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Transfer of risk under contract of sales of movables
2.3. Transfer of risk under contract of sales of movables
Like the performance of contract transfer of risk is also of paramount importance in the contract for the sale of goods. As a result this section will deal with the meaning of risk transfer, effect of risk transfer and the ways by which risk is transferred. Upon completing this section students should be able to:
- Provide the justification of risk transfer
- define what risk transfer is
- put the effect of risk transfer
Risk is the liability of loss or deteriorations of a thing sold. The thing sold may be damaged, destroyed or lost during transportation. Floods, tornadoes or other natural catastrophes may destroy it. As a result allocating risk some times requires transfer of risk from the seller to the buyer. General principle of economic analysis of contract tells us that risk shall be borne by the person who is in a better position of avoiding the risk or shared when none of the parties is in a batter position of avoiding the risk. Therefore the laws dealing with risk transfer are normatively required to take into consideration the efficient risk allocation.
The effect of risk allocation is that the person who bears the risk is to cover the value of the thing which has been damaged or lost. Thus, the basic principle, which is provided regarding transfer of risks in the sale of goods, is that, the buyer shall pay the price notwithstanding that the thing is lost or its value altered where the risks are transferred to him Article 2323 which provides as follows:
Where the risks are transferred to the buyer, he shall pay the price not withstanding that the thing is lost or its value altered.
The risks shall be transferred to the buyer from the day when the thing has been delivered to him in accordance with the provisions of the contract or of this code. The risk is transferred upon delivery notwithstanding that the thing delivered does not conform to the contract, where the buyer has not cancelled or required the cancellation of the contract or required that the thing be replaced.
Risk transfers from the seller to the buyer in the following cases.
- Delay of buyer
- Handing over to carriage
The risk transfers to the buyer when the seller delivers the thing to the buyer in any of the modes of delivery. According to Article 1758 of the Civil Code the debtor bears the risk till delivery is made according to the contract. This provision shows that risk is transferred upon delivery and it follows the principle which says res peri demino or risk perishes to the owner or risk follows to the ownership.
This way of risk transfer seems to be based on the assumption that when the thing is delivered the person to whom the thing is delivered is in a better position of avoiding the risk and shall accordingly bear the risk.
Be that as it may, there are circumstances where the risk is not transferred upon delivery. The buyer must accept the thing to assume its risk of loss or deterioration. The buyer usually accepts when the thing conforms to the contract or when the thing suffers from no defects. The buyer rejects the thing if it does not confirm to the contract or if it is defective when he required the seller to replace the non-conforming things or defective things. Therefore, delivery transfers risk to the buyer only when the thing conforms to the contract. If the thing does not conform to the contract, there must be failure to reject the thing or acceptance of the thing so that delivery transfers risk.
Even though it is generally said that delivery transfers risk, there are circumstances where risk transfers without the delivery of the thing. Sub Article (2) of article 1758 shows that risk is transferred to the creditor even if there is no delivery if the creditor is in default for not taking delivery.
Sales contract provisions have also provided, in addition to delivery, failure of the buyer to take delivery of goods transfers risk from the seller to the buyer even in the absence of delivery. The risks shall also be transferred to the buyer from the day he is late in paying the price pursuant to Article 2325 although being late in paying the price might result in delay to take delivery. This is an exception to the principle which declares that risk perishes to the owner and in light with risk follows hands.
In addition to delay certain additional conditions are attached when it involves fungible things. Where the sale relates to fungible things, the delay of the buyer shall not transfer the risks to him unless the thing, clearly designated for the performance of the contract, has been especially allocated to the buyer and the seller has sent notice to the buyer to that effect. Where fungible things are of such a nature that the seller cannot set aside part of them until the buyer takes delivery, it shall be sufficient for the seller to have performed all the acts necessary to enable the buyer to take immediate delivery. Therefore, the general conditions upon the fulfillment of which risk transfers to the buyer owing to delay in taking delivery of fungible things are:
- The thing must be designated for the purpose of delivery that is the thing must be identified from other things
- The thing must be allocated to the buyer, that is, identification alone is not enough.
- The notice of designation and allocation must be given to the buyer. Thus, default notice alone is not enough.
2.3.2. Special arrangement by the parties – term of shipment
In addition to delivery and delay of the buyer, handing over of the thing to the carriage also transfers risk in the case of a thing under voyage. Where the sale relates to a thing under voyage, the risks shall be transferred to the buyer from the day when delivery has taken place by the thing having been handed over to the carrier. This is special arrangement where the thing is delivered before the conclusion of the contract. Such transfer of risk allows transfer of risk before the conclusion of the contract. Article 2326 says that where the subject of sale in under voyage (being transported) the risk shall be transferred to the buyer upon delivery by handing over to the carrier. Delivery or handing over of a thing which is under voyage is effected before the conclusion of the contract because it is after delivery the thing can be called things under voyage. Effected deliver transfers risk and delivery is before the conclusion of the contract means risk is transferred retroactively.
Hence, it is not illogical inference to say the effect of contract of sale comes before the conclusion of contract. However, it is the effect which follows the cause not the cause which comes after effect. In addition to this mistake as to existence of a thing impossibility delivery before the conclusion of contract can also be a challenge for such transfer of risk as risk depends on validly formed contract.
For example some number of mobile apparatus was handed over to a carriage on September 7 and a contract of sales for the things under voyage was concluded on September 20. At the conclusion of the contract, however, the things under voyage was destroyed. In this case the risk is transferred to the buyer as of September 7 that it is when the things were handed over.
In this case leave alone risk transfer, the formation of valid contract is at issue for the buyer may invoke mistake as to the existence of the contract. It might also be said that there is no contract since the object of the contract relates to impossible object because non-existing object before the conclusion of contract is said to be impossible object.
Risk is not transferred in a situation where at the time of the making of the contract the seller knew or should have known that the thing had perished or was damaged. This seems to get it justification from allocating risk to the person who is in a better position of avoiding the risk and the seller who has knowledge or is reasonably expected to know is in a better position to avoid the risk by not entering the contract.
However, even though the seller does not know or should not have know, there seems not tenable justification to make the buyer bear a risk for a thing which did not exist at the time of the conclusion of the contract or was perished before the conclusion of the contract.
Special consideration is made when there are provisions relating to expenses and the goods are shipped in common. As far as a provision relating to expenses is concerned, any provision relating to expenses stipulated by the parties, especially a provision whereby expenses are to be borne by the seller does not in itself transfer the risks.
As far as goods shipped in common is concerned, the risks shall be allocated to each of the buyer in proportion to his share from the day when delivery has taken place by the goods after being handed over to the carrier, where the seller has sent to the buyer the bill of exchange or other document showing that the shipment has taken place.