International trade is the buying and selling activity that takes place between two nations. This is met by various challenges including the different laws that come from with traversing the various states and countries. This paper seeks to explain the legal distinction between transfer of property and transfer of risk and the implications that they impose on both the buyer and the seller. The English law, through the United Kingdom also known as the English Sales of Goods act of 1979, clearly provides distinction between the two according to Ziegel et al. (1998). It specifies the rules and provisions that should be followed when trying to determine the point at which the property and risk in a good are transferred from the seller to the buyer in a sales contract whether international or domestic (Ziegel et al. 1998).
Backdrop of International Sale of Goods Contract
Normally, the international sales contracts are governed by the laws of the country in consideration. It is therefore of utmost importance that we first understand what a contract of sales entails and in our case, the rules and provisions of the English Sales of Goods act. English sale of goods act defines a contract for sale of goods as and agreement or a contract between a seller and a buyer which has the effect of binding them legally. The terms of this contract are such that the seller provides or promises to provide the buyer with a specific good(s) and in return the buyer pays for the good. The act further goes on to emphasize that in a case where the seller has promised to provide the good(s) at a later date, then the transfer of property in the good(s) will take place when he carries on the end of his bargain according to North and Fawcett (1999).
At this point it is important to note that, this being a contract by law; all the general rules of contract law must strictly be observed. As a general reminder, the general rules of contract law that render a contract enforceable at law are; there must be an offer and acceptance, there must be an intention by both parties to contract, there must be consideration, both parties must have contractual capacity, the object of the contract must be legal, it has to be proved beyond reasonable doubt that there was mutual consent by contracting parties to enter into the contract.
With this in mind, we can now concentrate on explaining international sales contracts. The United Nations Convention of 1980 gives the definition of an international sales contract as an agreement or contract of sales where the contracting parties operate or run businesses in different countries. Furthermore, it highlights the respective responsibilities of the seller and the buyer. The seller is expected to ferry the goods to the buyer accompanied by the relevant documents required to transfer the title of the goods to the buyer (Reed, 2003). In return, the buyer is expected to pay the full amount chargeable on the goods and accept title to the goods. It should however be duly noted that England is not a member state to this convention. This however does not mean that contracting parties who are citizens of England cannot choose it as the backbone of their contract. In international sales contract, the parties involved have the freedom to choose the law that will apply to their contract failure to which choice is implied either through the courts, the laws of the country in which the transaction took place or previous contracts that they may have entered into according to Reed (2003).
England uses the provisions of the Rome convention. The article gives the contracting parties the liberty to choose the law which in their opinion would best govern their personalized contract of sales. It further directs that the parties’ choice of another country’s laws does not exonerate them from adhering to the laws that are considered to be compulsory by the country where the transaction took place. With this in mind, we can now delve into discussing the differences between transfers of property and transfer of risks as provided for in the English sale of goods act (Goode et al. 2004)
Transfer of Property and Transfer of Risks
In domestic contracts of sale, transfer of property and transfer of risks are interdependent in that, transfer of risk can only be deemed to have occurred at the time that transfer of property occurs. However, in international sales contracts this rule does not apply all the time. This means that international sales contracts are not always governed by the English sales of goods act of 1979. Such situations can therefore be classified as exceptions to the rule of the English sales of goods act according to Goode et al. (2004)
Transfer of Property
It is also important to note that parties to an international sales contract have the liberty to choose the law that will govern their contract but may not necessarily be able to choose the law that should be applied when determining the point at which property is transferred from the seller to the buyer. As a general rule, in cases where they do not choose the law to govern transfer of ownership, the laws of the country in question will be used to determine the specific point at which transfer of ownership of property from the seller to the buyer occurs. In a case where the buyer and the seller choose the rule, transfer of ownership of property will be considered to have occurred when the contract has been finalized and not when the buyer receives the goods or pays the amount chargeable (Goode et al. 2004).
It is important in any contract of sale to know the precise time that property in the goods passes from the buyer to the seller. This helps the parties to determine which one among them has to bear the loss incase of its occurrence. In order for this to be determined, it must be proved beyond reasonable doubt that the contracting parties intended for the property in the good to be transferred. According to the English sales good act of 1979; 7 if the contract of sales is such that the goods to be acquired by the seller have been ascertained and are specific, transfer of property from the seller to the buyer occurs at the point where the seller and the buyer wish it to occur. If however the contracting parties fail to make their wishes clearly known or identifiable, the act goes on to provide the guidelines to be followed to ensure that transfer of property from the buyer to the seller is recognized accordingly:
- Rule 1– if the contract entered into by the parties has no terms and restrictions, and the buyer seeks to acquire a specific good which is finished, from the seller, transfer of property occurs when the contract is finalized and not when the buyer pays the amount due on the good or when the seller delivers the good to the buyer. Therefore if one was to buy a phone from a retailer, and the retailer agrees to sell it to you, then the phone becomes yours even if you still haven’t paid for it and it hasn’t been delivered. This principle can be backed by the ruling in Dennant v Skinner (1948).
- Rule 2– if the contract entered into is such that the object of the contract, that is, the specific good that the buyer is looking to acquire is unfinished; the property will only be transferred when that good is completely finished.
- Rule 3– if on the other hand, the buyer offers to acquire a specific good that is finished, but, the seller is not sure about some of the attributes of the goods, the property will only be transferred after the seller has confirmed the aspects in doubt and has notified the buyer.
- Rule 4– in a case where the seller delivers the goods to the buyer without the buyer offering to buy the goods first, transfer of property will occur either when the buyer accepts the goods delivered to him or if he doesn’t accept them openly, he retains the goods beyond the period that the seller has allowed for the goods to be returned if not accepted.
- Rule 5– if the contract of sale is such that the goods the buyer intends to buy have not been ascertained, transfer of property will occur when the goods are completely finished and ascertained.
Transfer of Risks
The basic rule of transfer of risks according to the English sales of goods act (1979) requires that; 8 the risk associated with a good, for example risk of loss, damage, pilferage among others, will remain with the seller until transfer of property from the seller to the buyer occurs upon which, the buyer will thereon bear the risk associated with the goods. In other words risk is transferred only if and when property has been transferred from the buyer to the seller unless otherwise agreed upon. However, as mentioned above, international trade contracts are not always governed by this act. Risk is deemed to be transferred to the buyer upon shipment of the goods by the seller. Examples of such international trade contracts include; free on board contracts, cost and freight contracts, cost, insurance and freight contracts, free alongside the ship contracts, ex-ship contracts and ex-works contracts (Pryles, 2004).
Implications of These Rules on the Buyer and Seller When There Is a Cargo Claim
A free on board contract implies that the purchase price includes the cost of delivering the goods to the ship. The effect of this on the seller is that he has to clear the goods for export although he has the option of retaining the bill of lading which would act as security against payment by the buyer. He also has the option of delivering the goods to his own agent where the agent can only release the goods to the buyer upon payment. The effect of this to the buyer is that risk will still be transferred on shipment and should the goods be damaged after shipment, the buyer will bear the losses. Also he will have the liability of payment for the goods in full as agreed with seller in their contract. He can however claim insurance compensation if the goods were insured.
A cost, insurance, freight contract requires the seller to pay for freight and insurance in addition to the cost. He is also required to deliver the insurance policy, bill of lading and invoice to a bank, and also deliver the goods for shipment. Risk passes upon shipment. The buyer bears the losses if goods are damaged after shipment and is required to pay the full amount chargeable on the good to the bank so as to receive title to the goods. He may however claim insurance compensation for damages suffered. However if the buyer discovers that there was a breach of contract he may return the goods and sue the seller for damages (Pryles, 2004).
A free alongside the ship contract requires the seller to incur the cost of clearing the goods for exports and notify the buyer that he has delivered the goods alongside the ship. Risk is transferred when goods have been delivered alongside the ship. This means that the buyer has to arrange for the contract of freight and insurance. He also has to ensure that he gives the buyer details of the ship and the time of delivery. The buyer will bear all the losses that may occur after the goods are delivered alongside the ship (Pryles, 2004).
An ex-ship agreement means that the buyer has a right of receipt of goods from the seller on time. Therefore, the seller bears all the risks throughout the transit until the goods get to the buyer. The buyer then becomes liable upon receipt of goods. Ex-works contracts on the other hand take place between an overseas buyer and the manufacturer of goods (Shaw, 2003). The seller’s responsibility is to quote the factory cost of the goods ordered by the buyer. As soon as the goods are in a deliverable state, risk is transferred. The buyer then has to arrange for collection, freight and insurance according to Gary (2009).
In a cost and freight contract, the purchase price will normally include the cost and freight charges. The seller is therefore obliged to take care of these charges so as to clear the goods for export. Risk will be transferred when the goods are shipped and any losses occurring during transit will be borne by the buyer. The buyer will still have to pay the amount chargeable on the goods as noted by Davies (2005).
Apart from the legal actions available to the buyer mentioned above, the buyer may also sue the carrier of the goods for damage according to the terms of the contract of carriage. The rule that risk is transferred on shipment also has its exceptions which are provided for in the English sale of goods act of 1979 which states that; 9 if a seller enters into a sales contract, where a buyer buys goods from him and he delivers them, it is implied that the goods’ quality is acceptable. The act further goes on to explain what exactly is meant by the above (Shaw, 2003).Goods whose quality is considered acceptable are those goods which a normal person who is of sound mind would consider fit for the purpose for which it is intended to accomplish. Therefore, if the buyer builds his case on this exception and is able to prove to the court that the above happened, he may be able to reject the goods and sue the seller for damages. The buyer has an advantage according to Briggs (2002).
Contractual agreements are crucial and important in any business. Therefore, no matter which form of international sales contract the contracting parties choose, there will always be consequences that accrue to each of the contracting parties. Conclusively, in my legal opinion based on the legal principles discussed on the paper, care should be taken so as to avoid confusing the rules that apply to domestic sales contracts and those that apply to international sales contracts. It would be advisable for one to make sure that they are fully conversant with these laws so as to avoid unnecessary losses and law suits. Seeking legal counsel from experienced practitioners is also recommendable (Moens and Gillies (2006).
Briggs, A. (2002) The Conflict of Laws, Oxford: Oxford University Press.
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Gary, B. (2009) International Commercial Arbitration. London: Kluwer.
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Moens, G. & Gillies, P. (2006) International Trade and Business: Law, Policy and Ethics. Oxford: Oxford University Press.
North, P. & Fawcett, J. (1999) Cheshire and North’s Private International Law. London: Butterworths.
Pryles, M. (2004) International Trade Law. Oxford: Oxford University Press.
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