Passing of risk

What it means

The passing of risk is the moment from which the buyer rather than the seller bears the risk of accidental loss of, destruction of or damage to goods. If the goods are damaged after that moment through no fault of the seller, the buyer must still pay the price.

Under the Commercial Code, risk generally passes when the buyer takes delivery or, where the seller must dispatch the goods, on handover to the first carrier. In practice the moment is often set by the agreed Incoterms rule: EXW shifts risk to the buyer at the seller's warehouse, DDP only at the destination.

The passing of risk is not the same as the passing of ownership. The buyer may bear the risk before becoming the owner, for example under retention of title until payment, or vice versa. Both moments should therefore be set out clearly in the purchase contract.

How it works in practice

Special rules apply when selling to consumers: risk usually passes only when the consumer or a person they designate receives the goods, not when a carrier chosen by the seller does. An online shop therefore bears the risk of damage in transit and handles claims with the carrier.

Whoever bears the risk should insure the goods. In international trade, the chosen rule determines who takes out transport insurance and to what extent. Rules such as CIF or CIP oblige the seller to insure the goods for the buyer's benefit, but only at a minimum level of cover.

On delivery it is important to inspect the consignment and note visible damage on the delivery note or transport document. Without such a note it is hard to prove whether the damage occurred before or after the risk passed.

What to watch out for

If the buyer fails to take delivery on time although the goods were properly tendered, risk may pass from the moment of delay. Postponing delivery therefore does not protect the buyer and can lead to claims by the seller for storage costs.

A vague delivery clause, such as free delivery without stating place and risk, leads to disputes. Free delivery speaks to costs, not risk; it pays to name the Incoterms rule expressly, together with the place and version.