Why risk transfer is crucial in sales and purchases – some insights

Incoterms are widely used in (international) trade. Among other things, Incoterms determine the moment at which the risk of the goods transfers from the seller to the buyer. The moment of risk transfer differs per Incoterm. Risk transfer refers to the moment at which the risk of loss of or damage to the goods transfers from the seller to the buyer. For example, who bears the risk if the cargo gets wet during the sea voyage? Or if a truck carrying valuable electronics is stolen at night next to the highway?

In this blog, we discuss the moment of transfer of risk for a number of Incoterms. We provide practical examples and some useful tips. We also discuss the consequences of transfer of risk for the buyer's inspection period under the CISG.

Transfer of risk 
EXW
The least far-reaching Incoterm for the seller is Ex Works (EXW). This means that the goods are made available by the seller to the buyer at a specific location, often the seller's premises. That is the moment when the risk passes from the seller to the buyer. If damage occurs that is solely attributable to road transport, the seller is ‘off the hook’. Of course, the buyer can still try to recover the damage from the carrier. 

In practice, we often see that the seller loads the goods onto the means of transport, even though EXW has been agreed. It is not uncommon for an international road carrier to say: 'under the CMR Convention, I am not required to load'. If damage then occurs during loading by the seller, there will be a discussion about who is liable. The buyer, because the risk has already passed to them? The seller will argue that they loaded the goods at the buyer's expense and risk. After all, the carrier engaged by the buyer did not want to load the goods. Or the seller, because they loaded the goods? This is reason enough to clarify this before loading.
 
FAS
In the case of Free Alongside Ship (FAS), the risk is transferred when the seller places the goods alongside the vessel specified by the buyer at the port of loading. If damage occurs to the goods during loading on board, this is at the expense and risk of the buyer. FAS is a frequently used Incoterm for larger projects. Think, for example, of shipping a crane or other heavy equipment. The seller ensures that the goods are delivered alongside the vessel. However, as soon as the loading operation begins, the risk is transferred to the buyer. Loading using 'floating' cranes (cranes on board a vessel) or harbour cranes is a particularly risky activity. If damage occurs during loading on large projects, the damage can quickly amount to millions. With the Incoterm FAS, the seller is in principle not liable. This Incoterm is also widely used in the Scandinavian timber trade. Tree trunks are placed on the quay next to the vessel awaiting loading (at the buyer's risk).

FOB
This is different with Free On Board (FOB). With this Incoterm, the transfer of risk only takes place once the goods have been placed on board the vessel. In versions prior to the Incoterms 2010, the risk had already transferred to the buyer when the goods passed the vessel's rail. The question arose as to who was responsible for damage if the goods, which were still attached to the hoist, swung back onto the quay. This change has clarified that issue. In view of these kinds of differences between the versions of the Incoterms, it is strongly recommended to insert the year after the chosen Incoterm. This prevents any subsequent discussion about which version the parties intended to apply. [1]

In the case of the sale or purchase of chemicals, for example, it is advisable for the parties to agree exactly what is meant by 'placing on board the vessel’. It may be agreed, for instance, that this is the moment when the chemicals pass the flange of the vessel’s loading hose.

CPT and CIP
In the case of Carriage Paid To (CPT) and Carriage and Insurance Paid (CIP), the seller arranges and pays for transport to the agreed destination. However, the risk is already transferred to the buyer when the seller hands over the goods to the (first) carrier. A judgment by the Court of Rotterdam illustrates that a shipment of chemicals had become contaminated in a storage tank prior to transport. The seller had therefore handed over an already contaminated load to the (first) carrier. The Incoterm CPT had been agreed. The court ruled, with reference to CPT, that the seller was liable for the buyer's damage. After all, the damage had occurred before the moment of transfer of risk. [2]

DAP, DPU and DDP
With Delivered At Place (DAP), Delivered at Place Unloaded (DPU) and Delivered Duty Paid (DDP), the risk only passes at the moment of delivery by the seller at the agreed destination. Damage occurring during transport is therefore, in principle, the responsibility of the seller. These are the most far-reaching Incoterms for the seller. With DDP, the seller must also comply with import formalities, such as paying import duties and, for example, obtaining the correct import licence(s). Damage caused (e.g. delay) by the customs clearance process is therefore still borne by the seller under DDP. This may be different if the buyer has provided the seller with incorrect information required for customs clearance.

Buyer's inspection period under the CISG
The CISG generally applies to the international sale of movable goods if both parties are established in contracting states. [3] Under the CISG, the buyer has a ‘shortest possible’ examination period. [4] In principle, the examination period begins at the moment of transfer of risk (Art. 38(1) CISG). If the sales contract also covers transport, the buyer may postpone the inspection until after the goods have arrived at their destination (Art. 38(2) CISG). The practical examples discussed below will illustrate the influence of the Incoterms on both the examination and notice of lack of conformity obligations under the CISG.

The starting point of the examination period was discussed in a ruling by the Court of Rotterdam in May this year. A Dutch buyer had purchased Spanish clementines Ex Works (at the Spanish warehouse of the seller). [5] Upon arrival in (ultimately) Norway, the buyer found that the clementines were not in conformity with the purchase agreement. The buyer refused to pay the purchase price, after which the seller initiated these proceedings.

The court ruled that the buyer should have examined the clementines in Spain, prior to transport. [6] After all, that is the moment of transfer of risk, given the agreed Incoterm EXW, because with EXW, transport is not included in the sales agreement. By examining too late, the buyer also lost the right to invoke non-conformity. [7] In other words, the buyer is left with the damage.

The obligation to examine and give notice of lack of conformity under the CISG when using the Incoterm DDP was the subject of a case before the Court of Rotterdam at the end of 2024. A Dutch seller had sold a consignment of beef to a French buyer. This beef was then delivered to France, where the risk passed to the buyer. The buyer then had the meat shipped to end customers in Réunion, a French overseas department east of Madagascar (which was about 18,000 km after the DDP risk transfer in France). Upon arrival, according to the end customer the meat was found to have a strange odour. The buyer then complained for the first time about a possible defect. A surveyor engaged by the buyer stated, without further substantiation, that the odour must have arisen prior to delivery in France. The buyer then approached the seller and demanded compensation. The seller, on the other hand, demanded payment of the purchase price.

The court ruled that the buyer had not examined the meat properly after delivery to France (i.e. the moment of transfer of risk). According to the buyer, only a visual examination had been carried out. A more thorough examination can be expected from a professional trader in perishable goods. Furthermore, the goods in question were fresh meat, for which a notice period in case of lack of conformity of 24 hours applied in accordance with the seller's sales confirmation. The buyer was therefore required to give notice of lack of conformity to the seller within 24 hours (!). [8] In this case, the buyer only gave notice of lack of conformity after five weeks and 18,000 km. [9] The court rejected the buyer's claim. Furthermore, the buyer must pay the full purchase price to the Dutch seller.

These rulings illustrate the importance of risk transfer for the obligation to examine and give notice of lack of conformity. This importance is even greater in the case of perishable goods. In such cases, the examination period may even be only a few hours or days. The buyer must then also give notice of lack of conformity in due course. This follows explicitly from Article 39 CISG. If the buyer does not give notice of lack of conformity within a reasonable period of time after discovering a defect, the buyer loses 'the right to claim that the goods do not comply with the contract'. This means that the buyer cannot claim compensation, even if the goods do not meet the requirements of the sales contract.

Conclusion
It is clear that Incoterms entail more than just logistical agreements. They also determine who bears the risk of damage to the goods sold and at what point in time. An (incorrect) choice can have major consequences. Consider damage to the goods during sea transport: with FAS, the risk already lies with the buyer, while with DDP it still lies with the seller.

However, the moment of risk transfer is not always clear. For example, it may be unclear what 'placing on board the vessel' of chemicals means in FOB. In case of uncertainty, it is advisable to make clear further agreements in the sales agreement. This will prevent unpleasant discussions about damage.
 
It is important to note that the Incoterms influence the moment at which the buyer's examination period under the CISG begins. As a buyer, you therefore need to know exactly when your ‘examination clock' starts ticking. This is particularly important in the case of perishable goods, as anyone who takes action too late may be left empty-handed.