Sharing The Risk By Parties While Selecting And Applying The Terms

The selection of the appropriate term may be difficult. When choosing the term, it is generally recommended for the parties to consider the following:[1] who is responsible for the transport, who is responsible for the packaging of goods for export, the main transport costs and insurance coverage, who is responsible for the export clearance, and other related documents Depending on the terms of the sales contract, the parties decide which term to use. The choice can vary depending on the individual capacities of the parties. For example, if the seller is an expert in the transport business, this may be a promising factor in choosing which term it should be. (Preferably one of the terms in which the transportation is the seller’s responsibility). If, on the other hand, seller does not have sufficient experience in the transport business, then a term in which the responsibility of transportation is under the liability of the buyer must be selected. In practice, shared responsibility is positive for both parties because both parties mostly do not know the functioning of each other’s internal law hence buyer and seller are reluctant to deal with the legislation in ea

Passage of the Risk

i) Overview of the Risk Transition

In case of sales involving the transport of goods from one point to another, there is always a risk factor in unexpected events that may cause loss or damage of goods. In most cases, although these goods are insured, the allocation of risk is still significant[2]. There are financial implications for each transaction, so it is important that there are prescribed rules governing the passage of risk. In the first instance, where no provision is found for the insurance, the risk rule determines who will be responsible for the damage or the loss, or whether the buyer should be able to take the goods that have never been taken or damaged. However, the risk rule does not only determine who is responsible for the catastrophic events, but also indirectly determines the obligations of the parties regarding the insurance or depending on which side can deal well with the insurer.[3] The loss or damage of the goods usually occurs after the receipt of the goods, so the buyer is in a better position than the seller to initiate a claim to the insurance company.[4] This applies to cases where the containerized goods have been damaged but the container has not been damaged and it cannot be understood when the damage occurred. For example, while there is no damage to the container itself, damage to the goods can occur due to disturbance during transport or due to deterioration of organic goods inside the container as a result of failure to maintain adequate conditions. It is important that, in practice the seller or the buyer or none of them takes responsibility for the goods. The passage of risk has existed since the old Roman law period and is equally important today.

All accidents related to the loss or damage of the goods cannot be regulated by rules related to risk transition. [5]These rules can be vary depending on the definition of risk. Legally, risk refers to events that have caused physical damage and deterioration of goods. Therefore, the damage must not be attributed to one of the parties’ actions related to the contract. At the same time risk also includes; theft, exposure to sea water, exposure to overheating, mixing of goods (especially liquids with other goods), deterioration, shrinkage and evaporation. When goods are transported over a long period of time, such risks may affect the seller’s performance. The problem of risk distribution determines whether the parties have a legal responsibility for the contract with the actual events. Whether the risk passes to the buyer will depend on the time of loss. If the loss or damage occurred after the transfer of the risk to the buyer, then the buyer will be responsible for the payment of the purchase price. Otherwise, the damage remains with the seller. If the goods are no longer available, contractual liability is ended and there is nothing left to sell. But at the time of sale, when performance of the act has become impossible to do and when the risk has passed from the seller to the buyer; the buyer still will be responsible for the loss. Even if the seller has been relieved from the obligation to perform the performance; the buyer is still liable for the purchase price due to the transfer of the risk. The seller must cover the damage even if the seller still owns the goods when the risk has passed.

ii)Price Risk and the Risk of Non-Performance

If the goods are lost or damaged under the seller’s risk, the buyer is not responsible for the price; at the same time, the seller may be responsible for the damage caused by the non-delivery. If the risk is also passed to the buyer, the seller may indemnify the damage caused by the non-acceptance of the goods (such as storage fee). However, seller may also request payment of the price.[6] At this stage, it is important to make a distinction regarding the risk transition and the financial liabilities that applied to the person responsible for the risk. Schmittoff[7] says that the legal definition of the risk will be incomplete only when it is considered as price risk. This concept is a limited explanation when only mentioned by saying price risk. In theory, it is possible to divide the risk concept into two as price risk and non-performance risk. Price risk means that the purchase price is still paid despite the fact that the performance cannot be performed. Non-performance risk means that, despite the impossibility of performing the performance, it is still responsible for the fulfillment of this act or for the damage that occurs.[8]However, when physical integrity is affected by risk before it passes to the buyer and performance becomes objectively impossible; contractual responsibilities of both parties are over. Risk theory for these reasons; not to be confused with the impossibility of performance, frustration and force majeure. It should be clearly differentiated from legal doctrines with the same conditions in relation to the risk. These doctrines sometimes represent the exceptions and exemption forms that can terminate the responsibility of the parties, both internally and sometimes unilaterally.

 iii) The Concept of Risk Transition under English Law

 In English law, the risk usually passes after the ownership has been transferred.[9] The property rule is not fully complementary. Because in many cases it is difficult to determine the moment of transition of property. The English risk rule depends on the parties’ intentions and the circumstances of the situation. Once the property is transferred to the buyer, the buyer must pay the purchase price even if the seller is not responsible for damaging the goods. This still applies even if the buyer is not the owner of the goods or does not qualify for it. In addition, English risk rule is not consistent with the implementation of a property rule criterion for the passage of risk. Since the goods are delivered to the carrier prior to the right of disposal, it is considered to be unconditionally appropriate to the contract, so the property and the risk is transferred to the carrier with this transportation.[10] In English law, the relationship between risk transition and frustration doctrines is more complex. It is particularly difficult to distinguish between certain and uncertain goods. The Sale of Goods Act 1979 shows various ways of distinction between unascertained goods and generic goods could not be made entirely.[11] According to English law, discussions on trade terms show that the commercial practice distinguishes the transfer of property and risk transfer from each other.[12] This means that the commercial application does not need such a connection. The use of trade terms indicates the inadequacy of the default rule. An effective and efficient default rule must be able to provide legal certainty and reduce tolls, which the English rule cannot achieve.

Conclusion

Due to the highly competitive nature of the international trade; it is an economic endeavor that aims to maximize profit as quickly as possible and tries to reduce the level in disputes. That is why international trade is aimed at correct and precise conclusions when dealing with business and trade.[13] This certainty brought the standardization, and internationally accepted trade terms took place. The popularity and use of terms can also be seen in international and local trade. When the parties choose the Incoterms, even though there are 11 terms; each term is shaped according to the specific needs of traders, for example the type of goods sold, the type of transport used, and the ability of the parties to manage specific risks and costs associated with the sale contract and the transportation contract. Traders often do not adequately analyze the possible side-effects or benefits when choosing a commercial term. On the contrary, they continue to sell as they did before and like the previous ones.[14] Nonetheless, traders should consider which Incoterm to choose, in terms of costs, risks, responsibilities and other formalities.

The risk transition between the parties is different from country to country. The concept of the passage of the risk that has survived to the present day since the beginning of the trade has also varied in theory and practice. Therefore, the distinction of responsibility began to be important for the traders. This concept is important for merchants in determining the responsibilities and criteria that may arise from the transporting, loading, unloading, damage of goods or other procedures. Risk transition, which will be one of the sine qua non concept of trade in the future; will continue to exist with the Incoterms concepts, which are tried to standardize what extent the responsibility is imposed on the parties while trading.

[1]ISM, Incoterms 2010 – What do the Changes Mean?, (Special Report, Institute for Supply Management, 2010)

[2]Valioti, Passing of Risk in international sale contracts: A comparative examination of the rules on risk under the United Nations Convention for the International Sale of Goods (Vienna, 1980)

[3]Goodfriend, After the Damage is Done: Risk of Loss Under the United Nations Convention on Contracts for the International Sale of Goods. ( (22) Colum J Trans L, 1984)

[4]Posner, Economic Analysis of law, (Iowa Law Review Vol.93No:2) p.97

[5]Erauw, Observations on passing of risk” in The Draft UNCITRAL Digest and Beyond,(Vol.1, Thomson/West, 2005) p.293-298

[6]P.M. Roth, The Passing of Risk, (American Journal of Comparative Law (27), 1979) p 291-292

[7]Clive M. Schmitthoff, The Risk of Loss in Transit in International Sales. (Dalloz,1966) p.279

[8]Ibid 279-280.

[9]S. Grewal, Risk of Loss in Goods Sold in Transit: A Comparative Study of the UN Convention on

Contracts for the International Sale of Goods, the UCC and the British Sale of Goods Act, ((14) Loy LA Int’l & Comp LJ 93, 1991) p.113-114.

[10]Sale of Goods Act 1979 S.18 Rule 5(2)

[11]Howell v Coupland [1896] 1 QBD 258

[12]Michael G Bridge, Benjamin’s Sale of Goods, (Sweet & Maxwell Ltd, UK, 2014) par.6-34

[13]N. Horn, Uniformity and Diversity in Transnational Law II 4, (Eiselen, 1999 (116), SALJ 339)

[14]N. Horn and C. M. Schmitthoff, The Transnational Law Of International Commercial Transactions, (Deventer, Kluwer, 1982) p.139.