The parties to every sale contract have an interest in the quality and condition of the goods they trade in but when the sale at stake is an international one there is a further cause for concern: to reach their buyers the goods sold have to be carried across international, political and geographical boundaries.
It may well happen that such goods are shipped in lorries at the producers’ plant, transhipped on to barges or lighters, transhipped again on a seagoing vessel to be discharged at destination, several weeks after they have left the seller. While carried, the goods are in the control of a network of carriers, independent contractors working neither as agents of the seller nor for the buyer. But what happens if the goods are damaged or lost in transit? Although both the carrier (or its liability insurer) and the cargo insurer will provide compensation for transit losses, the identity of the party which will have suffered the loss depends on the answer to a rather different question: who bears the risk of loss of or damage to the goods while in transit?
According to the maxim ‘res perit domino’ only the owner of the cargo can suffer an actual loss as a result of its cargo being lost or damaged.
However, when goods are sold on shipment terms the situation is more elaborate and risk and property are very seldom transferred at the same time.
Risk Passes On or As From Shipment
Given the key importance of risk in international trade transactions it may happen that the parties expressly clarify the allocation of transit risks in their contracts with ad hoc clauses saying e.g. that “risk shall pass to Buyers at the loading port or terminal as the oil passes the loading vessel’s permanent hose connection”. In such cases it is clear that risk of transit loss will pass to the buyer at that very precise moment in time.
On the other hand, if the parties have not given special consideration to the issue of risk, risk will pass according to the type of contract stipulated by the parties.
In ex works contracts the duty of the seller is to place the goods at the disposal of the buyer at the agreed point, if any, at the named place of delivery (e.g. seller’s warehouse) not yet loaded on any collecting vehicle, whereas the buyer has the duty to take delivery of them and bears all risks of loss of or damage to the goods from the time they have been so delivered. The main consequence of this is that the risk of transit loss rests with the buyer from the point of collection at seller’s premises onwards.
At the opposite end of the spectrum, in contracts concluded on D terms the seller undertakes to arrange the carriage of the goods to the agreed point, if any, at the named destination in the country of import, whereas the buyer has to take delivery only if the goods it receives at destination are as agreed in the contract.
If the sale is concluded on shipment terms either the seller (in c.i.f. and c.&f./CFR sales) or the buyer (in f.o.b. sales) may undertake to make transport arrangements, but delivery of the goods always takes place on board the nominated vessel at the port of shipment.
Exceptions to the Rule
The rule that risk passes on or as from shipment is not without exceptions which – if triggered – would relieve the buyer from bearing all or part of the risk of transit loss or damages. Such exceptions may be divided into two main categories: (i) the contractual exceptions arising out of express agreement between the parties and (ii) the legal exceptions, where they find their source in statutory provisions or in the common law.
- Contractual Exceptions
In the exercise of their freedom of contract the parties may well decide to allocate the risks associated with the carriage of the goods sold as they see fit. In practice this is usually done with specifically drafted out turn clauses commonly related to the quantity, quality or condition of the cargo at the port of discharge. Such clauses usually provide for an adjustment in price in case the commodity reaches destination falling short in quantity, quality or condition as the case may be of the contract specifications with the effect of reversing the risk of such losses back on to the seller’s shoulders.
- Legal Exceptions
Whether or not the contract contains specific clauses on the reallocation of risks, both the Sale of Goods Act 1979 and the common law provide for a limited number of exceptions to the rule that risk passes on or as from shipment. There are five of these legal exceptions as follows:
- Where delivery has been delayed through the fault of the seller any loss which might not have occurred but for such fault is for the seller’s account;
- Where the seller acts as bailee or custodian of the goods, losses caused by breach of the duty to take reasonable care of such goods is for the seller’s account;
- Where the seller has failed to make a reasonable contract of carriage for the benefit of the buyer, the loss of or damage to the goods is also for the seller to bear;
- If the seller has failed to pass on information to enable the buyer to insure goods during their sea transit, again the goods will be at the seller’s risk during such sea transit; and
- If the consignment gets damaged or lost in transit because its condition at the time of shipment was such as to make it unlikely to withstand normal sea transit, they will be at seller’s rather than at buyer’s risk.
Property Passes when Intended to Pass
Although the transfer of risk is certainly a more significant issue to traders, there are circumstances in which it may be important to establish where property in the goods lies, the most obvious being where it is necessary to start a tortious action against the carrier or where either of the parties becomes insolvent. The default position under the Sale of Goods Act 1979 is that property will pass at such time as the parties to the contract intend it to be transferred, such intention to be ascertained having regard to the terms of the contract, the conduct of the parties and the circumstances of the case.
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