978-0132718974 Chapter 10 Solution Manual Part 2

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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.