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Transfer of Title under the INCOTERMS, the UCC, and
the CISG
Most international sales transactions incorporate the INCOTERMS 2000 into
the sales contract by selecting a shipping term that will govern the
transaction. These well-known shipping terms (FOB, FCA, etc.) allocate the
risks and duties of the parties, but do not address the passage of title –
which is therefore left to be determined by the governing law or provisions
of the contract that deal specifically with issues of title.
In a transaction involving parties from countries that
have adopted the CISG (such as the U.S., Canada, China, and European Union
countries), the UCC will govern an agreement where the parties have
expressly excluded the CISG. If the UCC governs the agreement, parties
should first know that title plays a lesser role in comparison to earlier
sales law. When drafting the UCC, Karl Llewellyn famously decoupled title
from issues that had previously relied on the passage of title, such as risk
of loss, insurable interest, and the right to sue third parties for injury
to the goods. Nevertheless, the passage of title can still have a
significant effect on certain legal questions, and therefore should not be
overlooked.
The UCC grants parties autonomy over the passage of
title by allowing them to identify in the agreement when title will pass. In
the event that the parties do not address passage of title, the UCC has
fall-back rules in Section 2-401 which establish when title passes. For
example, title passes upon shipment for a shipment contract and upon
delivery for a destination contract. However, parties should not rely on the
standard rules for passage of title since every transaction must be
individually analyzed to determine the most advantageous moment to transfer
title.
Like the UCC, the CISG also shies away from issues of
title. Article 4 of the Convention makes the diminished role of title clear
by stating that the Convention “is not concerned with . . . the effect which
the contract may have on the property in the goods sold.” This means that
issues of title will be resolved by applicable law, which may be the UCC or
may be the law of a foreign jurisdiction. In the end, parties are free under
both the UCC and the CISG to make their own determination about the timing
of the passage of title.
Why is Passage of Title Important?
Despite the diminished role of title in the UCC and the CISG, title can
still have a decisive effect with respect to various legal issues. The list
of issues that can be affected by when and where title was passed includes
the imposition of sales and property taxes, the buyer’s status as buyer in
the ordinary course of business, the determination whether the transaction
is a true lease or a sale, ownership and the related regulatory burdens
associated with ownership, the right to sue, the right to collect insurance
proceeds, the timing of the accrual of a cause of action related to the
goods, and even criminal liability. The issue is not always easily resolved
or answered.
One example is found in a recent New York federal court
decision where the court had to determine ownership rights to containers of
pasta seized in Italy and sold by a freight forwarder. The forwarder first
brought an action in Florence against the Italian pasta manufacturer and
received an order for payment from the manufacturer and distributor totaling
nearly € 605,000. The forwarder then seized the containers of pasta and sold
them to the U.S. pasta distributor and its customers to satisfy the
judgment. The manufacturer and distributor then filed suit in New York and
alleged the forwarder did not have title to the goods.
The court determined that the purchase agreement terms
required application of New Jersey law, specifically the UCC. Under the
express terms, it was agreed “that title to, and the risk of loss of theft,
damage or destruction to the Products shall remain” with the Italian
manufacturer until delivered and tendered to the distributor in the U.S. The
court rejected the argument that the bills of lading transferred title since
they are “contracts between shippers and carriers,” not buyers and sellers.
It also rejected the forwarder’s contention that Section 2-401 conferred a
security interest in the goods because the purchase agreement did not call
for the manufacturer to retain title beyond the time of delivery to the
distributor.
The distributor further argued that the term CIF on the invoices showed the
parties intended title to shift to it at the time the goods were delivered
to the shipper. The court noted CIF, under INCOTERMS, does not govern the
issue of title, but that if the parties used that term under the UCC, it
evidenced the parties waived the purchase agreement term to transfer title
when the products were delivered to it in the U.S. There was deposition
testimony to support a finding that the term was waived, including course of
performance evidence that the CIF term was actually never honored. This
course of performance was an issue to be decided at trial.
Some Practical Tips
Each transaction should be analyzed individually to determine the optimal
time and place for title to pass. Parties to the transaction will want to
consider and anticipate the potential issues and disputes that may be
affected by the passage of title. As the above-discussed case amply shows,
litigation and its attendant costs can result where agreements are not clear
regarding the transfer of title. Companies are encouraged to use sound
litigation avoidance strategies in an effort to reduce such additional
costs. |
