“Risk management” is not just a trendy catch phrase for corporate governance, it is also very important in international trade.
“Risk management” is not just a trendy catch phrase for corporate governance, it is also very important in international trade.
When and how risk in the goods being sold passes from the seller to the buyer must be considered in all exporting arrangements.
Risk in an international sale is higher than in a domestic sale because the sale involves parties from different countries, using various means of transportation, plus the sale is also exposed to many political risks such as civil unrest, military coups or natural risks like floods or hurricanes.
When and how risk passes is normally encompassed in the Incoterm (see also www.icc.org) you choose to incorporate in your contract of sale. For example, if you have priced your goods at $10 per unit FOB (“free on board”), the risk in the goods passes to the buyer once the goods pass over the ship’s rail – that is, if the ship sinks with the goods on it, then the buyer is responsible for rectifying that situation and has no recourse against the seller.
If you do not incorporate an Incoterm into your contract of sale and you have stipulated that the laws of Australia govern your contract, then the “sale of goods” legislation of your state will apply to your contract.
Under domestic legislation, passing of risk is dealt with under two basic principles:
Risk and goods pass at the same time.
The party that causes delay in delivery of the goods is liable for the costs, losses or damages flowing from the delay.
So under number 2, even if delivery has been made but there has been a delay, or delivery has not been made as it should have been under the contract, then the buyer is not responsible for losses – the seller is, even though the buyer might be in possession of the goods.
You should ensure that you have a solid understanding of the Incoterms you choose to use and ensure that you make reference to the Incoterm in a written contract. If you want to amend the operation of an Incoterm because the intention of the parties is slightly different, then your own definition of passing of risk should be clearly stated in your contract.
Lynda Slavinskis is an outgoing, intuitive and commercially savvy lawyer. She has worked in-house at Sussan Corporation and Tattersall’s and now assists small and medium businesses with import, export, leases, franchising, employment and general business advice as principal solicitor of Lynda Slavinskis Lawyers & Consultants. Lynda is on the Victorian State Government’s Small Business Advisory Council.
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James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
