Passing of ownership and risk in a sales contract

In an international sale of goods, the exact moment at which the risk of loss or damage to the goods passes from the seller to the buyer is of great importance. It determines whether the buyer must pay despite a complete or partial loss of the goods, or whether a seller should replace the goods if they have been damaged during transportation (CISG Article 66). As a rule, the risk passes when the ownership of the goods changes.

The parties may address the passing of risk (or the shift of ownership) in their contract expressly or by implication in the use of an Incoterm (see section 5.3). The ITC Model Contracts provide wording for the choice of an Incoterm, as well as for a transfer of property (i.e. ownership). Failing such a provision, the Vienna Convention sets forth a complete set of rules (see CISG Articles 66-70).

Passing of ownership depends on the applicable law #

First of all, how the ownership of and risk related to the goods under contract pass from the seller to the buyer is a matter for the applicable property law. But property laws will also refer to specific acts or circumstances such as the handing over of the goods and may permit a ‘retention of title’ (i.e. postponement of transfer of ownership until the purchase price has been paid in full). Those acts or circumstances may still need to be specified.

The two situations contemplated by the Vienna Convention are when the sales contract involves carriage of the goods (CISG Article 67) and when the goods are sold while in transit (CISG Article 68). In all other cases, the risk passes to the buyer when it takes over the goods or from the time when the goods are placed at its disposal and it commits a breach of contract by failing to take delivery, whichever comes first (CISG Article 69).

In the frequent case when the contract relates to goods that are not then identified, they must be identified as covered by the contract before it can be considered that they have been placed at the disposal of the buyer and that the risk of their loss has passed to the buyer (CISG Article 69(3) and 69(2)).

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