Passing of Risk
© Springer International Publishing Switzerland 2015Javier Plaza Penadés and Luz M. Martínez Velencoso (eds.)European Perspectives on the Common European Sales LawStudies in European Economic Law and Regulation410.1007/978-3-319-10497-3_10
10. Passing of Risk
University Pablo de Olavide, Sevilla, Sevilla, Spain
Francisco Oliva Blázquez
The theory of passing of risk is one of the most problematic topics regarding contract sales law. Indeed, when the sold goods are lost or damaged by accident, the buyer does not receive what he bought because the seller is discharged from its obligation of delivering (art. 88.1 CESL). However, there remains an unsolved question: does the buyer’s obligation to pay the price subsist? If the answer is positive, it is maintained that the buyer bears the risk. Hence, it is very important to determine clearly at what stage in the life of the contract does the risk pass to the buyer.
National laws usually link the passing of risk to abstract and general concepts, such as the conclusion of the contract, the transfer of ownership or the transfer of the physical possession of the goods. However, these “key concepts” are rigid and unsuited to international commercial practice. For these reasons, the CESL has opted to follow the “analytical approach” set out in the CISG. In short, this legal technique seeks to determine the moment of the passing of risk in the various situations that may arise in commercial reality. So, Chapter 14 of CESL regulates the passing of risk in sales involving carriage of goods, when the goods are sold in transit or when the goods are placed at buyer’s disposal. Each of these situations has its own rule governing the passing of risk. Moreover, the CESL expressly distinguishes between B2B and B2C contracts, thus ensuring a high level of consumer protection.
KeywordsPassing of riskIdentification of goods or digital contentDeliveryCarriage of the goodsGoods sold in transitRetaining of documentsPhysical possession of the goodsObligation to pay the price
10.1.1 The Problem of Passing of Risk in Sale of Goods Contracts
The passing of risk is one of the most complex legal issues related to sales law. In fact, it can be said that the wording “risk” has become a cult concept in the contract law world.1 Nonetheless, it is intrinsically versatile, and hence the main problem is that of determining what is the exact meaning of “passing of risk”.
When goods or digital content suffer any kind of loss or damage by accident (or due to no fault of either party) in the period in between the time of the conclusion of the contract and its performance, the seller is discharged from its obligation to deliver the goods that have been lost or destroyed. This is called “delivery risk” (Leistungsgefahr) or “risk of performance”.2 However, when we talk about the passing of risk in sales contracts we refer to the “price risk” (Preisgefahr), the “risk of counter-performance” or the “risk of payment”. Therefore, the following question must be answered: does the buyer’s obligation to pay the price remain in the above-mentioned situation?3
If the answer to this question is affirmative, the buyer shall bear the risk of the loss or damage (periculum est emptoris). In this situation, the buyer does not receive the goods if they are accidentally lost or, in the event of partial damage, he will only take over damaged goods, because, as we have seen, the seller is normally excused from the obligation to deliver other conforming goods. In addition, he must fulfil the obligation of paying the full price under the contract, provided of course, that the risk has passed, as we will see below.
On the contrary, the seller shall bear the risk of loss or damage (periculum est venditoris) when he loses the right to obtain the agreed price of the goods that have perished or become completely or partially damaged. Given the extraordinary significance that both solutions have for the parties, determining the exact time when the risk passes is deemed to be the key element in this problem.4
10.1.2 Passing of Risk in Private Comparative Law: Different Solutions for the Same Problem
The issue of passing of risk is a well-known subject in the national legal systems around the world and, in the course of its immemorial history,5 has raised uncountable doctrinal problems. In a nutshell, we can distinguish at least three different criterions normally invoked to solve the problem:
The conclusion of the contract
The criterion of the conclusion of the contract appears in various legal systems6 as a reflection of the powerful Roman rule: periculum est emptoris. 7 However, this rule poses several problems. Firstly, the task of determining the exact time of the conclusion of a contract between parties located in different places is not easy.8 It could also provoke unjust outcomes. Thus, it makes no sense to allocate the risk of loss or damage to the buyer from the moment of the conclusion of the contract because he usually has no access or control over the goods. Moreover, international sales normally involve bulk goods that have not been manufactured or specified, and in that situation the buyer bears the risk solely from the time of identification, not from the conclusion of the contract.9
Transfer of ownership
According to this second criterion, the risks are borne by the party having the ownership of the goods.10 This principle finds support in the legal proverb res perit domino. 11 But, in the point of view of most of the scholars, this is a legal criterion that ignores the needs of modern international sale of goods contracts.12 Linking the passing of risk to ownership may cause many problems because of the variety of systems regulating the question of the transfer of ownership under current comparative law.13 Moreover, it seems clear that the passing of risk is a problem that must be dealt with on a purely obligational plane (obligationis periculum). In other words, it can be misleading to try to solve the risk problem through the adage “periculum rei”.
Transfer of Physical Possession (Delivery)
The “delivery” criterion is found in German Law (Übergabeprinzip)14 and in the Uniform Law of International Sales of 1967 (art. 97 ULIS): “the risk shall pass to the buyer when delivery of the goods is effected in accordance with the provisions of the contract and the present Law”. This latter rule was subject to hard criticism on the ground that the concepts of “delivery” and “handing over” were too generic and, as a consequence, were used in many different legal contexts. However, at first glance, this could be a reasonable solution, because the party in physical possession of the goods is always in the better position to take measures for the prevention of risks of loss and damage.
10.1.3 The Typological Approach of CISG and its Influence in CESL
We have just seen how the national laws usually resort to abstract and general concepts (key concepts) to regulate the passing of risk . But these criteria, because of their limited flexibility, face highly important difficulties in adapting to the changing conditions of commercial life.
Mainly for this reason, the United Nations Convention on the International Sale of Goods (CISG) abandoned the legislative technique known as the “lump concept”,15 provided by civil law countries16 and, instead, adopted a new technique called the “typological approach”, whose origin is located in the common law system. This analytical technique tries to determine the passing of risk in each of the different situations that can be found in commercial reality. In other words, instead of establishing an all-encompassing legal standard (such as the transfer of ownership or the conclusion of the contract), the new rules describe in detail most of the situations that take place in the legal dealings, determining in each case the exact time in which the buyer begins to bear the risk.17 Thus, each of the situations that may appear in international sales will have a consistent and appropriate solution, adapted to commercial reality. This formula underlies the wording of the American Uniform Commercial Code18 and the Incoterms of the International Chamber of Commerce.19
Under this author’s opinion, this methodological approach meets in the main the objective requirements of legal dealings, i.e. it serves to “mirror commercial reality”.20 However, although this technique has been well received by legal scholars and practitioners as an important legal improvement,21 its problems should not be forgotten:
First, it is virtually impossible for a set of legal rules, no matter how detailed and complete they are, to capture the richness of forms and situations in which the international sale unfolds.22 In fact, it has been argued that the absence of specific rules for the passing of risk in the case of multiple sales of goods during transit (“daisy chain sales”) is the “Achilles heel” of the Vienna Convention.23
Furthermore, the emergence of new forms or variants of international sales contracts can lead to the obsolescence of any one law. As a consequence, the legislator has to review the rules continuously in order to guarantee their perfect suitability to reality, and, obviously, this situation is not to be recommended.24
In any case, we can assert, without any doubt, that the rules governing the passing of risk in the CESL are clearly inspired by the CISG25. Hence, it is essential to this study to take into consideration this important international Convention at every stage.
10.2 Passing of Risk in CESL: General Rules
10.2.1 Effect of Passing of Risk
The CESL regulates the passing of risk in Chapter 14,26 and distinguishes expressly between business to consumer (B2C) and business to business contracts (B2B). Since consumers deserve specific protection, the CESL opts, as does the DCFR, for setting two different regimes governing the problem of the passing of risk. However, the first section of Chapter 14 establishes two general rules governing any type of sale: effect of passing of risk (art. 140) and identification of goods or digital content to contract (art. 141).
Article 140 CESL lays down the legal effect of the transfer of risk as follows: “Loss of, or damage to, the goods or the digital content after the risk has passed to the buyer does not discharge the buyer from the obligation to pay the price, unless the loss or damage is due to an act or omission of the seller”. This rule is fully coherent with art. 105 CESL (Relevant time for establishing conformity), according to which the seller is liable for any lack of conformity existing at the time when the risk passes to the buyer under Chapter 14.
It should be noted, firstly, that the rule clearly regulates the “price risk” (or “the risk of counter-performance”), and, therefore, implies that the buyer has to pay the price of the goods once the risk has passed. The time of passing of risk depends on the kind of contract of sale concluded (B2B or B2C), but the legal effect is always the same: the buyer has to pay the price of the goods and the digital content even though they have been lost or damaged.
On the other hand, if the loss or damage is due to an act or omission of the seller, the buyer does not remain bound to pay the price. The rule does not require the act or omission of the seller to amount to a breach of contract , but normally the seller shall be responsible for loss or damage due to the total or partial breach of its obligation to deliver, if he has packed the goods in an insufficient or incorrect manner. The seller will be also liable for acts and omissions by persons for whom the seller is responsible (e.g. employees). It is very important to point out that, in both these cases, there is a breach of contract (non-performance) and, therefore, the buyer may invoke all the remedies provided by the CESL (art. 106). In other words, the rules governing the passing of risk in the CESL are not applicable in these situations. However, it must be noted that if the loss or damage has occurred as a result of a legal act by the seller, such as the legitimate exercise of a legally granted right,27 the rule would not come into play. In fact, in this case, the potential damage to the goods would have actually been caused by “a fait de l’acheteur”.28
Article 2(c) CESL defines ‘loss’ as “economic loss and non-economic loss in the form of pain and suffering, excluding other forms of non-economic loss such as impairment of the quality of life and loss of enjoyment.”29 Nevertheless, under art. 140 CESL, the concepts of “loss” (periculum interitus) and “deterioration” (periculum deteriorationis) must be interpreted according to their literal meaning, including both physical damage and any case in which the buyer is unable to receive the goods. Therefore, these situations could include theft, fire, shipwreck, shrinkage of the goods, emergency unloading or other transport risks.30
However, it is unclear whether the concept of “loss” also covers “acts of State” (e.g. confiscation of the goods, export or import bans, embargo, etc.) because, strictly speaking, these acts do not involve an impairment or loss of the goods. In other words, the key question is whether the “legal risks” are included, or not, in the concept of passing of risk . Günter Hager maintains that the acts of State have nothing to do with risk, and hence are a matter governed by international trade law.31 However, this author is in complete agreement with Johan Erauw, who points out that if the parties have not adopted a trade term (Incoterms) to deal with these risks, they might be treated under the risk-of-loss rules (in our case, the CESL).32 In this sense, an arbitration court, attached to the Hungarian Chamber of Commerce and Industry, considered the United Nations embargo against Yugoslavia as an act of force majeure that had to be borne by the party to whom the risk had passed, according to art. 67 CISG.33 On the contrary, the so-called “economic risk” (fluctuation of the value of goods on the market or, equally, exchange-rate fluctuation) is not covered by the rules governing passing of risk. Finally, however, it has to be remembered that it does not matter whether the goods have been lost or damaged completely or merely partially, because, in any case, the buyer has to pay the overall price of the goods.
10.2.2 Identification of Goods or Digital Content to Contract
It must also be borne in mind that the risk does not pass to the buyer until the goods or the digital content are clearly identified as the goods or digital content that are to be supplied under the contract (art. 141 CESL). Indeed, it must be remembered that if the goods are not properly identified, delivery still remains a possible option because “genus nunquam perit”. So, when the goods are generic in nature, there is not an issue regarding allocation of risk (“obligationis periculum”) .
In addition, it can be said that proper identification of the goods protects both parties. On one side, the buyer is protected against unjustified claims brought by an “unscrupulous” seller.34 On the other side, the seller is also protected because “the identification of the goods sets limits for the potential liability in the case of failure on delivery of the good (or digital content) which has been specified in the contract only by its genus”.35 In fact, the requirement of identification is of particular importance for the passing of risk in sales involving carriage, because if the carrier has not identified the goods sent to several clients, the seller has to bear the risk of loss or damage.
Therefore, art. 141 CESL links the passing of risk to the specification of the goods or the digital content.36 Whether the goods had, or not, been duly identified in the contract before they were lost or damaged will often be a question of proof. In any case, the identification of the goods may be done in three different ways:
This can be done “by the initial agreement”, i.e., at the precise moment of the conclusion of the contract of sale of goods or supply of digital content .
The seller can identify the goods by way of a simple notice given to the buyer. The notice “becomes effective when it reaches the addressee” (art. 10.3 CESL) and, therefore, has only prospective effects (ex nunc) 37: the buyer bears the risk when he receives the notice regarding the specification of the goods (art. 10.4. (a) CESL).
Finally, the identification may take place “otherwise”: by markings or by the packaging of the goods, by shipping documents, by separation of the goods, etc. [see, arts. 67.2 CISG and IV.A.-5:102(2) DCFR] .38
10.3 Passing of Risk in Contracts Between Traders
10.3.1 General Rule
The passing of risk in B2B contracts is regulated separately in Section 3 of Chapter 15. This section consists of four articles (143–146 CESL)39 that are not of a mandatory nature .40 Hence, the parties may deviate from these rules in order to determine the exact moment in which the risk has passed to the buyer. However, in the opinion of Zoll and Watson, the essential deviation from the standards set out in these provisions may sometimes appear abusive within the meaning of Chapter 9 (Unfair contract terms).41
Article 143 CESL contains the general rule applicable to all B2B contracts: “In a contract between traders the risk passes when the buyer takes delivery of the goods or digital content or the documents representing the goods”. Thus, the criterion used to determine the passing of risk is linked to the concept of “taking delivery”, and, therefore, the interpretation of this rule must be made in coordination with the provisions of art. 94 CESL (Method of delivery)42 and art. 129 (Taking delivery).
As can be seen, the article distinguishes two different situations: on the one hand, where the buyer takes delivery of the goods or the digital content; and, on the other hand, where the buyer takes delivery of documents representing the goods. In the first case, the buyer bears the risk when he takes physical control of the goods; while in the second case, the risk passes at the moment in which the buyer takes delivery of certain documents, such as a bill of landing or a warehouse receipt.43 In almost identical wording, the CESL considers that the buyer has fulfilled his obligation to take delivery when (a) he has done all the acts which could be expected in order to enable the seller to perform the obligation to deliver; and (b) he has taken over the goods, or the documents representing the goods or the digital content, as required by the contract (art. 129 CESL).
Surprisingly, the rule makes no reference to the passing of risk in a contract for the supply of digital content not supplied in a tangible medium. As we will see below, art. 142(2) links the passing of risk to the moment in which the consumer has obtained the control of the digital content. However, art. 142 CESL does not take into consideration the situation concerning intangible digital content. This is a gap in the proposed law that may provoke uncertainty among the traders involved in these contracts. Perhaps the best solution to overcome this interpretative problem is to deem both concepts (“taking delivery” and “obtained the control”) as one and the same.44
Finally, it should be noted that the general rule linking the passing of risk to the time when the buyer “takes delivery” of the goods is subject to the specific rules provided by the CESL for three different types of sale: Goods placed at buyer’s disposal (art. 144 CESL), Carriage of the goods (art. 145 CESL) and Goods sold in transit (art. 146 CESL)45.
10.3.2 Goods Placed at Buyer’s Disposal
10.3.2.1 Types of Sales
In international trade, the seller often undertakes personally to deliver the goods at a particular place determined in the contract. This place may be the seller’s own place of business (EW: Ex Works), a terminal for loading and unloading (DAT: Delivered At Terminal), a warehouse, the buyer’s habitual residence, etc. Article 144 CESL governs these situations distinguishing between two broad categories: disposal at the seller’s place of business (art. 144.1 CESL) and disposal at other locations (art. 144.2 CESL).
Both models of contracts are characterised by the obligation of the buyer to take delivery of the goods at the seller’s place of business or at other locations. Hence, the buyer must do all the acts that could be expected in order to enable the seller to perform the obligation to deliver, such as taking over the goods on time or paying the price. The seller, likewise, must do all the acts necessary to place the goods at the buyer’s disposal, such as identifying the goods and informing the buyer.46
Nevertheless, the passing of risk is not strictly linked to the general concept of “taking delivery” laid down in art. 141 CESL, but to other criteria that are explained below.
10.3.2.2 Seller’s Place of Business
When the goods have been placed at the buyer’s disposal at the place of business of the seller, the former bears the risk when the goods are made available but he fails to fulfil his duty to take over the goods according to the contract. Thus, the rule lays down the following requirements for the allocation of the risk to the buyer:
Firstly, the goods or the digital content must be placed at the buyer’s disposal. Therefore, the seller must fulfil his obligation to deliver the goods or supply the digital content [art. 91(a) CESL] by making the goods or the digital content—or where it is agreed that the seller need only deliver documents representing the goods, the documents—available to the buyer [art. 94.1(c) CESL].47
Secondly, the seller must fulfil his obligation to place the goods at the buyer’s disposal. This means that the seller must have complied with his duty to deliver according to the terms required by the contract, i.e., at the time and place agreed upon. In addition, the goods have to be clearly identified per art. 141 CESL.
The buyer must be aware that the goods are available. This requirement seems quite rational, since otherwise it would be too difficult for the buyer to take delivery of the goods placed at his disposal at the seller’s place of business. Normally, the correct way to fulfil this requirement requires the seller to notify that the goods are available to the buyer. It can be possible that the buyer is aware of this from other sources other than the seller (e.g. a third person), but, in any case, the seller carries the burden of proving the fact that the buyer was aware that the goods were available at the seller’s place of business.48
If the buyer is aware of the fact that the goods or the digital content are placed at his disposal at the seller’s place of business, the buyer then bears the risk “at the time when the goods or digital content should have been taken over”.49 Thus, it is clear that is not necessary, for the allocation of the risk, that the buyer takes physical possession of the goods : he bears the risk at the time when the goods “should have been taken over”. It has be to borne in mind that, where the time of delivery cannot be otherwise determined, the goods or the digital content must be delivered without undue delay after the conclusion of the contract (art. 95.1 CESL)50; and the delayed delivery of the goods is considered a type of non-performance per art. 87.1(a) CESL. Furthermore, as seen above, the buyer must take delivery of the goods or the digital content (art. 123.1b CESL), by doing all the acts which could be expected in order to enable the seller to perform the obligation to deliver, by taking over the goods or the documents representing the goods or digital content, as required by the contract (art. 129 CESL).
The approach adopted by the CESL is entirely consistent and coherent with the principles of “control and accessibility of the goods” governing the determination of the exact time of the passing of risk in this type of sales. It is assumed that the risk passes to the buyer when, after being made aware that the goods are available to him, he takes delivery of them.
However, if the buyer does not fulfil his obligation to take delivery of the goods without undue delay, he will bear the risk from the time when the goods or the digital content should have been taken over. In this sense, the spirit of the rule seems to be punishing the buyer’s breach of his obligation to take delivery, forcing him to bear the risk of loss and destruction from the moment he should have taken over the goods or the digital content.51 In short, art. 144.1 CESL prevents the buyer from postponing the passing of the risk by not taking delivery of the goods from the seller (the so-called mora creditoris), and, at the same time, incentivises the buyer to take over the goods, since he will bear the risk of paying the full price in case of loss or damage taking place during the period of the delay.52
Nevertheless, there is an exception to this specific regime. The buyer does not bear the risk if he is entitled to withhold taking of delivery pursuant to art. 113 CESL. Therefore, if the buyer has the right to withhold performance ,53 the seller bears the risk of loss or damage of the goods or the digital content, even if all the above requirements are met54.
10.3.2.3 Taking Delivery at Other Places
Article 144.2 CESL applies to cases in which the buyer is obliged to take over the goods at a place other than the place of business of the seller. This article is a “catchall provision”55 and covers a wide range of situations:56 where the buyer takes delivery of the goods at the warehouse of a third party (bailment contracts); the seller, acting as an international carrier, sends the goods to the premises of the buyer, using his own transport; or, finally, the seller concludes a contract of transport with an international carrier to deliver the goods at a particular place (destination contracts).57
In these cases, the risk passes to the buyer when the following requirements are met: firstly, the goods or the digital content are placed at the buyer’s disposal at a place other than the place of business of the seller; secondly, the seller hands over the goods; and thirdly, the buyer is aware of the fact that the goods are available to him at that place.
The goods or the digital content are placed at the buyer’s disposal when the seller gives the depositary an order to keep the goods available for the buyer (delivery order) or when he delivers to the buyer a title authorising him to take over the goods (warehouse certificate). If all these requirements are met, the risk is transferred to the buyer at the very moment when the delivery is due.
This rule does not take into account the “mora creditoris”, and hence the non-performance by the seller of an obligation stated in the contract is not required for the passing of risk . However, what if the seller delivers the goods before the agreed time? The literal meaning of the provision considered above could suggest that the risk passes only when the expected delivery date is met. Therefore, if the seller decides to fulfil his obligation to deliver before that moment, he shall bear the risk during the period of time remaining until “delivery is due”. Nevertheless, this solution appears rather inconsistent and, in this author’s opinion, it should to be understood that the buyer bears the risk whenever he decides to accept the goods.58 Moreover, it should be noted that if the seller delivers the goods or supplies the digital content before the time agreed upon, the buyer must take delivery unless he has a legitimate interest in refusing to do so (art. 130.1 CESL).