Transfer of Title and Risk under Foreign Trade Contracts in Russia: A Legal Guide

June 30, 2023

BRACE Law Firm ©

An international contract reflects all material terms of a global transaction, which serve as the foundation for interaction between foreign partners. A foreign trade contract includes various sections covering essential aspects, including the transfer of goods, the transfer of title to the goods, and the point at which risk passes.

The primary international instrument regulating the sale of goods is the United Nations Convention on Contracts for the International Sale of Goods [1] (the "Vienna Convention"). Under Article 30 of the Vienna Convention, a seller must deliver the goods, hand over any related documents, and transfer the title to the goods as required by the contract and the Convention.

If the seller is not bound to deliver the goods at any other particular place, its delivery obligation consists of:

• if the contract of sale involves the carriage of goods — handing the goods over to the first carrier for transmission to the buyer;[2]
• if the contract relates to specific goods, or unidentified goods to be drawn from stock or to be manufactured or produced, and at the time of the conclusion of the contract the parties knew that the goods were at, or were to be manufactured or produced at, a particular place — placing the goods at the buyer’s disposal at that place;
• in other cases — placing the goods at the buyer’s disposal at the place where the seller had its place of business at the time of the conclusion of the contract.

The Incoterms international rules set forth generally accepted definitions and rules regarding the delivery of goods between trading partners. These rules include trade terms and reflect established practices in the delivery of goods. Parties to an international transaction choose a suitable delivery basis and include it in the foreign trade contract; it is also critical for the parties to select the specific version of the Incoterms. The chosen delivery basis determines the transport logistics and the respective obligations of the seller and the buyer. Foreign trade partners should also specify the point at which title to the goods passes in the contract to avoid misunderstandings during delivery.

Despite established international norms in the sale of goods, parties may agree upon the law applicable to their trade relations when concluding a foreign trade contract, including choosing the legislation of the Russian Federation as the governing law.

Transfer of Goods under a Foreign Trade Contract

The seller’s delivery obligations are a material condition for the performance of a foreign trade contract, determining the point at which title passes, and in some cases, the payment for the goods and the transfer of the risk of damage or loss. Pursuant to Article 35(1) of the Vienna Convention, the seller must deliver goods which are of the quantity, quality, and description required by the contract and which are contained or packaged in the manner required by the contract. The seller must deliver the goods: [3]

• if a date is fixed by or determinable from the contract — on that date;
• if a period of time is fixed by or determinable from the contract — at any time within that period unless circumstances indicate that the buyer is to choose a date;
• in any other case — within a reasonable time after the conclusion of the contract.

Notably, if partners use the Incoterms when drafting a foreign trade contract, they agree to the specific conditions of the chosen delivery basis. For instance, the EXW (Ex Works) delivery basis implies that the buyer collects the goods from the seller’s warehouse or factory, while CPT (Carriage Paid To) obligates the seller to deliver the goods to a designated destination where the transfer occurs. Thus, in addition to choosing an Incoterm, parties must determine the exact moment the goods are transferred.

Under Russian legislation,[4] a seller fulfills its obligation to transfer goods to the buyer at the moment of:

• handing over the goods to the buyer or a person designated by the buyer, if the contract obligates the seller to deliver the goods;
• placing the goods at the buyer's disposal, if the goods are to be transferred to the buyer or its designee at the location of the goods.

Goods are considered placed at the buyer's disposal when, by the deadline provided in the contract, they are ready for transfer in the proper place and the buyer is aware of such readiness. Goods are not considered ready for transfer unless they are identified for the purposes of the contract through marking or otherwise.

Furthermore, under Russian law, if the contract of sale does not imply an obligation for the seller to deliver the goods or transfer them at their location, the seller fulfills its obligation to transfer the goods upon handing them over to a carrier or a communications organization for delivery to the buyer, unless the contract provides otherwise.

The transfer of goods implies the buyer receives goods of proper quality, ready for use or consumption. If the goods are of substandard quality or delivered late, the buyer may seek protection of its breached rights and recover compensation for losses from the supplier. [5]

Transfer of Title to Goods under a Foreign Trade Contract

The specified point at which title to the goods passes under a foreign trade contract allows the buyer to use and dispose of the acquired goods at its discretion from that moment onward. Under Russian legislation, an owner possesses the rights of possession, use, and disposal of its property,[6] which essentially constitutes the content of the right of ownership (title). Title to property that has an owner may be acquired by another person based on a contract of sale, exchange, gift, or another transaction for the alienation of such property. [7]

The Vienna Convention, which regulates international sales of goods, does not contain a specific section on the transfer of title. Article 30 of the Vienna Convention establishes the seller's obligation to deliver the goods, hand over documents, and transfer the title in accordance with the contract and the Convention. However, this international norm does not expressly reflect the exact moment title passes. Moreover, Article 4 of the Vienna Convention states that the Convention is not concerned with the effect which the contract may have on the property in the goods sold.

Consequently, when concluding a foreign trade contract, it is vital for the parties to determine the governing law. [8] If Russian law is chosen, parties must consider that the acquirer's title to a thing under a contract arises from the moment of its transfer, unless otherwise provided by law or the contract. [9]

Transfer is defined as the handing over of a thing to the acquirer, as well as the delivery to a carrier for shipment to the acquirer or delivery to a communications organization for the mailing of things alienated without an obligation to deliver. [10] A thing is considered handed over to the acquirer from the moment of its actual entry into the possession of the acquirer or its designee. Handing over a bill of lading 11] or another document of title to the goods is equivalent to the transfer of the thing.

The point at which title passes is linked not only to the transfer of risk but also to aspects such as the recording of the goods in accounting reports and taxation, which are important elements of an international transaction. To avoid misunderstandings between foreign partners, the foreign trade contract must stipulate the point at which title to the transferred goods passes.

Transfer of Risk of Loss, Accidental Destruction, and Damage in International Trade

Business activities involving the supply of goods are associated with risks of loss, accidental destruction, and damage, which may arise at any stage of performing a foreign trade contract. The risk of accidental destruction or accidental damage refers to the risk of incurring losses due to the spoilage of goods for reasons for which neither the supplier nor the buyer is responsible, such as force majeure or the unlawful actions of third parties. [12]

The transfer of risk in international transactions is regulated by international law, including the Incoterms and the text of the foreign trade contract. When choosing an Incoterm, foreign partners follow the conditions of the delivery bases, which provide for the point at which the risk of loss or damage passes during the transfer of goods from the seller to the buyer or a carrier.

The seller remains liable under the contract and the Vienna Convention for any lack of conformity which exists at the time when the risk passes to the buyer, even though the lack of conformity becomes apparent only after that time. [13]

Under Russian legislation, the risk of accidental destruction or accidental damage to goods passes to the buyer at the moment when, pursuant to the law or the contract, the seller is deemed to have fulfilled its obligation to transfer the goods to the buyer. [14] Loss of or damage to the goods after the risk has passed to the buyer does not discharge the buyer from its obligation to pay the price, unless the loss or damage is due to an act or omission of the seller. [15]

If the contract of sale involves carriage of the goods and the seller is not bound to hand them over at a particular place, the risk passes to the buyer when the goods are handed over to the first carrier for transmission to the buyer in accordance with the contract of sale.[16] If the seller is bound to hand the goods over to a carrier at a particular place, the risk does not pass to the buyer until the goods are handed over to the carrier at that place. The fact that the seller is authorized to retain documents controlling the disposition of the goods does not affect the passage of the risk. However, the risk does not pass to the buyer until the goods are clearly identified to the contract, whether by markings on the goods, by shipping documents, by notice given to the buyer, or otherwise. [17]

The buyer assumes the risk in respect of goods sold while in transit from the time the goods are handed over to the carrier who issued the documents embodying the contract of carriage. However, if at the time of the conclusion of the contract of sale the seller knew or ought to have known that the goods had been lost or damaged and did not disclose this to the buyer, the loss or damage is at the risk of the seller. [18]

Correlation between the Transfer of Goods, Title, and Risk in Foreign Trade

The correlation between the moment of transfer, the transfer of title, and the transfer of risk significantly affects the obligations of parties to a foreign trade contract. For instance, under Russian law, the risk of accidental destruction (accidental damage) passes at the same time as the title to the goods — at the moment the goods are transferred to the buyer.[19]

The transfer of title is closely linked to the moment of delivery, with two primary rules for the transfer of title:

• General Procedure: Title passes at the moment the goods are transferred to the buyer, which is documented by relevant instruments (acts, invoices, etc.).
• Special Procedure: Provided for by law or contract, where title may arise not only through delivery but due to other circumstances stipulated by law or the contract. For example, a contract may stipulate other conditions for the transfer of title (such as payment for the goods). Consequently, the documents confirming the transfer of title will be those confirming the occurrence of the events specified in the contract as "title transfer events" (in the case of payment — payment documents or bank statements). [20]

Additionally, under Russian law, if a contract of sale provides that title to the goods transferred to the buyer is retained by the seller until the goods are paid for or other circumstances occur, the buyer may not alienate the goods or otherwise dispose of them prior to the transfer of title, unless otherwise provided by law or the contract or following from the purpose and properties of the goods. [21]

In international norms, the transfer of goods, transfer of title, and transfer of risk may not coincide. Title may pass upon the transfer of shipping documents, at the moment of physical delivery, or after payment. To prevent misunderstandings, foreign partners should regulate this issue in the foreign trade contract independently of the chosen Incoterm, as Incoterms do not address the transfer of title. Each delivery basis implies a specific moment for the transfer of the risk of loss or damage, which dictates the subsequent performance of the foreign trade contract. [22]

If the parties fail to reach an agreement or reflect specific aspects of the transfer of goods, title, and risk, and are representatives of Contracting States to the Vienna Convention, the foreign trade contracts automatically fall under the provisions of the United Nations Convention on Contracts for the International Sale of Goods[23] regarding the matters governed by the Convention.

The future interaction between foreign partners in the event of disputes regarding the transfer of goods, title, and risk depends on the accuracy of the foreign trade contract's drafting. Therefore, parties must discuss all issues and aspects of the future contract before concluding an international transaction.

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References

1. United Nations Convention on Contracts for the International Sale of Goods. Concluded in Vienna on April 11, 1980.
2. Resolution of the Arbitration Court of the North-Western District dated May 31, 2023 No. F07-6244/2023 in Case No. A56-80951/2021 On Recovery of Debt under a Supply Contract and Penalties. The supplier cited improper payment by the buyer for the delivered goods. Counterclaim: On recovery of unjust enrichment. Ruling: The case was remanded for a new trial because, in rejecting the supplier's argument regarding the transfer of goods to the buyer, the court failed to consider the parties' electronic correspondence; the conclusion regarding the lack of grounds for debt recovery was premature and made without examining all evidence or the buyer's arguments regarding the purchase of similar goods on the Russian domestic market, supported by contracts with Russian suppliers and primary and payment documents.
3. Article 32 of the Vienna Convention.
4. Article 458 of the Civil Code.
5. Award of the Tribunal of the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation dated September 23, 2021 in Case No. M-50/2021. The ICAC satisfied the claim for the recovery of funds paid for the goods and interest for the use of others' funds, as the equipment delivered by the respondent did not meet the contract requirements and was unfit for the purposes for which it was purchased by the claimant.
6. Article 209(1) of the Civil Code.
7. Article 218(2) of the Civil Code.
8. Article 1210(1) of the Civil Code.
9. Article 223(1) of the Civil Code.
10. Article 224(1) of the Civil Code.
11. Article 142 of the Merchant Shipping Code of the Russian Federation dated April 30, 1999 No. 81-FZ.
12. Article-by-article Commentary to the Civil Code of the Russian Federation, Part Two: in 3 volumes, edited by P.V. Krasheninnikov.
13. Article 36(1) of the Vienna Convention.
14. Article 459(1) of the Civil Code.
15. Article 66 of the Vienna Convention.
16. Award of the ICAC at the RF CCI dated April 9, 2008 in Case No. 99/2007. The ICAC partially satisfied the claim for debt recovery, as the seller is liable for any lack of conformity existing at the time the risk passes to the buyer, even if the lack of conformity becomes apparent later.
17. Article 67 of the Vienna Convention.
18. Article 68 of the Vienna Convention.
19. Article 459(1) of the Civil Code.
20. Letter of the Federal Tax Service of the Russian Federation dated August 21, 2009 No. ShS-22-3/660@ On Sending Systematized Materials on Documenting Operations during the Transportation of Goods.
21. Article 491 of the Civil Code.
22. Resolution of the Arbitration Court of the Far Eastern District dated August 17, 2018 No. F03-3372/2018 in Case No. A51-21716/2016 On Recovery of Debt under a Lumber Sale Contract. Goods were shipped under the contract. During transit to the destination port, the vessel sank at sea with the cargo. The supplier claimed the buyer owed a debt for the delivered lumber due to the issuing bank's refusal to pay under the letter of credit at the nominated bank. The claim was satisfied because the goods were delivered and loaded onto the vessel, and under the contract terms, all risks, including the risk of accidental destruction or damage, passed to the buyer upon the goods passing the ship's rail at the port of shipment.
23. Review of Judicial Practice of the Supreme Court of the Russian Federation No. 2 (2021). Approved by the Presidium of the Supreme Court of the Russian Federation on June 30, 2021.