Risk, Transfer of

by Florian Faust

1. Subject matter and purpose

In general, the risk of loss, destruction or deterioration of an object is borne by the owner according to the principle casum sentit dominus. The question of transfer of risk arises in the case of the non-performance of an obligation. It is one aspect of the general problem of the bearing of risk, which becomes relevant if certain circumstances impede the performance, or render it impossible. From a logical point of view, one may distinguish between the risk of performance and the risk of counter-performance.

a) Risk of performance

The risk of performance concerns the question whether the debtor must perform an obligation notwithstanding existing or newly occurring obstacles. From the point of view of the debtor, the risk of performance denotes the risk of having to increase his efforts because of obstacles to performance. From the point of view of the creditor, the risk of performance means the risk of not fully receiving the debtor’s performance due to obstacles to performance. The risk of performance is relevant not only with regard to contractual obligations, but with regard to all kinds of obligations. It is only directly relevant insofar as the respective legal system grants specific performance. If this is not the case—as usually in common law systems—the risk of performance has only an indirect impact, namely as a preliminary question for secondary remedies, especially for claims for damages: whether or not the debtor’s non-performance makes him liable for damages depends on whether or not he bore the risk of performance and therefore was obliged to overcome an obstacle.

It has to be kept in mind that there is no such thing as the risk of performance. Rather one has to distinguish between various instances of non-performance, and the various risks of performance may be allocated differently. Thus, if only one specific object qualifies for performance, the risk of an irremediable deterioration is inevitably borne by the creditor. The risk of a remediable deterioration, on the other hand, can be borne by the debtor as well as by the creditor, depending on whether the debtor is obliged to remedy the deterioration. The risk of destruction of all objects qualifying for performance is inevitably borne by the creditor, while the risk of destruction of individual objects can have to be borne by both the debtor and the creditor. In German law, the event that transfers the risk of destruction and irremediable deterioration of individual objects from the debtor to the creditor is called Konkretisierung (appropriation) or, less commonly, Konzentration. As it is put by § 243(2) Bürgerliches Gesetzbuch (BGB) ‘the obligation is restricted to that object’. The restriction of the obligation to a specific object means that the creditor bears the risk of performance concerning destruction and irremediable deterioration, while it was previously borne by the debtor who had to fulfil his obligation by providing other objects if necessary.

The risk of performance may be relevant regardless of whether the debtor is responsible for the non-performance (according to whichever criteria). Hence, the creditor necessarily bears the risk of performance regarding irremediable impairments even if the debtor is responsible for them. The risk of performance for remediable impairments for which the debtor is responsible may be imposed on the creditor as well, for instance if the debtor is allowed to invoke appropriation although he is responsible for the destruction of the respective object. The creditor’s interests can be protected by granting him secondary remedies, especially a claim for damages.

b) Risk of counter-performance

The risk of counter-performance refers to the impact that obstacles to performance have on the counter-performance. Therefore it can only be relevant if there is a counter-performance and not in the case of gratuitous performances. From the debtor’s point of view, the risk of counter-performance denotes the risk of not or not fully receiving the counter-performance because problems occur with his own performance. From the creditor’s point of view, the risk of counter-performance means the risk to have to fulfil his own obligation (completely) without receiving the debtor’s performance. The creditor can bear the risk of counter-performance only for such circumstances for which he also carries the risk of performance, for the risk of counter-performance is only relevant if the debtor need not or need not fully perform.

The risk of counter-performance can only pass in respect of specific goods which are clearly identified in the contract (Arts 67(2), 69(3) CISG; ss 16, 20 Sale of Goods Act 1979; Arts 1585, 1586 French Code civil; Art 5:102(2) PEL S). This is important if the risk of counter-performance passes before delivery.

In contrast to the risk of performance, the risk of counter-performance is typically only relevant in case of obstacles to performance for which the debtor is not responsible: if the debtor is responsible for the obstacle to performance, the creditor, at any rate, is exempt from the counter-performance in whole or in part.

The time at which the risk of counter-performance passes should also be relevant for determining whether the goods are free from material defects, for the risk of deterioration is to be borne by the debtor before that time and by the creditor afterwards (eg Art 36(1) CISG; Art 25 Proposal for a Directive on Consumer Rights (COM(2008) 614 final); § 434 BGB; Art 2:208(1) PEL S; Art IV.A.-2:308(1) DCFR (Common Frame of Reference)).

2. Tendencies in legal development

Statutory rules are mainly concerned with the transfer of the risk of counter-performance; in Roman law, for instance, the concept of periculum only dealt with the risk of counter-performance. Of course, regarding the risk of performance, there are rules on the debtor’s exemption from performance, but rules envisaging a passing of that risk by allowing additional grounds for exemption can be found much more rarely. Notable examples are §§ 243(2), 300(2) BGB on the appropriation of obligations in kind. However, the rules on the risk of counter-performance often allow an inference of which party bears the risk of performance: for, at any rate, the creditor has to bear the risk of performance from the time from which he bears the risk of counter-performance because the risk of counter-performance only becomes relevant if the debtor is no longer obliged to perform.

The famous rule in Inst III,23,3 stated: emptione perfecta periculum est emptoris. Thus the risk of counter-performance passed to the buyer at the moment when the contract of sale was concluded, irrespective of the whereabouts of the object sold, provided that that object was unambiguously identified in the contract. However, the scope of application of this rule seems to have been restricted because the seller was subject to the strict custodia liability between conclusion of the contract and delivery. Therefore, the allocation of the risk of counter-performance was only relevant in the case of force majeure. Few modern regimes have followed the Roman rule; in particular, it is still found in Art 185 Swiss Code of Obligations (OR). In several national legal systems the risk passes together with legal title (eg Art 1138(2) Code civil; s 20(1) Sale of Goods Act 1979); in that case, the risk of counter-performance has no independent significance. If legal title is transferred at the time of the conclusion of the contract of sale (Art 1583 Code civil), the result is the same as under periculum est emptoris. The trend—especially in uniform law and in the international model laws—seems to be to assign the risk to the party in whose sphere of influence the object is situated: that party is in the best position to protect the object from damage and to insure it (Art 69(1) CISG; § 446, 1 BGB; §§ 1049, 1064 ABGB). If the debtor has to send the object to the creditor, some legal systems provide that the risk of counter-performance passes as soon as the object is handed over to the carrier (Art 67 CISG; § 447(1) BGB). In many legal systems the risk of counter-performance also passes to the creditor when he does not duly accept the object (§§ 326(2)1 alt 2, 446, 3 BGB; s 20(2) Sale of Goods Act 1979).

In the case of consumer contracts, special rules may apply which tend to transfer the risk of counter-performance to the buyer not before the time of delivery or—where applicable—non-acceptance (§ 474(2)2 BGB; s 20(4) Sale of Goods Act 1979, Art 5:103 PEL S).

3. International uniform law and international model laws

The sets of rules of international uniform law and the international model rules contain provisions on the debtor’s exemption from performance (Art 79 CISG (sale of goods, international (uniform law)); Art 3(3) Directive on the Sale of Consumer Goods (Dir 1999/44); Art 26(3) Proposal for a Directive on Consumer Rights; Art 7.2.2 UNIDROIT Principles of International Commercial Contracts (PICC) 2010; Art 9:102 Principles of European Contract Law (PECL); Art 4:202(1) PEL S; Art III.-3:302 DCFR) and thereby allocate the risk of performance. Rules on the transfer of the risk of performance relating to sales contracts (sale)—ie rules according to which the efforts required of the debtor are reduced from a certain time onwards—do not exist. However, Comment C to Art 5:101 PEL S states that, if the risk of counter-performance has passed, the seller does not have to overcome obstacles to performance; this follows from the fact that the risk of counter-performance cannot pass before the risk of performance.

None of the sets of rules follows the principle periculum est emptoris. Rather, the risk of counter-performance is initially assigned to the debtor. This is achieved by two means: if and as far as the debtor is excused, either the creditor’s obligation is extinguished (Art III.-3:104(4)2 DCFR) or the creditor is granted a right to withdraw from the contract (Art 49 CISG; Art 3(5) Directive on the Sale of Consumer Goods; Art 26(3) Proposal for a Directive on Consumer Rights; Art 7.3.1 UNIDROIT PICC 2010; Arts 9:301 ff PECL; Art 4:201(2)(a) PEL S) or to reduce the price (Arts 50 f CISG; Art 3(5) Directive on the Sale of Consumer Goods; Art 26(3) Proposal for a Directive on Consumer Rights; Art 9:401 PECL; Art 4:201 (2)(b) PEL S).

The Directive on the sale of consumer goods, the UNIDROIT PICC 2010 and the PECL do not contain rules on the transfer of the risk of counter-performance; according to recital 14, the Directive explicitly leaves the transfer of risk to be regulated by national law. In contrast, the proposed Directive on consumer rights determines at which time the risk of counter-performance passes; differing national provisions are inadmissible even if they favour the consumer (Art 4). According to Art 23, the risk of loss or damage shall pass to the consumer when he or a third party other than the carrier indicated by the consumer has acquired the material possession of the goods. If the consumer or such a third party has failed to take reasonable steps to acquire the material possession of the goods, the risk passes at the time of delivery as agreed by the parties; recital 38 gives the example that the consumer does not collect the goods from the post-office within the deadline fixed by the latter.

Detailed rules—similar to each other—on sales contracts can be found in Arts 66 ff CISG, Arts 5:101 ff PEL S and Arts IV.A.-5:101 ff DCFR. They concern only the transfer of the risk of damage that cannot be traced back to an act or omission of the seller. What kind of accountability this is supposed to mean remains unclear. The Comments to Art 5:101 PEL S contain various paraphrases: ‘in a fortuitous event, ie due to no fault of either party’, ‘events that neither party could foresee’, ‘if the seller is [not] responsible’. From the origins of the CISG it can be concluded that the expression refers to an act contrary to the seller’s duty, even though (due to a narrow understanding of contractual ancillary duties) not contrary to the contract.

Under the CISG, the risk of counter-performance normally passes to the buyer when he takes over the goods, when the seller, in accordance with the contract, places the goods at the buyer’s disposal at a place other than a place of business of the seller, and the buyer is aware of this, or when the goods are placed at the buyer’s disposal and he commits a breach of contract by failing to take delivery (Art 69 CISG). If the contract involves carriage of the goods, the risk passes when the goods are handed over to the first carrier (Art 67 CISG). If goods are sold in transit, the buyer bears the risk from the conclusion of the contract or, retroactively, from the time the goods were handed over to the carrier (Art 68 CISG).

In general, the PEL S also specify that the risk passes when the buyer takes over the goods (Art 5:102 PEL S). Except for consumer sales, the risk furthermore passes when the goods are placed at the buyer’s disposal, the buyer is aware of this and should take over the goods (Art 5:201 PEL S), when the goods are handed over to the first carrier for transmission to the buyer in accordance with the contract (Art 5:202 PEL S) and—in case of goods sold in transit—when the goods are handed over to the first carrier or when the contract is concluded (Art 5:203 PEL S). In consumer sales, the risk only passes when the buyer takes over the goods or has failed to perform the obligation to take delivery, and the failure is not excused (Art 5:103 PEL S).

Under the DCFR, the risk of counter-performance passes when the buyer takes over the goods (Art IV.A.-5:102(1) and Art IV.A.-5:103(1) DCFR) or—under certain conditions—fails to take them over (Arts IV.A.-5:103(2), IV.A.-5:201 DCFR). Except for consumer contracts, the risk also passes when the buyer takes over documents representing the goods (Art IV.A.-5:102(1) DCFR), when the goods are handed over to a carrier in accordance with the contract (Art IV.A.-5:202 DCFR) and when—in case of goods sold in transit—the goods are handed over to the first carrier or when the contract is concluded (Art IV.A.-5:203 DCFR). The DCFR contains provisions on the transfer of the risk of counter-performance also for construction contracts, processing contracts and storage contracts. The client must pay the price despite destruction of, or damage to, the stored goods if the storer cannot be held accountable and, prior to the destruction or damage, had notified the client that the latter was required to accept the return of the goods (Art IV.C.-5:108(2) DCFR). With regard to construction contracts and processing contracts, the DCFR contains a rule on the risk of performance as well. The constructor or processor is exempt from performing and can nevertheless claim payment of the price if: (1) the building or the thing which is to be processed is damaged or destroyed due to reasons for which he cannot be held accountable; and (2) the client should have previously taken control because the constructor or processor regarded the work as sufficiently completed and so has notified the client or—if no transfer of control is necessary in the case of structures—has informed the client about the completion of the work (Arts IV.C.-3:108(5), IV.C.-4:107(2) DCFR). Hence, the risk of performance and the risk of counter-performance pass by the legitimate claim to take over the object or the control of it.

Literature

Günter Hager, Die Gefahrtragung beim Kauf (1982); Bernd von Hoffmann, ‘Passing of Risk in International Sales of Goods’ in Petar Sarcevic and Paul Volken (eds), International Sale of Goods: Dubrovnik Lectures (1986), 265; Reinhard Zimmermann, The Law of Obligations (1996) 281 ff; Johan Erauw, ‘Observations on Passing of Risk’ in Franco Ferrari, Harry Flechtner and Ronald A Brand (eds), The Draft UNCITRAL Digest and Beyond: Cases, Analysis and Unresolved Issues in the U.N. Sales Convention (2004) 292; Larry A DiMatteo and others, International Sales Law. A Critical Analysis of CISG Jurisprudence (2005) 121 ff; Claus-Wilhelm Canaris, ‘Die Bedeutung des Übergangs der Gegenleistungsgefahr im Rahmen von § 243(2) BGB und § 275(2) BGB’ [2007] Juristische Schulung 793; Franz Dorn, ‘§ 243. Gattungsschuld’ in Mathias Schmoeckel, Joachim Rückert and Reinhard Zimmermann (eds), Historisch-kritischer Kommentar zum BGB, vol II/1 (2007); Martin Josef Schermaier, ‘§ 326. Gefahrenverteilung im gegenseitigen Vertrag’ in Mathias Schmoeckel, Joachim Rückert and Reinhard Zimmermann (eds), Historisch-kritischer Kommentar zum BGB, vol II/2 (2007); Peter Huber and Alastair Mullis, The CISG. A New Textbook for Students and Practitioners (2007) 314 ff; Günter Hager and Martin Schmidt-Kessel, Arts 66 ff in Peter Schlechtriem and Ingeborg Schwenzer (eds), Commentary on the UN Convention on the International Sale of Goods (3rd edn, 2010).