TT Talk - Incoterms, transfer of risk and title to sue
Returning to the topic of trade terms covered in TT Talk 178 in September 2013, this article aims to clarify the concepts of risk and property (or title to the goods) and explain how the use of the Incoterms® affects the transfer of risk and property. Further, the article sets out how the transfer of risk in intrinsically linked to the issue of who can sue for loss or damage to goods.
Most of those active within shipping, freight forwarding, logistics, road haulage or related industries are familiar with Incoterms®. The use of the three letter acronyms is widespread in bills of lading and other transport documents, shipments will often be referenced by one of the terms. For a general description of the background, operation and value of these trade terms, see the earlierTT Talk article.
Fundamentally, Incoterms® 'belong' to the traders and merchants or buyers and sellers of goods in international trade. However, since the terms are essentially concerned with the nature of the transport arrangements, it is perhaps surprising that the evidence of what has been agreed resides in the sales contract rather than the carriage contract. Which term has been agreed is commonly also indicated in the commercial invoice, but this is not a legally binding document in the manner of a concluded contract, simply request for payment.
In domestic trade risk and property in the goods will typically pass from the seller to the buyer at the same time, normally when the goods are collected or delivered. In international sales, however, risk is necessarily separated from the passing of property. Whereas Incoterms® deal with the transfer of risk, this is not so for the transfer of property. In other words, whereas risk in a 'shipment' sale (involving transport by sea or inland waterway) passes when the goods are loaded on the ship, property in the goods may pass at an earlier or later stage, as agreed between the seller (exporter) and buyer (importer).“whereas risk in a ‘shipment’ sale passes when the goods are loaded on the ship, property in the goods may pass at an earlier or later stage, as agreed between the seller and buyer”Why does this matter?
Imagine the following situation: a seller contracts with a freight forwarder for the shipment of goods from A to B. The freight forwarder acts as an NVOC and issues a bill of lading for the ocean carriage of the goods. If the goods are lost in transit, the shipper may claim for the loss. However, for the shipper to have a right to claim for the loss ('title to sue') he must have been on risk for the shipment. Where the goods have been sold on 'shipment' terms the title to sue does not remain with the shipper, even though he may have paid the freight, but with the consignee.“for the shipper to have a right to claim for the loss he must have been on risk for the shipment”
Further, if the cargo insurer indemnifies the shipper for the loss and attempts to recover against the freight forwarder, the subrogated insurer inherits the same rights as the party the insurer has indemnified (ie. the shipper) and will face the same difficulty as the shipper in establishing title to sue.
Why would a cargo insurer indemnify the shipper for such a loss? It may of course be by reason of poor attention to detail - failing to check which Incoterms® applies or overlooking the meaning of the applicable term in relation to risk - but it may also be that a cargo insurer allows an indemnification claim because the shipper has already paid the consignee for the loss. A further reason may be that the cargo policy has a coverage extension (eg. seller's interest clause) that allows for the shipper to claim even though he was not on risk.
It may be possible to remedy the situation of who has title to sue by an assignment of rights. While the parties are free to transfer the title to sue in this manner, the party to whom the rights are assigned cannot - as with subrogation - be put in a better position than the assignor. For example, if the shipper made the initial claim and later realises that the title had vested with the consignee, the time limit for making a claim may have expired. Under the Hague-Visby Rules, notice of loss needs to be given in writing 'before or at the time of the removal of the goods into the custody of the person entitled to delivery. or, if the loss or damage be not apparent, within three days' to avoid a presumption that the goods were delivered sound. If the wrong party has claimed within this time period a subsequent assignment of rights does not 'mend' any other aspect of the claim. Thus, if a timely claim cannot still be made, the presumption may stand.
For a freight forwarder, a related area potentially fraught with danger is where, either erroneously or out of an intention to be generous with a customer, he accepts a claim from a party not on risk for the transit - any subsequent recovery against the actual carrier may be significantly prejudiced.“in international trade the fact that a party may own the goods does not automatically give that party title to claim for any loss or damage”
In conclusion, in international trade the fact that a party may own or have 'title to' the goods does not automatically give that party title to sue or to claim for any loss or damage. This is determined by the risk allocation incorporated through Incoterms® into the sale contract that governs relations between the seller and the buyer. If a copy of the sale contract is not available, the commercial invoice will normally state which term has been agreed. Finally, the party who has paid the freight is not necessarily on risk for the goods in transit - and therefore may not be entitled to claim for the loss or damage to the goods.
We hope that you have found the above interesting. If you would like further information, or have any comments, please email us, or take this opportunity to forward to any colleagues who you may feel would be interested.
We look forward to hearing from you.
Risk Management Director, TT Club
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Incorporation of Incoterms into a sale contract will not bind any third party, or govern any other contract. It remains for the seller or buyer to ensure that the agreed Incoterm correctly reflects the reality for finance, carriage and insurance. Start with the end in mind!