Passage of risks and ownership - international trade

Marine, Bill of Lading, Cargo, Passage of Risks and Ownership Author: Aramayis Galichyan

The question of the exact time when ownership and risks of loss of or damage to goods pass from sellers to buyers is determined by international and national legal acts and contracts.

The determination of the time when risks and ownership pass from an international seller of goods to a buyer is important both for assessing the liability exposure of these parties, as well as for demonstrating insurable interest. The primary source of determining when the risks and ownership pass from the seller to the buyer is the contract of international sale of goods.

The rights and risks in respect of the cargo dynamically change during the whole period of the transportation. In many cases ownership may pass from the buyer to the seller contingent on certain events or at certain points during the carriage.

The passage of ownership is determined either by way of operation of applicable law or by way of an express provision under the contract of sale.

Sellers and buyers may apply the Incoterms rules developed and maintained by the International Chamber of Commerce. Incoterms provide predefined rules which help sellers and buyers of goods clarify the allocation of costs, responsibilities and risks involved the delivery of goods. It has to be noted that these rules are applicable only when they are agreed to be applicable by the seller and the buyer.

As it has been held in several international legal cases, ownership may pass from the seller to the buyer independent of the passage of risks.

In Oberlandesgericht Schleswig-Holstein, Germany, 29 October 2002, [3 U 54/01], in deciding the case, the Court noted that “the passing of the risk at the time of the handing over of the goods is independent of the passing of ownership”, which can also be derived from the Article 67 (1) of United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980) (CISG). Article 67 (1) states the following:

“If the contract of sale involves carriage of the goods and the seller is not bound to hand them over at a particular place, the risk passes to the buyer when the goods are handed over to the first carrier for transmission to the buyer in accordance with the contract of sale. If the seller is bound to hand the goods over to a carrier at a particular place, the risk does not pass to the buyer until the goods are handed over to the carrier at that place. The fact that the seller is authorized to retain documents controlling the disposition of the goods does not affect the passage of the risk.”

The CISG was adopted by a diplomatic conference in Vienna, on 11 April 1980, with the purpose of adopting uniform rules governing contracts for the international sale of goods between parties that are situated in different Contracting States or when the “rules of private international law lead to the application of the law of a Contracting State”.

Several states haven’t adopted the CISG, namely the United Kingdom, India, Kazakhstan, Portugal, the states of Arabian Peninsula and other countries. Being one of the most influential sources of contract law, English law sets out its own rules regulating various aspects of sales of goods. In accordance with the section 17(1) Sale of Goods Act 1979 (SOGA 1979), ownership passes to the buyer at such time as the parties to the contract intend it to be transferred.

Section 20(1) of the SOGA 1979 states:

“Unless otherwise agreed, the goods remain at the seller’s 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 buyer’s risk whether delivery has been made or not.”

However, in accordance with the section 16 of the SOGA:

“Where there is a contract for the sale of unascertained goods no property in the goods is transferred to the buyer unless and until the goods are ascertained.”

It appears that unless otherwise expressly agreed between the seller and the buyer, in accordance with the SOGA 1979, risks pass from one party to the other simultaneously with the passage of ownership, and it is ownership which is considered as a primary criterion for determining at whose risks the goods are. Most of international sale of goods involve carriage of goods. Section 32 (1) of the SOGA 1979 states that:

“Where, in pursuance of a contract of sale, the seller is authorised or required to send the goods to the buyer, delivery of the goods to a carrier (whether named by the buyer or not) for the purpose of transmission to the buyer is prima facie deemed to be a delivery of the goods to the buyer.”

Indeed, if parties have applied Incoterms, the allocation of risks should be determined by the application of appropriate Incoterms rules.

Following the provision of SOGA 1979, section 32 (1), it becomes obvious that where the transportation of goods is organised by the buyer, the carrier will be regarded as the buyer’s agent, and the passage of risks will take place when the sellers hands over the goods to the buyer’s carrier.

Conclusion

It can be concluded from the above that the passage of risks and ownership may in fact take place at different times under the auspices of the CISG.

When the transportation of goods includes carriage by sea, the issue of a Bill of Lading to the shipper will be the recognition of the shipper’s ownership in the goods. As soon as the Bill of Lading is passed to the other party, it will generally be considered as the time of passing the ownership.

Transfer of risks and transfer of property are connected under English Law, unless otherwise agreed between the seller and the buyer of goods. Such an agreement may be achieved through the application of Incoterms.

Incoterms deal with the passage of risks, the ascertainment of delivery of goods and allocation of costs between the seller and buyer of goods, but not with the passage of ownership.

The time when ownership passes from the seller to the buyer, is usually governed by international and national law and other applicable legal acts, and it is usually expressly ascertained by the contract of sale.

Therefore, it is of a critical importance to agree on the applicable law governing the contract of sale, to clarify the time when transfer of ownership and risks take place by appropriate provisions in the contract of sale. Failure to clarify the timing of passage of risks and ownership may lead to costly disputes.