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The Passing of Risk
The loss of goods through fire, theft, or other means can occur at any time: prior to delivery,
during transit or inspection, or after delivery. The legal concept of passage of risk determines who
is responsible for the loss. In most cases, the loss will be covered by insurance.
Passage of risk is defined as the shifting of responsibility for loss or damage from the seller to the
buyer. This means that once the risk passes, the buyer must pay the agreed-upon price for the
goods involved. The buyer must then absorb the cost of the loss or lodge a claim against his
insurer. Only if he can show that the loss or damage was due to an act or omission of the seller is
he excused from paying the price.
CISG allocates risks by considering the agreement of the parties and the means of delivery.
CISG’s risk allocation is not affected by breach of contract.
Agreement of the Parties – CISG allows parties to allocate risk among themselves and to
specify when the risk will pass between them. The parties most commonly do so through the use
of trade terms, such as Free on Board (FOB) or Cost, Insurance, and Freight (CIF).
Case 10-5: Chicago Prime Packers, Inc. v. Northam Food Trading Co.
Facts: Chicago Prime Packers, Inc., a seller of pork ribs, filed suit against Northam Food Trading
Issues: (1) Is Chicago Prime responsible for the loss if the ribs were spoiled at the time
Northam’s agent, Brown, received them from Chicago Prime’s agent, Brookfield? (2) Is Northam
responsible if they did not become spoiled until after the transfer?
Holdings: (1) Yes. (2) Yes.
Law / Explanation: The CISG does not clearly state which party has the burden of proof in a
case involving whether a product conforms to a purchase and sale contract. Therefore the U.S.
Order: Verdict affirmed in favor of Chicago Prime.
Means of Delivery – Goods may be transported by a carrier or delivered by the seller without
being transported by a carrier.
Goods Transported by Carrier
CISG distinguishes between shipment, transshipment, in-transit, and destination contracts. No
matter which of these contracts is used, the risk of loss will not pass until the goods are clearly
“identified” to the contract by markings on the goods, shipping documents, notice given to the
buyer, or otherwise.
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Shipment Contracts: When a contract requires the seller to deliver the goods to a carrier for
shipment and does not require the seller to deliver them to a particular place, the risk of loss
passes when the goods are “handed over” to the first carrier.
Transshipment Contracts: If a contract requires the seller to deliver the goods to a carrier at a
named place, who will then carry the goods to the buyer, the risk of loss passes to the buyer when
the goods are handed over to the carrier at that place.
In-Transit Contracts: Sometimes goods are sold after they are already aboard a carrier. In such a
case, the risk of loss passes to the buyer at the time the contract is concluded. However, if, at the
time the contract was made, the seller knew or ought to have known that goods had been lost or
damaged and he did not disclose this to the buyer, the risk will remain with the seller.
Destination Contracts: When a contract requires the seller to arrange transportation to a named
place of destination, the risk of loss passes to the buyer when the goods are handed over or placed
at his disposal at that place.
Goods Delivered Without Being Transported
When goods are not shipped to the buyer, the risk of loss passes when the goods are handed over
by the seller or otherwise put at the buyer’s disposal. The goods are not considered to be put at
the buyer’s disposal, however, until they are clearly identified to the contract.
Breach of Contract – The CISG rules on risk of loss are not concerned with breach of contract.
That is, with the exception of in-transit contracts, the risk of loss passes to the buyer at the
agreed-upon time and place of delivery.
Remedies
CISG provides for remedies that are (1) unique to the buyer, (2) unique to the seller, and (3)
available to either party. Although the buyer’s and seller’s remedies relate to their specific needs,
they are also interrelated.
Buyer’s Remedies – The buyer’s remedies are cumulative and immediate. CISG forbids a court
or arbitral tribunal from granting the seller a period of grace (délai de grâce) in which to comply
with a buyer’s demand for a remedy.
The remedies that are unique to the buyer are to:
compel specific performance,
avoid the contract for fundamental breach or nondelivery,
reduce the price,
refuse early delivery, and
refuse excess quantities.
Specific Performance
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The availability of a decree of specific performance depends on the domestic rules applicable to
the court hearing the suit. Assuming it is available, a buyer can ask that a seller either (1) deliver
substitute goods or (2) make repairs.
In either case, the buyer must first notify the seller that the goods are nonconforming and, if he is
asking for substitute goods, the nonconformity must amount to a fundamental breach. Also, the
buyer cannot have avoided the contract or resorted to some other inconsistent remedy.
Avoidance
CISG’s provisions for avoidance by a buyer are patterned after German law, especially in the
convention’s adoption of the German Nachfrist notice. Under CISG, a buyer may avoid a contract
if either (1) the seller commits a fundamental breach or (2) the buyer gives the seller a Nachfrist
notice and the seller rejects it or does not perform within the period it specifies.
A buyer’s Nachfrist notice is the fixing of “an additional period of time of reasonable length for
performance by the seller of his obligations.” The period must be definite, and the obligation to
perform within that period must be clear. Once the Nachfrist period has run, or once the
fundamental breach becomes clear, the buyer has a reasonable time in which to avoid the
contract.
During the Nachfrist period, the seller is entitled to correct (i.e., cure) the nonconformity at his
own expense. Even if there has been a breach, the seller is entitled to make a cure, unless the
circumstances—including the circumstance of the offer to make the cure—indicate that the
breach is fundamental and the buyer chooses to avoid the contract.
Case 10-6: The Shoe Seller’s Case
Facts: The plaintiff delivered shoes to the defendant. Delivery was late and the shoes did not
Issue: Is the remedy of avoidance available to the defendant?
Holding: No.
Law: (1) Avoidance is only allowed after a buyer gives the seller a Nachfrist notice and defines
Explanation: The buyer did not give the seller a Nachfrist notice. The buyer also was able to use
Order: Decision in favor of the plaintiff is affirmed.
Reduction in Price
If a buyer is not entitled to damages when a seller delivers nonconforming goods, the buyer will
be entitled to a reduction in price. This remedy has its origins in the Roman law remedy of actio
quanti minoris.
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The price reduction remedy is different from damages because it applies to a very special
situation. First, the buyer must have accepted goods that are nonconforming. Second, the seller
must not be responsible for the nonconformity.
The amount of the reduction is determined by a formula that considers the relative price of
conforming and nonconforming goods at the time of delivery. That is, “the buyer may reduce the
price in the same proportion as the value that the goods actually delivered had at the time of
delivery bears to the value that conforming goods would have had at that time.”
Refusing Early Delivery and Excess Quantity
If the seller delivers early, the buyer is under no obligation to take delivery. If the seller delivers
more than the amount agreed upon, the buyer may also accept or reject the excess part. However,
if the buyer does accept, he must pay for the excess goods at the contract rate.
The Effect of Nonconformity in a Part of the Goods
As to a defective part, CISG provides that the buyer may seek specific performance, obtain a
price reduction, or avoid that part of the contract. In doing so, however, he must comply with
CISG’s rules for those particular remedies. As for avoiding the whole contract, a buyer may do so
only if the partial delivery amounts to a fundamental breach of the whole.
Seller’s Remedies – The seller’s remedies are both cumulative and immediate. That is, the right
to recover damages is not lost if a seller exercises any other available remedy, and courts will not
grant the buyer a grace period in which to perform.
The remedies that are unique to the seller are
to compel specific performance,
to avoid the contract for a fundamental breach or failure to cure a defect, and
to obtain missing specifications.
Specific Performance
Assuming that a decree of specific performance is available under local law, a seller may require
a buyer to (1) take delivery and pay the contract price or (2) perform any other obligation
required by the contract. The availability of this remedy depends on the domestic rules applicable
to the court hearing the suit.
Avoidance
The seller may avoid the contract only if there has been a fundamental breach or, following a
Nachfrist notice, the buyer refuses to cure any defect in his performance.
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Missing Specifications
The missing specifications remedy applies to a special problem that can face sellers: obtaining
specifications for goods that the buyer fails to supply. If the buyer does not produce the
measurements that the seller needs by the date specified in the contract or within a reasonable
time after the seller asks for them, CISG allows the seller to ascertain them himself “in
accordance with the requirements of the buyer that may be known to him.”
The seller must then inform the buyer of what he has done and set a reasonable time period for
the buyer to supply different specifications. However, if the buyer does not respond, the seller’s
specifications become “binding.”
Remedies Available to Both Buyers and Sellers – The remedies available to both buyers and
sellers are (1) suspension of performance, (2) avoidance in anticipation of a fundamental breach,
(3) avoidance of an installment contract, and (4) damages.
Suspension of Performance
CISG, Article 71, describes the remedy of suspension of performance as follows:
Applying to threats of nonperformance: A party may stop performing.
Applying to threats of nonpayment discovered after the goods are in transit: A party may
prevent the handing over of the goods to the buyer even though the buyer holds a document
which entitles him to obtain them. This relates only to the rights in the goods as between the
buyer and the seller.
A party suspending performance, whether before or after dispatch of the goods, must
immediately give notice of the suspension to the other party and must continue with
performance if the other party provides adequate assurance of his performance.
Anticipatory Avoidance
Anticipatory avoidance is different from the avoidance remedies that apply specifically to buyers
and sellers. Those remedies apply only after an offending party has committed a fundamental
breach. The remedy provided in Article 72 arises as soon as “it is clear” that the other party “will
commit a fundamental breach.”
Likely cases in which this remedy could be invoked include:
the specific goods promised to the buyer are wrongfully sold to a third party;
the seller’s only employee capable of producing the goods dies or is fired; and
the seller’s manufacturing plant is sold.
If a party opts to anticipatorily avoid, CISG requires him, “if time allows,” to notify the other
party so that the latter can “provide adequate assurance of his performance.”
Avoidance of Installment Contracts
As to a particular installment, if there was a “fundamental breach with respect to that
installment,” then “the other party may declare the contract avoided with respect to that
installment.” If the breach of one installment gives a party “good grounds” to believe that a
fundamental breach of later installments “will occur,” then those later installments may be
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anticipatorily avoided. If the installments are interdependent, a fundamental breach of one
installment will allow a party to avoid the entire contract.
Damages
Article 74 states: Damages for breach of contract by one party consist of a sum equal to the loss,
including loss of profit, suffered by the other party as a consequence of the breach. Such damages
may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time
of the conclusion of the contract, in the light of the facts and matters of which he then knew or
ought to have known, as possible consequence of the breach of contract.
To calculate the damages, the convention uses two different rules. First, if an avoiding party has
entered into a good-faith substitute transaction—the buyer obtaining substitute goods or the seller
reselling the goods to another party—then damages are measured by the difference between the
contract price and the price received in the substitute transaction.
Alternatively, if the avoiding party did not enter into a substitute transaction, then the damages
are calculated by taking the difference between the contract price and the current price at the time
of avoidance. The current price is defined as “the price prevailing at the place where delivery of
the goods should have been made or, if there is not current price at that place, the price at such
other places as serves as a reasonable substitute.”
The party claiming damages is under an obligation to take reasonable measures “to mitigate the
loss.” If the claiming party fails to take such action, the other may seek a proportionate reduction
in the damages.
Excuses for Nonperformance
Two excuses are provided in CISG for a party’s failure to perform. One is force majeure; the
other is dirty hands.
Force Majeure – A party is not liable for any damages resulting from his failure to perform if he
can show that:
his failure was “due to an impediment beyond his control,”
the impediment was not something he could have reasonably taken into account at the time of
contracting, and
he remains unable to overcome the impediment or its consequences.
This excuse, commonly known as force majeure, applies to situations—such as natural disasters,
war, embargoes, strikes, breakdowns, and the bankruptcy of a supplier—that frustrate both the
party attempting to perform and the party expecting performance. Because neither party is really
at fault, the breaching party is excused from paying damages. He is not, however, exempted from
the application of any other appropriate remedy.
A party seeking to use CISG’s excuse of force majeure is under some additional limitations:
He/she has a duty to promptly notify the other party of “the impediment and its effect on his
ability to perform.”
If his/her claim is based on the failure of a third person to perform (such as a supplier), the
third party must itself be able to claim the excuse.
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The excuse may be used only as long as the underlying impediment continues in existence.
Dirty Hands – One party may not rely on a failure of the other party to perform, to the extent that
such failure was caused by the first party’s act or omission.
II. Chapter Questions
Application of the CISG
1. Students’ answers may vary. CISG applies to contracts for the international sale of goods—that
is, the buyer and seller must have their places of business in different states. In addition, either (1)
both of the states must be contracting parties to the convention or (2) the rules of private
Various Provisions of the CISG
2. Students’ answers may vary. An offer is a proposal addressed to specific persons indicating an
intention by the offeror to be bound to the sale or purchase of particular goods for a price.
Whether the retailer has made an offer to sell widgets or not can be determined from the general
Students may argue that an offer has been made and that there will be a binding contract under
the CISG if John accepts.
3. Students’ answers may vary. An offer becomes effective only after it reaches the offeree. Thus,
Rejection Under the CISG
4. Students’ answers may vary. A rejection becomes effective when it reaches the offeror. If an
Is Silence Acceptance Under the CISG?
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5. Students’ answers may vary. Silence or inactivity does not constitute acceptance. If a seller
sends a buyer an offer that says, “I know that this is such a good deal that I will assume that you
Modification of Contract and Reliance Under the CISG
6. Students’ answers may vary. Some may argue that the seller breached. A seller is required to (1)
deliver the goods, (2) hand over any documents relating to them, and (3) ensure that the goods
Although some may argue that the buyer breached because even though the seller is obliged to
produce goods that conform to the contract, the parties may (1) expressly excuse him/her from
What Are the Requirements of a Nachfrist Notice?
7. Students’ answers may vary. Under CISG, a buyer may avoid a contract if either (1) the seller
commits a fundamental breach or (2) the buyer gives the seller a Nachfrist notice and the seller
rejects it or does not perform within the period it specifies. A buyer’s Nachfrist notice is the fixing
Risk of Loss Under the CISG
8. Students’ answers may vary. If a contract requires the seller to deliver the goods to a carrier at a
named place, who will then carry the goods to the buyer, the risk of loss passes to the buyer when
Avoidance of Installment Contracts Under the CISG
9. Students’ answers may vary. If the installments are interdependent, a fundamental breach of
Damages for Breach of Contract Under the CISG
10. Students’ answers may vary. Students may argue that there is a contract under the CISG. As to
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III. Key Terms
Acceptance—Agreement to enter into a contract proposed by an offeror.
Anticipatory avoidance—Remedy available to either party when it becomes clear that the
other party will commit a fundamental breach.
Avoidance—Notification by a party that he is canceling a contract and returning everything
already received.
Choice-of-law clause—Contractual provision that identifies the law to be applied in the event
of a dispute over the terms or the performance of the contract.
Cumulative—Able to be joined or taken together.
Dirty hands—Maxim that a party whose actions cause the other party to breach may not
complain.
Firm offer—An offer that the offeror promises to keep open for a fixed period of time.
Force majeure—From French: “superior force.” An event or effect that cannot be reasonably
anticipated or controlled.
Foreseeability test—A breaching party is liable only for those damages that he foresaw or
ought to have foreseen.
General principles—Those principles underlying and common to a statutory scheme or treaty.
Good—A movable, tangible object. For the purposes of CISG, goods do not include things
bought for personal use or at an auction or foreclosure sale, nor may they be oceangoing
vessels or aircraft.
International sale—A sale involving a buyer and seller with places of business in different
states.
Missing specifications—Remedy that allows a seller to ascertain specifications himself when
the buyer fails to supply them as required by the contract or within a reasonable time after the
seller requests them.
Mitigation—Obligation of a party claiming damages to keep the damages to a minimum.
Nachfrist notice—The fixing by the buyer of an additional reasonable period of time in which
the seller may perform.
Negotiations—The preliminary discussions leading up to the adoption of an agreement.
Objective intent rule—Rule that contracts should be interpreted according to the
understanding that a reasonable person would have had at the time the agreement was made.
Offer—A proposal by one person to another indicating an intention to enter into a contract
under specified terms.
Passage of risk—The point in time when the buyer becomes responsible for losses to the
goods.
Parol evidence rule—When a contract describes itself as being complete and final,
preliminary or informal agreements made prior to or at the same time the contract was made
will be ignored when interpreting it.
Plain meaning rule—A statute or treaty is to be interpreted only from the words contained
within the statute or treaty.
Practice—The method of performance established between parties by their actions or
conduct.
Preempt—To take precedence over.
Reduction in price—Remedy that allows a buyer to pay less for nonconforming goods in
those cases where the buyer is not entitled to damages.
Rejection—Refusal by an offeree to become a party to a proposed contract.
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Revocation—Cancellation by the offeror of an offer.
Sale—The exchange of goods for an amount of money or its equivalent.
Specific performance—A court order directing a party to carry out the obligations he had
contractually promised to do.
Subjective intent approach—Rule that contracts should be interpreted according to the actual
intent and understanding of the parties at the time they made their agreement.
Suspension of performance—Remedy available to either party when it becomes clear that the
other party will not perform a substantial part of his obligation because of a serious
deficiency in his ability to perform, his creditworthiness, his preparations for performing, or
his performance.
Travaux préparatoires—From French: “preparatory work.” The legislative history of a statute
or treaty, that is, the negotiations leading up to its final drafting and adoption.
Usage—The customary method of performing or acting that is followed by a particular group
of people, such as people within a particular trade.
Withdrawal—Cancellation by the offeree of an acceptance.
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