The new delivery terms
Dr. John Murray, Jr. -- Purchasing, 2/5/2004 2:00:00 AM
Shared Imaging (SI) is a U.S. corporation that purchased a magnetic resonance imaging system (MRI) from Neuromed, a German corporation. The MRI was undamaged when it was loaded on a vessel for shipment to Calumet City, Ill. When it arrived at Calumet City, it was damaged and required extensive repair costing $285,000. The buyer's insurance company paid for the repairs and stood in the shoes of the buyer in claiming that the risk of such damage—the risk of loss—was on the seller. The contract delivery term was "CIF New York Seaport." The contract also stated that the MRI would remain the property of the seller, Neuromed, until complete payment was received. SI made a down payment, but full payment had not been made when the damaged MRI arrived at Calumet City. The question to be decided by a federal court in New York was, when did the risk of loss pass to the buyer? If the damage occurred before the risk passed to the buyer, the insurance company would recover the $285,000 it paid to its insured, the buyer, to have the MRI repaired.
CIF in the Uniform Commercial Code (UCC) means that the price includes the cost of the goods and the cost of insurance and freight to the named destination. The Uniform Commercial Code, however, would apply to a contract for the sale of goods between two U.S. corporations. Where the contract is between corporations in different countries that have adopted the United Nations Convention on Contracts for the International Sale of Goods (CISG), the CISG overrides the UCC. Both the U.S. and Germany (as well as 60 other nations) have adopted CISG . The New York court, therefore, applied CISG to determine who, as between the buyer and seller, bore the risk of damage to the MRI.
U.S. citizens are used to definitions of such terms as FOB, CIF and others under the UCC. Unlike the UCC, CISG does not define delivery terms. It states that the parties to an international contract for the sale of goods are assumed to have made their contract on the basis of widely known trade usages in international trade. The dominant delivery terms used throughout the world are INCOTERMS, terms published by the International Chamber of Commerce. Familiar terms such as FOB or CIF as defined in the UCC apply to any mode of transportation. As INCOTERMS, however, they are designed to be applied only where the goods will be transported by boat. The risk of loss passes when the goods have passed over the ship's rail. The typical shipment contract that U.S. citizens think of as FOB seller's plant, where the goods will be delivered by truck or rail, would become FCA (Free Carrier) contract under INCOTERMS under which the risk of loss would pass when the goods are handed to the carrier. If the buyer agrees to take delivery of the goods at the seller's premises, the INCOTERM would be Ex Works. There are a number of other INCOTERMS with which any party dealing in international transactions should be acquainted.
Using the INCOTERM definition of CIF, the court found that the risk of loss passed to the buyer when the MRI moved across the ship's rail at which time it was undamaged. The buyer did not argue with that definition of CIF as an INCOTERM. Rather, the buyer pointed to the provision in the contract stating that Neuromed retained the property, that is, the title, to the MRI until complete payment was made and complete payment was not made even when the MRI reached Calumet City. On its face, such an argument makes sense. After all, if Neuromed still had title to the MRI when it was damaged, does it not appear logical that the owner bears the risk of loss? The court answered, no. Under CISG , the passage of the risk of loss is independent of the transfer of title to the goods. Even under domestic contracts to which the UCC applies, risk of loss and the passage of title or ownership of the goods are separate questions. The court concluded that the risk of loss in this case-the damage that occurred after the MRI passed the ship's rail—was on the buyer. The buyer's insurer, therefore, could not collect $285,000 from Neuromed.
CISG has a number of provisions that are quite different from domestic U.S. contract law under the UCC. Unless the parties agree to opt out of CISG , any contract for the sale of goods involving corporations in different CISG countries will be controlled by CISG —not by their respective domestic laws. Delivery terms will be governed by INCOTERMS. Moreover, even sections of the UCC that define delivery terms such as FOB and CIF have recently been amended. The two organizations responsible for the UCC, the American Law Institute and the National Conference of Commissioners on Uniform State Laws, have recently approved an amended version of these and other sections that will be presented to state legislatures for possible enactment. The sections that define delivery terms have been excised because they are out of date. No substitute definitions of delivery terms have been included in the amended version. Presumably, the UCC will take the same position as CISG , which assumes that the parties intend to be bound by delivery terms that are widely used. The leading candidate would, again, be INCOTERMS.
Since they are commonly used in international transactions, why not use them in domestic contracts for the sale of goods as well? This is simply another reason for learning all about INCOTERMS and their application in a variety of settings.
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