dimatteo, L., et al, p. 122, International Sales Law A Critical Analysis of CISG Jurisprudence, (1st Published) (New York, United States of America: Cambridge University Press, 2005). 4 The rule is that risk passes from the seller to the buyer upon shipment of the goods.
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Chapter 2 of the paper will overview the development, scope and purpose of the INCOTERMS and their incorporation into international sale contracts. Chapter 3 will briefly focus on the four most important INCOTERMS in respect of the sale of goods carried by sea, emphasising the incidences of risk in each. Chapter 4 will concentrate on a comparative analysis between the INCOTERMS 2000 and a few other legislations. In chapter 5, the paper will further analyse some intricacies arising from the transfer of risk and proffer suggestions for their efficient determination. Chapter 6 will sum up all the analysis and underscore the need for an efficient solution to issues of risk allocation.

2.

WHAT ARE INCOTERMS?

International contracts for the sale of goods have often contained standard shipping and delivery terms which basically denote the obligations of buyers and sellers. The INCOTERMS are as such, a contractual code of acronym which aim at providing a set of international rules for the interpretation of the most commonly used trade terms in foreign trade and these terms are used to allocate the costs of freight and insurance and in addition to designating the point in time when the risk of loss passes to the purchaser. 5

In facilitating international commercial transactions, the principal functions of the INCOTERMS 6 include the elimination of uncertainties and differences in the interpretation of shipping and trade terms, and the avoidance of disputes by eliminating the barriers caused by distance, language and local business customs. 7

St Paul Insurance Co. v Neuromed Medical Systems (2002) US District LEXIS 5096 (S.D.N.Y), March 26, 2002, available at http://www.unilex.info/casc.cfm?pid=1$do=casc&id=730&step=FullText (last visited on 1 April 2007). 6 First published in 1936 by the ICC, they have been reviewed every ten years in the past sixty years to suit the development of technology. The INCOTERMS 2000 provide for the replacement of paper documentation by electronic equivalents (EDI messages), if the parties agree to communicate electronically. From the early years when they were drafted for use in contracts for carriage by sea, the 1980, 1990, 2000 versions have extended the applicability of INCOTERMS to other modes of transport, including planes, trains and trucks, and are evolving to meet the demands of electronic commerce. 7 Gabriel, H., Contract For the Sale of Goods: A Comparism of Domestic and International Law, p. 241 (1st Published), (New York, United States of America: Oceania Publications, Inc, 2004).

Although, INCOTERMS are terms of sale rather than of carriage of goods, they have an immense impact on the carriage of goods contract, determining issues such as the passing of goods from seller to buyer, the sellers delivery obligations and the

expenses borne by the parties in respect of the shipment, including insurance arrangements, custom clearance, payment of freight, etc. 8

The INCOTERMS are not mandatory in nature and although they could alter and supplement the provision of a sale contract, parties must expressly refer to them when it is intended that they be incorporated in the contract of sale. 9 INCOTERMS 2000 AND THE INCIDENCES OF RISK 10 FOBFree On Board Free On Board means that the seller delivers when the goods pass the ships rail at the named port of shipment. This means that the buyer has to bear all cost and risk of loss of or damage to the goods from that point. 11 The FOB term requires the seller to clear the goods for export. 12

3.

FASFree Alongside Ship Free Alongside Ship means that the seller delivers when the goods are placed alongside the vessel at the named port of shipment. This means that the buyer has to bear all the cost and risk of damage to the goods from that moment. 13 The FAS term requires the seller to clear the goods for export.

Persian Carpet Export, INCOTERMS, available at http://www.persiancarpetexport.com/incoterms.asp, last visited on 1 April 2007. 9 SeaRates.com, INCOTERMS 2000: ICC Official Rules For The Interpretation Of Trade Terms, http://www.searates.com/reference/incoterms/ , last visited on 1 April 2007. Note that parties must refer to the current version to avoid any dispute as to which version is intended. 10 Note that the transfer of risk under the INCOTERMS is mainly governed by Sections A5 and B5, which equates the time of passing of risk to the time of delivery. Sections A4 and B4 defines the moment of delivery in each and regulates the time of handing over of the goods by the seller and the taking over by the buyer. However, some occasions of passing of risk before delivery exist and would be discussed infra, chapter 4. 11 The seller need only put the goods on board the ship nominated by the buyer at the port of shipment and at the date agreed by the parties. The seller bears all the charges incurred up to and including delivery over the ships rail. 12 INCOTERMS 2000, FOB, paras, B5 and B6. 13 The seller therefore bears the risk and expense of delivering the goods to the loading dock alongside the vessel. Here, the actual loading of the goods over the ships rail is the buyers obligation.

CFR...............Cost and Freight Cost and Freight means that the seller delivers when the goods pass the ships rail in the port of shipment. The seller must pay the costs and freight necessary to bring the goods to the named port of destination, but the risk of loss or damage to the goods as well as any additional costs due to events occurring after the time of delivery are transferred from the seller to the buyer. 14 The CFR term requires the seller to clear the goods for export. 15

CIF.Cost, Insurance and Freight Cost, Insurance and Freight means that the seller delivers when the goods pass the ships rail in the port of shipment. The seller must pay the cost and freight necessary to bring the goods to the named port of destination but the risk of loss or damage to the goods, as well as any additional costs due to events arising after the time of delivery, are transferred from the seller to the buyer. 16 The CIF term requires the seller to clear the goods for export. 17

The Risk Covered The INCOTERMS cover any physical loss or damage to the goods that is accidental and for which none of the parties is responsible. 18 It covers only the price risk, 19 in effect, determining whether the buyer is liable to pay the price or whether the seller is entitled to claim the price in case of accidental loss or damage to the goods. It follows that the INCOTERMS do not regulate the risk of non-performance or of breach of contract. 20 This raises some uncertainty in transactions regarding international sale of goods, since the transfer of the risk of non-performance is actually linked with delivery of the goods as well and with the implication that in appropriate instances,

See The Red Sea (1997) 1 Lloyds Rep., 610 at 613 & 625. See generally INCOTERMS 2000, CFR, paras A1 to B10. 16 See generally INCOTERMS 2000, CIF, paras A1 to B5. Note however that in CIF sales, the seller has to procure marine insurance against the buyers risk of loss or of damage to the goods during carriage. 17 Here, the CIF seller is the shipper who contracts for the carriage of the goods in his own name, nominates the vessel, notifies the buyer accordingly, pays the freight and insures the goods. 18 This cover extends to acts of God and the acts of third parties, including theft, deterioration due to bad storage, etc. 19 See Valioti, Z., Passing of Risk in International Sale Contracts: A Comparative Examination of the Rules on Risk under the United Nations Convention on Contracts for the International Sale of Goods (Vienna 1980) and INCOTERMS 2000, in No. 2, NJCL p.7, (2004) available at http://www.njcl.fi/2_2004/article3.pdf (last visited on 24 April 2007). The notion of risk may encompass the insurance risk, commercial risk and political risk as well. 20 Ibid.
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the seller will have to provide substitute goods. Thus we may have a situation where the seller finds his obligations to care, to repair and eventually to redeliver, all reborn, with no clear time limit and under a vague standard. 21

4. THE PASSING OF RISK IN SALE CONTRACTS ON SHIPMENT TERMS 4.1 The Basic Rule The basic rule in a contract of sale is that risk passes at the time agreed upon by the parties. Section 20(1) of the English Sale of Good Act 1979 provides:

Unless otherwise agreed, the goods remain at the sellers risk until the property in them is transferred to the buyer, but when the property in them is transferred to the buyer the goods are at the buyers risk whether the delivery has been made or not.

This rule is variously modified by contractual terms and statutory rules which take into account peculiar situations: 22 By implication of Section 20(2), 23 if in a FOB contract the buyer fails to

I.

procure space aboard a ship within a reasonable time, he must bear the risk of any deterioration of goods on the wharf though the seller should normally bear the risk until shipment. 24

II.

Where quasi-specific goods under the control of a carrier or storehouse man

have been destroyed before they are actually ascertained, the buyer will have to bear the loss and pay the price.

III.

Where the goods have deteriorated during carriage, even though title and risk

may have passed to the buyer at the time when the goods where delivered to the

Eraw, J., CISG Articles 66 70: The Risk of Loss and Passing it, in VOL. 25 No 203 JLC, p. 209 (2005-06), available at http://www.uncitral.org/pdf/english/cisg25/Eraw.pdf (last visited on 9 April 2007). 22 Most of these situations form the analysis in chapter 5. 23 Basically provides that when delivery has been delayed by the fault of either the seller or the buyer, the goods are at the risk of the party who is at fault. But only as regard any loss which might not have occurred, but for such fault. 24 Goode, R., Commercial Law, pp 870 - 929(3rd Edition) (London, United Kingdom: Penguin group, 2004).

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carrier, the seller may be compelled to bear the loss because the goods did not remain merchantable for a reasonable time. 25

IV.

In CIF sales, though title is presumed to pass to the buyer only upon payment

on tender of documents, risk however passes to the buyer retrospectively as of the time of shipment. 26

V.

When the goods are to be delivered by carriage by sea, the seller must provide

such details as to enable the buyer to procure insurance covering the sea carriage. Failure to do so will imply that the seller bears the risk during the transit.

VI.

Where the goods originally shipped in good condition are lost or damaged

after shipment but before the contract of sale was concluded, the buyer cannot be compelled to accept the tender of documents since there were never any goods which conformed to the contract description. 27

4.2 The Uniform Commercial Code (UCC) The UCC is the model American sale code which concerns itself with the passing of risk. 28 It applies subject to the express agreement of parties. 29

4.2.1 Shipment Sales When the sale requires shipment by the carrier but does not require delivery by the seller at a particular destination, risk of loss passes to the buyer when the goods are delivered to the carrier. 30

4.2.2 Destination Sales Where the seller is required to deliver at a particular destination by means of a carrier, 31 risk passes to the buyer when the goods are duly tendered at that destination while in the carriers possession, so as to enable the buyer to take delivery. 32

Tetley, p. 35. A reasonable time would be until the buyer could dispose of them upon arrival and title would re-vest with the seller by the buyers rejection of the goods. 26 See The Julia (1949) AC 293 at 309, per Porter L.J. 27 Goode, p. 943. 28 The Code addresses the allocation of risk in terms of whether a sale requires delivery by the seller at a particular destination or not, that is, whether a shipment or destination sale is contemplated. Section 2 - 509(4). Section 2 509 (1) (a). This means that in a Shipment sale, like a CIF one, the seller needs only put the goods in custody of a carrier and risk of loss passes to the buyer at that point.
30
31 29

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This rule does not apply when the seller uses his own truck.

4.3 The CISG The United Nations Convention on Contracts for the International Sale of Goods 33 regulates the passing of risk in sale involving carriage of goods, mainly in its Article 67. 34 Paragraph 1 of the Article provides for two rules: (1) If the seller and buyer did not agree for the goods to be handed over at a particular place, then the risk passes to the buyer when the goods are handed over to the first carrier in accordance with the contract of sale.

(2)

If the parties agreed on the handing over of the goods to the carrier in a particular place, the risk passes when the goods are handed over to the carrier at that particular place.

Zoi 35 argues that the provisions imply that the seller would be the one who will have the obligation to arrange for the carriage of the goods and their transmission to the buyer and also that the phrase in accordance with the contract of sale, actually means that the handing over of the goods should be in accordance with the contract as a whole. 36 Bianca and Bonell 37 suggest that the carriage should be by a third party as the scope of Article 67 would not include carriage of goods by the parties themselves. This

See Section 2 509(1) (b). This means that in a destination sale like FOB (Place of buyers business), the seller must have the goods brought to the specified destination and he retains the risk of loss until the goods are tendered on arrival. 33 11 April 1980, entered into force on January 1, 1988. 34 Article 68 regulates passing of risk of goods sold during transit. Here, the risk passes to the buyer from the moment that the contract is concluded. Only in exceptional circumstances will risk pass retroactively from the moment of handing over of the goods to the carrier. The third sentence of Article 68 in a proviso, providing that when the seller has knowledge actual or deemed [before the conclusion of contract], that the goods had suffered loss or damaged and did not inform the buyer, the seller would bear the risk in that circumstances. Article 69(1) provides for residual cases. Risk passes to the buyer when he takes over the goods or if he does not do so in due time, from the time they are placed at his disposal.Includes cases involving taking over of the goods at the sellers premises, another persons premises or at a public warehose.
35 36

32

Valioti, supra. The phrase could result in some ambiguity in the sense that it could be interpreted to mean that the passing of the risk is effectuated when there is compliance with the contract of sale. 37 See Nicholas, B. in Bianca, C. and Bonell, M. (eds) para 2.2, Article 67: Commentary On The International Sales Law , available at http://cisgw3.law.pace.edu/cisg/biblio/nicholas-bb67.html (last visited on 20 April 2007).

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implies that the notion of first carrier suggest an independent third-party carrier which would include a freight forwarder and a multi-modal transport operator (MTO). 38

4.4 The Ship Rail Criterion Under the CIF and FOB terms, the time of delivery and hence the passing of risk is at the moment when the goods cross the ships rail. What point in time would goods be said to have crossed the ships rail? 39 What if the goods suffer loss or damage during the loading process, who then bears the risk? The unsatisfactory nature of this ship rail criterion is captured by Delvin J.: The ships rail has lost much of its nineteenth century significance. Only the most enthusiastic lawyer could watch with satisfaction the spectacle of liabilities shifting uneasily as the cargo sways at the end of a derrick across a notional perpendicular projecting from the ships rail.40

Two, though still unsatisfactory approaches have been taken to determine when the goods have crossed the ships rail. The first suggest that risk passes literally when the goods pass the ships rail and accordingly, the risk remains on the seller if they fall on the wharf or in the sea, but is on the buyer if they fall on the deck, having already passed the ships rail. 41 Seemingly simply, this approach smacks of practical problems of proof. It would be difficult to determine at every occasion the exact place where the goods had landed on each fall.

The other approach suggests that risk should pass at the end of the handing over process, when the loading process has ended and the goods are not in the sellers possession anymore. 42 The problem with this view is that it unduly presumes an intention that the parties wanted the risk to pass at the end of the loading process. 43 If the parties so intended, they would have expressly added that to their contract by using the terms stowed and/or trimmed. 44

Thus for risk to pass to the buyer, the carriage should be made by an independent carrier and not the seller or his agent. 39 Unfortunately, the entire scenario is fraught with vagueness since there is no specificity on the exact time of shipment, that is, in regard to the particular point in the loading process when it could be said that risk has passed from seller to buyer. 40 Pyrene Co. Limited v Scindia Navigation Co. Limited (1954) 2QB 402, 419. 41 Valioti, p. 30. 42 Ibid. 43 See Bridge, M., The International Sale of Goods: Law and Practice, p. 393 (1st published) (New York, United States of America: Oxford University Press 1999). 44 Stowed means that the seller is obliged to perform the loading at his own expense. Trimmed means that the seller will have to pay for the storage and safe placement of the goods inside the ship.

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An effective approach to this question would be adopting the position of Article 67(1) first sentence of the CISG according to which risk is transferred when the goods are handed over to the first carrier for transmission to the buyer. To relocate the moment of the passing of risk to the moment of handing over the goods to the carrier before the loading process starts [thus effectively putting the risk during loading on the buyer], would avoid the vagueness of the ship rail criterion. 45

5. 5.1

INCIDENCES OF POST-SHIPMENT RISK Loss Before Appropriation

Though title in CIF sales is presumed to pass from the seller to the buyer upon payment against the bill of lading, risk is generally accepted to have passed retrospectively, at the time of shipment. 46

A tricky situation however arises when ascertained goods are lost after shipment without the sellers knowledge and before the goods could be appropriated to the contract. The language of the INCOTERMS in proviso B5 requires that the goods have been duly appropriated to the contract, that is to say, clearly set aside or otherwise identified as the contract goods. This situation precipitates some problem when the sale concerns goods to be shipped in bulk along with other goods of the same kind. Identifying the contract goods before they are separated from the bulk at destination could present difficulties. 47 In C. Groom Ltd. V Barber, 48 the court held that even though title cannot pass by unconditional appropriation, the buyer had the risk, that the seller was entitled to be paid for the goods upon the buyer taking up the shipping documents, but that the buyer would be entitled to recover on the insurance policy and can also sue the carrier for the latters default. 49

45

See Flambouras, D., Transfer Of Risk In The Contract of Sale Involving Carriage Of Goods? A comparative study In English, Greek Law And The United Nations Convention On Contracts For The International Sale Of Goods available at http://wwwcisgw3.law.pace.edu/cisg/biblio/flambouras.html, (last visited on 21 April 2007). 46 The Julia, supra, at 309, per Lord Porter. 47 Ramberg, J., To What Extent Do INCOTERMS 2000 Vary Articles 67(2), 68 And 69? Vol. 5:219 JLC 220 (2005-06) available at http://www.uncitral.org/pdf/english/CISG25/Ramberg.pdf, (last visited on 21 April 2007). 48 (1915) 1 KB 316. 49 ibid, p.324.

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Goode 50, however argues that the seller cannot make a valid tender of shipping documents after loss of the goods unless before loss they had become fully identified as the contract goods. This argument underscores the grim situation that could result from the absence of an unconditional appropriation of the goods to the contract before their loss and the question of how they could be identified by the shipping documents or the insurance policy as the contract goods.

In the United Kingdom, where shipping documents have not been transferred to the CIF buyer, 51 such action can only be maintained if the buyer had title to the goods at the time when they were lost or damaged. 52 This further exemplifies the dilemma that could result here. Not even the CISG stipulation that 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 53 offers a clear insight.

5.2 Loss After Shipment But Before Contract Generally, if the contract goods, unknown to the parties have ceased to exist by the time of conclusion of the contract, such contract would either be void or frustrated and if they were damaged or deteriorated pre-contract and were not sold as such, the buyer will have the right to reject them for want of fitness and/or quality. 54 The question arises as to whether this rule becomes inapplicable if the seller, having procured shipping documents issued at the time when the goods where on board the ship and in good condition, delivers them to the buyer who can then claim against the carrier or insurer. 55 Benjamin 56 argues that the buyer is released only if there is a total loss of the goods. It is however submitted that the rule is not displaced and so the buyer is entitled to reject the documents, whether the goods are lost wholly or in part.

Though the INCOTERMS are not specific on the point, yet even the CIF buyer cannot be said to be contracting to buy claims but primarily, goods. Accordingly, if the goods have suffered loss, damage or deterioration even before the contract of sale was
Goode, p. 943. Or where the Carriage of Goods by Sea Act 1992 is inapplicable and the buyer has to sue the carrier in tort. 52 Tetley, p. 35. 53 CISG, Article 67(2). 54 See section 6, English Sale of Goods Act. 55 Goode, p. 943. 56 Benjamin, J., Benjamins Sale Of Goods, para 19-074, (6th Edition) (London, United Kingdom: Sweet & Maxwell, 2002).
51 50

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concluded, then the buyer should not ordinarily be compelled to accept the shipping documents because goods conforming to the contract were never at any point in time available to him. 57

According to Goode, if it be right that the seller cannot appropriate the goods to the contract after they have been lost, it must equally be true that an appropriation of damaged or deteriorated goods is ineffective, at least if the damage or deterioration results in their not conforming to the contract description. 58 This, in effect throws back the risk on the seller, despite shipment.

5.3 Sellers Failure to Provide Sufficient Information Section 32(3) of the Sale of Goods Act provides for an exceptional situation applicable to FOB contracts, where technically speaking, the party who has to make good the loss is not the party at risk. It provides that where goods are sent by the seller to the buyer by a route involving sea transit and under circumstances in which it is usual to insure, the seller must give such notice to the buyer as to enable him insure the goods during transit and if the seller fails to do so, then he bears the risk during transit. 59 Though it is generally accepted that in most varieties of FOB, 60 it is usual for the buyer to take out the insurance contract, the absence of clear principles on how the Section is to be applied is worrisome. In Wimble Sons & Co Ltd. v Rosenberg & Sons, 61 the majority of the English Court of Appeal while agreeing that the Section applied to FOB contracts failed to be conclusive as to the manner in which it applied, with each Judge taking a different view. 62

Hamilton, L.J., held that the Section did not apply at all to FOB contracts because the seller does not send the goods to the buyer by a route involving sea transit but merely puts them on board a ship for despatch to the buyer. Williams and Buckley, L.JJ., both disagreed with Hamilton, L.J, holding that the Section certainly applies to FOB contracts. However, they disagreed as to the manner of its application. While William,
57 58

There could not have been a contract without a subject-matter. Goode, p. 943. 59 Effectively, this scenario retains risk on the seller, even after shipment. 60 FOB contracts with Additional could be an exception. 61 (1913) 3KB 743. 62 The sellers in that case had shipped 200 bags of rice f.o.b Antwerp, without telling the buyers the name of the ship. Shortly after shipment the ship got stranded and the cargo became totally lost. The buyers had failed to take out insurance because of the failure of the sellers to notify them of the name of the ship. They refused to pay the price and the sellers then brought the action.

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L.J. in a dissenting judgement held that the seller should have provided more information and that the risk remained with him because of his failure to do so, Buckley, L.J thought that the seller had given sufficient information to comply with the terms of the section, further that the buyer can always take out a general policy of insurance without needing to know the name of the ship. This ambiguity in the manner of application of the Section could raise difficulties in the correct allocation of risk at some point in time in an FOB contract. 63

5.4 Passing of Risk as from shipment The established rule in both FOB and particularly, CIF contracts is that risk passes as from shipment. 64 Even if this is to be determined retrospectively, it is one area where the INCOTERMS could better adapt to a more conscionable and satisfactory application. As is often the case in most CIF contracts, the goods are already on the high sea before they are appropriated to the contract and upon resale, the risk passes to the buyer retrospectively from the time of shipment. 65 Consequently, while the goods are in transit, the buyer bears the risk and in the case of chain-sales the risk of the entire voyage is borne by the last buyer. 66 The buyer takes over from the seller the whole package of rights and liabilities which make up the commercial venture and accordingly must go through with the deal to pay the price and take up the documents when tendered even though the goods my have been lost and the seller has knowledge of their loss. 67

Although it has been argued that this rule eliminates difficult questions of proof as to the time the goods were lost or damaged while at sea, 68 it is submitted that this severe rule does not further the best commercial interest. The rule violates a basic principle of contracts that there must be an existing subject-matter for a contract to exist. 69 Not even the argument that a CIF contract is nothing more than a sale of documents 70 is

Todd, P., Modern Bills of Lading, p. 34 (2nd Edition) (Oxford, United Kingdom: Blackwell law Publications, 2005). 64 See The Julia, supra, Biddell Bros v Clemens Horst (E) Co. (1911) 1KB 934. 65 Thus risk is deemed to have passed before the contract was concluded! 66 Todd, p. 30. Justification for this rule has been sought in the reasoning that the buyer does not have to bear the loss personally, merely that he has no re-sought against the seller but can claim on his insurance or sue the carrier in tort. 67 See Menbre Saccharine Co Ltd v Corn products co Ltd (1919) !KB 198, Sealy and Hooley, Commercial Law: Text, Cases and Materials, p.449 (2nd Edition) (London, United Kingdom: Butterworths, 1999). 68 See Todd, p. 30. 69 See Couturier v Hastie 10 ER 1065. 70 See Arnhold Karberg v Blythe, Green, Jourdain & Co. (1916) 2KB 379 at388 where it was held that a CIF sale is not a sale of goods but a sale of documents relating to goods, per Scrutton, J.

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persuasive enough to displace this principle. On appeal, the court 71 rejected this position, holding that the correct description of the CIF contract is that it is a contract for the sale of goods to be performed by the delivery of documents. 72 Thus while not whittling down the importance of shipping documents, it must be stated that such importance is assumed by virtue of the contract of sale. It follows that if the contract of sale is bad for any reason, including the non existence of the subject-matter of the contract, then the documents would have no value in themselves.

A more practical approach in this regard would be adopting the position in Article 68 of the CISG which provides that where the goods are sold in transit, risk ordinarily passes on the conclusion of the contract, but may pass instead when the goods are handed over to the carrier if the circumstances so indicate. 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. 73 This provision takes into account the shipment rule but goes further to negate its application in respect of a seller who has knowledge, actual or deemed, that the goods have been lost or damaged at the time of conclusion of the contract and does not disclose this. This position is more in accordance with good faith and would better promote the interest of international commerce.

6.

CONCLUSION

The role of the INCOTERMS as an instrument for the allocation of risk and promotion of unification of usages in international commercial transactions has been largely successful. Its relative success in providing safety and certainty in international sale contracts and its flexibility, as indicated by its novelty in addressing issues of containerisation and multi-modal transport, has further endeared them to the commercial world, above other risk allocation instruments. 74

However, as has been shown in this paper, a few areas remain where the INCOTERMS do not give a clear and satisfactory answer to questions on the allocation of risk. The ship rail criterion among others, remain a most inefficient approach to the allocation of risk. The next version of the INCOTERMS could be better adapted to address these issues.
71 72

Arnhold Karberg v Blythe, Green, Jourdain & Co. (1916) 1KB 495. CA. ibid, p. 510, per Bankes, L.J 73 The CISG, Article 68. 74 See Valioti, pp. 33 34.

16

In summing up, the paper encourages parties to international sale contracts to pay additional attention to issues of risk allocation as their expressed intention could be defining where the INCOTERMS fall short.

17

BIBLIOGRAPHY 1 PRIMARY SOURCES

Treaties / Conventions Convention on International Sale of Goods, 11 April 1980,( entered into force on January 1, 1988).

Sale of Good Act 1979, United Kingdom. Uniform Commercial Code 2001. INCOTERMS 2000 I.C.C. Publication No. 560, Paris, 1999. Judicial Legislation Arnhold Karberg v Blythe, Green, Jourdain & Co. (1916) 2KB 379. Arnhold Karberg v Blythe, Green, Jourdain & Co. (1916) 1KB 495. CA. Biddell Bros v Clemens Horst (E) Co. (1911) 1KB 934. C. Groom Ltd. V Barber (1915) 1 KB 316. Comptoir DAchat et de Vente du Boerenbond Belge S/A v. Luis De Ridder, Ltda. (The Julia), AC 293. Couturier v Hastie 10 ER 1065. Leigh and Sullivan Ltd v Aliakmon Shipping Co. Ltd (1986) 2 Lloyds Rep. 1, HL. Menbre Saccharine Co Ltd v Corn products co Ltd (1919) 1KB 198. Pyrene Co. Limited v Scindia Navigation Co. Limited (1954) 2QB 402, The Red Sea (1997) 1 Lloyds Rep., 610 at 613 & 625. Wimble Sons & Co Ltd. v Rosenberg & Sons, 1913) 3KB 743.

2 Books

SECONDARY SOURCES

Bridge, M., The International Sale of Goods: Law and Practice, p. 393 (1st published) (New York, United States of America: Oxford University Press 1999).

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Dimatteo, L., et al, p. 122, International Sales Law A Critical Analysis of CISG Jurisprudence, (1st Published) (New York, United States of America: Cambridge University Press, 2005). 18

Gabriel, H., Contract For the Sale of Goods: A Comparism of Domestic and International Law, p. 241 (1st Published), (New York, United States of America: Oceania Publications, Inc, 2004).

Goode, R., Commercial Law, pp 870 - 929(3rd Edition) (London, United Kingdom: Penguin group, 2004). Sealy and Hooley, Commercial Law: Text, Cases and Materials, p.449 (2nd Edition) (London, United Kingdom: Butterworths, 1999). Todd, P., Modern Bills of Lading, p. 34 (2nd Edition) (Oxford, United Kingdom: Blackwell law Publications, 2005).

Other Sources Internet Eraw, J., CISG Articles 66 70: The Risk of Loss and Passing it, in VOL. 25 No 203 JLC, p. 209 (2005-06), available at http://www.uncitral.org/pdf/english/cisg25/Eraw.pdf (last visited on 9 April 2007). Flambouras, D., Transfer Of Risk In The Contract of Sale Involving Carriage Of Goods? A comparative study In English, Greek Law And The United Nations Convention On Contracts For The International Sale Of Goods available at http://wwwcisgw3.law.pace.edu/cisg/biblio/flambouras.html, (last visited on 21 April 2007). Nicholas, B. in Bianca, C. and Bonell, M. (eds) para 2.2, Article 67: Commentary On The International Sales Law , available at http://cisgw3.law.pace.edu/cisg/biblio/nicholas-bb67.html (last visited on 20 April 2007). Persian Carpet Export, INCOTERMS, available at http://www.persiancarpetexport.com/incoterms.asp, last visited on 1 April 2007. Ramberg, J., To What Extent Do INCOTERMS 2000 Vary Articles 67(2), 68 And 69? Vol. 5:219 JLC 220 (2005-06) available at http://www.uncitral.org/pdf/english/CISG25/Ramberg.pdf, (last visited on 21 April 2007). SeaRates.com, INCOTERMS 2000: ICC Official Rules For The Interpretation Of Trade Terms, http://www.searates.com/reference/incoterms/ , last visited on 1 April 2007. Tetley, W., Sale of Goods The Passing of Title and Risk A Resume, p.1, available at http://www.mcgill.ca/files/maritimelaw/ch7.pdf (last visited 24 April 2007). Valioti, Z., Passing of Risk in International Sale Contracts: A Comparative Examination of the Rules on Risk under the United Nations Convention on Contracts for theInternational Sale of Goods (Vienna 1980) and INCOTERMS 2000, in No. 2, NJCL p.7, (2004) available at http://www.njcl.fi/2_2004/article3.pdf (last visited on 24 April 2007). 19
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