Incoterm Case Study

We looked at a case where risk of loss vs. passage of title are questioned to make a case for either party.  That is, does ownership infer risk of loss, or are the two terms mutually exclusive of one another?

In this case (http://www.cisg.law.pace.edu/cases/020326u1.html), we have a seller in Germany who is sold an imaging machine to a buyer in the United States.  The terms of the agreement were written up in a one page contract in which various headings were defined, including the following:

"Product": the contract provides, the "system will be delivered cold and fully functional." 

"Delivery Terms": provides, "CIF New York Seaport, the buyer will arrange and pay for customs clearance as well as transport to Calmut City."

"Payment Terms": states three payments, one initial down payment, a second payment prior to shipping, and a final payment upon acceptance by buyer within 3 business days after arrival in buyer’s city

"Disclaimer": states, "system including all accessories and options remain the property of [seller] till complete payment has been received." 

Furthermore, preceding this clause is a handwritten note, initialed by[buyer], stating, "Acceptance subject to Inspection." 

Once the seller and the buyer entered into the agreement with the terms as defined above, both parties proceeded to procure services from various entities to transport, insure, and provide customs entry services for the equipment.  The equipment was loaded onto the ocean vessel at the port of shipment in full working order.  This fact was not contested and both parties agreed on that.  However, when it reached its destination of buyer’s city, it had been damaged and was in need of extensive repair, which led buyer to conclude that the equipment had been damaged in transit. 

The U.S. company’s insurance company (who paid the cost of damages), referred to here as the buyer, brought the action against the German company (seller).  The seller, however, has moved to dismiss the case as they feel they fulfilled their obligation under the terms of the contract, that is, the seller had no further obligations regarding the risk of loss once it delivered the equipment to the vessel at the port of shipment due to the Incoterms® “CIF” clause in the contract.  

The buyer contends that the “CIF” terms were superseded by other contract terms such that the risk of loss remained with the seller.  The buyer argues that although CIF was agreed upon, the seller added a disclaimer that they will retain ownership until they received payment in full, which in their view modified the terms by retaining title and thus assuming risk of lost.

Another consideration for this case is the Convention on Contracts for the International Sale of Goods (CISG) laws.  Like the Incoterms®, it does not address when title transfers from seller to buyer.  In other words, that has to be specifically spelled out in the documentation.  Pursuant to the CISG, “…the risk passes without taking into account who owns the good… the passage of risk and transfer of the title need not occur at the same time.  The seller’s retention of documents controlling the disposition of the goods does not affect the passage of risk.”  

This case is a great example on the distinction between the terminology of ownership vs. risk.  Although they can both occur at the same time, it does not necessarily mean that it is implied or that they are both one of the same.

The court concluded that pursuant to the applicable (a) German law, (b) the U.N. Convention on Contracts for the International Sale of Goods, and (c) the "CIF" Incoterms® in the contract operated to pass the risk of loss to buyer at the port of shipment, at which time, the parties agree, the equipment was undamaged and in good working order. Given these facts, the seller’s motion to dismiss for failure to state a claim was granted by the court.


This Incoterms® Case Study and other valuable information can be found in Global Training Center's book, Incoterms 2010 and the UCC: A Guide to International & Domestic Terms of Sale.  The book can be purchased by going to our library: https://marketplace.mimeo.com/GTC_Books#name=13

Catherine J. Petersen is the author of this book and also an instructor with Global Training Center.  You can find more information on Cathy here: http://www.globaltrainingcenter.com/instructors/catherine-j-petersen

Case Study : Responsibility of buyer and seller in the case of cargo damage

I would like to use below question from a reader as a case study to debate the responsibility of buyer and seller in the case of cargo damage..

Question :  My client is a seller of steel. He sent  cargo to the buyer in two shipments: 1 in CFR conditions and 2 in CIF.

Before the shipments, he did an inspection and everything Was ok. The captain signed a clean Bill of lading. The problem Was that when the cargo arrived at port of destination the buyer  concluded that the cargo were wet.

He contacted with the seller to do an inspection but finally he did It without the presence of the seller. Finally, the inspection concluded that the cargo have different dimension that the seller said.

The buyer is trying to not to pay the cargo because of damages.

However, i understand that my client, seller, is not responsible because in CFR and CIF the risk is transfer to the buyer when the cargo is on board.

Who is responsible in this case? The shipping line? Or the person Who place the goods inside the container? Should the seller check the container before place the goods?

I sought the views of Mr.Sumit Banerjee and he opines as below..

1. Presuming that this was a CY/CY shipment, shipping line cannot be held responsible for the quality of cargo inside a container. ‘Shipper’s Load Stow and Count‘ clause shall apply.

2. The exporter (presuming the seller is also the exporter) needs to check the container and be satisfied with cargoworthiness of the same, before stuffing cargo inside. In case the container being offered to the exporter by shipping line is not in correct shape and cargoworthy, the exporter has

  • the right to refuse accepting the same from the shipping line and
  • an obligation to the buyer not to utilize the same to avoid exposing the cargo to be loaded to the risk of damage.

3. A seller and a buyer decide on pre-shipment inspection and the seller is obliged to follow the same. In the case under study, the seller is expected to have done her/his duty in case s/he has followed the agreed procedure of pre-shipment inspection and provided the buyer with required inspection certificate etc.

4. At the port of discharge, a joint inspection was necessary when the buyer decided to declare goods having been received in damaged condition. The inspection carried out without seller’s participation has prejudiced the case against the seller and the seller has the right to challenge the inspection result.

5. The exporter may request the shipping line to advise if the subject container underwent any severe condition during its voyage by way of rough sea, abnormal handling etc that might be attributable to be any cause of a damage to the cargo inside the container.

6. In case the container reached the destination in the same shape and condition as it was at the time of loading, then it is difficult to explain why should the seller be responsible for damage and/or deterioration of the quality of the cargo inside the container unless the cargo being carried was prone to damage/deterioration intrinsically during its passage of sea voyage due to change in weather condition, its own chemical composition or any other reason, and that the seller has not taken additional precaution accordingly.

7. With a long term business plan in mind, such claims are often handled on the basis of commercial considerations, but should the claim amount be high and/or one or both the parties decide to go the legal route, then the legal framework contained in the purchase order shall become applicable.

The seller is responsible to check and ensure that the container used is in cargoworthy condition and there are no holes in the container and that the container door seals close properly.. Whatever the Incoterms used, in the event of the container being neither cargo worthy nor sea worthy, the shipper will be held liable liable for the damages.. As the terms used were CIF, the buyer should make a claim against the seller’s insurance..

I must however point out that as per Incoterms® 2010 Rules, CIF may not be the appropriate term to use where goods are handed over to the carrier before they are on board the vessel, for example goods in containers, which are typically delivered at a terminal.. In such circumstances, the CIP rule should be used..

I must also point out that the Captain should not have issued/signed a Clean Bill of Lading as this is an FCL container packed and shipped under SLAC conditions and as such he was not aware of the condition of the cargo that was loaded in the container.. This could open him/his employer to claims..

Pleased to hear your views/comments on the question and the answer(s).. 

+++

Sumit Banerjee – is the MD of a prestigious multinational organization in the field of shipping and logistics services.. He is a Member of The Institute of Chartered Shipbrokers, London, holds an MBA degree, Masters in Commerce and also has a degree in Law.. After having served the shipping industry in Middle East, Red Sea, India, East and West Africa, he is currently based in South Africa..


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