Commercial Transactions Law questions and answers

1. What does the ‘passing of risk to the buyer’ mean? In other words, what risks are carried by the buyer upon passing of the risk and what are the practical consequences for the buyer if such risks materialize? It means that the buyer will bear the effects of any fortuitous destruction or damage to the merx even where, as is the case in most instances, they have not yet taken delivery of the merx. Practically, this would mean that the buyer is still obliged to tender the full purchase price under the contract (no recourse to a reduction in price or refund for example). 2. When does the risk pass to the buyer under the common law of sale? Risk rule says that unless the parties agree otherwise, risk of accidental (note does not apply where it is at the fault of the seller) damage or destruction prior to delivery passes to the buyer when contract is perfected. 3. If you have not already done so in your answer to question 2, explain what is meant by the concept ‘perfecta’. Risk only passes if the sale is prefecta NB!! Sale is perfecta where: • The price is fixed (merely ascertainable is not enough) • The subject matter must be ascertained. • All suspensive conditions must have been fulfilled. On fulfilment of the suspensive condition the risk passes to the buyer from the date of sale. 4. May the risk rule of the common law be excluded by agreement between the parties? Give an example of how this may be done. The parties may, by agreement, vary the incidence of risk and it is common practice to insert a clause stating that risk passes to the buyer from the date that the buyer receives possession or ownership. 5. When did the risk pass on the facts of Lendalease Finance v CMA (prescribed in respect of Passing of Ownership)? In an FOB contract, risk passes when the seller loads the goods onto the ship. Any damage occurring during transit is the buyer’s risk. When carriage takes place then the goods are not moving directly between the seller and the buyer; in between they are with a carrier (most often a 3rd party carrier). So, the question is what happens when the goods are destroyed/damaged when in the possession of a 3rd party carrier. It is NB to ascertain who carries the risk so that the party carrying the risk can take out insurance. FOB (Free on Board) contract – such as in Lendalese the risk passes to the buyer once the seller has fulfilled its obligation in terms of the contract relating to delivery ⇒ risk passes once the goods have been placed on the ship in the seller’s harbour. Once loaded onto the ship, the risk becomes the buyers’.