1. If the contract stated that it was governed by the laws of Germany, why did the court apply the law of the CISG?

Shared Imaging, an American company, agreed to purchase an MRI machine from Neuromed, a German seller. The one-page contract of sale stated that the delivery terms were “CIF New York Seaport, the buyer will arrange and pay for customs clearance as well as transport to Calumet City.” In addition, under “Disclaimer” it stated, “system including all accessories and options remain the property of Neuromed till complete payment has been received.” Payment was to be made when the machine was received in Calumet City. The contract also stated that it was to be governed by the laws of Germany. The MRI was loaded aboard the vessel Atlantic Carrier undamaged and in good working order. When it reached its destination of Calumet City, Illinois, it had been damaged and was in need of extensive repair, which led plaintiff to conclude that the MRI had been damaged in transit. Shared Imaging filed its claim for insurance with St. Paul Guardian, who brought this action against Neuromed for damages. Neuromed argues that the case should be dismissed because it is not liable under German law. 

Plaintiff next contends that … the other terms in the contract are evidence that the parties’ intention to supersede and replace the “CIF” term such that Neuromed retained title and the risk of loss. That is incorrect. Citing the “Delivery Terms” clause in the contract, plaintiff posits that had the parties intended to abide by the strictures of INCOTERMS there would have been no need to define the buyer’s obligations to pay customs and arrange further transport. Plaintiff’s argument, however, is undermined by Incoterms 1990, which provides that “[i]t is normally desirable that customs clearance is arranged by the party domiciled in the country where such clearance should take place.” The “CIF” term as defined by INCOTERMS only requires the seller to “clear the goods for export” and is silent as to which party bears the obligation to arrange for customs clearance. The parties are therefore left to negotiate these obligations. As such, a clause defining the terms of customs clearance neither alters nor affects the “CIF” clause in the contract. Plaintiff also cites to the “Payment Terms” clause of the contract, which specified that final payment was not to be made upon seller’s delivery of the machine to the port of shipment, but rather, upon buyer’s acceptance of the machine in Calumet City. These terms speak to the final disposition of the property, not to the risk for loss or damage. INCOTERMS do not mandate a payment structure, but rather simply establish that the buyer bears an obligation to “[p]ay the price as provided in the contract of sale.” Inclusion of the terms of payment in the contract does not modify the “CIF” clause. The terms of the contract do not modify the “CIF” clause in the contract such that the risk of loss remained with Neuromed. The fact remains that the CISG, INCOTERMS, and German law all distinguish between the passage of the risk of loss and the transfer of title. Thus, because (1) Neuromed’s risk of loss of, or damage to, the MRI machine under the contract passed to plaintiff upon delivery of the machine to the carrier at the port of shipment and (2) it is undisputed that the MRI machine was delivered to the carrier undamaged and in good working order, Neuromed’s motion to dismiss for failure to state a claim is hereby granted. 

Decision. The U.S. court, interpreting German law, held that a delivery term in a sales contract (here CIF) should be defined according to Incoterms, in the absence of contractual provisions specifying otherwise. The court reasoned that under the CISG, merchants impliedly agree to trade usages of which they should have known. Incoterms are so widely used that they have become a trade usage, or international custom, applicable to this contract. The risk of loss passed to the buyer at the port of shipment.

Comment. Incoterms 2010 eliminates the rule regarding passage of risk in C terms when goods pass over the ship’s rail in favor of passage of risk when the goods are on board the vessel. According to the International Chamber of Commerce, the new rule on passage of risk “more closely reflects modern commercial reality and avoids the rather dated image of the risk swinging to and fro across an imaginary perpendicular line.”