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Who Bears the Risk of Loss During the International Sales of Goods in Transit?

The World is becoming a smaller place. During the 1950's companies who once purchased “goods” solely within their home State,( i.e. intrastate), began buying “goods” through interstate commerce.  [See, “Does the UCC or Common Law Govern Your Contract”, posted 12/13/23]. By the 1980’s, many companies were buying “goods” from across the globe requiring long distance transportation via ship, plane, or truck. As “goods” began to spend more time in transit, unpredictable risks, including weather, war, seizure, accident, contamination, theft, loss, breakage, damage, etc. exposed “goods” in transit to far greater risks. Such increased risks beg the question as to who bears the risk of loss while “goods” are in international transit – the buyer, seller, or carrier?

With the expansion of global sales, the United Nations sought to provide a framework to answer questions surrounding international sales, including risk of loss for “goods” during transit. In 1980, all 193 member countries of the United Nations debated adoption of the “United Nations Convention on Contracts for the International Sale of Goods” or CISG. The CISG provides laws governing the sales of “goods” between companies (not consumers) located in different countries.  As a practical matter, the CISG applies to most international sales of “goods”, because: 1.) there are 195 recognized countries in the World, and all but two – Vatican City and the State of Palestine – are members of the United Nations, and 2.) 90 of the 195 countries who are members of the United Nations, including all but 2 of the major trading partners with the United States - the United Kingdom and Hong Kong - have adopted the CISG. However, some member countries to the CISG have adopted adopted the CISG subject to declarations limiting or restricting provisions which are inconsistent with the laws of their country.

Under the CISG, once risk of loss passes to the buyer, the purchase price must be paid regardless as to whether the “goods” were received or in what condition. Whereas, if the risk of loss remains with the seller, the buyer is not responsible for payment unless the “goods” are received, in the same condition under which they were purchased. In order to facilitate identifying responsibility for managing, insuring and documenting the shipment between seller and buyer, the CISG recognizes eleven globally recognized shorthand trade terms,(i.e., Incoterms), defined by the International Chamber of Commerce. The Incoterms are represented by 3 letter acronyms (e.g., CIF, FOB, DAP) that allocate responsibility between seller and buyer based upon:  i.) agreed place, ii.) port of loading, iii.) port of destination, iv.) place of destination, and v.) destination.  [See, www.trade.gov/know-your-incoterms].

Articles 66 through 70 of the CISG identify who bears the risk of loss for “goods” in transit, where the parties have not already expressly done so through the terms of their contracts. Article 66 establishes an exception to the buyer accepting risk of loss, where the seller caused the loss or damage to “goods” by intentional or negligent act or omission. Article 67 provides, unless the risk of loss is identified by contract, all risk passes to the buyer once the goods are handed over to the first carrier. Article 68 provides risk of loss for “goods” sold while in transit passes to the buyer upon execution of the sales contract, unless agreed  otherwise. Article 69 provides if risk of loss transfers to the buyer at a specified place, the risk shifts to the buyer once the “goods” are made available by the seller. Finally, Article 70 provides the Articles 67, 68, and 69 do not limit remedies available to the buyer in the event the seller commits a fundamental breach of the sales contract (i.e. defective goods, lack of title).

As with everything, an ounce of prevention is worth a pound of cure. The best advice for companies involved with the international sale of “goods” is to become knowledgeable about the CISG and Incoterms. And if your company seeks to shift risk that differs from the rules provided therein, make sure to expressly identify such measures in your written sales contract.

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