UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

Economic analysis of risk to goods in transit Anderson, Harold Andreas 1988

Your browser doesn't seem to have a PDF viewer, please download the PDF to view this item.

Item Metadata

Download

Media
831-UBC_1988_A6_4 A52.pdf [ 6.58MB ]
Metadata
JSON: 831-1.0077706.json
JSON-LD: 831-1.0077706-ld.json
RDF/XML (Pretty): 831-1.0077706-rdf.xml
RDF/JSON: 831-1.0077706-rdf.json
Turtle: 831-1.0077706-turtle.txt
N-Triples: 831-1.0077706-rdf-ntriples.txt
Original Record: 831-1.0077706-source.json
Full Text
831-1.0077706-fulltext.txt
Citation
831-1.0077706.ris

Full Text

ECONOMIC ANALYSIS OF RISK TO GOODS IN TRANSIT BY HAROLD ANDREAS ANDERSON B.A. (Honours), A c a d i a U n i v e r s i t y , 1979 LL.B., DALHOUSIE UNIVERSITY, 1979 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF LAWS i n THE FACULTY OF GRADUATE STUDIES THE FACULTY OF LAW We accept t h i s t h e s i s as conforming t o the standard THE UNIVERSITY OF BRITISH COLUMBIA October 11, 1988 (c) H a r o l d Andreas Anderson, 1988 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of C C C C | < > <S^U Ji'e£ The University of British Columbia Vancouver, Canada Date Qcf&jyu / Q} jj)?^ DE-6 (2/88) ABSTRACT The r u l e s g o v e r n i n g r i s k t o goods i n t r a n s i t c o n t a i n e d i n the B r i t i s h Columbia S a l e o f Goods A c t a r e based on a s t a t u t e enac ted i n 1893. A l t h o u g h the method o f t r a n s p o r t as w e l l as the t y p e s o f goods b e i n g t r a n s p o r t e d have changed s i g n i f i c a n t l y s i n c e t h a t t i m e , t h e r u l e s have not been m o d i f i e d . The h y p o t h e s i s e x p l o r e d i n t h i s t h e s i s i s whether r u l e s g o v e r n i n g r i s k t o goods i n t r a n s i t d r a f t e d i n the l a t e n i n e t e e n t h c e n t u r y r e p r e s e n t e f f i c i e n t r u l e s i n the l a t e t w e n t i e t h c e n t u r y . The t h e s i s a p p l i e d economic a n a l y s i s t o the r u l e s t o t e s t t h e i r e f f i c i e n c y . The r u l e s were t e s t e d i n the ocean t r a n s i t env i ronment . I t was c o n c l u d e d t h a t the r u l e s were not e f f i c i e n t and r e q u i r e d s u b s t a n t i a l m o d i f i c a t i o n . An e f f i c i e n t s e t o f r u l e s g o v e r n i n g r i s k t o goods i n t r a n s i t was advanced . i i i TABLE OF CONTENTS CHAPTER ONE INTRODUCTION 1 CHAPTER TWO THEORETICAL APPROACH 8 A. The Advantages of the Economic Approach 8 B. The B a s i s o f the Economic Approach 10 C. The Role of E f f i c i e n c y i n A n a l y s i s 14 D. Economic Theory and the L i m i t s o f i t s Power of E x p l a n a t i o n 16 E. The Technique of Economic A n a l y s i s 19 F. The C o n t r a c t Paradigm 32 G. C o n t r a c t A n a l y s i s 3 6 CHAPTER THREE THE TRANSIT ENVIRONMENT 42 A. Commercial S a l e s I n v o l v i n g an Arrangement of D e l i v e r y by the S e l l e r B. Methods of T r a n s p o r t a t i o n C. C o n t r a c t u a l Events D. The L e g a l Environment E. Types of R i s k CHAPTER FOUR STRUCTURING THE MODELS 67 A. Ex p e r i m e n t a l Question 67 B. Assumptions 68 C. R i s k F a c t o r s 69 CHAPTER FIVE ANTICIPATED DAMAGE 78 A. The Optimal Model 78 B. The S a l e of Goods A c t Model 84 C. Comparison of the S a l e o f Goods A c t and The Optimal Models 87 . CHAPTER SIX UNANTICIPATED THIRD PARTY DAMAGE 91 A. The Optimal Model 91 B. The S a l e o f Goods A ct Model 100 42 43 44 48 61 i v C. Comparison of the S a l e of Goods A c t and the Optimal Model 103 CHAPTER SEVEN UNANTICIPATED INTERNALLY CAUSED DAMAGE 108 A. The Optimal Model 109 B. The S a l e of Goods Act Model 114 C. Comparison of the S a l e of Goods A c t and the Optimal Models 118 CHAPTER EIGHT CONCLUSION 125 A. Summary of the Purpose and Method 125 B. Summary of the A n a l y t i c a l Method 129 C. Summary of I n c o n s i s t e n c i e s Between the S a l e of Goods A c t and Optimal Models 13 5 D. I n a p p r o p r i a t e n e s s of the 'Risk' Concept 144 E. A D r a f t Wording of the Optimal Rules 14 5 F. C o n c l u s i o n Summary 14 6 BIBLIOGRAPHY 147 CHAPTER ONE INTRODUCTION Goods w i l l almost always undergo some change during t h e i r t r a n s i t from the s e l l e r ' s warehouse to the buyer's location. Often these changes are anticipated by the pa r t i e s . In some cases the changes may even be desired. An example of t h i s i s the sale of unripe f r u i t which w i l l ripening during t r a n s i t and be ready for sale upon a r r i v a l . When the changes are known i n advance the pri c e paid for goods w i l l r e f l e c t t h e i r value at the end of the t r a n s i t . The buyer w i l l receive goods which do not conform to what he expected to receive and as a r e s u l t , the buyer suffers a los s . However, i n cases where changes are not desired or anticipated, the pri c e paid for the goods w i l l not r e f l e c t t h e i r value when received by the buyer. There are several choices for the d i s p o s i t i o n of t h i s l o s s . The loss could either be l e f t with the buyer, transferred to the s e l l e r or shared between the two. Each option has i t s own benefits and costs for both the parties and society. Such losses are allocated between the part i e s according to the terms of the sales contract or the relevant sales law. If the a l l o c a t i o n i s made according to contract, i t means that the p a r t i e s had the forethought to s e t t l e the po t e n t i a l 2 dispute i n advance. If the a l l o c a t i o n i s made according to the relevant sales law, the parties either ignored the p o s s i b i l i t y or trusted the sales law to solve t h i s type of problem. In e i t h e r case, i t i s e s s e n t i a l for the c a l c u l a t i o n of the costs of the exchange that the p a r t i e s understand how such a loss would be d i s t r i b u t e d . I f s e l l e r s are responsible for damage, the prices they charge for t h e i r goods would r e f l e c t the cost of the r i s k . S e l l e r s would be encouraged to make an e f f o r t to ensure that goods survived transport unharmed. On the other hand, i f buyers are held responsible for the loss, the p r i c e they would be w i l l i n g to pay for goods would r e f l e c t the r i s k of receiving goods of a lower value. In such a case buyers may be encouraged to provide extra protection for the goods. Res p o n s i b i l i t y for damage to goods during t r a n s i t may be made all o c a t e d for any number of reasons and on an large number of basis. However i t i s done, i t i s e s s e n t i a l that buyers and s e l l e r s be aware of the rules and that the rules respond to the needs of the p a r t i e s i n ensuring a successful sale and to society i n improving the way sales are transacted. Even when the rules are c l e a r c a l c u l a t i n g the r i s k s that goods w i l l be damaged i n t r a n s i t i s no easy task. Very often sales involve the, transportation of goods over great distances from the s e l l e r ' s factory or warehouse to the buyer's lo c a t i o n . The transportation phase of the transaction i s 3 f r e q u e n t l y o c c a s i o n e d by the use o f d i f f e r e n t methods of t r a n s p o r t , each w i t h i t s own s e t of s p e c i f i c r i s k s . At any p o i n t i n a s a l e s c e n a r i o the goods c o u l d be damaged by i n t e r n a l as w e l l as e x t e r n a l causes which may not be d i s c o v e r e d u n t i l t h e i r a r r i v a l a t the buyer's warehouse. N a t u r a l l y , a t the i n i t i a l stages o f the t r a n s a c t i o n , the s e l l e r bears r e s p o n s i b i l i t y f o r a l l of sources of damage and consequently f o r any damage which occurs t o the goods. T h i s changes d u r i n g the course o f the s a l e . At some p o i n t between the time the goods l e a v e the s e l l e r ' s l o c a t i o n and the time they reach the buyer's warehouse, the t o t a l r e s p o n s i b i l i t y f o r the d i f f e r e n t types o f r i s k o f damage pass from the s e l l e r t o the buyer. T h i s r i s k t o goods environment i s f u r t h e r c o m p l i c a t e d by the c o n f l i c t between the a b i l i t y t o p r o t e c t goods and the r e s p o n s i b i l i t y f o r doing so. From a common sense p e r s p e c t i v e , r e s p o n s i b i l i t y f o r damage ought t o be somehow r e l a t e d t o a b i l i t y t o p r o t e c t the goods. But i n f a c t under many s a l e s law regimes the r e s p o n s i b i l i t y f o r p r o v i d i n g p r o t e c t i o n f o r goods i s r e l a t e d t o oth e r f a c t o r s . Merchants t r a d i n g under such regimes are faced w i t h e i t h e r i g n o r i n g the obvious absence o f l o g i c i n the s i t u a t i o n or a l t e r n a t i v e l y n e g o t i a t i n g terms which p r o v i d e f o r i t s c o r r e c t i o n . Whatever the b a s i s f o r the r u l e s on r e s p o n s i b i l i t y f o r damage t o goods i n t r a n s i t and the complexity o f the t r a n s i t environment, these r u l e s are v e r y complex. These r u l e s p l a y a 4 l a r g e p a r t i n the s t r u c t u r i n g of every s a l e s t r a n s a c t i o n and thus tend t o make s a l e s v e r y complex. However, i n s p i t e of the apparent complexity, the s t r u c t u r i n g p r o v i d e d by these r u l e s are of c r i t i c a l importance t o the success of a s a l e . Often t h i s aspect these r u l e s are of g r e a t e r importance than the r u l e s governing p r i c e or time. A s u c c e s s f u l and mutually p r o f i t a b l e s a l e r e q u i r e s a t a minimum t h a t r e s p o n s i b i l i t y f o r the a c t u a l and c a l c u l a b l e changes the goods w i l l undergo d u r i n g each phase of t r a n s i t be s p e c i f i c a l l y a s s i g n e d i n advance and t h a t the p a r t i e s be forewarned of the r e s p o n s i b i l i t i e s undertaken. I f r e d u c t i o n of damage of the goods i s a g o a l , the p a r t y i n c o n t r o l of the p o t e n t i a l source of damage t o the goods ought t o be r e s p o n s i b l e f o r i t s c o n t r o l . In Canada the a l l o c a t i o n of r e s p o n s i b i l i t y f o r damage i s governed by p r o v i n c i a l S a l e of Goods A c t s . B r i t i s h Columbia's S a l e of Goods A c t governs a l l s a l e s which occur w i t h i n the p r o v i n c e and which due t o the r u l e s of p r i v a t e i n t e r n a t i o n a l law are governed by B r i t i s h Columbia law. The S a l e o f Goods Act was d r a f t e d d u r i n g the l a t t e r p a r t o f the n i n e t e e n t h century and thus r e p r e s e n t s a s o l u t i o n f o r problems as seen d u r i n g t h a t p e r i o d . A p e r t i n e n t q u e s t i o n i s whether these same r u l e s are a s o l u t i o n t o modern problems. The B r i t i s h Columbia S a l e of Goods A c t s e t s up a r i s k regime which separates a b i l i t y t o p r o t e c t goods from the 5 r e s p o n s i b i l i t y f o r doing so. Presumably merchants i n t h i s p r o v i n c e must e i t h e r i g n o r e t h e i r r i s k s or c o n t r a c t out of the r i s k p r o v i s i o n s . In e i t h e r case, merchants o p e r a t i n g under t h i s law s u f f e r the disadvantage of doing b u s i n e s s w i t h u n c a l c u l a t e d r i s k or n e g o t i a t i n g r i s k i n each and every t r a d e . On i t s f a c e , t h i s regime adds unnecessary c o s t s t o doing b u s i n e s s . Thus, a t t h i s l e v e l i t s i s apparent t h a t these s o l u t i o n s of the n i n e t e e n t h c e n t u r y are not a p p r o p r i a t e f o r our modern times. However, t h i s p o i n t ought t o examined i n depth t o determine e x a c t l y how the S a l e of Goods A c t i s i n e f f i c i e n t and what can be done t o c o r r e c t i t . The purpose of t h i s paper i s t o e x p l o r e t h i s p o i n t . The o p e r a t i n g h y p o t h e s i s s t a t e s t h a t the r i s k r u l e s designed t o operate i n the l a s t c e n t u r y do not r e p r e s e n t e f f i c i e n t r u l e s f o r the a l l o c a t i o n of r e s p o n s i b i l i t y f o r damage t o goods i n t r a n s i t i n the l a t e t w e n t i e t h c e n t u r y . S i n c e t h i s paper i s l o o k i n g a t the e f f i c i e n c y o f r i s k r u l e s the f i r s t g o a l ought t o be t o examine the meaning of the word. Chapter Two of t h i s paper p r e s e n t s a d e t a i l e d review of the concept of economic e f f i c i e n c y and the a n a l y t i c a l method c a l l e d economic a n a l y s i s . the paper w i l l c o n s i d e r the v a r i o u s meanings of the term as w e l l as the breadth of i t s e x p l a n a t i v e power. In a d d i t i o n , the paper w i l l c o n s i d e r the t o o l s p r o v i d e d by the economic approach w i t h an eye t o t h e i r use i n e v a l u a t i n g r i s k r u l e s . 6 In o r d e r t o e v a l u a t e the s o u r c e s o f damage t o goods i n t r a n s i t and the a b i l i t i e s o f the p a r t i e s t o p r o t e c t goods d u r i n g t r a n s i t , t h i s paper c o n d u c t s an e x a m i n a t i o n o f the most common forms o f t r a n s i t f o r goods and l e g a l r e g i m e . Theses i s s u e s a r e c o n s i d e r e d i n Chapte r T h r e e . C h a p t e r Three t a k e s a d e t a i l e d l o o k a t the t y p e o f s a l e c a l l e d t h e " s a l e and arrangement of d e l i v e r y " . The s e t t i n g chosen i s t h e ocean t r a n s i t env i ronment due t o b o t h i t s e m p i r i c a l r e l e v a n c e and the c o n c e n t r a t i o n i t r e c e i v e s i n the B r i t i s h Columbia S a l e o f Goods A c t . The e v a l u a t i o n o f l e g a l r u l e s i n v o l v e s a compar ison between t h e s u b j e c t r u l e s and a s t a n d a r d . Economic a n a l y s i s p r o v i d e s the t o o l s f o r such a compar ison t h r o u g h models and c o m p a r a t i v e s t a t e s . Chapte r Four d e t a i l s the c r e a t i o n o f the models and i d e n t i f i e s the parameters and v a r i a b l e s c o n s i d e r e d i n t h e m o d e l s . T h i s p a r t o f the r e s e a r c h i s o f c r i t i c a l impor tance t o t h e c o n c l u s i o n s r e a c h e d . The l e g a l r u l e s b e i n g c o n s i d e r e d must be e v a l u a t e d a c c o r d i n g t o c o n f o r m i t y t o a s p e c i f i c and d e f i n e d s t a n d a r d . Models and c o m p a r a t i v e s t a t i c s a l l o w f o r such a c o m p a r i s o n . C h a p t e r f i v e th rough Seven p r e s e n t an e x h a u s t i v e a n a l y s i s o f t h e S a l e o f Goods A c t r i s k r u l e s w i t h a compar ison t o the s t a n d a r d c a l l e d by t h i s paper o p t i m a l l y e f f i c i e n t r i s k r u l e s . These c h a p t e r s d e t a i l the a n a l y s i s o f each i n d i v i d u a l r u l e s 7 under the s t a t u t e which r e l a t e s t o r i s k t o goods i n t r a n s i t . The a n a l y s i s l e a d s t o a number of important c o n c l u s i o n s r e g a r d i n g the e f f i c i e n c y of the S a l e of Goods A c t Rules and the content of o p t i m a l l y e f f i c i e n t r u l e s . Chapter E i g h t concludes the r e s e a r c h by d i s c u s s i n g the r e s u l t s of the comparison. T h i s chapter takes the c o n c l u s i o n s reached i n the a n a l y s i s t o t h e i r l o g i c a l ends. C o n c l u s i o n s are reached on the v a l u e of the a n a l y t i c a l method t o the study of r i s k r u l e s . An i n h e r e n t problem wi t h the S a l e of Goods Act r u l e s i s h i g h l i g h t e d and d i s c u s s e d . A summary i s p r o v i d e d of the d i f f e r e n c e s between the S a l e of Goods A c t models and the o p t i m a l models and an e x p l a n a t i o n i s o f f e r e d as t o the causes of the d i f f e r e n c e s . F i n a l l y , an o p t i m a l s e t o f r u l e s i s o u t l i n e d and d i s c u s s e d . The c o n c l u s i o n s of t h i s t h e s i s are t h a t the S a l e of Goods Ac t does not p r o v i d e and e f f i c i e n t s e t of r u l e s f o r the a l l o c a t i o n o f r e s p o n s i b i l i t y f o r damage t o goods i n t r a n s i t . The problem w i t h the r u l e s are t h a t f o r h i s t o r i c a l reasons the r u l e s do not adequately take p r o t e c t i o n of the goods i n t o account. T h i s r e q u i r e s r a t i o n a l merchants t o n e g o t i a t e out of the s t a t u t e each and every time t h a t a s a l e and d e l i v e r y c o n t r a c t i s c r e a t e d . 8 CHAPTER TWO THEORETICAL APPROACH A. The Advantages of the Economic Approach The p r o c e s s of drawing c o n c l u s i o n s e n t a i l s the use of p e r s p e c t i v e . G e n e r a l l y , a p e r s p e c t i v e i s an approach which a l l o w s f o r the o r d e r i n g and s o r t i n g of i n f o r m a t i o n . In e f f e c t , p e r s p e c t i v e i s a vantage p o i n t from which the observer can judge the v a l u e of i n f o r m a t i o n . Drawing c o n c l u s i o n s would be i m p o s s i b l e without t h i s advantage. F r e q u e n t l y , l e g a l r e s e a r c h e r s have i g n o r e d the p e r s p e c t i v e through which they s t r u c t u r e t h e i r work. They seem t o take the a t t i t u d e s and v a l u e s through which they v a l u e i n f o r m a t i o n f o r granted. The defence of c o n c l u s i o n s are o f t e n based on "sound l e g a l r e a s o n i n g and common sense". T h i s i s s h o r t hand f o r the i n v i s i b l e a p p l i c a t i o n of the r e s e a r c h e r ' s own p o i n t of view. T h i s approach s u f f e r s from a number of disadvantages. The most important i s t h a t without a known p e r s p e c t i v e i t may d i f f i c u l t t o compare c o n c l u s i o n s . 1 Another disadvantage i s t h a t i f p e r s p e c t i v e i s i g n o r e d the p e r s p e c t i v e i t s e l f cannot be s u b j e c t e d t o t e s t . . Coase, R.H. "Economics And Contiguous D i s c i p l i n e s " (1978), 7 J o u r n a l of L e g a l S t u d i e s 201, p. 203. 9 An a l t e r n a t i v e t o assuming the p e r s p e c t i v e used i n r e s e a r c h i s t o s e t the p e r s p e c t i v e up as a major p a r t of the r e s e a r c h p r o j e c t . That i s , the purpose of the r e s e a r c h i s as much the t e s t i n g of the p e r s p e c t i v e as i t i s the e x p l o r a t i o n of the s u b j e c t matter of the study. T h i s approach p r o v i d e s an o p p o r t u n i t y t o understand the e f f e c t o f p e r s p e c t i v e on r e s e a r c h c o n c l u s i o n s . F u r t h e r , the r e s e a r c h c o n c l u s i o n s may be compared t o o t h e r c o n c l u s i o n s which used the same p e r s p e c t i v e . There are a number of p e r s p e c t i v e s a v a i l a b l e t o the l e g a l r e s e a r c h e r . They i n c l u d e h i s t o r i c a l , l o g i c a l p s y c h o l o g i c a l and economic. Each p e r s p e c t i v e possesses i t s own s e t of advantages and disadvantages. The r e s e a r c h e r must choose the p e r s p e c t i v e which w i l l address the s e l e c t e d problems and p r o v i d e the d e s i r e d c o n c l u s i o n s . T h i s paper has chosen the economic p e r s p e c t i v e . The reason f o r t h i s i s t h a t the economic p e r s p e c t i v e possesses a g r e a t d e a l o f e x p l a n a t i v e power r e g a r d i n g p u r e l y commercial phenomenon. As w i l l be e x p l o r e d l a t e r i n t h i s chapter, the u n d e r l y i n g b a s i s of the approach p a r a l l e l s the assumed g o a l s of the commercial world. I t s p r i n c i p l e weakness of an i n a b i l i t y t o e x p l a i n the moral s i d e of the law has l i t t l e e f f e c t i n a commercial s e t t i n g . 10 B. The B a s i s of the Economic Approach The u n d e r l y i n g b a s i s of the economic approach i s t h a t law, i n i t s o p e r a t i o n and e f f e c t , i s governed by economic p r i n c i p l e s . Although t h e r e are numerous secondary assumptions, the c e n t r a l theme of the d i s c i p l i n e i s the concept o f economic e f f i c i e n c y . 3 Economics a p p l i e d t o law i s i n essence a study of the e f f i c i e n c y of l aw. 4 There are a t l e a s t t h r e e c r i t e r i a f o r e f f i c i e n c y , pareto, a l l o c a t i v e and k a l d o r - h i c k s . Each d e f i n e s a s t a t e which has the c h a r a c t e r i s t i c of maximized r e s o u r c e use. The c r i t e r i a are d i f f e r e n t because of the need t o account f o r d i f f e r e n t means o f a r r i v i n g a t the e f f i c i e n t s t a t e . 1. Pareto C r i t e r i o n The p a r e t o c r i t e r i o n was c r e a t e d t o a l l o w f o r q u a n t i t a t i v e comparisons between competing s t a t e s of u t i l i t y . 5 I t comprises t h r e e r e l a t e d concepts, the o p t i m a l , s u p e r i o r and i n f e r i o r s t a t e . 2. Murphy, J.G. and Coleman, J.L. The P h i l o s o p h y of Law.  An I n t r o d u c t i o n t o J u r i s p r u d e n c e . Totowa, New J e r s e y : Rowman & A l l a n h e l d , 1984, p. 212. 3 . S t i g l e r , G.J. The Theory of P r i c e . Rev. Ed. New York: MacMillan, 1952, pp. 148-149. 4. Murphy, supra, note 2, p.212. 5. Coleman, J.L. " E f f i c i e n c y , Exchange, And A u c t i o n : P h i l o s o p h i c a l Aspects of the Economic Approach t o Law" (1980), 68 C a l i f o r n i a Law Review 221, pp.225 and 231. 11 The o p t i m a l s t a t e i s t h a t s t a t e from which any improvement f o r one p a r t y w i l l cause a detriment t o another. Both l o g i c a l l y and p r a c t i c a l l y , o p t i m a l s t a t e s are not comparable on e f f i c i e n c y grounds. 7 T h i s i s because once the op t i m a l t h r e s h o l d i s reached, p o s i t i o n i s determined by i n t e r n a l d i s t r i b u t i o n which has no r e l e v a n c e f o r e f f i c i e n c y p u r p o s e s . 8 The comparative s t a t e s of p a r e t o s u p e r i o r and i n f e r i o r , a re d e f i n e d i n r e l a t i o n t o each o t h e r . The s u p e r i o r s t a t e i s any s t a t e which i s an improvement over a p r e v i o u s s t a t e f o r a t l e a s t one competitor and no competitor i s made worse o f f by the change. 9 The i n f e r i o r s t a t e i s one from which a s u p e r i o r s t a t e can a r i s e . The p o s i t i o n s are comparable i n t e r se i n t h a t the t o t a l v a l u e of the exchange i n c r e a s e s w i t h each s u p e r i o r move. Pareto s u p e r i o r moves are p o s s i b l e u n t i l the opt i m a l s t a t e i s reached. 2. A l l o c a t i v e E f f i c i e n c y C r i t e r i o n A l l o c a t i v e e f f i c i e n c y a l s o d e s c r i b e s the s t a t e o f maximized p r o d u c t i v e r e s o u r c e u s e . 1 0 I t i s the s t a t e from which any change would decrease the net aggregate v a l u e of a 6. Coleman, J.L. " E f f i c i e n c y , U t i l i t y , and Wealth M a x i m i z a t i o n " (1980), 8 H o f s t r a Law Review 509, pp.512-513. 7. I b i d , p. 513. 8 . Murphy, supra, note 2, pp. 218. 9. I b i d . 10. Coleman, supra, note 5, p. 222. 12 t r a n s a c t i o n . 1 1 Market models t e s t f o r a l l o c a t i v e e f f i c i e n c y . That i s , e q u i l i b r i u m s always r e p r e s e n t the p o i n t where two or more f o r c e s are counter balanced or m a x i m i z e d . 1 2 An a l l o c a t i v e e f f i c i e n t s t a t e i s by d e f i n i t i o n p a r e t o o p t i m a l . A c c o r d i n g t o P r o f e s s o r J u l e s Coleman, the o n l y d i f f e r e n c e between the two s t a t e s i s the absence i n the former o f a h i s t o r i c a l or comparative dimension. J 3. K a l d o r - H i c k s C r i t e r i o n A f a i l i n g o f both the p a r e t o and a l l o c a t i v e e f f i c i e n c y c r i t e r i a i s t h a t they do not account f o r i n v o l u n t a r y t r a n s f e r s . 1 4 The k a l d o r - h i c k s c r i t e r i o n was formulated f o r p r e c i s e l y t h a t s i t u a t i o n . The k a l d o r - h i c k s c r i t e r i o n h o l d s t h a t a d i s t r i b u t i o n i s e f f i c i e n t i f the g a i n of the b e n e f i t e d p a r t y exceeds the l o s s of a l l disadvantaged o n e s . 1 6 In o t h e r words, i f a p a r t y i s i n j u r e d by the o p e r a t i o n of law then the b e n e f i t s must be so g r e a t t h a t i n t h e o r y the i n j u r e d p a r t y c o u l d be compensated. 1 7 The s t a t e of k a l d o r - h i c k s e f f i c i e n c y 1 1 . I b i d . 38. S t i g l e r , supra, note 3, p. 33. 1 3 . Coleman, supra. note 5, p. 223. 14. Posner, R.A. Economic A n a l y s i s of Law, 3rd. ed. Boston: L i t t l e Brown, 1986, p. 14. 15. I b i d . 16. Murphy, supra, note 2, p. 218. 1 7 . T u l l o c k , G. "Two k i n d s of L e g a l E f f i c i e n c y " (1980), 8 H o f s t r a Law Review 659, p. 664 13 i s a p o t e n t i a l p a r e t o s u p e r i o r s t a t e i n t h a t the b e n e f i t e d p a r t y c o u l d d i s t r i b u t e h i s g a i n thus c r e a t i n g a pa r e t o s u p e r i o r s t a t e . 1 8 However, i t i s not necessary t h a t he do s o . 1 9 The k a l d o r - h i c k s c r i t e r i o n has the c a p a c i t y t o d e f i n e e f f i c i e n c y when market exchanges f a i l t o occur o r when the markets f a i l s t o operate e f f i c i e n t l y . P r o f e s s o r Coleman i n d i c a t e s t h a t t h e r e are onl y two o c c a s i o n s when k a l d o r - h i c k s e f f i c i e n c y i s j u s t i f i e d . The f i r s t i n v o l v e s weeding out i n e f f i c i e n t c ompetitors i n an e x i s t i n g m a r k e t . 2 0 For example, t h e r e i s no l e g a l e n t i t l e m e n t t o compensation f o r an i n f e r i o r c o m p e titor who has been d r i v e n out of b u s i n e s s . The second o c c a s i o n d e s c r i b e d by P r o f e s s o r Coleman i n v o l v e s c o r r e c t i o n of market f a i l u r e . 2 2 For example, t h e r e i s no l e g a l e n t i t l e m e n t t o compensation f o r monopolists once the impediments t o c o m p e t i t i o n have been removed. 2 3 The k a l d o r - h i c k s c r i t e r i o n c r e a t e s an a l l o c a t i v e e f f i c i e n t and p a r e t o optimal outcome because the f i n a l net p o s i t i o n cannot be changed without i n j u r i n g a t l e a s t one p a r t y . In o t h e r words, a k a l d o r - h i c k s s o l u t i o n g r a p h i c a l l y 18. Coleman, supra, note 5, p. 238. 19. I b i d . 2 0 . I b i d , p. 247. 2 1 . I b i d . 2 2 . I b i d . 2 3 . I b i d . 14 f a l l s on the optimal f r o n t i e r . S i n c e o p t i m a l s t a t e s are not comparable on e f f i c i e n c y grounds, any k a l d o r - h i c k s s t a t e i s as e f f i c i e n t as any a l l o c a t i v e e f f i c i e n t or p a r e t o o p t i m a l s t a t e s . C. The Role o f E f f i c i e n c y i n A n a l y s i s There are s e v e r a l reasons why e f f i c i e n c y t h e o r y p l a y s such a l a r g e r o l e i n economic a n a l y s i s . One reason i s based on the normative weight a t t a c h e d t o e f f i c i e n c y . The oth e r i s based on the apparent s i m i l a r i t y between r a t i o n a l human b e h a v i o r and the beh a v i o r necessary t o achieve an e f f i c i e n t s t a t e . The normative argument h o l d s t h a t e f f i c i e n c y i s a d e s i r a b l e s t a t e f o r s o c i e t y . 2 4 That i s , s o c i e t y b e n e f i t s i f the t o t a l amount of r e s o u r c e s a v a i l a b l e f o r d i s t r i b u t i o n i n c r e a s e s o r i s a t a maximum p o s i t i o n . The comparative p a r e t o s t a t e s d e f i n e i n c r e a s e s i n t o t a l r e s o u r c e s a v a i l a b l e f o r d i s t r i b u t i o n w h i l e the t h r e e o p t i m a l s t a t e s o f p a r e t o , a l l o c a t i v e and k a l d o r - h i c k s e f f i c i e n c y d e f i n e the p e r f e c t s t a t e . Even the k a l d o r - h i c k s c r i t e r i o n w i t h i t s obvious p e n a l t y t o one p a r t y i s a d e s i r a b l e s t a t e . The r a t i o n a l f o r t h i s i s based on an i n d i v i d u a l i s t i c i d e o l o g y . I t h o l d s t h a t i f an i n d i v i d u a l i s going t o be d e p r i v e d o f p r o p e r t y by s o c i e t y , i t 2 4 . Posner, R. A. "The Value of Wealth: A Comment on Dworkin and Kronman" (1980), 9 J o u r n a l o f Le g a l S t u d i e s 243, p. 247. 15 i s o n l y j u s t i f the net b e n e f i t t o s o c i e t y i s g r e a t e r than the co r r e s p o n d i n g l o s s t o the i n d i v i d u a l . 2 5 T h i s i s another way of s a y i n g t h a t o p t i m a l e f f i c i e n c y r e q u i r e s the maximization of r e s o u r c e s r e g a r d l e s s o f t h e i r i n t e r n a l d i s t r i b u t i o n . The b e h a v i o r a l ' j u s t i f i c a t i o n i s based on the o b s e r v a t i o n t h a t a common f e a t u r e o f human be h a v i o r i s the d e s i r e t o a c q u i r e r e s o u r c e s . Assuming r a t i o n a l i t y and f i n i t e r e s o u r c e s , human beings must compete among themselves. Thus, humans are c o m p e t i t i v e and r a t i o n a l and i n c o m p e t i t i o n w i l l always maximize t h e i r p o s i t i o n s . The l i m i t i n g f a c t o r t o a c h i e v i n g a maximization i s the a v a i l a b i l i t y o f i n f o r m a t i o n . That i s , i n a world where t h e r e are no s e c r e t s , every r a t i o n a l competitor w i l l pursue h i s p o s i t i o n t o i t s maximum. Si n c e e f f i c i e n c y d e f i n e s s t a t e s o f maximized p o s i t i o n s every time two or more i n d i v i d u a l s compete i n a s i t u a t i o n where access t o i n f o r m a t i o n i s not a t i s s u e , the outcome w i l l always be d e f i n e d as e f f i c i e n t . 2 6 Thus, t o an economist the b e h a v i o r a l c o n s t a n t i s s a f e l y assumed t o be r a t i o n a l maximization. z o . T u l l o c k , G. "Two Kinds o f Le g a l E f f i c i e n c y " 8 H o f s t r a Law Review 659, p. 664. 2 6 . Coase, R. " The Problem of S o c i a l Cost" (1960), 3 J o u r n a l o f Law and Economics 1, p. 7. 16 As we have seen, r a t i o n a l maximization i s t a u t o l o g i c a l w i t h two of the t h r e e d e f i n i t i o n s of e f f i c i e n c y . 2 7 K a l d o r -h i c k s e f f i c i e n c y i s o n l y s t a t e which has d i f f i c u l t y b e i n g d e f i n e d i n terms of r a t i o n a l maximization. T h i s i s because r a t i o n a l maximization assumes consent and no r a t i o n a l person would consent t o have p r o p e r t y taken from him without compensation. I t s j u s t i f i c a t i o n i s d e r i v e d i n s t a t e s where consent i s o v e r r i d d e n by the needs of s o c i e t y . D. Economic Theory and the L i m i t s of i t s Power o f E x p l a n a t i o n The apparent v u l n e r a b i l i t y of the economic approach l i e s i n i t s i n a b i l i t y t o e x p l a i n the j u s t i c e component of the law. To the e x t e n t t h a t t h i s i s t r u e , economic t h e o r y may be d i f f i c u l t t o r a t i o n a l i z e i n terms of j u s t i c e . The g i s t o f the argument i s whether e f f i c i e n c y and j u s t i c e are i n any way comparable. The concept of j u s t i c e i s e m p i r i c a l l y empty. I t cannot be q u a n t i f i e d nor can i t be e m p i r i c a l l y t e s t e d . 2 8 Rather, j u s t i c e o n l y d e s c r i b e s an emotive response t o an event. T h i s i s i l l u s t r a t e d by the common l e g a l d e f i n i t i o n of j u s t i c e as, "The c o n s t a n t and p e r p e t u a l d i s p o s i t i o n t o g i v e . Posner, supra, note 14, p. 3 and Coase, supra. note 1, 203. PR • . . . . Brenner, R., "Economics - An I m p e r i a l i s t S c i e n c e " (1980), 9 J o u r n a l of Legal S t u d i e s 179, p. 184. 17 every man h i s d u e . " 2 9 The components of u n i f o r m i t y of time and s u b j e c t treatment are q u a n t i f i a b l e and thus e m p i r i c a l l y meaningful. However, t h i s i s not t r u e f o r the component of what a man i s 'due'. In a world of f i n i t e r e s o u r c e s , d e c i d i n g what a man i s due i n v o l v e s a comparison between i n d i v i d u a l s . I t i s h i g h l y l i k e l y t h a t every i n d i v i d u a l has h i s own i d e a of what he i s due as w e l l as what o t h e r s are due. Given the c omplexity of the decision-making process, i t i s even d o u b t f u l t h a t a consensus e x i s t s i n s o c i e t y as t o how t o d e f i n e what a man i s due. T h i s i s c o n t r a s t e d w i t h the concept of e f f i c i e n c y . The concept of e f f i c i e n c y does not a s p i r e t o account f o r what a person i s due. E f f i c i e n c y d e f i n e s a q u a n t i f i a b l e s t a t e of e q u i l i b r i u m between two or more competing f o r c e s . I t e x i s t s i n a r e l a t i o n s h i p w i t h f o r c e s such t h a t a change i n one f o r c e , changes the p o i n t a t which e f f i c i e n c y i s a c h i e v e d . 3 1 Thus, j u s t i c e and e f f i c i e n c y are d i f f e r e n t types of concepts. E f f i c i e n c y d e s c r i b e s phenomena w h i l e j u s t i c e s t a t e s an emotive o p i n i o n of the speaker. I t i s c o n c e i v a b l e t h a t a person or an i d e o l o g y might h o l d t h a t an e f f i c i e n t r e s u l t i s a j u s t r e s u l t , but the r e v e r s e i s c e r t a i n l y not t r u e . Judge . B l a c k ' s Law D i c t i o n a r y . R e v . 4th Ed., West: St. Paul, Min., 1968, p.1002. 3 0 . Stewart, I.M.T. Reasoning and Method i n Economics An  I n t r o d u c t i o n t o Economic Methodology, London: McGraw-Hill, 1979, p. 143. 3 1 . I b i d . 18 Posner suggests t h a t i n e f f i c i e n c y i s m o r a l l y wrong i n a world of f i n i t e r esources.3 2 However, t h i s does not imply t h a t e v e r y t h i n g e f f i c i e n t i s m o r a l l y r i g h t . For example, no one would c o n s i d e r i t j u s t t h a t r i c h and p r o d u c t i v e people f l o u r i s h w h i l e poor un p r o d u c t i v e people s t a r v e . However, t h i s s i t u a t i o n may d e s c r i b e an e f f i c i e n t r e l a t i o n s h i p between competing p a r a m e t e r s . 3 3 The f a c t t h a t economics and j u s t i c e are incomparable sh o u l d not d e t r a c t from the v a l u e of the economic a n a l y s i s of law. A t h e o r y r a r e l y e x p l a i n s e v e r y t h i n g . I t remains v a l i d as l o n g as i t i s not superseded by another w i t h g r e a t e r e x p l a n a t o r y power. 3 4 However, i t i s e s s e n t i a l t o a p p r e c i a t e the e x p l a n a t o r y l i m i t s of a t h e o r y t o ensure t h a t c o n c l u s i o n s d e r i v e d from i t are p l a c e d i n t h e i r proper p e r s p e c t i v e . The i n a b i l i t y of economics t o e x p l a i n j u s t i c e does not pose any problem f o r the a n a l y s i s of r i s k r u l e s . T h i s i s because the p r i n c i p l e s of d i s t r i b u t i v e j u s t i c e would r a r e l y impact on the p u r e l y commercial arrangements between c o n t r a c t i n g p a r t i c i p a n t s i n the s a l e and arrangement of d e l i v e r y of goods. 51. Posner, R. A. "The Value of Wealth: A Comment on Dworkin and Kronman" (1980), 9 J o u r n a l of L e g a l S t u d i e s 243, a t p. 243. 55. P r o f e s s o r J u l e s Coleman r e c o g n i z e s t h i s p o i n t and d e s c r i b e s the dichotomy t h i s way: ... the economist sees the domain of e f f i c i e n c y as the s i z e of the "pie' 1 and the domain o f j u s t i c e or m o r a l i t y as the shape and d i s t r i b u t i o n of i t s pieces.(Murphy, supra, note 2, pp. 215.) 56. I b i d . 19 C o n t r a c t i n g p a r t i e s are presumed t o consent t o the d i s t r i b u t i o n a l c h a r a c t e r i s t i c s of t h e i r r e l a t i o n s h i p . Unless t h e r e i s a problem w i t h the consent of a p a r t y , j u s t i c e ought not t o e f f e c t the s e t t l e m e n t of a d i s p u t e . B e n e f i t s and c o s t s can be d i s t r i b u t e d ex ante a c c o r d i n g t o which p a r t y would have purchased the b e n e f i t or s o l d the c o s t a t the i n c e p t i o n of the t r a n s a c t i o n . 3 5 E. The Technique of Economic A n a l y s i s 1. The Role of Assumptions and the C r e a t i o n of Models Economic a n a l y s i s uses models t o e x p l a i n economic • 3 6 b e h a v i o r . ° A model i s a r e p r e s e n t a t i v e s i m p l i f i c a t i o n of a phenomenon, and thus p r e s e n t s i t s a b s t r a c t i o n . 3 7 The r e l a t i o n s h i p between t h e o r y and models i s complex and f r e q u e n t l y low l e v e l t h e o r i e s are expressed i n modular t e r m s . 3 8 As a g e n e r a l r u l e , a model i s l e s s a b s t r a c t than a t h e o r y and tends t o have g r e a t e r e m p i r i c a l c o n t e n t . 3 9 The key t o c r e a t i n g workable models i s t o s i m p l i f y the m odel 1s environment by making assumptions r e g a r d i n g matters not a t i s s u e . 4 0 Assumptions can be e i t h e r t h e o r y based, . Coleman, supra. note 5, pp. 2 42-2 49 57. Stewart, supra, note 30, p.197. 37. I b i d , p. 144. 38. I b i d , p. 197. 3 9 . I b i d . 40. I b i d , p.143. 20 r e f e r r e d t o as p o s t u l a t e s or a x i o m s , 4 1 or e m p i r i c a l l y d e r i v e d and simply r e f e r r e d t o as a s s u m p t i o n s . 4 2 The term assumption i s u s u a l l y used f o r a l l low l e v e l statements and the terms p o s t u l a t e or axiom are r e s e r v e d f o r h i g h e r l e v e l o n e s . 4 3 Because a model's c a p a c i t y t o produce r e a l i s t i c c o n c l u s i o n s i s based on i t s degree of e m p i r i c a l accuracy, i t i s important t o minimize d i s t o r t i o n o f the e m p i r i c a l world i n the model by the assumption-making p r o c e s s . 4 4 T h i s l e a v e s open the q u e s t i o n of whether a model's l e v e l o f r e a l i s m can be enhanced through the use of u n r e a l i s t i c a s s u m p t i o n s . 4 5 In s p i t e o f the r i s k o f d i s t o r t i o n , economics l i k e o t h e r s c i e n t i f i c d i s c i p l i n e s u t i l i z e s u n r e a l i s t i c assumptions which seem t o produce r e a l i s t i c c o n c l u s i o n s . 4 6 An e x p l a n a t i o n may be t h a t use of the u n r e a l i s t i c assumption may i n e f f e c t r e p r e s e n t a s h o r t - c u t through an e m p i r i c a l t h i c k e t t h a t the s c i e n c e i s too i m p r e c i s e t o p r o p e r l y address. 41. I b i d , p.136. 42. I b i d , p.135. 43. I b i d , p. 73. 44. P o l i n s k y , A.M. An I n t r o d u c t i o n t o Law and Economics. Boston: L i t t l e Brown, 1983, p. 4. 45. There i s an ongoing debate i n economic methodology l i t e r a t u r e r e g a r d i n g the v a l u e of u n r e a l i s t i c and unprovable assumptions i n model b u i l d i n g . ( S t e w a r t , supra, note 30, pp.132-136.). 46. Posner, supra, note 14, p.12, 21 a) E q u i l i b r i u m and Comparative S t a t i c s One of the most important assumptions i n economics i s the e x i s t e n c e o f e q u i l i b r i u m . E q u i l i b r i a are used t o s i m p l i f y the c o n c l u s i o n drawing process by p u t t i n g the model i n t o a s t a t i c s t a t e . 4 7 An e q u i l i b r i u m d e s c r i b e s a s t a t e from which t h e r e i s A fl no net tendency t o move. I t r e p r e s e n t s a balance between the v a r i o u s f o r c e s i n the model. For example, i n the t r a d i t i o n a l demand-supply model, an e q u i l i b r i u m i s reached when the p r i c e o f goods demanded equals the m a r g i n a l 4 9 c o s t 5 0 of t h e i r p r o d u c t i o n . The s u p p l i e r has no i n c e n t i v e t o i n c r e a s e p r o d u c t i o n when he w i l l l o s e money f o r every u n i t produced beyond the e q u i l i b r i u m p o i n t . L i k e w i s e , the consumer w i l l not purchase goods i f they are p r i c e d beyond t h e i r m a r g i n a l v a l u e t o him. A s t a t i c or e q u i l i b r i u m e x i s t s a t t h i s p o i n t . I t i s p o s s i b l e t o draw c o n c l u s i o n s from the model based on where the e q u i l i b r i u m i s e s t a b l i s h e d . For example, i n the above model i t i s p o s s i b l e t o determine the volume of goods which c o u l d be produced and consumed a t v a r i o u s c o s t s and p r i c e s . 47. Samuelson, P.A. Foundations of Economic A n a l y s i s , E n l . Ed., Cambridge: Harvard U n i v e r s i t y Press, 1983, p. 8. 48. S t i g l e r , s u p r a f note 3, p. 14. 49. M a r g i n a l i s a p e r s p e c t i v e on b e n e f i t o r l o s s which corresponds t o each a d d i t i o n a l u n i t as i t i s produced or consumed. (Murphy, supra, note 2, p. 219.) 5 0 . Cost means o p p o r t u n i t y c o s t which i s the b e n e f i t foregone by p a s s i n g up the next b e s t use of the r e s o u r c e . (Posner, supra, note 14, p. 6.) 22 Another purpose of the assumption of e q u i l i b r i u m s t a t e s i s t o f a c i l i t a t e comparisons between models. Models can be more c o n v e n i e n t l y compared i f they have the same dynamic s t a t u s . The p r o c e s s of comparing e q u i l i b r i u m s i s r e f e r r e d t o as comparative s t a t i c s . 5 2 The t r a n s i t i o n a l p r o c e s s from one s t a t e o f e q u i l i b r i u m t o another i s not e x p l i c a b l e by t h i s type of c o m p a r i s o n . 5 3 Instead, the c h a r a c t e r i s t i c s of the two or more e q u i l i b r i u m s t a t e s may a l l o w f o r c o n c l u s i o n s r e g a r d i n g the e f f e c t of m a n i p u l a t i o n of e i t h e r assumption or data. An example of the use of assumptions, models and comparative s t a t i c s i s the rancher-farmer d i s p u t e i n Coase's "The Problem of S o c i a l C o s t " . 5 5 Coase compares two models t o i l l u s t r a t e t h a t e x t e r n a l i t i e s 5 6 are i n t e r n a l i z e d 5 7 by market f o r c e s . 5 8 51. Stewart, supra. note 30, p.142. 52. S t i g l e r , supra. note 3, pp. 17-19. 53. Samuelson, supra. note 47, p. 8. 54. I b i d , p. 7. 55. Coase, R. " The Problem of S o c i a l Cost" (1960), 3 J o u r n a l of Law and Economics 1, pp. 2-8. 56. E x t e r n a l i t i e s are i n Coase's words "...those a c t i o n s of b u s i n e s s f i r m s which have harmful e f f e c t s on o t h e r s . " ( I b i d , p. 1.) That i s , e x t e r n a l i t i e s are a type o f e f f e c t produced by an a c t i v i t y which causes a r e d u c t i o n i n the v a l u e of another a c t i v i t y . (Demsetz, H. "When Does the Rule of L i a b i l i t y M a t t e r ? " (1972), 1 J o u r n a l of L e g a l S c i e n c e 13, p. 13.) 57. I n t e r n a l i z a t i o n o f an e x t e r n a l i t y means t o a l l o c a t e the v a l u e (negative) t o the p r i v a t e c o s t of the a c t i v i t y of i t s c r e a t i o n . 58. Coase, supra, note 55, pp. 2-8. 23 The models concern the economic r e l a t i o n s h i p between two c o m p e t i t o r s f o r l a n d use. The rancher uses h i s l a n d t o feed c a t t l e and the farmer uses h i s t o grow co r n . As t h e r e are no f e n c e s , the c a t t l e are f r e e t o wander over both p i e c e s of p r o p e r t y , but they a p p a r e n t l y p r e f e r t o remain on t h e i r master's p r o p e r t y u n t i l most of the good feed i s devoured. An i n c r e a s e i n the number of c a t t l e beyond the number which the r a n c h e r ' s l a n d w i l l c omfortably support causes the cows t o f i l l t h e i r excess demand f o r food a t the expense of the farmer's c o r n . The f i r s t model assumes t h a t the rancher i s r e s p o n s i b l e t o the farmer f o r a l l the damage caused by h i s marauding c a t t l e . The rancher p r o f i t s by each a d d i t i o n a l cow he m a i n t a i n s . However, a d d i t i o n a l cows cause a d d i t i o n a l damage. Coase p o s t u l a t e s t h a t the rancher w i l l not i n c r e a s e the s i z e of the herd beyond i t s p r o f i t a b l e l e v e l i n r e l a t i o n t o crop damage. . There i s an optimal number of cows which p r o v i d e s maximum p r o f i t i n s p i t e of having t o compensate the farmer. That p o i n t i s the balance between the rancher's p r o f i t and compensation margins or the e q u i l i b r i u m p o i n t i n the model. The second model assumes t h a t the rancher i s not r e s p o n s i b l e f o r any of the damage caused by h i s c a t t l e . That i s , no matter how much damage the cows cause the farmer, the rancher i s not r e q u i r e d by any r u l e t o compensate him. A l l o t h e r f a c t o r s are i d e n t i c a l t o the f i r s t model. The farmer 59. See below. 24 w i l l compensate the rancher f o r m a i n t a i n i n g the herd a t a l e v e l which p r o v i d e s the farmer wi t h the g r e a t e s t p r o f i t . T h i s p o i n t i s the p o i n t t h a t the marginal v a l u e o f an a d d i t i o n a l cow t o the rancher i s l e s s than the damage the farmer w i l l s u f f e r as a r e s u l t o f the a d d i t i o n . An e q u i l i b r i u m i s reached a t the p o i n t where the marginal v a l u e o f the a d d i t i o n a l cows equals the marginal damage dome t o the cor n . A comparison o f the two e q u i l i b r i u m p o i n t s i n d i c a t e s t h a t the p o i n t s are i d e n t i c a l . In oth e r words, i n a p e r f e c t market e x t e r n a l i t i e s would be i n t e r n a l i z e d by the b a r g a i n i n g between the p a r t i e s r e g a r d l e s s o f the o r i g i n a l a l l o c a t i o n o f r i g h t s . 6 0 Coase i n c o r p o r a t e s a number of assumptions i n the models t o e l i m i n a t e matters not a t i s s u e . Two examples are the e l i m i n a t i o n o f the e f f e c t of a decrease i n p r o d u c t i o n o f corn or cows on the p r i c e o f the commodity 6 1and the e l i m i n a t i o n of the e f f e c t o f the annual c o s t o f l a n d . 6 2 Both assumptions a f f e c t the e q u i l i b r i u m p o s i t i o n by changing the v a l u e o f the pro d u c t s from v a r i a b l e s t o c o n s t a n t s and making the c o s t o f l a n d n i l . N e i t h e r reduces the model's e f f i c a c y t o i l l u s t r a t e the phenomenon. T h i s i s because the v a l u e s o f the assumed 60. T h i s c o n c l u s i o n i s c o n d i t i o n a l upon the e x i s t e n c e o f a p e r f e c t market which e n t a i l s p e r f e c t knowledge, zero t r a n s a c t i o n c o s t s and c o o p e r a t i v e b a r g a i n e r s . 61. Coase, supra. note 55, p. 4. 62. I b i d . T h i s assumption i s made by assuming t h a t the l a n d i s owned by the farmer. 25 v a r i a b l e s are r e l a t i v e l y low i n r e l a t i o n t o v a r i a b l e s b e i n g t e s t e d i n the model. A more p r o b l e m a t i c assumption i s the e x i s t e n c e of zero t r a n s a c t i o n c o s t s . T r a n s a c t i o n c o s t s are o f t e n c r i t i c a l l y important i n n e g o t i a t i o n s . By e x c l u d i n g t h e i r e f f e c t , Coase h i g h l i g h t e d t h e i r i m p o r t a n c e . 6 3 T h i s i l l u s t r a t e s another use of assumptions i n models. 2. T h e o r e t i c a l P o s t u l a t e s or Axioms As i n d i c a t e d above, p o s t u l a t e s or axioms p l a y the r o l e of t h e o r e t i c a l assumption i n economic a n a l y s i s . That i s , p o s t u l a t e s are both l o g i c a l e x t e n s i o n s from t h e o r y 6 4 and g e n e r a l o b s e r v a t i o n s about the e m p i r i c a l w o r l d . 6 5 The use of p o s t u l a t e s and assumptions a s s i s t i n s i m p l i f y i n g the model b u i l d i n g process by promoting d i s t i n c t i o n between v a r i a b l e s which can be assumed and those which cannot. For example, i n the farmer-rancher model the p o s t u l a t e Coase assumed was t h a t n e i t h e r c o m petitor would a c t . P o l i n s k y , supra, note 44, p. 12. 64. Stewart, supra. note 30, p. 73. 65. I b i d , p. 136. [ P o s t u l a t e s can be t a u t o l o g i c a l l y r e l a t e d t o t h e o r y . These h i g h l e v e l statements are g e n e r a l l y c a l l e d theorems and are o n l y s u s c e p t i b l e t o e m p i r i c a l p r o o f under unusual c o n d i t i o n s . Or they can be c l o s e r t o the r e a l w orld i n which case they may be c a l l e d b e h a v i o r a l g e n e r a l i z a t i o n s or i n some cases simply "assumptions". Assumptions are open t o e m p i r i c a l p r o o f under most c o n d i t i o n s . A c c o r d i n g t o Samuelson, a meaningful theorem i s one which c o u l d be r e f u t e d under i d e a l c o n d i t i o n s . ( Samuelson, supra, note 47, p. 4.)] 26 i n a manner d e t r i m e n t a l t o t h e i r i n t e r e s t s . T h i s e l i m i n a t e s the need t o c o n s i d e r p s y c h o l o g i c a l elements, as w e l l as, h i g h l i g h t i n g the need t o t e s t f o r the maximum p o s i t i o n of each p a r t y . A number of important p o s t u l a t e s a re d e t a i l e d below. a) Competitive R a t i o n a l M a x i m i z a t i o n As i l l u s t r a t e d by the rancher-farmer model, economic a n a l y s i s u t i l i z e s a p o s t u l a t e o r assumption d e s c r i b i n g the m o t i v a t i o n a l c h a r a c t e r of the b a s i c b e h a v i o r a l u n i t o f the a n a l y s i s , which i s human beh a v i o r . Man i s t h e o r i z e d and • fi7 assumed t o be a r a t i o n a l maximizer o f wealth. A c c o r d i n g t o Posner and many o t h e r s , t h i s i s the c e n t r a l assumption i n economic a n a l y s i s o f l a w . 6 8 Without i t , any c o n c l u s i o n d e r i v e d from a model would be c o n t i n g e n t on the s p e c i f i c type of emotion d i s p l a y e d by the human s u b j e c t s . Arguably, a model's accuracy i s d i m i n i s h e d by making such a broad sweep of the whole range o f human emotions and i n t e l l e c t . In f a c t , the most p e r s u a s i v e c r i t i c i s m o f economic method i s i t s o v e r s i m p l i f i c a t i o n o f human b e h a v i o r . 6 9 Economists attempt t o overcome the apparent i n a c c u r a c y o f t h i s assumption by d e a l i n g w i t h phenomena o n l y a t the l e v e l of 66. Stewart, supra. note 30, p. 73. 67. I b i d , and S t i g l e r , supra. note 3, p. 148. 6 Q . Posner, supra, note 14, p. 3. 6 9 . Dworkin, R. M. "Is Wealth a Value?" (1980), 9 J o u r n a l of L e g a l S t u d i e s 191, p. 220, and L e f f , A. A. "Economic A n a l y s i s o f Law: Some Realism About Nominalism" (1974), 60 V i r g i n i a Law Review 451, p. 457. 27 a g g r e g a t e s . 7 0 N a t u r a l l y , t h i s means t h a t any c o n c l u s i o n s developed u s i n g t h i s assumption are onl y g e n e r a l statements 7 1 about b e h a v i o r . x Some w r i t e r s have p o i n t e d out t h a t r a t i o n a l maximization may i t s e l f have more than one dimension. A d i s t i n c t i o n must be made between s h o r t and l o n g term i n t e r e s t s . S t r a t e g i c b e h a v i o r i s a form o f l o n g term i n t e r e s t wherein the a c t o r l i n k s two or more t r a n s a c t i o n s t o promote improved b a r g a i n i n g p o s i t i o n i n the l a t e r t r a n s a c t i o n a t the expense of the former p o s i t i o n . 7 2 In oth e r words, i t may be both r a t i o n a l and r e s o u r c e maximizing t o a c t i r r a t i o n a l l y i n one t r a n s a c t i o n t o promote another. b) F i n i t e Resources and The Rule o f Resource G r a v i t a t i o n C l o s e l y a l i g n e d w i t h the assumption of r a t i o n a l m aximization are the assumptions o f f i n i t e r e s o u r c e s and re s o u r c e g r a v i t a t i o n . F i n i t e r e s o u r c e s means t h a t a l l r e s o u r c e s are s c a r c e and thus p a r t i e s compete f o r t h e i r a c q u i s i t i o n . The r u l e o f r e s o u r c e g r a v i t a t i o n h o l d s t h a t . Burrows, P. and V e l j a n o v s k i , G. The Economic  Approach t o Law. Toronto: Butterworths, 198 3, p.3, and S t i g l e r , supra, note 3, p. 149. 7 1 . S t i g l e r , I b i d . . Murphy, supra, note 2, p. 232. 28 r e s o u r c e s w i l l be a c q u i r e d by the p a r t y which v a l u e s them most.' From an e m p i r i c a l p o i n t of view, i t i s q u i t e obvious t h a t the q u a n t i t y of a l l r e s o u r c e i s f i n i t e . I t i s e q u a l l y obvious t h a t r e s o u r c e s tend t o go t o the p a r t y who i s w i l l i n g t o pay the most f o r them. In most cases t h a t p a r t y has the c a p a c i t y t o maximize the p r o f i t a b l e use of the r e s o u r c e . c) The Law of Supply and Demand The law of supply and demand ho l d s t h a t t h e r e i s an i n v e r s e r e l a t i o n s h i p between the p r i c e charged and q u a n t i t y demanded. 7 4 The r u l e expresses an obvious b e h a v i o r a l g e n e r a l i z a t i o n . The i n v e r s e r e l a t i o n s h i p of q u a n t i t y and p r i c e i s commonly i l l u s t r a t e d i n the r e a l w o r l d . 7 5 The t h e o r e t i c a l g e n e r a t i o n of the r u l e i s a l i t t l e more co m p l i c a t e d . The r u l e of supply and demand (as w e l l as many ot h e r economic r u l e s ) i s c o n t i n g e n t upon the e x i s t e n c e of a 7 market. A market i s a s p a t i a l and temporal event wherein 73. Value i s d e f i n e d as the p r i c e t h a t a p a r t y i s w i l l i n g t o pay f o r a r e s o u r c e . (Posner, supra. note 14, p. 11.) P r i c e i s the same as c o s t . Both are d e f i n e d i n terms of foregone o p p o r t u n i t y . That i s , "... the use of r e s o u r c e s f o r any purpose i n c u r s a c o s t which i s equal t o the v a l u e of the b e s t foregone a l t e r n a t i v e use." (Burrows, supra. note 70, p. 4.) 74. Posner, s u p r a f note 14, p. 5. 75. S t i g l e r , s u p r a f note 3, pp. 43-44. 76. For example, the Coase p o s t u l a t e . competing f o r c e s operate t o make exchanges. A p e r f e c t market oc c u r s whenever the f o r c e s operate i n such a way t o a l l o w f o r p e r f e c t l y simultaneous and c o n s i s t e n t exchange.' 0 The more r e p r e s e n t a t i v e a model i s t o a p e r f e c t market, the more p r e c i s e the o p e r a t i o n of i l l u s t r a t e d economic 7 Q p r i n c i p l e s . 3 In order t o e f f e c t a model of a p e r f e c t market, the elements of zero t r a n s a c t i o n c o s t s 8 0 and p e r f e c t knowledge • s i must be i n e x i s t e n c e . I f a model f a i l s t o a l l o w f o r exchanges, i t i s r e f l e c t i n g a s i t u a t i o n of a f a i l e d market which may be caused by i m p e r f e c t knowledge and/or e x c e s s i v e t r a n s a c t i o n c o s t s . W i t h i n t h i s context, the t h e o r e t i c a l b a s i s o f the r u l e may be e x p l a i n e d as f o l l o w s . S i n c e each decision-making u n i t i s a t t a i n i n g e f f i c i e n c y i n the market by a c t i n g i n a r e s o u r c e -maximizing manner, each u n i t a c q u i r e s the most r e s o u r c e s a t the l e a s t c o s t . The v a l u e of r e s o u r c e s i n t e r se i s a f u n c t i o n of t h e i r comparative s c a r c i t y . 8 2 That i s , as the q u a n t i t y of 77. S t i g l e r , supra, note 3, p. 55. 78. I b i d . 79. I b i d . 80. T r a n s a c t i o n c o s t s are r e s o u r c e s employed i n the p r o c e s s o f b a r g a i n i n g , o b t a i n i n g i n f o r m a t i o n and c o n c l u d i n g agreements. ( H i r s c h W.Z. Law and Economics An I n t r o d u c t o r y  A n a l y s i s , New York: Academic Press, 1979, p. 5.) 81. Coleman, supra, note 5. p. 223. 82. S t i g l e r , supra, note 3, p. 80. 30 one r e s o u r c e i n c r e a s e s , i t s v a l u e i n r e l a t i o n t o a s t a t i c r e s o u r c e decreases and v i c e v e r s a . J d) The Coase Theorem Ronald Coase i n 11 The Problem of S o c i a l Cost" i l l u s t r a t e d t h a t the f o r c e s o f a p e r f e c t market w i l l c r e a t e an a l l o c a t i v e e f f i c i e n t r e s u l t r e g a r d l e s s o f the i n i t i a l a l l o c a t i o n o f OA . r i g h t s o r any e x t e r n a l i t y . In the Coase a n a l y s i s , r i g h t s and e x t e r n a l i t i e s are e s s e n t i a l l y the same. Both r i g h t s and e x t e r n a l i t i e s i n f r i n g e on o t h e r people. E m p i r i c a l p r o o f of the p o s t u l a t e i s d i f f i c u l t owing t o the l a c k o f examples of p e r f e c t markets. However, Coase p o i n t s out t h a t the p o s t u l a t e can be i l l u s t r a t e d by l o o k i n g a t b u s i n e s s f i r m s . The g o a l o f a b u s i n e s s f i r m i s t o enhance i t s t o t a l a l l o c a t i v e e f f i c i e n c y . That i s , i t promotes a maximization of revenue w i t h a m i n i m i z a t i o n o f c o s t . 8 6 W i t h i n a f i r m which comprises a number of d i f f e r e n t and c o n f l i c t i n g a c t i v i t i e s , t he more v a l u a b l e a c t i v i t y w i l l purchase the r i g h t t o operate from the l e s s v a l u a b l e a c t i v i t i e s r e g a r d l e s s o f the 83. I b i d . 8 4 . Coase, supra, note 55, p. 16, 85. I b i d . 8 6 . I b i d . 31 f i r m ' s i n t e r n a l r u l e s t r u c t u r e . 7 The f i r m ' s d e s i r e f o r Q Q maximum p r o f i t a b i l i t y w i l l r e q u i r e t h i s b e h a v i o r . 0 0 T h i s p o s t u l a t e i s t a u t o l o g i c a l l y r e l a t e d t o a l l o c a t i v e e f f i c i e n c y and pa r e t o o p t i m a l i t y . 8 9 A l l o c a t i v e e f f i c i e n c y d e s c r i b e s the s t a t e o f maximum p r o d u c t i v e r e s o u r c e use. Competing f o r c e s i n a p e r f e c t market a f f e c t maximum res o u r c e use. Hence, p e r f e c t markets are always a l l o c a t i v e e f f i c i e n t . S i n c e e x t e r n a l i t y c a u s i n g a c t i v i t i e s are by d e f i n i t i o n i n e f f i c i e n t , such a c t i v i t i e s do not e x i s t i n p e r f e c t markets. e) The R e c i p r o c a l R e l a t i o n s h i p Between R i g h t s and Du t i e s An e s s e n t i a l element of the Coase theorem i s the p o s t u l a t e t h a t r i g h t s and d u t i e s are r e c i p r o c a l . 9 0 The t h e o r e t i c a l support f o r the r e l a t i o n s h i p a r i s e s by d e f i n i t i o n . Every r i g h t i m p l i e s a c o r r e s p o n d i n g duty. The e m p i r i c a l p o i n t i s i l l u s t r a t e d i n Coase's a n a l y s i s o f the rancher/farmer model 87. I b i d . o o , °. Coase's p o i n t i s advanced by P r o f e s s o r C.R. Knoeber's a r t i c l e c o n c e r n i n g the e f f e c t s of v e r t i c a l i n t e g r a t i o n . Knoeber suggests t h a t v e r t i c a l l y i n t e g r a t e d r e l a t i o n s h i p s e l i m i n a t e the need f o r law. Instead, the v e r t i c a l l y i n t e g r a t e d s t r u c t u r e i t s e l f ensures an e f f i c i e n t r e l a t i o n s h i p between competing a c t i v i t i e s . (Knoeber, C.R. "An A l t e r n a t i v e Mechanism To Assure C o n t r a c t u a l R e l i a b i l i t y " (198 3), 12 J o u r n a l o f Le g a l S t u d i e s 333, pp. 333-4.) P r o f e s s o r C a l a b r e s i p o i n t s out t h a t v e r t i c a l i n t e g r a t i o n i s merely a restatement of the coase theorem. ( C a l a b r e s i , G. & Melamed, D. "Property R i g h t , L i a b i l i t y , Rules and I n a l i e n a b i l i t y : One View of the C a t h e d r a l " (1972), 85 Harvard Law Review 1089, p. 1095.) 89. Coleman supra, note 5, p. 225. 90. See Coase, supra, note 55, pp. 2 and 13. 32 d i s c u s s e d above. Coase viewed e x t e r n a l i t i e s as caused by both p a r t i c i p a n t s . 9 1 I f corn was not grown or c a t t l e not r a i s e d , t h e r e would be no nuisance. Both are e q u a l l y r e s p o n s i b l e f o r the harm. 9 2 F. The C o n t r a c t Paradigm 1. The F u n c t i o n of C o n t r a c t Law The f u n c t i o n of c o n t r a c t law i s t o enhance the e f f i c i e n c y of exchanges of goods and s e r v i c e s . 9 3 E f f i c i e n c y i n t h i s sense means t h a t goods and s e r v i c e s are both t r a n s f e r r e d t o t h e i r most v a l u e d uses and t h a t the exchange i s completed i n an e f f i c i e n t manner. 9 5 An e f f i c i e n t c o n t r a c t i m p l i e s t h a t the v a l u e s exchanged are both e q u i v a l e n t and c o n f i g u r e d i n d i f f e r e n t f o r m s . 9 6 That i s , the exchange v a l u e of a r e s o u r c e may i n c l u d e items such as r i s k 9 7 and i n f o r m a t i o n . 9 8 For example, a c o n t r a c t f o r 91. I b i d , p. 13. 92. I b i d . . P o l i n s k y , supra. note 44, p. 118. 9 4 . Posner, supra, note 14, pp. 106-108. . Posner, A. and R o s e n f i e l d , A.M. " I m p o s s i b i l i t y and R e l a t e d D o c t r i n e s i n C o n t r a c t Law: An Economic A n a l y s i s " (1977), 6 J o u r n a l of Legal S t u d i e s 83, p. 88. 9 6 . I b i d , pp. 83-84. 9 7 . I b i d , p. 91. . Kronman, A.T. "Mistake, D i s c l o s u r e , Information, and the Law of C o n t r a c t s " (1978), 7 J o u r n a l of L e g a l S t u d i e s 1, p. 14. 33 the s a l e o f goods t o be exchanged i n the f u t u r e i n v o l v e s the r i s k t h a t the v a l u e of the goods may change p r i o r t o d e l i v e r y . N a t u r a l l y , a change i n v a l u e w i l l b e n e f i t one p a r t y a t the expense of the ot h e r . In every exchange the i n f o r m a t i o n and r i s k components are t r a d e d a l o n g w i t h the goods. 3 The v a l u e of a r i s k about the f u t u r e can be c a l c u l a t e d by m u l t i p l y i n g the a n t i c i p a t e d l o s s times the p r o b a b i l i t y o f i t s o c c u r r e n c e . 1 0 0 I n f o r m a t i o n about the p r e s e n t and f u t u r e v a l u e o f the goods i s l i k e w i s e accounted f o r i n the c o n t r a c t . In s a l e s o f goods such i n f o r m a t i o n i s o f t e n i n the form of a warranty t h a t the goods w i l l meet a c e r t a i n e x p e c t a t i o n i n the f u t u r e . C o n t r a c t law promotes the e f f i c i e n c y o f exchanges i n a number of d i f f e r e n t ways. F i r s t , i t tends t o a l l o w the enforcement of o n l y e f f i c i e n t e x c h a n g e s . 1 0 1 I n e f f i c i e n t exchanges are p e n a l i z e d and the be h a v i o r d i s c o u r a g e d . For example, a c o n t r a c t w i l l not be e n f o r c e d a c c o r d i n g t o i t s terms when one or both p a r t i e s are s u f f i c i e n t l y mistaken about the s u b j e c t matter o r c o n d i t i o n s so t o r a d i c a l l y change the b a r g a i n made by p a r t i e s . 1 0 2 In t h i s example, c o n t r a c t law Q Q , 3 . Barton, J.H. " The Economic B a s i s o f Damages f o r Breach o f C o n t r a c t " (1972), 1 J o u r n a l o f Le g a l S t u d i e s 277, p. 278. 1 0 ° . Posner and R o s e n f i e l d , supra. note 95, p. 88. 1 0 1 . I b i d , p. 4, 1 0 2 . Bishop, W. "The C o n t r a c t - T o r t Boundary and the Economics of Insurance" (1983), 12 J o u r n a l of L e g a l S t u d i e s 241, pp. 253-255. 34 s e t s a l i m i t on a l l o w a b l e i n f o r m a t i o n e r r o r which ought t o encourage the a c q u i s i t i o n and s h a r i n g of i n f o r m a t i o n e s s e n t i a l t o the b a r g a i n . Second, c o n t r a c t law p r o v i d e s an o p t i o n a l s e t of d e f a u l t terms which the p a r t i e s may or may not i n c o r p o r a t e i n t h e i r c o n t r a c t s . R e l i a n c e on the terms reduces the c o s t of c o n t r a c t i n g by s a v i n g both the time spent a c q u i r i n g i n f o r m a t i o n and the time spent b a r g a i n i n g . 1 0 4 These d e f a u l t terms may be i n c o r p o r a t e d by c h o i c e or by a f a i l u r e t o c o n t r a c t out of the e x i s t i n g law. The assumption of r a t i o n a l maximization h o l d s t h a t p a r t i e s w i l l use the d e f a u l t terms c o n t a i n e d i n the law as l o n g as t h e i r use promotes e f f i c i e n t r e s u l t s . N a t u r a l l y , t h i s p r o p o s i t i o n assumes t h a t the p a r t i e s possess s u f f i c i e n t i n f o r m a t i o n about the terms of the law t o make t h a t judgement. T h i r d , c o n t r a c t law p r o v i d e s the framework f o r ex post r e s o l u t i o n of d i s p u t e s by t r i b u n a l s . 1 0 5 Thus, i n e f f i c i e n t exchanges due t o i n f o r m a t i o n e r r o r s can be c o r r e c t e d by ex p o s t adjustment of the agreement. P r o v i s i o n s which i n c o r p o r a t e o b j e c t i v e t e s t s are good examples of the s t r u c t u r i n g p r o v i d e d by c o n t r a c t law. ± { J J . H i r s c h , supra, note 80, p. 8. 1 0 4 . P o l i n s k y , supra. note 44, p. 27. 1 0 5 . Rea, S. A. " E f f i c i e n c y I m p l i c a t i o n s o f P e n a l t i e s and L i q u i d a t e d Damages" (1984), 13 J o u r n a l of L e g a l S t u d i e s 147, pp. 148-149. 35 2. The F u n c t i o n Of C o n t r a c t s The c o n t r a c t d e v i c e a l l o w s people t o c l a r i f y e x p e c t a t i o n s and d e c i d e i n advance how t o r e s o l v e p o t e n t i a l d i s p u t e s . u o Assuming p e r f e c t i n f o r m a t i o n , a d e d u c t i v e c o n c l u s i o n of the r a t i o n a l maximization assumption i s t h a t p a r t i e s w i l l chose c o n t r a c t p r o v i s i o n s which appear ex ante t o enhance 1 07 e f f i c i e n c y . Hence, c o n t r a c t s t o the e x t e n t of s p e c i f i c a t i o n and p e r f e c t knowledge are guaranteed t o be e f f i c i e n t . 1 0 8 However, s i n c e the c o s t of s p e c i f y i n g numerous c o n t i n g e n c i e s i s v e r y high, few c o n t r a c t s approach t h i s p r e c i s i o n . 3 Moreover, i t i s t h e o r e t i c a l l y i m p o s s i b l e t o account ex ante f o r a l l p o s s i b l e c o n t i n g e n c i e s . Consequently, c o n t r a c t i n g p a r t i e s n e c e s s a r i l y r e l y t o a l a r g e p a r t on the d e f a u l t terms p r o v i d e d by c o n t r a c t law t o f i l l out t h e i r e x c h a n g e s . 1 1 0 1 0 6 . P o l i n s k y , supra. note 44, p. 25. 1 0 7 . I b i d , p. 31. 1 0 8 . I b i d , p. 29. 1 0 9 . I b i d , p. 25. 1 1 0 . I b i d . 36 G. C o n t r a c t A n a l y s i s 1. G e n e r a l l y The purpose of economic a n a l y s i s i s t o t e s t f o r e f f i c i e n c y . The common f e a t u r e of a l l the d e f i n i t i o n s of e f f i c i e n c y i s the maximization of the t o t a l v a l u e o f the exchange i r r e s p e c t i v e of i n d i v i d u a l success. S u b j e c t t o p e r f e c t knowledge, i n d i v i d u a l success i s accorded by the r a t i o n a l maximization presumption. Because the a c t of c o n t r a c t i n g d i s t r i b u t e s the r i s k of an exchange, the e f f i c i e n c y of a c o n t r a c t or o f c o n t r a c t law can be measured by comparing models of r i s k c o n f i g u r a t i o n s . T h i s method o f t e s t i n g f o r e f f i c i e n c y i s r e f e r r e d t o as r i s k a n a l y s i s . 2. R i s k A n a l y s i s The c o m p e t i t i o n between p a r t i e s t o assume r i s k f o r the h i g h e s t p r i c e o r pass i t on f o r the l e a s t c o s t f a c i l i t a t e s c o n t r a c t u a l e f f i c i e n c y . 1 1 1 The v a l u e t h a t a p a r t y p l a c e s on a r i s k i s dependent upon t h a t p a r t y ' s r e l a t i v e a v e r s i o n t o 11 2 i t . " - That i s , assuming p e r f e c t i n f o r m a t i o n , the p a r t y w i t h the l e a s t concern over the l i k e l i h o o d of the occurrence of the r i s k e d event or of i t s consequences w i l l accept the r i s k a t the lowest c o s t . . Posner and R o s e n f i e l d , supra. note 95, p. 88. . P o l i n s k y , supra, note 44, p. 119. 37 T h i s p a r t y who w i l l charge the l e a s t f o r assuming a r i s k has the s u p e r i o r c a p a c i t y t o e i t h e r the prevent the occurrence of the r i s k or i n s u r e a g a i n s t i t s consequences. Thus, an e f f i c i e n t exchange r e q u i r e s t h a t the most e f f i c i e n t p r e v e n t e r o r i n s u r e r ought t o bear r e s p o n s i b i l i t y f o r t h a t s p e c i f i c r i s k . 1 1 3 The s u p e r i o r p r e v e n t e r i s the p a r t y w i t h the most c o n t r o l over the r i s k e d e v e n t . 1 1 4 In the s a l e of goods s e t t i n g , t h a t means the p a r t y w i t h p o s s e s s i o n of the goods or c o n t r o l over the person w i t h p o s s e s s i o n . In any case the p a r t y who i s n e i t h e r i n p o s s e s s i o n nor i n c o n t r o l has l i t t l e o p p o r t u n i t y t o ensure t h a t r i s k e d events do not occur. A s u p e r i o r i n s u r e r i s a p a r t y b e s t a b l e t o absorb the c o s t s of the occurrence of the r i s k e d e v e n t . 1 1 5 The s u p e r i o r i n s u r e r has the b e s t a b i l i t y t o determine the p r o b a b i l i t y and magnitude o f the event and t o d i s t r i b u t e the expected l o s s . 1 1 6 Posner and R o s e n f i e l d p o i n t out t h a t i n the event of c o n f l i c t between the two parameters of s u p e r i o r p r e v e n t e r and i n s u r e r , the r i s k s hould be a l l o c a t e d a c c o r d i n g t o the e m p i r i c a l importance of the parameter. However, i n most Kronman, supra, note 98, p. 9. Posner, supra, note 14, p. 45. Posner and R o s e n f i e l d , supra, note 95, p. 90. I b i d . I b i d , p. 102. 113 m 1 1 4 . 115^ 1 1 6. 117 38 cases, r i s k would be a l l o c a t e d t o the s u p e r i o r r i s k a v o i d e r as common sense d i c t a t e s p r e v e n t i o n i s more e f f i c i e n t than i n s u r a n c e . Moreover, i n s a l e of goods t r a n s a c t i o n s many r i s k s are not i n s u r a b l e . A c c o r d i n g t o r i s k a n a l y s i s , a c o n t r a c t ought not t o be e n f o r c e d i f the promisor (the p a r t y guaranteeing the performance) i s l e s s a b l e than the promisee t o perform the 11 ff • • o b l i g a t i o n . The reason f o r t h i s i s t h a t a c o n t r a c t ceases t o be e f f i c i e n t when the promisee i s the s u p e r i o r r i s k b e a r e r . 1 1 9 O b v i o u s l y , a promisor's informed express acceptance of the r i s k of performance should be e n f o r c e d . 1 2 0 However, as s t a t e d a t the o u t s e t , expressed terms are assumed t o be e f f i c i e n t and thus t h i s s i t u a t i o n i s not l i k e l y t o occur without the occurrence of an i n f o r m a t i o n e r r o r by the promisor. From the p o i n t of view of r i s k t o goods i n t r a n s i t , a l e g a l regime i s e f f i c i e n t i f i t a l l o c a t e s r i s k t o the p a r t y l e a s t adverse t o i t . T h i s formula i s j u s t i f i e d by l o o k i n g a t i t i n terms of l e g a l c l a r i t y and c o n f o r m i t y t o commercial p r a c t i c e and the r e d u c t i o n of a v o i d a b l e l o s s e s . 1 1 8 . I b i d . 1 1 9 . I b i d , p. 90. 1 2 ° . I b i d , p.98. 39 a) C l a r i t y and Conformity t o Common E x p e c t a t i o n In a s h o r t statement, c l a r i t y i n a law means t h a t the r i s k s a l l o c a t e d by the law are d i s c e r n a b l e i n advance. C l o s e l y a s s o c i a t e d w i t h t h a t i s t h a t knowledge of the law's a l l o c a t i o n o f r i s k i s synonymous wit h c o n f o r m i t y t o common e x p e c t a t i o n . O b v i o u s l y , w i t h enough l e g a l r e s e a r c h almost any s e t o f laws becomes c l e a r . However, the t r u l y c l e a r law i s one which conforms t o common e x p e c t a t i o n and thus saves the c o s t o f the l e g a l r e s e a r c h . 1 2 1 The common e x p e c t a t i o n i s t h a t the p a r t y w i t h the lowest insurance c o s t should bear the a s s o c i a t e d r i s k . Insurance c o s t s are measured i n terms of knowledge of the r i s k s ( p r o b a b i l i t y and c o s t ) , a b i l i t y t o prevent the r i s k from o c c u r r i n g and an a b i l i t y t o d i v e r s i f y the c o s t s o f b e a r i n g the r i s k . 1 2 3 I f t he p a r t i e s are aware from the onset o f who bears what r i s k then t h e r e i s l e s s o f a chance o f i n a c c u r a t e p r i c i n g . That i s , the p a r t y who knowingly bears a r i s k stands a b e t t e r chance o f r e c o v e r i n g i t s c o s t ex ante than he would i f the r i s k was not d i s c o v e r e d u n t i l i t m a n i f e s t e d i t s e l f . . Note, "Risk o f Loss i n Commercial T r a n s a c t i o n s : E f f i c i e n c y Thrown Into the Breach" (1979), 65 V i r g i n i a Law Review 557, p. 557. 1 2 2 . I b i d , p.558. 1 2 3 . Bishop, W. "The C o n t r a c t - T o r t Boundary and the Economics o f Insurance" (1983), 12 J o u r n a l o f L e g a l S t u d i e s 241, p. 257. 40 A l t e r n a t i v e l y , i f the p a r t y b e a r i n g the r i s k i s more r i s k adverse, then he can exchange the r i s k as p a r t o f the o v e r a l l n e g o t i a t i o n . The most e f f i c i e n t r i s k b e a r e r would f i n d i t i n h i s i n t e r e s t t o assume the r i s k f o r a c o s t which exceeds h i s c o s t s o f assumption but i s l e s s than the opposing p a r t y ' s c o s t . I f n e i t h e r p a r t y i s s u f f i c i e n t l y r i s k n e u t r a l t o absorb the r i s k , the p a r t y a l l o c a t e d the r i s k s hould have s u f f i c i e n t knowledge t o make an e f f i c i e n t purchase of i n s u r a n c e . 1 2 4 b) Reduction of A v o i d a b l e Losses The g o a l of p r e v e n t i n g l o s s i s s u p e r i o r t o i n s u r i n g a g a i n s t i t s o c c u r r e n c e . 1 2 5 P r e v e n t i n g a v o i d a b l e l o s s e s has s e v e r a l a s p e c t s . The f i r s t aspect i s t h a t o v e r a l l l o s s e s w i l l be reduced i f the person i n c o n t r o l of the goods i s r e s p o n s i b l e f o r t h e m . 1 2 6 Making the p a r t y i n c o n t r o l of the goods r e s p o n s i b l e f o r t h e i r s a f e t y combines both the a b i l i t y and the i n c e n t i v e t o p r o t e c t the goods i n one p a r t y . The second aspect i s t h a t the p a r t y who i s the s u p e r i o r m i t i g a t o r ought t o bear r e s p o n s i b i l i t y f o r any l o s s . 1 2 7 The most e f f i c i e n t l o s s m i t i g a t o r i s a l s o the s u p e r i o r p r e v e n t e r . Note, "Risk of Loss i n Commercial T r a n s a c t i o n s : E f f i c i e n c y Thrown Into the Breach" supra, note 121, p. 558. 1 2 5 . Bishop, supra, note 101, p. 257. . Note, "Risk of Loss i n Commercial T r a n s a c t i o n s : E f f i c i e n c y Thrown Into the Breach" supra, note 121, p. 560. 1 2 7 . Posner, supra, note 14, p. 108. o f a v o i d a b l e l o s s e s which a r i s e a f t e r the goods are damaged or l o s t . The t h i r d a spect i s t h a t i f performance of the c o n t r a c t r e s u l t s i n a p a r t y i n c u r r i n g a l o s s , then t h a t p a r t y ought t o be a b l e t o t e r m i n a t e performance without e i t h e r p a r t y s u f f e r i n g a d i s p r o p o r t i o n a t e share o f l o s s . The c o s t s of breach cannot exceed an amount which a p p r o p r i a t e l y compensates the p r o m i s e e . 1 2 8 . Barton, J.H. " The Economic B a s i s o f Damages f o r Breach o f C o n t r a c t " (1972), 1 J o u r n a l of L e g a l S t u d i e s 277, p. 278. 42 CHAPTER THREE THE TRANSIT ENVIRONMENT A. Commercial S a l e s I n v o l v i n g an Arrangement of D e l i v e r y by the S e l l e r In a s a l e and arrangement of d e l i v e r y c o n t r a c t the s e l l e r undertakes t o arranges t r a n s p o r t a t i o n of the goods t o the 1 O Q buyer and d e l i v e r s the goods t o the f i r s t c a r r i e r . The buyer u s u a l l y pays f o r the c a r r i a g e and the i n s u r a n c e coverage •i i n f o r the goods. In most cases the buyer does not see the goods u n t i l they a r r i v e a t h i s l o c a t i o n . J J-W i t h i n the scope of the standard commercial s a l e i n v o l v i n g a s a l e and arrangement of d e l i v e r y t h e r e are a number of p o s s i b l e arrangements f o r the d i s t r i b u t i o n o f r e s p o n s i b i l i t y . They range from the s e l l e r a c c e p t i n g the t o t a l r e s p o n s i b i l i t y f o r t r a n s p o r t a t i o n t o the s e l l e r a c c e p t i n g none. In most cases the p a r t i e s agree on a d i v i s i o n o f r i s k . F r e q u e n t l y t h i s d i v i s i o n o f r i s k i s f a c i l i t a t e d thought the i n s e r t i o n of a t r a d e term i n t o the c o n t r a c t . 1 3 2 1 OO x * . Sassoon, David M. C.I.F. and F.O.B. C o n t r a c t s 2nd. ed. London: Stevens & Son, 1975, p. 310. 1 3 ° . I b i d . 1 3 1 . Hoyle, Mark S. The Law of I n t e r n a t i o n a l Trade. 2nd ed. London: C. C. H. E d i t i o n s , 1985, pp. 18-22. 1 3 2 . S c h m i t t h o f f , C l i v e M. The Export Trade. 8th. ed., London: Stevens & Sons, 1986, p. 6. 43 However, c o n t r a c t s r a r e l y account f o r a l l the r i s k o f t r a n s i t . Moreover , t h e r e may be o c c a s i o n s when the c o n t r a c t i s c o m p l e t e l y s i l e n t on r i s k . When e i t h e r o f t h e s e two events o c c u r , t h e r i s k i s a l l o c a t e d a c c o r d i n g t o t h e d e f a u l t p r o v i s i o n s c o n t a i n e d i n the r e l e v a n t d o m e s t i c l a w . 1 3 3 B. Methods o f T r a n s p o r t a t i o n Buyers and s e l l e r s t e n d t o t r a n s p o r t goods by the l e a s t e x p e n s i v e means a v a i l a b l e . G e n e r a l l y , the lower the c o s t , the g r e a t e r t h e s t r e s s on the g o o d s . F o r example , s h i p s a r e l e s s e x p e n s i v e t h a n a i r c r a f t but they a re s l o w e r and t h e i r passages more a r d u o u s . The roughness o f t h e sea t a k e s i t s t o l l on c a r g o . In s p i t e o f the r i s k s o c c a s i o n e d by ocean t r a n s p o r t a t i o n i t i s the most common means o f t r a n s p o r t i n g goods l o n g d i s t a n c e s . 1 3 4 T r u c k s o r r a i l t r a n s p o r t i s f r e q u e n t l y used t o ge t the goods t o the dock f o r l o a d i n g on t o the ocean v e s s e l . A t the p o i n t o f d e p a r t u r e o r some p o i n t d u r i n g the t r a n s i t the goods may be l o a d e d i n t o c o n t a i n e r s and the goods w i l l remain i n c o n t a i n e r s f o r a p e r i o d o f the t r a n s i t . . The n a t i o n a l i t y o f the r e l e v a n t d o m e s t i c i s d e t e r m i n e d a c c o r d i n g t o the d o m e s t i c r u l e s o f p r i v a t e i n t e r n a t i o n a l law. The e f f e c t o f p r i v a t e i n t e r n a t i o n a l law w i l l be b r i e f l y d i s c u s s e d l a t e r i n the p a p e r . 1 3 4 . I b i d , p . 8. 44 In some cases the method of t r a n s p o r t a t i o n may s w i t c h - I O C back and f o r t h between t r u c k , r a i l and ocean v e s s e l . For example, goods may be loaded on a t r u c k i n Surrey, Great B r i t a i n d e l i v e r e d t o an ocean v e s s e l i n South Hampton and loaded i n t o a c o n t a i n e r a t the dock s i d e . From t h e r e the goods are shipped by ocean v e s s e l t o H a l i f a x where they are o f f loaded and removed from the c o n t a i n e r . The goods may then be loaded back on a t r u c k f o r an a c r o s s Canada t r i p t o Vancouver. In Vancouver the goods c o u l d be loaded back on t o a s h i p f o r t r a n s p o r t t o a d e s t i n a t i o n i n A s i a . C. C o n t r a c t u a l Events A s a l e l i k e any o t h e r b u s i n e s s p r o j e c t i n v o l v e s a sequence of events s t a r t i n g w i t h the making o f the c o n t r a c t and c o n c l u d i n g w i t h the e x p i r a t i o n of the v a r i o u s l i m i t a t i o n p e r i o d s . There are a number of events which occur a l o n g the c r i t i c a l p ath o f every s a l e . Some of these events are p h y s i c a l and some are n o n p h y s i c a l . The c r i t i c a l p h y s i c a l events which occur i n s a l e s are the i d e n t i f i c a t i o n , p r e p a r a t i o n f o r d e l i v e r y , d e l i v e r y and i n s p e c t i o n o f the goods by the buyer. The n o n p h y s i c a l events are the passage of p r o p e r t y , the passage of r i s k and the a c t of the buyer's acceptance. . See g e n e r a l l y , Holloway, I. C. "Troubled Waters: The L i a b i l i t y o f a F r e i g h t Forwarder as a P r i n c i p a l under Anglo-Canadian Law" (1986), 17 J o u r n a l of Maritime Law and Commerce 243 . 45 1. P h y s i c a l E v e n t s In t h e c o u r s e o f the normal s a l e o f g o o d s , the buyer p l a c e s an o r d e r w i t h the s e l l e r . T h i s l e a v e s i t up t o the s e l l e r t o s e l e c t the goods w i t h which t o f i l l t h e o r d e r . I d e n t i f i c a t i o n o c c u r s by the s e l l e r s ' a c t o f s e p a r a t i n g the 1 T 7 goods from a b u l k by mark ing o r a r r a n g i n g o f s t o r a g e . Once t h e goods a r e i d e n t i f i e d , the s e l l e r w i l l p r e p a r e them f o r d e l i v e r y . T h i s may i n v o l v e c o m p l e t i n g t h e m a n u f a c t u r i n g and p a c k a g i n g the goods f o r the i n t e n d e d v o y a g e . As p a r t o f t h i s s t e p t h e s e l l e r may a d j u s t t h e goods l e v e l o f d u r a b i l i t y t o the a n t i c i p a t e d r i g o r s o f t h e i n t e n d e d v o y a g e . The nex t p h y s i c a l s t e p on t h e c r i t i c a l p a t h i s d e l i v e r y . F r e q u e n t l y , t h e a c t o f d e l i v e r y has n o t h i n g t o do w i t h p u t t i n g t h e buyer i n a c t u a l p o s s e s s i o n o f the g o o d s . I n s t e a d , i n the most common c a s e the s e l l e r s i m p l y p u t s the goods on b o a r d the method o f t r a n s p o r t a t i o n chosen by the p a r t i e s and n o t i f i e s t h e buyer o f t h a t f a c t . 1 3 8 The s i g n i f i c a n c e o f the event i s t h a t i t d e t e r m i n e s when c o n f o r m i t y o f the goods t o the c o n t r a c t i s j u d g e d . 1 3 9 X J . S a s s o o n , s u p r a , note 1, p. 203. 1 3 V . I b i d . 1 3 8 . S c h m i t t h o f f , C l i v e M. The S a l e o f Goods. 2nd. e d . London: S tevens & S o n s , 1966, p . 2 07. 1 3 9 . I b i d . 46 Even i f i n s p e c t i o n occurs a t a l a t e r time, d e f e c t s i n the goods must have e x i s t e d a t the p o i n t of d e l i v e r y . A buyer's c a p a c i t y t o r e j e c t the s e l l e r ' s performance i s determined by the s t a t e o f the goods as a t the time of d e l i v e r y . 1 4 0 The buyer may r e j e c t goods which do not p e r f e c t l y conform t o the d e s c r i p t i o n i n the c o n t r a c t as a t the time of d e l i v e r y . I n s p e c t i o n does not u s u a l l y occur u n t i l the goods a r r i v e a t the buyer's l o c a t i o n . 1 4 1 However, i t i s p o s s i b l e t h a t the p a r t i e s might agree t h a t the goods be i n s p e c t e d p r i o r t o shipment o r t h a t the goods o b t a i n a t h i r d p a r t y c e r t i f i c a t i o n p r i o r t o d e l i v e r y . In the event of the l a t t e r two o p t i o n s , the p o i n t of d e l i v e r y i s a l s o the e f f e c t i v e p o i n t of i n s p e c t i o n . 2. N o n - p h y s i c a l Events Once the c o n t r a c t has been made and c o n s i d e r a t i o n p a i d , the next n o n p h y s i c a l event i s u s u a l l y the passage of p r o p e r t y . P a s s i n g o f p r o p e r t y i s determined a t the time the goods r e c e i v e i d e n t i f i c a t i o n or ascertainment a c c o r d i n g t o the c o n t r a c t . 1 4 2 No p r o p e r t y can pass u n t i l t h a t time. The p a r t i e s may d e l a y the passage of p r o p e r t y u n t i l a l a t e r time 1 4 0 . I b i d , p. 450. 1 4 1 . I b i d , p. 203. 1 4 2 . I b i d , pp. 205-206, 47 as f o r example when the s e l l e r w ishes t o m a i n t a i n a s e c u r i t y i n t e r e s t i n the g o o d s . There a r e t h r e e d i f f e r e n t t y p e s o f r i s k under A n g l o -Canad ian law. They a r e the r i s k o f e x t e r n a l l y caused damage, the r i s k o f i n t e r n a l l y caused damaged and the r i s k o f damage which ought t o have been a n t i c i p a t e d . The r e s p o n s i b i l i t i e s f o r them p a s s from the s e l l e r t o the buyer a t d i f f e r e n t t i m e s . C o n t r o l o v e r the goods has n o t h i n g t o do w i t h t h e t r a n s f e r o f any o f the r i s k . However, no r i s k w i l l p a s s u n t i l a f t e r the passage o f p r o p e r t y i n the g o o d s . 1 4 4 Under A n g l o - C a n a d i a n law some o f the r i s k s p a s s s i m u l t a n e o u s l y w i t h p r o p e r t y . The r i s k s o f a n t i c i p a t e d damage and e x t e r n a l l y caused damage p a s s a t t h i s p o i n t . By c o n t r a s t , t h e r i s k o f i n t e r n a l l y caused damage may not p a s s u n t i l a f t e r t h e b u y e r has a c t u a l l y r e c e i v e d and i n s p e c t e d the g o o d s . The b u y e r ' s a c t o f a c c e p t a n c e o c c u r s when d e l i v e r y t a k e s p l a c e . D e l i v e r y may o c c u r when the goods a r e handed o v e r t o t h e b u y e r ' s agent o r the s e l l e r ' s agent becomes the agent o f t h e b u y e r . 1 4 5 The b u y e r ' s r i g h t t o i n s p e c t t h e goods has n o t h i n g t o do w i t h a c c e p t a n c e . 1 4 3 . I b i d , p . 208. 1 4 4 . B e n j a m i n ' s S a l e o f Goods. Ed by A . G. G u e s t , G e n e r a l E d i t o r , London: Sweet & Maxwe l l , 1987, p. 2 07. 1 4 5 . I b i d . 48 D. The Legal Environment Risk rules for purely domestic transactions are cont r o l l e d by domestic law. However, when a sales transaction takes place between parties residing i n d i f f e r e n t j u r i s d i c t i o n s , the rules of private i n t e r n a t i o n a l law govern which set of domestic rules w i l l apply. Moreover, i f the par t i e s reside i n d i f f e r e n t countries, private international law may di c t a t e that the"rules of an international convention governs the transaction. 1. Domestic Law In B r i t i s h Columbia the Sale of Goods Act governs the tra n s f e r of r i s k to goods. The Sale of Goods Act i s a r e l a t i v e l y old statute which c o d i f i e d the law e x i s t i n g as of 1893. *° The r i s k to goods sections have not been s u b s t a n t i a l l y amended since c o d i f i c a t i o n . 1 4 7 The Sale of Goods Act presents an in t e r e s t i n g case of 19th century law which has not been updated to deal with complex problems occurring i n the l a t e 20th century. a) The D e f i n i t i o n of Risk The Sale of Goods Act uses what appears i n the l a t e twentieth century to be a s i m p l i s t i c approach to the d e f i n i t i o n of r i s k . The statute breaks r i s k down into two 1 4 6 . Ibid, p. 4. 1 4 7 . Ibid. 49 c a t e g o r i e s . The f i r s t c ategory i s the o v e r a l l r i s k o f the t r a n s i t . The second categ o r y i s the r i s k o f the a n t i c i p a t e d damage the goods w i l l undergo i n every t r a n s i t . The breakdown occurs i n s e c t i o n 37. 37. Where the s e l l e r of goods agrees t o d e l i v e r them a t h i s own r i s k a t a p l a c e o t h e r than t h a t where they are when s o l d , the buyer must n e v e r t h e l e s s , u n l e s s otherwise agreed, take any r i s k o f d e t e r i o r a t i o n i n the goods n e c e s s a r i l y i n c i d e n t t o the course o f t r a n s i t . Over the p a s t one hundred years the c o u r t s have f i n e tuned the c a t e g o r i e s . The refinement has been due t o an emphasis on the cause of the damage t o the goods. The common law r e c o g n i z e s t h a t damage may be a t t r i b u t e d t o e i t h e r the a c t i o n o f the s e l l e r o r the a c t i o n o f the c a r r i e r i n both c a t e g o r i e s . b) E x t e r n a l l y Caused Damage Perhaps owing t o the importance of p r i v a t e p r o p e r t y i n the 18th and 19th c e n t u r i e s , the S a l e o f Goods A c t a l l o c a t e s r i s k t o goods on the b a s i s o f ownership. T h i s i s covered i n s e c t i o n 25. 25. U n l e s s otherwise agreed, the goods remain a t the s e l l e r ' s r i s k u n t i l the p r o p e r t y i n them i s t r a n s f e r r e d t o the buyer, but when the p r o p e r t y i n them i s t r a n s f e r r e d t o the buyer the goods are a t the buyer's r i s k , whether d e l i v e r y has been made or not; p r o v i d e d t h a t where d e l i v e r y has been delayed through the f a u l t of e i t h e r buyer or s e l l e r , the goods are a t the r i s k o f the p a r t y i n f a u l t as regards any l o s s which might not have o c c u r r e d but f o r such f a u l t ; p r o v i d e d a l s o t h a t n o t h i n g i n t h i s s e c t i o n s h a l l a f f e c t the d u t i e s o r l i a b i l i t i e s of e i t h e r s e l l e r o r buyer as a b a i l e e o r c u s t o d i a n o f the goods of the o t h e r p a r t y . 50 The a c t of d e l i v e r y which e n t a i l s the s e l l e r g i v i n g up c o n t r o l o f the goods o n l y impacts on r i s k i f the intended time sequence of the s a l e i s upset by a d e f a u l t of a p a r t y and the d e l a y causes damage t o the goods. Otherwise, c o n t r o l i s i r r e l e v a n t t o r i s k . I f r i s k passes t o the buyer p r i o r t o c o n t r o l p a s s i n g , the s e l l e r would become the b a i l e e o f the goods. H i s d u t i e s as b a i l e e a re dependent on the common law of bailment which holds a b a i l e e f o r h i r e t o the standard of reasonable c a r e of the g o o d s . 1 4 8 I f the s e l l e r t r a n s p o r t s the goods t o the buyer's l o c a t i o n a f t e r p r o p e r t y has passed, the s e l l e r has the duty of a b a i l e e o f reasonable care u n l e s s the s e l l e r undertakes a g r e a t e r r e s p o n s i b i l i t y than i s e n v i s i o n e d i n s e c t i o n 37. 2. Passage of P r o p e r t y P r o p e r t y cannot pass u n t i l the s e l l e r ' s performance has come t o an end. T h i s may r e q u i r e a n y t h i n g from the ascertainment o f the goods t o t h e i r d e l i v e r y t o the buyer. T h i s i s covered by s e c t i o n 23 which i s quoted below i n i t s e n t i r e t y . 23. (1) Unless a d i f f e r e n t i n t e n t i o n appears, the i n t e n t i o n o f the p a r t i e s as t o the time a t which the p r o p e r t y i n the goods i s t o pass t o the buyer i s governed by the r u l e s s e t out i n s u b s e c t i o n s (2) t o (7). X 4 . T e t l e y , W i l l i a m , Q.C. Marine Cargo Claims. 2nd. ed. Toronto: Butterworths, 1978, p. 232. 51 (2) Where t h e r e i s an u n c o n d i t i o n a l c o n t r a c t f o r the s a l e of s p e c i f i c goods i n a d e l i v e r a b l e s t a t e , the p r o p e r t y i n the goods passes t o the buyer when the c o n t r a c t i s made, and i t i s immaterial whether the time of payment or the time o f d e l i v e r y , o r both, be postponed. (3) Where t h e r e i s a c o n t r a c t f o r the s a l e o f s p e c i f i c goods, and the s e l l e r i s bound t o do something t o the goods f o r the purpose of p u t t i n g them i n t o a d e l i v e r a b l e s t a t e , the p r o p e r t y does not pass u n t i l such t h i n g be done and the buyer has n o t i c e of i t . (4) Where t h e r e i s a c o n t r a c t f o r the s a l e o f s p e c i f i c goods i n a d e l i v e r a b l e s t a t e , but the s e l l e r i s bound t o weigh, measure, t e s t o r do some o t h e r a c t or t h i n g w i t h r e f e r e n c e t o the goods f o r the purpose of a s c e r t a i n i n g the p r i c e , the p r o p e r t y does not pass u n t i l such a c t or t h i n g be done and the buyer has n o t i c e o f i t . (5) When goods are d e l i v e r e d t o the buyer on appr o v a l or "on s a l e o r r e t u r n " , or oth e r s i m i l a r terms, the p r o p e r t y passes t o the buyer (a) when he s i g n i f i e s h i s ap p r o v a l o r acceptance t o the s e l l e r o r does any oth e r a c t ad o p t i n g the t r a n s a c t i o n ; (b) i f he does not s i g n i f y h i s ap p r o v a l o r acceptance t o the s e l l e r , but r e t a i n s the goods without g i v i n g n o t i c e o f r e j e c t i o n , then, i f a time has been f i x e d f o r the r e t u r n o f the goods, on the e x p i r a t i o n o f such time, and, i f no time has been f i x e d , on the e x p i r a t i o n o f a reasonable time. What i s a reasonable time i s a q u e s t i o n o f f a c t . (6) Where t h e r e i s a c o n t r a c t f o r the s a l e o f u n a s c e r t a i n e d o r f u t u r e goods by d e s c r i p t i o n , and goods of t h a t d e s c r i p t i o n and i n a d e l i v e r a b l e s t a t e are u n c o n d i t i o n a l l y a p p r o p r i a t e d t o the c o n t r a c t , e i t h e r by the s e l l e r w i t h the assent o f the buyer, or by the buyer w i t h the assent o f the s e l l e r , the p r o p e r t y i n the goods thereupon passes t o the buyer. The assent may be express o r i m p l i e d , and may be g i v e n e i t h e r b e f o r e o r a f t e r the a p p r o p r i a t i o n i s made. 52 (7) Where, i n pursuance of the c o n t r a c t , the s e l l e r d e l i v e r s the goods t o the buyer or t o a c a r r i e r or other b a i l e e , whether named by the buyer or not, f o r the purpose of t r a n s m i s s i o n t o the buyer, and does not r e s e r v e the r i g h t of d i s p o s a l , he i s deemed t o have u n c o n d i t i o n a l l y a p p r o p r i a t e d the goods t o the c o n t r a c t . The most important a c t f o r the purpose of t r a n s f e r r i n g p r o p e r t y i s the i d e n t i f i c a t i o n of the goods t o the c o n t r a c t . The S a l e of Goods Act r e c o g n i z e s two s t a t e s or c o n d i t i o n s of the goods. Goods are e i t h e r s p e c i f i c or u n a s c e r t a i n e d . The s t a t e d assumption of s u b s e c t i o n s (2), (3), (4), (6) and (7) of s e c t i o n 2 3 i s t h a t the buyer cannot a c q u i r e goods which have not been i d e n t i f i e d or s e p a r a t e d from the mass of goods owned by the s e l l e r . Ascertainment r e q u i r e s t h a t the goods be i d e n t i f i e d or s e t a s i d e and t h a t the buyer r e c e i v e n o t i c e of t h e i r ascertainment. Another c o n d i t i o n r e q u i r e d by s e c t i o n 23 i s t h a t the goods be put i n a d e l i v e r a b l e s t a t e or a c t u a l l y be d e l i v e r e d t o the buyer o r a t h i r d p a r t y f o r t r a n s m i s s i o n t o the buyer. The s t a t u t e i s s i l e n t on what c o n s t i t u t e s a d e l i v e r a b l e s t a t e . The p o s s i b i l i t i e s range from completion of manufacture t o f u l l y packaged and p r o t e c t e d f o r t r a n s i t . A r e a s o n a b l e assumption i s t h a t the q u a l i t y of the d e l i v e r a b l e s t a t e i s dependent upon where the d e l i v e r y w i l l take p l a c e . For example, i f the d e l i v e r y i s t o take p l a c e a t the s e l l e r ' s l o c a t i o n , then no packaging or p r e p a r a t i o n f o r t r a n s i t i s r e q u i r e d . A l t e r n a t i v e l y , i f the s e l l e r i s t o d e l i v e r the goods t o the buyer's door, the d e l i v e r a b l e s t a t e would r e q u i r e packaging t o w i t h s t a n d the t r i p . 53 3. S a l e v e r s u s S a l e and Arrangement of D e l i v e r y C o n t r a c t s The two c a t e g o r i e s of s a l e s c o n t r a c t s d e f i n e the o b l i g a t i o n undertaken by the s e l l e r r e g a r d i n g t r a n s i t . They are the simple s a l e c o n t r a c t which c o u l d i n c l u d e a shipment c o n t r a c t and the s a l e and arrangement of d e l i v e r y . The simple s a l e c o n t r a c t i s presumably the standard e n v i s i o n e d by the S a l e of Goods Act owing t o the r e l a t i v e amount of s t a t u t o r y language on the s u b j e c t . In the simple s a l e c o n t r a c t p r o p e r t y and r i s k pass when the goods are put i n a d e l i v e r a b l e s t a t e and the buyer has a c t u a l n o t i c e . T h i s i s covered i n s u b s e c t i o n s (2) , (3) and (4) of s e c t i o n 23 quoted above. Adding an o b l i g a t i o n t o arrange shipment e n t a i l s a duty t h a t the s e l l e r make a p p r o p r i a t e arrangements r e g a r d i n g the t r a n s i t . T h i s might i n c l u d e n o t i c e t o the buyer t h a t the goods have been put aboard a s h i p so t h a t the buyer can o b t a i n i n s u r a n c e . 36. (1) Where, i n pursuance of a c o n t r a c t of s a l e , the s e l l e r i s a u t h o r i z e d or r e q u i r e d t o send the goods t o the buyer, d e l i v e r y of the goods t o a c a r r i e r , whether named by the buyer or not, f o r the purpose of t r a n s m i s s i o n t o the buyer i s deemed, i n the absence of evidence t o the c o n t r a r y , t o be a d e l i v e r y of the goods t o the buyer. (2) U n l e s s otherwise a u t h o r i z e d by the buyer, the s e l l e r must make such c o n t r a c t w i t h the c a r r i e r on b e h a l f of the buyer as may be reasonable, having r e g a r d t o the nature o f the goods and the o t h e r circumstances o f the case. I f the s e l l e r omits t o do so, and the goods are l o s t or damaged i n course of t r a n s i t , the buyer may d e c l i n e t o t r e a t the d e l i v e r y t o the c a r r i e r as a d e l i v e r y t o h i m s e l f , or may h o l d the s e l l e r r e s p o n s i b l e i n damages. 54 (3) U n l e s s otherwise agreed, where goods are sent by the s e l l e r t o the buyer by a r o u t e i n v o l v i n g sea t r a n s i t , under circumstances i n which i t i s u s u a l t o i n s u r e , the s e l l e r must g i v e such n o t i c e t o the buyer as may enable him t o i n s u r e them d u r i n g t h e i r sea t r a n s i t , and i f the s e l l e r f a i l s t o do so the goods s h a l l be deemed t o be a t h i s r i s k d u r i n g the sea t r a n s i t . S e c t i o n 3 6 (2) may r e q u i r e t h a t the s e l l e r ' s c o n t r a c t of a f f r a i g h t m e n t p r o p e r l y v a l u e the goods f o r the purposes of l i m i t a t i o n of the l i a b i l i t y of the c a r r i e r . Under the Hague 1 A Q . • Rules- 1-" which are appended t o the C a r r i a g e of Goods By Water A c t 1 5 0 the l i a b i l i t y o f the c a r r i e r i s l i m i t e d t o a per package v a l u a t i o n of the goods u n l e s s otherwise s p e c i f i e d i n the c o n t r a c t of a f f r a i g h t m e n t . 1 5 x 4. E f f e c t of Breach on the A l l o c a t i o n of R i s k There are o n l y t h r e e o c c a s i o n s when a f a i l u r e of the s e l l e r ' s performance w i l l prevent r i s k from p a s s i n g . One i s when the s e l l e r f a i l s t o g i v e n o t i c e t h a t e i t h e r the goods have been d e l i v e r e d t o a sea going c a r r i e r or t h a t the goods have been a s c e r t a i n e d and put i n a d e l i v e r a b l e s t a t e . The second o c c u r s when the s e l l e r f a i l s t o make an a p p r o p r i a t e arrangement of t r a n s p o r t w i t h a c a r r i e r i n a s a l e and shipment c o n t r a c t . The t h i r d occurs when due t o some a c t of the x ^ . The Hague Rules are r u l e s which l i m i t s h i p owner l i a b i l i t y . They o r i g i n a t e d i n 1924 as a r e s u l t of a c o n f e r e n c e h e l d a t the Hague i n 1921. The r u l e s attempt t o balance the r i g h t s o f s h i p owner's a g a i n s t s h i p p e r s of goods. 1 5 0 . R.S.C. 1970, c. 15. 1 5 1 . I b i d . A r t . IV, s. 4, s s . 5. 55 s e l l e r , the d e l i v e r y i s delayed and the r i s k o c c a s i o n e d by t h i s f a i l u r e i s l i m i t e d t o damage caused by the d e l a y i t s e l f . The onus on the s e l l e r t o p r o t e c t goods s p e c i f i e d i n the c o n t r a c t from p e r i s h i n g b e f o r e r i s k has passed i s minimized by s e c t i o n 11. S e c t i o n 11 p r o v i d e s t h a t the s e l l e r must be a t f a u l t i n o r d e r t o t r e a t d e s t r u c t i o n o f the goods as a breach of c o n t r a c t . 11. Where t h e r e i s an agreement t o s e l l s p e c i f i c goods, and subsequently the goods, without any f a u l t on the p a r t of the s e l l e r o r buyer, p e r i s h b e f o r e the r i s k passes t o the buyer, the agreement i s avoided.The burden on the s e l l e r f o r goods s p e c i f i e d i n the c o n t r a c t i s much the same as the duty of a b a i l e e f o r h i r e , a r o l e the s e l l e r undertakes once p r o p e r t y i n the goods has passed t o the buyer. We see from the wording of s e c t i o n 23 t h a t a d e l i v e r y of nonconforming goods does not e f f e c t the passage of r i s k so l o n g as the goods are i n a d e l i v e r a b l e s t a t e when t u r n e d over t o the buyer or c a r r i e r . T h i s wording p r e s e n t s obvious d i f f i c u l t i e s which are remedied by an assumption t h a t o n l y p r o p e r t y i n conforming goods can pass t o the b u y e r . 1 5 2 The buyer must be g i v e n an o p p o r t u n i t y t o examine the goods t o ensure c o n f o r m i t y . The concept of acceptance i s r e l i e d on t o p r o v i d e the remedy of r e j e c t i o n t o the buyer. x . S c h m i t t h o f f , C l i v e M. "The R i s k of T r a n s i t i n I n t e r n a t i o n a l S a l e s " U n i f i c a t i o n o f the Law Governing  I n t e r n a t i o n a l S a l e s of Goods, ed. by John Honnold, P a r i s : L i b r a i r i e D a l l o n , 1966, p. 191. 56 38 (1) Where goods a r e d e l i v e r e d t o the buyer which he has not p r e v i o u s l y examined, he i s not deemed t o have a c c e p t e d them u n l e s s and u n t i l he has had a r e a s o n a b l e o p p o r t u n i t y o f examin ing them f o r t h e purpose o f a s c e r t a i n i n g whether they a r e i n c o n f o r m i t y w i t h the c o n t r a c t . A c c e p t a n c e o r r e j e c t i o n o c c u r s a t the p o i n t o f d e l i v e r y . In t h e c a s e o f a s a l e and arrangement o f d e l i v e r y c o n t r a c t , the b u y e r ' s i n s p e c t i o n might not o c c u r u n t i l t h e a r r i v a l o f t h e goods a t the b u y e r ' s l o c a t i o n . T h i s i s i n s p i t e o f the f a c t t h a t d e l i v e r y and the t r a n s f e r o f r i s k and p r o p e r t y o c c u r r e d upon the d e l i v e r y t o the c a r r i e r . In t h i s c a s e the b u y e r ' s l e g i t i m a t e r e j e c t i o n based on the f a c t t h a t the goods were nonconforming a t the p o i n t o f d e l i v e r y , a c t s t o r e t r o a c t i v e l y b l o c k the t r a n s f e r o f p r o p e r t y and r i s k . A b r e a c h by the buyer o n l y has e f f e c t on the t r a n s f e r o f r i s k i f the s e l l e r w i t h h o l d s d e l i v e r y o r r e a c q u i r e s p o s s e s s i o n o f t h e goods a f t e r d e l i v e r y . The s e l l e r ' s a u t h o r i t y t o d e l a y per fo rmance o r a c t u a l l y i n t e r c e p t the goods a f t e r h i s per fo rmance i s p r o v i d e d by s e c t i o n 43. 4 3 (1) S u b j e c t t o t h i s A c t and o f any S t a t u t e i n t h a t b e h a l f , n o t w i t h s t a n d i n g t h a t the p r o p e r t y i n the goods may have p a s s e d t o the b u y e r , the u n p a i d s e l l e r o f goods , as s u c h , has by i m p l i c a t i o n o f law (a) a l i e n on t h e goods o r r i g h t t o r e t a i n them f o r the p r i c e w h i l e he i s i n p o s s e s s i o n o f them; (b) i n c a s e o f the i n s o l v e n c y o f the b u y e r , a r i g h t o f s t o p p i n g the goods i n t r a n s i t a f t e r he has p a r t e d w i t h the p o s s e s s i o n o f them; and (c) a r i g h t o f r e s a l e as l i m i t e d by t h i s A c t . 57 (2) Where the p r o p e r t y i n goods has not passed t o the buyer, the unpaid s e l l e r has, i n a d d i t i o n t o h i s oth e r remedies, a r i g h t o f w i t h h o l d i n g d e l i v e r y s i m i l a r t o and c o e x t e n s i v e w i t h h i s r i g h t s o f l i e n and stoppage i n t r a n s i t . The d e l a y caused by the s e l l e r ' s w i t h h o l d i n g o r r e p o s s e s s i o n would be the r e s p o n s i b i l i t y o f the buyer and thus a c c o r d i n g t o s e c t i o n 25, the goods would be a t the buyer's r i s k d u r i n g the whole p e r i o d . Presumably, the buyer would bear the r i s k f o r the goods i n the s e l l e r ' s p o s s e s s i o n u n t i l the s e l l e r abandoned the i n t e n t i o n t o t r a n s f e r the goods t o the buyer e i t h e r by s e l l i n g them t o another buyer o r by a s s i m i l a t i n g them i n t o h i s i n v e n t o r y . 51 (1) Su b j e c t t o t h i s s e c t i o n , a c o n t r a c t o f s a l e i s not r e s c i n d e d by the mere e x e r c i s e by an unpaid s e l l e r o f h i s r i g h t o f l i e n , or r e t e n t i o n o r stoppage i n t r a n s i t . (2) When an unpaid s e l l e r who has e x e r c i s e d h i s r i g h t of l i e n , o r r e t e n t i o n o r stoppage i n t r a n s i t , r e s e l l s the goods, the buyer a c q u i r e s a good t i t l e t o i t as a g a i n s t the o r i g i n a l buyer. (3) Where the goods are of a p e r i s h a b l e nature, o r where the unpaid s e l l e r g i v e s n o t i c e t o the buyer o f h i s i n t e n t i o n t o r e s e l l , and the buyer does not w i t h i n a reaso n a b l e time pay or tender the p r i c e , the unpaid s e l l e r may r e s e l l the goods and r e c o v e r from the o r i g i n a l buyer damages f o r any l o s s o c c a s i o n e d by h i s breach of c o n t r a c t . (4) Where the s e l l e r e x p r e s s l y r e s e r v e s a r i g h t o f r e s a l e i n case the buyer should make d e f a u l t , and on the buyer making d e f a u l t r e s e l l s the goods, the o r i g i n a l c o n t r a c t o f s a l e i s thereby r e s c i n d e d , but without p r e j u d i c e t o any c l a i m the s e l l e r may have f o r damages. The S a l e o f Goods Act, s. 25 58 a) I n t e r n a l l y Caused Damage The c a t e g o r y of r i s k of d e t e r i o r a t i o n p r e c i p i t a t e d by i n t e r n a l causes i s not s p e c i f i c a l l y mentioned i n the S a l e of Goods A c t . Instead, the r u l e s have been developed by the c o u r t s u s i n g as a s t a r t i n g p o i n t the i m p l i e d warranty s e c t i o n s of the s t a t u t e . There are two i m p l i e d w a r r a n t i e s as t o the q u a l i t y of the goods, namely the w a r r a n t i e s of m e r c h a n t a b i l i t y and f i t n e s s f o r purpose. They are s e t out i n s e c t i o n 18: 18. S u b j e c t t o t h i s A c t and any s t a t u t e i n t h a t b e h a l f , t h e r e i s no i m p l i e d warranty or c o n d i t i o n as t o the q u a l i t y or f i t n e s s f o r any p a r t i c u l a r purpose o f goods s u p p l i e d under a c o n t r a c t of s a l e , except as f o l l o w s : (a) where the buyer, e x p r e s s l y or by i m p l i c a t i o n , makes known t o the s e l l e r the p a r t i c u l a r purpose f o r which the goods are r e q u i r e d , so as t o show t h a t the buyer r e l i e s on the s e l l e r ' s s k i l l o r judgment, and the goods are of a d e s c r i p t i o n which i t i s i n the course of the s e l l e r ' s b u s i n e s s t o supply, whether he i s the manufacturer or not, t h e r e i s an i m p l i e d c o n d i t i o n t h a t the goods are r e a s o n a b l y f i t f o r such purpose; except t h a t i n the case of a c o n t r a c t f o r the s a l e of a s p e c i f i e d a r t i c l e under i t s patent or o t h e r t r a d e name, t h e r e i s no i m p l i e d c o n d i t i o n as t o i t s f i t n e s s f o r any p a r t i c u l a r purpose; (b) where goods are bought by d e s c r i p t i o n from a s e l l e r who d e a l s i n goods of t h a t d e s c r i p t i o n , whether he i s the manufacturer or not, t h e r e i s an i m p l i e d c o n d i t i o n t h a t the goods s h a l l be of merchantable q u a l i t y ; but i f the buyer has examined the goods t h e r e i s no i m p l i e d c o n d i t i o n as regards d e f e c t s which such examination ought t o have r e v e a l e d ; (c) an i m p l i e d warranty or c o n d i t i o n as t o q u a l i t y or f i t n e s s f o r a p a r t i c u l a r purpose may be annexed by the usage of t r a d e ; and 59 (d) an express warranty or c o n d i t i o n does not n e g a t i v e a warranty or. c o n d i t i o n i m p l i e d by t h i s A c t u n l e s s i n c o n s i s t e n t w i t h i t . I n t e r e s t i n g l y , n e i t h e r warranty addresses q u a n t i t y of the goods. Presumably the d r a f t e r s of the s t a t u t e assumed t h a t q u a n t i t y i s always a c o n f o r m i t y i s s u e . However, i t i s p o s s i b l e t h a t goods c o u l d s h r i n k d u r i n g t r a n s i t even though they were of the r i g h t q u a n t i t y a t the p o i n t of d e l i v e r y where c o n f o r m i t y i s judged. 5. INCOTERMS INCOTERMS p r o v i d e a means of c o n t r a c t i n g out of the d e f a u l t p r o v i s i o n s of the S a l e of Goods A c t . INCOTERMS are the c r e a t i o n of the I n t e r n a t i o n a l Chamber of Commerce. 1 5 4 They r e p r e s e n t n i n e t r a d e terms used i n i n t e r n a t i o n a l t r a d e . T h e i r purpose i s t o s t a n d a r d i z e and c l a r i f y the r e s p o n s i b i l i t i e s of the s e l l e r and the buyer i n t r a n s f e r r i n g g o o d s . 1 5 5 INCOTERMS cover the whole spectrum of s e l l e r r e s p o n s i b i l i t y f o r d e l i v e r y from a simple s a l e , through s a l e and d e l i v e r y t o a s a l e and d e s t i n a t i o n c o n t r a c t . They are predominant i n i n t e r n a t i o n a l t r a d e and as w e l l are f r e q u e n t l y used i n domestic t r a d e . 1 5 6 I C A , . I n t e r n a t i o n a l Chamber of Commerce. I n t e r n a t i o n a l  Rules f o r the I n t e r p r e t a t i o n of Trade Terms. Incoterms (1980). 1 5 5 . S c h m i t t h o f f , supra. note 4, pp. 102-103. 1 5 6 . Sassoon, supra, note 1, p. 8. 60 P r i v a t e i n t e r n a t i o n a l law i s domestic law which determines what law w i l l apply i n a case which has an i n t e r n a t i o n a l element. I n t e r n a t i o n a l elements c o u l d i n c l u d e such items as the l o c a t i o n of the buyer or s e l l e r i n another j u r i s d i c t i o n or the f a c t t h a t the goods were damaged i n another p r o v i n c e or country. For s a l e of goods cases the d e f a u l t term i n the law i s t h a t c o n t r a c t s h a l l be governed by 1 57 the law which has the c l o s e s t c o n n e c t i o n t o the c o n t r a c t . G e n e r a l l y , c o u r t s h o l d t h a t i n the absence of a s p e c i f i c c h o i c e of law i n the c o n t r a c t , the law of the s e l l e r ' s j u r i s d i c t i o n w i l l a p p l y . 1 5 8 6. T h i r d P a r t y L i m i t a t i o n of L i a b i l i t y The r u l e s f o r l i m i t a t i o n of t h i r d p a r t y l i a b i l i t y are c o n t a i n e d i n domestic law. F r e q u e n t l y these r u l e s have i n t e r n a t i o n a l o r i g i n s . For example, f o r i n t e r n a t i o n a l a i r cargo, the r u l e s are governed by the I n t e r n a t i o n a l Convention on A i r T r a n s p o r t a t i o n scheduled t o the C a r r i a g e by A i r A c t . 1 5 9 For goods t r a n s p o r t e d out of Canada by water the r u l e s are based on the Hague Rules scheduled t o the C a r r i a g e of Goods by 1 f o Water A c t . S i n c e the b u l k of i n t e r n a t i o n a l t r a d e i s 1 5 V . I b i d . 1 5 8 . I b i d , p. 9. 1 5 9 . R.S.C. 1970, c. 14. 1 6 0 . R.S.C. 1970, c. 15. 61 c a r r i e d by water, the Hague Rules have important e f f e c t s on 1 CI the a l l o c a t i o n of r i s k i n s a l e s . The two areas of g r e a t e s t impact on r i s k a l l o c a t i o n are the l i m i t a t i o n s on the c a t e g o r i e s of c a r r i e r l i a b i l i t y and the per package v a l u e l i m i t a t i o n i n the event the c a r r i e r i s l i a b l e . C a r r i e r l i a b i l i t y i s e s s e n t i a l l y l i m i t e d t o f a i l u r e t o e x e r c i s e due d i l i g e n c e i n making the s h i p seaworthy ( a r t I I I , s i ) and t o p r o p e r l y stow the goods on board the v e s s e l ( a r t I I I , s 2 ) . The per-package l i m i t a t i o n r u l e h o l d s t h a t i n the event of c a r r i e r l i a b i l i t y , the c a r r i e r ' s l i a b i l i t y i s l i m i t e d t o $500.00 (Canadian) per package u n l e s s the nature of the goods and t h e i r h i g h e r v a l u e i s s p e c i f i e d p r i o r t o shipment most commonly i n the c o n t r a c t of a f f r a i g h t m e n t ( a r t I I I , s 5 ) . The e x t e n t t o which the Hague Rule l i m i t a t i o n of l i a b i l i t y extends t o n o n - c a r r i e r s such as s t e vedores and warehouseman i s dependent upon the wording i n the c o n t r a c t of a f f r a i g h t m e n t . The d e f a u l t r u l e s do not p r o v i d e f o r t h e i r p r o t e c t i o n . E. Types of R i s k R i s k , w i t h r e f e r e n c e t o goods i n t r a n s i t , r e f e r s t o any change t o the goods o c c u r r i n g i n t r a n s i t which d i m i n i s h e s the v a l u e of the goods t o t h e i r r e c i p i e n t . The buyer b e i n g the r e c i p i e n t i n the normal case would r e c o g n i z e t h a t the goods 1 6 1 . See below. 62 have been s u b j e c t t o a t r a n s i t r i s k by comparing the d e l i v e r e d goods a g a i n s t the c o n t r a c t d e s c r i p t i o n . In many cases d i s t i n g u i s h i n g between the m a n i f e s t a t i o n of r i s k ( i . e . , damaged goods) and nonconformity w i l l be d i f f i c u l t as the d e f i n i t i o n s of the two are o v e r l a p p i n g . That i s , i n the event t h a t nonconforming goods a r r i v e the buyer may assume t h a t the goods were never conforming i n the f i r s t p l a c e . L i k e w i s e , i f the goods do not a r r i v e a t a l l , the buyer may assume t h a t they were never d e l i v e r e d t o the c a r r i e r . In the s i t u a t i o n where the s e l l e r r e t a k e s p o s s e s s i o n o f the goods a f t e r they ex p e r i e n c e d the t r a n s i t environment, i t w i l l be obvious t o the s e l l e r t h a t a change i n the goods i s the r e s u l t of a t r a n s i t r i s k . There are t h r e e c a t e g o r i e s of causes of r i s k t o goods. The f i r s t i s t h a t the goods w i l l be s u b j e c t t o an abnormal t r a n s i t . The second i s t h a t the goods w i l l be shipped on an i n a p p r o p r i a t e means of t r a n s p o r t a t i o n or t h a t the means of t r a n s p o r t a t i o n may be a p p r o p r i a t e but t h a t the arrangements were not a p p r o p r i a t e c o n s i d e r i n g the nature of the goods. The t h i r d i s t h a t due t o an i n s u f f i c i e n c y of d u r a b i l i t y the goods cannot s u r v i v e a p r o p e r l y arranged normal t r a n s i t . In the o f t e n complex world of t r a n s p o r t a t i o n of goods i t i s d i f f i c u l t t o d i s t i n g u i s h between the d u r a b i l i t y f a c t o r s of goods and the q u a l i t y of the events of t r a n s i t . In f a c t , i n many cases f a c t o r s i n a l l t h r e e c a t e g o r i e s i n t e r a c t t o become the cause or causes of the damage. 63 1. R i s k o f an Abnormal T r a n s i t a) Normal ve r s u s Abnormal T r a n s i t The v a s t m a j o r i t y of t r a n s i t s occur without i n c i d e n t . However, even i n the normal case goods d e t e r i o r a t e as a n a t u r a l consequence of the voyage. Packaging and i n h e r e n t d u r a b i l i t y o f the goods are f a c t o r s which tend t o minimize the expected bumps and j a r s expected i n every t r a n s i t . Abnormal t r a n s i t s are those where something unexpected o c c u r s . For example, goods may be s u b j e c t t o water damage i f hatches are not p r o p e r l y s e a l e d o r the v e s s e l s p r i n g s a l e a k . Goods may be dropped over the s i d e l o a d i n g o r u n l o a d i n g . b) T h i r d P a r t y L i a b i l i t y There i s o n l y one categor y o f event which a l l o w s f o r re c o v e r y a g a i n s t the c a r r i e r f o r damage t o cargo. That i s damage r e s u l t i n g from a f a i l u r e o f due d i l i g e n c e on the p a r t of t h e owner o r crew of the v e s s e l i n the stowage or p r e p a r a t i o n o f the v e s s e l f o r the v o y a g e . 1 6 2 1 6 2 . T h i s i s s e t out i n A r t i c l e I I I paragraphs 1 and 2 and A r t i c l e IV paragraph 1 of the C a r r i a g e of Goods by Water Ac t , supra. note 22. A r t i c l e I I I 1. The c a r r i e r s h a l l be bound, b e f o r e and a t the be g i n n i n g o f the voyage, t o e x e r c i s e due d i l i g e n c e t o , (a) make the s h i p seaworthy; (b) p r o p e r l y man, equip, and supply the s h i p ; 64 Even i n the event t h a t absence of due d i l i g e n c e i s e s t a b l i s h e d , the per—package l i m i t a t i o n r u l e l i m i t s r e c o v e r y t o f i v e hundred Canadian d o l l a r s u n l e s s the p a r t i e s c o n t r a c t otherwise. A l l o t h e r events on board the v e s s e l do not g i v e r i s e t o t h i r d p a r t y l i a b i l i t y . T h i s means t h a t the v a s t m a j o r i t y of events which c o u l d g i v e r i s e t o a c l a i m f o r damages i n t r a n s i t are not a c t i o n a b l e a g a i n s t the c a r r i e r . 2. R i s k of an I n a p p r o p r i a t e Arrangement of T r a n s i t a) Means and Stowage The p a r t y r e s p o n s i b l e f o r a r r a n g i n g the means of t r a n s i t must choose not o n l y the type of t r a n s i t but a l s o how the goods are t o be stowed on the v e s s e l i f the c h o i c e i s by sea. (c) make the h o l d s , r e f r i g e r a t i n g and c o o l chambers, and a l l o t h e r p a r t s of the s h i p i n which goods are c a r r i e d , f i t and s a f e f o r t h e i r r e c e p t i o n , c a r r i a g e and p r e s e r v a t i o n . 2. S u b j e c t t o the p r o v i s i o n s of A r t i c l e IV, the c a r r i e r s h a l l p r o p e r l y and c a r e f u l l y l o a d , handle, stow, c a r r y , keep, c a r e f o r and d i s c h a r g e the goods c a r r i e d . A r t i c l e IV 1. N e i t h e r the c a r r i e r nor the s h i p s h a l l be l i a b l e f o r l o s s or damage a r i s i n g or r e s u l t i n g from unseaworthiness u n l e s s caused by want of due d i l i g e n c e on the p a r t of the c a r r i e r t o make the s h i p seaworthy, and t o secure t h a t the s h i p i s p r o p e r l y manned, equipped and s u p p l i e d , and t o make the h o l d s , r e f r i g e r a t i n g and c o o l chambers and a l l o t h e r p a r t s o f the s h i p i n which goods are c a r r i e d f i t and s a f e f o r t h e i r r e c e p t i o n , c a r r i a g e and p r e s e r v a t i o n i n accordance wi t h the p r o v i s i o n s of paragraph 1 of A r t i c l e I I I . Whenever l o s s or damage has r e s u l t e d from unseaworthiness, the burden of p r o v i n g the e x e r c i s e of due d i l i g e n c e s h a l l be on the c a r r i e r o r o t h e r person c l a i m i n g exemption under t h i s s e c t i o n . 65 The packaging of the goods, as w e l l as t h e i r degree of d u r a b i l i t y , a f f e c t both the c h o i c e of the type of t r a n s p o r t and whether the goods can w i t h s t a n d i n f e r i o r stowage. F a c t o r s such as the speed of the v e s s e l , the r o u t e i t w i l l f o l l o w , i t s a b i l i t y t o w i t h s t a n d expected weather and i t s c a p a c i t y t o p r o p e r l y stow the goods ought t o be c o n s i d e r e d . A r r a n g i n g f o r proper stowage of the goods i s c r i t i c a l as goods stowed on deck i n c u r no c a r r i e r l i a b i l i t y f o r damage done d u r i n g the t r a n s i t . 1 6 3 O b v i o u s l y , the type of t r a n s p o r t chosen f o r the t r a n s i t i s c r i t i c a l t o i t s success. b) Proper V a l u a t i o n Another f a c t o r i n the a p p r o p r i a t e arrangement of the means of t r a n s p o r t i s the proper v a l u a t i o n of the goods f o r purposes of the Hague Rule per-package v a l u e l i m i t a t i o n . 1 6 4 I f the p a r t y a r r a n g i n g t r a n s p o r t does not s p e c i f y the proper v a l u a t i o n of the goods i n the c o n t r a c t of a f f r a i g h t m e n t then, even i f the c a r r i e r commits an a c t i o n a b l e wrong, the person b e a r i n g the r i s k of the voyage cannot r e c o v e r more than a nominal amount. 6 3 . I b i d . A r t . I. s. (c) 6 4 . I b i d . A r t . IV, s. 5. 66 3. R i s k t h a t the Goods Lack S u f f i c i e n t D u r a b i l i t y t o Withstand a Normal T r a n s i t In a d d i t i o n t o bumps and j a r s , most goods w i l l d e t e r i o r a t e a c e r t a i n amount i n t r a n s i t due t o i n t e r n a l causes. P e r i s h a b l e s r i p e n and age. Nonperishables are a f f e c t e d by the changing environmental c o n d i t i o n s experienced d u r i n g the t r a n s i t . The producer of the goods may have an o p p o r t u n i t y t o i n c r e a s e d u r a b i l i t y by p r o c e s s e s of manufacture and/or packaging. The r e q u i r e d amount of d u r a b i l i t y i n t e r a c t s w i t h the mode of t r a n s p o r t s e l e c t e d . That i s , i f the s e l l e r i s aware of or i s r e s p o n s i b l e f o r the s e l e c t i o n of a d i f f i c u l t c a r r i a g e , he may be a b l e t o b u i l d i n s u f f i c i e n t d u r a b i l i t y t o w i t h s t a n d the t r i p o r a l t e r n a t i v e l y package s u f f i c i e n t l y t o ensure s u r v i v a l . Claims a g a i n s t water c a r r i e r s cannot be s u c c e s s f u l i f the cause o f the d e t e r i o r a t i o n i s i n h e r e n t t o the goods or t h e i r packaging. D u r a b i l i t y and packaging are i n t e r r e l a t e d . F r a g i l e goods r e q u i r e e x t r a packaging w h i l e s t u r d y goods do not r e q u i r e as much. 67 CHAPTER FOUR STRUCTURING THE MODELS A. Experimental Question T h i s a n a l y s i s w i l l examine whether the S a l e o f Goods Act pr e s e n t s an e f f i c i e n t a l l o c a t i o n of r i s k t o goods d u r i n g t r a n s i t . The a n a l y s i s w i l l review the r i s k s o c c u r r i n g d u r i n g t r a n s i t i n r e l a t i o n t o the e f f e c t on the b e h a v i o r o f the p a r t i e s . The a n a l y s i s w i l l address the e f f e c t s o f the r u l e s on c l a r i t y and co n f o r m i t y t o common e x p e c t a t i o n , and r e d u c t i o n o f a v o i d a b l e l o s s e s . To a l l o w f o r c o n c l u s i o n s based on the e f f e c t o f the i n e f f i c i e n c y o f the S a l e o f Goods Act, an o p t i m a l l y e f f i c i e n t model w i l l be c r e a t e d f o r comparison. An o p t i m a l l y e f f i c i e n t model a l l o c a t e s r i s k s t o the p a r t y b e s t a b l e t o d e a l w i t h them. Such an a l l o c a t i o n minimizes the e f f e c t o f the r i s k s on the p a r t i e s ' b e h a v i o r . 1 6 5 The r i s k s d i s c u s s e d i n the p r e v i o u s c h a p t e r were grouped i n t o t he t h r e e c a t e g o r i e s . The f o l l o w i n g a n a l y s i s w i l l f o l l o w t h a t c a t e g o r i z a t i o n . . Notes, "Risk o f Loss i n Commercial T r a n s a c t i o n s : E f f i c i e n c y Thrown Into the Breach" (1979), 65 V i r g i n i a Law Review 557, p. 560. 68 B. Assumptions To s i m p l i f y the environment f o r the purposes of a n a l y s i s o n l y s a l e and arrangement of d e l i v e r y c o n t r a c t s w i l l be c o n s i d e r e d . The reason t h a t t h i s type of s a l e was s e l e c t e d i s t w o f o l d . F i r s t , i t i s a common form of s a l e when goods t r a v e l l o n g d i s t a n c e s . 1 6 6 Thus, i t p r e s e n t s a r e a l i s t i c t e s t i n g ground f o r an e f f i c i e n c y e v a l u a t i o n . Second, the s a l e and arrangement of d e l i v e r y c o n t r a c t p r e s e n t s a r e l a t i v e l y c o m p l i c a t e d s a l e s c e n a r i o . T h i s p r o v i d e s the a n a l y s i s w i t h a number of r e l e v a n t f a c t o r s w i t h which t o t e s t the e f f i c i e n c y of the r u l e s . T h i s t h e s i s w i l l assume t h a t the goods w i l l a t some p o i n t t r a v e l by ocean t r a n s p o r t . The reason f o r t h i s assumption i s a l s o t w o f o l d . The f i r s t i s t h a t ocean t r a n s p o r t i s a common means of t r a n s i t f o r many goods t r a d e d i n B r i t i s h Columbia. T h e r e f o r e , the i n c l u s i o n o f ocean t r a n s p o r t i s r e a l i s t i c . The second i s t h a t the r u l e s which govern the l i a b i l i t y o f ocean c a r r i e r s a re b i a s e d a g a i n s t the s h i p p e r s o f g o o d s . 1 6 7 Thus, they p r e s e n t a harsh backdrop a g a i n s t which the e f f e c t s o f r i s k r u l e s have g r e a t e r c l a r i t y . In the model, we w i l l make the assumption t h a t damage i s p r e v e n t a b l e on the margin. T h i s assumption i m p l i e s another assumption. That i s , when r e s p o n s i b i l i t y f o r f a c t o r s which 1 6 6 . Sassoon, David M. C.I.F. and F.O.B. C o n t r a c t s 2nd. ed. London: Stevens & Son, 1975, p. 24. . See o p . c i t . p. . 69 have a c a u s a l c o n n e c t i o n t o the r i s k e d damage are a l l o c a t e d a c c o r d i n g t o the p a r t i e s ' r e s p e c t i v e c o n t r o l over them, the p a r t y w i t h the b e s t chance of p r e v e n t i n g the damage a t the l e a s t c o s t w i l l have an i n c e n t i v e t o do so. A r e d u c t i o n on the margin i m p l i e s t h a t o n l y a c e r t a i n amount o f damage can be e c o n o m i c a l l y c o n t r o l l e d . T h i s subset i s composed of damage which can be e l i m i n a t e d by the p a r t i e s ' e x e r c i s e o f c o n t r o l c o s t i n g l e s s than the r e t u r n . For the p a r t i e s t o do otherwise i m p l i e s a m o t i v a t i o n t o not a c t i n t h e i r r a t i o n a l b e s t i n t e r e s t s . C. R i s k F a c t o r s The p a r t i e s have a l i m i t e d c a p a c i t y t o reduce the f i n a n c i a l l o s s r e s u l t i n g from the r i s k s of t r a n s i t . Of course, the l i m i t i n g f a c t o r i s economics. The c o s t o f e l i m i n a t i n g some r i s k s exceeds the v a l u e gained by the e x e r c i s e . A good example i s what the S a l e o f Goods A c t c a l l s n e c e s s a r i l y i n c i d e n t a l d e t e r i o r a t i o n which by d e f i n i t i o n i s the p r e d i c t e d d e t e r i o r a t i o n which cannot be e c o n o m i c a l l y e l i m i n a t e d . Elements of s a l e s determine the i n c i d e n t s o f damage. These elements are the method and arrangement of c a r r i a g e , the type of goods and t h e i r p r e p a r a t i o n f o r the t r a n s i t . A d d i t i o n a l l y , the c o n t r o l o f damage once i t has o c c u r r e d i s dependent upon m i t i g a t i o n and the a v a i l a b i l i t y and e f f i c i e n c y of a remedy. 70 1. D i s t a n c e , Route and Time of Year The d i s t a n c e the goods must t r a v e l , the r o u t e taken and the season when the goods are be i n g t r a n s p o r t e d have a b e a r i n g on a n t i c i p a t e d damage. For example, one expects more damage t o occur d u r i n g a l o n g sea voyage i n the n o r t h A t l a n t i c i n midwinter than t r u c k i n g goods a s h o r t d i s t a n c e w i t h i n B r i t i s h Columbia d u r i n g the month of J u l y . To some ext e n t both p a r t i e s c o n t r o l d i s t a n c e , r o u t e and time of year. The buyer seeks out a s p e c i f i c s e l l e r knowing t h a t any goods w i l l have t o t r a v e l over a c e r t a i n r o u t e t o get t o h i s l o c a t i o n . The buyer a l s o s e l e c t s the time of year f o r the t r a n s i t . F or example, a purchase o r d e r made i n October i n v o l v i n g a f o u r month manufacturing time means t h a t the goods w i l l be d e l i v e r e d i n midwinter. The s e l l e r may have some c o n t r o l over the r o u t e the goods w i l l take t o get t o the buyer's l o c a t i o n . When the s e l l e r makes the t r a n s i t arrangements w i t h the c a r r i e r t h e r e may be o p t i o n s over r o u t i n g . The c h o i c e s may be between d i r e c t and i n d i r e c t r o u t e s . The d i r e c t r o u t e s may be more expensive. However, t h i s i s a minor c o n t r o l as the type o f goods and the arrangements made between the p a r t i e s as t o the c o s t o f t r a n s p o r t a t i o n w i l l t o a l a r g e p a r t determine r o u t i n g . 2. Means of T r a n s p o r t a t i o n In s p i t e o f the importance of the s e l e c t i o n o f the means of t r a n s p o r t a t i o n , n e i t h e r p a r t y has e x c l u s i v e c o n t r o l . The 71 means o f t r a n s p o r t a t i o n i s g e n e r a l l y determined by the type of goods b e i n g t r a n s p o r t e d and the d i s t a n c e o f the t r a n s p o r t . For example, c o a l r e q u i r e s a v e r y d i f f e r e n t type o f t r a n s p o r t than does f r u i t . Short d i s t a n c e s over l a n d may be c o n v e n i e n t l y completed by t r u c k . Longer d i s t a n c e s may r e q u i r e r a i l o r ocean t r a n s p o r t . The p a r t i e s can v a r y the means of t r a n s p o r t a t i o n t o a minor e x t e n t . However, the a v a i l a b l e range of v a r i a t i o n i s determined by the economics of the exchange. That i s , the p a r t i e s would not agree t o i n c r e a s e the c o s t s o f t r a n s p o r t a t i o n beyond the p o i n t where i t exceeded the a d d i t i o n a l b e n e f i t gained. 3. C l a s s o f V e s s e l The s e l e c t i o n o f a s p e c i f i c c l a s s o f v e s s e l w i t h i n the t r a n s p o r t group i s a l s o important. As one might expect, a modern l i n e r p l y i n g the North A t l a n t i c would o c c a s i o n l e s s e x t e r n a l l y caused damage than would a pre-World War I I v i n t a g e tramp steamer. However, g r e a t e r s e c u r i t y means g r e a t e r c o s t and thus the two are f r e q u e n t l y t r a d e d o f f . The s e l l e r has a l i m i t e d c o n t r o l over the s e l e c t i o n o f the c l a s s o f v e s s e l . The s e l l e r ' s f a m i l i a r i t y w i t h the goods be i n g s o l d p r o v i d e s him wit h knowledge r e g a r d i n g t h e i r s p e c i f i c f r a g i l i t y and the r i s k s o c c a s i o n e d by t r a n s p o r t . T h i s knowledge ought t o be r e v e a l e d d u r i n g the n e g o t i a t i o n over the c o s t o f the product and the c o s t s o f t r a n s p o r t a t i o n . 72 In a d d i t i o n , s i n c e the s e l l e r arranges the t r a n s p o r t he may have the o p t i o n t o c o n t r a c t w i t h a c a r r i e r u s i n g a b e t t e r c l a s s o f v e s s e l . The s e l l e r ' s a b i l i t y t o e f f e c t the s e l e c t i o n o f c l a s s of v e s s e l i s l i m i t e d by the buyer's w i l l i n g n e s s t o pay the a d d i t i o n a l c o s t s o f t r a n s p o r t . The buyer's c o n t r o l over the c o s t s o f t r a n s p o r t i m p l i e s a j o i n t c o n t r o l over t h i s f a c t o r . 4. V e s s e l s W i t h i n C l a s s W i t h i n a c l a s s of v e s s e l some v e s s e l s have b e t t e r r e c o r d s than o t h e r s i n the amount of damage which occurs d u r i n g a normal voyage. Stevedores and crews may be p r o v i d e d g r e a t e r i n c e n t i v e and t r a i n i n g by the t r a n s p o r t company t o improve performance and thus minimize the i n e v i t a b l e bumps and scrapes t h a t goods are s u b j e c t e d t o d u r i n g l o a d i n g and u n l o a d i n g . The i n c e n t i v e s and t r a i n i n g may a l s o l e a d t o a r e d u c t i o n i n the i n c i d e n t s o f n e g l i g e n c e c a u s i n g damage t o the goods. The n a v i g a t o r and master may be encouraged t o p l o t and s t e e r a course through s a f e r waters. T h i s means t h a t the voyage may be more expensive measured i n time and f u e l , but i t would reduce the wear and t e a r on the goods and the r i s k o f t h e i r l o s s d u r i n g the t r i p . To the exte n t t h a t the s e l l e r ' s c h o i c e o f v e s s e l w i t h i n the c l a s s i s not l i m i t e d by the buyer's u n w i l l i n g n e s s t o pay f o r s u p e r i o r s e r v i c e , the s e l l e r c o n t r o l s the c h o i c e o f v e s s e l . The s e l l e r ' s knowledge of the goods coupled w i t h h i s 73 ex p e r i e n c e i n t r a n s p o r t i n g goods out of l o c a l p o r t s p r o v i d e s him w i t h an a b i l i t y t o s e l e c t the v e s s e l w i t h the b e s t l o s s p r e v e n t i o n r e c o r d a v a i l a b l e . In a d d i t i o n , the s e l l e r ' s r e s p o n s i b i l i t y t o arrange the shipment puts him i n d i r e c t c o n t r o l o f the d e c i s i o n making p r o c e s s . 5. Method of Stowage The method of stowage on board the v e s s e l i s another f a c t o r which may determine the l e v e l o f damage d u r i n g a t r a n s i t . The l o c a t i o n and c o n d i t i o n of the stowage has a d i r e c t b e a r i n g on the expected r i s k s t o the goods. Goods stowed on deck are more l i k e l y t o d e t e r i o r a t e than goods s a f e l y p l a c e d i n a stowage compartment. N a t u r a l l y , deck stowage i s l e s s expensive than the a l t e r n a t i v e s below deck. There are a v a r i e t y o f arrangements of below deck stowage. Each possesses a c o s t / b e n e f i t i n r e l a t i o n t o the expected r i s k s . The q u a l i t y o f v e n t i l a t i o n and r e f r i g e r a t i o n a v a i l a b l e i n the stowage compartment may have an impact on the goods. T h i s i s e s p e c i a l l y t r u e of p e r i s h a b l e s . The c o s t s of stowage i n s p e c i a l compartments are u s u a l l y g r e a t e r than i n g e n e r a l stowage. The a c t u a l placement of the goods has an impact. For example, goods on the bottom of p i l e s have a g r e a t e r l i k e l i h o o d o f b e i n g crushed than do goods a t the top. 74 S i n c e the s e l l e r has the r e s p o n s i b i l i t y t o arrange the c a r r i a g e , he ought t o be r e s p o n s i b l e f o r the type of stowage. However, the buyer may be u n w i l l i n g t o pay f o r s u p e r i o r stowage i f the r e t u r n does not j u s t i f y the exp e n d i t u r e . 6 . V a l u a t i o n V a l u a t i o n under the C a r r i a g e By Water A c t has l i t t l e d i r e c t impact on a n t i c i p a t e d damage. The reason f o r t h i s i s t h a t the c a r r i e r ' s r e s p o n s i b i l i t y must be based on showing a t a minimum some n e g l i g e n c e . Negligence i s always unexpected. However, s i n c e a r e a l i s t i c v a l u a t i o n o f the goods makes the c a r r i e r an i n s u r e r a g a i n s t h i s own n e g l i g e n c e , a r e a l i s t i c v a l u a t i o n may encourage the c a r r i e r t o e x e r c i s e g r e a t e r care over the goods. T h i s may reduce the l i k e l i h o o d o f any damage o c c u r r i n g d u r i n g t r a n s i t . The s e l l e r ought t o be r e s p o n s i b l e f o r v a l u a t i o n s i n c e he makes the c o n t r a c t w i t h the c a r r i e r . A r e a l i s t i c v a l u a t i o n r a i s e s the c o s t s o f the c a r r i a g e . Hence, t h i s c o s t may be j u s t i f i e d simply t o p r o v i d e an i n d i r e c t c o n t r o l on a n t i c i p a t e d damage. Although, the buyer may be u n w i l l i n g t o pay the a d d i t i o n a l c a r r i a g e c o s t s . 7 i Packaging and D u r a b i l i t y The l e v e l o f packaging and i n h e r e n t d u r a b i l i t y o f the goods has an impact on damage. The l e v e l o f damage which o c c u r s d u r i n g a voyage may be decreased by improvements i n the l e v e l o f packaging and d u r a b i l i t y . 75 The s e l l e r has e x c l u s i v e c o n t r o l of the goods d u r i n g t h e i r p r e p a r a t i o n f o r t r a n s i t . Thus, the s e l l e r has the onl y o p p o r t u n i t y t o p r o v i d e s u f f i c i e n t packaging and d u r a b i l i t y t o ensure a t r a n s i t f r e e o f any type o f damage. However, the c o s t o f a d d i t i o n a l packaging and d u r a b i l i t y which would e l i m i n a t e o r reduce a n t i c i p a t e d damage adds t o the c o s t o f the goods. The buyer may be u n w i l l i n g t o pay f o r p r o t e c t i o n t h a t c o s t s more than i t i s guaranteed t o r e t u r n i n r e d u c t i o n o f damage. 8. I n s p e c t i o n and M i t i g a t i o n The buyer i s the o n l y p a r t y p r e s e n t a t the end of the t r a n s i t . Thus, he has the e x c l u s i v e o p p o r t u n i t y t o i n s p e c t the goods and take whatever a c t i o n i s necessary t o sa l v a g e them. T h i s p r o v i d e s the buyer w i t h an a b i l i t y t o determine i f the c a r r i e r has been a t f a u l t f o r any damage t o the goods. The d e t e r r e n t o f i n s p e c t i o n may p r o v i d e the c a r r i e r w i t h i n c e n t i v e t o improve i t s o v e r a l l performance which would presumably reduce the l e v e l of damage. In a d d i t i o n , i f the goods have become u n s u i t e d f o r t h e i r o r i g i n a l purpose due t o damage s u f f e r e d d u r i n g the voyage, the buyer i s i n the b e s t p o s i t i o n t o m i t i g a t e the l o s s . That i s , the buyer b e i n g i n the b u s i n e s s o f buying the s p e c i f i c goods f o r r e s a l e o r f u r t h e r manufacture i s i n the b e s t p o s i t i o n t o s e l l goods which are below the standard he r e q u i r e s . 76 Moreover, the buyer presumably has l o c a l knowledge r e g a r d i n g markets i n h i s area and thus i s b e t t e r s u i t e d t o r e s e l l damaged goods. 9. Remedy C l o s e l y a s s o c i a t e d w i t h the p h y s i c a l p o s i t i o n i n g o f the buyer a t the end of the t r a n s i t i s the f a c t t h a t he has the b e s t o p p o r t u n i t y t o seek a remedy a g a i n s t the c a r r i e r . I t may be v e r y d i f f i c u l t f o r the s e l l e r t o i n s t i t u t e a law s u i t a g a i n s t a c a r r i e r due t o problems of j u r i s d i c t i o n and s e r v i c e of p r o c e s s . The buyer's advantage i s t h a t the c a r r i e r and the damaged goods are i n the same p l a c e a t the same time. Moreover, under many domestic maritime law regimes, the owner o f goods has a r i g h t t o l i e n an o f f e n d i n g v e s s e l f o r damage done t o goods d u r i n g t r a n s i t . As t h i s type o f procedure i s f a c i l i t a t e d by immediate a c t i o n and a h i g h l e v e l o f s u p e r v i s i o n , presence a t the p o i n t o f d e l i v e r y i s v e r y important. 10. Summary of R i s k F a c t o r s 77 BUYER 1. D i s t a n c e 2. Time of Year 3. I n s p e c t i o n 4. M i t i g a t i o n 5. Remedy BUYER AND SELLER SELLER 1. C l a s s of V e s s e l 1. S p e c i f i c C a r r i e r 2. D u r a b i l i t y 3. Packaging 4. Stowage 5. V a l u a t i o n 78 CHAPTER FIVE ANTICIPATED DAMAGE A. The Optimal Model The p a r t i e s cannot i n s u r e a g a i n s t a n t i c i p a t e d damage due t o the f a c t t h a t i t s occurrence i s by d e f i n i t i o n a c e r t a i n t y . 1 6 8 The concept of ins u r a n c e i s o n l y v a l i d as long as the event i s a p r o b a b i l i t y . Thus, the p a r t i e s * c a p a c i t y t o s e l f i n s u r e o r t o o b t a i n t h i r d p a r t y i n s u r a n c e i s not r e l e v a n t . S i n c e the occurrence o f the r i s k cannot be completely c o n t r o l l e d , the o n l y e f f i c i e n t way t o d e a l w i t h r i s k i s t o lower the i n c i d e n c e o f i t s occurrence and t o reduce i t s impact when i t does occur. T h i s i s achieved by making p a r t i e s r e s p o n s i b l e f o r f a c t o r s under t h e i r e x c l u s i v e c o n t r o l . T h i s p r o v i d e s an i n c e n t i v e t o the p a r t i e s t o a c t i n ways which decrease the occurrence and impact of the r i s k . 1. D e c r e a s i n g R i s k o f Occurrence There are two s e t s o f f a c t o r s which bear on d e c r e a s i n g the occurrence o f the r i s k . The f i r s t s e t d e a l s w i t h r e d u c i n g the exposure of the goods t o hazardous c o n d i t i o n s . T h i s s e t i n c l u d e s the f a c t o r s o f d i s t a n c e , time of year, c l a s s of v e s s e l , d u r a b i l i t y , packaging, s p e c i f i c c a r r i e r , stowage and . Sassoon, David M. "Damage R e s u l t i n g From N a t u r a l Decay Under Insurance, c a r r i a g e and S a l e o f Goods C o n t r a c t s " (1965), 28 Modern Law Review 180, p. 180. 79 v a l u a t i o n . The second s e t d e a l s w i t h s t i m u l a t i n g the market p l a c e t o d i s c r i m i n a t e a g a i n s t poor pe r f o r m i n g c a r r i e r s . T h i s s e t i s composed of the s p e c i f i c c a r r i e r f a c t o r . D i s t a n c e , r o u t e s and time of year are f a c t o r s which have some i n f l u e n c e on the occurrence of a n t i c i p a t e d damage. To the e x t e n t of t h e i r i n f l u e n c e , the buyer's d e c i s i o n s of when and from whom t o purchase goods have an impact on the r i s k . However, i f the buyer i s saddled w i t h the r e s p o n s i b i l i t y f o r the e f f e c t s of these d e c i s i o n s h i s c o s t s w i l l v a r y on a s e a s o n a l b a s i s and w i t h the l o c a t i o n of the s e l l e r . The consequence of t h i s i s t h a t buyers i n g e n e r a l w i l l be d e t e r r e d from p u r c h a s i n g goods f o r d e l i v e r y over l o n g d i s t a n c e s and d u r i n g the w i n t e r months. In s a l e s i n v o l v i n g l o n g d i s t a n c e c a r r i a g e , the buyer i s a l r e a d y saddled w i t h the i n c r e a s e d c o s t s of t r a n s p o r t a t i o n . Adding the r i s k of a n t i c i p a t e d damage p r o v i d e s an even g r e a t e r d i s i n c e n t i v e . Packaging and d u r a b i l i t y are f a c t o r s which have the t h e o r e t i c a l c a p a c i t y t o e l i m i n a t e the r i s k of a n t i c i p a t e d d e t e r i o r a t i o n . However, as i n d i c a t e d above, th e s e f a c t o r s are j o i n t l y c o n t r o l l e d through the p r o c e s s of c o s t s h a r i n g . That i s , any i n c r e a s e i n the c o s t t o the s e l l e r of packaging or d u r a b i l i t y i s passed on t o the buyer. I f he r e f u s e s t o pay f o r the added p r o t e c t i o n , the s e l l e r o b v i o u s l y w i l l not p r o v i d e i t . Hence, an a l l o c a t i o n of r e s p o n s i b i l i t y because of t h e s e f a c t o r s w i l l not l e a d t o a more e f f i c i e n t outcome r e g a r d i n g a n t i c i p a t e d d e t e r i o r a t i o n . 80 The f a c t o r s of c l a s s of c a r r i e r and s p e c i f i c c a r r i e r w i t h i n the c l a s s bear d i r e c t l y on d e c r e a s i n g the r i s k of a n t i c i p a t e d d e t e r i o r a t i o n . The former f a c t o r i s j o i n t l y c o n t r o l l e d and thus s u f f e r s from a problem d i s c u s s e d above. That i s , the buyer must agree on an i n c r e a s e i n the c o s t of t r a n s p o r t a t i o n b e f o r e the s e l l e r w i l l be w i l l i n g t o purchase a h i g h e r q u a l i t y c a r r i e r . Hence, t o a l l o c a t e r e s p o n s i b i l i t y f o r a n t i c i p a t e d d e t e r i o r a t i o n based on t h i s f a c t o r would be t o no a v a i l . The c h o i c e of the s p e c i f i c c a r r i e r i s another matter. W i t h i n a g i v e n c o s t s t r u c t u r e a number of c a r r i e r s are a v a i l a b l e f o r h i r e . The s e l l e r ' s c h o i c e of c a r r i e r may based on a number of c r i t e r i a i n c l u d i n g h i s t o r i c a l r e l a t i o n s h i p , promotion or a d v e r t i s i n g . By making the s e l l e r r e s p o n s i b l e f o r the r i s k of a n t i c i p a t e d d e t e r i o r a t i o n the s e l l e r w i l l be encouraged t o base the c h o i c e on the r e d u c t i o n of h i s r i s k . Thus, v e s s e l s w i t h r e c o r d s of h i g h i n c i d e n t s of damage t o goods w i l l be weeded out of the i n d u s t r y . The f i n a l f a c t o r s i n t h i s category of stowage and v a l u a t i o n bear on the p r e v e n t i o n of a n t i c i p a t e d d e t e r i o r a t i o n as w e l l . The s e l l e r arranges stowage and v a l u a t i o n as p a r t of h i s arrangement of t r a n s p o r t . An i n c r e a s e i n the q u a l i t y of stowage or v a l u a t i o n w i l l e n t a i l an i n c r e a s e i n the c o s t of shipment. S i n c e the buyer i s r e s p o n s i b l e f o r the c o s t of c a r r i a g e , the s e l l e r cannot purchase an i n c r e a s e i n q u a l i t y without the concurrence of the buyer. 81 2. Decreasing Consequence of the Damage The consequences of the damage may be minimized by f a s t a c t i o n on the p a r t of one or both of the p a r t i e s . F i r s t , i f i t i s e c o n o m i c a l l y p o s s i b l e the damage must be stopped i f c o n t i n u i n g and r e p a i r e d . Second, the goods ought t o be s o l d a t the h i g h e s t v a l u e i n the circumstances. The buyer's p o s i t i o n a t the end of t r a n s i t puts him i n the most a p p r o p r i a t e p o s i t i o n t o e f f e c t both g o a l s . I t would be i m p o s s i b l e f o r the s e l l e r t o d u p l i c a t e the buyer's advantage by m a i n t a i n i n g a presence a t the l o c a t i o n of each of h i s buyers. The buyer's e x c l u s i v e o p p o r t u n i t y t o i n s p e c t the goods upon t h e i r a r r i v a l p r o v i d e s the o p p o r t u n i t y f o r immediate a c t i o n t o prevent f u r t h e r damage t o the goods. Water damaged goods may be salvaged by c l e a n i n g and d r y i n g . R i p e n i n g p e r i s h a b l e s may be r e f r i g e r a t e d . The buyer's s u p e r i o r knowledge of r e p a i r f a c i l i t i e s and markets a t h i s l o c a t i o n p r o v i d e s the buyer w i t h the o p p o r t u n i t y t o salvage damaged goods at t h e i r b e s t v a l u e . D u p l i c a t i o n by the s e l l e r would r e q u i r e t r a v e l t o the buyer's l o c a t i o n and time t o become acquainted w i t h l o c a l f a c i l i t i e s . Without the r e s p o n s i b i l i t y f o r immediate a c t i o n the buyer would not i n t e r c e d e t o p r o t e c t the goods. The buyer would e i t h e r n e g o t i a t e w i t h the s e l l e r r e g a r d i n g c o n s i d e r a t i o n f o r 82 h i s s e r v i c e s or back o f f from the s a l e t o seek a l e g a l remedy. In e i t h e r case the goods would c o n t i n u e t o d e t e r i o r a t e . 3. D i v i s i o n of the R i s k The r i s k of a n t i c i p a t e d d e t e r i o r a t i o n ought t o be d i v i d e d between the p a r t i e s . There are f o u r reasons f o r t h i s . The f i r s t i s t h a t t h e r e are a g r e a t number of r i s k f a c t o r s which are under both p a r t i e s ' c o n t r o l . They are c l a s s of v e s s e l , stowage, v a l u a t i o n , packaging and d u r a b i l i t y . I f the t o t a l r i s k was passed on t o one p a r t y or the o t h e r , the f a c t o r s under j o i n t c o n t r o l may r e c e i v e unequal treatment. The second i s t h a t both p a r t i e s have e x c l u s i v e c o n t r o l over f a c t o r s which i n f l u e n c e the occurrence and s e v e r i t y of the r i s k . The buyer c o n t r o l s d i s t a n c e , time of year, r o u t i n g , i n s p e c t i o n and m i t i g a t i o n . The s e l l e r c o n t r o l s the s p e c i f i c c a r r i e r . Making one p a r t y s o l e l y r e s p o n s i b l e f o r the r i s k decreases the i n c e n t i v e t o the o t h e r of e x e r c i s i n g c a r e over the r i s k f a c t o r s under t h e i r c o n t r o l . The t h i r d i s i f the buyer i s saddled w i t h the r i s k buyers w i l l be p r o v i d e d an i n c e n t i v e which may d i s t o r t p u r c h a s i n g b e h a v i o r . Buyers would be encouraged t o purchase l o c a l l y . I f a l o c a l purchase i s not p o s s i b l e , buyers would tend t o purchase on a s easonal b a s i s . N e i t h e r b e h a v i o r i s i n the i n t e r e s t o f u n i v e r s a l and continuous t r a d e . 83 The f o u r t h reason f o r a d i v i s i o n o f r i s k i s based on the f a c t t h a t i n most cases the c a r r i e r w i l l not be h e l d l i a b l e f o r a n t i c i p a t e d damage. Thus, the o n l y method of i n t e r n a l i z i n g t he c o s t o f a l a c k l u s t e r performance on the p a r t of t h e c a r r i e r i s t o make the s e l e c t i o n p r o c e s s dependent upon a r e c o r d o f low l e v e l s of t h i s type of damage. T h i s i s onl y accomplished by making the s e l l e r bear some r i s k over the h i r i n g o f the c a r r i e r . A d i v i s i o n o f the r i s k may be e f f e c t e d by two d e v i c e s . The f i r s t i s t o r e q u i r e o n l y an approximate performance from the s e l l e r . That i s , r a t h e r than r e q u i r e t h a t the goods p e r f e c t l y conform a t the c o n c l u s i o n o f the t r a n s i t , the op t i m a l model ought t o r e q u i r e o n l y g e n e r a l f i t n e s s f o r the purpose f o r which they were intended. The r e s u l t of r e q u i r i n g a lower l e v e l o f performance on the p a r t o f the s e l l e r takes i n t o account the f a c t t h a t the goods w i l l s u f f e r some d e t e r i o r a t i o n i n t r a n s i t . The buyer knows a t the o u t s e t t h a t the goods when they a r r i v e a t h i s l o c a t i o n w i l l o n l y approximate the c o n t r a c t d e s c r i p t i o n . Thus, the buyer w i l l p r o v i d e a d e s c r i p t i o n which r e q u i r e s a s u f f i c i e n t l y h i g h l e v e l o f performance t h a t even an approximation w i l l s e rve h i s needs. The second d e v i c e i s t o make the s e l l e r r e s p o n s i b l e f o r any a n t i c i p a t e d d e t e r i o r a t i o n which makes the goods f a i l t o conform t o t h e i r approximate d e s c r i p t i o n . Coupled w i t h t h i s i s t o make the buyer's r i g h t t o r e c e i v e approximately 84 conforming goods a damage r i g h t i n s t e a d of a p r o p e r t y r i g h t . I f the buyer i s p r o v i d e d the r i g h t t o r e j e c t goods t h a t s u f f e r e d from a n t i c i p a t e d d e t e r i o r a t i o n beyond an approximate performance, then the buyer's c a p a c i t y as the s u p e r i o r m i t i g a t o r would not be taken i n t o account. B. The S a l e of Goods A c t Model The S a l e of Goods A c t and Common Law d i v i d e n e c e s s a r i l y i n c i d e n t a l d e t e r i o r a t i o n i n t o two c a t e g o r i e s . The f i r s t i s d e f i n e d i n s e c t i o n 37 and i n c l u d e s d e t e r i o r a t i o n which can be a t t r i b u t e d t o the events of the t r a n s i t i t s e l f . The second i s d e f i n e d as d e t e r i o r a t i o n which r e s u l t s from an i n t e r n a l cause. T h i s l a t t e r c a t e g o r y i s h i g h l i g h t e d i n the case of Mash,  and M u r r e l l L t d . v. Joseph I. Emanuel L t d ' 1 6 9 D i p l o c k J . d e f i n e d the r u l e t h a t a n t i c i p a t e d d e t e r i o r a t i o n due t o an i n t e r n a l cause i s the r e s p o n s i b i l i t y of the s e l l e r : . . . t h ere i s an i m p l i e d warranty not merely t h a t they s h a l l be merchantable a t the time they are put on the v e s s e l , but t h a t they s h a l l be i n such a s t a t e t h a t they can endure the normal journey and be i n a merchantable c o n d i t i o n upon a r r i v a l . 1 7 0 Although a s a l e s c o n t r a c t r e q u i r e s p e r f e c t c o n f o r m i t y , Mr. J u s t i c e D i p l o c k d i d not r e q u i r e t h a t standard of the defendants Joseph I. Emanuel L t d . Instead, H i s L o r d s h i p . [1961] 1 W.W.R. 862, (Q.B. The d e c i s i o n was r e v e r s e d on f a c t u a l grounds i n the Court of Appeal; [1962] 1 A l l E. R. 770) 1 V 0 . I b i d , p. 866. 85 r e q u i r e d o n l y m e r c h a n t a b i l i t y . M e r c h a n t a b i l i t y r e q u i r e s t h a t the goods be o f a q u a l i t y capable o f s a l e under the 171 d e s c r i p t i o n . In c o n t r a s t , the former category, d e t e r i o r a t i o n which can be a t t r i b u t e d t o the events of the t r a n s i t i t s e l f , i s the r e s p o n s i b i l i t y o f the buyer. T h i s r u l e i s i l l u s t r a t e d by the o l d but s t i l l a u t h o r i t a t i v e case o f B u l l v. R o b i n s o n . 1 7 2 F o r t y y e a r s b e f o r e the S a l e o f Goods A c t was enacted the Exchequer Court i n B u l l v. Robinson d e c i d e d t h a t even when the s e l l e r t akes the r e s p o n s i b i l i t y f o r r i s k d u r i n g t r a n s i t , the buyer bears the r e s p o n s i b i l i t y f o r a n t i c i p a t e d d e t e r i o r a t i o n o c c u r r i n g d u r i n g a normal t r a n s i t due t o the course o f t r a n s i t i t s e l f . The case i n v o l v e d hoop i r o n which r u s t e d t o a unmerchantable s t a t e d u r i n g a c a n a l voyage from S t a f f o r d s h i r e t o L i v e r p o o l d u r i n g w i n t e r . The Exchequer c o u r t found as a f a c t t h a t no i r o n c o u l d s u r v i v e a w i n t e r t r i p on the c a n a l s without r u s t i n g t o the same exte n t t h a t t h i s i r o n d i d . The Court h e l d t h a t the s e l l e r c o u l d not be expected t o do the i m p o s s i b l e and d e l i v e r conforming hoop i r o n by c a n a l i n m i d w i n t e r . 1 7 3 ± , ± . S c h m i t t h o f f , C l i v e M. The S a l e o f Goods. 2nd. ed. London: Stevens & Sons, 1966, p. 141. 1 7 2 . (1854), 10 Exchequer Reports 341 (Exchequer Court) 1 7 3 . I b i d , p. 344. 86 The Court's r a t i o n a l was based on the buyer's knowledge of t h e r i s k s when he c o n t r a c t e d . The Court made the assumption t h a t the buyer ought t o have been aware of the proba b l e s t a t e o f the i r o n a f t e r such a t r a n s i t . 1 7 4 A p p a r e n t l y t h i s awareness should have come from the buyer's e x p e r i e n c e i n t r a v e l l i n g from h i s home i n L i v e r p o o l a l l the way t o S t a f f o r d s h i r e t o buy the goods. F u r t h e r , the Court made t h i s assumption i g n o r i n g the s e l l e r ' s knowledge of the r i g o r s of the t r i p and i n s p i t e of the f a c t t h a t the s e l l e r had agreed t o accept the r i s k s o f t r a n s i t . Presumably the buyer n e g o t i a t e d w i t h the s e l l e r and p a i d f o r the p r i v i l e g e of r e c e i v i n g conforming goods i n L i v e r p o o l . In summary, i t i s c l e a r t h a t d e c i s i o n s under the S a l e of Goods A c t r e q u i r e s a d e t e r m i n a t i o n of the cause of the damage i n o r d e r t o a l l o c a t e r e s p o n s i b i l i t y . A c c o r d i n g t o Mash and  M u r r e l l a n t i c i p a t e d damage due t o i n t e r n a l causes i s the r e s p o n s i b i l i t y o f the s e l l e r . Whereas, a c c o r d i n g t o the r u l e s t a t e d i n B u l l v. Robinson, e x t e r n a l l y caused d e t e r i o r a t i o n i s the r e s p o n s i b i l i t y o f the buyer. 1 7 4 . I b i d 87 C. Comparison of the S a l e of Goods A c t and The Optimal Models 1. General Comparison I n t e r e s t i n g l y , the Mash & M u r r e l l f o r m u l a t i o n f o r i n t e r n a l l y caused d e t e r i o r a t i o n i s i d e n t i c a l t o the optimal model. That i s , the s e l l e r i s r e s p o n s i b l e f o r a l l damage which d e t r a c t s from the goods m e r c h a n t a b i l i t y or approximate c o n f o r m i t y except i n s i t u a t i o n s where the damage r e s u l t s from a cause e x t e r n a l t o the goods. The remedy f o r breach of warranty i s damages i n s t e a d of r e j e c t i o n . The buyer i s r e s p o n s i b l e f o r the d i f f e r e n c e between the p e r f e c t s t a t e (conforming s t a t e ) and the approximate s t a t e (merchantable s t a t e ) . The d i f f e r e n c e between the S a l e of Goods A c t and the o p t i m a l model concerns the e x i s t e n c e of the c a u s a l d i s t i n c t i o n i n the former. In the B u l l s i t u a t i o n the buyer i s r e s p o n s i b l e f o r a n t i c i p a t e d damage caused by the c a r r i a g e . Under t h i s f o r m u l a t i o n each and every time a c o u r t d e c i d e s a d e t e r i o r a t i o n case, a d i s t i n c t i o n i s made based on the cause of the damage. Making t h i s d i s t i n c t i o n i s v e r y d i f f i c u l t . For example, i n the B u l l d e c i s i o n , the Exchequer Court c o u l d have e a s i l y determined t h a t the i r o n r u s t e d due t o i n t e r n a l i n s t e a d of e x t e r n a l causes. Thus, on t h a t b a s i s the s e l l e r would have been r e s p o n s i b l e f o r the r u s t i n g of the i r o n . 88 2. L e g a l C l a r i t y and Conformity t o Common E x p e c t a t i o n The r i s k r u l e f o r m u l a t i o n as i l l u s t r a t e d i n the B u l l d e c i s i o n l a c k s l e g a l c l a r i t y . In a d d i t i o n , i t does not correspond t o the common e x p e c t a t i o n . The a l l o c a t i o n o f r e s p o n s i b i l i t y based on c a u s a t i o n c o m p l i c a t e s the r u l e . I t i s ve r y d i f f i c u l t t o d i s t i n g u i s h between d e t e r i o r a t i o n caused by the t r a n s i t and o t h e r causes o f d e t e r i o r a t i o n . G e n e r a l l y , a n t i c i p a t e d d e t e r i o r a t i o n i s caused by an i n t e r a c t i o n of a number of f a c t o r s . Some of these f a c t o r s are r e l a t e d t o the c a r r i a g e and some are r e l a t e d t o the goods. For example, a rough voyage and s p e c i a l f r a g i l i t y may i n t e r a c t w i t h an i n f e r i o r arrangement of c a r r i a g e t o cause damage t o the goods. Thus, a t t r i b u t i n g r e s p o n s i b i l i t y t o any one cause i s v e r y d i f f i c u l t . Moreover, t o do so i n some cases may be i m p o s s i b l e . The e x e r c i s e o f attempting t o p r e d i c t the p o t e n t i a l causes o f a n t i c i p a t e d d e t e r i o r a t i o n and account f o r them ex ante g r e a t l y i n c r e a s e s the u n c e r t a i n t y of a c o n t r a c t . In a d d i t i o n , i s o l a t i n g causes o f damage a f t e r a l o s s has been d i s c o v e r e d i n c r e a s e s the c o s t s o f r e s o l v i n g d i s p u t e s ex post. Another component of the c l a r i t y i s s u e i s t h a t the Sal e of Goods A c t r u l e f o r c e s the buyer t o engage i n c o s t l y r e s e a r c h i n order t o predetermine the exposure o f good t o a n t i c i p a t e d damage. In the B u l l case f o r example, the buyer o b v i o u s l y thought t h a t the hoop i r o n would a r r i v e i n a us a b l e 89 form. Otherwise he would never have purchased i t . The s e l l e r p o s s e s s i n g a g r e a t e r awareness of h i s product may have known t h a t the i r o n would not s u r v i v e the t r i p on the c a n a l s . However, he a p p a r e n t l y was under no duty t o d i s c l o s e t h i s t o the buyer. From the p o i n t of view of businessmen the r u l e i n B u l l comes as a b i t of a s u r p r i s e . Basing r e s p o n s i b i l i t y on c a u s a l d i s t i n c t i o n s may seem a r b i t r a r y t o t r a d e r s unacquainted w i t h the law. To the businessman c a u s a l d i s t i n c t i o n s make l i t t l e sense. They do not a s s i s t i n the p r e d i c t i o n of r i s k s ex ante nor t o the r e s o l u t i o n of d i s p u t e s ex p o s t . The f a c t t h a t the buyer ought t o bear the r i s k o f a n t i c i p a t e d damage when the s e l l e r knows more about the product and arranges the t r a n s i t i s a l s o s u r p r i s i n g t o the businessman. F i r s t , common b u s i n e s s sense d i c t a t e s t h a t the person who possesses the b e s t a b i l i t y t o perform ought t o bear the r i s k o f nonperformance. The s e l l e r has g r e a t e r f a m i l i a r i t y w i t h the product and arranges the t r a n s p o r t . Thus, he appears t o have a s u p e r i o r a b i l i t y t o prevent l o s s e s due t o causes r e l a t e d t o the t r a n s p o r t . Second, businessmen count on the proper working of a c o m p e t i t i v e market. Rules which enhance the o p e r a t i o n of the market g a i n t h e i r h i g h e s t acceptance. R e l i e v i n g the s e l l e r o f r e s p o n s i b i l i t y f o r h i s c h o i c e of t r a n s i t company d e t r a c t s from the o p t i m a l o p e r a t i o n of the market. Thus such a r u l e w i l l f i n d l i t t l e acceptance. 90 3. Reduction o f A v o i d a b l e Losses The r u l e i n B u l l does not promote a r e d u c t i o n o f a v o i d a b l e l o s s e s . S i n c e the s e l l e r i s not r e s p o n s i b l e f o r a n t i c i p a t e d d e t e r i o r a t i o n caused by the t r a n s i t he has no i n c e n t i v e t o h i r e c a r r i e r s and arrange stowage t o reduce i t s r i s k o f occur r e n c e . Nor i s he p r o v i d e d i n c e n t i v e t o package and i n s t a l l d u r a b i l i t y i n such a way as t o reduce the occ u r r e n c e of a n t i c i p a t e d damage. Moreover, the u n c e r t a i n t y as t o r e s p o n s i b i l i t y due t o the c a u s a l d i s t i n c t i o n d i l u t e s the i n c e n t i v e p r o v i d e d by the r u l e i n Marsh & M u r r e l l . That i s , the s e l l e r may be l e s s i n c l i n e d t o p r o p e r l y prepare the goods i f he f o r e s e e s c o n f u s i o n over the r e s p o n s i b i l i t y f o r damage. 91 CHAPTER SIX UNANTICIPATED THIRD PARTY DAMAGE A. The Optimal Model The r i s k of t h i r d p a r t y damage i s a r i s k of harm r e s u l t i n g from a c t i o n s of people o t h e r than the p a r t i e s t o the s a l e . Although the buyer and the s e l l e r cannot e c o n o m i c a l l y e l i m i n a t e t h i s r i s k they can t o some exte n t decrease i t s s e v e r i t y . The f i r s t p r i o r i t y of the o p t i m a l model i s the c o n t r o l of the o f f e n d i n g p a r t i e s ' a c t i o n s . T h i s i s accomplished by e n s u r i n g t h a t b e h a v i o r which has a n e g a t i v e e f f e c t on the goods w h i l e i n t r a n s i t i s i n t e r n a l i z e d by the r e s p o n s i b l e p a r t y . 1 7 5 The model's second p r i o r i t y i s t o minimize the consequences of the harm once the goods have been damaged. 1. I n t e r n a l i z a t i o n of the Damage The p a r t i e s possess d i f f e r e n t c a p a c i t i e s t o e n f o r c e i n t e r n a l i z a t i o n of harm by the c a r r i e r . A l l the c a p a c i t i e s should t o be e x e r c i s e d as long as they are n o n c o n f l i c t i n g . The s e l l e r has c o n t r o l over two f a c t o r s which i n t e r n a l i z e the c a r r i e r ' s harmful a c t i v i t i e s . They are the c a p a c i t y t o d i s c r i m i n a t e i n the h i r e of c a r r i e r s and r e q u i r e t h a t a h i g h e r v a l u e f o r the goods be r e f l e c t e d i n the s h i p p i n g documents. 1 7 5 . H i r s c h W.Z. Law and Economics An I n t r o d u c t o r y  A n a l y s i s . New York: Academic Press, 1979, p. 18. 92 The buyer has s u p e r i o r c o n t r o l over one v e r y important f a c t o r . That i s , the c a p a c i t y t o sue the c a r r i e r f o r damages. The s e l l e r ' s c a p a c i t y t o d i s c r i m i n a t e i n the h i r e of a c a r r i e r has both s p e c i f i c and g e n e r a l e f f e c t s . The s p e c i f i c e f f e c t i s t h a t the s e l l e r has the c a p a c i t y t o h i r e v e s s e l s w i t h good r e c o r d s over those which do not possess good r e c o r d s . The obvious consequence i s t h a t the goods w i l l r e c e i v e a h i g h e r standard of care d u r i n g the t r a n s i t . T h i s w i l l reduce the p r o b a b i l i t y of harm. The g e n e r a l e f f e c t concerns the s e l l e r ' s c a p a c i t y t o e f f e c t the c a r r i e r market. The s e l l e r ' s c h o i c e of c a r r i e r p r o v i d e i n c e n t i v e t o conform t o h i s s e l e c t i o n c r i t e r i a . I f he s e l e c t s o n l y v e s s e l s w i t h s u p e r i o r performances, those v e s s e l s w i l l u l t i m a t e l y d r i v e the p o o r l y p e r f o r m i n g v e s s e l s out of b u s i n e s s . The s e l l e r ' s a c t i o n s i n p l a c i n g a h i g h v a l u e on the goods i n the s h i p p i n g documents has o n l y l i m i t e d e f f e c t on c a r r i e r b e h a v i o r . A v a l u a t i o n above the s t a t u t o r y presumption makes the c a r r i e r an i n s u r e r f o r the f u l l v a l u e of the goods. However, due t o the f a c t t h a t the c a r r i e r i s o n l y l i a b l e f o r a s m a l l p o r t i o n of any harm o c c u r r i n g d u r i n g c a r r i a g e , a h i g h v a l u a t i o n o n l y p r o v i d e s the i n c e n t i v e t o make the v e s s e l more seaworthy a t the onset of the voyage and t o improve c a r e over the stowage o f the goods. 93 The damage i n t e r n a l i z i n g f a c t o r under the buyer's c o n t r o l i s h i s c a p a c i t y t o o b t a i n a l e g a l remedy a g a i n s t the c a r r i e r . As t h i s f a c t o r i s c o n t r o l l e d by both a proper v a l u a t i o n of the goods and the c a r r i e r committing s p e c i f i c a c t s or omissions, the remedy has a l i m i t e d impact. N a t u r a l l y , both the s e l l e r and the buyer have the c a p a c i t y t o sue the c a r r i e r f o r damages. However, an enhanced a b i l i t y means t h a t i t can be done w i t h lower t r a n s a c t i o n c o s t s and thus the m a r g i n a l v a l u e of the l a w s u i t i s enhanced. Enhanced a b i l i t y t o seek a remedy e f f e c t s the g e n e r a l market by f o r c i n g i n e f f i c i e n t companies out of b u s i n e s s . T h i s i s a c h i e v e d by making i n e f f i c i e n t companies pay damage awards f o r l o s s e s o c c u r r i n g d u r i n g t r a n s i t s . The r e s u l t i n g i n c r e a s e i n i n s u r a n c e premiums has a n e g a t i v e e f f e c t on a c c i d e n t prone c a r r i e r s . The c a p a c i t y of the p a r t i e s t o make the c a r r i e r bear the r e s p o n s i b i l i t y f o r harm t o the goods may be grouped i n t o two c a t e g o r i e s . The f i r s t c a t e g o r y concerns both the g e n e r a l and s p e c i f i c e f f e c t s of d i s c r i m i n a t i n g i n the h i r e of the c a r r i a g e . The second categ o r y concerns the a b i l i t y of the p a r t i e s t o put p r e s s u r e on the c a r r i e r t o perform through the use of h i g h v a l u a t i o n and a c c e s s i b l e remedy. R e s p o n s i b i l i t y i n the second categ o r y i s shared by the p a r t i e s . A d d i t i o n a l l y , e f f i c i e n c y r e q u i r e s t h a t c a p a c i t i e s i n both c a t e g o r i e s be e x e r c i s e d t o ensure i n t e r n a l i z a t i o n . The problem i s f i n d i n g a s u i t a b l e mix of r e s p o n s i b i l i t y . 94 Both p a r t i e s cannot s i m u l t a n e o u s l y bear the r i s k o f t h i r d p a r t y damage. Nor can t h i s r i s k be broken down i n t o components which can be shared by the p a r t i e s a c c o r d i n g t o t h e i r c a p a c i t i e s . The a l t e r n a t i v e i s t o a l l o c a t e the r i s k of a s p e c i f i c performance t o e i t h e r the buyer or the s e l l e r . The s e l l e r ' s d u t i e s under the heading of arrangement of t r a n s p o r t c o u l d be s p e c i f i c a l l y d e f i n e d as r e q u i r i n g a reaso n a b l e s e l e c t i o n o f v e s s e l and the c o r r e c t documentation of v a l u e f o r the goods t o be shipped. The j u s t i f i c a t i o n f o r t h i s i s the s e l l e r ' s a b i l i t y t o i n f l u e n c e the market and t o arrange r e l i a b l e t r a n s p o r t f o r the goods. A d d i t i o n a l l y , the s e l l e r can improve the e f f i c a c y o f the remedy as a t o o l by p r o p e r l y e v a l u a t i n g the goods. The buyer ought t o be r e s p o n s i b l e f o r damage caused which i s a c t i o n a b l e a g a i n s t the c a r r i e r . The j u s t i f i c a t i o n f o r t h i s i s the buyer's s u p e r i o r a b i l i t y t o e f f e c t a l e g a l remedy. 2. M i n i m i z a t i o n of the Consequences of the Damage A major f a c t o r c o n t r o l l e d by the buyer i s m i t i g a t i o n . The buyer's s u p e r i o r a b i l i t y t o m i t i g a t e damage weighs h e a v i l y i n making him r e s p o n s i b l e f o r the m i n i m i z a t i o n o f the consequences of damage. However, some of the f a c t o r s b e a r i n g on the m i n i m i z a t i o n of damage are c o n t r o l l e d j o i n t l y by the p a r t i e s , e.g., the f a c t o r s o f stowage, c l a s s o f v e s s e l , packaging and d u r a b i l i t y . I f one p a r t y i s a s s i g n e d e x c l u s i v e r e s p o n s i b i l i t y f o r 95 m i n i m i z a t i o n o f damage, the o t h e r ' s i n c e n t i v e t o perform h i s share o f the j o i n t r e s p o n s i b i l i t y w i l l be d i m i n i s h e d . The s o l u t i o n t o the problem of a l l o c a t i n g the r e s i d u e of the r i s k i s i t s d i v i s i o n between the p a r t i e s . The j u s t i f i c a t i o n f o r t h i s i s t h a t an e x c l u s i v e assignment of the r i s k p r o v i d e s a d i s i n c e n t i v e t o one or the o t h e r p a r t y f o r proper performance. 3. D i v i d i n g the R i s k A d i v i s i o n of the r i s k between the p a r t i e s c o u l d be based on one o f two approaches. The f i r s t i s t o make each p a r t y a b s o l u t e l y r e s p o n s i b l e f o r the s p e c i f i c f a c t o r s under t h e i r c o n t r o l . T h i s approach assumes t h a t a l l the r i s k i s c o n t r o l l e d by the f a c t o r s o u t l i n e d above. That i s , t h e r e i s no r e s i d u a l r i s k l e f t t o be a l l o c a t e d . The second i s t o a s s i g n a r e s i d u a l r i s k t o one of the p a r t i e s and r e q u i r e t h a t the o t h e r p a r t y perform h i s r e s p o n s i b i l i t i e s t o e i t h e r a v a r i a b l e o r a f i x e d l e v e l . The former approach has the advantage of e l i m i n a t i n g the assignment o f the r e s i d u a l r i s k o f the t r a n s i t . T h i s means t h a t i s s u e s such as the time of r i s k p a s s i n g and c o n t r i b u t i n g f a c t o r s would be e l i m i n a t e d . T h i s approach i s based on the assumption t h a t a l l damage i s caused by an a c t i o n a b l e f a i l u r e o f performance by e i t h e r the p a r t i e s t o the s a l e or the c a r r i e r . The problem w i t h t h i s p r o p o s i t i o n i s t h a t goods may s u f f e r some c a s u a l t y which i s 96 beyond the c o n t r o l of e i t h e r the buyer or the s e l l e r . For example, i f the ocean v e s s e l s i n k s w i t h a t o t a l l o s s o f the cargo and the s i n k i n g was not p r e d i c t a b l e by e i t h e r the s e l l e r nor the buyer, n e i t h e r p a r t y c o u l d be h e l d r e s p o n s i b l e . In t h i s example the s o l e c a u s a l element which might be r e l a t e d t o a r i s k f a c t o r c o n t r o l l e d by a p a r t y would be the a p p r o p r i a t e arrangement of t r a n s p o r t . However, i f t h i s f a c t o r was assumed t o c o n t r o l the r e l a t i v e l y u n p r e d i c t a b l e events which occur d u r i n g an ocean, the s e l l e r would be i n e f f e c t the i n s u r e r o f the goods d u r i n g t r a n s i t . T h i s would make every s a l e and arrangement of d e l i v e r y c o n t r a c t a s a l e and d e l i v e r y . The second approach r e q u i r e s two events. F i r s t , t he approach r e q u i r e s an assignment of the r e s i d u a l r i s k t o one p a r t y . Second, the oth e r p a r t y ought t o be r e s p o n s i b l e t o perform t o a predetermined standard. The r e s i d u a l assignment ought t o be made t o the p a r t y w i t h the s u p e r i o r c a p a c i t y t o d e a l w i t h a g e n e r a l u n p r e d i c t e d l o s s . The buyer i s probably the p a r t y who should bear the r e s i d u a l r i s k . There are two reasons f o r t h i s . F i r s t , s i n c e most oc c u r r e n c e s o f damage and l o s s r a i s e the i s s u e o f c a r r i e r l i a b i l i t y , the buyer's s u p e r i o r c a p a c i t y t o b r i n g an a c t i o n a g a i n s t the c a r r i e r makes the d e l e g a t i o n o f t h i s r e s p o n s i b i l i t y t o him e f f i c i e n t . Second, i n the event t h a t the damage or l o s s i s not a c t i o n a b l e a g a i n s t the c a r r i e r , the buyer's s u p e r i o r m i t i g a t i o n c a p a c i t y makes him the l i k e l y c h o i c e . 97 A number o f s p e c i f i c r i s k s ought t o be a s s i g n e d t o the s e l l e r . The s e l l e r should have r e s p o n s i b i l i t y f o r f a c t o r s under h i s c o n t r o l . An important q u e s t i o n concerns the l e v e l o f r e q u i r e d performance. Obv i o u s l y , t h e r e are two p o s s i b l e l e v e l s , s t r i c t o r a b s o l u t e r e s p o n s i b i l i t y and a l e s s e r s t a n d a r d based on t e s t s such as a degree of f o r e s e e a b i l i t y or custom. R e q u i r i n g a b s o l u t e standards has the disadvantage of making each performance depend upon the circumstances of the i n d i v i d u a l case. In e f f e c t i t would be making the s e l l e r s t r i c t l y l i a b l e f o r damage r e s u l t i n g form a f a i l u r e of one of t h e f a c t o r s under h i s c o n t r o l . For example, f o r each shipment, the l e v e l of packaging and d u r a b i l i t y would have t o depend upon i n f o r m a t i o n about the i n f i n i t e number of p o t e n t i a l r i s k s t o which the goods may be s u b j e c t . T h i s l e v e l of r e s p o n s i b i l i t y g r e a t l y i n c r e a s e s the i n f o r m a t i o n c o s t s of the s e l l e r . These c o s t s must be passed on t o the buyer and they may not add t o the e f f i c i e n c y of the t r a n s a c t i o n . The a l t e r n a t i v e t o s t r i c t l i a b i l i t y i s t o s e t l i m i t s on the s e l l e r ' s performance. The o p t i o n s f o r l i m i t s are t h a t they can be s e t a c c o r d i n g t o e i t h e r f i x e d or determinable standards. A f i x e d standard c o u l d be gauged by r e f e r e n c e t o i n d u s t r i a l p r a c t i c e or custom. Determinable standards might be s e t by r e f e r e n c e t o some degree of f o r e s e e a b i l i t y . 98 A f i x e d standard has the advantage t h a t i t would be known throughout the i n d u s t r y . I t c o u l d be r e a d i l y e s t a b l i s h e d ex ante and i t s c o s t taken i n t o account i n the s a l e n e g o t i a t i o n s . The p r i n c i p l e disadvantage o f a customary standard i s t h a t i t may r e q u i r e a h i g h degree of e x p e r t i z e f o r i t s ex ante d e t e r m i n a t i o n . Moreover, customs change from area t o area. The a c q u i s i t i o n o f the r e q u i r e d e x p e r t i z e may i n c r e a s e the c o s t s o f e n t e r i n g i n t o a s a l e s t r a n s a c t i o n and thus i t s e x i s t e n c e may d i s c o u r a g e new e n t r a n t s . 1 7 6 A second disadvantage o f the customary standard i s t h a t i t may not prove adequate t o p r o t e c t the goods i n every t r a n s i t s i t u a t i o n . That i s , a customary standard may not account f o r p a r t i c u l a r l y hazardous t r a n s i t s o r normal t r a n s i t s w i t h novel t y p es o f goods. A standa r d based on some form of f o r e s e e a b i l i t y has the advantage i n most cases o f p r o v i d i n g s u p e r i o r p r o t e c t i o n f o r the goods w h i l e a t the same time not p l a c i n g an onerous burden on the s e l l e r . There are two o p t i o n s t o the f o r e s e e a b i l i t y s tandard, namely o b j e c t i v e and s u b j e c t i v e . Each has advantages and disadvantages. The o b j e c t i v e standard more c l o s e l y approximates an i n d u s t r i a l s t andard. That i s , i t r e q u i r e s the s e l l e r t o perform t o and the buyer t o expect the g e n e r a l standard i n the x . See f o r example, Warren, E. "Trade usage and P a r t i e s i n the Trade: As Economic R a t i o n a l e f o r an In F l e x i b l e R ule" (1980-81), 42 U n i v e r s i t y o f P i t t s b u r g h Law Review 515. 99 i n d u s t r y . The s e l l e r i s r e s p o n s i b l e t o p r o t e c t a g a i n s t r i s k s known by the average s e l l e r i n the i n d u s t r y . Thus, i t g e n e r a l l y p r e s e n t s a s i m i l a r economic p r o f i l e as a customary st a n d a r d w i t h the e x c e p t i o n t h a t the performance may v a r y s l i g h t l y t o account f o r s p e c i f i c v a r i a b l e s . T h i s may i n c r e a s e the i n f o r m a t i o n c o s t s of the t r a n s a c t i o n . The s u b j e c t i v e standard i s dependent upon the knowledge of the s p e c i f i c s e l l e r . The s e l l e r i s not r e q u i r e d t o a c q u i r e i n f o r m a t i o n about the s p e c i f i c r i s k s of the intended t r a n s i t nor i s he r e q u i r e d t o possess any knowledge about h i s p r o d u c t ' s d u r a b i l i t y . The advantage of t h i s s t a n d a r d i s t h a t i t reduces the t r a n s i t r i s k i n f o r m a t i o n c o s t s o f the t r a n s a c t i o n t o zero. F u r t h e r , i t p r e s e n t s no bar t o new e n t r a n t s i n t o the i n d u s t r y . The knowledge of each s e l l e r determines the standard f o r performance. I t s disadvantage i s t h a t the s t a n d a r d would be d i f f i c u l t t o determine ex ante and almost i m p o s s i b l e t o e s t a b l i s h ex p o s t . In a d d i t i o n , i t may i n c r e a s e the i n f o r m a t i o n c o s t s of buyers who may have t o r e s e a r c h the e x p e r i e n c e of a s p e c i f i c s e l l e r b e f o r e e n t e r i n g i n t o a transaction:. R e g a r d l e s s o f the standard chosen by the o p t i m a l model, i n d u s t r i a l p r a c t i c e e v e n t u a l l y a l l o w s f o r the e s t a b l i s h m e n t of a custom r e c o g n i z e d by common law. The o b j e c t i v e s t a n d a r d would i n c r e a s e the speed of the p r o c e s s . Each standard produces i t s own economic e f f e c t . Custom has the advantage of c e r t a i n t y and thus i t s use would reduce 100 t r a n s a c t i o n c o s t s . The o b j e c t i v e standard c l o s e l y approximates the customary standard and p r o v i d e s the added advantage of r e d u c i n g a v o i d a b l e l o s s e s i n unique cases. The s u b j e c t i v e s t a n d a r d has the advantage of zero i n f o r m a t i o n c o s t s f o r s e l l e r s but i n c r e a s e s the i n f o r m a t i o n c o s t s f o r buyers. A r e a s o n a b l e s o l u t i o n t o the c h o i c e between v a r i a b l e standards i s t o r e q u i r e the s e l l e r t o perform t o an o b j e c t i v e standard. T h i s i s j u s t i f i e d by the need t o minimize the buyer's disadvantage by h o l d i n g the r e s i d u a l r i s k . That i s , by r e q u i r i n g a h i g h e r standard from the s e l l e r , the l i k e l i h o o d o f l o s s f a l l i n g i n t o the r e s i d u a l r i s k of the buyer i s decreased. F u r t h e r , a h i g h e r standard f o r the s e l l e r has the advantage of d e c r e a s i n g the c a p a c i t y t o a v o i d l o s s e s . F i n a l l y , the f a c t t h a t the o b j e c t i v e standard i s the f a m i l i a r -s t a n d a r d f o r d u t i e s i n the common law world, businessmen i n North America w i l l be f a m i l i a r w i t h i t . B. The S a l e o f Goods Act Model The a l l o c a t i o n of r i s k f o r t h i r d p a r t y damage i s covered by the S a l e o f Goods Act i n s e c t i o n s 23, 25 and 37. The Act makes the passage of r i s k and p r o p e r t y c o i n c i d e n t a l . 1 7 7 N e i t h e r p r o p e r t y nor r i s k can pass u n t i l the s e l l e r completes h i s performance. The duty of performance r e q u i r e s the s e l l e r t o i d e n t i f y the goods, prepare the goods f o r 1 7 7 . s. 25. 101 d e l i v e r y and g i v e n o t i c e t o the buyer of the completion of 17 8 performance . A remarkable f e a t u r e o f the S a l e o f Goods A c t coverage of t h i r d p a r t y r i s k i s t h a t r i s k may pass t o the buyer a t d i f f e r e n t p o i n t s i n the t r a n s a c t i o n depending upon when the s e l l e r completes h i s performance. For example, i f the goods are a s c e r t a i n e d and prepared f o r d e l i v e r y , r i s k passes upon n o t i c e b e i n g g i v e n t o the buyer. T h i s c o u l d occur w h i l e the goods are i n the s e l l e r ' s warehouse or w h i l e i n t r a n s i t t o the ocean c a r r i e r o r i t c o u l d occur when the goods are d e l i v e r e d t o the ocean c a r r i e r . The s i t u a t i o n i s f u r t h e r complicated by p r o v i s i o n s i n the S a l e o f Goods A c t which s u b d i v i d e r i s k based upon the category o f goods i n v o l v e d , the type o f t r a n s p o r t a t i o n s e l e c t e d and i t s arrangement. Passage of r i s k i n s p e c i f i c goods may d i f f e r from t h a t of u n a s c e r t a i n e d goods. In c e r t a i n circumstances the s e l l e r i s not r e s p o n s i b l e f o r l o s s which occurs without f a u l t even b e f o r e r i s k has passed. S e c t i o n 11 p r o v i d e s t h a t i f s p e c i f i c goods p e r i s h without the f a u l t o f the s e l l e r b e f o r e r i s k passes t o the buyer, the agreement i s avoided. T h i s p r o t e c t i o n f o r the s e l l e r makes the d i s t i n c t i o n between s p e c i f i c goods and u n a s c e r t a i n e d goods of c r i t i c a l 1 7 8 . s s . 23 (3) and (4).The c o s t o f in s u r a n c e and the p o s s i b i l i t y o f a b i l a t e r a l i n s u r a n c e monopoly w i l l d e t e r buyers from e n t e r i n g the market. 102 importance t o the passage of r i s k i n a s a l e . The s t a t u t e d e f i n e s s p e c i f i c goods as "... goods i d e n t i f i e d and agreed on a t the time a c o n t r a c t o f s a l e i s made."-1-'3 T h i s i m p l i e s t h a t s p e c i f i c goods are those which e x i s t e d a t the time the c o n t r a c t was made. In e f f e c t , i f the buyer agrees t o purchase t h i s type o f goods, the s e l l e r ' s r i s k i s l i m i t e d t o a r e s p o n s i b i l i t y t o e x e r c i s e reasonable c a r e . An i n a p p r o p r i a t e arrangement f o r the c o n t r a c t o f c a r r i a g e has the e f f e c t o f making the s e l l e r r e s p o n s i b l e f o r a l l the r i s k s o f the voyage. I t i s p o s s i b l e f o r r i s k t o pass t o the buyer when the goods are s t i l l i n the s e l l e r ' s warehouse and f o r the r i s k t o r e t u r n t o the s e l l e r when the goods are loaded on board the v e s s e l . In f a c t , i n t h i s type o f s i t u a t i o n the scope of the s e l l e r ' s r i s k may be h i g h e r w h i l e the goods are at sea than when the goods were s a f e l y i n h i s warehouse. In a d d i t i o n t o a r r a n g i n g proper t r a n s p o r t , the s e l l e r must g i v e n o t i c e o f pending ocean t r a n s i t t o the buyer. A f a i l u r e t o do so w i l l cause the r i s k o f the voyage t o remain w i t h the s e l l e r . As i n the case above, t h i s may r e p r e s e n t not o n l y a r e v e r s i o n o f the r i s k but a l s o an i n c r e a s e d r i s k burden on the s e l l e r . Any d e l a y i n d e l i v e r y which causes damage t o the goods i s the r e s p o n s i b i l i t y o f the p a r t y c a u s i n g the d e l a y r e g a r d l e s s o f who has the r i s k a t t h a t p o i n t i n time. D e l i v e r y i s s. 23 (2). 103 d e f i n e d as t u r n i n g over p o s s e s s i o n of the goods. The S a l e of Goods A c t presumes t h a t d e l i v e r y t o a c a r r i e r i s d e l i v e r y t o the buyer. Hence, i f f o r some reason the goods are d e l a y e d i n t h e i r t r a n s f e r t o the c a r r i e r , damage caused by the d e l a y i s the r e s p o n s i b i l i t y of the p a r t y a t f a u l t . The p r o v i s i o n has l i t t l e e f f e c t i f the buyer i s r e s p o n s i b l e f o r a d e l a y i n d e l i v e r y as the r i s k would pass t o him i n any event. However, i f the s e l l e r i s a t f a u l t , r i s k might v e r y w e l l r e v e r t back t o him i f i t has a l r e a d y passed. Under the S a l e of Goods A c t the s e l l e r does not have a s p e c i f i c duty t o package the goods and t o p r o v i d e necessary d u r a b i l i t y . I f the c o n t r a c t i s s i l e n t on packaging and d u r a b i l i t y , the s e l l e r w i l l not be l i a b l e f o r t h e i r f a i l u r e i n regards t o t h i r d p a r t y l i a b i l i t y . Under the S a l e of Goods Act the buyer i s saddled w i t h the n e c e s s i t y of making a separate c o n t r a c t w i t h the s e l l e r f o r packaging and a s s u r i n g s p e c i f i c p r o t e c t i o n a g a i n s t t h i r d p a r t y damage. C. Comparison of the S a l e of Goods Act and the Optimal Model 1. G e n e r a l l y The most pronounced c h a r a c t e r i s t i c of the S a l e of Goods Ac t a l l o c a t i o n of the r i s k of t h i r d damage i s i t s absence of c e r t a i n t y . On many o c c a s i o n s the p a r t i e s are unaware of who bears the r i s k a t g i v e n p o i n t s i n time. The t i m i n g of t r a n s f e r o f r i s k may depend on a number of f a c t o r s . 104 The reason f o r the u n c e r t a i n t y i n the S a l e of Goods A ct i s the a s s o c i a t i o n o f r i s k and p r o p e r t y . P r o p e r t y u n l i k e r i s k i s a complex s u b j e c t . The ownership of goods i s dependent on a number of v a r i a b l e s . I t s passage d u r i n g a s a l e i s based on h i s t o r i c c r i t e r i a such as the type and the p h y s i c a l s t a t e o f the goods. R i s k on the ot h e r hand i s simply the r e s p o n s i b i l i t y f o r damage t o the goods. Passage of r i s k ought t o be based on the a b i l i t y t o p r o t e c t the goods r a t h e r than ownership. In the o p t i m a l model, r i s k from ownership of the goods. In f a c t ownership i s not mentioned i n the d i s c u s s i o n on the model. Passage of r i s k i s based on c o n t r o l over the f a c t o r s which may cause damage, or once damage has o c c u r r e d , i t s l i m i t a t i o n . 2. L e g a l C l a r i t y and Conformity t o Common E x p e c t a t i o n The unnecessary complexity o f the S a l e o f Goods A c t r u l e s makes the law u n c l e a r . Not o n l y i s the passage of r i s k dependent upon the nature of the goods and t h e i r s t a t e o f r e a d i n e s s but i t i s p o s s i b l e t h a t r i s k can f l i p f l o p back and f o r t h between the p a r t i e s . For example, i f the s a l e i n v o l v e s a s c e r t a i n e d goods which are prepared f o r d e l i v e r y , r i s k passes upon n o t i c e b e i n g g i v e n t o the buyer. I f f o r some reason the s e l l e r i s unable t o t u r n the goods over on the d e l i v e r y date, the r i s k r e v e r t s back t o him u n t i l d e l i v e r y i s completed. A f t e r the goods are loaded on an ocean v e s s e l the r i s k cannot pass u n t i l the s e l l e r n o t i f i e s the buyer of the l o a d i n g . 105 Hence, even a f t e r d e l i v e r y , i f the s e l l e r f a i l s f o r some reason t o n o t i f y the buyer, the r i s k may remain w i t h him a f t e r the c o n t r o l of the goods has passes t o a t h i r d p a r t y . F i n a l l y , i f the arrangement of t r a n s p o r t i s not reasonable, the r i s k of the s p e c i f i c voyage r e v e r t s back t o the s e l l e r u n t i l the buyer takes d e l i v e r y of the goods i n the p o r t of d e s t i n a t i o n . Even a f t e r r i s k has f i n a l l y passed t o the buyer, t h e r e may be u n c e r t a i n t y as t o the l e v e l of packaging and d u r a b i l i t y r e q u i r e d by c o n t r a c t . S i n c e the S a l e of Goods A c t i s s i l e n t on the i s s u e , the packaging and d u r a b i l i t y terms may have t o be read i n t o the agreement ex p o s t t o r e s o l v e d i s p u t e s . The u n c e r t a i n t y and v a r i a b i l i t y causes c o n f u s i o n f o r both the buyer and the s e l l e r . I t i s a d v i s a b l e f o r both p a r t i e s t o m a i n t a i n i n s u r a n c e coverage from the time the goods are i d e n t i f i e d u n t i l the r i s k has c l e a r l y and f i n a l l y passed. The p a r t i e s may not be c e r t a i n of t h i s u n t i l the goods are s a f e l y aboard the ocean c a r r i e r and the s e l e c t i o n of the c a r r i e r i s accepted by the buyer as reasonable. The i n s u r a n c e c o s t s , both i n terms of a c q u i s i t i o n and i n terms o f coverage, are h i g h e r due t o the u n c e r t a i n t y . An i n s u r e r w i l l r e q u i r e a g r e a t d e a l of d e t a i l i n o r d e r t o determine the r i s k t o be covered. I f the p a r t i e s are t o p r o v i d e t h i s i n f o r m a t i o n they must remain i n v o l v e d i n the events of the s a l e u n t i l i t s c o n c l u s i o n . A d d i t i o n a l l y , t o be s a f e a c e r t a i n amount of excess i n s u r a n c e w i l l be r e q u i r e d by 106 the s e l l e r t o cover the p o s s i b i l i t y t h a t r i s k may r e v e r t back d u r i n g the t r a n s i t . The p o t e n t i a l f o r problems ex p o s t i s heightened by the f a c t of double i n s u r a n c e coverage. That i s , w i t h m u l t i p l e the two or more i n s u r a n c e companies may be p r o v i d e d an o p p o r t u n i t y t o deny l i a b i l i t y and p o i n t t o each o t h e r as the a p p r o p r i a t e source f o r r e l i e f . The p r o f i t a b i l i t y of s a l e s i s reduced due t o the h i g h i n f o r m a t i o n requirements. I n f o r m a t i o n c o s t s are i n c r e a s e d by the requirement t h a t the p a r t i e s more c l e a r l y d e f i n e the type of goods i n v o l v e d i n the t r a n s a c t i o n , the type of packaging and the amount of d u r a b i l i t y . Moreover, the s e l l e r ' s v a r i o u s n o t i c e requirements i n c r e a s e h i s need t o manage the goods once they l e a v e h i s warehouse. Businessmen must f i n d the complex nature o f the S a l e of Goods A c t r u l e s t o be unusable. The c r i t e r i a f o r the passage of r i s k i s unfathomable t o a l l but the expert l e g a l a d v i s e r s . The o n l y s o l u t i o n open t o businessmen i s t o c o n t r a c t out of the r u l e s . 3. Reduction of A v o i d a b l e Losses I f the r i s k passes w h i l e the goods are i n the p o s s e s s i o n o f the s e l l e r , the buyer i s saddled w i t h the r i s k of goods which are not i n h i s p o s s e s s i o n . Having no c o n t r o l , the buyer has no o p p o r t u n i t y t o p r o t e c t the goods. Moreover, s i n c e he has no knowledge of the s e l l e r ' s p h y s i c a l p l a n t and l e s s 107 s p e c i f i c knowledge of the goods themselves, even i f he had the o p p o r t u n i t y t o i n t e r v e n e and p r o t e c t the goods, the buyer l a c k s the knowledge t o do so. The buyer's a b i l i t y t o s e l f i n s u r e or a c q u i r e i n s u r a n c e a t a r e a s o n a b l e p r i c e i s h i n d e r e d by h i s l a c k of knowledge about the s p e c i f i c r i s k s f a c i n g the goods. The o n l y economical a l t e r n a t i v e f o r the buyer i s t o purchase insurance from the s e l l e r . T h i s o p t i o n p r e s e n t s the d i f f i c u l t y of a l l o w i n g the s e l l e r t o c r e a t e a b i l a t e r a l monopoly. A d d i t i o n a l l y , s i n c e r i s k t o the goods may pass b e f o r e t h e i r d e l i v e r y t o the buyer, the s e l l e r w i l l have p o s s e s s i o n of the goods without r e s p o n s i b i l i t y of t h e i r s a f e t y . Thus, the s e l l e r w i l l have l e s s i n c e n t i v e t o p r o v i d e f o r p r o t e c t i o n of the goods. The o p t i m a l model does not a l l o w r i s k t o pass b e f o r e p o s s e s s i o n . F u r t h e r , even a f t e r passage, the o p t i m a l model r e q u i r e s p a r t y performance a c c o r d i n g t o c o n t r o l over packaging, p r o v i s i o n of d u r a b i l i t y and arrangement of t r a n s i t . Through t h i s means, the p a r t y w i t h the s u p e r i o r c a p a c i t y possesses the duty t o perform. 108 CHAPTER SEVEN UNANTICIPATED INTERNALLY CAUSED DAMAGE There are s e v e r a l reasons why a f a i l u r e o f packaging and d u r a b i l i t y i s c o n s i d e r e d a r i s k o f t r a n s i t . The f i r s t i s t h a t from the buyer's p e r s p e c t i v e a t the end of t r a n s i t , a f a i l u r e of d u r a b i l i t y o r packaging i s i n d i s t i n g u i s h a b l e from the m a n i f e s t a t i o n o f any ot h e r r i s k . That i s , when the goods a r r i v e a t the buyer's l o c a t i o n i n a damaged s t a t e , the buyer may be unable t o d i s t i n g u i s h a packaging f a i l u r e from damage caused by a t h i r d p a r t y . Moreover, the i n e x p e r i e n c e d buyer may be unable t o d i s t i n g u i s h such a f a i l u r e from a n t i c i p a t e d damage. A second reason i s t h a t i n many cases f a i l u r e s o f packaging and d u r a b i l i t y i n t e r a c t w i t h o t h e r f a c t o r s c a u s i n g damage t o the goods. In many cases the l e v e l o f packaging and d u r a b i l i t y a f f e c t s the amount of damage, and r e s o l v i n g d i s p u t e s ex p o s t may i n v o l v e j u d g i n g the adequacy o f the packaging and d u r a b i l i t y . A t h i r d reason i s t h a t , due t o e i t h e r the shipment of no v e l p r o d u c t s or the shipment of e x i s t i n g p r o d u c t s i n novel ways, the s e l l e r may be unaware ex ante t h a t h i s goods l a c k d u r a b i l i t y o r packaging r e l a t i v e t o the intended t r a n s i t . The s e l l e r may be w i l l i n g t o take the " r i s k " t h a t the goods w i l l s u r v i v e i n t a c t . 109 To some e x t e n t the c o s t s a s s o c i a t e d w i t h t h e l e v e l o f d u r a b i l i t y and p a c k a g i n g a r e i n t e r a c t i v e w i t h o t h e r c o s t s o f the t r a n s i t . Tha t i s , the c a r r i e r may be w i l l i n g t o reduce t h e c o s t o f i t s s e r v i c e i f t h e r e i s l e s s chance o f b e i n g h e l d l i a b l e f o r damage. One way t o e n s u r e t h a t t h e r i s k o f damage i s lowered i s t o p r o v i d e s u p e r i o r p a c k a g i n g a n d / o r d u r a b i l i t y . In a d d i t i o n , t h e buyer may be w i l l i n g t o pay more f o r goods t h a t s t a n d a b e t t e r chance o f a r r i v i n g unharmed. F i n a l l y , i n s u r a n c e c o s t s may be reduced t o r e f l e c t a d e c r e a s e i n r i s k due t o enhanced p a c k a g i n g and d u r a b i l i t y . A . The O p t i m a l Model The s e l l e r i s p r e s e n t d u r i n g the p e r i o d when t h e goods a r e b e i n g p r e p a r e d f o r t r a n s i t . T h i s p r o v i d e s him w i t h an o p p o r t u n i t y t o package the goods and p r o v i d e the l a s t t o u c h e s t o e n s u r e t h e i r d u r a b i l i t y . T h u s , he ought t o be r e s p o n s i b l e t o package and o t h e r w i s e p r e p a r e t h e goods f o r t h e upcoming t r a n s i t . The a l t e r n a t i v e t o s e l l e r r e s p o n s i b i l i t y f o r p a c k a g i n g i s t o r e q u i r e the buyer t o m a i n t a i n a p r e s e n c e a t the s e l l e r ' s l o c a t i o n . I t i s c o n c e i v a b l e . t h a t i n some c a s e s the buyer may w i s h t o be p r e s e n t when the goods a r e b e i n g made ready f o r sh ipment . However, t o r e q u i r e him t o be p r e s e n t i n a l l c a s e s w i l l i n c r e a s e h i s c o s t s o f the t r a n s a c t i o n . The s e l l e r ' s s p e c i f i c knowledge r e g a r d i n g t h e d u r a b i l i t y o f the goods p r o v i d e s him w i t h a d d i t i o n a l advantage i n 110 packaging. The buyer's cost i n duplicating the necessary knowledge w i l l add to the already expensive arrangements of being present at the point of shipment. Further, making the buyer responsible for packaging provides a d i s i n c e n t i v e to the s e l l e r for i n s t a l l i n g the economical maximum amount of d u r a b i l i t y to the goods. In such an arrangement the s e l l e r may be l e s s i n c l i n e d to expend the e f f o r t necessary to ensure optimal s u r v i v a b i l i t y . The only disadvantage to the s e l l e r i n being responsible for packaging and d u r a b i l i t y i s having to deal with damaged goods at the buyer's location. This problem may be overcome by requiring the buyer to accept goods damaged during t r a n s i t and having the s e l l e r compensate the buyer for the diminution of the value of the goods. The buyer has the best opportunity to inspect the goods at the conclusion of the t r a n s i t . He i s located at the end of the t r a n s i t and presumably has the knowledge and f a c i l i t y to properly inspect the goods. To require the s e l l e r to inspect the goods at the conclusion of the t r a n s i t increases h i s costs by having to maintain a presence at every buyer's locat i o n . In addition, the buyer i s i n the best p o s i t i o n to mitigate any loss including loss occasioned by a f a i l u r e of packaging or d u r a b i l i t y . The reason for t h i s i s that the buyer i s i n the business of acquiring that p a r t i c u l a r type of good fo r further manufacture or resale. Thus, he has r I l l knowledge of the product and knowledge of l o c a l markets. Knowledge o f the product p r o v i d e s an a b i l i t y t o remedy damage and t o f a c i l i t a t e r e s a l e . The buyer's knowledge of l o c a l markets means he i s a b l e t o o b t a i n the b e s t l o c a l p r i c e f o r damaged p r o d u c t s . I t would be s i g n i f i c a n t l y more expensive f o r the s e l l e r t o t r a v e l t o the buyer's l o c a t i o n i n o r d e r t o remedy d e f e c t s and t o e f f e c t the d i s p o s a l of the goods. Thus, the s e l l e r ought t o be r e s p o n s i b l e f o r packaging and p r o v i d i n g d u r a b i l i t y . The remedy f o r breach of the duty ought t o be damages r a t h e r r e j e c t i o n . As noted i n the d i s c u s s i o n on r i s k f a c t o r s , both p a r t i e s have an a f f e c t on the l e v e l of packaging and d u r a b i l i t y . To review, t h e r e are two reasons f o r t h i s . The f i r s t i s t h a t the buyer having some knowledge of the product n e g o t i a t e s a p r i c e which r e f l e c t s the p a r t i c u l a r p roduct's d u r a b i l i t y and a b i l i t y t o w i t h s t a n d the a n t i c i p a t e d t r a n s i t . The second i s t h a t a f t e r the goods have been s e l e c t e d , the p a r t i e s u s u a l l y n e g o t i a t e the method of t r a n s p o r t a t i o n and the type of packaging t o be used. I t i s h i g h l y l i k e l y t h a t i n many cases the buyer r e l i e s on the s e l l e r ' s a d v i c e r e s p e c t i n g the l e v e l of packaging r e q u i r e d . Thus, the d i s c u s s i o n of the s e l l e r ' s r e s p o n s i b i l i t y f o r d u r a b i l i t y and packaging i s framed by the j o i n t c o n t r o l over the s u b j e c t . W i t h i n the l i m i t s d i s c u s s e d above, t h e r e are two standards f o r measuring the s e l l e r ' s performance. The f i r s t i s t h a t performance c o u l d be measured by the p h y s i c a l s t a t e of 112 the goods upon t h e i r a r r i v a l a t the buyer's l o c a t i o n . The second i s t h a t the performance c o u l d be measured by an a r b i t r a r y s t a n d a r d u n r e l a t e d t o the e v e n t u a l outcome of the t r a n s i t . The f i r s t s tandard p r o v i d e s an advantage t o the buyer a t the expense of the s e l l e r . In e f f e c t , the s e l l e r would be g u a r a n t e e i n g the s a f e a r r i v a l o f the goods. The buyer would know i n advance what s t a t e the goods would be i n upon t h e i r a r r i v a l a t h i s l o c a t i o n . The ex po s t c a l c u l a t i o n o f damages would be simple owing t o the ease of measuring the d i f f e r e n c e between the goods t h a t a r r i v e d and the goods d e s c r i b e d i n the c o n t r a c t . The disadvantage t o the s e l l e r i s t h a t i t would be v e r y d i f f i c u l t ex ante t o determine the r e q u i r e d l e v e l o f performance. Thus, the s e l l e r ' s c o s t s c o u l d not be c a l c u l a t e d u n t i l the goods a c t u a l l y a r r i v e d a t the buyer's l o c a t i o n . The c o s t o c c a s i o n e d by t h i s u n c e r t a i n t y would be passed on t o the buyer i n the form of h i g h e r p r i c e s . An a r b i t r a r y standard has the advantage of a l l o w i n g a more a c c u r a t e c a l c u l a t i o n of the r e q u i r e d e f f o r t a t the p o i n t o f t r a n s a c t i n g the exchange. Whatever the standard, the s e l l e r would be a b l e t o more a c c u r a t e l y e s timate c o s t s . As i n the d i s c u s s i o n r e g a r d i n g t h i r d p a r t y r i s k s , t h e r e are a number of a v a i l a b l e standards. Each possesses advantages and disadvantages. 113 A customary standard i s the b e s t d e f i n e d standard. Buyers and s e l l e r s a c quainted w i t h the p r a c t i c e i n the i n d u s t r y would f i n d an i n d u s t r y wide standa r d easy t o d e a l w i t h . Both p a r t i e s t o an agreement c o u l d take the r i s k s of damage and the c o s t of performance i n t o account ex ante. The o n l y major disadvantage t o a customary standard i s t h a t i t i n c r e a s e s the i n f o r m a t i o n c o s t t o newcomers i n the i n d u s t r y . That i s , i n o r d e r t o operate i n an environment which uses customary p r a c t i c e s , knowledge of the standards must be a c q u i r e d . T h i s e n t a i l s a c o s t t o the newcomer and may d i s c o u r a g e h i s entrance i n t o the i n d u s t r y . The o b j e c t i v e standard has the advantage o f r e q u i r i n g the s e l l e r t o become acq u a i n t e d w i t h what the i n d u s t r y c o n s i d e r s r e a s o n a b l e . The c o s t s of packaging and d u r a b i l i t y would have t o be c a l c u l a t e d w i t h r e f e r e n c e t o the expected r i g o r s of the t r a n s i t . The l e v e l of c are taken of the goods would be judged a c c o r d i n g t o the r e l a t i v e c o s t s of the p r o t e c t i o n and the b e n e f i t p r o v i d e d t o the goods. The o b j e c t i v e standard has the f u r t h e r advantage of e q u a l i t y of treatment between buyers and s e l l e r s r e g a r d l e s s of t h e i r e x p e r i e n c e w i t h the p a r t i c u l a r i n d u s t r y . Moreover, under Anglo-Canadian law, p r a c t i c e s of l o n g s t a n d i n g e v e n t u a l l y become customary standards. The s u b j e c t i v e standard has the c h a r a c t e r i s t i c of p a s s i n g the i n f o r m a t i o n c o s t s a s s o c i a t e d w i t h packaging and d u r a b i l i t y 114 from the s e l l e r t o the buyer. That i s , p r i o r t o a g r e e i n g t o a s a l e and arrangement of d e l i v e r y c o n t r a c t , buyers would have t o i n v e s t i g a t e the l e v e l of knowledge possessed by the s e l l e r i n o r d e r t o determine the r i s k s of i n t e r n a l l y caused damage. Moreover, the s u b j e c t i v e s t a n d a r d would not a l l o w the buyer t o predetermine the v a l u e of the goods a t the c o n c l u s i o n of the t r a n s i t . In a d d i t i o n , the buyer's remedy a g a i n s t the s e l l e r would be s e v e r e l y l i m i t e d due t o the convenience a f f o r d e d the s e l l e r of a c t i n g t o the standard of h i s p e r s o n a l knowledge. Due t o t h e s e p o i n t s and the d i s c u s s i o n e a r l i e r i n t h i s paper, i t i s c l e a r t h a t the o b j e c t i v e t e s t p r o v i d e s the s u p e r i o r standard. The c o s t s f o r new e n t r a n t s o c c a s i o n e d by the use of customary standards m i t i g a t e s a g a i n s t t h e i r e n t r y . The problems o f u n c e r t a i n t y and the d i f f i c u l t y of e f f e c t i n g a remedy m i t i g a t e s a g a i n s t the use of the s u b j e c t i v e standard. B. The S a l e of Goods A c t Model The l e a d i n g case of Mash, and M u r r e l l L t d . v. Joseph I.  Emanuel L t d . O V J d e f i n e s the s e l l e r ' s r e s p o n s i b i l i t y f o r d e t e r i o r a t i o n due t o i n t e r n a l causes. Mr. J u s t i c e D i p l o c k s t a t e d the r u l e as f o l l o w s : x o U . [1961] 1 W.W.R. 862, (Q.B. The d e c i s i o n was r e v e r s e d on f a c t u a l grounds i n the Court of Appeal; [1962] 1 A l l E. R. 770) 115 ...there i s an i m p l i e d warranty not merely t h a t they s h a l l be merchantable a t the time they are put on the v e s s e l , but t h a t they s h a l l be i n such a s t a t e t h a t they can endure the normal journey and be i n a merchantable c o n d i t i o n upon a r r i v a l . 1 Mr. J u s t i c e D i p l o c k found as a f a c t t h a t the t r a n s i t was n o p , , normal. That i s , n o t h i n g of consequence o c c u r r e d d u r i n g the voyage which might have damaged the goods. T h i s was enough f o r H i s L o r d s h i p t o f i n d t h a t the goods must not have been of merchantable q u a l i t y when p l a c e d on board. ° I n t e r e s t i n g l y , the Court of Appeal r e v e r s e d Mr. J u s t i c e D i p l o c k ' s d e c i s i o n on the f i n d i n g t h a t the h o l d was not p r o p e r l y v e n t i l a t e d and the potatoes may have d e t e r i o r a t e d 1 R d . . . . . from t h a t cause. °^ I m p l i c i t i n the d e c i s i o n of Lord J u s t i c e Pearson i n the Court of Appeal was the r e l u c t a n c e t o extend the warranty of m e r c h a n t a b i l i t y t o r i s k d u r i n g t r a n s i t . The warranty w i l l o n l y operate i f a l l o t h e r p o s s i b l e causes f o r the damage have been e l i m i n a t e d . 1 8 5 To f i t i n t o the i m p l i e d warranty of m e r c h a n t a b i l i t y the buyer must show, i n a d d i t i o n t o an absence of a l l o t h e r causes, t h a t the s e l l e r was a s e l l e r o f goods of t h a t d e s c r i p t i o n , t h a t i t was a s a l e by d e s c r i p t i o n and t h a t the 1 8 1 . I b i d , p. 773. 1 8 2 . I b i d , p. 780. 1 8 3 . I b i d . 1 R 4 • Mash & M u r r e l l L t d . v. Joseph I. Emanuel L t d . . [1962] 1 WLR 16, ( C A . ) p. 18. 1 8 5 . I b i d . 116 buyer d i d not have an o p p o r t u n i t y t o i n s p e c t the goods p r i o r t o s h i p m e n t . 1 8 6 The warranty of f i t f o r purpose sees l i m i t e d s e r v i c e as a c o n t r o l of r i s k t o goods i n t r a n s i t . I f the buyer can show rea s o n a b l e r e l i a n c e on the s e l l e r ' s e x p e r t i z e i n the p r e p a r a t i o n of the goods f o r t r a n s i t , then the s e l l e r may be 1 o 7 l i a b l e f o r damage occasi o n e d by h i s f a i l u r e . The l e v e l of performance r e q u i r e d i s t h a t the goods be r e a s o n a b l y f i t f o r the purpose f o r which they were intended. Thus s t r i c t c o n f o r m i t y i s not r e q u i r e d . The cases support the use of t h i s warranty i n d e a l i n g w i t h p r e p a r a t i o n f o r d e l i v e r y and packaging. The p r o o f r e q u i r e d , a s i d e from reasonable r e l i a n c e i s t h a t the goods d e t e r i o r a t e d as a r e s u l t of a s p e c i f i c f a i l u r e on the p a r t of T O O the s e l l e r . 0 0 Hence, the buyer must e s t a b l i s h t h a t the voyage was-normal and t h a t the cause o f the damage was some f a i l u r e of p r e p a r a t i o n . An i l l u s t r a t i v e case, George W i l l s & Sons, L t d . v. Thomas IRQ • Brown & Sons e t a l . i n v o l v e d a s a l e and arrangement of d e l i v e r y of h e r r i n g from England t o A u s t r a l i a . The buyers - L O ° . Sassoon, David M. "Damage R e s u l t i n g From N a t u r a l Decay Under Insurance, c a r r i a g e and S a l e of Goods C o n t r a c t s " (1965), 28 Modern Law Review 180, pp. 352-353. i 0 7 . Halsbury's Laws of England, v.141 p.310. 1 8 8 . I b i d . 1 8 9 . (1922), 12 LI.L.Rep. 292, p. 294. 117 a d v i s e d the s e l l e r t h a t the h e r r i n g were purchased f o r r e s a l e and t h a t they were r e l y i n g on the s e l l e r ' s e x p e r t i s e f o r proper packaging. The h e r r i n g were damaged d u r i n g t r a n s i t due t o f a u l t y packaging. The Court h e l d the s e l l e r r e s p o n s i b l e f o r a l l damage t o the h e r r i n g which o c c u r r e d d u r i n g the voyage. The r u l e c i t e d by the Court was the i m p l i e d warranty of f i t n e s s f o r i n n , purpose. To a c t i v a t e the duty under the warranty, the Court made the f o l l o w i n g f i n d i n g s of f a c t : t h a t improper packaging caused the damage; t h a t the s e l l e r was an expert i n the f i e l d o f packaging; and t h a t the buyer was s p e c i f i c a l l y r e l y i n g on the s e l l e r ' s a b i l i t y t o package p r o p e r l y . Whether the buyer i s p u r c h a s i n g goods by d e s c r i p t i o n or r e l y i n g on the s e l l e r ' s s k i l l i n packaging and p r e p a r i n g them f o r t r a n s i t , the l e v e l of the s e l l e r ' s duty i s the same. That i s , i n Mash and M u r r e l l Mr. J u s t i c e D i p l o c k t h a t the potatoes had t o a r r i v e i n s t a t e which allowed f o r t h e i r i n t e n ded r e s a l e . " 1 L i k e w i s e , i n George W i l l s & Sons the h e r r i n g had t o a r r i v e i n a s t a t e s u i t a b l e f o r r e s a l e . 1 9 3 The common f e a t u r e was t h a t the s e l l e r knew the reason why the buyer purchased the goods. Apparently, i t i s the s e l l e r ' s duty t o 1 9 0 . I b i d . 1 9 1 . I b i d . 1 9 2 Mash & M u r r e l l . Supra. a t note 16. p. 866. 1 n o , . George W i l l & Sons L t d . supra, a t note 25, p. 294. 118 guarantee t h a t the goods w i l l a r r i v e i n a s t a t e s u i t a b l e t o the known purpose of the buyer. C. Comparison of the S a l e of Goods A c t and the Optimal Models 1. G e n e r a l l y The o p t i m a l and S a l e of Goods A c t models have one n o t a b l e s i m i l a r i t y and a number of d i f f e r e n c e s . The s i m i l a r i t y i s t h a t the buyer's remedy f o r breach i s based i n damages i n s t e a d o f p r o p e r t y . T h i s u t i l i z e s the buyer's s u p e r i o r a b i l i t i e s as a m i t i g a t o r of the damage. I t f o r e s t a l l s any requirement t h a t the s e l l e r m a i n t a i n a presence a t the buyer's l o c a t i o n . Thus, i t enhances the e f f i c i e n c y o f the exchange. A l l the d i f f e r e n c e s are due t o the S a l e of Goods A c t requirement t h a t the s e l l e r ensure t h a t the goods a r r i v e a t the buyer's l o c a t i o n i n a merchantable c o n d i t i o n . T h i s requirement has s e v e r a l consequences. The consequences e f f e c t the i n f o r m a t i o n flow between the p a r t i e s . F i r s t , the s e l l e r may have an i n c e n t i v e t o d i s t r i b u t e m i s i n f o r m a t i o n about the t r a n s i t and i t s e f f e c t s on the goods. Although the s e l l e r may not f i n d i t i n h i s i n t e r e s t t o undervalue the goods, he may be encouraged t o confuse the buyer on what t o expect a t the end of t r a n s i t . That i s , the s e l l e r may wish t o lower the buyer's e x p e c t a t i o n s . The consequence of t h i s i s t h a t the i n f o r m a t i o n flow between the p a r t i e s w i l l be r e s t r i c t e d . The maximum 119 p r o d u c t i v e use of the goods w i l l not be achieved u n l e s s n e c e s s a r y i n f o r m a t i o n can flow unimpeded. Second, s i n c e the t e s t f o r performance i s the f u l f i l l m e n t o f e x p e c t a t i o n s a c t u a l l y known by the s e l l e r , the s e l l e r has an i n t e r e s t i n m a i n t a i n i n g an ignorance about the buyer's a c t u a l e x p e c t a t i o n s . For a number of p r o d u c t s t h i s would be v e r y d i f f i c u l t . For example, i n Mash and M u r r e l l the Court a p p l i e d an o b j e c t i v e t e s t . The shipped p o t a t o e s had o n l y one purpose and t h a t was f o r r e s a l e f o r human consumption: I am s a t i s f i e d t h a t when the potatoes, the s u b j e c t - m a t t e r o f t h i s a c t i o n , were loaded a t L i m a s s o l they were "not f i t t o t r a v e l " t o L i v e r p o o l on the I o n i a n on the voyage which she was t a k i n g , which I have h e l d was a normal voyage, i n the sense t h a t they were i n such a c o n d i t i o n t h a t i n the o r d i n a r y course o f events they would, on a r r i v a l a t L i v e r p o o l , be u n f i t f o r human consumption, which i s the purpose f o r which Cyprus s p r i n g p o t a t o e s i n bags are normally u s e d . 1 9 4 However, f o r many o t h e r products the s e l l e r c o u l d p u r p o s e l y m a i n t a i n an ignorance about the end use of the product. The consequences of t h i s i s t h a t i n f o r m a t i o n which may a s s i s t i n e n s u r i n g t h a t the goods a r r i v e s a f e l y may not be r e c e i v e d by the s e l l e r . That i s , knowledge of the end use of a product which may be h e l p f u l i n d e a l i n g w i t h a number of the Mash & M u r r e l l . Supra, a t note 16. p. 866. 120 f a c t o r s under the s e l l e r ' s c o n t r o l i n c l u d i n g packaging and d u r a b i l i t y may not pass. T h i r d , the buyer i s g i v e n a d i s t i n c t i n c e n t i v e t o make c l e a r h i s intended purpose f o r the goods. Even i n cases of goods which have an obscure purpose, the s e l l e r ' s awareness of any purpose appears t o make him a guarantor of the f a c t t h a t t h e goods w i l l a r r i v e f i t f o r t h a t purpose. T h i s means t h a t i n f o r m a t i o n which has no o t h e r purpose than t o i n c r e a s e the s e l l e r ' s l i a b i l i t y i s b e i n g t r a n s m i t t e d between the p a r t i e s . Obviously, t h i s w i l l i n c r e a s e the t r a n s a c t i o n c o s t s o f the exchange. Fourth, the buyer i s g i v e n a d i s i n c e n t i v e t o become i n v o l v e d i n the p r e p a r a t i o n o f the goods f o r t r a n s i t . That i s , i f the s e l l e r can show t h a t h i s s k i l l i s not r e q u i r e d t o ensure the s a f e a r r i v a l o f the goods, the r i s k o f d e t e r i o r a t i o n may pass t o the buyer. The d i s i n c e n t i v e t o become i n v o l v e d i n the p r e p a r a t i o n of the goods may mean t h a t the knowledge and e x p e r t i z e on packaging and d u r a b i l i t y possessed by the buyer w i l l not be passed on t o the s e l l e r . Thus, the s p e c i f i c goods as w e l l as a l l t he goods shipped by the s e l l e r i n the f u t u r e are disadvantaged a c c o r d i n g l y . F i n a l l y , t he s e l l e r i s encouraged t o r e q u i r e t h a t the goods be i n s p e c t e d by the buyer or h i s agent p r i o r t o shipment. T h i s has the advantage t o the s e l l e r o f p a s s i n g the 121 r i s k o f a l l obvious d e f e c t s which might cause d e t e r i o r a t i o n 1 Q C d u r i n g the voyage t o the buyer. The buyer has an e q u a l l y powerful i n t e r e s t i n not examining the goods p r i o r t o shipment even i f such an examination serves o t h e r purposes. In e i t h e r case, l i a b i l i t y r u l e s are i n t e r f e r i n g w i t h the o r d e r l y flow of i n f o r m a t i o n between the p a r t i e s . C l e a r l y , r e q u i r i n g the s e l l e r t o guarantee t h a t the goods a r r i v e i n a s p e c i f i c s t a t e causes d i s t o r t i o n s t o the r e l a t i o n s h i p between the p a r t i e s . 2. L e g a l C l a r i t y and Conformity t o Common E x p e c t a t i o n In one sense the S a l e of Goods A c t model p r e s e n t s a c l e a r r u l e f o r the d i v i s i o n o f the r i s k o f u n a n t i c i p a t e d i n t e r n a l l y caused damage. Under the S a l e of Goods A c t the s e l l e r bears a l l the r i s k . O b viously, from the buyer's p e r s p e c t i v e t h i s i s a c l e a r arrangement. What i s not c l e a r ex ante i s the l e v e l o f e f f o r t r e q u i r e d by the s e l l e r t o cover t h i s r i s k . That i s , the i m p l i e d w a r r a n t i e s o f m e r c h a n t a b i l i t y and f i t n e s s f o r purpose r e q u i r e the s e l l e r t o guarantee the c o n d i t i o n of the goods upon t h e i r a r r i v a l a t the buyer's l o c a t i o n . However, the two w a r r a n t i e s do not i n f o r m the s e l l e r o f the e x t e n t of the e f f o r t r e q u i r e d t o f u l f i l l h i s performance. 1 9 5 . s. 35. 122 For example, i n Mash & M u r r e l l the case t u r n e d on whether events d u r i n g the voyage or f o r c e s i n t e r n a l t o the goods caused the damage. The t r i a l c o u r t found one cause o f the damage and the Court of Appeal found another, a l l on the same f a c t s . I f ex p o s t d e t e r m i n a t i o n of the " r i s k s " i s t h i s d i f f i c u l t i n most cases, then the s e l l e r has l i t t l e chance of making an a c c u r a t e ex ante p r e d i c t i o n of the performance r e q u i r e d of him. The c o s t s i n c u r r e d by the s e l l e r , i n e i t h e r e x t r a p r e p a r a t i o n o f the goods f o r t r a n s i t or c o n t r a c t i n g out of the w a r r a n t i e s decrease the e f f i c i e n c y of the t r a n s a c t i o n . These c o s t s are presumably passed on t o the buyer i n the form of h i g h e r p r i c e s . The average businessman would be s u r p r i s e d by the Anglo-Canadian approach t o u n a n t i c i p a t e d i n t e r n a l l y caused d e t e r i o r a t i o n . He would probably not expect the s e l l e r i n a s a l e and arrangement of d e l i v e r y c o n t r a c t t o guarantee s a f e a r r i v a l o f the goods. Indeed, businessmen presumably expect t h a t the p a r t i e s perform t h e i r o b l i g a t i o n s t o a s p e c i f i c s t a n d a r d such as a customary standard or t o the b e s t of t h e i r a b i l i t y . The l a t t e r e n t a i l s an o b j e c t i v e t e s t . 3. Reduction of A v o i d a b l e Losses The S a l e of Goods A c t model does tend t o reduce some a v o i d a b l e l o s s e s . The model makes the p a r t y w i t h s u p e r i o r c o n t r o l over the f a c t o r s of packaging and d u r a b i l i t y 123 completely r e s p o n s i b l e f o r damage which i s due t o t h e i r inadequacy. However, the model a c t u a l l y i n c r e a s e s l o s s e s due t o h i g h e r t r a n s a c t i o n c o s t s . The S a l e of Goods A c t model ig n o r e s the f a c t t h a t t o some ext e n t both p a r t i e s c o n t r o l the f a c t o r s of d u r a b i l i t y and packaging. The buyer may chose goods which may not have the p r o p e n s i t y t o s u r v i v e a l o n g t r a n s i t . I t appears from the Mash & M u r r e l l case t h a t the s e l l e r may have the duty of e i t h e r warning the buyer of the r i s k s of t r a n s m i t t i n g the goods or of t a k i n g the r i s k h i m s e l f . A d d i t i o n a l l y , the s e l l e r may have a duty t o warn the buyer d u r i n g n e g o t i a t i o n s t h a t the p r i c e n e g o t i a t e d f o r the packaging i s inadequate t o ensure the s u r v i v a b i l i t y o f the goods from a packaging p e r s p e c t i v e . In e i t h e r case, the requirement of i n f o r m i n g the buyer of the e f f e c t of h i s purchase d u r i n g n e g o t i a t i o n s i n c r e a s e s the i n f o r m a t i o n c o s t s of the exchange. T h i s i n c r e a s e t o the i n f o r m a t i o n c o s t s of the exchange comes without a c o r r e s p o n d i n g decrease i n the r i s k t o the goods. Another f a i l u r e o f the S a l e of Goods A c t model i s t h a t i t does not take i n t o account the buyer's c a p a c i t y as the s u p e r i o r i n s p e c t o r of the goods a t the end of the t r a n s i t . That i s , by making the s e l l e r completely r e s p o n s i b l e f o r l o s s e s due t o inadequate d u r a b i l i t y and packaging, the buyer i s p r o v i d e d a d i s i n c e n t i v e t o i n t e r v e n e and remedy goods which a r r i v e i n a s t a t e of d e t e r i o r a t i o n which c o n t i n u e s a f t e r the t r a n s i t ends. The buyer's duty t o m i t i g a t e o n l y r e q u i r e s him 124 t o m i t i g a t e h i s l o s s and not the s e l l e r ' s l o s s . This might mean t h a t the buyer could stand by and watch the goods r o t on the dock. As long as h i s r e l i a n c e and replacement c o s t s are reasonable i n the circumstances, the r e s p o n s i b i l i t y f o r the d e t e r i o r a t i o n r e s t s w i t h the s e l l e r . 125 CHAPTER EIGHT CONCLUSION The purpose of t h i s c o n c l u s i o n i s t o summarize the r e s u l t s of the a n a l y s i s and answer the q u e s t i o n of whether the S a l e of Goods A c t p r e s e n t s an e f f i c i e n t s e t of r u l e s f o r the a l l o c a t i o n o f r e s p o n s i b i l i t y f o r damage t o goods i n t r a n s i t . From t h i s summary, an optimal s e t of r u l e s w i l l be developed. These o p t i m a l r u l e s r e p r e s e n t the recommended s o l u t i o n from an economic p e r s p e c t i v e . P a r t one of t h i s c h apter summarizes the purpose of the t h e s i s and b r i e f l y reviews how the t h e s i s a c h i e v e d i t s purpose. P a r t two d i s c u s s e s the a n a l y t i c a l method used i n the a n a l y s i s . P a r t t h r e e summarizes the r e s u l t s of the comparison o f the two s e t s of r u l e s and o f f e r s one e x p l a n a t i o n f o r the i n e f f i c i e n c i e s i n the S a l e of Goods Act r u l e s . P a r t f o u r e x p l o r e s the form and content of the o p t i m a l s e t of r u l e s . The c h a p t e r concludes by b r i e f l y i n d i c a t i n g the o v e r a l l v a l u e of e f f i c i e n t r u l e s i n t h i s area of law. A. Summary o f the Purpose and Method T h i s paper p r e s e n t s a d e t a i l e d a n a l y s i s of the S a l e of Goods A c t r u l e s governing r i s k t o goods i n t r a n s i t . When goods are s o l d t o a d i s t a n t buyer, the t r a n s a c t i o n a l elements o f the s a l e are d i s p e r s e d over the p e r i o d between completion o f manufacture and the a r r i v a l o f the goods a t the buyer's l o c a t i o n . The r e s p o n s i b i l i t y f o r damage t o the goods i s o n l y 126 one s e t of t r a n s a c t i o n a l elements. In B r i t i s h Columbia r e s p o n s i b i l i t y f o r damage i s governed by s e c t i o n s of the S a l e of Goods A c t and the case law which i n t e r p r e t s the s e c t i o n s . The r i s k regime s e t up by the S a l e Of Goods A c t o r i g i n a t e d d u r i n g the l a t e n i n e t e e n t h c e n t u r y . I t r e p r e s e n t e d s o l u t i o n s t o l a t e n i n e t e e n t h c e n t u r y problems. The r e s e a r c h d e t a i l e d i n t h i s paper i s based on the assumption t h a t due t o the enormous amount of change o c c u r r i n g d u r i n g the l a s t one hundred y e a r s , t h i s regime no l o n g e r o f f e r s adequate s o l u t i o n s t o problems r e s u l t i n g from damage t o goods i n t r a n s i t . T e s t i n g of t h i s assumption r e q u i r e d the answer t o two r e l a t e d q u e s t i o n s . The f i r s t concerned the degree of e f f i c i e n c y o f the S a l e of Goods A c t . The second q u e s t i o n concerned the form and content of the s e t of o p t i m a l l y e f f i c i e n t r u l e s . The answer t o these two q u e s t i o n s r e q u i r e d the acceptance o f two standards. They are, the standard o f e f f i c i e n c y and the s t a n d a r d of the modern commercial environment. E f f i c i e n c y i s an economic measure. Hence, the d r i v e f o r a s t a n d a r d looked t o the d i s c i p l i n e o f economics f o r an answer. Chapter Two examined the t h e o r e t i c a l and m e t h o d o l o g i c a l elements of the economic approach. I t was concluded t h a t economic a n a l y s i s p r o v i d e s a u s e f u l p e r s p e c t i v e through which t o e v a l u a t e laws p o s s e s s i n g a predominantly economic impact. Economic a n a l y s i s measures the 127 f a c i l i t y o f a law t o promote b e h a v i o r which maximizes the produ c t o f the be h a v i o r . I t cannot measure or p r o v i d e a sta n d a r d f o r the d i s t r i b u t i v e e f f e c t s of the b e h a v i o r nor of the non-economic v a l u e of the product t o s o c i e t y . C l e a r l y , the economic standard i s not a p p r o p r i a t e f o r the e v a l u a t i o n o f every type o f law. However, i t was concluded t h a t r u l e s d e t e r m i n i n g r e s p o n s i b i l i t y f o r damage t o goods i n t r a n s i t possesses o n l y economic impact. Hence, the standard was judged a p p r o p r i a t e . Economic a n a l y s i s p r o v i d e s the a d d i t i o n a l advantage i n t h a t i t possesses u s e f u l a n a l y t i c a l t o o l s which make j u d g i n g the e f f i c i e n c y o f a law and making q u a n t i t a t i v e comparisons t o o t h e r l e g a l regimes p o s s i b l e . These t o o l s i n c l u d e use of models and comparable s t a t e s . In a d d i t i o n , economic th e o r y p r o v i d e s a framework w i t h i n which phenomena may be s i m p l i f i e d through the use of f a c t u a l assumption. As good as these t o o l s are, t h e i r use p r e s e n t s c e r t a i n r i s k s . F i r s t , t h e r e i s the r i s k t h a t the phenomena under a n a l y s i s w i l l be o v e r s i m p l i f i e d by i t s i n s e r t i o n i n t o a n a l y t i c a l models. T h i s paper attempted t o a v o i d t h i s r i s k by narrowing the f i e l d o f view t o c o n s i d e r i n g r e s p o n s i b i l i t y f o r damage as between the buyer and the s e l l e r and i g n o r i n g the damage quantum v a r i a b l e . Second, t h e r e i s the r i s k t h a t the assumptions made i n the pro c e s s o f s i m p l i f y i n g the phenomenon w i l l b i a s the c o n c l u s i o n s of the a n a l y s i s . T h i s r i s k was 128 reduced by m i n i m i z i n g the number of assumptions made and e n s u r i n g , as f a r as p o s s i b l e , t h e i r n e u t r a l c ontent. Chapters Three and Four c o n s i d e r e d the s t a n d a r d of the modern commercial environment. As such, these two c h a p t e r s s e t the scene f o r the a n a l y s i s . Chapter Three p r o v i d e d an i n depth d e s c r i p t i o n of the ocean t r a n s i t environment. T h i s was c o n s i d e r e d a r e a l i s t i c environment i n which t o t e s t the S a l e of Goods A c t r u l e s and develop o p t i m a l l y e f f i c i e n t r u l e s . The ocean t r a n s i t environment i s one of the most common t r a n s i t environments. In a d d i t i o n , i t p r o v i d e s a r e a l i s t i c backdrop i n which t o view r u l e s which governed the a l l o c a t i o n of r e s p o n s i b i l i t y f o r damage t o goods d u r i n g t r a n s i t . T h i s l a t t e r p o i n t i s based on two p o i n t s . The f i r s t i s t h a t f o r h i s t o r i c a l reasons ocean s h i p p e r s have v e r y l i m i t e d l i a b i l i t y f o r damage t o goods o c c u r r i n g d u r i n g an ocean voyage. T h i s means t h a t the o t h e r p a r t i e s t o the s a l e assume almost a l l the r e s p o n s i b i l i t y f o r damage t o the goods. Only i n cases where the c a r r i e r f a i l e d t o make the v e s s e l seaworthy or i s n e g l i g e n t i n stowage of the cargo does he i n c u r l i a b i l i t y . The second p o i n t i s t h a t the S a l e of Goods A c t emphasizes ocean t r a n s i t . The o n l y r e f e r e n c e made by the A c t t o a s p e c i f i c environment r e f e r s t o the ocean environment. T h i s i n d i c a t e s t h a t i n the n i n e t e e n t h century, the d r a f t e r s of the 129 s t a t u t e were p r e o c c u p i e d w i t h ocean t r a n s i t . S i n c e most of the e f f o r t and thought went i n t o r u l e s c o v e r i n g the ocean environment, t h i s area o f f e r s the most d e f i n e d and thus most i n t e r e s t i n g regime o f r i s k r u l e s f o r a n a l y s i s . Chapter Four developed the s t r u c t u r e of the models i n which the r u l e s were t e s t e d . The v a r i o u s r i s k s were reduced t o u s a b l e v a r i a b l e s and a l l o c a t e d t o the p a r t i e s a c c o r d i n g t o t h e i r e f f e c t i v e c o n t r o l over them. An i n t e r e s t i n g c o n c l u s i o n of the a n a l y s i s c o n t a i n e d i n Chapter Four i s t h a t a l a r g e number of r i s k f a c t o r s cannot be c l e a r l y a l l o c a t e d . Indeed, f i v e o f the e l e v e n r i s k f a c t o r s c o n s i d e r e d are w i t h i n the c o n t r o l o f both p a r t i e s . Chapters F i v e through Seven d e a l t w i t h b u i l d i n g and comparing models of each categ o r y of r u l e as d e f i n e d by the S a l e o f Goods A c t . The comparison promoted a number of c o n c l u s i o n s r e g a r d i n g the e f f i c i e n c y of the S a l e of Goods Act r u l e s . These c o n c l u s i o n s answered both of our h y p o t h e t i c a l q u e s t i o n s c o n c e r n i n g the e f f i c i e n c y of the S a l e of Goods A c t and the c ontent of o p t i m a l l y e f f i c i e n t r u l e s . B. Summary o f the A n a l y t i c a l Method The purpose of the a n a l y s i s was t o i d e n t i f y the i n e f f i c i e n c i e s of the S a l e of Goods A c t r u l e s and attempt t o e x p l a i n the reasons f o r them. The focus was the maximization o f the aggregate v a l u e of the exchange. E f f i c i e n c y was d e f i n e d as the p r o p e n s i t y of the r u l e t o p r o t e c t goods from 130 damage d u r i n g t r a n s i t and t o reduce the need f o r communication between the p a r t i e s r e g a r d i n g the d e t a i l s o f r e s p e c t i v e p a r t y r e s p o n s i b i l i t y . I t was assumed t h a t r e d u c i n g a c t u a l r i s k t o goods and the requirement of communication reduced the net aggregate c o s t o f the exchange t o the p a r t i e s . S i n c e the a n a l y s i s o n l y c o n s i d e r e d net aggregate v a l u e , the i d e n t i t y and a c t u a l v a l u e o f the goods was assumed t o be a co n s t a n t . A d d i t i o n a l l y , the models d i d not d e a l w i t h the g e n e r a l economic consequences of a l o s s nor w i t h the d i s t r i b u t i v e e f f e c t s o f i t s a l l o c a t i o n . There were two reasons f o r t h i s . The f i r s t was based on the assumption t h a t l e g a l r u l e s governing the commercial b e h a v i o r o f i n d i v i d u a l s ought not t o d i s t i n g u i s h between the i n d i v i d u a l s . The second was based on the Coase Theorem which h o l d s t h a t d i s t r i b u t i v e e f f e c t s are i r r e l e v a n t when the p a r t i e s a re b a r g a i n i n g f r e e l y and have r e l a t i v e l y low communication c o s t s . The a n a l y s i s assumed both p o i n t s . Each r u l e governing r e s p o n s i b i l i t y f o r damage t o goods i n t r a n s i t was c o n s i d e r e d i n i s o l a t i o n . T h i s added an a r t i f i c i a l i t y t o the a n a l y s i s because the r u l e s a re r a r e l y c o n s i d e r e d i n t h i s f a s h i o n . In every s i t u a t i o n i n v o l v i n g the d r a f t i n g o f a c o n t r a c t o r the s e t t l e m e n t o f a d i s p u t e , the r u l e s would be used without d i v i d i n g the r u l e s i n t o p r e c i s e c a t e g o r i e s . For example, a buyer n e g o t i a t i n g a c o n t r a c t may 6 . See i n f r a , pp. 29-30. 131 r e q u i r e a term t h a t d e f i n e s the s t a t e o f the goods upon a r r i v a l a t the buyer's l o c a t i o n . T h i s one term encompasses both the a n t i c i p a t e d and u n a n t i c i p a t e d damage c a t e g o r i e s . I t d e f i n e s merchantable q u a l i t y and a n t i c i p a t e d damage. The second disadvantage of t h i s c h o i c e o f approach was t h a t the j u s t i f i c a t i o n and e f f e c t o f the r u l e s were overlapped t o a l a r g e e x t e n t . T h i s encouraged a redundancy i n the a n a l y s i s . The j u s t i f i c a t i o n f o r c o n s i d e r i n g the r u l e s i n i s o l a t i o n i s t w o f o l d . The f i r s t i s t o s i m p l i f y the models. The need f o r s i m p l i f i c a t i o n has g r e a t e r importance than the r i s k o f a r t i f i c i a l i t y and thus a b s t r a c t i o n of the c o n c l u s i o n . The g o a l o f the a n a l y s i s was t o q u e s t i o n s p e c i f i c r u l e s and de s i g n o p t i m a l l y e f f i c i e n t ones. T h i s r e q u i r e d t h a t each r u l e be g i v e n independent and c l o s e s c r u t i n y . The second j u s t i f i c a t i o n i s t h a t the a n a l y s i s i n d i c a t e d a v e r y important f a c t about the S a l e o f Goods A c t r u l e s . The r u l e s s u f f e r from a c a t e g o r i z a t i o n problem. T h i s w i l l be d i s c u s s e d l a t e r i n t h i s c h a pter. U s i n g models t o analyze r u l e s r e q u i r e d s i m p l i f i c a t i o n of both the environment and the r u l e s b e i n g t e s t e d . To e l i m i n a t e c o n f u s i o n , the models looked a t a s i n g l e s a l e i n v o l v i n g an arrangement of d e l i v e r y by the s e l l e r . Merchants and commercial lawyers c a l l t h i s a s a l e and arrangement o f d e l i v e r y c o n t r a c t and i t i s the most common method o f s e l l i n g 132 goods a t a d i s t a n c e i n the western world. F r e q u e n t l y , c o n t r a c t s have t h i s type of t r a n s a c t i o n expressed i n the form o f the INCOTERM ' f . o . b . ' 1 9 8 The S a l e of Goods A c t models r e l i e d on two sources of i n f o r m a t i o n . They were the s p e c i f i c s e c t i o n s of the s t a t u t e which d e a l w i t h damage t o goods and s e v e r a l l e a d i n g cases i n t e r p r e t i n g these s e c t i o n s . Both sources r e f l e c t the h i s t o r i c a l development of the r u l e s . The S t a t u t e was enacted i n 1893 and the r i s k t o goods s e c t i o n s have not been amended s i n c e t h a t time. The case law c o n s i d e r e d spans the l i f e t i m e of the s t a t u t e . The o p t i m a l models, on the o t h e r hand, used r u l e s s p e c i f i c a l l y designed t o o p t i m i z e the e f f i c i e n t a l l o c a t i o n of r e s p o n s i b i l i t y f o r damage. O p t i m a l l y e f f i c i e n t c o n t r a c t r u l e s have two d i s t i n c t o b j e c t s . The f i r s t o b j e c t i s t o promote an e f f i c i e n t o p e r a t i o n of exchanges. The second o b j e c t i s t o decrease the amount of the p a r t i e s ' time and e f f o r t r e q u i r e d i n making the exchange. D e a l i n g w i t h the l a t t e r p o i n t f i r s t , every exchange i n v o l v e s necessary r e s e a r c h and n e g o t i a t i o n i n t o terms and c o n d i t i o n s of the exchange. C o n t r a c t law a s s i s t s the e f f i c i e n c y of exchanges by r e d u c i n g t h i s need f o r r e s e a r c h and n e g o t i a t i o n . T h i s i s e f f e c t e d by p r o v i d i n g r u l e s which are -1 Q7 1 3 S a s s o o n , supra, note 129, p. 18. 1 9 8 . I b i d . 133 c l e a r and conform t o the e x p e c t a t i o n s of the p a r t i e s . The a n a l y s i s c o n t a i n e d i n p r e v i o u s c h a p t e r s d e f i n e d t h i s i n terms of a " c l a r i t y and co n f o r m i t y t o common e x p e c t a t i o n t e s t " . An obvious d i f f i c u l t y i n a s s e s s i n g c l a r i t y and con f o r m i t y t o common e x p e c t a t i o n i s the q u e s t i o n o f e x a c t l y what i s meant by c l e a r and whose e x p e c t a t i o n forms the standard. These two d i f f i c u l t i e s are overcome through the use of the r a t i o n a l maximization assumption. I f people are assumed t o be r a t i o n a l and d e s i r o u s o f a maximization of r e s o u r c e s , then r u l e s which promote e f f i c i e n c y w i l l always m i r r o r what' r a t i o n a l people t h i n k a p p r o p r i a t e . Thus, e f f i c i e n t r u l e s are always c l e a r t o e f f i c i e n t people and w i l l meet the e x p e c t a t i o n s The former p o i n t a l s o depends on the r a t i o n a l maximization assumption. R a t i o n a l and maximizing people want t o maximize the v a l u e gained from exchanges. Assuming p e r f e c t knowledge and low communication c o s t s , i n every n e g o t i a t i o n of an exchange the p a r t i e s would s e t t l e on terms t h a t p r o v i d e the same amount of p r o t e c t i o n f o r the goods as the p r o j e c t e d c o s t of the consequences of the damages. To g i v e t h i s e f f e c t i n an e f f i c i e n t manner, the p a r t y b e s t a b l e t o p r o t e c t the goods should be the p a r t y r e s p o n s i b l e t o do so. A d d i t i o n a l l y , i f a r i s k e d event o c c u r r e d , the p a r t y a g r e e i n g t o be r e s p o n s i b l e would be the one b e s t a b l e t o e i t h e r absorb the l o s s o r t r a n s f e r the l o s s t o an o u t s i d e p a r t y . In r i s k t o goods s i t u a t i o n s , the p o t e n t i a l o u t s i d e p a r t i e s are the s h i p p e r or ste v e d o r e s . 134 The l o g i c o f the r a t i o n a l maximization assumption was extended t o cover the e f f e c t of the r u l e s on t h i r d p a r t y b e h a v i o r as w e l l . The q u e s t i o n asked was whether an a l l o c a t i o n of r e s p o n s i b i l i t y would encourage s e l l e r s t o be more s e l e c t i v e r e g a r d i n g which s h i p they h i r e d . S e l l e r ' s h i r i n g p r a c t i c e s may have an e f f e c t on the b e h a v i o r of s h i p p e r s by rewarding s h i p s w i t h good r e c o r d s w i t h a d d i t i o n a l b u s i n e s s and t h e r e f o r e p r o f i t . As w i t h any r e s e a r c h , t h e r e i s a p o s s i b i l i t y t h a t the t h e o r e t i c a l f o u n d a t i o n i s i n c o r r e c t . In t h i s case, t h i s would be due t o the p o s s i b i l i t y of e x p l a n a t i o n by v a l u e s o t h e r than economic ones. An example of such a v a l u e i s the concept of j u s t i c e . However, i t i s not l i k e l y t h a t j u s t i c e p l a y s a major p a r t i n r u l e s g o v e r n i n g r i s k t o goods i n t r a n s i t . T h i s i s due t o the f a c t t h a t the concept of j u s t i c e p e r t a i n s t o an i n t e r v e n t i o n by c o u r t s or l e g i s l a t u r e s t o promote an emotive r e s u l t . " I t was concluded t h a t emotive i n t e r v e n t i o n would r a r e l y be r e q u i r e d t o c o n t r o l p u r e l y commercial a c t i v i t y such as the area of law reviewed i n t h i s paper. Another c a u t i o n r e g a r d i n g the c o n c l u s i o n s reached by t h i s r e s e a r c h concerns the use of f a c t u a l assumptions. A number of f a c t s were assumed t o s i m p l i f y the models s u f f i c i e n t l y t o a l l o w f o r the development of e q u i l i b r i u m and comparison. 9 . i n f r a , pp. 13 t o 17 135 Because of the dependence on f a c t u a l assumptions, the v a l u e of the c o n c l u s i o n s of t h i s paper are dependent upon t h e i r accuracy. To the extent t h a t the assumptions are not e m p i r i c a l l y s u b s t a n t i a t e d , the c o n c l u s i o n s must be accepted as a p r i o r i . F u r t h e r , e m p i r i c a l t e s t i n g of the c o n c l u s i o n s was not p o s s i b l e due t o the f a c t t h a t t h e r e i s l i m i t e d case law d e a l i n g w i t h the r i g h t s between merchants i n s a l e and arrangement of d e l i v e r y c o n t r a c t s . A p p a r e n t l y , most d i s p u t e s are s e t t l e d i n f o r m a l l y between merchants and t h e i r i n s u r e r s . 2 0 0 Moreover, the d r a f t e r s of c o n t r a c t s d e a l i n g w i t h overseas shipment of goods g e n e r a l l y use the expressed INCOTERM f.o.b. i n t h e i r c o n t r a c t s . 2 0 1 L i t t l e c o n s i d e r a t i o n i s a p p a r e n t l y g i v e n t o the more complex i s s u e s o f r e s p o n s i b i l i t y of the person i n c o n t r o l of the goods. C. Summary of I n c o n s i s t e n c i e s Between the S a l e of Goods A c t and Optimal Models 1. The C a t e g o r i z a t i o n Problem O r g a n i z i n g the S a l e of Goods A c t r u l e s i n models uncovered a t h e o r e t i c a l d i f f i c u l t y w i t h the r u l e s . The S a l e of Goods A c t d i v i d e s r i s k i n t o the t h r e e c a t e g o r i e s of a n t i c i p a t e d damage, u n a n t i c i p a t e d i n t e r n a l l y caused damage and 2 0 0 . P r o v i n c e of O n t a r i o , O n t a r i o Law reform Commission. Report on the S a l e of Goods. V o l . 1. Toronto: Queen's P r i n t e r , 1983, p. 11. 201 . Sassoon, s u p r a f note 129, p. 18. 136 e x t e r n a l l y caused damage. T h i s a n a l y s i s r e v e a l e d t h a t the r u l e s f o r the f i r s t two c a t e g o r i e s are a p p l i e d i d e n t i c a l l y . T h i s means t h a t the S a l e of Goods A c t a p p l i e s o n l y two s e t s of r u l e s c o v e r i n g damage t o goods i n t r a n s i t . They are, r u l e s c o v e r i n g i n t e r n a l l y caused damage and r u l e s c o v e r i n g e x t e r n a l l y caused damage. The d i s t i n c t i o n between a n t i c i p a t e d damage and u n a n t i c i p a t e d i n t e r n a l l y caused damage p r o v i d e s no v a l u e i n a n a l y z i n g problems about r i s k t o goods i n t r a n s i t . Merchantable q u a l i t y i s the standard the goods must reach a t the end of the t r a n s i t . I f the s e l l e r f a i l s t o p r o v i d e goods of t h i s standard, the buyer i s e n t i t l e d t o compensation p r o p o r t i o n a l t o the f a i l u r e . A n t i c i p a t e d d e t e r i o r a t i o n i s d e f i n e d as the expected decrease i n v a l u e of the goods which occurs d u r i n g a normal t r a n s i t . I t r e p r e s e n t s a spread from p e r f e c t c o n f o r m i t y t o a l e v e l of damage which w i l l go uncompensated. Any damage over the a n t i c i p a t e d t h r e s h o l d must be compensated i n p r o p o r t i o n t o the damage. Both the merchantable q u a l i t y and the a n t i c i p a t e d d e t e r i o r a t i o n standards are measured by an o b j e c t i v e t e s t . The a b s t r a c t i o n of the o b j e c t i v e t e s t a l l o w s c o u r t s t o a d j u s t the performance term t o accommodate any r e a s o n a b l e r e s u l t i n the eyes o f the c o u r t . The p a r t i e s ' o b j e c t i v e l y determined e x p e c t a t i o n d e f i n e s both a n t i c i p a t e d damage and the spread allowed by merchantable 137 q u a l i t y . Both concepts may be argued as a defence t o a damage c l a i m made by an ag g r i e v e d buyer. The form o f both arguments i s t he same. That i s , the goods d i d not d e t e r i o r a t e any more than the buyer ought ( o b j e c t i v e l y ) t o have expected. T h i s i s what was argued i n the B u l l case. A l t e r n a t i v e l y , In Marsh &  M u r r e l l the s e l l e r l o s t on the p o i n t because the c o u r t found t h a t the goods had d e t e r i o r a t e d beyond the buyer's reasonable e x p e c t a t i o n s . Another common f e a t u r e i n the B u l l and Mash & M u r r e l l d e c i s i o n s was t h a t both c o u r t s c o n s i d e r e d the s e l l e r ' s r e s p o n s i b i l i t y was l i m i t e d by c a u s a t i o n . In Mash & M u r r e l l the Court o f Queens Bench awarded the buyer damages because i t c o u l d not f i n d an abnorm a l i t y i n the voyage. Abnormality meant t h a t another cause e x i s t e d which might e x p l a i n the damage. In B u l l . the c o u r t made an e x p l i c i t r e f e r e n c e t o c a u s a t i o n by b a s i n g i t s d e c i s i o n on the f a c t t h a t r u s t was a n a t u r a l consequence o f s h i p p i n g i r o n i n w i n t e r . As i n Mash &  M u r r e l l . n o t h i n g u n n a t u r a l o c c u r r e d d u r i n g the voyage. I t i s c l e a r t h a t both merchantable q u a l i t y and a n t i c i p a t e d damage p r o v i d e an ex pos t a d j u d i c a t o r w i t h the t o o l s t o account f o r damage a n t i c i p a t e d t o occur d u r i n g the t r a n s i t . Both are based on an o b j e c t i v e measurement of the p a r t i e s e x p e c t a t i o n s . Both p r o v i d e an ex pos t o p p o r t u n i t y t o c o r r e c t i n e f f i c i e n c i e s i n c o n t r a c t s f o r the s a l e and d e l i v e r y of goods. 138 In summary, the S a l e of Goods A c t c o n t a i n s o n l y two c a t e g o r i e s o f r u l e s c o v e r i n g damage t o goods i n t r a n s i t . One concerns i n t e r n a l damage and h o l d s t h a t the s e l l e r i s s t r i c t l y r e s p o n s i b l e t o p r o v i d e goods which at the c o n c l u s i o n of the t r a n s i t meet the o b j e c t i v e l y determined e x p e c t a t i o n s of the p a r t i e s . The second covers e x t e r n a l l y caused damage and holds t h a t once r i s k has passed t o the buyer, the s e l l e r i s c ompletely a b s o l v e d of a l l r e s p o n s i b i l i t y . 2. Summary o f the Comparison The comparison between the S a l e of Goods A c t r u l e s and the o p t i m a l r u l e s r e v e a l e d a number of d i f f e r e n c e s between the two s e t s . These d i f f e r e n c e s i n d i c a t e d the e x i s t e n c e of i n e f f i c i e n c i e s i n the S a l e of Goods Act r u l e s . a) E x t e r n a l l y Caused Damage The S a l e of Goods A c t r u l e s c o v e r i n g e x t e r n a l l y caused damage have two important c h a r a c t e r i s t i c s . The f i r s t i s t h a t the h o l d e r o f the r i s k i s a b s o l u t e l y r e s p o n s i b l e f o r a l l e x t e r n a l l y caused damage. The second i s t h a t t h i s a b s o l u t e r e s p o n s i b i l i t y may pass from the s e l l e r t o the buyer a t any one of a number of p o i n t s d u r i n g the t r a n s a c t i o n . Moreover, the r e s p o n s i b i l i t y may r e v e r t back t o the s e l l e r i f he f a i l s t o perform c e r t a i n d u t i e s i n a m i n i m a l l y s a t i s f a c t o r y way. F a i l u r e s which may cause a r e v e r s i o n of the r i s k are: i ) i n a p p r o p r i a t e c h o i c e of v e s s e l ; 139 i i ) f a i l u r e t o g i v e n o t i c e of shipment; and, i i i ) d e l a y i n shipment which causes damage. The reasons f o r the v a r i a b i l i t y i n t i m i n g of the p a s s i n g o f r e s p o n s i b i l i t y are due t o the a s s o c i a t i o n of r i s k and p r o p e r t y i n the S a l e of ,Goods A c t . The event which t r i g g e r s the c e s s a t i o n o f r e s p o n s i b i l i t y f o r e x t e r n a l l y caused damage i s not a t a l l connected wi t h the r e s p o n s i b i l i t y f o r i t s p r e v e n t i o n . Indeed, i t i s v e r y p o s s i b l e t h a t r e s p o n s i b i l i t y c o u l d pass w h i l e the goods are s t i l l i n the s e l l e r ' s warehouse. Obv i o u s l y , t h i s adds a g r e a t d e a l of u n c e r t a i n t y t o s a l e s t r a n s a c t i o n s . T h i s u n c e r t a i n t y causes i n c r e a s e d c o s t s f o r i n s u r a n c e , n e g o t i a t i o n , r e s e a r c h and p r o b a b l y produces an i n c r e a s e d r i s k of e x t e r n a l l y caused damage. By c o n t r a s t , the optimal model possesses o n l y one r u l e f o r the a l l o c a t i o n of r e s p o n s i b i l i t y f o r damage t o goods i n t r a n s i t . I t i s t h a t the s e l l e r must use r e a s o n a b l e c a r e i n a l l a c t i v i t i e s under h i s c o n t r o l . The s e t of a c t i v i t i e s under the s e l l e r ' s c o n t r o l i n c l u d e s p r o v i d i n g goods w i t h s u f f i c i e n t d u r a b i l i t y and packaging t o w i t h s t a n d the voyage, and the proper arrangement of s h i p and stowage. Under the o p t i m a l s e t , t h e r e i s no i s s u e o f the passage o f r i s k . Instead, i f e x t e r n a l l y caused damage can be shown t o have r e s u l t e d i n p a r t from a f a i l u r e of a s e l l e r ' s duty, then the s e l l e r i s l i a b l e f o r t h a t p o r t i o n of the harm. Under the 140 S a l e o f Goods A c t s e t of r i s k r u l e s the buyer must e s t a b l i s h t h a t r i s k had not passed from the s e l l e r or e l s e the s e l l e r i s h e l d b l a m e l e s s . I t i s e i t h e r a l l o r no t h i n g . A s i g n i f i c a n t f a c t o r r e g a r d i n g e f f i c i e n c y i s t h a t under the S a l e o f Goods A c t the a c t u a l passage of r i s k has no t h i n g t o do w i t h c a r e and c o n t r o l o f the goods. Thus, i t i s i n the s e l l e r ' s i n t e r e s t t o a c t i v a t e the passage of r i s k l o n g b e f o r e he has g i v e n up c o n t r o l o f the goods. T h i s p r e s e n t s the obvious consequences t h a t s e l l e r s may be encouraged t o manipulate the events o f a s a l e simply t o t r i g g e r a p r o p e r t y p a s s i n g event. Once r i s k passes, the s e l l e r i s p r o v i d e d a r e l a t i v e d i s i n c e n t i v e t o p r o t e c t the goods. H i s p a r t o f the t r a n s a c t i o n i s completed. Any a d d i t i o n a l l o s s p r e v e n t i o n a c t i v i t y must be n e g o t i a t e d f o r and compensated by the buyer. E x t e r n a l damage r u l e s under the S a l e o f Goods A c t are c l e a r l y i n e f f i c i e n t . C onfusion due t o the v a r i a b i l i t y o f time o f r i s k passage r e q u i r e s the p a r t i e s t o n e g o t i a t e t h i s term i n each and every t r a n s a c t i o n . Even when the term i s d e f i n e d , the p r e c i s i o n o f the event and the im p r e c i s e nature of e x p e c t a t i o n , i n t e r p r e t a t i o n and c o n t r a c t t e r m i n o l o g y means t h a t t h e r e i s always a p o s s i b i l i t y o f ex p o s t d i s p u t e s . T h i s i s not a d e s i r a b l e s i t u a t i o n f o r r u l e s which are designed t o f a c i l i t a t e exchanges. 141 b) I n t e r n a l l y Caused Damage I n t e r n a l damage p r e s e n t s a l e s s b o l d comparison. Under the S a l e o f Goods A c t the s e l l e r ' s duty t o p r o t e c t the goods a g a i n s t i n t e r n a l l y caused damage i s a b s o l u t e w i t h i n bounds d e f i n e d by the p a r t i e s ' e x p e c t a t i o n s and c a u s a t i o n . P a r t y e x p e c t a t i o n i s d e f i n e d by the concepts of merchantable q u a l i t y and a n t i c i p a t e d damage. Cau s a t i o n i s d e f i n e d by the category of e x t e r n a l l y caused damage d i s c u s s e d above. By c o n t r a s t , the optimal s e t of r u l e s bases the duty on the same c r i t e r i a as e x t e r n a l l y caused damage. That i s , the s e l l e r i s r e q u i r e d t o perform e v e r y t h i n g under h i s c o n t r o l a c c o r d i n g t o the l i m i t s o f r e a s o n a b i l i t y . Use o f an o b j e c t i v e l y determinable duty has a number of advantages. The advantages are r e l a t i v e ease of pr e d e t e r m i n i n g the r e q u i r e d performance and c o n s i s t e n c y w i t h the duty r e q u i r e d f o r the p r o t e c t i o n of the goods a g a i n s t e x t e r n a l l y caused damage. The ex ante advantages are o p e r a t i o n a l i z e d by a r e d u c t i o n of t r a n s a c t i o n c o s t s . They possess a g r e a t e r degree of c l a r i t y and c o n f o r m i t y t o common e x p e c t a t i o n . That i s , i t i s e a s i e r t o v i s u a l i z e r e s p o n s i b i l i t y l i m i t e d by both a b i l i t y (causation) and reaso n a b l e f o r e s e e a b i l i t y than i t i s t o v i s u a l i z e r e s p o n s i b i l i t y d e f i n e d by the q u a l i t y o f goods upon a r r i v a l l e s s merchantable q u a l i t y and t h i r d p a r t y i n t e r v e n t i o n . 142 The o v e r a l l d i f f e r e n c e between the two s e t s of r u l e s i s t h a t the r u l e s i n the optimal model are based on p r i n c i p l e s s i m i l a r t o those used i n t o r t law r a t h e r than c o n t r a c t law. The s e l l e r ' s r e s p o n s i b i l i t y i s d e f i n e d i n terms of d u t i e s . These d u t i e s flow from both the s e l l e r ' s a b i l i t y t o p r o t e c t the goods and damage r e s u l t i n g t o the goods i f the s e l l e r breaches the duty. I f i t appears ex ante o r can be shown ex  po s t t h a t the s e l l e r c o u l d not have p r o t e c t e d the goods u s i n g r e a s o n a b l e c a r e then the s e l l e r would not possess a duty t o do so. I f i t i s reasonable t h a t the goods a r r i v e i n a p e r f e c t l y conforming s t a t e then t h a t d e f i n e s the s e l l e r ' s duty. A l t e r n a t i v e l y , i f the s e l l e r cannot ensure t h a t the goods a r r i v e a t a l l , then he has breached no duty i f they do not i n f a c t a r r i v e . Thus, under the op t i m a l r u l e s , an ex p o s t damage r e s p o n s i b i l i t y a n a l y s i s would f o l l o w a t y p i c a l t o r t a n a l y s i s . The a g g r i e v e d buyer must prove duty, breach and damage t o succeed. The e x i s t e n c e of a duty would be based on the a b i l i t y t o p r o t e c t . The r e s p o n s i b i l i t y t o do so would be assumed because of the commercial r e l a t i o n s h i p between the p a r t i e s . For h i s defence the s e l l e r must show t h a t the damage to the goods o c c u r r e d o u t s i d e h i s c o n t r o l . To do t h i s the s e l l e r would prove t h a t he performed h i s d u t i e s t o a reasonable s t a n d a r d . 143 The ex ante a n a l y s i s would f o l l o w an e q u a l l y simple p r o c e s s . The p a r t i e s would determine t h e i r c o s t s i n an exchange by f i r s t a d d r e s s i n g the p a r t s o f the s a l e under t h e i r c o n t r o l and secondly by a t t a c h i n g a c o s t o f a c t i n g i n a reaso n a b l e manner i n f u l f i l l i n g t h e i r p a r t s . A way of view i n g the optimal r u l e s i s t o v i s u a l i z e every s a l e as two separate t r a n s a c t i o n s . One t r a n s a c t i o n i s the s a l e o f the good. The second t r a n s a c t i o n i s the s a l e o f s e r v i c e s which t r a v e l w i t h the goods t o the buyer's l o c a t i o n . These s e r v i c e s are the s e l l e r ' s promises of a c t i o n and guarantees. They are l i m i t e d by both the s e l l e r ' s c a p a c i t y t o perform and the p r i c e the buyer i s w i l l i n g t o pay f o r the s e r v i c e . For i n s t a n c e , the s a l e of a t r a c t o r i n v o l v e s the s a l e of a good (passage of p r o p e r t y and t i t l e ) and the s e r v i c e s o f : 1. t i m e l y a r r i v a l a t dock s i d e ; 2. s e l e c t i o n o f an a p p r o p r i a t e means of t r a n s p o r t a t i o n ; and, 3. proper n o t i c e t o the buyer of shipment and documentation t o the s h i p p e r . 4. s u f f i c i e n t d u r a b i l i t y b u i l t i n t o the t r a c t o r and packaging a c c o r d i n g t o the s e l l e r ' s r easonable e x p e c t a t i o n o f the r i g o r s o f t r a n s i t . I f damage r e s u l t s due t o a f a i l u r e o f e i t h e r the goods or the s e r v i c e s , the s e l l e r i s l i a b l e . There i s no i s s u e of the p a s s i n g o f p r o p e r t y o r r i s k . Nor i s t h e r e any concern over V 144 the d e f i n i t i o n o f merchantable q u a l i t y o r a n t i c i p a t e d d e t e r i o r a t i o n . Both p a r t i e s can e a s i l y c a l c u l a t e the ex ante c o s t s o f the whole package of goods and s e r v i c e s i n v o l v e d i n the t r a n s a c t i o n . The ex post d i s p u t e r e s o l u t i o n p r o c e s s i s s t r e a m l i n e d by d e a l i n g w i t h h i g h l y d e f i n e d d u t i e s . The o n l y f a c t u a l i s s u e t o c o n s i d e r would be the s e l l e r ' s a c t u a l c o n t r o l over the cause o f the damage. D. I n a p p r o p r i a t e n e s s o f the 'Risk' Concept R i s k i s an ambiguous term. I t has numerous meanings none o f which d e a l w i t h the e x i s t e n c e o f a duty. The use of r i s k ranges from i t s i n s u r a n c e t o common usage. For example, the r i s k which a p p l i e s t o ins u r a n c e i s the p r e s e n t v a l u e o f a f u t u r e n e g a t i v e event m u l t i p l i e d by i t s p r o b a b i l i t y o f occu r r e n c e . I t s common usage d e s c r i b e s t a k i n g a chance o r gambling. Buyers and s e l l e r s may view t h e i r t r a n s a c t i o n s as f r a u g h t w i t h r i s k i n the common sense. In a d d i t i o n , they may v e r y w e l l be i n t e r e s t e d i n r e d u c i n g the p o t e n t i a l c o s t o f the gamble t o a p r e s e n t v a l u e . However, i t serves no purpose t o d e s c r i b e the r e l a t i o n s h i p between the p a r t i e s i n terms of r i s k . An a n a l y s i s of the r i g h t s and c o r r e s p o n d i n g d u t i e s i n a s a l e and arrangement of d e l i v e r y c o n t r a c t does not r e q u i r e the use o f the r i s k concept. The s e l l e r has the r i g h t t o r e c e i v e 145 payment upon d e l i v e r y o f the goods and the performance of h i s v a r i o u s d u t i e s . The buyer pays f o r the r i g h t t o r e c e i v e d e l i v e r y o f the goods and the performance of the s e l l e r ' s d u t i e s . As the s e l l e r performs h i s d u t i e s h i s o v e r a l l r e s p o n s i b i l i t y t o the buyer decreases. At some f u t u r e p o i n t h i s r e s p o n s i b i l i t y w i l l cease completely. But u n t i l t h a t event o c c u r s , the buyer and the s e l l e r are i n v o l v e d i n a r e l a t i o n s h i p d e f i n e d by both p a r t i e s r i g h t s and o b l i g a t i o n s d e f i n e d as d u t i e s . E. A D r a f t Wording of the Optimal Rules The s p e c i f i c wording of op t i m a l r u l e s f o r r e s p o n s i b i l i t y of damage t o goods d u r i n g t r a n s i t ought t o be l e f t t o draftsmen e x p e r t i n the r u l e s o f l e g i s l a t i v e d r a f t i n g and s t a t u t o r y i n t e r p r e t a t i o n . However, s i n c e t h i s t h e s i s proposes new r u l e s , an o u t l i n e o f the r u l e s ought t o be presented. The f o l l o w i n g wording c o u l d be c o n s i d e r e d t o e f f e c t the g o a l o f the o p t i m a l r u l e s t o make the p a r t y b e s t a b l e t o perform r e s p o n s i b l e f o r performance. Where the c o n t r a c t r e q u i r e s o r a u t h o r i z e s the s e l l e r t o s h i p the goods by independent c a r r i e r t o the buyer's l o c a t i o n , the s e l l e r must: 1. arrange a l l a s p e c t s of shipment of the goods i n such a way t o reasonably ensure t h e i r a r r i v a l a t the buyer's l o c a t i o n i n the c o n d i t i o n a n t i c i p a t e d by the p a r t i e s when the c o n t r a c t was entered i n t o , i n c l u d i n g without l i m i t i n g the g e n e r a l i t y o f the f o r e g o i n g ; 146 a) s e l e c t the c a r r i e r and type o f stowage i n r e l a t i o n t o the f r a g i l i t y o f the goods and v u l n e r a b i l i t y o f t h e i r packaging; b) p r o v i d e proper n o t i c e o f the shipment t o the buyer; and, c) t r a n s m i t proper documentation which i n c l u d e s an a c c u r a t e v a l u a t i o n of the goods t o the c a r r i e r . 2. d e l i v e r goods t o the c a r r i e r which are capable of w i t h s t a n d i n g the reasonably a n t i c i p a t e d r i g o r s o f the intended t r a n s i t t a k i n g i n t o account the good's d u r a b i l i t y and packaging, the type and i d e n t i t y of the c a r r i e r , t he time of year and the l e n g t h o f the voyage. F. C o n c l u s i o n Summary Optimal r u l e s promote r e l a t i o n s h i p r a t h e r than c o n f r o n t a t i o n . P a r t i e s who engage i n a s a l e and arrangement of d e l i v e r y agreement have as t h e i r o b j e c t the e f f i c i e n t t r a n s f e r o f goods f o r p r o f i t . The promotion o f the r e l a t i o n s h i p mode of b u s i n e s s a s s i s t s i n the r e d u c t i o n o f c o s t s by making i t i n both p a r t i e s i n t e r e s t t h a t conforming goods a r r i v e a t the buyer's l o c a t i o n . The i n t e r t w i n i n g o f r i g h t s and d u t i e s promotes a v e r t i c a l l y i n t e g r a t e d b u s i n e s s r e l a t i o n s h i p . N e i t h e r p a r t y b e n e f i t s from any a c t which reduces the v a l u e o f the a c t i v i t y . I t i s i n the i n t e r e s t o f both p a r t i e s t o see t h a t the r e l a t i o n s h i p i s p r o d u c t i v e and p r o f i t a b l e . In t h a t way s o c i e t y as w e l l as the p a r t i e s p r o f i t s by the e x e r c i s e . 147 BIBLIOGRAPHY Baker, C.E. " S t a r t i n g P o i n t s i n the Economic A n a l y s i s of Law" (1980), 8 H o f s t r a Law Review 939. Barton, J.H. " The Economic B a s i s of Damages f o r Breach of C o n t r a c t " (1972), 1 J o u r n a l of L e g a l S t u d i e s 277. Benjamin's S a l e of Goods, Ed by A. G. Guest, General E d i t o r , London: Sweet & Maxwell, 1987. Berman, H a r o l d J . and Kaufman, C o l i n , "The Law of I n t e r n a t i o n a l Commercial T r a n s a c t i o n s (Lex M e r c a t o r i a ) " (1978), 19 Harvard I n t e r n a t i o n a l Law J o u r n a l 221 Bishop, W. "The Choice of Remedy f o r Breach of C o n t r a c t " (1985), 14 J o u r n a l of L e g a l S t u d i e s 299. Bishop, W. "The C o n t r a c t B a i n b r i d g e , S. "Trade Usages i n I n t e r n a t i o n a l S a l e s of Goods: An A n a l y s i s of the 1964 and 1980 S a l e s Convention", [1984] V i r g i n i a J o u r n a l of I n t e r n a t i o n a l Law 219 Boland, L. The Foundations of Economic Method, London: A l l e n & Unwin, 1982. Brenner, R., "Economics - An I m p e r i a l i s t S c i e n c e " (1980), 9 J o u r n a l of L e g a l S t u d i e s 179. Burrows, P. and V e l j a n o v s k i , G. The Economic Approach t o Law, Toronto: Butterworths, 1983. C a i n , George H., "The Vienna Convention: Posing a New I n t e r n a t i o n a l Law of S a l e s " (1983), 57 C o n n e c t i c u t Bar J o u r n a l 327 C a l a b r e s i , G. " T r a n s a c t i o n Costs, Resource A l l o c a t i o n And L i a b i l i t y Rules - A Comment" (1968), 11 J o u r n a l of Law and Economics 67. C a l a b r e s i , G. & Melamed, D. "Property R i g h t , L i a b i l i t y , Rules and I n a l i e n a b i l i t y : One View of the C a t h e d r a l " (1972), 85 Harvard Law Review 1089. C a s t e l , J . G., de M e s t r a l , A. L. C. and Graham, W. C. I n t e r n a t i o n a l Business T r a n s a c t i o n s and Economic  R e l a t i o n s . Toronto: Edmond Montgomery, 1986. Coase, R. " The Problem of S o c i a l Cost" (1960), 3 J o u r n a l of Law and Economics 1. 148 Coase, R.H. "Economics And Contiguous D i c i p l i n e s " (1978), 7 J o u r n a l o f L e g a l S t u d i e s 201. Coleman, J.L. " E f f i c i e n c y , Exchange, And A u c t i o n : P h i l o s o p h i c a l Aspects of the Economic Approach t o Law" (1980), 68 C a l i f o r n i a Law Review 221. Coleman, J.L. " E f f i c i e n c y , U t i l i t y , and Wealth Maximization" (1980), 8 H o f s t r a Law Review 509. Coleman, J.L. "The Economic A n a l y s i s o f Law" (1982), 24 NOMOS 83. Coleman, J.L. "The Normative B a s i s o f Economic A n a l y s i s : A C r i t i c a l Review of R i c h a r d Posner's The Economics of J u s t i c e " (1982), 34 S t a n f o r d Law Review 1105. Colinvaux, R. Carver's C a r r i a g e by Sea. 13th ed. London: Stevens & Sons, 1982. Cooter, "The Cost o f Coase" (1982), 11 J o u r n a l o f L e g a l S t u d i e s 1. Demsetz, H. "Some Aspects o f Pro p e r t y R i g h t s " (1966), 9 J o u r n a l o f Law and Economics 61. Demsetz, H. "Wealth D i s t r i b u t i o n And the Ownership of R i g h t s " (1972), 1 J o u r n a l o f Legal S t u d i e s 223. Demsetz, H. "When Does the Rule o f L i a b i l i t y M a t t e r ? " (1972), 1 J o u r n a l o f Le g a l S t u d i e s 13. Drie d g e r , Elmer A. The C o n s t r u c t i o n o f S t a t u t e s . Toronto: Butterworths, 1974. Dworkin, R. M. "Is Wealth a Value? " (1980), 9 J o u r n a l o f Legal S t u d i e s 191. E l l i c k s o n , R.C. "Of Coase and C a t t l e : D i s p ute R e s o l u t i o n Among Neighbors i n Shasta County" (1985/86), 38 S t a n f o r d Law Review 623. Gonzalez, 0. "Remedies Under the U. N. Convention f o r the I n t e r n a t i o n a l S a l e o f Goods" (1984), 2 I n t e r n a t i o n a l Tax and Business Lawyer 79 H i r s c h W.Z. Law and Economics An I n t r o d u c t o r y A n a l y s i s . New York: Academic Press, 1979. H i r s c h , W.Z. "Reducing Law's U n c e r t a i n t y and Complexity" (1974), 21 U.C.L.A. Law Review 1233. Holderness, C.G. "A Le g a l Foundation f o r Exchange" (1985), 14 J o u r n a l o f Le g a l S t u d i e s 321. 149 Honnold, J . " The Uniform Law For The I n t e r n a t i o n a l S a l e of Goods" (1965), 30 Law and Contempory Problems 326 Honnold, John O. Uniform Law f o r I n t e r n a t i o n a l S a l e s Under the  1980 U n i t e d Nations Convention. New York: Kluwer Law and Ta x a t i o n , 1983. Horwitz, M.J. "Law and Economics: S c i e n c e o r P o l i t i c s ? " (1980), 8 H o f s t r a Law Review 908. Hoyle, Mark S. The Law of I n t e r n a t i o n a l Trade. 2nd ed. London: C. C. H. E d i t i o n s , 1985. I n t e r n a t i o n a l Chamber of Commerce. I n t e r n a t i o n a l Rules f o r the I n t e r p r e t a t i o n o f Trade Terms. Incoterms (1980). Jakubowski, J . "The Autonomy of I n t e r n a t i o n a l Trade Law and I t s I n f l u e n c e on the I n t e r p r e t a t i o n and A p p l i c a t i o n o f i t s R u l e s " Law and I n t e r n a t i o n a l Trade, ed. by F r i t z F a b r i c i u s , F r a n k f u r t : Athenaum V e r l a g , 1973. J o k e l a , H. "The Role o f Usages i n the Uniform Law on I n t e r n a t i o n a l S a l e s " (1966), 10 Scandinavean S t u d i e s i n the Law 83 Ke l s o , J . C. " The U n i t e d Nations Convention on C o n t r a c t s f o r the I n t e r n a t i o n a l S a l e of Goods: C o n t r a c t Formation and the b a t t l e o f Forms" (1982-83), 21 Columbia J o u r n a l of T r a n s n a t i o n a l Law 52 9 Knoeber, C.R. "An A l t e r n a t i v e Mechanism To Assure C o n t r a c t u a l R e l i a b i l i t y " (1983), 12 J o u r n a l of L e g a l S t u d i e s 333. Kornhauser, L.A. "A Guide t o the Perplexed Claims o f E f f i c i e n c y i n the Law" (1980), 8 H o f s t r a Law Review 591. Kronman, A. T. "Mistake, D i s c l o s u r e , I nformation, And the Law of C o n t r a c t " (1978), 7 J o u r n a l o f Le g a l S t u d i e s 1. Kronman, A. T. "Wealth Maximization as a Normative P r i n c i p l e " (1980), 9 J o u r n a l o f Le g a l S t u d i e s 227. Lawson, F. H., " The P a s s i n g o f P r o p e r t y and R i s k i n the Sal e of Goods - A Comparative Study" (1949), 65 Law Q u a r t e r l y Review 33 L e f f , A. A. "Economic A n a l y s i s o f Law: Some Realism About Nominalism" (1974), 60 V i r g i n i a Law Review 451. Murphy, J.G. and Coleman, J.L. The Ph i l o s o p h y o f Law. An I n t r o d u c t i o n t o J u r i s p r u d e n c e . Totowa, New J e r s e y : Rowman & A l l a n h e l d , 1984. 150 Note, "Risk o f Loss i n Commercial T r a n s a c t i o n s : E f f i c i e n c y Thrown Into the Breach" (1979), 65 V i r g i n i a Law Review 557. O ' D r i s c o l l . G. P., " J u s t i c e , E f f i c i e n c y , and the Economic A n a l y s i s o f Law: A Comment on F r i e d " (1980), 9 J o u r n a l of L e g a l S t u d i e s 355. P o l i n s k y , A.M. "Economic A n a l y s i s as a P o t e n t i a l l y D e f e c t i v e Product: A Buyer's Guide t o Posner*s Economic A n a l y s i s of Law" (1973-74), 87 Harvard Law Review 1655. P o l i n s k y , A.M. "Risk S h a r i n g Through Breach of C o n t r a c t Remedies" (1983), 12 J o u r n a l of L e g a l S t u d i e s 427. P o l i n s k y , A.M. An I n t r o d u c t i o n t o Law and Economics. Boston: L i t t l e Brown, 1983. Posner R.A. "The E t h i c a l and P o l i t i c a l B a s i s of the E f f i c i e n c y Norm i n Common Law A d j u d i c a t i o n " (1980), 8 -H o f s t r a Law Review 487. Posner, R. A. "The Value of Wealth: A Comment on Dworkin and Kronman" (1980), 9 J o u r n a l of L e g a l S t u d i e s 243. Posner, R.A. "A Reply t o Some Recent C r i t i c i s m s of the E f f i c i e n c y Theory of the Common Law" (1981), 9 H o f s t r a Law Review 775. Posner, R.A. and R o s e n f i e l d , A.M. " I m p o s s i b i l i t y and R e l a t e d D o c t r i n e s i n C o n t r a c t Law: An Economic A n a l y s i s " (1977), 6 J o u r n a l of L e g a l S t u d i e s 83. Posner, R.A. Economic A n a l y s i s of Law. 3rd. ed. Boston: L i t t l e Brown, 1986. P r i e s t , G.L. "Nonconforming Goods Under the Uniform Commercial Code: An Economic Approach" (1978), 91 Harvard Law Review 960. P r o v i n c e o f O n t a r i o , O n t a r i o Law reform Commission. Report on  the S a l e of Goods. V o l s . 1 & 2. Toronto: Queen's P r i n t e r , 1983 . Rea, S. A. " E f f i c i e n c y I m p l i c a t i o n s of P e n a l t i e s and L i q u i d a t e d Damages" (1984), 13 J o u r n a l of L e g a l S t u d i e s 147. R e i n h a r t , G. "Development of a Law f o r the I n t e r n a t i o n a l S a l e of Goods" (1983-84), 14 Cumberland Law Review 89 R i z z o M.J. "The Mirage of E f f i c i e n c y " (1980), 8 H o f s t r a Law Review 641. 151 Rohwer, Claude D. and Coe, Jack J . "The Vienne Convention on the I n t e r n a t i o n a l S a l e o f Goods and the UCC - P e a c e f u l C o e x i s t e n c e ? " Legal Aspects of I n t e r n a t i o n a l Business  T r a n s a c t i o n s . Ed. by D. Campell and C. Rohwer, Amsterdam: E l s e v i e r S c i e n c e P u b l i s h i n g , 1984. Ros e t t , A. " C r i t i c a l R e f l e c t i o n s on the U n i t e d Nations Convention on C o n t r a c t s f o r the I n t e r n a t i o n a l S a l e o f Goods" (1984), 45 Ohio S t a t e Law J o u r n a l 265 Roth, P. M. "The Pa s s i n g o f R i s k " (1979), 27 American J o u r n a l of Comparative Law 291 Ryan, K. W. I n t e r n a t i o n a l Trade Law. Sydney: Law Book, 1976. Samuelson, P.A. Foundations o f Economic A n a l y s i s . E n l . Ed., Cambridge: Harvard U n i v e r s i t y Press, 1983. Sassoon, David M. "Damage R e s u l t i n g From N a t u r a l Decay Under Insurence, c a r r i a g e and S a l e of Goods C o n t r a c t s " (1965), 2 8 Modern Law Review 180 Sassoon, David M. " L i a b i l i t y f o r the I n t e r n a t i o n a l c a r r i a g e of Goods by Sea, Land and A i r : Some Comparisons" (1971/72), 3 J o u r n a l o f Maritime Law & Commerce 725 Sassoon, David M. C.I.F. and F.O.B. C o n t r a c t s 2nd. ed. London: Stevens & Son, 1975. S c h m i t t h o f f , C l i v e M. "The R i s k o f T r a n s i t i n I n t e r n a t i o n a l S a l e s " U n i f i c a t i o n o f the Law Governing I n t e r n a t i o n a l  S a l e s o f Goods, ed. by John Honnold, P a r i s : L i b r a i r i e D a l l o n , 1966. S c h m i t t h o f f , C l i v e M. The Export Trade. 8th. ed., London: Stevens & Sons, 198 6. S c h m i t t h o f f , C l i v e M. The S a l e o f Goods. 2nd. ed. London: Stevens & Sons, 1966. Schwartz, A. "Cure and Revocation f o r Q u a l i t y D e f e c t s " The U t i l i t y o f Bar g a i n s " (1975), 16 Boston C o l l e g e I n d u s t r i a l and Commercial Law Review 543. Sealy , L. S. " R i s k i n the Law of S a l e s " (1972), 31 Cambridge Law J o u r n a l 225 Stewart, I.M.T. Reasoning and Method i n Economics An I n t r o d u c t i o n t o Economic Methodology. London: McGraw-H i l l , 1979. S t i g l e r , G.J. The Theory of P r i c e , Rev. Ed. New York: MacMillan, 1952. 152 Sundberg, Jacob W.F. 11 A Uniform I n t e r p r e t a t i o n o f Uniform Law" (1966), 10 Scandinavian S t u d i e s i n Law 222 T e t l e y , W i l l i a m , Q.C. Marine Cargo Claims. 2nd. ed. Toronto: Butterworths, 1978. T o r t Boundary and the Economics of Insurance" (1983), 12 J o u r n a l o f L e g a l S t u d i e s 241. T r i b e , L.H. "Technology Assessment and the Fourth D i s c o n t i n u i t y : The L i m i t s of Instrumental R a t i o n a l i t y " (1973), 46 Southern C a l i f o r n i a Law Review 617. T u l l o c k , G. "Two k i n d s of L e g a l E f f i c i e n c y " (1980), 8 H o f s t r a Law Review 659. U n i t e d N a t i o n s , U n i t e d Nations Conference On C o n t r a c t s f o r the  I n t e r n a t i o n a l S a l e of Goods, Vienna, 10 march - 11 A p r i l ,  1980. New York: U n i t e d Nations, 1981. Warren, E. "Trade usage and P a r t i e s i n the Trade: As Economic R a t i o n a l e f o r an In F l e x i b l e Rule" (1980-81), 42 U n i v e r s i t y of P i t t s b u r g h Law Review 515. Winship, P e t e r , " I n t e r n a t i o n a l S a l e s C o n t r a c t s Under the 1980 Vienna Convention " (1984-85), Uniform Commercial Code Law J o u r n a l 55 Wooldridge, Frank, The Kinds of FOB C o n t r a c t s i n Law And I n t e r n a t i o n a l Trade. F r a n k f u r t : Athenaum V e r l a g , 1973. 

Cite

Citation Scheme:

        

Citations by CSL (citeproc-js)

Usage Statistics

Share

Embed

Customize your widget with the following options, then copy and paste the code below into the HTML of your page to embed this item in your website.
                        
                            <div id="ubcOpenCollectionsWidgetDisplay">
                            <script id="ubcOpenCollectionsWidget"
                            src="{[{embed.src}]}"
                            data-item="{[{embed.item}]}"
                            data-collection="{[{embed.collection}]}"
                            data-metadata="{[{embed.showMetadata}]}"
                            data-width="{[{embed.width}]}"
                            async >
                            </script>
                            </div>
                        
                    
IIIF logo Our image viewer uses the IIIF 2.0 standard. To load this item in other compatible viewers, use this url:
http://iiif.library.ubc.ca/presentation/dsp.831.1-0077706/manifest

Comment

Related Items