In international commercial transactions, determining the point at which risk is transferred is a key factor that directly affects the rights and obligations of the parties involved in the contract. The United Nations Convention on Contracts for the International Sale of Goods (“CISG”) provides clear provisions on the mechanism of risk transfer, helping businesses avoid unnecessary disputes.
In this article, BLawyers Vietnam presents below five important considerations when entering international sales contracts to help businesses better understand how to safeguard their rights and interests.
Determining the point in time when risk is transferred
One of the most important aspects of risk transfer is clearly identifying the exact moment when the risk shifts from the seller to the buyer. This is critical because if the goods are lost or damaged after the risk has passed to the buyer, the buyer is not exempt from the obligation to pay for the goods.
Under the CISG, the timing of risk transfer depends on the terms of the contract and the method of delivery, as follows:
- If the contract involves carriage of the goods and the seller is not required to deliver them at a specific destination, the risk passes to the buyer when the goods are handed over to the first carrier.
- If the contract involves carriage of the goods and the seller is required to deliver them to the carrier at a specified place, the risk passes to the buyer at the moment the goods are handed over to the carrier at that place.
- If the contract does not contain a provision regarding carriage, the risk is transferred when the buyer takes possession of the goods at the designated place.
- If the buyer fails to take delivery on time, the risk may pass even if actual delivery has not occurred.
International commercial terms (Incoterms) that largely determine the transfer of risk
While the CISG provides regulations on the transfer of risk, in practice, the International commercial terms (“Incoterms”) issued by the International Chamber of Commerce (ICC) are also a decisive factor that directly affects the point in time when the risk is transferred. Incoterms set out in detail the responsibilities of the seller and the buyer at each stage of the goods transportation process. Common terms include:
- EXW (Ex Works): The seller delivers the goods at their premises, and the buyer bears all costs and risks from the moment of receipt.
- FOB (Free on Board): The seller is responsible for delivering the goods onto the vessel at the port of export, and the risk is transferred to the buyer as soon as the goods are loaded onto the vessel.
- CIF (Cost, Insurance and Freight): The seller must pay for the transportation and insurance costs of the goods, but the risk is transferred to the buyer when the goods are handed over to the maritime carrier or loaded onto the deck of the transport vessel at the port of departure, depending on the terms specified in the insurance contract.
- DDP (Delivered Duty Paid): The seller bears all risks and costs until the goods are delivered to the buyer at the designated location.
Choosing the correct Incoterms not only affects the allocation of risk but also impacts tax obligations, insurance costs, and transportation responsibilities. Therefore, it is crucial for businesses to understand and clearly agree upon the applicable Incoterms in the contract to avoid unnecessary disputes.
The principle of precedence in conflicts between CISG and Incoterms provisions on the transfer of risk
Incoterms is a set of international trade rules that are widely recognized and used around the world. Incoterms sets out rules related to pricing and the responsibilities of the parties in an international commercial transaction. When the contract refers to delivery terms under Incoterms, the rules on the transfer of risk will also apply according to Incoterms, unless the parties have agreed otherwise.
This is in line with the provisions of Articles 9.1 and 9.2 of the CISG, which specifically state that the parties are bound by the practices they have agreed upon, as well as by the customs they have established.
Therefore, in cases where the contract references Incoterms but there is a difference between the risk transfer provisions of Incoterms and the CISG, the terms of Incoterms will take precedence. Additionally, it is important to note that the CISG only provides regulations on the transfer of risk when the contract does not specifically agree on the terms of trade. This means that if the contract does not reference Incoterms or does not contain a clear provision on the timing of risk transfer, the provisions of the CISG will automatically apply to determine the parties’ responsibilities.
The party is responsible for when goods are damaged
Under the provisions of the CISG, after the risk has been transferred, the seller is not liable for any loss or damage to the goods, unless:
- The loss or damage is due to the act or negligence of the seller;
- At the time of contract formation, if the seller knew or should have known that the goods were lost or damaged but failed to inform the buyer, the seller shall be liable for the loss or damage;
- The parties have agreed otherwise regarding insurance or compensation responsibilities.
Therefore, businesses should pay attention to the specific provisions regarding liability for damaged goods when drafting contracts to avoid unforeseen financial losses in the future.
Delivery delays and risk liability
In some instances, the seller may deliver the goods later than agreed. In such cases, the risk remains with the seller until the goods are actually delivered in accordance with the terms of the contract. However, if the buyer fails to take delivery as scheduled, the risk may pass to the buyer even without actual receipt of the goods.
According to Article 69 of the CISG, if the buyer is obligated to take delivery at a specific location but fails to do so in a timely manner, the risk passes to the buyer from the moment they ought to have taken delivery. This means that if the goods are lost or damaged during the period of delay caused by the buyer, the buyer bears the risk instead of the seller.
On the other hand, if the seller fails to fulfill their delivery obligations on time, the buyer is entitled to claim damages or terminate the contract under the provisions of the CISG. These protections safeguard the buyer against risks arising from delayed delivery.
A clear understanding of the risk transfer rules under the CISG and Incoterms not only enables businesses to properly allocate responsibilities but also helps minimize disputes during contract performance. To protect their interests, businesses should pay close attention when drafting contracts, selecting appropriate delivery terms, and adopting an effective risk management strategy.
The above is not official advice from BLawyers Vietnam. If you have any questions or suggestions about the above, please contact us at info@blawyersvn.com. BLawyers Vietnam would love to hear from you.
Date: 19 August 2025
Writer: BLawyers Vietnam
