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UBC Theses and Dissertations

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

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ECONOMIC ANALYSIS OF RISK TO GOODS IN TRANSIT BY HAROLD ANDREAS ANDERSON B.A. ( H o n o u r s ) , A c a d i a U n i v e r s i t y , 1979 L L . B . , DALHOUSIE UNIVERSITY, 1979 A THESIS SUBMITTED  IN PARTIAL FULFILLMENT OF  THE REQUIREMENTS FOR THE DEGREE OF MASTER OF LAWS in THE FACULTY OF GRADUATE STUDIES THE FACULTY OF LAW  We a c c e p t t h i s t h e s i s a s c o n f o r m i n g to the standard  THE UNIVERSITY OF BRITISH COLUMBIA October (c)  11, 1988  H a r o l d A n d r e a s A n d e r s o n , 1988  In  presenting  degree freely  at  this  the  available  copying  of  department publication  of  in  partial  fulfilment  University  of  British  Columbia,  for  this or  thesis  reference  thesis by  this  and  for  his  scholarly  or  thesis  study.  her  for  of I  I further  purposes  gain  shall  of  CCCC|<>  Date  DE-6  (2/88)  Qcf&jyu  /Q  }  jj)?^  be  It not  <S^U Ji'e£  The University of British Columbia Vancouver, Canada  that  agree  permission.  Department  requirements  agree  may  representatives.  financial  the  that  the  be  an  advanced  Library shall  permission for  granted  is  for  by  understood allowed  the  make  extensive  head  that  without  it  of  copying my  my or  written  ABSTRACT The r u l e s contained  governing r i s k  i n the  British  transport  transported the  rules  explored to  as w e l l  as t h e  in  1893.  types  have not been m o d i f i e d . in this  thesis  represent  transit  i s whether  drafted  efficient  i n the rules  Goods A c t  Although the  of  goods  have changed s i g n i f i c a n t l y  goods i n t r a n s i t  century  goods i n  Columbia S a l e of  b a s e d on a s t a t u t e e n a c t e d of  to  method  being  since that  The  are  time,  hypothesis  rules  governing  late  nineteenth  i n the  late  risk  twentieth  century. The t h e s i s test  their  applied  efficiency.  ocean t r a n s i t  economic a n a l y s i s t o The r u l e s were t e s t e d  environment.  r u l e s were n o t  efficient  modification.  An e f f i c i e n t  to  goods i n t r a n s i t  It  in  rules the  was c o n c l u d e d t h a t  and r e q u i r e d set  the  of  was a d v a n c e d .  the  substantial  rules  governing  risk  to  iii TABLE OF CONTENTS CHAPTER ONE INTRODUCTION CHAPTER  1  TWO  THEORETICAL APPROACH  8  A. T h e A d v a n t a g e s  o f t h e Economic Approach  8  B. T h e B a s i s o f t h e E c o n o m i c A p p r o a c h  10  C. T h e R o l e o f E f f i c i e n c y  14  D. E c o n o m i c  i n Analysis  T h e o r y a n d t h e L i m i t s o f i t s Power o f  Explanation E.  The T e c h n i q u e o f Economic A n a l y s i s  F. T h e C o n t r a c t  16 19  Paradigm  32  G. C o n t r a c t A n a l y s i s CHAPTER THREE THE TRANSIT ENVIRONMENT A. C o m m e r c i a l S a l e s I n v o l v i n g a n A r r a n g e m e n t  36  of  D e l i v e r y by t h e S e l l e r  42 42  B. M e t h o d s o f T r a n s p o r t a t i o n  43  C. C o n t r a c t u a l E v e n t s  44  D. T h e L e g a l  48  E.  Environment  Types o f R i s k  CHAPTER FOUR STRUCTURING THE MODELS  61 67  A. E x p e r i m e n t a l Q u e s t i o n  67  B. A s s u m p t i o n s  68  C. R i s k  69  Factors  CHAPTER F I V E ANTICIPATED DAMAGE  78  A. T h e O p t i m a l M o d e l  78  B. T h e S a l e o f Goods A c t M o d e l  84  C. C o m p a r i s o n o f t h e S a l e o f Goods A c t a n d The O p t i m a l M o d e l s  87 .  CHAPTER S I X UNANTICIPATED THIRD PARTY DAMAGE A. T h e O p t i m a l M o d e l B. T h e S a l e o f Goods A c t M o d e l  91 91 100  iv C. C o m p a r i s o n o f t h e S a l e o f Goods A c t and t h e Optimal Model  103  CHAPTER SEVEN UNANTICIPATED INTERNALLY CAUSED DAMAGE A. The O p t i m a l  108  Model  109  B. The S a l e o f Goods A c t M o d e l  114  C. C o m p a r i s o n o f t h e S a l e o f Goods A c t a n d the Optimal Models  118  CHAPTER EIGHT CONCLUSION  125  A. Summary o f t h e P u r p o s e and M e t h o d  125  B. Summary o f t h e A n a l y t i c a l M e t h o d  129  C. Summary o f I n c o n s i s t e n c i e s Between o f Goods A c t and O p t i m a l D.  Inappropriateness  of the  F. C o n c l u s i o n BIBLIOGRAPHY  Summary  Models  'Risk'  E. A D r a f t Wording o f t h e Optimal  the Sale  Concept Rules  13 5 144 14 5 14 6 147  CHAPTER ONE INTRODUCTION Goods w i l l almost always undergo some change d u r i n g  their  t r a n s i t from t h e s e l l e r ' s warehouse t o t h e buyer's l o c a t i o n . O f t e n t h e s e changes a r e a n t i c i p a t e d by the p a r t i e s . cases t h e changes may even be d e s i r e d .  In some  An example o f t h i s i s  the  s a l e o f u n r i p e f r u i t which w i l l r i p e n i n g d u r i n g t r a n s i t  and  be ready f o r s a l e upon a r r i v a l .  known i n advance t h e p r i c e p a i d  When t h e changes a r e  f o r goods w i l l r e f l e c t t h e i r  v a l u e a t t h e end o f t h e t r a n s i t . The  buyer w i l l r e c e i v e goods which do not conform t o what  he expected t o r e c e i v e and as a r e s u l t , t h e buyer s u f f e r s a loss.  However, i n cases where changes a r e not d e s i r e d o r  a n t i c i p a t e d , t h e p r i c e p a i d f o r t h e goods w i l l not r e f l e c t t h e i r v a l u e when r e c e i v e d by t h e buyer. There a r e s e v e r a l c h o i c e s f o r t h e d i s p o s i t i o n o f t h i s loss.  The l o s s c o u l d  e i t h e r be l e f t w i t h t h e buyer,  t r a n s f e r r e d t o t h e s e l l e r o r shared between t h e two. o p t i o n has i t s own b e n e f i t s and c o s t s  Each  f o r both t h e p a r t i e s and  society. Such l o s s e s a r e a l l o c a t e d between t h e p a r t i e s a c c o r d i n g t o t h e terms o f t h e s a l e s c o n t r a c t  o r the r e l e v a n t  I f t h e a l l o c a t i o n i s made a c c o r d i n g t o c o n t r a c t ,  s a l e s law.  i t means t h a t  the p a r t i e s had t h e forethought t o s e t t l e t h e p o t e n t i a l  2 dispute  i n advance.  I f the a l l o c a t i o n i s made a c c o r d i n g  the r e l e v a n t s a l e s law,  the p a r t i e s e i t h e r ignored  to  the  p o s s i b i l i t y or t r u s t e d the s a l e s law t o s o l v e 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 f o r the c a l c u l a t i o n of the c o s t s o f the exchange t h a t the p a r t i e s understand how a l o s s would be d i s t r i b u t e d .  I f s e l l e r s are r e s p o n s i b l e  such for  damage, the p r i c e s they charge f o r t h e i r goods would r e f l e c t the c o s t of the r i s k .  S e l l e r s would be encouraged t o make an  e f f o r t t o ensure t h a t goods s u r v i v e d t r a n s p o r t unharmed. the other hand, i f buyers are h e l d r e s p o n s i b l e the p r i c e they would be w i l l i n g t o pay  f o r the l o s s ,  f o r goods would r e f l e c t  the r i s k of r e c e i v i n g goods of a lower v a l u e . buyers may  be encouraged t o p r o v i d e  On  In such a case  e x t r a p r o t e c t i o n f o r the  goods. 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 may made a l l o c a t e d f o r any number of b a s i s . buyers and  number of reasons and  on an  large  However i t i s done, i t i s e s s e n t i a l t h a t  s e l l e r s be aware of the r u l e s and  t h a t the  respond t o the needs of the p a r t i e s i n e n s u r i n g s a l e and  be  t o s o c i e t y i n improving the way  rules  a successful  s a l e s are  transacted.  Even when the r u l e s are c l e a r c a l c u l a t i n g the r i s k s t h a t goods w i l l be damaged i n t r a n s i t i s no easy t a s k .  Very o f t e n  s a l e s i n v o l v e the, t r a n s p o r t a t i o n of goods over g r e a t from the s e l l e r ' s f a c t o r y or warehouse t o the location.  The  distances  buyer's  t r a n s p o r t a t i o n phase of the t r a n s a c t i o n i s  3 frequently  occasioned  transport,  each w i t h  point  i t s own s e t o f s p e c i f i c  i n a sale scenario  internal  as w e l l  discovered  until  Naturally, seller  t h e goods c o u l d  as e x t e r n a l their  be damaged b y  c a u s e s w h i c h may n o t b e  arrival  at the i n i t i a l  a t the buyer's  the s e l l e r ' s  A t some p o i n t  the  d i f f e r e n t types of r i s k  the  buyer. This  risk  conflict  o f damage p a s s  t o goods environment  between t h e a b i l i t y  from t h e s e l l e r t o  i s further complicated  to protect  responsibility  f o r damage o u g h t t o be somehow  From a common s e n s e  such regimes a r e faced absence o f l o g i c  perspective,  related to  B u t i n f a c t u n d e r many  regimes t h e 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  goods i s r e l a t e d t o o t h e r  factors.  by  goods and t h e  f o r doing so.  t h e goods.  between  responsibility for  responsibility  to protect  This  l o c a t i o n and t h e time  t h e y r e a c h t h e b u y e r ' s warehouse, t h e t o t a l  law  warehouse.  stages of the t r a n s a c t i o n , the  the course of the sale.  t i m e t h e goods l e a v e  ability  A t any  f o r any damage w h i c h o c c u r s t o t h e g o o d s .  changes d u r i n g  the  risks.  b e a r s r e s p o n s i b i l i t y f o r a l l o f s o u r c e s o f damage and  consequently  the  b y t h e u s e o f d i f f e r e n t methods o f  sales  protection for  Merchants t r a d i n g  under  with e i t h e r ignoring the obvious  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 negotiating  terms which p r o v i d e  for i t s correction .  Whatever t h e b a s i s  f o r t h e 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 g o o d s i n t r a n s i t  and t h e c o m p l e x i t y  environment, these r u l e s a r e very  complex.  of the transit  These r u l e s p l a y  a  4 large part  i n the  s t r u c t u r i n g of  t h u s t e n d t o make s a l e s v e r y  to the  success of  of greater A  changes the  and  forewarned of the o f damage o f t h e  law  goods i s a g o a l ,  of the  a l l o c a t i o n of  p r o v i n c i a l Sale  and  w h i c h due  Sale  British  time.  the  at  a  calculable  that  the  parties  undertaken. party  If  be  be  reduction  i n c o n t r o l of  goods ought t o  the  be  century  seen d u r i n g  British  r e s p o n s i b i l i t y f o r damage i s British  Columbia's 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  Columbia was  and  law.  drafted during thus represents  that period.  w h e t h e r t h e s e same r u l e s a r e The  are  each phase of t r a n s i t  o f Goods A c t s .  to the  o f Goods A c t  nineteenth  problems as  these rules  governs a l l s a l e s which occur w i t h i n  g o v e r n e d by  The  importance  for i t s control.  o f Goods A c t  are  i n a d v a n c e and  responsibilities  I n Canada t h e g o v e r n e d by  aspect  a c t u a l and  undergo d u r i n g  s o u r c e o f damage t o t h e  responsible  critical  mutually p r o f i t a b l e sale requires  goods w i l l assigned  of  the  r u l e s governing p r i c e or  r e s p o n s i b i l i t y f o r the  specifically  province  Often t h i s  importance than the  minimum t h a t  Sale  apparent complexity,  these r u l e s are  a sale.  successful  potential  by  and  complex.  However, i n s p i t e o f t h e structuring provided  every sales t r a n s a c t i o n  the  latter  part  a solution for  A pertinent  question  a s o l u t i o n t o modern p r o b l e m s .  Columbia S a l e  regime which separates a b i l i t y  o f Goods A c t to protect  s e t s up  goods from  a  risk the  is  5 responsibility province  f o r doing  must e i t h e r  risk provisions. this  law  On  of the  level  The  and  what c a n  i n the  f o r the  allocation  transit  i n the  Since r u l e s the  this first  be  do  not  late twentieth  evaluating  the risk  every  trade. doing  these  appropriate  for  S a l e o f Goods A c t  o u g h t t o be  this point.  represent  The to  efficient rules  f o r damage t o g o o d s i n  efficiency  of  risk  t o examine t h e meaning o f  of t h i s paper presents and  a detailed  the  the paper w i l l  c o n s i d e r the of  an  eye  of  method various  i t s explanative  c o n s i d e r the  economic approach w i t h  the  review  analytical  t e r m as w e l l a s t h e b r e a d t h  rules.  is  r i s k r u l e s designed  paper i s l o o k i n g at the goal  in  century.  In a d d i t i o n , the paper w i l l by  under  done t o c o r r e c t i t .  o f economic e f f i c i e n c y  meanings o f t h e  provided  the  of r e s p o n s i b i l i t y  economic a n a l y s i s .  power.  are not  the  with  i t s i s apparent t h a t  s t a t e s t h a t the  l a s t century  C h a p t e r Two  concept  called  i n e a c h and  purpose of t h i s paper i s to explore  operate  the  business  of  However, t h i s p o i n t o u g h t t o e x a m i n e d  operating hypothesis  word.  of doing  century  d e p t h t o d e t e r m i n e e x a c t l y how inefficient  or c o n t r a c t out  regime adds u n n e c e s s a r y c o s t s t o  nineteenth  o u r modern t i m e s .  this  merchants o p e r a t i n g  r i s k or negotiating r i s k  Thus, a t t h i s  solutions  risks  case,  disadvantage  i t s face, t h i s  business.  Presumably merchants i n  ignore t h e i r  In e i t h e r  s u f f e r the  uncalculated  so.  tools  t o t h e i r use  in  6  In transit  order to and t h e  evaluate abilities  during transit,  this  common f o r m s o f  transit  issues  are  for  and t h e  Columbia Sale of  The e v a l u a t i o n the  provides the comparative  subject tools  of  goods of  the  most  regime.  Theses  look at  the  of  of  delivery".  type The  due t o b o t h  concentration  it  sale  setting its  receives  in  the  rules  i n v o l v e s a comparison  and a s t a n d a r d .  Economic a n a l y s i s  s u c h a c o m p a r i s o n t h r o u g h m o d e l s and  Chapter Four d e t a i l s the  parameters  the  creation  and v a r i a b l e s  of  the  considered  models.  of  the  research is  conclusions reached.  must be e v a l u a t e d defined  to protect  in  Three.  environment  legal  for  states.  This part the  goods  Goods A c t .  rules  models and i d e n t i f i e s i n the  parties  a detailed  ocean t r a n s i t  relevance  damage t o  g o o d s and l e g a l  " s a l e and a r r a n g e m e n t  chosen i s the  between  of the  considered i n Chapter  c a l l e d the  British  sources of  p a p e r c o n d u c t s an e x a m i n a t i o n  Chapter Three takes  empirical  the  standard.  of  The l e g a l  according to  critical  importance  to  rules being considered  conformity  M o d e l s and c o m p a r a t i v e  to  a s p e c i f i c and  statics  allow  for  such a comparison. Chapter of  the  five  Sale of  through Seven p r e s e n t  Goods A c t r i s k  s t a n d a r d c a l l e d by t h i s These c h a p t e r s d e t a i l  analysis  r u l e s with a comparison to  paper o p t i m a l l y  the  an e x h a u s t i v e  a n a l y s i s of  efficient  risk  each i n d i v i d u a l  the  rules. rules  7 under the 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  a n a l y s i s l e a d s t o a number o f i m p o r t a n t  regarding the the  content  efficiency  of the  the  results  of the  comparison.  reached  i n the  analysis to t h e i r  are  reached  of r i s k rules the  of the  m o d e l s and  differences.  The  and  allocation  provide  account.  not  the  A  the  ends.  conclusions  Conclusions  method t o t h e  the  Sale  study  o f Goods A c t  summary i s p r o v i d e d  S a l e o f Goods A c t m o d e l s and  explanation Finally,  an  i s o f f e r e d as optimal  to the  of  the  causes  set of rules i s  of t h i s t h e s i s are t h a t the and  efficient  Sale of  set of r u l e s f o r  take  p r o t e c t i o n of the  transit. reasons  goods  i s created.  the  into  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 every  Goods  the  f o r damage t o g o o d s i n  r u l e s are that f o r h i s t o r i c a l  adequately  s t a t u t e e a c h and  contract  takes  analytical  discussed.  of r e s p o n s i b i l i t y  problem with  r u l e s do  logical  d i s c u s s i n g the  discussed.  conclusions  does not  r e s e a r c h by  inherent problem with  an  and  rules.  This chapter  d i f f e r e n c e s between t h e  outlined  the  An  i s h i g h l i g h t e d and  of the  The  the value  rules.  optimal  Act  on  conclusions  S a l e o f Goods A c t R u l e s  of optimally e f f i c i e n t  Chapter E i g h t concludes  transit.  t i m e t h a t a s a l e and d e l i v e r y  out  of  8 CHAPTER  TWO  THEORETICAL APPROACH A.  The  Advantages of the  The  process  perspective. allows effect, can be  ordering  perspective  judge the value impossible  perspective seem t o t a k e information b a s e d on  of  legal  the  this  most  difficult that be  f o r granted.  i s an  the  use  approach  of  which  information.  In  from which the  observer  Drawing c o n c l u s i o n s  would  values  They  through which they  defence of conclusions  reasoning  invisible  the  s t r u c t u r e t h e i r work.  and The  have i g n o r e d  and  common s e n s e " .  application  of the  value  are This  often is  researcher's  view.  important  f r o m a number o f  i s that without  t o compare c o n c l u s i o n s .  i f perspective  subjected  of  entails  advantage.  researchers  T h i s approach s u f f e r s The  sorting  information.  attitudes  "sound l e g a l  point of  and  through which they  s h o r t hand f o r t h e own  a perspective  i s a vantage p o i n t  without  Frequently,  Approach  of drawing c o n c l u s i o n s  Generally,  f o r the  Economic  to  i s ignored  disadvantages.  a known p e r s p e c t i v e 1  the  i t  Another disadvantage i s perspective  itself  cannot  test.  . C o a s e , R.H. " E c o n o m i c s And (1978), 7 J o u r n a l o f L e g a l S t u d i e s  may  Contiguous D i s c i p l i n e s " 201, p. 203.  9 An  alternative  t o assuming  the p e r s p e c t i v e used i n  research  i s t o s e t t h e p e r s p e c t i v e up  research  project.  much t h e t e s t i n g  as a major  part of the  That i s , the purpose of the r e s e a r c h of the perspective  i s as  as i t i s t h e e x p l o r a t i o n  of the subject matter of the study.  T h i s approach provides  opportunity  of perspective  research  to understand the e f f e c t  conclusions.  be c o m p a r e d t o o t h e r  Further,  the research  conclusions  an  on  conclusions  may  w h i c h u s e d t h e same  perspective.  T h e r e a r e a number o f p e r s p e c t i v e s researcher. and  They  economic.  advantages  include h i s t o r i c a l ,  and d i s a d v a n t a g e s .  the desired  T h i s paper has reason great  for this deal  underlying  effect  researcher  chosen t h e economic  i s t h a t t h e economic  As w i l l  set of  must c h o o s e  the  and  conclusions. perspective.  later  i n a commercial  purely  in this  b a s i s of the approach p a r a l l e l s  commercial  chapter,  t h e assumed  I t s p r i n c i p l e weakness o f  t o e x p l a i n the moral setting.  The  perspective possesses a  power r e g a r d i n g  be e x p l o r e d  of the commercial world. inability  The  legal  psychological  address the s e l e c t e d problems  of explanative  phenomenon.  logical  E a c h p e r s p e c t i v e p o s s e s s e s i t s own  p e r s p e c t i v e which w i l l provide  a v a i l a b l e to the  s i d e o f t h e law h a s  the goals  an little  10 B.  The The  law,  Basis of  i n i t s o p e r a t i o n and  concept of  essence a  the  central  study of  There are  at  and  characteristic  are  different  1. The  of  Pareto  at  discipline  is  the  Economics a p p l i e d t o of  law. for  efficiency,  The  need t o  efficient  account  law  is  4  maximized r e s o u r c e use.  the  that  secondary  state  the  is  economic  Each d e f i n e s a  for  pareto,  which  has  criteria different  state.  Criterion created to  allow  c o m p a r i s o n s between competing  comprises three r e l a t e d  inferior  3  the  efficiency  p a r e t o c r i t e r i o n was  quantitative  numerous  three c r i t e r i a  because of  arriving  i s g o v e r n e d by  theme o f  the  least  economic approach  effect,  kaldor-hicks.  the  means o f  the  economic e f f i c i e n c y .  allocative  Approach  Although t h e r e are  assumptions,  It  Economic  u n d e r l y i n g b a s i s of  principles.  in  the  concepts,  the  for  s t a t e s of  optimal,  utility.  superior  5  and  state.  2. Murphy, J.G. and Coleman, J . L . The P h 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, p. 212. . S t i g l e r , G.J. The T h e o r y o f M a c M i l l a n , 1952, pp. 148-149. 3  4.  Murphy, s u p r a ,  n o t e 2,  Price.  Rev.  Ed.  New  York:  p.212.  5. Coleman, J . L . " E f f i c i e n c y , E x c h a n g e , And Auction: Philosophical A s p e c t s o f t h e E c o n o m i c A p p r o a c h t o Law" (1980), 68 C a l i f o r n i a Law R e v i e w 221, pp.225 and 231.  11 The  optimal state  improvement Both  state  from which  f o r one p a r t y w i l l  cause  a detriment t o another.  logically  comparable optimal  on e f f i c i e n c y  This  7  i s reached, p o s i t i o n  any  are not  i s because  once t h e  i s d e t e r m i n e d by  h a s no r e l e v a n c e f o r e f f i c i e n c y  8  comparative  are defined  s t a t e s o f p a r e t o s u p e r i o r and  i n relation  s t a t e which  least  optimal states  grounds.  d i s t r i b u t i o n which  purposes.  The  and p r a c t i c a l l y ,  threshold  internal  any  i s that  t o each o t h e r .  inferior,  The s u p e r i o r  state i s  i s an improvement o v e r a p r e v i o u s s t a t e  for at  one c o m p e t i t o r and no c o m p e t i t o r i s made w o r s e o f f by  the change. state  9  The i n f e r i o r  can a r i s e .  that the total  state  The p o s i t i o n s  i s one f r o m w h i c h a r e comparable  superior se i n each  P a r e t o s u p e r i o r moves a r e p o s s i b l e u n t i l t h e i s reached.  2. A l l o c a t i v e Allocative  Efficiency  efficiency  Criterion  also describes the state of  maximized p r o d u c t i v e r e s o u r c e u s e . which  a  inter  v a l u e o f t h e exchange i n c r e a s e s w i t h  s u p e r i o r move. optimal  state  1 0  I t i s the state  from  any c h a n g e w o u l d d e c r e a s e t h e n e t a g g r e g a t e v a l u e o f a  6. Coleman, J . L . " E f f i c i e n c y , U t i l i t y , a n d W e a l t h M a x i m i z a t i o n " ( 1 9 8 0 ) , 8 H o f s t r a Law R e v i e w 509, pp.512-513. 7. I b i d , 8  .  9. 10.  p . 513.  Murphy, s u p r a , n o t e 2, pp. 218. Ibid. Coleman, s u p r a , n o t e  5, p . 222.  12 transaction. That  Market models t e s t  1 1  i s , e q u i l i b r i u m s always r e p r e s e n t  more f o r c e s a r e An  counter  allocative  optimal.  According  of a h i s t o r i c a l 3. A  criteria  precisely  1 4  i f a party  b e n e f i t s must be c o u l d be  1 1  .  38. 1 3  .  s t a t e s i s the  only  absence i n the  former  J  do  not  and  account  allocative  The  is efficient  so g r e a t  compensated.  1 7  that The  formulated  kaldor-hicks i f the  gain  l o s s of a l l disadvantaged i s i n j u r e d by  the  efficiency  for involuntary  of the ones.  operation  i n theory  the  for  criterion  of  holds  benefited In  1 6  law  other  then  the  injured party  state of kaldor-hicks  efficiency  Ibid. Stigler,  supra,  n o t e 3,  p.  33.  Coleman, s u p r a .  n o t e 5,  p.  223.  14. P o s n e r , R.A. E c o n o m i c A n a l y s i s o f Law, B o s t o n : L i t t l e Brown, 1986, p. 14. 15.  Ibid.  16.  Murphy, s u p r a ,  n o t e 2,  p.  3rd.  ed.  218.  . T u l l o c k , G. "Two k i n d s o f L e g a l 8 H o f s t r a Law R e v i e w 659, p. 664 1 7  pareto  Criterion  that situation.  exceeds the  words,  two  or  1 2  definition  k a l d o r - h i c k s c r i t e r i o n was  a distribution  party  s t a t e i s by  of both the pareto  The  p o i n t where two  maximized.  or comparative dimension.  i s t h a t they  transfers.  or  the  efficiency.  t o P r o f e s s o r J u l e s Coleman, t h e  Kaldor-Hicks failing  balanced  efficient  d i f f e r e n c e between t h e  that  for allocative  Efficiency"  (1980),  13 is  a p o t e n t i a l pareto  party  could d i s t r i b u t e h i s gain thus c r e a t i n g a  superior so.  superior state i n that the benefited  state.  1 8  pareto  However, i t i s n o t n e c e s s a r y  t h a t he do  1 9  The k a l d o r - h i c k s c r i t e r i o n h a s t h e 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 m a r k e t e x c h a n g e s f a i l markets f a i l s  t o operate  indicates that there efficiency  there  competitors  i s no l e g a l  competitor occasion market  efficiently.  The f i r s t  when  2 0  failure.  2 2  kaldor-hicks  F o r example,  t o compensation f o r an  who h a s b e e n d r i v e n o u t o f b u s i n e s s .  described  Coleman  i n v o l v e s weeding out  i n an e x i s t i n g m a r k e t .  entitlement  o r when t h e  Professor  a r e o n l y two o c c a s i o n s  i s justified.  inefficient  t o occur  by P r o f e s s o r  Coleman  F o r example,  there  inferior  The second  involves correction of  i s no l e g a l  entitlement  t o c o m p e n s a t i o n f o r m o n o p o l i s t s once t h e impediments t o competition  have been  removed.  The k a l d o r - h i c k s efficient position party.  and p a r e t o  2 3  criterion  optimal  c r e a t e s an a l l o c a t i v e  outcome  c a n n o t be changed w i t h o u t I n o t h e r words,  18. Coleman,  supra,  19. I b i d . 2 0  .  I b i d , p . 247.  2 1  .  Ibid.  2  2  .  Ibid.  2 3  .  Ibid.  because t h e f i n a l net  injuring  a kaldor-hicks  a t l e a s t one  solution graphically  n o t e 5, p . 238.  14 falls  on t h e o p t i m a l  frontier.  c o m p a r a b l e on e f f i c i e n c y efficient  Since optimal  states are not  grounds, any k a l d o r - h i c k s s t a t e  a s any a l l o c a t i v e  efficient  or pareto  i s as  optimal  states. C.  The R o l e  of Efficiency  i n Analysis  There a r e s e v e r a l reasons such  a large role  on t h e n o r m a t i v e based  i n economic a n a l y s i s .  theory  One r e a s o n  weight attached t o e f f i c i e n c y .  on t h e a p p a r e n t  behavior  why e f f i c i e n c y  similarity  and t h e b e h a v i o r  t o achieve  i s based  The o t h e r i s  between r a t i o n a l  necessary  plays  human  an e f f i c i e n t  state. The  normative  argument h o l d s t h a t e f f i c i e n c y  desirable  state  forsociety.  the t o t a l  amount o f r e s o u r c e s a v a i l a b l e  2 4  That  i s , society benefits i f  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 . states define increases i n t o t a l  for distribution The c o m p a r a t i v e  pareto  resources available f o r  d i s t r i b u t i o n while the three optimal allocative  isa  states of pareto,  and k a l d o r - h i c k s e f f i c i e n c y  define the perfect  state.  Even t h e k a l d o r - h i c k s c r i t e r i o n w i t h 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 . based  on a n i n d i v i d u a l i s t i c  individual  i t s obvious  The r a t i o n a l  ideology.  penalty  f o rthis i s  I t h o l d s t h a t i f an  i s g o i n g t o be d e p r i v e d o f p r o p e r t y b y s o c i e t y , i t  . P o s n e r , R. A. "The V a l u e o f W e a l t h : A Comment on D w o r k i n a n d Kronman" (1980), 9 J o u r n a l o f L e g a l S t u d i e s 243, p. 247. 2 4  15 is  only  just  i f the net b e n e f i t t o s o c i e t y i s greater than the  corresponding  loss to the i n d i v i d u a l .  of saying  that optimal  resources  regardless  The that  efficiency  of their  distribution.  i s b a s e d on t h e o b s e r v a t i o n  a common f e a t u r e o f human b e h a v i o r  acquire  resources.  human b e i n g s competitive  i s the desire to  Assuming r a t i o n a l i t y  and f i n i t e  must compete among t h e m s e l v e s . and r a t i o n a l  i s a n o t h e r way  requires the maximization of  internal  behavioral' j u s t i f i c a t i o n  This  2 5  and i n c o m p e t i t i o n  resources,  T h u s , humans a r e will  always  maximize t h e i r p o s i t i o n s .  The  limiting  availability are  f a c t o r t o achieving a maximization  of information.  no s e c r e t s , e v e r y  position  rational  i s , i n a world  competitor  will  where  there  pursue h i s  t o i t s maximum.  Since every  That  i s the  efficiency  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  t i m e two o r more i n d i v i d u a l s compete i n a  where a c c e s s  t o information  always be d e f i n e d behavioral  i s n o t a t i s s u e , t h e outcome  as e f f i c i e n t .  constant  situation  2 6  will  Thus, t o an e c o n o m i s t t h e  i s s a f e l y assumed t o b e  rational  maximization.  . T u l l o c k , G. "Two K i n d s o f L e g a l H o f s t r a Law R e v i e w 659, p . 664. z o  Efficiency"  . C o a s e , R. " The P r o b l e m o f S o c i a l J o u r n a l o f Law a n d E c o n o m i c s 1, p . 7. 2 6  Cost"  8  (1960), 3  16 As we w i t h two hicks  have seen,  maximization  of the three d e f i n i t i o n s  efficiency  defined  rational  i n terms  rational  has  maximization.  This no  Its j u s t i f i c a t i o n i s derived  i s o v e r r i d d e n by t h e n e e d s o f  D. E c o n o m i c T h e o r y Explanation The in  difficult The justice  this  a r e i n any way  empirically  tested.  "The  . Posner, 1,  of  comparable.  2 8  Rather,  lies law.  be  justice.  The  quantified  justice  and  concept of j u s t i c e i s nor can  i t be  o n l y d e s c r i b e s an  event.  i s i l l u s t r a t e d by t h e common l e g a l  as,  where  component o f t h e  e c o n o m i c t h e o r y may  i n terms  I t c a n n o t be  r e s p o n s e t o an  This justice  i n states  g i s t o f t h e argument i s w h e t h e r e f f i c i e n c y  empty.  emotive  without  o f t h e economic approach  i s true,  to rationalize  empirically  person  society.  to e x p l a i n the j u s t i c e  To t h e e x t e n t t h a t  i s because  and t h e L i m i t s o f i t s Power o f  apparent v u l n e r a b i l i t y  i t s inability  being  rational  w o u l d c o n s e n t t o h a v e p r o p e r t y t a k e n f r o m him  consent  Kaldor-  2 7  difficulty  m a x i m i z a t i o n assumes c o n s e n t and  compensation.  tautological  of e f f i c i e n c y .  i s o n l y s t a t e which of r a t i o n a l  is  definition  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  supra, note  14,  p.  3 and  Coase,  of  to give  supra.  note  203. PR  • . . . . B r e n n e r , R., " E c o n o m i c s - An I m p e r i a l i s t S c i e n c e " ( 1 9 8 0 ) , 9 J o u r n a l o f L e g a l S t u d i e s 179, p. 184.  17 e v e r y man and  his due."  subject  treatment  meaningful. is  what a man  i s due  i s highly  what he  that man  'due'.  is  that  person  f o r the  component  resources,  of  deciding  a comparison between i n d i v i d u a l s .  every  i n d i v i d u a l has are  h i s own  due.  decision-making process,  i s contrasted efficiency  i s due.  changes the  idea  Given  t o how  of  the  i t i s even  point  doubtful  to define  what  such t h a t  and  efficiency  E f f i c i e n c y describes  an  result,  of the  ideology but  the  . B l a c k ' s Law 1968, p.1002.  are  reverse  It exists  a c h a n g e i n one achieved.  d i f f e r e n t types  I t i s conceivable  that  an  efficient  i s c e r t a i n l y not  Dictionary.Rev.  4th  Ed.,  true.  force,  3 1  of  phenomena w h i l e j u s t i c e  speaker.  might h o l d  is  forces.  .  Ibid.  a  of  states  that  a  result is a Judge  West: S t .  Paul,  . S t e w a r t , I.M.T. R e a s o n i n g and Method i n E c o n o m i c s I n t r o d u c t i o n t o Economic Methodology, London: M c G r a w - H i l l , 1979, p. 143. 3 0  3 1  a  The  f o r what  a quantifiable state  o r more c o m p e t i n g forces  efficiency.  a s p i r e to account  at which e f f i c i e n c y  emotive o p i n i o n  person or  concept of  E f f i c i e n c y defines  Thus, j u s t i c e concepts.  with the  does not  a r e l a t i o n s h i p with  Min.,  time  thus e m p i r i c a l l y  finite  as what o t h e r s  e q u i l i b r i u m b e t w e e n two  just  of  due.  concept of  an  true  a c o n s e n s u s e x i s t s i n s o c i e t y as  This  in  i s not  In a world of  as w e l l  of the  components o f u n i f o r m i t y  q u a n t i f i a b l e and  involves  likely  i s due  complexity  are  However, t h i s  what a man  It  The  2 9  An  18 Posner suggests t h a t of  finite  inefficiency  resources.3 2  everything  However, t h i s  e f f i c i e n t i s morally  would c o n s i d e r  i t just  f l o u r i s h while  poor unproductive  situation  may  competing  parameters.  The should law. as  not  as  i t i s not  explanatory the  power.  explanatory  derived  p o s e any  problem  because the i m p a c t on  s u p e r s e d e d by  f o r the  principles  one  people However,  this  between  incomparable  economic a n a l y s i s of I t remains  another with  to  to ensure t h a t  i n t h e i r proper  commercial  appreciate conclusions  perspective.  a n a l y s i s of r i s k r u l e s .  of d i s t r i b u t i v e  valid  greater  of economics t o e x p l a i n j u s t i c e  the purely  of  of the  are  However, i t i s e s s e n t i a l  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 delivery  justice  l i m i t s of a theory  inability  that  3 3  from i t are p l a c e d  The  productive  explains everything.  3 4  world  example, no  efficient relationship  d e t r a c t from t h e v a l u e rarely  For  imply  people starve.  t h a t e c o n o m i c s and  A theory  long  an  wrong i n a  does not  right.  t h a t r i c h and  describe  fact  i s morally  does This  j u s t i c e would  not is  rarely  arrangements between s a l e and  arrangement  of  goods.  51. P o s n e r , R. A. "The V a l u e o f W e a l t h : A Comment on D w o r k i n and Kronman" ( 1 9 8 0 ) , 9 J o u r n a l o f 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 t h e d i c h o t o m y t h i s way: ... t h e e c o n o m i s t s e e s t h e d o m a i n o f e f f i c i e n c y a s t h e s i z e o f t h e " p i e ' and t h e domain o f j u s t i c e o r m o r a l i t y a s t h e s h a p e and d i s t r i b u t i o n o f i t s p i e c e s . ( M u r p h y , s u p r a , n o t e 2, pp. 215.) 1  56.  Ibid.  19 Contracting parties distributional there  i s a problem w i t h the  to  e f f e c t the  can  be  distributed  purchased the transaction.  The 1.  ex  or  consent of  °  Unless  justice  Benefits  ought  and  costs  sold  the  cost  at  the  inception  have  of  Economic  the  Analysis the  uses models t o  Creation  explain  of  Models  economic  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 o f  relationship frequently  As  3 8  The  thus presents  level  theories  a general  tends to  key  to  creating  1  issue.  rule,  are  Stewart,  37.  Ibid,  p.  144.  38.  Ibid,  p.  197.  .  Ibid.  40.  Ibid,  content.  n o t e 30,  be pp.  either 2 42-2  p.197.  theory 49  than  3 9  simplify  making assumptions r e g a r d i n g  supra,  p.143.  abstract  workable models i s t o  . Coleman, s u p r a . n o t e 5, 57.  and  i n modular  a model i s l e s s  Assumptions can  4 0  expressed  a  The  3 7  models i s complex  have g r e a t e r e m p i r i c a l  m o d e l s e n v i r o n m e n t by at  its abstraction.  b e t w e e n t h e o r y and  low  t h e o r y and  3 9  a party,  a dispute.  R o l e o f A s s u m p t i o n s and  phenomenon, and  not  their relationship.  36  behavior.  terms.  the  5  Economic a n a l y s i s  •  consent to  ante a c c o r d i n g t o which p a r t y would  Technique of The  of  settlement of  benefit  3  presumed t o  characteristics  not  E.  are  the  matters  based,  a  20 referred and is  t o as p o s t u l a t e s  simply  u s u a l l y used  Because conclusions  f o r a l l low l e v e l are reserved  i s b a s e d on  utilizes  realistic  process.  This  4 4  i s too imprecise  I b i d , p.136.  42.  I b i d , p.135.  43.  I b i d , p.  i t  o f r e a l i s m can  like  unrealistic 4 6  4 5  assumptions  An  explanation  a s s u m p t i o n may  In  which may  in effect the  to properly address.  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 B o s t o n : L i t t l e Brown, 1983, p . 4.  and  Economics.  45. T h e r e i s an o n g o i n g d e b a t e i n e c o n o m i c methodology l i t e r a t u r e r e g a r d i n g t h e v a l u e o f u n r e a l i s t i c and u n p r o v a b l e a s s u m p t i o n s i n model b u i l d i n g . ( S t e w a r t , s u p r a , n o t e 30, pp.132-136.). 46.  Posner,  be  other  a s h o r t - c u t t h r o u g h an e m p i r i c a l t h i c k e t t h a t  41.  4 3  leaves  assumptions.  economics  conclusions.  be t h a t u s e o f t h e u n r e a l i s t i c  science  ones.  realistic  a model's l e v e l  of the r i s k of d i s t o r t i o n ,  represent  terms  of the e m p i r i c a l world i n  t h r o u g h t h e use o f u n r e a l i s t i c  seem t o p r o d u c e  assumption  i t s degree of e m p i r i c a l accuracy,  o f whether  disciplines  term  level  a model's c a p a c i t y t o produce  open t h e q u e s t i o n  scientific  The  4 2  f o r higher  t h e m o d e l by t h e a s s u m p t i o n - m a k i n g  spite  or e m p i r i c a l l y derived  s t a t e m e n t s and t h e  important t o minimize d i s t o r t i o n  enhanced  4 1  r e f e r r e d t o as a s s u m p t i o n s .  p o s t u l a t e o r axiom  is  or axioms,  supra,  n o t e 14,  p.12,  21 a)  Equilibrium  and Comparative  Statics  One o f t h e most i m p o r t a n t a s s u m p t i o n s existence  of equilibrium.  conclusion state.  4 7  An e q u i l i b r i u m  n e t t e n d e n c y t o move.  the  a r e used t o s i m p l i f y the  d r a w i n g p r o c e s s by p u t t i n g describes A  no  Equilibria  various  traditional  forces  i n economics i s t h e  t h e model i n t o a  a state  from which t h e r e i s  fl I t represents  i n t h e model.  a balance  F o r example,  demand-supply model, an e q u i l i b r i u m  between  i nthe i s reached  when t h e p r i c e o f g o o d s demanded e q u a l s t h e m a r g i n a l of t h e i r production. increase  production  when he w i l l  l o s e money f o r e v e r y point.  m a r g i n a l v a l u e t o him. I t i s possible  A static  Enl.  t h e consumer their  exists at this  F o r example,  t o d e t e r m i n e t h e volume o f  be p r o d u c e d and consumed a t v a r i o u s  costs  prices.  47. S a m u e l s o n , P.A. F o u n d a t i o n s o f E c o n o m i c A n a l y s i s , E d . , C a m b r i d g e : H a r v a r d U n i v e r s i t y P r e s s , 1983, p . 8. 48.  Stigler,  supra  f  n o t e 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 w h i c h c o r r e s p o n d s t o each a d d i t i o n a l u n i t as i t i s produced o r consumed. (Murphy, s u p r a , n o t e 2, p . 219.) . C o s t means o p p o r t u n i t y c o s t f o r e g o n e b y p a s s i n g up t h e n e x t b e s t ( P o s n e r , s u p r a , n o t e 14, p . 6.) 5 0  5 0  unit  f r o m t h e model  i s established.  i n t h e a b o v e model i t i s p o s s i b l e goods which c o u l d  or equilibrium  t o draw c o n c l u s i o n s  b a s e d on where t h e e q u i l i b r i u m  and  Likewise,  n o t p u r c h a s e goods i f t h e y a r e p r i c e d beyond  point.  cost  4 9  The s u p p l i e r h a s no i n c e n t i v e t o  produced beyond t h e e q u i l i b r i u m will  static  which i s t h e b e n e f i t use o f t h e resource.  22 Another is  purpose  to f a c i l i t a t e  of the assumption  comparisons  more c o n v e n i e n t l y compared status.  The  one  statics.  state of equilibrium  type of comparison. o r more e q u i l i b r i u m the e f f e c t  An  Problem  forces.  The  be  i s referred  process  externalities  this  of the  two  allow f o r conclusions regarding assumption  of assumptions,  Cost".  from  i s n o t e x p l i c a b l e by  or data.  models  and  i s the rancher-farmer dispute i n  of Social  that  equilibriums  transitional  t o another  example o f t h e u s e  illustrate  5 2  s t a t e s may  statics  Models can  Instead, the c h a r a c t e r i s t i c s  5 3  states  i f t h e y h a v e t h e same d y n a m i c  of manipulation of either  comparative "The  between models.  p r o c e s s o f comparing  t o as c o m p a r a t i v e  of equilibrium  C o a s e compares two  5 5  5 6  are i n t e r n a l i z e d  5 7  Coase's  models t o by  market  5 8  51.  Stewart,  s u p r a . n o t e 30,  52.  Stigler,  s u p r a . n o t e 3, pp.  53.  Samuelson,  54.  Ibid,  p.  55. C o a s e , R. J o u r n a l o f Law and  p.142.  s u p r a . n o t e 47,  17-19. p.  8.  7. " The P r o b l e m o f S o c i a l E c o n o m i c s 1, pp. 2-8.  Cost"  (1960),  3  56. E x t e r n a l i t i e s a r e i n C o a s e ' s words " . . . t h o s e a c t i o n s o f b u s i n e s s f i r m s w h i c h h a v e h a r m f u l 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 w h i c h c a u s e s a r e d u c t i o n i n t h e v a l u e o f a n o t h e r a c t i v i t y . (Demsetz, H. "When Does t h e R u l e o f L i a b i l i t y M a t t e r ? " ( 1 9 7 2 ) , 1 J o u r n a l o f 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 value (negative) to the p r i v a t e cost of the a c t i v i t y of its creation. 58.  Coase,  s u p r a , n o t e 55,  pp.  2-8.  23 The  models c o n c e r n t h e economic r e l a t i o n s h i p between  competitors cattle  and  fences,  f o r l a n d use.  rancher uses h i s land t o  t h e f a r m e r u s e s h i s t o grow c o r n .  the c a t t l e  property,  The  feed  As t h e r e a r e  but they a p p a r e n t l y p r e f e r t o remain feed  their  increase  i n t h e number o f c a t t l e b e y o n d t h e number w h i c h  rancher's land w i l l  most o f t h e g o o d  on  property u n t i l  their  no  a r e f r e e t o wander o v e r b o t h p i e c e s o f  master's  fill  two  i s devoured.  comfortably support causes  An  the  t h e cows t o  e x c e s s demand f o r f o o d a t t h e e x p e n s e o f t h e  farmer's corn.  The to  first  the farmer  cattle.  The  maintains.  m o d e l assumes t h a t t h e r a n c h e r i s r e s p o n s i b l e f o r a l l t h e damage c a u s e d by h i s  rancher p r o f i t s  by e a c h a d d i t i o n a l  However, a d d i t i o n a l  cows c a u s e  Coase p o s t u l a t e s t h a t t h e r a n c h e r w i l l of  t h e h e r d beyond i t s p r o f i t a b l e  damage.  . There  maximum p r o f i t That p o i n t  other  damage.  not i n c r e a s e the  level  in relation  i s an o p t i m a l number o f cows w h i c h  margins  f o r any  or the e q u i l i b r i u m point  size  to crop provides farmer. and  i n t h e model.  o f t h e damage c a u s e d by h i s c a t t l e .  See  That  much damage t h e cows c a u s e t h e f a r m e r ,  i s n o t r e q u i r e d by any  factors  59.  additional  i n s p i t e o f h a v i n g t o compensate t h e  no m a t t e r how  rancher  he  s e c o n d m o d e l assumes t h a t t h e r a n c h e r i s n o t  responsible is,  cow  i s t h e b a l a n c e between t h e r a n c h e r ' s p r o f i t  compensation  The  marauding  are i d e n t i c a l  below.  r u l e t o c o m p e n s a t e him.  to the f i r s t  model.  The  the  All  farmer  24 will  compensate t h e r a n c h e r f o r m a i n t a i n i n g  level  which provides  t h e farmer with  t h e herd  the greatest  at a  profit.  This point  i s the point that the marginal value  o f an  additional  cow t o t h e r a n c h e r i s l e s s t h a n t h e damage t h e  farmer w i l l  s u f f e r as a r e s u l t  equilibrium  i s r e a c h e d a t t h e p o i n t where t h e m a r g i n a l  o f t h e a d d i t i o n a l cows e q u a l s  of the addition.  An value  t h e m a r g i n a l damage dome t o t h e  corn.  A c o m p a r i s o n o f t h e two e q u i l i b r i u m p o i n t s the  points  are identical.  In other  words,  indicates that  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 t h e b a r g a i n i n g the  parties regardless  of the original  Coase i n c o r p o r a t e s  a number o f a s s u m p t i o n s  to eliminate matters not a t issue. elimination  allocation  of the effect  of a decrease 6 1  effect  affect  land n i l .  o f t h e annual c o s t o f l a n d .  from v a r i a b l e s t o c o n s t a n t s Neither  phenomenon.  i n production  6 2  i s because  o f corn  the elimination of Both  assumptions ofthe  and making t h e c o s t o f  reduces t h e model's e f f i c a c y  This  6 0  i n t h e models  t h e e q u i l i b r i u m p o s i t i o n by changing t h e v a l u e  products  the  of r i g h t s .  Two e x a m p l e s a r e t h e  o r cows on t h e p r i c e o f t h e c o m m o d i t y a n d the  between  the values  to illustrate  o f t h e 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 t h e 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, z e r o 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 bargainers. 61. land  Coase,  supra.  n o t e 55, p . 4.  62. I b i d . T h i s a s s u m p t i o n i s owned b y t h e f a r m e r .  i s made b y a s s u m i n g t h a t t h e  25 v a r i a b l e s are  relatively  tested  model.  i n the  A more p r o b l e m a t i c transaction costs. important  assumptions  in relation  assumption  Transaction  i n negotiations.  highlighted their of  low  By  importance.  i s the  costs  This  6 3  As  i n d i c a t e d above, p o s t u l a t e s  general  assumption are  use  or  effect,  Coase  another  o r axioms p l a y  use  and  empirical  world.  distinction  between v a r i a b l e s which can For  example,  C o a s e assumed was  . Polinsky, Stewart,  supra,  i n the that  s u p r a . n o t e 30,  6 4  and  in  assumed and  f a r m e r - r a n c h e r model  p. p.  of  promoting  be  neither  n o t e 44,  role  6 5  assumptions a s s i s t  model b u i l d i n g p r o c e s s by  the  That i s ,  from t h e o r y  the  64.  zero  Axioms  simplifying  postulate  of  critically  illustrates  extensions  about the  of postulates  which cannot.  their  i n economic a n a l y s i s .  both l o g i c a l  observations  The  often  being  i n models.  Theoretical Postulates  postulates  existence  are  excluding  2.  theoretical  to variables  those the  c o m p e t i t o r would  act  12. 73.  65. I b i d , p. 136. [ P o s t u l a t e s c a n be t a u t o l o g i c a l l y r e l a t e d to theory. 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 t h e o r e m s and a r e 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 t h e y c a n be c l o s e r t o t h e r e a l w o r l d i n w h i c h c a s e t h e y 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 o r i n some c a s e s s i m p l y "assumptions". A s s u m p t i o n s a r e open t o e m p i r i c a l p r o o f u n d e r most c o n d i t i o n s . A c c o r d i n g t o S a m u e l s o n , a m e a n i n g f u l t h e o r e m i s one w h i c h c o u l d be r e f u t e d u n d e r i d e a l c o n d i t i o n s . ( S a m u e l s o n , s u p r a , n o t e 47, p. 4.)]  26 in  a manner d e t r i m e n t a l t o t h e i r  t h e need  interests.  to consider psychological  highlighting party.  t h e need  to test  This  elements,  eliminates  as w e l l a s ,  f o r t h e maximum p o s i t i o n  A number o f i m p o r t a n t p o s t u l a t e s a r e d e t a i l e d  o f each below.  a) C o m p e t i t i v e R a t i o n a l M a x i m i z a t i o n As  illustrated  analysis utilizes motivational analysis,  by t h e r a n c h e r - f a r m e r model,  a p o s t u l a t e o r assumption  describing the  character of the basic behavioral unit  which  i s human b e h a v i o r .  assumed t o b e a r a t i o n a l a n d many o t h e r s ,  fi7  economic derived  analysis  maximizer this  of law.  6 8  f r o m a model w o u l d  of emotion  a broad  Without  it,  According to  assumption i n  any c o n c l u s i o n  b e c o n t i n g e n t on t h e s p e c i f i c  In fact,  o f economic  o f human b e h a v i o r .  attempt  assumption  b y d e a l i n g w i t h phenomena o n l y a t t h e l e v e l o f  Stewart,  67.  Ibid,  6  inaccuracy of this  s u p r a . n o t e 30, p . 73.  and S t i g l e r ,  s u p r a . n o t e 3, p . 148.  Q  . Posner, . of Legal Analysis Virginia 6 9  t o overcome t h e a p p a r e n t  6 9  Economists  66.  such  o f human e m o t i o n s a n d  t h e most p e r s u a s i v e c r i t i c i s m  method i s i t s o v e r s i m p l i f i c a t i o n  type  subjects.  a model's a c c u r a c y i s d i m i n i s h e d by making  sweep o f t h e w h o l e r a n g e  intellect.  of wealth.  i s the central  d i s p l a y e d b y t h e human  Arguably,  of the  Man i s t h e o r i z e d and  •  Posner  economic  s u p r a , n o t e 14, p . 3.  D w o r k i n , R. M. " I s W e a l t h a V a l u e ? " ( 1 9 8 0 ) , 9 J o u r n a l S t u d i e s 191, p . 220, a n d L e f f , A. A. " E c o n o m i c o f Law: Some R e a l i s m A b o u t N o m i n a l i s m " ( 1 9 7 4 ) , 60 Law R e v i e w 451, p . 457.  27 aggregates. developed  Naturally,  7 0  using this  t h i s means t h a t  assumption  any c o n c l u s i o n s  are only general  statements  71  about  behavior.  x  Some w r i t e r s h a v e p o i n t e d o u t t h a t may i t s e l f  h a v e more t h a n one d i m e n s i o n .  be made b e t w e e n s h o r t a n d l o n g t e r m behavior links  rational  i s a form  o f l o n g term  maximization  A distinction  interests.  i n t e r e s t wherein  Strategic the actor  two o r more t r a n s a c t i o n s t o p r o m o t e i m p r o v e d  position  i n the later  position.  7 2  I n o t h e r words,  resource maximizing promote  transaction  bargaining  a t t h e expense o f t h e former  i t may b e b o t h r a t i o n a l a n d  to act irrationally  i n one t r a n s a c t i o n t o  another.  b) F i n i t e R e s o u r c e s Gravitation Closely maximization  and The R u l e  a l i g n e d w i t h t h e assumption a r e t h e assumptions  resource gravitation.  Finite  acquisition.  o f Resource  of rational  of finite  r e s o u r c e s and  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 a r e s c a r c e and thus p a r t i e s  compete f o r t h e i r  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  that  . B u r r o w s , P. a n d V e l j a n o v s k i , G. The E c o n o m i c A p p r o a c h t o Law. T o r o n t o : B u t t e r w o r t h s , 198 3, p . 3 , a n d S t i g l e r , s u p r a , n o t e 3, p . 149. 7 1  .  must  Stigler,  Ibid.  . Murphy, s u p r a , n o t e  2, p . 232.  28 resources  will  be  acquired  by  the  p a r t y which v a l u e s  them  most.' From an the  quantity  that  e m p i r i c a l p o i n t of view, of a l l resource  resources  tend  t o go  t h e most f o r them. t o maximize the c) The  The law  is finite.  I n most c a s e s  and  is willing  t h a t p a r t y has  of the  o f S u p p l y and  of supply  It i s equally  t o t h e p a r t y who  p r o f i t a b l e use  Law  i t i s q u i t e obvious  The  7 4  generalization. price  i s commonly The  illustrated  The  an  that there  obvious  i n the  generation  r u l e of supply  economic r u l e s )  pay  capacity  and  is  real  of the and  i s contingent  an  quantity  behavioral  inverse r e l a t i o n s h i p of q u a n t i t y  theoretical  complicated. other  The  to  Demand  demand h o l d s  r u l e expresses  obvious  resource.  i n v e r s e r e l a t i o n s h i p between t h e p r i c e c h a r g e d demanded.  the  that  world.  and  7 5  rule is a l i t t l e  demand  more  (as w e l l a s many  upon t h e  existence  of  a  7 market.  A market  is a spatial  and  temporal  event  wherein  73. V a l u e i s d e f i n e d a s t h e 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 . ( P o s n e r , s u p r a . n o t e 14, p. 11.) Price i s t h e same a s c o s t . Both are d e f i n e d i n terms of foregone opportunity. T h a t i s , "... t h e u s e o f 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 best f o r e g o n e a l t e r n a t i v e u s e . " ( B u r r o w s , s u p r a . n o t e 70, p. 4.) 74.  Posner,  75.  Stigler,  76.  For  supra  n o t e 14,  f  supra  f  example, t h e  n o t e 3,  p. pp.  5. 43-44.  Coase p o s t u l a t e .  competing  forces operate  market occurs allow The  t o make e x c h a n g e s .  whenever t h e  for perfectly  forces operate  simultaneous  and  A perfect  i n s u c h a way  to  c o n s i s t e n t exchange.'  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 m a r k e t ,  more p r e c i s e t h e  operation  of i l l u s t r a t e d  0  the  economic  7Q principles. the  In order  3  elements of  w h i c h may  transaction Within may is  be  I f a model f a i l s  i t is reflecting be  c a u s e d by  a situation  imperfect  this  context, as  the  follows.  efficiency  least  of t h e i r  to allow  for  of a f a i l e d  knowledge and/or  cost.  The  comparative  77.  Stigler,  78.  Ibid.  79.  Ibid.  theoretical Since  market  excessive  value  rule  acting in a  of resources 8 2  n o t e 3,  That  p.  inter i s , as  se the  unit  resource-  a c q u i r e s t h e most r e s o u r c e s  scarcity.  supra,  b a s i s of the  each decision-making  i n t h e m a r k e t by  m a x i m i z i n g manner, e a c h u n i t the  p e r f e c t knowledge  costs.  explained  attaining  and  8 0  si  i n existence.  exchanges,  a model o f a p e r f e c t m a r k e t ,  zero t r a n s a c t i o n c o s t s  • must be  to effect  at  i s a function quantity  55.  80. T r a n s a c t i o n c o s t s a r e r e s o u r c e s employed i n t h e 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 E c o n o m i c s An I n t r o d u c t o r y A n a l y s i s , New Y o r k : A c a d e m i c P r e s s , 1979, p. 5.) 81.  Coleman, s u p r a ,  n o t e 5.  82.  Stigler,  n o t e 3,  supra,  p. p.  223. 80.  of  30 one  resource  increases,  i t s value  r e s o u r c e d e c r e a s e s and v i c e  versa.  i n relation to a static J  d) The C o a s e Theorem R o n a l d Coase i n that  the forces  efficient  11  The P r o b l e m o f S o c i a l  of a perfect  market w i l l  Cost" i l l u s t r a t e d  create  result regardless of the i n i t i a l  an a l l o c a t i v e  allocation of .  OA  rights and  o r any e x t e r n a l i t y .  I n t h e Coase a n a l y s i s ,  e x t e r n a l i t i e s a r e e s s e n t i a l l y t h e same.  externalities  infringe  Empirical the  lack  points  its  firms.  is difficult  markets.  t h e p o s t u l a t e c a n be i l l u s t r a t e d b y l o o k i n g The g o a l o f a b u s i n e s s  total allocative efficiency.  That  firm  at  i s t o enhance  i s , i t promotes a of c o s t .  8 6  Within  f i r m w h i c h c o m p r i s e s a number o f d i f f e r e n t a n d c o n f l i c t i n g  activities, to  owing t o  However, C o a s e  maximization o f revenue w i t h a m i n i m i z a t i o n a  B o t h r i g h t s and  people.  proof of the postulate  o f examples o f p e r f e c t  out that  business  on o t h e r  rights  operate  83. 8 4  .  t h e more v a l u a b l e a c t i v i t y w i l l  from t h e 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 t h e  Ibid. Coase,  85.  Ibid.  .  Ibid.  8 6  purchase the r i g h t  supra,  n o t e 55, p . 16,  31 firm's  internal rule s t r u c t u r e .  The f i r m ' s  7  desire f o r Q Q  maximum p r o f i t a b i l i t y This  postulate  efficiency  require  the state  Competing  forces  this  Allocative efficiency  8 9  i n a perfect  m a r k e t a f f e c t maximum  markets a r e always a l l o c a t i v e  Since e x t e r n a l i t y causing a c t i v i t i e s such a c t i v i t i e s  e) The R e c i p r o c a l Duties An  that  theoretical  support  illustrated  oo  efficient.  a r e by d e f i n i t i o n  do n o t e x i s t i n p e r f e c t  Relationship  r i g h t s and d u t i e s  markets.  Between R i g h t s a n d  are r e c i p r o c a l .  9 0  The  f o r t h e 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 implies  87.  resource  e s s e n t i a l element o f t h e Coase theorem i s t h e  postulate  is  0 0  o f maximum p r o d u c t i v e r e s o u r c e u s e .  Hence, p e r f e c t  inefficient,  behavior.  i s tautologically related to allocative  and p a r e t o o p t i m a l i t y .  describes  use.  will  a corresponding duty.  i n Coase's a n a l y s i s  The e m p i r i c a l  point  o f t h e r a n c h e r / f a r m e r model  Ibid. ,  °. C o a s e ' s p o i n t i s a d v a n c e d b y P r o f e s s o r C.R. K n o e b e r ' s a r t i c l e concerning the e f f e c t s of v e r t i c a l integration. 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 t h e need f o r law. I n s t e a d , t h e 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 e n s u r e s an e f f i c i e n t r e l a t i o n s h i p b e t w e e n c o m p e t i n g a c t i v i t i e s . ( K n o e b e r , C.R. "An A l t e r n a t i v e M e c h a n i s m T o A s s u r e 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 L e g a l S t u d i e s 333, p p . 333-4.) Professor Calabresi points out that v e r t i c a l i n t e g r a t i o n i s merely a restatement o f t h e c o a s e t h e o r e m . ( C a l a b r e s i , G. & Melamed, D. " P r o p e r t y R i g h t , L i a b i l i t y , R u l e s a n d I n a l i e n a b i l i t y : One V i e w o f t h e Cathedral" ( 1 9 7 2 ) , 85 H a r v a r d Law R e v i e w 1089, p . 1095.) 89.  Coleman s u p r a ,  n o t e 5, p . 225.  90.  See C o a s e , s u p r a ,  n o t e 55, pp. 2 a n d 13.  32 discussed  above.  Coase viewed e x t e r n a l i t i e s  both p a r t i c i p a n t s . raised,  there  responsible F.  The 1. The  of  w o u l d be  f o r the  Contract The  I f corn  9 1  no  harm.  Function  t h e i r most v a l u e d  are That  of Contract  uses  manner.  efficient  s u c h as  risk  and  91.  I b i d , p.  92.  Ibid.  .  Posner,  equally  law  i s t o enhance t h e Efficiency  9 3  and  t h a t the  efficiency  in  this  both t r a n s f e r r e d to  exchange i s completed  in  9 5  and  implies  configured  t h a t the  in different  of a resource  information.  9 8  values  may  exchanged  forms.  include  For  example,  p.  118.  9 6  items  a contract  for  13.  . Polinsky, 9 4  not  Law  s e r v i c e s are  exchange v a l u e 9 7  Both are  services.  contract  both equivalent i s , the  grown o r c a t t l e  by  Paradigm  e x c h a n g e s o f g o o d s and  An  caused  9 2  f u n c t i o n of c o n t r a c t  efficient  not  nuisance.  s e n s e means t h a t g o o d s and  an  was  as  supra.  supra,  n o t e 44,  n o t e 14,  pp.  106-108.  . P o s n e 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 E c o n o m i c A n a l y s i s " ( 1 9 7 7 ) , 6 J o u r n a l o f L e g a l S t u d i e s 83, p. 88.  the 14.  9 6  .  I b i d , pp.  9 7  .  I b i d , p.  Law  83-84. 91.  . Kronman, A.T. " M i s t a k e , D i s c l o s u r e , I n f o r m a t i o n , and o f C o n t r a c t s " ( 1 9 7 8 ) , 7 J o u r n a l o f L e g a l S t u d i e s 1, p.  33 the  s a l e o f goods t o be exchanged i n t h e f u t u r e i n v o l v e s t h e  r i s k that the value Naturally,  o f t h e g o o d s may c h a n g e p r i o r  a change i n v a l u e w i l l  to delivery.  b e n e f i t one p a r t y a t t h e  expense o f t h e o t h e r . In every traded  e x c h a n g e t h e i n f o r m a t i o n and r i s k  along with  t h e goods.  The v a l u e  3  components a r e  of a r i s k  about t h e  f u t u r e c a n be c a l c u l a t e d by m u l t i p l y i n g t h e a n t i c i p a t e d l o s s times  the probability  the present accounted  and f u t u r e v a l u e  1 0 0  Information  I n s a l e s o f goods  such  i s o f t e n i n t h e f o r m o f a w a r r a n t y t h a t t h e goods  meet a c e r t a i n  Contract  expectation  i n the future.  law promotes t h e e f f i c i e n c y  number o f d i f f e r e n t  ways.  First,  enforcement o f only e f f i c i e n t  o f exchanges i n a  i t tends t o allow the  exchanges.  1 0 1  Inefficient  exchanges a r e p e n a l i z e d and t h e b e h a v i o r  discouraged. For  example,  according  a contract w i l l  t e r m s when one o r b o t h the  n o t be e n f o r c e d  parties are s u f f i c i e n t l y  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  bargain  about  o f t h e goods i s l i k e w i s e  f o r i n the contract.  information will  of i t s occurrence.  made b y p a r t i e s .  1 0 2  In t h i s  example,  to i t s  mistaken  about  change t h e  c o n t r a c t law  ,  QQ  . B a r t o n , J.H. " T h e E c o n o m i c B a s i s o f Damages f o r B r e a c h o f C o n t r a c t " ( 1 9 7 2 ) , 1 J o u r n a l o f L e g a l S t u d i e s 277, p. 278. 3  1  0  °.  1 0 1  .  Posner and R o s e n f i e l d , s u p r a . Ibid,  n o t e 95, p . 88.  p . 4,  . B i s h o p , W. "The C o n t r a c t - T o r t B o u n d a r y a n d t h e Economics o f Insurance" ( 1 9 8 3 ) , 12 J o u r n a l o f L e g a l S t u d i e s 241, p p . 253-255. 1 0 2  34 sets a l i m i t  on  encourage the to the  allowable  information  acquisition  and  terms which the  Reliance  c o n t r a c t i n g by  saving  information t e r m s may contract  and  be  the  on  of the  information essential  the  not  incorporate  terms reduces the  both the  time spent  existing  o p t i o n a l set of d e f a u l t  time spent  use  t h e i r use  the  o r by  a failure  information  about the  Third, resolution  contract  of disputes  e x c h a n g e s due  to  by  o b j e c t i v e t e s t s are  structuring provided  ± { J J  .  Hirsch,  1 0 4  .  Polinsky,  by  supra,  Thus, be  n o t e 80,  this  judgement. post  inefficient  c o r r e c t e d by  ex  P r o v i s i o n s which  good examples o f  contract  supra.  1 0 5  as  sufficient  framework f o r ex  e r r o r s can  agreement.  law  Naturally,  t o make t h a t  the  tribunals.  information  adjustment of the  incorporate  provides  law  that  i n the  results.  p a r t i e s possess  terms of the law  to  law.  promotes e f f i c i e n t  assumes t h a t t h e  of  These d e f a u l t  1 0 4  d e f a u l t terms c o n t a i n e d  proposition  their  acquiring  bargaining.  choice  in  cost  assumption of r a t i o n a l maximization holds  parties will  post  an  o r may  i n c o r p o r a t e d by  out  The  provides  p a r t i e s may  contracts.  as  sharing of  to  bargain.  S e c o n d , c o n t r a c t law  long  e r r o r which ought  the  law.  p.  n o t e 44,  8. p.  27.  . 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" ( 1 9 8 4 ) , 13 J o u r n a l o f L e g a l S t u d i e s 147, pp. 148-149. 1 0 5  35 2.  The  The and  Function  Of  Contracts  contract device  decide  allows  i n a d v a n c e how  a deductive  assumption  efficient.  disputes.  u  c o n c l u s i o n of  ante t o  o  the  chose  enhance  07  efficiency.  Hence, c o n t r a c t s t o t h e  specification  expectations  i s that parties w i l l  c o n t r a c t p r o v i s i o n s w h i c h a p p e a r ex 1  to c l a r i f y  to resolve potential  Assuming p e r f e c t i n f o r m a t i o n , r a t i o n a l maximization  people  and  extent  of  p e r f e c t knowledge a r e g u a r a n t e e d t o  be  1 0 8  However, s i n c e t h e  c o s t o f s p e c i f y i n g numerous  contingencies  i s very  precision.  Moreover,  3  a c c o u n t ex  high,  few  c o n t r a c t s approach  i t is theoretically  impossible  ante f o r a l l p o s s i b l e contingencies.  contracting parties necessarily rely d e f a u l t terms p r o v i d e d exchanges.  by  .  Polinsky,  supra.  c o n t r a c t law  1 0 7  .  Ibid,  p.  31.  1 0 8  .  Ibid,  p.  29.  1 0 9  .  Ibid,  p.  25.  1 1 0  .  Ibid.  n o t e 44,  to  Consequently,  t o a l a r g e p a r t on to  1 1 0  1 0 6  this  p.  25.  fill  out  their  the  36 G.  Contract 1.  Analysis  Generally  The  purpose o f economic a n a l y s i s i s t o t e s t  efficiency. efficiency  The  common f e a t u r e o f a l l t h e  i s the maximization of the  exchange i r r e s p e c t i v e p e r f e c t knowledge,  exchange, t h e be  definitions  total  value  success.  success  of  of  the  Subject  i s accorded  by  to the  presumption.  act of c o n t r a c t i n g d i s t r i b u t e s  efficiency  m e a s u r e d by  individual  individual  r a t i o n a l maximization Because the  of  for  the  risk  of  o f a c o n t r a c t o r o f c o n t r a c t law  comparing models o f r i s k c o n f i g u r a t i o n s .  method o f t e s t i n g  for efficiency  i s r e f e r r e d t o as  an  can This  risk  analysis. 2.  Risk  The highest  competition  b e t w e e n p a r t i e s t o assume r i s k  p r i c e o r p a s s i t on  contractual risk  Analysis  efficiency.  1 1 1  f o r the The  least  value  i s d e p e n d e n t upon t h a t p a r t y ' s  cost  for  the  facilitates  that a party places  relative  aversion  on  a  to  11 2 i t . " the  least  risked the  That  i s , assuming p e r f e c t i n f o r m a t i o n ,  concern over the  event or of  lowest  likelihood  of the  i t s consequences w i l l  the  party  occurrence  accept  the  risk  cost.  . P o s n e r and . Polinsky,  Rosenfield, supra,  supra.  n o t e 44,  p.  n o t e 95, 119.  p.  88.  with of at  the  37 This has  the  of the  risk  or  will  charge the  capacity  insure  l e a s t f o r assuming a  to e i t h e r the  against  exchange r e q u i r e s  prevent the  i t s consequences.  that  the  1  1  most e f f i c i e n t  superior  over the  preventer  risked event.  means t h e  party  i s the In the  1 1 4  with possession  person with possession.  neither  i n possession  ensure t h a t  costs  of the  i n s u r e r has  specific  the  best  insurer,  the  m  .  115^  .  117  risk  not  two  should  Kronman, s u p r a , Posner,  supra,  P o s n e r and  p.  102.  case the  best  able  control who  that over  is  opportunity  out  that  to absorb 1 1 5  to  n o t e 98,  p. p.  superior and  expected l o s s .  i n the  superior  parameter.  The  the  probability  allocated according  n o t e 14,  control  occur.  parameters of be  most  party  little  to determine the  Rosenfield,  Ibid.  goods o r  risked event.  point  importance of the  Ibid,  of the  to d i s t r i b u t e the  Rosenfield  between the  113  ability  e v e n t and  conflict  with the  i n c o n t r o l has  occurrence of the  P o s n e r and  1 1 6  preventer  s a l e o f goods s e t t i n g ,  insurer i s a party  magnitude o f the  empirical  nor  party  I n any  r i s k e d e v e n t s do  superior  1 1 4  an  3  The  A  risk  occurrence  Thus,  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  risk.  the  who  superior  efficient or  party  event  and  the  However, i n most  9. 45.  supra,  n o t e 95,  p.  90.  1  of  preventer to  1  6  38 cases,  r i s k w o u l d be  allocated  to the  common s e n s e d i c t a t e s p r e v e n t i o n i n s u r a n c e . Moreover,  superior risk  i s more e f f i c i e n t  avoider  as  than  i n s a l e o f g o o d s t r a n s a c t i o n s many  risks  are not i n s u r a b l e . According enforced  obligation.  i s less  11  risk  stated  able than reason  to  the  the promisee t o perform •  for this  the  •  i s that a contract  when t h e p r o m i s e e i s t h e  be  superior  ceases  risk  1 1 9  Obviously, the  a c o n t r a c t ought not  (the p a r t y guaranteeing  ff  The  efficient  bearer.  analysis,  i f the promisor  performance)  t o be  to risk  informed  o f p e r f o r m a n c e s h o u l d be  at the  efficient without  a promisor's  and  the  outset, expressed thus  this  occurrence  enforced.  acceptance  1 2 0  However,  t e r m s a r e assumed t o  situation o f an  express  i s not  likely  to  i n f o r m a t i o n e r r o r by  of as  be  occur the  promisor.  From t h e p o i n t o f v i e w o f r i s k legal  regime i s e f f i c i e n t  least  adverse  it  to i t .  i n terms of l e g a l  practice  and  the  1 1 8  .  Ibid.  1 1 9  .  Ibid,  °.  Ibid,  1  2  This  t o goods i n t r a n s i t ,  i f i t a l l o c a t e s r i s k to the formula  clarity  and  is justified  conformity  to  reduction of avoidable l o s s e s .  p.  90.  p.98.  by  a  party  looking at  commercial  39 a)  C l a r i t y and Conformity  In a s h o r t risks  statement,  allocated  Closely  of risk  expectation.  that  with  conformity  enough l e g a l  set  o f l a w s becomes c l e a r .  one  w h i c h c o n f o r m s t o common e x p e c t a t i o n  cost the  of the legal party with  associated  risk.  the  the risk  law i s  and t h u s saves t h e  T h e common e x p e c t a t i o n  1 2 1  insurance  cost should  i s that  bear the  (probability  and c o s t ) ,  ability to  f r o m o c c u r r i n g a n d an a b i l i t y t o d i v e r s i f y  costs of bearing If  clear  a l m o s t any  Insurance c o s t s a r e measured i n terms o f  knowledge o f t h e r i s k s prevent  t o common  research  However, t h e t r u l y  research.  t h e lowest  i n advance.  i s t h a t knowledge o f t h e law's  i s synonymous w i t h  Obviously,  Expectation  c l a r i t y i n a l a w means t h a t t h e  by t h e law a r e d i s c e r n a b l e  associated with  allocation  t o Common  the parties  the r i s k .  1  2  3  a r e aware f r o m t h e o n s e t  i s less  o f who b e a r s what  risk  then there  That  i s , t h e p a r t y who k n o w i n g l y b e a r s a r i s k s t a n d s  chance o f r e c o v e r i n g  o f a chance o f i n a c c u r a t e  pricing. a better  i t s c o s t ex a n t e t h a n h e w o u l d i f t h e  r i s k was n o t d i s c o v e r e d  u n t i l i t manifested  itself.  . Note, " R i s k 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 I n t o t h e B r e a c h " ( 1 9 7 9 ) , 65 V i r g i n i a Law R e v i e w 557, p . 557. 1 2 2  .  Ibid,  p.558.  . B i s h o p , W. "The C o n t r a c t - T o r t B o u n d a r y a n d t h e E c o n o m i c s o f I n s u r a n c e " ( 1 9 8 3 ) , 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. 1 2 3  40 Alternatively, adverse,  t h e n he  negotiation. his  can  of  cost.  most e f f i c i e n t  assumption but  the  party  b) The  of preventing  i t s occurrence.  several  aspects.  reduced  i f the  responsible  first  person  for them.  goods r e s p o n s i b l e the  The  1 2 6  mitigator  risk  second aspect  opposing  should  purchase of  have  to  to  insuring  avoidable  i s that  Making the  party  losses  party  loss mitigator  i n c o n t r o l of  who  i s a l s o the  will  goods i s  g o o d s i n one  the  has  overall losses  s a f e t y combines b o t h t h e  i s that  1 2 4  Losses  aspect  the  absorb  sufficient  insurance.  the  ability  party.  i s the  o u g h t t o b e a r r e s p o n s i b i l i t y f o r any  most e f f i c i e n t  party's  risk neutral  loss i s superior  incentive to protect  The  overall  his  i n c o n t r o l of the  for their  of the  risk  f o r a c o s t which exceeds  Preventing  1 2 5  part  i s more  i t in  a l l o c a t e d the efficient  risk  r i s k b e a r e r would f i n d  Reduction of Avoidable goal  as  is sufficiently  against  and  risk  risk  the  i s l e s s than the  If neither party  risk,  bearing  exchange t h e  k n o w l e d g e t o make an  be  party  i n t e r e s t t o assume t h e  costs  the  The  i f the  superior  loss.  superior  1  2  7  The  preventer  . 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 I n t o t h e B r e a c h " s u p r a , n o t e 121, p. 558. 1 2 5  .  Bishop,  supra,  n o t e 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 I n t o t h e B r e a c h " s u p r a , n o t e 121, p. 560. 1 2 7  .  Posner,  supra,  n o t e 14,  p.  108.  of avoidable  l o s s e s which a r i s e  a f t e r t h e g o o d s a r e damaged o r  lost. The results be  third  aspect  i n a party  incurring  able t o terminate  suffering  i s that  i f performance of t h e c o n t r a c t a loss,  then that party  performance without  a d i s p r o p o r t i o n a t e share  either  of loss.  party  The c o s t s o f  b r e a c h c a n n o t e x c e e d an amount w h i c h a p p r o p r i a t e l y the  promisee.  ought t o  compensates  1 2 8  . B a r t o n , J.H. " The E c o n o m i c B a s i s o f Damages f o r B r e a c h o f C o n t r a c t " ( 1 9 7 2 ) , 1 J o u r n a l o f L e g a l S t u d i e s 277, p. 278.  42 CHAPTER THREE THE A. C o m m e r c i a l the S e l l e r  TRANSIT ENVIRONMENT  Sales Involving  I n a s a l e and  arrangement  an A r r a n g e m e n t  of delivery  undertakes to arranges transportation  of Delivery  contract the  by  seller  o f t h e goods t o t h e 1 OQ  b u y e r and d e l i v e r s t h e g o o d s t o t h e f i r s t buyer u s u a l l y pays •i  f o r t h e c a r r i a g e and t h e i n s u r a n c e c o v e r a g e I n most c a s e s t h e b u y e r d o e s  they a r r i v e  at h i s location.  JJ  not see the  -  W i t h i n the scope o f the s t a n d a r d commercial involving  a s a l e and  number o f p o s s i b l e responsibility. total  of r i s k .  They  range  of d e l i v e r y  there are a  from t h e s e l l e r  accepting  f o r transportation to the  Frequently t h i s  sale  f o r the d i s t r i b u t i o n  I n most c a s e s t h e p a r t i e s  thought the i n s e r t i o n  1  arrangement  arrangements  responsibility  a c c e p t i n g none.  The  i n  f o r t h e goods. goods u n t i l  carrier.  division  of r i s k  o f a t r a d e term  of the  seller  a g r e e on a  division  is facilitated  into the  contract.  OO  * . S a s s o o n , D a v i d M. C . I . F . and F.O.B. C o n t r a c t s e d . L o n d o n : S t e v e n s & Son, 1975, p . 310. x  1  3  °.  3  1  2nd.  Ibid.  . H o y l e , Mark S. The Law o f I n t e r n a t i o n a l e d . L o n d o n : C. C. H. E d i t i o n s , 1985, pp. 18-22. 1  1 3 2  Trade.  2nd  . S c h m i t t h o f f , C l i v e M. The E x p o r t T r a d e . 8 t h . e d . , L o n d o n : S t e v e n s & Sons, 1986, p. 6. 1  3  2  43 However, transit. is  contracts  Moreover,  completely  occur,  the  provisions B.  there  silent  risk  is  rarely  on r i s k .  allocated  When e i t h e r according to  relevant  e x p e n s i v e means a v a i l a b l e . the  s t r e s s on t h e  Generally, goods.  more a r d u o u s .  The r o u g h n e s s o f t h e  spite  transportation  of  it  the  Trucks or r a i l goods t o  the  point  departure  for  but they  contract  t h e s e two  3  4  .  Ibid,  events  default law.  1 3 3  the  lower  are  the  cost,  ships are  s l o w e r and t h e i r sea takes  least  its  is  frequently  l o a d i n g on t o  o r some p o i n t containers  8.  less  toll  on  transporting  1 3 4  a period of  p.  the  passages  the  the  get  ocean v e s s e l .  during the  and t h e  used to  transit  goods w i l l  the  remain  the At  the  goods in  transit.  . The n a t i o n a l i t y o f t h e r e l e v a n t d o m e s t i c i s determined according to the domestic 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. 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 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 t h e p a p e r . 1  of  r i s k s o c c a s i o n e d by ocean  transport  dock f o r  may be l o a d e d i n t o containers  risk  goods by t h e  i s t h e most common means o f  goods l o n g d i s t a n c e s .  of  the  For example,  aircraft  In  of  domestic  transport  expensive than  cargo.  the  Transportation  B u y e r s and s e l l e r s t e n d t o  greater  all  may be o c c a s i o n s when t h e  contained i n the  Methods o f  account f o r  law  44 In  some c a s e s  t h e method o f t r a n s p o r t a t i o n may  switch - I O C  b a c k and  f o r t h between t r u c k , r a i l  e x a m p l e , g o o d s may Britain loaded  be  delivered into  loaded  be  on  a truck i n Surrey,  a c o n t a i n e r a t the dock s i d e .  and  Vancouver.  the container.  a t r u c k f o r an  Contractual  any  path  physical  and  The  of every  identification,  then  to  l o a d e d b a c k on  to  involves a  of the v a r i o u s  sale.  limitation  which occur  Some o f t h e s e  events  physical  events  which occur  along  the  are  preparation for delivery,  o f t h e g o o d s by  the buyer.  The  i n s a l e s are  delivery  the buyer's  the  and  nonphysical  are the passage of property, the passage of r i s k of  g o o d s may  some a r e n o n p h y s i c a l .  critical  inspection  are  s t a r t i n g w i t h t h e making o f t h e c o n t r a c t  T h e r e a r e a number o f e v e n t s  critical  the  i n Asia.  other business project  concluding with the e x p i r a t i o n  periods.  and  Events  sequence of events and  The  a c r o s s Canada t r i p  a ship for transport to a destination  like  Great  From t h e r e  I n V a n c o u v e r t h e g o o d s c o u l d be  A sale  For  o c e a n v e s s e l t o H a l i f a x where t h e y  removed f r o m  l o a d e d b a c k on  C.  ocean v e s s e l .  t o an o c e a n v e s s e l i n S o u t h Hampton  g o o d s a r e s h i p p e d by off  loaded  and  and  events  the  act  acceptance.  . See g e n e r a l l y , H o l l o w a y , I . C. " T r o u b l e d W a t e r s : The L i a b i l i t y o f a F r e i g h t F o r w a r d e r as a P r i n c i p a l u n d e r A n g l o C a n a d i a n Law" ( 1 9 8 6 ) , 17 J o u r n a l o f M a r i t i m e Law and Commerce 243 .  45 1.  P h y s i c a l Events  In  the  course of the  places  an o r d e r w i t h t h e  seller  to  s e l e c t the  Identification  normal s a l e of goods, seller.  buyer  it  up t o  This leaves  goods w i t h which t o  o c c u r s by t h e  the  sellers'  fill  act  of  the  the  order.  separating  the  1 T7  g o o d s f r o m a b u l k by m a r k i n g o r a r r a n g i n g o f Once t h e them f o r  goods a r e  delivery.  identified,  the  seller will  T h i s may i n v o l v e c o m p l e t i n g  m a n u f a c t u r i n g and p a c k a g i n g t h e g o o d s f o r As p a r t  of  this  durability  to  The n e x t Frequently, the  step the  the  anticipated  act  method o f the that  transportation  buyer of t h a t it  seller  fact.  the  is  .  judged.  Sassoon,  the  is  Instead,  and the  goods t o  supra, note  1,  p.  the the  notifies event  is  the  203.  1  3  V  .  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 G o o d s . S t e v e n s & S o n s , 1966, p . 2 0 7 .  9  .  3  in  1 3 9  J  1  putting  g o o d s on b o a r d  X  London:  delivery.  do w i t h  The s i g n i f i c a n c e o f  d e t e r m i n e s when c o n f o r m i t y o f  contract  path  c h o s e n by t h e p a r t i e s  1 3 8  of  intended voyage.  goods.  simply puts the  the  goods l e v e l  has n o t h i n g t o  possession of  m o s t common c a s e t h e  critical  prepare  intended voyage.  the  r i g o r s of the  of d e l i v e r y  buyer i n a c t u a l  the  s e l l e r may a d j u s t  p h y s i c a l s t e p on t h e  the  storage.  Ibid.  Ibid.  2nd.  ed.  46 Even i f i n s p e c t i o n o c c u r s a t a l a t e r g o o d s must h a v e e x i s t e d a t t h e capacity the  to r e j e c t the  s t a t e of the The  t o the  the  does not  the  the  to delivery.  point  contract  as  A  delivery. not  the  buyer's  the  g o o d s be  goods o b t a i n  time of  delivery.  goods a r r i v e a t  In the  inspected  a third  event of the  of d e l i v e r y i s a l s o the  by  1 4 0  However, i t i s p o s s i b l e t h a t  1 4 1  the  p e r f e c t l y conform  at the  usually occur u n t i l  p a r t i e s might agree t h a t shipment o r t h a t  time of  r e j e c t g o o d s w h i c h do  buyer's l o c a t i o n .  prior  at the  d e s c r i p t i o n i n the  Inspection  of d e l i v e r y .  in  s e l l e r ' s performance i s determined  g o o d s as  b u y e r may  point  time, d e f e c t s  party  latter  prior  the to  certification two  effective point  options, of  inspection. 2.  Non-physical  Once t h e the  Events  contract  next nonphysical  event  Passing  of property  receive  identification  contract.  1 4 2  p a r t i e s may  No  has  i s u s u a l l y the  i s determined at the  the  consideration passage of time the  or ascertainment according  property  delay  b e e n made and  can  pass u n t i l  passage of property  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,  that  property.  goods to  time.  until  paid,  the The  a later  time  47 as f o r  e x a m p l e when t h e  interest  Canadian law. risk  of  three  different  They a r e  internally  the  types of  risk  of  them p a s s f r o m t h e  any o f  security  over the the  c a u s e d damaged and t h e  seller  to  the  However,  passage of property  buyer at  and e x t e r n a l l y  different  after  the  this  anticipated  point.  By  contrast,  buyer 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 t h e g o o d s .  The b u y e r ' s a c t  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  b u y e r ' s agent  the  buyer.  nothing to  1 4 5  c a u s e d damage may n o t p a s s u n t i l  may o c c u r when t h e  the  or the  seller's  The b u y e r ' s r i g h t  agent to  becomes t h e  inspect the  to of  goods has  do w i t h a c c e p t a n c e .  3  .  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 , L o n d o n : Sweet & M a x w e l l , 1987, p . 2 0 7 .  5  .  4  takes  agent  4  1  after  goods a r e handed o v e r  1  Editor,  the  damage  the  Delivery  of  r i s k s pass  risk  of  for  times.  transfer  pass u n t i l  The r i s k s o f  c a u s e d damage p a s s a t  internally  damage  the  place.  of  of  1 4 4  U n d e r A n g l o - C a n a d i a n law some o f simultaneously with property.  risk  do w i t h t h e  no r i s k w i l l  i n the g o o d s .  c a u s e d damage,  The r e s p o n s i b i l i t i e s  goods has n o t h i n g t o  risk.  r i s k under A n g l o -  externally  which ought t o have been a n t i c i p a t e d .  Control  a  i n the goods.  There are  the  s e l l e r wishes to maintain  Ibid,  Ibid.  p.  208. General  48 D. The L e g a l Environment R i s k r u l e s f o r p u r e l y domestic t r a n s a c t i o n s a r e c o n t r o l l e d by domestic law.  However, when a s a l e s  t a k e s p l a c e between p a r t i e s r e s i d i n g j u r i s d i c t i o n s , the rules of private  i n different international  which s e t o f domestic r u l e s w i l l apply. parties reside law  i n d i f f e r e n t countries,  may d i c t a t e t h a t t h e " r u l e s  transaction  law govern  Moreover, i f t h e private  international  o f an i n t e r n a t i o n a l  convention  governs t h e t r a n s a c t i o n . 1. Domestic Law In B r i t i s h Columbia t h e S a l e o f Goods A c t governs t h e t r a n s f e r o f r i s k t o goods. r e l a t i v e l y o l d statute 1893.  *°  The S a l e o f Goods A c t i s a  which c o d i f i e d t h e law e x i s t i n g as o f  The r i s k t o goods s e c t i o n s  have not been  s u b s t a n t i a l l y amended s i n c e c o d i f i c a t i o n .  1 4 7  The S a l e o f  Goods A c t p r e s e n t s an i n t e r e s t i n g case o f 19th c e n t u r y law which has n o t been updated t o d e a l w i t h complex problems occurring  i n t h e l a t e 20th c e n t u r y .  a) The D e f i n i t i o n o f R i s k The  S a l e o f Goods A c t uses what appears i n t h e l a t e  t w e n t i e t h c e n t u r y t o be a s i m p l i s t i c approach t o t h e d e f i n i t i o n of r i s k .  1 4 6  .  I b i d , p. 4.  1 4 7  .  Ibid.  The s t a t u t e  breaks r i s k down i n t o two  49 categories. transit.  The f i r s t  The second c a t e g o r y  damage t h e g o o d s w i l l occurs  category  i n section  i s the overall  i s the r i s k  risk  of the  of the anticipated  undergo i n every t r a n s i t .  The breakdown  37.  37. Where t h e s e l l e r o f g o o d s a g r e e s 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 t h a n t h a t where t h e y a r e when s o l d , t h e b u y e r must n e v e r t h e l e s s , unless otherwise a g r e e d , t a k e any r i s k o f d e t e r i o r a t i o n i n t h e g o o d s n e c e s s a r i l y incident t o the course of t r a n s i t . Over t h e p a s t  one h u n d r e d y e a r s t h e c o u r t s  tuned t h e c a t e g o r i e s .  have  The r e f i n e m e n t h a s b e e n due t o an  e m p h a s i s on t h e c a u s e o f t h e damage t o t h e g o o d s . law  recognizes that  action  fine  T h e common  damage may be a t t r i b u t e d t o e i t h e r t h e  of the s e l l e r or the action  of the carrier  i n both  categories. b)  Externally  Caused  Damage  Perhaps owing t o t h e importance o f p r i v a t e the risk  1 8 t h and 1 9 t h c e n t u r i e s , t o g o o d s on t h e b a s i s  section  property i n  t h e S a l e o f Goods A c t a l l o c a t e s  o f ownership.  This  i s covered i n  25.  25. U n l e s s o t h e r w i s e a g r e e d , t h e g o o d s r e m a i n a t t h e s e l l e r ' s r i s k u n t i l t h e 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 t h e b u y e r , b u t when t h e 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 t h e b u y e r t h e goods a r e a t t h e b u y e r ' s r i s k , w h e t h e r d e l i v e r y h a s b e e n made o r n o t ; p r o v i d e d t h a t where d e l i v e r y h a s b e e n d e l a y e d t h r o u g h t h e f a u l t o f e i t h e r b u y e r o r s e l l e r , t h e goods a r e a t t h e r i s k o f t h e p a r t y i n f a u l t a s r e g a r d s any l o s s w h i c h m i g h t n o t h a v e o c c u r r e d b u t 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 nothing in t h i s section shall affect the duties or 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 t h e goods o f t h e o t h e r p a r t y .  50 The control  a c t o f d e l i v e r y which o f t h e goods o n l y  sequence  of the sale  entails  i m p a c t s on r i s k  i s u p s e t by a d e f a u l t  d e l a y c a u s e s damage t o t h e g o o d s . irrelevant If  of a party  and t h e  control i s  to risk.  s e l l e r would  t o control passing, the  become t h e b a i l e e o f t h e g o o d s .  b a i l e e a r e dependent  goods.  g i v i n g up  i f t h e i n t e n d e d time  Otherwise,  r i s k passes t o t h e buyer p r i o r  a bailee  the s e l l e r  H i s d u t i e s as  on t h e common l a w o f b a i l m e n t w h i c h  holds  f o r h i r e t o the standard of reasonable care of the I f the s e l l e r  1 4 8  t r a n s p o r t s t h e goods t o t h e b u y e r ' s  location  a f t e r p r o p e r t y has passed, t h e s e l l e r has t h e duty o f  a bailee  of reasonable care unless the s e l l e r undertakes a  greater responsibility 2.  Passage  than i s envisioned  of Property  Property cannot pass u n t i l come t o a n e n d . ascertainment This  i n s e c t i o n 37.  the s e l l e r ' s  performance has  T h i s may r e q u i r e a n y t h i n g f r o m t h e  o f t h e goods t o t h e i r  i s c o v e r e d by s e c t i o n  23 w h i c h  delivery  t o t h e buyer.  i s quoted below i n i t s  entirety.  23. (1) U n l e s s a d i f f e r e n t i n t e n t i o n a p p e a r s , t h e i n t e n t i o n o f t h e p a r t i e s as t o t h e time a t which t h e p r o p e r t y i n t h e goods i s t o p a s s t o t h e b u y e r i s governed by t h e r u l e s s e t o u t i n s u b s e c t i o n s (2) t o ( 7 ) .  X  4  Toronto:  . T e t l e y , W i l l i a m , Q.C. M a r i n e B u t t e r w o r t h s , 1978, p . 232.  Cargo  Claims.  2nd. e d .  51 (2) Where t h e r e i s a n u n c o n d i t i o n a l c o n t r a c t f o r t h e 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 , t h e p r o p e r t y i n t h e g o o d s p a s s e s t o t h e b u y e r when t h e c o n t r a c t i s made, and i t i s i m m a t e r i a l w h e t h e r t h e t i m e o f payment o r t h e t i m e o f d e l i v e r y , o r b o t h , be p o s t p o n e d . (3) Where t h e r e i s a c o n t r a c t f o r t h e s a l e o f s p e c i f i c g o o d s , a n d t h e s e l l e r i s bound t o do s o m e t h i n g t o t h e g o o d s f o r t h e p u r p o s e o f 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 , t h e p r o p e r t y d o e s n o t p a s s u n t i l s u c h t h i n g be done a n d t h e b u y e r h a s n o t i c e o f i t . (4) Where t h e r e i s a c o n t r a c t f o r t h e s a l e o f s p e c i f i c g o o d s i n a d e l i v e r a b l e s t a t e , b u t t h e s e l l e r i s bound t o w e i g h , m e a s u r e , t e s t o r do some o t h e r a c t o r t h i n g w i t h r e f e r e n c e t o t h e goods f o r t h e p u r p o s e o f a s c e r t a i n i n g the p r i c e , t h e p r o p e r t y does n o t p a s s u n t i l such a c t o r t h i n g be done a n d t h e b u y e r h a s n o t i c e o f i t .  (5) When g o o d s a r e d e l i v e r e d t o t h e b u y e r on a p p r o v a l o r "on s a l e o r r e t u r n " , o r o t h e r s i m i l a r t e r m s , t h e 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 a p p r o v a l o r a c c e p t a n c e t o t h e s e l l e r o r d o e s any o t h e r a c t a d o p t i n g t h e transaction; (b) i f he d o e s n o t s i g n i f y h i s a p p r o v a l o r a c c e p t a n c e t o t h e s e l l e r , b u t r e t a i n s t h e 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 b e e n f i x e d f o r t h e r e t u r n o f t h e g o o d s , on t h e e x p i r a t i o n o f s u c h t i m e , a n d , i f no t i m e h a s b e e n f i x e d , on t h e e x p i r a t i o n o f a r e a s o n a b l e t i m e . What i s a reasonable time i s a question 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 t h e 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 o f 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 a r e 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 t h e c o n t r a c t , e i t h e r by t h e s e l l e r w i t h t h e a s s e n t o f t h e b u y e r , o r by t h e b u y e r w i t h t h e a s s e n t o f t h e s e l l e r , t h e p r o p e r t y i n t h e goods t h e r e u p o n p a s s e s t o t h e b u y e r . The a s s e n t may be e x p r e s s o r i m p l i e d , a n d 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 t h e a p p r o p r i a t i o n i s made.  52 (7) Where, i n p u r s u a n c e o f t h e c o n t r a c t , t h e s e l l e r d e l i v e r s t h e goods t o t h e b u y e r o r t o a c a r r i e r o r o t h e r b a i l e e , w h e t h e r named by t h e b u y e r o r n o t , f o r t h e p u r p o s e o f t r a n s m i s s i o n t o t h e b u y e r , and d o e s n o t r e s e r v e t h e r i g h t o f d i s p o s a l , he i s deemed t o h a v e 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 h e goods t o t h e c o n t r a c t .  The  most i m p o r t a n t  property  i s the  The  Sale  o f Goods A c t  the  goods.  stated  not by  23 i s that  seller.  identified their  or  purpose of t r a n s f e r r i n g  of the  recognizes  Goods a r e  two  goods t o t h e states or  either specific subsections  the  been i d e n t i f i e d the  f o r the  identification  assumption of  section  act  separated  (2),  (3),  from the  Ascertainment requires set aside  and  that  the  conditions  or unascertained. (4),  buyer cannot a c q u i r e  or  contract.  (6)  of The  and  (7)  of  goods w h i c h have  mass o f g o o d s owned  that  the  goods  buyer r e c e i v e  be  notice  of  ascertainment.  Another c o n d i t i o n g o o d s be to the  put  buyer or a t h i r d  statute  The  possibilities  is silent  p a c k a g e d and  assumption  party  on  the  delivered  to the  buyer.  what c o n s t i t u t e s a d e l i v e r a b l e  protected  i s that the  i f the  i s that  a c t u a l l y be  for transmission  for transit.  q u a l i t y of the delivery will  t h e n no  required.  A l t e r n a t i v e l y , i f the  buyer's door, the  at the  trip.  is  For  seller's  for transit  is  i s to d e l i v e r the  d e l i v e r a b l e s t a t e would  packaging t o withstand the  to  reasonable  take place.  packaging or p r e p a r a t i o n seller  A  state.  deliverable state  d e l i v e r y i s to take place  location,  to the  s e c t i o n 23  range from c o m p l e t i o n o f manufacture  d e p e n d e n t u p o n where t h e example,  by  i n a d e l i v e r a b l e s t a t e or  The  fully  required  require  goods  53 3.  Sale versus  The  two  Sale  categories  and  of s a l e s c o n t r a c t s  o b l i g a t i o n u n d e r t a k e n by are  the  simple  contract  and  The  the  amount o f  by  s a l e and  seller  the  Sale  regarding  i n subsections  the  transit.  include a  i s presumably the  o f Goods A c t  s t a t u t o r y l a n g u a g e on  a d e l i v e r a b l e s t a t e and  define  Contracts  They  shipment  arrangement of d e l i v e r y .  sale contract  sale contract property  covered  the  s a l e c o n t r a c t which c o u l d  simple  envisioned  Arrangement of D e l i v e r y  and the  the  owing t o t h e subject.  r i s k p a s s when t h e b u y e r has  (2) , (3)  and  standard relative  In the  goods a r e  actual notice.  (4)  simple  o f s e c t i o n 23  put  This  in is  quoted  above.  A d d i n g an that  the  seller  transit.  o b l i g a t i o n t o arrange shipment e n t a i l s make a p p r o p r i a t e  T h i s might  goods have been put  a  arrangements r e g a r d i n g  i n c l u d e n o t i c e to the a b o a r d a s h i p so t h a t  buyer that the  duty the  the  buyer can  obtain  insurance. 36. (1) Where, i n p u r s u a n c e o f a c o n t r a c t o f s a l e , t h e s e l l e r i s a u t h o r i z e d o r r e q u i r e d t o send t h e goods t o t h e b u y e r , d e l i v e r y o f t h e g o o d s t o a c a r r i e r , w h e t h e r named by t h e b u y e r o r n o t , f o r t h e p u r p o s e o f t r a n s m i s s i o n t o t h e b u y e r i s deemed, i n t h e a b s e n c e o f e v i d e n c e t o t h e c o n t r a r y , t o be a d e l i v e r y o f t h e g o o d s t o t h e b u y e r . (2) U n l e s s o t h e r w i s e a u t h o r i z e d by t h e b u y e r , t h e s e l l e r must make s u c h c o n t r a c t w i t h t h e c a r r i e r on b e h a l f o f t h e b u y e r as may be r e a s o n a b l e , h a v i n g r e g a r d t o t h e n a t u r e o f t h e g o o d s and t h e o t h e r c i r c u m s t a n c e s o f t h e c a s e . I f t h e s e l l e r o m i t s t o do so, and t h e g o o d s a r e l o s t o r damaged i n c o u r s e o f t r a n s i t , t h e b u y e r may d e c l i n e t o t r e a t t h e d e l i v e r y t o t h e 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 , o r may h o l d t h e 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 o t h e r w i s e a g r e e d , where g o o d s a r e s e n t by t h e s e l l e r t o t h e b u y e r by a r o u t e i n v o l v i n g s e a 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 s u c h n o t i c e t o t h e b u y e r a s may enable h i m t o i n s u r e them d u r i n g t h e i r s e a t r a n s i t , and i f t h e s e l l e r f a i l s t o do so t h e g o o d s 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 .  Section  36  affraightment limitation 1A Q  5  0  properly value  of the  liability  the  the  of the  carrier.  appended t o t h e  liability  c o n t r a c t of 4.  Effect  of the  o f B r e a c h on  s e l l e r ' s performance w i l l seller  i s limited  fails  when t h e  of  of Hague  prevent  third  per  specified  of  seller  occurs  in  Risk  when a f a i l u r e  risk  going  put  Water  1 5 x  occasions  arrangement of t r a n s p o r t with The  to a  of  the  from p a s s i n g .  One  to give n o t i c e that e i t h e r the  h a v e b e e n a s c e r t a i n e d and  contract.  otherwise  the A l l o c a t i o n  have been d e l i v e r e d t o a sea  second occurs  Under the  C a r r i a g e o f Goods By  carrier  affraightment.  There are only three  when t h e  contract  goods f o r t h e p u r p o s e s  package v a l u a t i o n o f t h e goods u n l e s s the  seller's  •  which are  1  1  r e q u i r e t h a t the  .  Rules- -" Act  (2) may  carrier  goods  or t h a t the  goods  in a deliverable state. fails  t o make an  a carrier  when due  is  The  appropriate  i n a s a l e and  t o some a c t o f  shipment  the  ^ . The Hague R u l e s a r e r u l e s w h i c h l i m i t s h i p owner liability. T h e y o r i g i n a t e d i n 1924 a s a r e s u l t o f a c o n f e r e n c e h e l d a t t h e Hague i n 1921. The r u l e s a t t e m p t t o b a l a n c e t h e 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 o f g o o d s . x  1 5 0  .  R.S.C. 1970,  1 5 1  .  Ibid.  c.  A r t . IV,  15. s.  4,  ss.  5.  55 seller, this  failure The  contract section fault of  the delivery  i s d e l a y e d and t h e r i s k  i s limited  o c c a s i o n e d by  t o damage c a u s e d b y t h e d e l a y  onus on t h e s e l l e r  to protect  goods s p e c i f i e d  from p e r i s h i n g b e f o r e r i s k has p a s s e d 11.  Section  11 p r o v i d e s t h a t  i n order to treat  destruction  itself. i nthe  i s m i n i m i z e d by  t h e s e l l e r must be a t  o f t h e goods as a b r e a c h  contract. 11. Where t h e r e i s an a g r e e m e n t t o s e l l s p e c i f i c g o o d s , and s u b s e q u e n t l y t h e g o o d s , w i t h o u t a n y f a u l t on t h e p a r t of t h e s e l l e r o r buyer, p e r i s h b e f o r e t h e r i s k passes t o t h e b u y e r , t h e a g r e e m e n t i s a v o i d e d . T h e b u r d e n on t h e s e l l e r f o r g o o d s s p e c i f i e d i n t h e c o n t r a c t i s much t h e same a s t h e d u t y o f a b a i l e e f o r h i r e , a r o l e t h e s e l l e r u n d e r t a k e s once p r o p e r t y i n t h e goods has p a s s e d t o t h e buyer.  We s e e f r o m t h e w o r d i n g nonconforming  goods does  of section  not e f f e c t  23 t h a t  t h e passage  a delivery of o f r i s k so  l o n g as t h e goods a r e 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 o v e r  to  presents obvious  the buyer o r c a r r i e r .  difficulties property  which  T h i s wording  a r e remedied  by an assumption  that  i n c o n f o r m i n g goods c a n p a s s t o t h e b u y e r .  only  1 5 2  The  b u y e r must be g i v e n an o p p o r t u n i t y t o e x a m i n e t h e g o o d s t o ensure conformity.  The c o n c e p t o f a c c e p t a n c e i s r e l i e d  on t o  p r o v i d e t h e remedy o f r e j e c t i o n t o t h e b u y e r .  . 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 t h e Law G o v e r n i n g I n t e r n a t i o n a l S a l e s o f Goods, e d . b y J o h n H o n n o l d , P a r i s : L i b r a i r i e D a l l o n , 1966, p . 191. x  56  38 (1) Where g o o d s a r e d e l i v e r e d t o t h e b u y e r w h i c h he h a s n o t p r e v i o u s l y e x a m i n e d , he i s n o t deemed t o h a v e a c c e p t e d them u n l e s s and u n t i l he h a s h a d a r e a s o n a b l e o p p o r t u n i t y o f e x a m i n i n g them f o r t h e p u r p o s e o f a s c e r t a i n i n g whether they are i n c o n f o r m i t y w i t h the contract. Acceptance or r e j e c t i o n In  the  case of  occurs at  a s a l e and a r r a n g e m e n t  the b u y e r ' s i n s p e c t i o n might not the  goods a t  fact  o c c u r r e d upon t h e buyer's  legitimate  and t h e delivery  rejection  were n o n c o n f o r m i n g a t retroactively  transfer to  of  the  in  of  and  risk  carrier.  of  b l o c k the t r a n s f e r  of  if  the  the  s e l l e r withholds  goods a f t e r  delivery.  performance or a c t u a l l y performance  contract, arrival  spite  of  i s p r o v i d e d by s e c t i o n  the  the  property case  fact  that  t h e goods  acts and  the  to risk.  on t h e  transfer  or reacquires  goods a f t e r  of  possession  The s e l l e r ' s a u t h o r i t y  intercept  of  this  of property  delivery  delivery.  In  delivery,  A b r e a c h by t h e b u y e r o n l y has e f f e c t risk  the  This is  b a s e d on t h e  the point  of  delivery  occur u n t i l  the b u y e r ' s l o c a t i o n .  that delivery  the p o i n t  to  delay  his  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 t h e p r o p e r t y i n t h e goods may h a v e p a s s e d t o t h e b u y e r , t h e u n p a i d s e l l e r o f g o o d s , a s s u c h , h a s by i m p l i c a t i o n o f law (a) the  a l i e n on t h e g o o d s o r r i g h t t o r e t a i n them 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 t h e m ;  (b) i n c a s e o f t h e i n s o l v e n c y o f t h e b u y e r , a o f s t o p p i n g t h e g o o d s i n t r a n s i t a f t e r he h a s w i t h t h e p o s s e s s i o n o f t h e m ; and (c)  a right  of  r e s a l e as l i m i t e d  by t h i s  Act.  for  right parted  57 (2) Where t h e p r o p e r t y i n g o o d s h a s n o t p a s s e d t o t h e buyer, t h e unpaid s e l l e r has, i n a d d i t i o n t o h i s other r e m e d i e s , 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 s t o p p a g e i n transit. The  delay  caused by t h e 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 t h e r e s p o n s i b i l i t y according  o f t h e b u y e r and thus  t o s e c t i o n 25, t h e g o o d s w o u l d be a t t h e b u y e r ' s  r i s k d u r i n g t h e whole p e r i o d . bear the r i s k  Presumably, t h e buyer would  f o r t h e goods i n t h e s e l l e r ' s p o s s e s s i o n  the  seller  the  b u y e r e i t h e r by s e l l i n g  until  abandoned t h e i n t e n t i o n t o t r a n s f e r t h e goods t o  assimilating  them t o a n o t h e r  buyer o r by  them i n t o h i s i n v e n t o r y .  51 (1) S u 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 n o t r e s c i n d e d b y t h e mere e x e r c i s e b y a n u n p a i d s e l l e r o f h i s r i g h t o f 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 . (2) When an u n p a i d s e l l e r who h a s e x e r c i s e d h i s r i g h t o f 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 t h e goods, t h e b u y e r 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 t h e g o o d s a r e o f a p e r i s h a b l e n a t u r e , o r where the unpaid s e l l e r gives n o t i c e t o t h e buyer o f h i s i n t e n t i o n t o r e s e l l , and t h e b u y e r does n o t w i t h i n a reasonable time pay o r tender t h e p r i c e , t h e unpaid s e l l e r may r e s e l l t h e g o o d s a n d r e c o v e r f r o m t h e o r i g i n a l b u y e r damages f o r any l o s s o c c a s i o n e d b y h i s b r e a c h o f contract.  (4) Where t h e 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 c a s e t h e b u y e r s h o u l d make d e f a u l t , a n d on t h e b u y e r making d e f a u l t r e s e l l s t h e goods, t h e o r i g i n a l c o n t r a c t of s a l e i s thereby rescinded, but without p r e j u d i c e t o any c l a i m t h e s e l l e r may h a v e f o r damages.  The  S a l e o f Goods A c t ,  s . 25  58 a) The internal  I n t e r n a l l y Caused  category of r i s k  o f 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  causes i s not s p e c i f i c a l l y mentioned  Goods A c t .  Instead,  courts  using  of the  statute.  t h e r u l e s have been  as a s t a r t i n g p o i n t  T h e r e a r e two goods,  Damage  namely t h e w a r r a n t i e s  f o r purpose.  They  d e v e l o p e d by  the implied  implied warranties  i n the Sale  warranty  of  the sections  as t o t h e q u a l i t y o f t h e  of merchantability  are s e t out i n s e c t i o n  and f i t n e s s  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 w a r r a n t y o r c o n d i t i o n a s t o t h e q u a l i t y o r f i t n e s s f o r any p a r t i c u l a r p u r p o s e o f g o o d s s u p p l i e d under a c o n t r a c t o f s a l e , e x c e p t as f o l l o w s : (a) where t h e b u y e r , e x p r e s s l y o r by i m p l i c a t i o n , makes known t o t h e s e l l e r t h e p a r t i c u l a r p u r p o s e f o r w h i c h t h e g o o d s a r e r e q u i r e d , so a s t o show t h a t t h e b u y e r r e l i e s on t h e s e l l e r ' s s k i l l o r judgment, and t h e goods a r e o f a d e s c r i p t i o n which i t i s i n t h e course of the s e l l e r ' s business t o supply, whether he i s t h e m a n u f a c t u r e r o r n o t , 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 t h e goods a r e r e a s o n a b l y f i t f o r such purpose; except that 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 p a t e n t 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 p u r p o s e ; (b) where g o o d s a r e b o u g h t by d e s c r i p t i o n f r o m a s e l l e r who d e a l s i n g o o d s o f t h a t d e s c r i p t i o n , w h e t h e r he i s t h e m a n u f a c t u r e r o r n o t , 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 t h e g o o d s s h a l l be o f m e r c h a n t a b l e q u a l i t y ; b u t i f t h e b u y e r h a s examined t h e g o o d s 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 r e g a r d s d e f e c t s which such e x a m i n a t i o n ought t o have revealed; (c) an i m p l i e d w a r r a n t y o r c o n d i t i o n a s t o q u a l i t y o r f i t n e s s f o r a p a r t i c u l a r p u r p o s e may be annexed by t h e u s a g e o f t r a d e ; and  59 (d) an e x p r e s s w a r r a n t y o r c o n d i t i o n d o e s n o t n e g a t i v e a w a r r a n t y or. c o n d i t i o n i m p l i e d by t h i s unless inconsistent with i t . Interestingly, goods.  neither  Presumably the  warranty addresses quantity  d r a f t e r s of the  quantity  i s always a c o n f o r m i t y  possible  that  goods c o u l d  t h e y were o f t h e conformity 5.  right  issue.  shrink  quantity  at the  of the  of the  They r e p r e s e n t  point  even  though  o f d e l i v e r y where  purpose i s to  Chamber o f  terms used  standardize  of the  contracting  seller  out  o f Goods A c t .  International  and and  of  the  INCOTERMS Commerce.  in international clarify  the  are 1 5 4  trade.  the  buyer i n t r a n s f e r r i n g  1 5 5  INCOTERMS c o v e r t h e responsibility  whole spectrum o f  f o r d e l i v e r y from a simple  delivery to  predominant used  Sale  nine trade  responsibilities  and  transit  INCOTERMS  creation  goods.  that  i s judged.  default provisions  Their  assumed  the  However, i t i s  during  INCOTERMS p r o v i d e a means o f  the  statute  of  Act  a s a l e and  destination  i n international trade  i n domestic I C A  trade.  seller sale, through  contract.  and  as w e l l  are  They  sale are  frequently  1 5 6  ,  . I n t e r n a t i o n a l Chamber o f Commerce. R u l e s f o r t h e I n t e r p r e t a t i o n o f T r a d e Terms. (1980). 1 5 5  .  Schmitthoff,  1 5 6  .  Sassoon,  s u p r a . n o t e 4,  supra,  n o t e 1,  p.  pp. 8.  International Incoterms  102-103.  60 Private  i n t e r n a t i o n a l law  d e t e r m i n e s what law  will  international  element.  such  the  i t e m s as  jurisdiction  default  term  apply  an  I n t e r n a t i o n a l elements c o u l d  fact  law  buyer or s e l l e r  that the  or country.  i n the  which  i n a c a s e which has  l o c a t i o n of the  or the  another province  i s d o m e s t i c law  include  i n another  g o o d s were damaged i n  For  s a l e o f goods c a s e s  i s that contract shall  be  the  governed  by  1 57  the  law  which has  Generally, choice  the  courts hold that  o f law  i n the  jurisdiction will 6.  L i m i t a t i o n of  i n d o m e s t i c law.  international the  origins.  of the  seller's  For  Liability liability  Frequently  these  r u l e s have  example,  scheduled  For  out  the  law  specific  party  on A i r T r a n s p o r t a t i o n  b a s e d on  absence of a  contract.  of t h i r d  r u l e s a r e g o v e r n e d by  goods t r a n s p o r t e d  to the  1 5 8  rules for limitation  contained  cargo,  i n the  contract, the  apply.  T h i r d Party  The  c l o s e s t connection  the  for international a i r I n t e r n a t i o n a l Convention  to the  o f Canada by  Hague R u l e s s c h e d u l e d  Carriage water the  to the  by  Air  rules  Carriage  Since  the  bulk  1 5 V  .  Ibid.  1 5 8  .  I b i d , p.  1 5 9  .  R.S.C. 1970,  c.  14.  1 6 0  .  R.S.C. 1970,  c.  15.  9.  of  Act.  international trade  is  1 5 9  are  o f Goods  1fo  Water A c t .  are  by  61 carried  by  water, the  Hague R u l e s h a v e i m p o r t a n t  the  allocation The  two  of  risk  areas of  greatest  limitations  per  package v a l u e l i m i t a t i o n  to  Carrier  e x e r c i s e due  III,  si)  (art  III,  the  and  limited the  to  to  liability  properly The  i n the  $500.00  carrier liability event the  i n making the stow t h e  limited  (Canadian) per  t h e i r higher value  failure  board the  carrier's  contract  of  (art  vessel  holds that  liability  package u n l e s s the is specified  the  is  s h i p seaworthy  g o o d s on  the  to  are  and  carrier  per-package l i m i t a t i o n r u l e  s h i p m e n t most commonly i n t h e s  risk allocation  is essentially  carrier liability,  g o o d s and  III,  i m p a c t on  c a t e g o r i e s of  diligence  s2).  event of  the  on  sales.  the  liable.  on  in  effects  CI  1  in  is  nature  prior  of  to  affraightment  (art  5).  The  extent to  liability  which the  extends to  Hague R u l e l i m i t a t i o n  non-carriers  warehouseman i s d e p e n d e n t upon t h e affraightment.  The  default  rules  s u c h as  stevedores  wording i n the do  not  of  provide  and  contract for  of  their  protection. E.  Types of  Risk  Risk, with reference to change t o value of recipient  1 6 1  .  the the  goods o c c u r r i n g goods t o  i n the See  goods i n t r a n s i t ,  refers  any  i n t r a n s i t which d i m i n i s h e s  their recipient.  The  buyer being  normal case would r e c o g n i z e t h a t  below.  to  the  the  the  goods  62  have been s u b j e c t  to a t r a n s i t  goods a g a i n s t  contract  the  r i s k by  comparing the  description.  I n many c a s e s d i s t i n g u i s h i n g b e t w e e n t h e risk as  (i.e.,  the  the  damaged g o o d s ) and  d e f i n i t i o n s of the  event t h a t  that  the  two  are  overlapping.  nonconforming goods a r r i v e t h e  i f the  manifestation  nonconformity w i l l  g o o d s were n e v e r c o n f o r m i n g  Likewise,  g o o d s do  not  i n the  first  s i t u a t i o n where t h e  retakes  transit  obvious to the  a change i n t h e  of  a transit  first  three  i s that  transit.  The  inappropriate  The  the  second  be  appropriate  third  i s that  due  goods cannot s u r v i v e the  often  categories goods w i l l  be  i s t h a t the  appropriate  subject  considering t o an  i t will  In goods  be result  the  be  or that that  abnormal  shipped the  the  on  means  an  of  arrangements  nature of the  goods.  arranged normal t r a n s i t .  of t r a n s p o r t a t i o n  g o o d s and  the  q u a l i t y of the  durability factors  categories  damage.  In  o f goods i t i s  events of t r a n s i t .  factors i n a l l three  cause or causes of the  t o an  goods.  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  a properly  complex w o r l d  but  t o d i s t i n g u i s h between t h e  the  of the  goods i s t h e  goods w i l l  difficult  many c a s e s  buyer  carrier.  of causes of r i s k to  means o f t r a n s p o r t a t i o n  t r a n s p o r t a t i o n may were n o t  environment,  assume  risk.  There are The  that  the  possession  a f t e r they experienced the  is, in  place.  a r r i v e at a l l ,  the  of  difficult  b u y e r may  assume t h a t t h e y were n e v e r d e l i v e r e d t o t h e seller  be  That  may  seller  delivered  In  of  fact,  in  i n t e r a c t t o become  63  1. R i s k a) The  o f an Abnormal T r a n s i t  Normal v e r s u s  vast majority  Abnormal T r a n s i t of transits  occur  without  incident.  However, e v e n i n t h e n o r m a l c a s e g o o d s d e t e r i o r a t e a s a natural  consequence o f t h e voyage.  durability  o f t h e goods a r e f a c t o r s which t e n d  e x p e c t e d bumps a n d j a r s Abnormal t r a n s i t s occurs.  P a c k a g i n g and  expected  i n every  transit.  F o r example, g o o d s may be s u b j e c t sealed  T h i r d Party  There i s only recovery  against  or  springs  a leak.  unloading.  Liability  one c a t e g o r y  the carrier  o f event which allows f o r  f o r damage t o c a r g o .  damage r e s u l t i n g f r o m a f a i l u r e  of the vessel  That i s  o f due d i l i g e n c e on t h e p a r t  o f t h e owner o r c r e w o f t h e v e s s e l preparation  unexpected  t o w a t e r damage i f  or the vessel  Goods may be d r o p p e d o v e r t h e s i d e l o a d i n g b)  t o minimize the  a r e t h o s e where s o m e t h i n g  hatches are not properly  inherent  i n t h e stowage o r  f o r the voyage.  1 6 2  . T h i s i s s e t o u t i n A r t i c l e I I I p a r a g r a p h s 1 and 2 and A r t i c l e I V p a r a g r a p h 1 o f t h e C a r r i a g e o f Goods b y W a t e r A c t , s u p r a . n o t e 22. 1 6 2  Article III 1. The c a r r i e r s h a l l be bound, b e f o r e a n d a t t h e b e g i n n i n g o f t h e v o y a g e , t o e x e r c i s e due d i l i g e n c e t o , (a) make t h e s h i p  seaworthy;  (b)  equip,  p r o p e r l y man,  and s u p p l y  the ship;  64  Even i n the established, to  the  event t h a t  a b s e n c e o f due  per—package l i m i t a t i o n  f i v e hundred Canadian d o l l a r s u n l e s s  diligence is  rule limits  recovery  the  contract  parties  otherwise. All third  other  party  e v e n t s on  liability.  board the  T h i s means t h a t t h e  events which c o u l d  give  are  actionable  against  Risk  Inappropriate  not 2.  a) The  o f an  Means and  party  rise  responsible only  goods are  s t o w e d on  and fit  to a claim  the  not  give  rise  vast majority  f o r damages i n  to of  transit  carrier. Arrangement of T r a n s i t  Stowage  must c h o o s e n o t t o be  v e s s e l do  the  for arranging  the  means o f  transit  type of t r a n s i t  but  a l s o how  the  the  vessel  i f the  choice  i s by  sea.  (c) make t h e h o l d s , r e f r i g e r a t i n g and c o o l chambers, a l l o t h e r p a r t s o f t h e s h i p i n which goods a r e c a r r i e d , 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 t h e p r o v i s i o n s o f A r t i c l e IV, t h e 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 , h a n d l e , stow, c a r r y , k e e p , c a r e f o r and d i s c h a r g e t h e g o o d s c a r r i e d . Article  IV  1. N e i t h e r t h e c a r r i e r n o r t h e s h i p s h a l l be l i a b l e f o r l o s s o r damage a r i s i n g o r r e s u l t i n g f r o m u n s e a w o r t h i n e s s u n l e s s c a u s e d by want o f due d i l i g e n c e on t h e p a r t o f t h e c a r r i e r t o make t h e s h i p s e a w o r t h y , and t o s e c u r e t h a t t h e s h i p i s p r o p e r l y manned, e q u i p p e d and s u p p l i e d , and t o make t h e 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 t h e s h i p i n w h i c h g o o d s a r e 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 a c c o r d a n c e w i t h t h e p r o v i s i o n s o f p a r a g r a p h 1 o f A r t i c l e I I I . Whenever l o s s o r damage h a s r e s u l t e d f r o m u n s e a w o r t h i n e s s , t h e b u r d e n o f p r o v i n g t h e e x e r c i s e o f due d i l i g e n c e s h a l l be on t h e c a r r i e r or 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  durability,  o f t h e goods, as w e l l  affect  as t h e i r  both the choice of the type of  and w h e t h e r t h e g o o d s c a n w i t h s t a n d i n f e r i o r  will  Factors  such as t h e speed  follow,  its ability  of the v e s s e l ,  during the  transit.  Obviously, critical b)  carrier  t o be c o n s i d e r e d . as  goods  f o r damage done  chosen  f o r the  transit  Proper V a l u a t i o n factor  i n the a p p r o p r i a t e arrangement o f i s the proper v a l u a t i o n  o f t h e Hague R u l e p e r - p a c k a g e  valuation  the route i t  1 6 3  the party arranging transport  bearing the r i s k  value  limitation.  amount.  6 3  .  Ibid.  A r t . I . s.  6 4  .  Ibid.  A r t . IV,  s.  (c) 5.  1 6 4  proper  of a f f r a i g h t m e n t then,  commits an a c t i o n a b l e wrong, t h e  of the voyage cannot  the  o f t h e goods f o r  does not s p e c i f y t h e  o f t h e goods i n t h e c o n t r a c t  even i f t h e c a r r i e r  nominal  liability  the type of transport  means o f t r a n s p o r t  If  stowage.  to i t s success.  Another  purposes  transport  f o r p r o p e r stowage o f t h e g o o d s i s c r i t i c a l  s t o w e d on d e c k i n c u r no  is  of  t o w i t h s t a n d e x p e c t e d w e a t h e r and i t s  c a p a c i t y t o p r o p e r l y stow t h e g o o d s o u g h t Arranging  degree  person  r e c o v e r more t h a n  a  66  3. R i s k t h a t t h e Goods L a c k W i t h s t a n d a Normal T r a n s i t  Sufficient  I n a d d i t i o n t o bumps and j a r s , deteriorate causes.  r i p e n and age.  a f f e c t e d by t h e c h a n g i n g during  the t r a n s i t .  opportunity and/or  be a b l e  experienced h a v e an  That  i n t e r a c t s w i t h t h e mode  i s , i f the s e l l e r  to build  against  i s aware o f o r  f o r the s e l e c t i o n of a d i f f i c u l t in sufficient  durability  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  Claims cause  conditions  o f t h e g o o d s may  amount o f d u r a b i l i t y  selected.  responsible  trip  internal  packaging.  of t r a n s p o r t  may  due t o  Nonperishables are  environmental  The p r o d u c e r  will  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 o f m a n u f a c t u r e  The r e q u i r e d  is  most g o o d s  a c e r t a i n amount i n t r a n s i t  Perishables  Durability to  water c a r r i e r s  cannot  carriage,  he  to withstand the  t o ensure  survival.  be s u c c e s s f u l i f t h e  of the d e t e r i o r a t i o n i s inherent  t o t h e goods o r  their  packaging.  Durability  and p a c k a g i n g  a r e 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 extra packaging while sturdy much.  g o o d s do n o t r e q u i r e  as  67 CHAPTER FOUR STRUCTURING THE MODELS A. E x p e r i m e n t a l  Question  This analysis w i l l presents  an e f f i c i e n t  transit. transit  allocation  The a n a l y s i s w i l l  The a n a l y s i s w i l l  on  clarity  of  avoidable  To  and c o n f o r m i t y  model w i l l  the risks  occurring  on t h e b e h a v i o r  address  the effects  during  ofthe  of the rules  t o common e x p e c t a t i o n ,  f o r c o n c l u s i o n s b a s e d on t h e e f f e c t  and r e d u c t i o n  ofthe  o f t h e S a l e o f Goods A c t , an o p t i m a l l y  be c r e a t e d  model a l l o c a t e s r i s k s  f o r comparison.  An o p t i m a l l y  t o the party best  able t o deal  Such an a l l o c a t i o n m i n i m i z e s t h e e f f e c t  the p a r t i e s '  The  during  losses.  allow  inefficiency  o f r i s k t o goods  review  i n relation to the effect  parties.  them.  examine w h e t h e r t h e S a l e o f Goods A c t  risks  into the three  behavior.  efficient efficient with  o f t h e r i s k s on  1 6 5  discussed  i n the previous  categories.  chapter  were g r o u p e d  The f o l l o w i n g a n a l y s i s w i l l  follow  that categorization.  . Notes, " R i s k 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 I n t o t h e B r e a c h " ( 1 9 7 9 ) , 65 V i r g i n i a Law R e v i e w 557, p . 560.  68  B.  Assumptions To s i m p l i f y t h e e n v i r o n m e n t f o r t h e p u r p o s e s o f a n a l y s i s  only  s a l e and arrangement  considered. twofold. long  of delivery contracts  The r e a s o n t h a t  First,  distances.  this  will  be  t y p e o f s a l e was s e l e c t e d i s  i t i s a common f o r m o f s a l e when goods t r a v e l 1 6 6  Thus,  ground f o r an e f f i c i e n c y  i tpresents evaluation.  a realistic Second,  testing  t h e s a l e and  arrangement  of delivery contract  presents  a  complicated  sale scenario.  provides  the analysis with a  number o f r e l e v a n t  This  relatively  f a c t o r s w i t h which t o t e s t t h e e f f i c i e n c y  of the r u l e s .  This travel  thesis will  by ocean t r a n s p o r t .  also twofold.  The f i r s t  means o f t r a n s i t Therefore, second  they present  assumption i s  ocean t r a n s p o r t traded  against  in British  the shippers  a harsh backdrop against  In t h e model,  i s a common Columbia.  i s realistic.  of goods.  6  The  o f ocean 1 6 7  Thus,  which t h e e f f e c t s o f  clarity.  we w i l l  on t h e m a r g i n .  make t h e a s s u m p t i o n t h a t This  assumption i m p l i e s  damage i s another  T h a t 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 w h i c h  . S a s s o o n , D a v i d M. C . I . F . and F.O.B. C o n t r a c t s L o n d o n : S t e v e n s & Son, 1975, p . 24. 1  ed.  i s that  a t some p o i n t  t h e r u l e s which govern t h e l i a b i l i t y  r u l e s have g r e a t e r  assumption.  The r e a s o n f o r t h i s  f o r many g o o d s  are biased  preventable  t h e goods w i l l  t h e i n c l u s i o n o f ocean t r a n s p o r t  i s that  carriers  risk  assume t h a t  6  . See o p . c i t . p . .  2nd.  69  have a c a u s a l  connection to the risked  according to the parties'  respective  damage a r e a l l o c a t e d  control  o v e r them, t h e  p a r t y w i t h t h e b e s t c h a n c e o f p r e v e n t i n g t h e damage a t t h e least  cost  will  have  A reduction  an i n c e n t i v e  t o do s o .  on t h e m a r g i n i m p l i e s  that  only a certain  amount o f damage c a n be e c o n o m i c a l l y c o n t r o l l e d . is  composed o f damage w h i c h c a n be e l i m i n a t e d  exercise parties their  of control  t o do o t h e r w i s e  r a t i o n a l best  C. R i s k  financial  For the  a motivation t o not a c ti n  interests.  have  a limited capacity  t o reduce the  l o s s r e s u l t i n g from t h e r i s k s o f t r a n s i t .  the l i m i t i n g factor  eliminating exercise.  i s economics.  Of  The c o s t o f  some r i s k s e x c e e d s t h e v a l u e g a i n e d b y t h e A good  necessarily the  by t h e p a r t i e s '  l e s s than the return.  implies  subset  Factors  The p a r t i e s  course,  costing  This  example  i s what t h e S a l e o f Goods A c t c a l l s  incidental deterioration  predicted  deterioration  which by d e f i n i t i o n i s  w h i c h c a n n o t be e c o n o m i c a l l y  eliminated.  Elements o f s a l e s  determine the i n c i d e n t s  T h e s e e l e m e n t s a r e t h e method a n d a r r a n g e m e n t t y p e o f goods  and t h e i r p r e p a r a t i o n  Additionally,  the control  dependent of  upon m i t i g a t i o n  a remedy.  o f damage. of carriage, the  f o r the t r a n s i t .  o f damage o n c e  i t has o c c u r r e d i s  and t h e a v a i l a b i l i t y  and e f f i c i e n c y  70 1. D i s t a n c e , The the on  R o u t e a n d Time o f Y e a r  d i s t a n c e t h e g o o d s must t r a v e l ,  s e a s o n when t h e g o o d s a r e b e i n g a n t i c i p a t e d damage.  to occur  during  a long  the route  transported  t a k e n and  have a  F o r example, one e x p e c t s more damage sea voyage i n t h e n o r t h A t l a n t i c i n  m i d w i n t e r t h a n 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 Columbia d u r i n g  To  that  any g o o d s w i l l  transit.  involving will  have t o t r a v e l  r o u t e and  seller  knowing  over a c e r t a i n route  to get  The b u y e r a l s o s e l e c t s t h e t i m e o f y e a r f o r  F o r example, a p u r c h a s e o r d e r  made i n O c t o b e r  a f o u r month m a n u f a c t u r i n g t i m e means t h a t t h e goods  be d e l i v e r e d i n m i d w i n t e r .  The will  both p a r t i e s c o n t r o l distance,  The b u y e r s e e k s o u t a s p e c i f i c  to h i s location. the  British  t h e month o f J u l y .  some e x t e n t  time of year.  bearing  s e l l e r may h a v e some c o n t r o l o v e r t h e r o u t e  take  t o get t o the buyer's l o c a t i o n .  makes t h e t r a n s i t options indirect  arrangements w i t h  over r o u t i n g . routes.  However, t h i s  t h e goods  When t h e s e l l e r  the c a r r i e r  t h e r e may be  The c h o i c e s may be b e t w e e n d i r e c t and  The d i r e c t  routes  may be more  i s a minor c o n t r o l as t h e type  expensive.  o f g o o d s and t h e  a r r a n g e m e n t s made b e t w e e n t h e p a r t i e s a s t o t h e c o s t o f transportation will  t o a l a r g e p a r t determine  routing.  2. Means o f T r a n s p o r t a t i o n In s p i t e  o f t h e i m p o r t a n c e o f t h e s e l e c t i o n o f t h e 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 generally  goods b e i n g  and t h e d i s t a n c e  For  transported  example,  coal requires  t h a n does f r u i t . conveniently rail  of the transport.  d i f f e r e n t type of transport  distances  o v e r l a n d may be  c o m p l e t e d by t r u c k .  o r ocean The  Short  a very  determined by t h e type o f  Longer d i s t a n c e s  may  require  transport.  p a r t i e s can vary  minor extent.  t h e means o f t r a n s p o r t a t i o n t o a  However, t h e a v a i l a b l e r a n g e o f v a r i a t i o n i s  d e t e r m i n e d by t h e economics o f t h e exchange. p a r t i e s would n o t agree t o i n c r e a s e  That  i s , the  the costs of  t r a n s p o r t a t i o n b e y o n d t h e p o i n t where i t e x c e e d e d t h e additional 3.  benefit  Class  The  of Vessel  selection of a specific  transport  group i s a l s o  modern l i n e r externally  the  However, g r e a t e r  seller  less  s e c u r i t y means g r e a t e r traded  fragility  The s e l l e r ' s  off.  f a m i l i a r i t y w i t h t h e goods  him w i t h knowledge r e g a r d i n g and t h e r i s k s  occasioned  k n o w l e d g e o u g h t t o be r e v e a l e d  over the cost  cost  has a l i m i t e d c o n t r o l over t h e s e l e c t i o n o f  sold provides  specific  As one m i g h t e x p e c t , a  c a u s e d damage t h a n w o u l d a p r e - W o r l d War I I v i n t a g e  class of vessel.  being  This  important.  t h u s t h e two a r e f r e q u e n t l y The  class of vessel within the  p l y i n g t h e North A t l a n t i c would o c c a s i o n  tramp steamer. and  gained.  during  o f t h e p r o d u c t and t h e c o s t s  by  their transport.  the negotiation of transportation.  72 In  addition,  since the s e l l e r  have t h e o p t i o n class  with a c a r r i e r  using  he may  a better  of vessel. The  vessel  seller's  ability  to e f f e c t the selection of class of  i s l i m i t e d by t h e b u y e r ' s w i l l i n g n e s s t o pay t h e  additional costs  to contract  arranges the transport  costs  of transport.  of transport 4.  Vessels  Within than others  Within  a joint  c o n t r o l over t h i s  factor.  Class  a class of vessel  some v e s s e l s  have b e t t e r  records  i n t h e amount o f damage w h i c h o c c u r s d u r i n g  normal voyage. incentive  implies  The b u y e r ' s c o n t r o l o v e r t h e  S t e v e d o r e s and c r e w s may b e p r o v i d e d  and t r a i n i n g by t h e t r a n s p o r t  a  greater  company t o i m p r o v e  p e r f o r m a n c e a n d t h u s m i n i m i z e t h e i n e v i t a b l e bumps a n d s c r a p e s that  goods a r e s u b j e c t e d  to during  loading  and u n l o a d i n g .  i n c e n t i v e s a n d 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 incidents The  of negligence navigator  causing  The  i nthe  damage t o t h e g o o d s .  a n d m a s t e r may be e n c o u r a g e d 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 t h e  v o y a g e may be more e x p e n s i v e m e a s u r e d i n t i m e a n d f u e l ,  but i t  w o u l d r e d u c e t h e wear and t e a r on t h e g o o d s a n d t h e r i s k o f their  loss during To  the extent  the t r i p . that  the s e l l e r ' s  choice  of vessel  the  c l a s s i s n o t l i m i t e d by t h e buyer's u n w i l l i n g n e s s  for  superior  vessel.  service, the s e l l e r  The s e l l e r ' s  within t o pay  controls the choice of  knowledge o f t h e goods c o u p l e d w i t h h i s  73 experience  i n t r a n s p o r t i n g goods o u t o f l o c a l  h i m w i t h an a b i l i t y prevention  record  responsibility control  to select  available.  In a d d i t i o n ,  the  process.  determine the l e v e l  T h e l o c a t i o n and c o n d i t i o n  b e a r i n g on t h e e x p e c t e d  risks  placed  stowage i s l e s s  t o t h e goods.  risks.  available  to deteriorate Naturally,  deck  o f arrangements o f below deck  The q u a l i t y  This  i s especially  stowage  i n special  general  stowage.  in relation  of v e n t i l a t i o n  i n t h e stowage compartment  goods.  may  and  refrigeration  h a v e an i m p a c t on t h e  true of perishables.  compartments  to the  are usually  The c o s t s o f  greater than i n  The a c t u a l p l a c e m e n t o f t h e g o o d s h a s an i m p a c t . example, g o o d s on t h e b o t t o m o f p i l e s likelihood  than  expensive than t h e a l t e r n a t i v e s below deck.  Each possesses a c o s t / b e n e f i t  expected  a  o f t h e stowage has a  i n a stowage compartment.  There are a v a r i e t y stowage.  i s another  o f damage d u r i n g  Goods s t o w e d on d e c k a r e more l i k e l y goods s a f e l y  seller's  o f Stowage  f a c t o r w h i c h may  direct  loss  t o a r r a n g e t h e shipment p u t s him i n d i r e c t  The method o f stowage on b o a r d t h e v e s s e l  transit.  provides  the vessel with the best  o f t h e d e c i s i o n making  5. Method  ports  have a  greater  o f b e i n g c r u s h e d t h a n do g o o d s a t t h e t o p .  For  74  Since carriage,  t h e s e l l e r has t h e r e s p o n s i b i l i t y he o u g h t t o be r e s p o n s i b l e  t o arrange the  f o r t h e t y p e o f stowage.  However, t h e b u y e r may be u n w i l l i n g t o p a y f o r s u p e r i o r stowage i f t h e r e t u r n does n o t j u s t i f y t h e e x p e n d i t u r e . 6.  Valuation  Valuation direct that  impact  under t h e C a r r i a g e  By W a t e r A c t h a s  on a n t i c i p a t e d damage.  the carrier's  responsibility  a minimum some n e g l i g e n c e .  The r e a s o n  forthis i s  must be b a s e d on s h o w i n g a t  Negligence i s always unexpected.  However, s i n c e a r e a l i s t i c  valuation  carrier  h i s own n e g l i g e n c e ,  an i n s u r e r a g a i n s t  little  o f t h e g o o d s makes t h e a  realistic  v a l u a t i o n may e n c o u r a g e t h e c a r r i e r t o e x e r c i s e  greater  over t h e goods.  T h i s may r e d u c e t h e l i k e l i h o o d  o f any damage  occurring  transit.  The  during  s e l l e r o u g h t t o be r e s p o n s i b l e  makes t h e c o n t r a c t raises  the costs  justified damage.  simply  7i  The  of the carriage. t o provide  Although,  additional  with the c a r r i e r .  carriage  level  Hence, t h i s  an i n d i r e c t  valuation  c o s t may be  c o n t r o l on a n t i c i p a t e d  costs. Durability  o f p a c k a g i n g and i n h e r e n t  g o o d s h a s an i m p a c t on damage. occurs during  A realistic  s i n c e he  t h e b u y e r may be u n w i l l i n g t o p a y t h e  P a c k a g i n g and level  forvaluation  care  The l e v e l  durability  of the  o f damage w h i c h  a v o y a g e may be d e c r e a s e d b y i m p r o v e m e n t s i n t h e  o f p a c k a g i n g and d u r a b i l i t y .  75 The their  s e l l e r has e x c l u s i v e c o n t r o l o f t h e goods  preparation  opportunity  fortransit.  t o provide  ensure a t r a n s i t  during  Thus, t h e s e l l e r h a s t h e o n l y  sufficient  f r e e o f any t y p e  packaging  and d u r a b i l i t y  to  o f damage.  However, t h e c o s t o f a d d i t i o n a l p a c k a g i n g  and  durability  w h i c h w o u l d e l i m i n a t e o r r e d u c e a n t i c i p a t e d damage a d d s t o t h e cost  o f t h e goods.  protection reduction 8. The  t h a t c o s t s more t h a n  i t i s guaranteed t o r e t u r n i n  o f damage.  I n s p e c t i o n and M i t i g a t i o n buyer i s the only party present  transit. the  The b u y e r may be u n w i l l i n g t o p a y f o r  a t t h e end o f t h e  T h u s , he h a s t h e e x c l u s i v e o p p o r t u n i t y  goods and t a k e  whatever a c t i o n i s necessary  to inspect  t o salvage  them. This provides  t h e buyer with  has been a t f a u l t  an a b i l i t y  the  carrier  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  f o r any damage t o t h e g o o d s .  i n c e n t i v e t o improve i t s o v e r a l l presumably reduce t h e l e v e l  t o determine i f  the carrier  performance which would  o f damage.  I n a d d i t i o n , i f t h e g o o d s h a v e become u n s u i t e d original  with  p u r p o s e due t o damage s u f f e r e d d u r i n g  buyer i s i n the best p o s i t i o n  t h e voyage, t h e  to mitigate the loss. o f buying  That i s ,  the  buyer being  for  r e s a l e o r f u r t h e r manufacture i s i n t h e best p o s i t i o n t o  sell  i n the business  for their  goods which a r e below t h e s t a n d a r d  the s p e c i f i c  he r e q u i r e s .  goods  76  Moreover, t h e buyer presumably has l o c a l markets i n h i s area damaged  and t h u s  knowledge  regarding  i s better suited to resell  goods.  9. Remedy Closely  associated with  the physical positioning of the  buyer a t t h e end o f t h e t r a n s i t best be  opportunity  i s the fact  t h a t he has t h e  t o s e e k a remedy a g a i n s t t h e c a r r i e r .  very  difficult  f o r the s e l l e r to institute  against  a carrier  due t o p r o b l e m s o f j u r i s d i c t i o n  of  process.  I t may  a law s u i t and s e r v i c e  The b u y e r ' s advantage i s t h a t t h e c a r r i e r  damaged g o o d s a r e i n t h e same p l a c e a t t h e same  and t h e  time.  M o r e o v e r , u n d e r many d o m e s t i c m a r i t i m e l a w r e g i m e s , t h e owner o f g o o d s h a s 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 g o o d s d u r i n g t r a n s i t . is  As t h 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  supervision,  of procedure  level of  presence a t the point of d e l i v e r y i s very  important. 10.  type  Summary  of Risk  Factors  77 BUYER  BUYER AND SELLER  1.  1. C l a s s o f V e s s e l  Distance  2. Time o f Year  2.  Durability  3.  3.  Packaging  Inspection  4. M i t i g a t i o n  4. Stowage  5. Remedy  5.  Valuation  SELLER  1. S p e c i f i c Carrier  78 CHAPTER F I V E ANTICIPATED DAMAGE A.  The O p t i m a l The  p a r t i e s cannot  to the fact certainty. as  that  insure against  i t s occurrence  a n t i c i p a t e d damage due  i s by d e f i n i t i o n  The c o n c e p t o f i n s u r a n c e  1 6 8  t h e event  self  Model  i s a probability.  insure or to obtain t h i r d  a  i s only v a l i d  as long  Thus, t h e p a r t i e s * c a p a c i t y t o party  insurance  i s not  relevant. Since controlled,  the occurrence the only  lower t h e incidence when i t d o e s o c c u r . responsible provides  efficient  This  c a n n o t be  completely  way t o d e a l w i t h  of i t s occurrence i s achieved  f o r f a c t o r s under t h e i r  risk  and t o r e d u c e i t s impact by making p a r t i e s  exclusive control.  This  Decreasing  Risk  and i m p a c t o f t h e r i s k .  o f Occurrence  T h e r e a r e two s e t s o f f a c t o r s w h i c h b e a r on of the risk.  The f i r s t  decreasing  the  occurrence  the  e x p o s u r e o f t h e goods t o hazardous c o n d i t i o n s .  includes the factors of distance, vessel,  i sto  a n i n c e n t i v e t o t h e p a r t i e s t o a c t i n ways w h i c h  decrease the occurrence  1.  of the r i s k  durability,  packaging,  s e t deals with  time o f year,  specific  carrier,  reducing  This set  class of s t o w a g e and  . S a s s o o n , D a v i d M. "Damage R e s u l t i n g From N a t u r a l Decay U n d e r I n s u r a n c e , c a r r i a g e a n d S a l e o f Goods C o n t r a c t s " ( 1 9 6 5 ) , 28 Modern Law R e v i e w 180, p . 180.  79 valuation. place set  The  second s e t d e a l s  to discriminate  against  i s composed o f t h e Distance,  routes  some i n f l u e n c e on  the  of t h e i r  carrier  and  f r o m whom t o p u r c h a s e g o o d s h a v e an  i n f l u e n c e , the  buyer i s saddled  e f f e c t s of these decisions  seasonal  basis  The  with the  and  during  distance  increased  the  carriage,  costs  anticipated  with the  the  damage p r o v i d e s  theoretical  capacity  deterioration.  to eliminate  However, as  vary  c o n t r o l l e d through the  is,  increase  durability  i s p a s s e d on  cost  t o the  f o r the  added p r o t e c t i o n ,  provide  i t .  Hence, an  factors will  regarding  not  saddled risk  the  seller  buyer. seller  a l l o c a t i o n of  of  with  the  of  the  anticipated factors  sharing.  of packaging  I f he  refuses  obviously  will  to  are  That or pay  not  r e s p o n s i b i l i t y because  l e a d t o a more e f f i c i e n t  anticipated deterioration.  be  disincentive.  process of cost  to the  will  involving  f a c t o r s which have risk  a  long  sales  Adding the  the  risk.  on  i n d i c a t e d above, t h e s e  jointly  i n the  In  even g r e a t e r  d u r a b i l i t y are  the  i n general  buyer i s already  an  o f when  seller.  i s that buyers  w i n t e r months.  To  responsibility for  his costs w i l l  of t r a n s p o r t a t i o n .  P a c k a g i n g and  these  i m p a c t on  from p u r c h a s i n g goods f o r d e l i v e r y o v e r  distances  any  buyer's d e c i s i o n s  l o c a t i o n of the  consequence of t h i s  deterred  long  and  f a c t o r s which have  o c c u r r e n c e o f a n t i c i p a t e d damage.  extent  the  This  factor.  time of year are  the  However, i f t h e  market  poor performing c a r r i e r s .  specific and  with s t i m u l a t i n g the  outcome  of  80 The within  factors  specific carrier  t h e c l a s s b e a r d i r e c t l y on d e c r e a s i n g t h e r i s k o f  anticipated controlled That  o f c l a s s o f c a r r i e r and  deterioration.  The  and t h u s s u f f e r s  former f a c t o r  from a problem d i s c u s s e d  i s , t h e b u y e r must a g r e e on an i n c r e a s e  transportation  before the s e l l e r w i l l  higher quality c a r r i e r . anticipated  is jointly above.  i n the cost  of  be w i l l i n g t o p u r c h a s e a  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  d e t e r i o r a t i o n b a s e d on t h i s f a c t o r w o u l d  be t o no  avail.  The  choice of the s p e c i f i c c a r r i e r i s another matter.  Within a given cost available  for hire.  structure The  on a number o f c r i t e r i a  seller's  The  deterioration  with records of high  be weeded o u t o f t h e  final  factors  incidents  i n t h i s c a t e g o r y o f stowage  The  shipment. carriage,  will  Since the buyer the s e l l e r  An  increase  c a n n o t p u r c h a s e an  without the concurrence of the buyer.  as p a r t  i n the q u a l i t y of  e n t a i l an i n c r e a s e i s responsible  and  deterioration  a r r a n g e s s t o w a g e and v a l u a t i o n  of transport.  stowage o r v a l u a t i o n  of h i s r i s k .  industry.  as w e l l .  arrangement  be  o f damage t o  b e a r on t h e p r e v e n t i o n o f a n t i c i p a t e d  his  responsible  the s e l l e r w i l l  valuation  seller  based  relationship,  t o b a s e t h e c h o i c e on t h e r e d u c t i o n  vessels  goods w i l l  historical  By m a k i n g t h e s e l l e r  for the r i s k of a n t i c i p a t e d  Thus,  c h o i c e o f c a r r i e r may  including  promotion or a d v e r t i s i n g .  encouraged  a number o f c a r r i e r s a r e  i n the cost  f o r the cost  increase  of  of  in quality  of  81  2.  Decreasing  The action it  consequences of the  on  t h e p a r t o f one  i s economically  continuing  and  or both  i n the  buyer's p o s i t i o n  impossible  a d v a n t a g e by his  be  m i n i m i z e d by  of the p a r t i e s .  p o s s i b l e t h e damage must be  f o r the  at the  seller  maintaining  fast  First,  stopped  i f  i f  g o o d s o u g h t t o be  sold  at  circumstances.  t h e most a p p r o p r i a t e p o s i t i o n be  Damage  damage may  r e p a i r e d . Second, t h e  the highest value  The  Consequence o f t h e  end  of t r a n s i t  to e f f e c t  both  him  goals.  to d u p l i c a t e the  a presence at the  puts  in  I t would  buyer's  location  of each  of  buyers. The  buyer's e x c l u s i v e opportunity  upon t h e i r  arrival  action to prevent g o o d s may  be  the  be  by  for  drying.  goods  immediate W a t e r damaged Ripening  refrigerated.  b u y e r ' s s u p e r i o r knowledge o f r e p a i r f a c i l i t i e s  opportunity  to salvage  D u p l i c a t i o n by and  the  the buyer with  s e l l e r would r e q u i r e t r a v e l  responsibility  with  e i t h e r negotiate with  the  seller  value.  to the  local  buyer's  facilities.  f o r immediate a c t i o n t h e  i n t e r c e d e t o p r o t e c t the goods. regarding  The  and  the  damaged g o o d s a t t h e i r b e s t  t i m e t o become a c q u a i n t e d  Without the would not  opportunity  c l e a n i n g and  markets at h i s l o c a t i o n provides  location  i n s p e c t the  f u r t h e r damage t o t h e g o o d s .  salvaged  p e r i s h a b l e s may  The  provides  to  buyer  buyer would  consideration for  82 his In  services  or back o f f from the  e i t h e r case the 3.  risk  between the The  of  f a c t o r s which are of v e s s e l , the  total  t h e r e are  stowage, v a l u a t i o n , r i s k was  second  passed  on  risk.  inspection carrier.  the  i s that  and  mitigation.  will  be  third  local  an  the  unequal  other,  the  other of  the  control  severity  the  of  routing,  specific  f o r the  risk  care  over  buyer i s saddled with the  risk  buyers  control.  w h i c h may  distort  purchasing  encouraged to purchase l o c a l l y .  possible,  and  If  treatment.  time of year,  responsible  class  durability.  seller controls  solely  a seasonal basis.  of universal  They are  o c c u r r e n c e and  distance,  The  incentive  purchase i s not  or  risk  exercising  B u y e r s w o u l d be  p u r c h a s e on interest  to  i s i f the  provided  behavior. a  party  incentive  receive  the  f a c t o r s under t h e i r  The  number o f  party  divided  this.  b o t h p a r t i e s have e x c l u s i v e  buyer c o n t r o l s  M a k i n g one  risk  a great  one  c o n t r o l may  The  decreases the  reasons f o r  p a c k a g i n g and  to  over f a c t o r s which i n f l u e n c e the  four  o u g h t t o be  under both p a r t i e s ' c o n t r o l .  f a c t o r s under j o i n t The  deteriorate.  deterioration  There are  i s that  remedy.  Risk  anticipated  parties.  first  seek a l e g a l  goods would c o n t i n u e t o  D i v i s i o n of the  The  sale to  buyers would t e n d  Neither behavior  continuous  trade.  to  is in  the  If  83 The fact for  fourth reason f o r a d i v i s i o n  that  i n most c a s e s t h e c a r r i e r w i l l  a n t i c i p a t e d damage.  internalizing  Thus,  i s b a s e d on t h e  n o t be h e l d  o f low l e v e l s  of this  t y p e o f damage.  This  first  i s only  over the  perfectly  o f t h e r i s k may be e f f e c t e d b y two d e v i c e s .  i s t o r e q u i r e o n l y an approximate p e r f o r m a n c e  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  conform  purpose  t o require only general  f o r w h i c h t h e y were i n t e n d e d .  a lower l e v e l  o f performance  account the f a c t  deterioration  from  t h e goods  at the conclusion of the t r a n s i t , the  o p t i m a l model o u g h t  into  upon  of the carrier.  A division The  on t h e p a r t  i s t o make t h e s e l e c t i o n p r o c e s s d e p e n d e n t  a c c o m p l i s h e d b y m a k i n g t h e s e l l e r b e a r some r i s k hiring  liable  t h e o n l y method o f  t h e c o s t o f a l a c k l u s t e r performance  of t h e c a r r i e r a record  of risk  fitness  The r e s u l t  on t h e p a r t  t h a t t h e goods w i l l  f o r the  of requiring  of the s e l l e r suffer  takes  some  i n transit.  The b u y e r knows a t t h e o u t s e t t h a t t h e g o o d s when t h e y arrive  at h i s location will  description. requires  Thus,  The any  anticipated  high l e v e l  provide a description o f performance  that  which  e v e n an  s e r v e h i s needs.  second d e v i c e  conform t o t h e i r is  t h e buyer w i l l  a sufficiently  approximation w i l l  only approximate t h e c o n t r a c t  i s t o make t h e s e l l e r  responsible f o r  d e t e r i o r a t i o n w h i c h makes t h e g o o d s f a i l t o approximate d e s c r i p t i o n .  t o make t h e b u y e r ' s r i g h t  Coupled with  t o receive approximately  this  84 c o n f o r m i n g g o o d s a damage r i g h t i n s t e a d If  the  buyer i s provided the  suffered  from a n t i c i p a t e d  performance, then the mitigator B.  The  would not Sale of  The  defined  taken i n t o  Goods A c t  deterioration  in section  and  as  the  and  Common Law  i n t o two  Murrell  defined  the  internal  Ltd.  v.  i s highlighted  cause i s the  Although a sales Justice  itself.  i n the  is  the  second  internal  to  Mash, J. an  seller:  1 7 0  requires  require  d e f e n d a n t s J o s e p h I . Emanuel L t d .  that  perfect  conformity,  standard  Instead, His  of  the  Lordship  . [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 g r o u n d s i n t h e C o u r t o f A p p e a l ; [1962] 1 A l l E. R. 770) 1 V 0  .  I b i d , p.  866.  is  cause.  case of Diplock  1 6 9  be  warranty not merely t h a t they a t t h e t i m e t h e y a r e p u t on t h e s h a l l be i n s u c h a s t a t e t h a t t h e y j o u r n e y and be i n a m e r c h a n t a b l e l.  contract  D i p l o c k d i d not  The  d e t e r i o r a t i o n due  r e s p o n s i b i l i t y of  . . . t h e r e i s an i m p l i e d s h a l l be m e r c h a n t a b l e v e s s e l , but t h a t they can endure the normal c o n d i t i o n upon a r r i v a  Mr.  transit  anticipated  first  d e t e r i o r a t i o n which can  J o s e p h I . Emanuel L t d '  rule that  necessarily  The  d e t e r i o r a t i o n w h i c h r e s u l t s f r o m an  and  the  divide  categories.  includes  events of  category  approximate  Model  defined  latter  that  account.  to  This  right.  superior  attributed as  the  37  r e j e c t goods  buyer's capacity  be  a property  d e t e r i o r a t i o n b e y o n d an  S a l e o f Goods A c t  incidental  right to  of  85 required the  only merchantability.  Merchantability  requires  that  goods be o f a q u a l i t y c a p a b l e o f s a l e under t h e 171  description. In c o n t r a s t , be  t h e former category,  d e t e r i o r a t i o n which can  a t t r i b u t e d t o the events o f the t r a n s i t  responsibility old  but s t i l l  Forty years  o f t h e buyer.  i s the  rule i s illustrated  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 .  before  Exchequer Court seller  This  itself,  the Sale  1 7 2  o f Goods A c t was e n a c t e d t h e  i n B u l l v. Robinson decided  takes the r e s p o n s i b i l i t y  buyer bears the r e s p o n s i b i l i t y occurring during  by t h e  t h a t e v e n when t h e  f o r r i s k during  transit, the  foranticipated deterioration  a normal t r a n s i t  due t o t h e c o u r s e o f t r a n s i t  itself.  The  c a s e i n v o l v e d hoop i r o n w h i c h r u s t e d  unmerchantable s t a t e during to Liverpool during fact  t h a t no i r o n  winter.  could  a c a n a l voyage from S t a f f o r d s h i r e The Exchequer c o u r t  survive a winter  w i t h o u t r u s t i n g t o t h e same e x t e n t Court held that the s e l l e r impossible  to a  could  trip  that this  found as a  on t h e c a n a l s iron did.  The  n o t be e x p e c t e d t o do t h e  a n d d e l i v e r c o n f o r m i n g hoop i r o n b y c a n a l i n  midwinter.  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 L o n d o n : S t e v e n s & S o n s , 1966, p . 141. ± , ±  1 7 2  .  (1854),  1 7 3  .  I b i d , p . 344.  o f Goods. 2nd. e d .  10 E x c h e q u e r R e p o r t s 341 ( E x c h e q u e r  Court)  86 The of  Court's r a t i o n a l  was b a s e d  t h e r i s k s when he c o n t r a c t e d .  assumption  that  probable state  t h e buyer ought of the iron  Apparently  this  experience  in travelling  after  1 7 4  a l l the  t o buy t h e goods.  t h e C o u r t made t h i s  the  that  paid  such a t r a n s i t .  f r o m h i s home i n L i v e r p o o l  knowledge o f t h e r i g o r s  transit.  T h e C o u r t made t h e t o h a v e b e e n aware o f t h e  seller's fact  knowledge  a w a r e n e s s s h o u l d h a v e come f r o m t h e b u y e r ' s  way t o S t a f f o r d s h i r e  Further,  on t h e b u y e r ' s  assumption of the t r i p  ignoring the and i n s p i t e o f  t h e s e l l e r had agreed t o a c c e p t t h e r i s k s o f  Presumably  t h e b u y e r n e g o t i a t e d w i t h t h e s e l l e r and  f o r the privilege  of receiving  c o n f o r m i n g goods i n  Liverpool. 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 Sale 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 o f t h e c a u s e o f t h e damage in  order t o allocate  Murrell  anticipated  responsibility stated the  i n B u l l v. Robinson,  7  4  .  Ibid  A c c o r d i n g t o Mash a n d  damage due t o i n t e r n a l  of the s e l l e r .  responsibility  1  responsibility.  causes  i s the  Whereas, a c c o r d i n g t o t h e r u l e  externally  o f t h e buyer.  caused d e t e r i o r a t i o n  is  87 C. C o m p a r i s o n Models  of the Sale  1. G e n e r a l  model. which  caused  That  conformity a cause warranty  t h e Mash & M u r r e l l  i s responsible  except  for  to the  optimal  f o r a l l damage  from t h e goods m e r c h a n t a b i l i t y  external  or  approximate  i n s i t u a t i o n s where t h e damage r e s u l t s f r o m t o t h e goods.  The  remedy f o r b r e a c h  i s damages i n s t e a d o f r e j e c t i o n .  responsible  Optimal  formulation  deterioration i s identical  i s , the s e l l e r  detracts  The  Comparison  Interestingly, internally  o f Goods A c t and  The  buyer i s  f o r t h e d i f f e r e n c e between t h e p e r f e c t  (conforming state)  and t h e a p p r o x i m a t e  state  of  state  (merchantable  state). The optimal  d i f f e r e n c e between t h e S a l e model c o n c e r n s t h e e x i s t e n c e  i n the former.  In the B u l l  o f Goods A c t and of the causal  s i t u a t i o n the buyer  distinction  i s responsible  f o r a n t i c i p a t e d damage c a u s e d by t h e c a r r i a g e .  Under  formulation  a  each  deterioration  and  every time a court  case, a d i s t i n c t i o n  decides  i s made b a s e d  the  this  on t h e  cause  o f t h e damage.  Making t h i s d i s t i n c t i o n in  the B u l l  determined external  i s very  d e c i s i o n , the Exchequer that the iron rusted  causes.  been r e s p o n s i b l e  due  difficult.  For  example,  Court could  have  to internal  instead  easily  T h u s , on t h a t b a s i s t h e s e l l e r w o u l d f o r the r u s t i n g of the  iron.  of have  88 2.  Legal  The decision  C l a r i t y a n d C o n f o r m i t y t o Common E x p e c t a t i o n  risk rule lacks  f o r m u l a t i o n as i l l u s t r a t e d  legal clarity.  c o r r e s p o n d t o t h e common The  i t does n o t  expectation.  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 b a s e d on c a u s a t i o n  complicates the rule.  I t i s very d i f f i c u l t  between d e t e r i o r a t i o n of  In addition,  i n the Bull  deterioration.  to distinguish  caused by t h e t r a n s i t and o t h e r  Generally,  anticipated  deterioration i s  c a u s e d b y a n i n t e r a c t i o n o f a number o f f a c t o r s . these to  factors  are related  t h e goods.  fragility carriage  a n d some a r e r e l a t e d  may i n t e r a c t w i t h an i n f e r i o r a r r a n g e m e n t o f t o c a u s e damage t o t h e g o o d s .  Thus,  attributing  t o a n y one c a u s e i s v e r y d i f f i c u l t .  Moreover,  do s o i n some c a s e s may be i m p o s s i b l e . The  exercise  o f attempting t o p r e d i c t  causes o f a n t i c i p a t e d ante g r e a t l y addition,  deterioration  increases  and a c c o u n t  the uncertainty  increases  the costs  f o r them ex  of a contract.  of resolving  A n o t h e r component o f t h e c l a r i t y Goods A c t r u l e  research  the potential  In  i s o l a t i n g c a u s e s o f damage a f t e r a l o s s h a s b e e n  discovered  of  Some o f  F o r example, a r o u g h v o y a g e a n d s p e c i a l  responsibility to  to the carriage  causes  forces  issue  d i s p u t e s ex p o s t . i s that  the Sale  t h e b u y e r t o engage i n c o s t l y  i n o r d e r t o p r e d e t e r m i n e t h e e x p o s u r e o f good t o  anticipated  damage.  I n t h e B u l l c a s e f o r example, t h e b u y e r  obviously thought that  t h e hoop i r o n w o u l d a r r i v e  i n a usable  89 form.  O t h e r w i s e he w o u l d n e v e r h a v e p u r c h a s e d  it.  p o s s e s s i n g a g r e a t e r a w a r e n e s s o f h i s p r o d u c t may that  t h e i r o n would not s u r v i v e the t r i p  However, he the  a p p a r e n t l y was  under  seller  h a v e known canals.  no d u t y t o d i s c l o s e t h i s  of view  o f businessmen  comes a s a b i t o f a s u r p r i s e . d i s t i n c t i o n s may law.  sense.  To t h e b u s i n e s s m a n T h e y do n o t a s s i s t  The  fact  that  the r u l e  i n Bull  Basing r e s p o n s i b i l i t y  seem a r b i t r a r y  nor t o the r e s o l u t i o n  on  c a u s a l d i s t i n c t i o n s make  i n the p r e d i c t i o n  of r i s k s  ex  of  anticipated  damage when t h e s e l l e r  knows more a b o u t  the  p r o d u c t and  arranges the t r a n s i t  p e r s o n who risk  due  i s also  possesses the best a b i l i t y  o f nonperformance.  appears  t o causes  surprising  The  t o p e r f o r m ought  seller  arranges the  to the transport.  to  the bear  has g r e a t e r  t o have a s u p e r i o r a b i l i t y  related  t o the  common b u s i n e s s s e n s e d i c t a t e s t h a t  f a m i l i a r i t y w i t h t h e p r o d u c t and T h u s , he  ante  o f d i s p u t e s ex p o s t .  the buyer  First,  with  little  t o bear the r i s k  businessman.  causal  to traders unacquainted  ought  the  to  buyer.  From t h e p o i n t  the  on t h e  The  transport.  to prevent  Second,  losses  businessmen  count  on t h e p r o p e r w o r k i n g  which  enhance t h e o p e r a t i o n o f t h e market g a i n t h e i r h i g h e s t  acceptance.  Relieving the s e l l e r  choice of t r a n s i t of  o f a c o m p e t i t i v e market.  t h e market.  company d e t r a c t s  of r e s p o n s i b i l i t y  Rules  for his  from t h e o p t i m a l o p e r a t i o n  Thus s u c h a r u l e w i l l  find  little  acceptance.  90 3.  Reduction of Avoidable  The r u l e avoidable  losses.  anticipated incentive risk and  i n Bull  Since the s e l l e r i s not responsible f o r  carriers  of occurrence. install  does n o t promote a r e d u c t i o n o f  deterioration  to hire  c a u s e d b y t h e t r a n s i t he h a s no and a r r a n g e stowage t o r e d u c e i t s  N o r i s he p r o v i d e d  durability  i n Marsh & M u r r e l l .  the  t o package  damage.  Moreover, t h e u n c e r t a i n t y causal d i s t i n c t i o n  incentive  i n s u c h a way a s t o r e d u c e t h e  occurrence of anticipated  to  Losses  dilutes That  as t o r e s p o n s i b i l i t y  the incentive  due t o t h e  p r o v i d e d by t h e r u l e  i s , t h e s e l l e r may be l e s s  inclined  p r o p e r l y p r e p a r e t h e g o o d s i f he f o r e s e e s c o n f u s i o n responsibility  f o r damage.  over  91 CHAPTER  SIX  UNANTICIPATED THIRD PARTY DAMAGE A.  The  Optimal  The  risk  resulting sale.  Model  o f t h i r d p a r t y damage i s a r i s k  from a c t i o n s of p e o p l e o t h e r  Although the  eliminate this  b u y e r and  r i s k they  can  the  of  harm  than the p a r t i e s to  seller  cannot  t o some e x t e n t  the  economically  decrease i t s  severity. The the  first  priority  optimal  offending parties' actions.  ensuring  that behavior  goods w h i l e party.  1 7 5  in transit  The  1.  t o be  The  harm o n c e t h e  o f harm by  has  the long  value  f o r the  . Analysis. 1 7 5  i n the  the  on  the  responsible  i s to minimize  the  g o o d s h a v e b e e n damaged.  capacities to  carrier. as t h e y  c o n t r o l o v e r two  reflected  enforce  A l l the c a p a c i t i e s are n o n c o n f l i c t i n g .  f a c t o r s which  They a r e  h i r e of c a r r i e r s  g o o d s be  effect  by  Damage  c a r r i e r ' s harmful a c t i v i t i e s .  discriminate  c o n t r o l of  i s accomplished  i s i n t e r n a l i z e d by  e x e r c i s e d as  seller  model i s t h e  a negative  p a r t i e s possess d i f f e r e n t  internalization should  which has  I n t e r n a l i z a t i o n of the  The  This  model's second p r i o r i t y  consequences of the  the  of the  and  i n the  the  internalize  capacity  require that a shipping  to higher  documents.  H i r s c h W.Z. Law and E c o n o m i c s An I n t r o d u c t o r y New Y o r k : A c a d e m i c P r e s s , 1979, p. 18.  92 The  b u y e r has  That  i s , the The  capacity  seller's  c a r r i e r has effect  superior  will  The  reduce the  effect  carrier  and  general  has  the  of  p r o b a b i l i t y of  effects.  not  during  h i r e of  The  to hire possess the  the  vessels good  goods  will  transit.  This  The  seller's  seller's  capacity  choice  of  selects  only  vessels with superior poorly  to  carrier  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 .  u l t i m a t e l y d r i v e the  a  specific  provide  will  factor.  harm.  e f f e c t concerns the  c a r r i e r market.  i n the  capacity  care  important  f o r damages.  to discriminate  o v e r t h o s e w h i c h do  standard  general  the  seller  the  very  obvious consequence i s t h a t  a higher  The  sue  both s p e c i f i c  w i t h good r e c o r d s  receive  to  capacity  i s that the  records.  c o n t r o l o v e r one  performances, those  performing vessels  If  he  vessels  out  of  business. The in  the  seller's  shipping  behavior. the  an  However, due  valuation  only  of  that  the  stowage o f the  goods.  value  of the  carrier  i s only  during  the  goods  carrier  v o y a g e and  to  goods. liable  carriage,  i n c e n t i v e t o make t h e  onset of the  on  s t a t u t o r y p r e s u m p t i o n makes  full the  value  l i m i t e d e f f e c t on  harm o c c u r r i n g  provides  seaworthy a t the the  fact  any  only  above t h e  i n s u r e r f o r the  to the  portion  i n placing a high  documents has  A valuation  carrier  small  actions  a  for a  high  vessel  more  improve c a r e  over  93 The  damage i n t e r n a l i z i n g  is  his capacity  As  this  the  carrier  remedy has  capacity ability  t o sue  the  carrier i t can  losses  by  acts  and  the  the  carrier.  or  the  omissions,  b u y e r have  f o r damages.  be  of the  However, an  lawsuit  companies out  during  premiums h a s  the enhanced  done w i t h l o w e r t r a n s a c t i o n  making i n e f f i c i e n t  occurring  insurance  specific  a negative  general  of business.  c o m p a n i e s pay  transits.  The  costs  i s enhanced.  t o s e e k a remedy e f f e c t s t h e  forcing inefficient  achieved  seller  marginal value  Enhanced a b i l i t y by  remedy a g a i n s t  control  both a proper v a l u a t i o n of  committing  both the  means t h a t  thus the  buyer's  a l i m i t e d impact.  Naturally,  and  a legal  f a c t o r i s c o n t r o l l e d by  g o o d s and the  to obtain  f a c t o r under the  market  This  is  damage awards  r e s u l t i n g increase  e f f e c t on  accident  for in  prone  carriers.  The  capacity  responsibility categories. specific  use  f o r harm t o t h e  The  The  to put  of high  first  be  on  and  i n the  the  carrier  accessible  grouped  h i r e of  exercised  into  general  and  the  ability  of  the the  remedy.  requires  i s s h a r e d by that  the  capacities in  to ensure i n t e r n a l i z a t i o n .  i s f i n d i n g a s u i t a b l e mix  the two  to perform through  second category  Additionally, efficiency be  c a r r i e r bear  category concerns both the  pressure  valuation  both categories problem  g o o d s may  second category concerns the  Responsibility parties.  p a r t i e s t o make t h e  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  carriage. parties  of the  of r e s p o n s i b i l i t y .  The  94 Both p a r t i e s p a r t y damage.  cannot simultaneously bear t h e r i s k o f t h i r d  N o r c a n t h i s r i s k be b r o k e n down  c o m p o n e n t s w h i c h c a n be s h a r e d b y t h e p a r t i e s their a  capacities.  The a l t e r n a t i v e  s p e c i f i c performance t o e i t h e r The  s e l l e r ' s duties  transport  could  be s p e c i f i c a l l y  this  f o r t h e goods  i s to allocate the r i s k of  the buyer o r the s e l l e r .  defined  arrange r e l i a b l e transport  evaluating  to influence  f o r t h e goods.  actionable  is  the buyer's superior  and t o  Additionally, the  against  the c a r r i e r . ability  f o r damage c a u s e d  The j u s t i f i c a t i o n  to effect a legal  M i n i m i z a t i o n o f t h e Consequences  A major  factor  The b u y e r ' s s u p e r i o r i n making  controlled ability  him r e s p o n s i b l e  consequences  for this  remedy.  o f t h e Damage  to mitigate  damage w e i g h s  heavily  f o r the minimization of the  o f damage.  damage a r e c o n t r o l l e d o f stowage,  one p a r t y  which  by t h e b u y e r i s m i t i g a t i o n .  However, some o f t h e f a c t o r s  If  t h e market  t h e goods.  is  factors  documentation  The j u s t i f i c a t i o n f o r  The b u y e r o u g h t t o be r e s p o n s i b l e  of  a  c a n i m p r o v e t h e e f f i c a c y o f t h e remedy a s a t o o l b y  properly  2.  as r e q u i r i n g  and t h e c o r r e c t  t o be s h i p p e d .  i s the s e l l e r ' s a b i l i t y  seller  according to  under t h e h e a d i n g o f arrangement o f  reasonable s e l e c t i o n of vessel of value  into  class  jointly  b e a r i n g on t h e m i n i m i z a t i o n by t h e p a r t i e s ,  of vessel,  i s assigned exclusive  e.g., t h e  p a c k a g i n g and d u r a b i l i t y .  responsibility for  95 m i n i m i z a t i o n o f damage, t h e o t h e r ' s share o f the j o i n t The the  incentive  responsibility will  t o perform h i s  be d i m i n i s h e d .  s o l u t i o n t o t h e problem o f a l l o c a t i n g t h e residue  r i s k i s i t s d i v i s i o n between t h e p a r t i e s .  justification  f o r t h i s i s that  r i s k provides a disincentive proper  an e x c l u s i v e  The  assignment o f the  t o one o r t h e o t h e r p a r t y f o r  performance.  3.  Dividing  the Risk  A d i v i s i o n o f t h e r i s k between t h e p a r t i e s on  one o f two a p p r o a c h e s .  absolutely control.  responsible This  controlled no  the  a p p r o a c h assumes t h a t  risk left  a residual  other party  variable The  the  party  outlined  above.  That  i s , there i s  The second  i sto  and r e q u i r e  that  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 level.  former approach has t h e advantage o f e l i m i n a t i n g t h e r i s k of the t r a n s i t .  This  such as t h e t i m e o f r i s k p a s s i n g and  f a c t o r s w o u l d be  is  be b a s e d  a l l the r i s k i s  r i s k t o one o f t h e p a r t i e s  or a fixed  issues  This  i s t o make e a c h  t o be a l l o c a t e d .  assignment o f t h e r e s i d u a l that  The f i r s t  could  f o r t h e s p e c i f i c f a c t o r s under t h e i r  by t h e f a c t o r s  residual  assign  of  contributing  eliminated.  a p p r o a c h i s b a s e d on t h e a s s u m p t i o n t h a t  c a u s e d by an a c t i o n a b l e parties  proposition  means  to the sale i s that  failure  a l l damage  o f performance by e i t h e r  or the c a r r i e r .  The p r o b l e m w i t h  g o o d s may s u f f e r some c a s u a l t y  this  which i s  96 beyond t h e c o n t r o l o f e i t h e r t h e buyer o r t h e s e l l e r . example,  i f t h e ocean v e s s e l  sinks with  a total  For  loss of the  c a r g o a n d t h e s i n k i n g was n o t p r e d i c t a b l e b y e i t h e r t h e s e l l e r nor  t h e buyer, n e i t h e r p a r t y In t h i s  related  example t h e s o l e c a u s a l  to a risk  appropriate  c o u l d be h e l d  arrangement o f t r a n s p o r t .  during  However, i f t h i s unpredictable  transit.  s e c o n d a p p r o a c h r e q u i r e s two e v e n t s .  Second, t h e o t h e r  perform t o a predetermined  party  F i r s t , the  The residual  a general  standard.  buyer i s probably risk.  liability,  the superior  capacity to  loss.  t h e p a r t y who s h o u l d  bear the First,  since  o f damage a n d l o s s r a i s e t h e i s s u e o f c a r r i e r  t h e b u y e r ' 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  t h e c a r r i e r makes t h e d e l e g a t i o n  responsibility the  The r e s i d u a l a s s i g n m e n t  T h e r e a r e two r e a s o n s f o r t h i s .  most o c c u r r e n c e s  against  unpredicted  t o one  o u g h t t o be r e s p o n s i b l e t o  o u g h t t o be made t o t h e p a r t y w i t h deal with  every  a s a l e and d e l i v e r y .  a p p r o a c h r e q u i r e s an assignment o f t h e r e s i d u a l r i s k party.  events  T h i s w o u l d make  and arrangement o f d e l i v e r y c o n t r a c t The  factor  a n o c e a n , t h e s e l l e r w o u l d be i n e f f e c t t h e  i n s u r e r o f t h e goods d u r i n g sale  e l e m e n t w h i c h m i g h t be  f a c t o r c o n t r o l l e d b y a p a r t y w o u l d be t h e  was assumed t o c o n t r o l t h e r e l a t i v e l y which occur  responsible.  t o him e f f i c i e n t .  Second,  damage o r l o s s i s n o t a c t i o n a b l e  of this i n the event  against  that  the c a r r i e r , the  b u y e r ' 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 h i m t h e l i k e l y choice.  97 A number o f s p e c i f i c seller.  The  under h i s An  seller  risks  important  s h o u l d have r e s p o n s i b i l i t y  question concerns  Obviously,  such  the  t h e r e a r e two  or absolute r e s p o n s i b i l i t y  and  level  a lesser  individual  standards  case.  liable  In e f f e c t  shipment, the  has  f o r damage r e s u l t i n g  level  of packaging  t o w h i c h t h e g o o d s may  responsibility  may  not The  the  c a n be  standards. industrial s e t by  be  and  fixed  The  practice  standard  of  circumstances  of  the  seller o f one  of  f o r each  d u r a b i l i t y would have t o  subject.  number o f This level  potential of  information costs of on  t o t h e b u y e r and  the  they  l i a b i l i t y i s to set limits options  set according to either A  custom.  of the t r a n s a c t i o n .  to s t r i c t  performance.  strict on  the disadvantage  infinite  passed  efficiency  alternative  seller's  they  be  to the  based  form a f a i l u r e  g r e a t l y increases the  T h e s e c o s t s must be add  or  F o r example,  depend upon i n f o r m a t i o n about t h e  seller.  factors  i t w o u l d be m a k i n g t h e  f a c t o r s under h i s c o n t r o l .  risks  the  of required  standard  m a k i n g e a c h p e r f o r m a n c e d e p e n d upon t h e  the  for  to  possible levels,  as a degree of f o r e s e e a b i l i t y  Requiring absolute  strictly  assigned  control.  performance.  tests  o u g h t t o be  fixed  c o u l d be  o r custom.  for limits or  r e f e r e n c e t o some d e g r e e o f  that  determinable  g a u g e d by  Determinable  are  on  reference  standards  foreseeability.  to  might  98 A  f i x e d standard  has t h e advantage t h a t  throughout the industry. a n t e and i t s c o s t The that  taken i n t o account  i t may r e q u i r e  a high  i n the sale  degree o f e x p e r t i z e  negotiations.  of entering  existence  expertize  disadvantage o f t h e customary standard prove adequate t o p r o t e c t That  particularly  t o area.  may i n c r e a s e t h e  i n t o a s a l e s t r a n s a c t i o n and t h u s i t s  may d i s c o u r a g e new e n t r a n t s .  situation.  is  f o r i t s ex a n t e  Moreover, customs change from a r e a  acquisition of the required  costs  b e r e a d i l y e s t a b l i s h e d ex  p r i n c i p l e disadvantage o f a customary standard  determination. The  I t could  i t w o u l d be known  1 7 6  A  second  i s that  t h e goods i n e v e r y  i s , a customary standard  i t may n o t  transit  may n o t a c c o u n t f o r  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 e s o f goods.  A  standard  advantage the on  b a s e d on some f o r m o f f o r e s e e a b i l i t y h a s t h e  i n most c a s e s o f p r o v i d i n g  superior  protection for  g o o d s w h i l e a t t h e same t i m e n o t p l a c i n g a n o n e r o u s the seller.  standard,  T h e r e a r e two o p t i o n s  namely o b j e c t i v e  burden  to the foreseeability  and s u b j e c t i v e .  Each has  advantages and d i s a d v a n t a g e s .  The  objective  industrial  standard  standard.  That  more c l o s e l y a p p r o x i m a t e s an i s , i t requires  the s e l l e r to  p e r f o r m t o and t h e b u y e r t o e x p e c t t h e g e n e r a l  standard  i nthe  . S e e f o r example, W a r r e n , E . " T r a d e u s a g e and P a r t i e s i n t h e T r a d e : A s E c o n o m i c R a t i o n a l e f o r an I n F l e x i b l e R u l e " ( 1 9 8 0 - 8 1 ) , 42 U n i v e r s i t y o f P i t t s b u r g h Law R e v i e w 515. x  99 industry. known by  The the  seller  average s e l l e r  generally presents with  slightly  t o account  the  nor  economic p r o f i l e  for specific  s u b j e c t i v e standard  specific  i s he  as  a  customary  variables.  vary  T h i s may  seller.  durability.  reduces  almost  seller  specific  the t r a n s i t  into the  determines that the  The  The  t r a n s a c t i o n to zero. entrants  i s d e p e n d e n t upon t h e  r e q u i r e d to possess  product's  the  increase  standard  risks any  of the  industry.  i t presents  The  no  i s that  the  bar  to  new  seller  I t s disadvantage  t o d e t e r m i n e ex  ex p o s t .  research the  experience  of a s p e c i f i c  ante  In a d d i t i o n , i t  i n f o r m a t i o n c o s t s o f b u y e r s who  into  transit  standard  knowledge o f each  difficult  impossible to establish  acquire  knowledge about h i s  f o r performance.  w o u l d be  intended  information costs of  Further,  knowledge  required to  advantage of t h i s  risk  standard  i s not  increase the  may  is and may  have t o  s e l l e r before  entering  a transaction:.  Regardless industrial  of the  practice  would i n c r e a s e the  Each standard the  standard  c h o s e n by  eventually allows  a c u s t o m r e c o g n i z e d by  has  Thus, i t  e x c e p t i o n t h a t t h e p e r f o r m a n c e may  i n f o r m a t i o n about the  it  industry.  risks  information costs of the t r a n s a c t i o n .  The of  the  i n the  a similar  standard  the  i s responsible to protect against  common law.  speed o f the  f o r the  The  optimal  model,  establishment  objective standard  process.  p r o d u c e s i t s own  advantage of c e r t a i n t y  the  and  economic e f f e c t . thus  i t s use  would  Custom reduce  of  100 transaction  costs.  The  o b j e c t i v e standard  approximates the customary standard advantage of r e d u c i n g subjective costs  standard  avoidable  has  f o r s e l l e r s but  the  and  closely  provides the  added  l o s s e s i n unique cases.  advantage of zero  increases the  The  information  information costs for  buyers.  A reasonable standards  s o l u t i o n t o t h e c h o i c e between v a r i a b l e  i s to r e q u i r e the  standard.  This i s j u s t i f i e d  buyer's disadvantage by  requiring  of l o s s  seller  a higher  falling  decreased.  by  standard  residual  from the  residual  a higher  t o an o b j e c t i v e  t h e need t o m i n i m i z e  holding the  i n t o the  Further,  by  to perform  risk  risk.  seller,  the That i s ,  the  likelihood  of the buyer i s  standard  f o r the  seller  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 . Finally,  the  standard  f o r d u t i e s i n t h e common law  North B.  t h a t the  America w i l l The The  by  fact  the  be  S a l e o f Goods A c t allocation  of r i s k  S a l e o f Goods A c t  completes h i s performance.  1 7 7  .  to identify s.  25.  familiar-  businessmen i n  Model for third  p a r t y damage i s  i n s e c t i o n s 23,  N e i t h e r p r o p e r t y nor  seller  world,  i s the  f a m i l i a r with i t .  makes t h e p a s s a g e o f r i s k  the  o b j e c t i v e standard  and  property  risk The  25  and  coincidental.  can pass u n t i l duty  37.  the  covered The  Act  1 7 7  seller  of performance r e q u i r e s  the goods, p r e p a r e  t h e goods f o r  101 delivery  and g i v e  n o t i c e t o t h e buyer o f t h e completion o f  17 8 performance  .  A remarkable feature third  party  different seller are  risk  points  i s that  of the Sale  r i s k may p a s s t o t h e b u y e r a t  i n t h e t r a n s a c t i o n d e p e n d i n g u p o n when t h e  completes h i s performance.  ascertained  notice being  o f Goods A c t c o v e r a g e o f  and p r e p a r e d  given  F o r example,  f o r d e l i v e r y , r i s k p a s s e s upon  t o the buyer.  This  could  goods a r e i n t h e s e l l e r ' s warehouse o r w h i l e ocean c a r r i e r t o t h e ocean  The Sale  or i t could  i f t h e goods  occur  occur  while the  i n transit  to the  when t h e g o o d s a r e d e l i v e r e d  carrier.  situation  i s further complicated  o f Goods A c t w h i c h s u b d i v i d e  o f goods i n v o l v e d ,  risk  by p r o v i s i o n s  i nthe  based upon t h e c a t e g o r y  t h e t y p e 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 o f r i s k unascertained not  goods.  responsible  before  risk  i n specific  g o o d s may d i f f e r  from t h a t o f  In c e r t a i n circumstances the s e l l e r i s  f o r l o s s which occurs  has passed.  Section  goods p e r i s h w i t h o u t t h e f a u l t  without  11 p r o v i d e s  fault that  even  i f specific  of the s e l l e r before  risk  p a s s e s t o t h e buyer, t h e agreement i s a v o i d e d . T h i s p r o t e c t i o n f o r t h e s e l l e r makes t h e 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 o f c r i t i c a l  . s s . 23 (3) and ( 4 ) . T h e c o s t o f i n s u r a n c e 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 b u y e r s from e n t e r i n g t h e market. 1 7 8  and t h e deter  102 importance t o t h e passage o f r i s k defines at  specific  i n a sale.  The s t a t u t e  g o o d s a s "... g o o d s i d e n t i f i e d  t h e time a contract  o f s a l e i s made."- -' 1  3  a n d a g r e e d on  This  implies  specific  goods a r e t h o s e which e x i s t e d a t t h e t i m e t h e  contract  was made.  this  i f t h e buyer agrees t o purchase  t y p e o f goods, t h e s e l l e r ' s  responsibility An has  In effect,  inappropriate  the effect  risks  to exercise  on  the r i s k  board t h e v e s s e l .  forrisk  of carriage  f o r a l l the  t o pass t o the  i n the seller's  w a r e h o u s e and  In fact,  i n this  type o f s i t u a t i o n the  r i s k may b e h i g h e r  w h i l e t h e goods a r e  s e a t h a n when t h e g o o d s were s a f e l y i n h i s w a r e h o u s e .  must g i v e failure  notice  only  t o do s o w i l l  a reversion  proper transport,  o f pending ocean t r a n s i t  with the s e l l e r .  cause t h e r i s k  the s e l l e r  t o t h e buyer.  A  o f t h e voyage t o remain  As i n t h e c a s e above, t h i s  may r e p r e s e n t n o t  o f t h e r i s k b u t a l s o an i n c r e a s e d  risk  burden  the s e l l e r . Any  the  care.  t o r e t u r n t o t h e s e l l e r when t h e g o o d s a r e l o a d e d  In a d d i t i o n t o arranging  on  to a  arrangement f o r t h e c o n t r a c t  I t i s possible  scope o f t h e s e l l e r ' s at  i s limited  reasonable  b u y e r when t h e g o o d s a r e s t i l l for  risk  o f making t h e s e l l e r r e s p o n s i b l e  o f t h e voyage.  that  delay  i n d e l i v e r y w h i c h c a u s e s damage t o t h e g o o d s i s  responsibility  o f who h a s t h e r i s k  s.  of the party  causing  at that point  23 ( 2 ) .  the delay  i n time.  regardless  Delivery i s  103 defined  as t u r n i n g over  possession  of the  g o o d s . The  Goods A c t p r e s u m e s t h a t d e l i v e r y t o a c a r r i e r the  Sale  of  i s d e l i v e r y to  buyer. Hence,  i f f o r some r e a s o n  t r a n s f e r to the responsibility little  if  the  him  seller  already  Under t h e duty  durability, regards  the  contract with  seller will party  with  seller  against third  certainty. the  transfer  event.  However,  w e l l r e v e r t back  s e l l e r does not  the  to  for their  and failure  S a l e o f Goods  n e c e s s i t y o f making a and  have a  necessary  on p a c k a g i n g  Under the  f o r packaging party  to provide  liable  assuring  in Act  separate specific  damage.  S a l e o f Goods A c t  most p r o n o u n c e d c h a r a c t e r i s t i c  allocation  bears  in  and  the  Optimal  Model  Generally  The Act  the  n o t be  liability.  Comparison of the 1.  the  contract i s silent  the buyer i s saddled  C.  has  passed.  t o p a c k a g e t h e g o o d s and I f the  i n any  their  i s the  provision  r i s k might v e r y  S a l e o f Goods A c t  to third  protection  the delay  The  r i s k w o u l d p a s s t o him  i s at fault,  i f i t has  durability.  damage c a u s e d by  in  i f the buyer i s r e s p o n s i b l e f o r a delay  as t h e  specific  goods a r e d e l a y e d  of the p a r t y at f a u l t .  effect  delivery  carrier,  the  On risk  of the  risk  of t h i r d  many o c c a s i o n s  d e p e n d on  Sale of  Goods  damage i s i t s a b s e n c e  t h e p a r t i e s a r e unaware o f  at given p o i n t s i n time.  o f r i s k may  of the  The  a number o f  timing factors.  of  of who  104 The  reason f o r the uncertainty  is  the association  of risk  is  a complex s u b j e c t .  the  criteria  goods.  I t s passage  Property unlike  risk  o f goods i s dependent during a sale  on  i s b a s e d on  such as t h e t y p e and t h e p h y s i c a l  state of  R i s k on t h e o t h e r h a n d i s s i m p l y t h e  responsibility to  and p r o p e r t y .  The ownership  a number o f v a r i a b l e s . historic  i n t h e S a l e o f Goods A c t  be b a s e d  f o r damage t o t h e g o o d s .  on t h e a b i l i t y  to protect  Passage  of risk  t h e goods r a t h e r  ought  than  ownership.  In In  t h e o p t i m a l model, r i s k  fact  ownership  model.  Passage  from ownership  i s n o t mentioned  of risk  i s based  w h i c h may c a u s e damage, o r o n c e  o f t h e goods.  i n the discussion  on c o n t r o l  on t h e  over the factors  damage h a s o c c u r r e d ,  i t s  limitation. 2. L e g a l C l a r i t y The  a n d C o n f o r m i t y t o Common E x p e c t a t i o n  u n n e c e s s a r y c o m p l e x i t y o f t h e S a l e o f Goods A c t r u l e s  makes t h e l a w u n c l e a r . dependent  Not o n l y  i s t h e passage  upon t h e n a t u r e o f t h e goods and t h e i r  readiness but i t i s possible that f o r t h between t h e p a r t i e s . a s c e r t a i n e d goods which  risk  F o r example,  the  state of flop  b a c k and  i f the sale  involves  are prepared f o r d e l i v e r y ,  upon n o t i c e b e i n g g i v e n t o t h e b u y e r . seller  can f l i p  of risk  risk  passes  I f f o r some r e a s o n t h e  i s u n a b l e t o t u r n t h e g o o d s o v e r on t h e d e l i v e r y  risk  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 t h e g o o d s a r e l o a d e d on a n o c e a n v e s s e l pass u n t i l the s e l l e r n o t i f i e s  date,  the r i s k  cannot  t h e buyer o f t h e l o a d i n g .  105 Hence, e v e n a f t e r d e l i v e r y , i f t h e reason the  to notify  the  c o n t r o l of the  buyer, the  g o o d s has  seller  r i s k may  i f the  arrangement of t r a n s p o r t  the  of the  specific  until  the  buyer takes  f o r some  remain with  passes to a t h i r d  Finally, risk  fails  after  party.  i s not  reasonable,  voyage r e v e r t s back t o the  d e l i v e r y of the  him  goods i n t h e  seller port  of  destination.  Even a f t e r may  be  u n c e r t a i n t y as  r e q u i r e d by on  the  be  read  contract.  issue, the  The the  r i s k has  i n t o the  maintain  p a r t i e s may  not  aboard the  seller.  the  the  be  terms o f coverage,  determine the provide  this  events of the  o f Goods A c t  durability  and  the  is  silent have  f o r both  f o r both p a r t i e s to  time the and  goods  finally the  are  passed.  s e l e c t i o n of the  carrier  are higher  An  require a great  sale until  is  reasonable. and  information  The  goods a r e s a f e l y  c o s t s , both i n terms of a c q u i s i t i o n  r i s k t o be  to  disputes.  causes confusion  I t i s advisable  clearly  there  durability  t e r m s may  to resolve  c e r t a i n of t h i s u n t i l  b u y e r as  insurance  insurer w i l l  Sale  variability  r i s k has  buyer,  o f p a c k a g i n g and  coverage from the  ocean c a r r i e r  by  the  a g r e e m e n t ex p o s t  insurance until  The  Since  passed to the  level  p a c k a g i n g and  the  identified  accepted  to the  u n c e r t a i n t y and  b u y e r and  finally  due deal  covered. they  to the  uncertainty.  of d e t a i l  i n order  I f the p a r t i e s are  must r e m a i n i n v o l v e d i n  i t s conclusion.  s a f e a c e r t a i n amount o f e x c e s s i n s u r a n c e  in  to to the  A d d i t i o n a l l y , to  be  will  by  be  required  106 the  s e l l e r to cover  during the The fact two to  potential  f o r p r o b l e m s ex p o s t  insurance  o r more i n s u r a n c e deny l i a b i l i t y for  The  and  coverage.  c o m p a n i e s may  be  the  they  by  the  i s , with m u l t i p l e the  provided  an  p o i n t t o e a c h o t h e r as t h e  requirements.  Information  due  opportunity  appropriate  t h a t t h e p a r t i e s more c l e a r l y  amount o f d u r a b i l i t y . requirements  to the  costs are  Moreover, the  high  increased  d e f i n e the  goods i n v o l v e d i n t h e t r a n s a c t i o n , t h e t y p e  notice  of  by  type  packaging  seller's  various  i n c r e a s e h i s n e e d t o manage t h e g o o d s o n c e  l e a v e h i s warehouse.  B u s i n e s s m e n must f i n d Goods A c t risk  r u l e s t o be  only solution  the  rules. 3. R e d u c t i o n If the  the  complex n a t u r e  unusable.  The  i s unfathomable t o a l l but  The  of  That  p r o f i t a b i l i t y of s a l e s i s reduced  requirement  and  of  i s heightened  relief.  information the  r e v e r t back  transit.  of double  source  of  t h e p o s s i b i l i t y t h a t r i s k may  the  criteria  the  expert  f o r the legal  of Avoidable while  of  passage  advisers.  open t o b u s i n e s s m e n i s t o c o n t r a c t o u t  r i s k passes  of  Losses t h e goods a r e  s e l l e r , the buyer i s saddled with  which are not  of the Sale  i n h i s possession.  H a v i n g no  has  no  o p p o r t u n i t y t o p r o t e c t the goods.  has  no  knowledge o f t h e  seller's  the  i n the risk  possession of  control,  Moreover,  p h y s i c a l p l a n t and  goods the since less  buyer he  107 specific  knowledge o f t h e goods t h e m s e l v e s ,  opportunity lacks the The  to  i n t e r v e n e and  k n o w l e d g e t o do buyer's a b i l i t y  at a reasonable about the  price  specific  risks  seller.  allowing  the  Additionally, their  of the  by  h i s lack of goods.  since r i s k to the  The  the  insurance  knowledge only insurance  difficulty  of  monopoly.  g o o d s may  seller will  responsibility  have l e s s  the  buyer  f o r the buyer i s to purchase  to create a b i l a t e r a l  goods w i t h o u t  seller will  insure or acquire  f a c i n g the  d e l i v e r y t o the buyer, the  of the the  to self  This option presents  seller  goods, the  had  so.  i s hindered  economical a l t e r n a t i v e from the  p r o t e c t the  e v e n i f he  of t h e i r  pass  have  before  possession  safety.  incentive to provide  Thus,  for protection  goods.  The  optimal  possession.  model d o e s n o t  Further,  allow  even a f t e r passage, t h e  r e q u i r e s p a r t y performance according packaging,  r i s k to pass  before  optimal  to control  model  over  p r o v i s i o n of d u r a b i l i t y  and  arrangement of  T h r o u g h t h i s means, t h e p a r t y w i t h  the  superior capacity  possesses  the  duty  to  perform.  transit.  108 CHAPTER SEVEN UNANTICIPATED There durability  are several  r e a s o n s why  i s considered a r i s k  from t h e buyer's of  INTERNALLY  durability  caused  or packaging  The f i r s t  i s indistinguishable  location  to distinguish  by a t h i r d  may be u n a b l e  of packaging  p e r s p e c t i v e a t t h e end o f t r a n s i t ,  a t the buyer's  may be u n a b l e  a failure  of transit.  m a n i f e s t a t i o n o f any o t h e r r i s k . arrive  CAUSED DAMAGE  party.  That  a  and  i s that failure  from t h e  i s , when t h e g o o d s  i n a damaged s t a t e ,  a packaging  failure  t h e buyer  from  damage  Moreover, t h e i n e x p e r i e n c e d buyer  to distinguish  such a f a i l u r e  reason  i n many c a s e s  from  anticipated  damage. A second packaging damage  i s that  and d u r a b i l i t y  t o t h e goods.  durability  affects  and  A third  with other factors  I n many c a s e s t h e l e v e l  t h e amount o f damage,  d i s p u t e s ex p o s t may packaging  interact  failures  of causing  o f p a c k a g i n g and  and r e s o l v i n g  i n v o l v e j u d g i n g t h e adequacy o f t h e  durability. reason  i s that,  due t o e i t h e r  n o v e l p r o d u c t s o r t h e shipment  of existing  t h e shipment products  i n novel  ways, t h e s e l l e r may be unaware ex a n t e t h a t h i s g o o d s durability  o r packaging  s e l l e r may be w i l l i n g survive  intact.  relative  of  lack  t o the intended t r a n s i t .  t o take the " r i s k "  t h a t t h e goods  The  will  109 To some e x t e n t t h e durability  and p a c k a g i n g a r e  the  transit.  the  cost of  liable  for  That its  is,  lowered  is  In  addition,  the  service  damage.  is  that  costs associated with the  to  if  carrier there  One way t o  provide  the  interactive  A.  chance of  The O p t i m a l  are  to  reduce  being  risk  of  reflect  held  damage  durability.  t o p a y more f o r unharmed.  of  goods  Finally,  a decrease  in  risk  durability.  Model i s present  being prepared  opportunity  to  l e s s chance of  arriving  of  costs  superior packaging and/or  e n h a n c e d p a c k a g i n g and  The s e l l e r  is  ensure t h a t the  i n s u r a n c e c o s t s may be r e d u c e d t o due t o  with other  may be w i l l i n g  b u y e r may be w i l l i n g  stand a better  level  for  during the  transit.  package the  to  ensure t h e i r  durability.  to  package and o t h e r w i s e  p e r i o d when t h e  goods  T h i s p r o v i d e s him w i t h  g o o d s and p r o v i d e  the  T h u s , he o u g h t t o  prepare  the  goods f o r  last  be  an  touches  responsible  the  upcoming  transit.  The a l t e r n a t i v e t o to  require  location. wish to  of  It  responsibility  buyer to maintain is  conceivable.that  be p r e s e n t  shipment. will  the  seller  when t h e  However,  to  a presence at in  goods a r e  require  increase his  costs of  The s e l l e r ' s  s p e c i f i c knowledge  the  the  him t o  for  packaging  the  some c a s e s t h e  seller's buyer  b e i n g made r e a d y be p r e s e n t  is  in a l l  may  for cases  transaction. regarding  g o o d s p r o v i d e s him w i t h a d d i t i o n a l  the  advantage  durability in  110  packaging.  The buyer's c o s t i n d u p l i c a t i n g the  necessary  knowledge w i l l add t o the a l r e a d y expensive arrangements of being present  a t the p o i n t of shipment.  F u r t h e r , making the buyer r e s p o n s i b l e f o r packaging p r o v i d e s a d i s i n c e n t i v e t o the s e l l e r f o r 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 t o the goods. an arrangement the s e l l e r may e f f o r t necessary The  In such  be l e s s i n c l i n e d t o expend the  t o ensure optimal  survivability.  o n l y disadvantage t o the s e l l e r i n b e i n g  responsible  f o r packaging and d u r a b i l i t y i s having t o d e a l w i t h damaged goods a t the buyer's l o c a t i o n .  T h i s problem may  be overcome  by r e q u i r i n g the buyer t o accept goods damaged d u r i n g and having  the s e l l e r compensate the buyer f o r the  transit  diminution  of the v a l u e of the goods. The  buyer has the b e s t o p p o r t u n i t y t o i n s p e c t the goods  a t the c o n c l u s i o n of the t r a n s i t .  He  i s l o c a t e d a t the end  the t r a n s i t and presumably has the knowledge and p r o p e r l y i n s p e c t the goods.  facility  of  to  To r e q u i r e the s e l l e r t o i n s p e c t  the goods a t the c o n c l u s i o n of the t r a n s i t i n c r e a s e s h i s c o s t s by having  to maintain  a presence a t every buyer's l o c a t i o n .  In a d d i t i o n , 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 any  l o s s i n c l u d i n g l o s s occasioned  packaging or d u r a b i l i t y . buyer i s i n the b u s i n e s s  The  reason  of  f o r t h i s i s t h a t the  of a c q u i r i n g t h a t p a r t i c u l a r type  good f o r f u r t h e r manufacture or r e s a l e .  r  by a f a i l u r e  Thus, he  has  of  Ill k n o w l e d g e o f t h e p r o d u c t and  knowledge o f l o c a l  K n o w l e d g e o f t h e p r o d u c t p r o v i d e s an a b i l i t y and  to f a c i l i t a t e  m a r k e t s means he  resale.  the s e l l e r  I t w o u l d be  to travel  remedy d e f e c t s and  t o be As  noted  review, buyer  the d i s p o s a l  t o be  of the  goods.  remedy f o r b r e a c h  of the  factors,  of packaging  reasons  for this.  duty  both  parties  and  durability.  The  first  To  i s that  h a v i n g some k n o w l e d g e o f t h e p r o d u c t n e g o t i a t e s a the p a r t i c u l a r product's d u r a b i l i t y  withstand the anticipated  transit.  a f t e r t h e goods have been s e l e c t e d ,  The  packaging  t o be u s e d .  the buyer  relies  packaging  It i s highly  on t h e s e l l e r ' s  and  the subject. standards that  and  likely  and  price ability  i s that  usually  the type that  the  of  i n many c a s e s  advice respecting the  level  required.  Thus, t h e d i s c u s s i o n durability  second  the p a r t i e s  n e g o t i a t e t h e method o f t r a n s p o r t a t i o n  is  i n order to  rejection.  on t h e l e v e l  t h e r e a r e two  expensive  r e s p o n s i b l e f o r packaging  i n t h e d i s c u s s i o n on r i s k  which r e f l e c t s  of  location  local  price for  s i g n i f i c a n t l y more  The  damages r a t h e r  h a v e an a f f e c t  to  ought  providing durability.  ought  knowledge o f  to the buyer's  to effect  Thus, t h e s e l l e r and  buyer's  t o remedy damage  i s able to obtain the best l o c a l  damaged p r o d u c t s . for  The  markets.  packaging  of the s e l l e r ' s i s framed  Within the l i m i t s  f o r measuring  performance  responsibility  by t h e j o i n t  control  for over  d i s c u s s e d above, t h e r e a r e  the s e l l e r ' s  performance.  The  c o u l d be m e a s u r e d by t h e p h y s i c a l  two  first state  of  112 t h e g o o d s upon t h e i r second  i s that  arbitrary  arrival  at the buyer's l o c a t i o n .  t h e p e r f o r m a n c e c o u l d be m e a s u r e d  standard unrelated to the eventual  by  The  an  outcome o f t h e  transit. The  first  s t a n d a r d p r o v i d e s an a d v a n t a g e t o t h e b u y e r a t  t h e expense o f the s e l l e r .  In e f f e c t ,  guaranteeing the safe a r r i v a l  t h e s e l l e r would  o f t h e goods.  The b u y e r w o u l d  know i n a d v a n c e what s t a t e t h e goods w o u l d be arrival  at h i s location.  i n upon  The ex p o s t c a l c u l a t i o n  t h e goods t h a t  arrived  their  o f damages  w o u l d be s i m p l e o w i n g t o t h e e a s e o f m e a s u r i n g t h e between  be  difference  and t h e g o o d s d e s c r i b e d  i n the  contract. The d i s a d v a n t a g e t o t h e s e l l e r difficult  i s that  ex a n t e t o d e t e r m i n e t h e r e q u i r e d  performance.  Thus, t h e s e l l e r ' s  calculated  until  t h e goods  location.  The c o s t  actually  arrived  a t the buyer's  of the required Whatever  i n the discussion  a r e a number o f a v a i l a b l e  estimate  regarding t h i r d standards.  disadvantages.  effort  party  a  a t the point  the standard,  s e l l e r w o u l d be a b l e t o more a c c u r a t e l y  be  prices.  s t a n d a r d has t h e advantage o f a l l o w i n g  o f t r a n s a c t i n g t h e exchange.  a d v a n t a g e s and  of  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 w o u l d  more a c c u r a t e c a l c u l a t i o n  As  level  very  c o s t s c o u l d n o t be  p a s s e d on t o t h e b u y e r i n t h e f o r m o f h i g h e r An a r b i t r a r y  i t w o u l d be  the  costs. risks,  Each p o s s e s s e s  there  113 A customary standard B u y e r s and  sellers  i n d u s t r y would with.  standard.  acquainted with the p r a c t i c e  find  an  i n d u s t r y wide s t a n d a r d  i n the  easy  to deal  B o t h p a r t i e s t o an a g r e e m e n t c o u l d t a k e t h e r i s k s  damage and The that  i s the best defined  the c o s t of performance i n t o  o n l y major disadvantage  i t i n c r e a s e s the  industry.  That  account  ex  of  ante.  t o a customary standard  is  i n f o r m a t i o n c o s t t o newcomers i n t h e  i s , i n order to operate  i n an  environment  which uses customary p r a c t i c e s ,  knowledge o f t h e  must be  a c o s t t o t h e newcomer and  acquired.  discourage  The seller  h i s entrance  costs of packaging  The  level  of care taken  according to the r e l a t i v e b e n e f i t provided t o the The equality  d u r a b i l i t y would  of treatment  have  of  o f t h e g o o d s w o u l d be  the  judged  the  goods. the  between b u y e r s  experience with the p a r t i c u l a r law,  practices  e v e n t u a l l y become c u s t o m a r y The  rigors  c o s t s o f t h e p r o t e c t i o n and  o b j e c t i v e s t a n d a r d has  under Anglo-Canadian  the  and  the  industry considers  c a l c u l a t e d with reference to the expected  transit.  their  the advantage o f r e q u i r i n g  t o become a c q u a i n t e d w i t h what t h e The  may  i n t o the i n d u s t r y .  o b j e c t i v e s t a n d a r d has  reasonable. t o be  This entails  standards  f u r t h e r advantage and  sellers  industry. of long  of  r e g a r d l e s s of Moreover,  standing  standards.  s u b j e c t i v e s t a n d a r d has  the c h a r a c t e r i s t i c  information costs a s s o c i a t e d with packaging  and  of passing durability  114 from the  seller  to the  s a l e and  arrangement o f d e l i v e r y c o n t r a c t , b u y e r s would have  to  i n v e s t i g a t e the  in  order  buyer.  level  risks  of  transit.  afforded  the  severely limited  seller  to agreeing  by  the  allow  goods a t t h e  to the  of a c t i n g to the  a  seller  the  conclusion  b u y e r ' s remedy a g a i n s t due  to  c a u s e d damage.  would not  of the  In a d d i t i o n , the  s e l l e r w o u l d be  internally  subjective standard  buyer to predetermine the value of the  i s , prior  o f knowledge p o s s e s s e d  to determine the  Moreover, the  That  the  convenience  standard  of h i s  personal  knowledge.  Due paper,  to these  p o i n t s and  i t i s c l e a r t h a t the  superior  standard.  The  the  costs  f o r new  use  The  p r o b l e m s o f u n c e r t a i n t y and  B.  The  of customary standards  The  Sale  against the  o f Goods A c t  O V J  the  use  of the  stated the  r u l e as  to  the  occasioned  against  difficulty  their  by  entry.  of e f f e c t i n g  subjective  standard.  internal  M u r r e l l L t d . v.  seller's causes.  Joseph  responsibility Mr.  Justice  I.  for Diplock  follows:  . [1961] 1 W.W.R. 862, (Q.B. The d e c i s i o n r e v e r s e d on f a c t u a l g r o u n d s i n t h e C o u r t o f A p p e a l ; A l l E . R. 770) x o U  this  Model  defines the  d e t e r i o r a t i o n due  entrants  mitigates  l e a d i n g c a s e o f Mash, and  Emanuel L t d .  in  objective test provides  the  remedy m i t i g a t e s  discussion earlier  was [1962] 1  a  115 . . . t h e r e i s an i m p l i e d w a r r a n t y n o t m e r e l y t h a t t h e y s h a l l be m e r c h a n t a b l e a t t h e t i m e t h e y a r e p u t on t h e v e s s e l , b u t t h a t t h e y s h a l l be i n s u c h a s t a t e t h a t t h e y c a n e n d u r e t h e n o r m a l j o u r n e y and be i n a m e r c h a n t a b l e c o n d i t i o n upon a r r i v a l . 1  Mr.  Justice  n  o  normal.  D i p l o c k f o u n d as a f a c t  p  ,  That  i s , n o t h i n g of consequence  been o f merchantable Interestingly, Diplock's decision  q u a l i t y when p l a c e d on b o a r d .  and t h e p o t a t o e s may  Implicit  of merchantability  To  Justice not  deteriorated  of Lord  Justice  the r e l u c t a n c e t o extend  to r i s k during t r a n s i t .  only operate i f a l l other p o s s i b l e  t h e damage h a v e b e e n  °  .  i n the d e c i s i o n  i n t h e C o u r t o f A p p e a l was  warranty w i l l  have .  . . .  °^  was  r e v e r s e d Mr.  on t h e f i n d i n g t h a t t h e h o l d was  1 Rd  the warranty  This  t h a t t h e g o o d s must n o t h a v e  the Court of Appeal  properly ventilated  Pearson  occurred during  h a v e damaged t h e g o o d s .  enough f o r H i s L o r d s h i p t o f i n d  cause.  eliminated.  b u y e r must show, i n a d d i t i o n that  description,  t h e s e l l e r was that  i t was  1  8  1  .  Ibid,  p.  773.  1  8  2  .  Ibid,  p.  780.  1  8  3  .  Ibid.  1 8 5  t o an a b s e n c e a seller  o f goods o f  a s a l e by d e s c r i p t i o n  • Mash & M u r r e l l L t d . v . J o s e p h [1962] 1 WLR 16, ( C A . ) p . 18. 8  5  .  Ibid.  the  of a l l other that  and t h a t  1 R4  1  The  causes f o r  f i t i n t o the implied warranty of m e r c h a n t a b i l i t y  causes,  was  ,  the voyage which might  from t h a t  that the t r a n s i t  I . Emanuel L t d . .  the  116 buyer d i d not to  h a v e an  shipment. The  control  opportunity  to  inspect  goods p r i o r  1 8 6  warranty of  f i t f o r p u r p o s e s e e s l i m i t e d s e r v i c e as  o f r i s k t o goods i n t r a n s i t .  r e a s o n a b l e r e l i a n c e on preparation  the  of the  the  seller's  I f the  buyer can  expertize  goods f o r t r a n s i t ,  in  then the  a  show  the  s e l l e r may  be  1o 7 liable  f o r damage o c c a s i o n e d  performance r e q u i r e d the  by  i s that  his  the  failure.  g o o d s be  The  i s not  required,  aside  deteriorated  as  Thus  of  f i t for  strict  required.  cases support the  with preparation  level  reasonably  p u r p o s e f o r w h i c h t h e y were i n t e n d e d .  conformity  The  use  of t h i s warranty  f o r d e l i v e r y and  packaging.  in  The  from r e a s o n a b l e r e l i a n c e i s t h a t a r e s u l t of  a specific  dealing  failure  proof the  on  goods  the  part  of  T O O  the  seller.  0  0  Hence, t h e  v o y a g e w a s - n o r m a l and failure  of  An  that  the  cause of the  the  damage was  some  preparation.  illustrative  c a s e , George W i l l s & Sons, L t d . v.  IRQ Brown & Sons e t a l . delivery  b u y e r must e s t a b l i s h t h a t  of h e r r i n g  Thomas  • involved  a s a l e and  arrangement  from England t o A u s t r a l i a .  The  of  buyers  - ° . S a s s o o n , D a v i d M. "Damage R e s u l t i n g From N a t u r a l D e c a y U n d e r I n s u r a n c e , 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 " ( 1 9 6 5 ) , 28 Modern Law R e v i e w 180, pp. 352-353. L O  i  07  . H a l s b u r y ' s Laws o f E n g l a n d , v.141 1 8 8  .  Ibid.  1 8 9  .  (1922),  12  L I . L . R e p . 292,  p.  294.  p.310.  117 advised the s e l l e r and  that  t h e y were r e l y i n g  proper packaging. to  t h a t t h e h e r r i n g were p u r c h a s e d  faulty The  The  on t h e s e l l e r ' s  expertise for  h e r r i n g were damaged d u r i n g t r a n s i t  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. by t h e C o u r t was  the implied warranty  purpose.  To  C o u r t made t h e  following  caused  the  of packaging;  Whether t h e b u y e r  for transit,  the l e v e l  i n Mash and M u r r e l l  had  to arrive  i n a state  t h e goods.  0  .  Ibid.  1  9  1  .  Ibid.  1  9  2  no  ability  skill  Mr.  an e x p e r t i n  t o package p r o p e r l y .  i n packaging  Justice  suitable  that the s e l l e r  9  improper  specifically  and  duty  i s t h e same.  Diplock that the  Mash & M u r r e l l .  potatoes  intended  1 9 3  The  knew t h e r e a s o n why  Supra.  That  & Sons t h e h e r r i n g  for resale.  Apparently,  or  p r e p a r i n g them  i n s t a t e which allowed f o r t h e i r  1  1  that  t h a t t h e b u y e r was  L i k e w i s e , i n George W i l l s  f e a t u r e was purchased  and  of the s e l l e r ' s  is,  to arrive  findings of fact:  the  i s p u r c h a s i n g g o o d s by d e s c r i p t i o n  on t h e s e l l e r ' s  1  cited  for  t h e damage; t h a t t h e s e l l e r was  on t h e s e l l e r ' s  resale."  of f i t n e s s  rule  a c t i v a t e the duty under the warranty,  packaging field  The  ,  inn  relying  due  packaging. Court held the s e l l e r  relying  for resale  common  the  i t i s the s e l l e r ' s  at note  16.  p.  had  buyer duty  to  866.  ,  . George W i l l  & Sons L t d . s u p r a , a t n o t e  25,  p.  294.  118 g u a r a n t e e t h a t t h e goods w i l l  arrive  i n a state  suitable  to  t h e known p u r p o s e o f t h e b u y e r . C. C o m p a r i s o n Models 1. The  Generally o p t i m a l and S a l e o f Goods A c t m o d e l s h a v e one n o t a b l e  similarity that  o f t h e S a l e o f Goods A c t and t h e O p t i m a l  and a number o f d i f f e r e n c e s .  The  t h e b u y e r ' s remedy f o r b r e a c h i s b a s e d  of property. a mitigator  This u t i l i z e s  similarity is i n damages  instead  the buyer's superior a b i l i t i e s  o f t h e damage.  It forestalls  any  requirement  the s e l l e r maintain a presence at the buyer's l o c a t i o n . it  enhances All  the e f f i c i e n c y  the differences  requirement that  of the  a r e due  the s e l l e r  the buyer's l o c a t i o n  the information  f l o w between t h e  First,  exchange. t o t h e S a l e o f Goods A c t  i n a merchantable c o n d i t i o n .  several  consequences.  t h e s e l l e r may  The  i t s effects  distribute  and  A l t h o u g h t h e s e l l e r may  i t in his interest  he may  be e n c o u r a g e d  The  wish t o lower the buyer's  consequence  of t h i s  between t h e p a r t i e s w i l l  i s that  on t h e  goods.  to  to confuse the  b u y e r on what t o e x p e c t a t t h e end o f t r a n s i t . s e l l e r may  effect  parties.  m i s i n f o r m a t i o n about the t r a n s i t  u n d e r v a l u e t h e goods,  at  This  consequences  h a v e an i n c e n t i v e t o  not f i n d  that Thus,  ensure t h a t t h e goods a r r i v e  requirement has  as  That i s , the  expectations.  the information  be r e s t r i c t e d .  The  maximum  flow  119 p r o d u c t i v e use necessary  o f t h e goods w i l l  i n f o r m a t i o n can  Second,  s i n c e the t e s t  of expectations an  interest  actual  actually  very d i f f i c u l t . an  I am  an  F o r example,  t h a t was  satisfied  travel"  t o L i v e r p o o l on  taking,  w h i c h I h a v e h e l d was  of events  i n Mash and shipped  were i n s u c h  the  at Limassol I o n i a n on  the  buyer's  had  the  However, f o r many o t h e r p r o d u c t s purposely  maintain  product.  The  may  assist  ignorance  they  the  seller.  w h i c h may  be  used.  helpful  Mash & M u r r e l l .  one  were " n o t  f i t to  i n the  the  was  sense  ordinary  course  unfit  for  Cyprus  1 9 4  seller end  could  use  of  the  i s t h a t i n f o r m a t i o n which  t h a t t h e goods a r r i v e That  only  t h e v o y a g e w h i c h she  about the  consequences of t h i s  i n ensuring  r e c e i v e d by a product  an  Court  subject-matter  a t L i v e r p o o l , be  i n bags a r e n o r m a l l y  be  consumption:  human c o n s u m p t i o n , w h i c h i s t h e p u r p o s e f o r w h i c h spring potatoes  has  t h i s would  potatoes  a normal voyage,  arrival  seller  M u r r e l l the  a c o n d i t i o n that i n the  t h e y w o u l d , on  fulfillment  about the  t h a t when t h e p o t a t o e s ,  action,  they  seller,  ignorance  The  of t h i s  that  the  f o r r e s a l e f o r human  were l o a d e d  unless  f o r performance i s the  F o r a number o f p r o d u c t s  objective test.  p u r p o s e and  achieved  unimpeded.  known by  i n maintaining  expectations.  applied  flow  n o t be  s a f e l y may  i s , knowledge o f t h e i n dealing with  Supra, a t note  16.  end  not use  a number o f  p.  866.  be of the  120 f a c t o r s under t h e s e l l e r ' s durability  control  i n c l u d i n g p a c k a g i n g and  may n o t p a s s .  Third,  the buyer i s given  c l e a r h i s intended  a distinct  i n c e n t i v e t o make  purpose f o r t h e goods.  Even i n cases o f  g o o d s w h i c h h a v e an o b s c u r e p u r p o s e , t h e s e l l e r ' s  awareness o f  any  p u r p o s e a p p e a r s t o make h i m a g u a r a n t o r o f t h e f a c t  the  goods w i l l a r r i v e f i t f o r t h a t T h i s means t h a t  than t o increase  the s e l l e r ' s  between t h e p a r t i e s . transaction costs Fourth, involved is,  information  purpose.  w h i c h h a s no o t h e r  liability  Obviously,  this  i s being  will  purpose  transmitted  increase the  o f t h e exchange.  the buyer i s given  i n the preparation  a d i s i n c e n t i v e t o become  o f t h e goods f o r t r a n s i t .  i f t h e s e l l e r c a n show t h a t h i s s k i l l  ensure t h e safe  that  arrival  That  i s not required to  o f t h e goods, t h e r i s k o f  d e t e r i o r a t i o n may p a s s t o t h e b u y e r .  The the  d i s i n c e n t i v e t o become i n v o l v e d  g o o d s may mean t h a t t h e k n o w l e d g e a n d e x p e r t i z e  p a c k a g i n g and d u r a b i l i t y  Thus, t h e s p e c i f i c  t h e g o o d s s h i p p e d by t h e s e l l e r  disadvantaged  Finally,  on  goods as w e l l as  i n the future are  accordingly.  the s e l l e r  g o o d s be i n s p e c t e d shipment.  of  p o s s e s s e d by t h e b u y e r w i l l n o t be  p a s s e d on t o t h e s e l l e r . all  i n the preparation  This  i s encouraged t o r e q u i r e  that the  by t h e b u y e r o r h i s a g e n t p r i o r t o  has t h e advantage t o t h e s e l l e r o f p a s s i n g t h e  121 risk  o f a l l obvious d e f e c t s which might 1  cause  deterioration  Q C  d u r i n g the voyage  t o the buyer.  powerful  i n n o t examining t h e goods p r i o r  even  interest  liability  Clearly, arrive  in a specific  the s e l l e r  I n one  Clarity  c a u s e d damage. the r i s k .  the s e l l e r  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  of the r i s k  of unanticipated  clear  internally bears  O b v i o u s l y , from t h e buyer's p e r s p e c t i v e t h i s i s  ex a n t e i s t h e l e v e l  to cover t h i s  risk. and  do n o t i n f o r m t h e s e l l e r fulfill  .  fitness  35.  required  implied  f o r purpose  require  o f t h e g o o d s upon  their  However, t h e two w a r r a n t i e s  of the extent of the e f f o r t  h i s performance.  s.  of e f f o r t  That i s , the  t o guarantee the c o n d i t i o n  a t the buyer's l o c a t i o n .  5  to the  parties.  warranties of merchantability  9  flow of  arrangement.  by t h e s e l l e r  1  either  U n d e r t h e S a l e o f Goods A c t t h e s e l l e r  What i s n o t c l e a r  arrival  In  s e n s e t h e S a l e o f Goods A c t m o d e l p r e s e n t s a  f o r the d i v i s i o n  a clear  shipment  t o g u a r a n t e e t h a t t h e goods  s t a t e causes d i s t o r t i o n s  r e l a t i o n s h i p between t h e  to  to  parties.  requiring  2. L e g a l  equally  r u l e s are i n t e r f e r i n g with the orderly  i n f o r m a t i o n between t h e  all  an  i f s u c h an e x a m i n a t i o n s e r v e s o t h e r p u r p o s e s .  case,  rule  The b u y e r h a s  required  122 F o r example,  i n Mash & M u r r e l l  events d u r i n g the voyage o r f o r c e s c a u s e d t h e damage. damage and facts.  The  trial  t h e c a s e t u r n e d on internal  court  the Court of Appeal  f o u n d one  found another,  i n most c a s e s , t h e n t h e s e l l e r h a s  m a k i n g an a c c u r a t e ex a n t e p r e d i c t i o n required  of  The  costs  i s this  little  of the  i n c u r r e d by t h e s e l l e r ,  warranties decrease the e f f i c i e n c y c o s t s are presumably  chance  performance  in either  extra  or c o n t r a c t i n g  out of the  of the t r a n s a c t i o n .  p a s s e d on t o t h e b u y e r  average businessman  Canadian  approach  deterioration. and  arrival  w o u l d be  to unanticipated  These  i n t h e form  of  arrangement  of d e l i v e r y  o f t h e goods.  Indeed,  standard  such as a customary  ability.  The  s u r p r i s e d by t h e  internally  Anglo-  caused  He w o u l d p r o b a b l y n o t e x p e c t t h e s e l l e r  the p a r t i e s perform t h e i r  latter  entails  c o n t r a c t t o guarantee  businessmen  presumably  obligations to a  safe expect  specific  standard or to the best of an o b j e c t i v e  in a  their  test.  3. 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 The  S a l e o f Goods A c t model d o e s t e n d t o r e d u c e  avoidable control  of  prices.  The  that  a l l on t h e same  him.  p r e p a r a t i o n o f t h e goods f o r t r a n s i t  sale  goods  cause o f the  I f ex p o s t d e t e r m i n a t i o n o f t h e " r i s k s "  difficult  higher  to the  whether  losses.  The  model makes t h e p a r t y w i t h  over the f a c t o r s  o f p a c k a g i n g and  some  superior  durability  123 completely  responsible  inadequacy. to higher  The extent  f o r damage w h i c h  i s due  However, t h e model a c t u a l l y i n c r e a s e s  Sale  o f Goods A c t model i g n o r e s  The  b u y e r may  the f a c t  chose goods which  to survive a long t r a n s i t .  e i t h e r warning  the buyer  of the r i s k s  price negotiated survivability  effect  of informing  negotiations This  provided  arrive transit  i n a s t a t e o f d e t e r i o r a t i o n which buyer's  of the  the transit.  responsible for  and p a c k a g i n g ,  a disincentive to intervene  The  a  c a p a c i t y as  completely  t o inadequate d u r a b i l i t y  ends.  the  goods.  i n s p e c t o r o f t h e g o o d s a t t h e end  l o s s e s due  increases  of  o f Goods A c t m o d e l i s t h a t i t  does not t a k e i n t o account t h e buyer's  i s , by making t h e s e l l e r  the buyer  increase to the  decrease i n the r i s k to the of the Sale  seller  perspective.  c o s t s o f t h e e x c h a n g e comes w i t h o u t  failure  of  the  information  Another  the  i s inadequate t o ensure  c o s t s o f t h e exchange.  corresponding  from  the  the  the requirement during  not have  negotiations that  o f t h e goods from a p a c k a g i n g  of h i s purchase  and  A d d i t i o n a l l y , the  information  is  t h a t t o some  have t h e duty  during  f o r the packaging  In e i t h e r case,  superior  due  of t r a n s m i t t i n g the  goods o r o f t a k i n g t h e r i s k h i m s e l f . h a v e a d u t y t o warn t h e b u y e r  may  I t appears  Mash & M u r r e l l c a s e t h a t t h e s e l l e r may  That  losses  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  propensity  the  their  transaction costs.  packaging.  may  to  and  buyer  remedy g o o d s  continues  duty to m i t i g a t e  the  only  which  after  the  requires  him  124  t o m i t i g a t e h i s l o s s and n o t t h e s e l l e r ' s l o s s .  T h i s might  mean t h a t t h e b u y e r c o u l d s t a n d by and watch t h e goods r o t on t h e dock.  As l o n g as h i s r e l i a n c e and r e p l a c e m e n t c o s t s a r e  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 rests with the s e l l e r .  125 CHAPTER EIGHT CONCLUSION The results  purpose of t h i s of the  c o n c l u s i o n i s t o summarize  a n a l y s i s and  S a l e o f Goods A c t p r e s e n t s allocation From t h i s  answer t h e an  of r e s p o n s i b i l i t y summary, an  These o p t i m a l  question  efficient  the  of whether  set of r u l e s f o r  f o r damage t o g o o d s i n  optimal  set of r u l e s w i l l  rules represent  the  the  the  transit.  be  developed.  recommended s o l u t i o n  from  an  economic p e r s p e c t i v e .  Part thesis  one  and  purpose.  of t h i s  briefly P a r t two  chapter  reviews  how  Part three  o f t h e two  s e t s o f r u l e s and  explores The  the  chapter  A.  i n the  by  Goods A c t  r u l e s governing  goods a r e  sold  briefly area  the  rules.  optimal  the  responsibility  for  the  four rules.  overall  value  Method a n a l y s i s of the  r i s k t o goods i n t r a n s i t .  arrival  comparison  Part  s e t of  i n the  law.  t o a d i s t a n t buyer, the  o f m a n u f a c t u r e and The  of  of the  explanation  indicating  a detailed  s a l e are d i s p e r s e d over  location.  one  of the  P u r p o s e and  T h i s paper presents  of the  results  offers  content  rules in this  Summary o f t h e  a n a l y t i c a l method u s e d  S a l e o f Goods A c t  f o r m and  the  t h e s i s achieved i t s  summarizes t h e  concludes  of e f f i c i e n t  the  discusses the  analysis.  inefficiencies  summarizes t h e p u r p o s e o f  of  When  t r a n s a c t i o n a l elements  t h e p e r i o d between of the  Sale  goods a t t h e  f o r damage t o t h e  completion buyer's  goods i s o n l y  126 one  set of transactional  responsibility  elements.  risk  originated  Columbia  f o r damage i s g o v e r n e d by s e c t i o n s o f t h e  o f Goods A c t and t h e c a s e law w h i c h The  In B r i t i s h  regime  interprets the  sections.  s e t up by t h e S a l e Of Goods A c t  during the l a t e nineteenth century. I t represented  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 century problems. detailed  i n t h i s paper  The  research  i s b a s e d on t h e a s s u m p t i o n t h a t due  t h e enormous amount o f c h a n g e o c c u r r i n g d u r i n g t h e l a s t hundred  years,  t o problems  this  r e g i m e no  resulting  Testing related  of t h i s  questions.  efficiency  longer offers  adequate  The o f two  assumption  one  solutions  The  first  r e q u i r e d t h e answer t o  concerned the degree  o f t h e S a l e o f Goods A c t .  The  second  two  of  question  optimally  rules. a n s w e r t o t h e s e two  standards.  They  questions required the acceptance  are, the standard of e f f i c i e n c y  t h e s t a n d a r d o f t h e modern c o m m e r c i a l Efficiency  i s an e c o n o m i c  C h a p t e r Two  methodological I t was  examined  Hence, t h e d r i v e f o r  o f economics  the t h e o r e t i c a l  elements o f t h e economic  concluded that  economic  f o r an  and  approach.  analysis provides a  p e r s p e c t i v e t h r o u g h which t o e v a l u a t e laws p o s s e s s i n g p r e d o m i n a n t l y economic  impact.  and  environment.  measure.  a standard looked to the d i s c i p l i n e answer.  to  f r o m damage t o g o o d s i n t r a n s i t .  c o n c e r n e d t h e f o r m and c o n t e n t o f t h e s e t o f efficient  Sale  Economic  useful  a  a n a l y s i s measures t h e  127 facility product  o f a law t o promote b e h a v i o r of the behavior.  standard  Clearly,  was  of the product  type  rules determining  transit  possesses  judged  effects  t h e economic s t a n d a r d  e v a l u a t i o n o f every that  I t c a n n o t measure o r p r o v i d e a  f o r the distributive  t h e non-economic v a l u e  which maximizes t h e  o f law.  of the behavior to society.  i s not appropriate f o r the  However, i t was  responsibility  o n l y economic impact.  Hence, t h e s t a n d a r d  appropriate.  i t possesses  the e f f i c i e n c y other  legal  useful analytical  through As risks.  regimes p o s s i b l e .  t o o l s w h i c h make j u d g i n g  These t o o l s  i n c l u d e use o f  I n a d d i t i o n , economic  a f r a m e w o r k w i t h i n w h i c h phenomena may b e the use o f f a c t u a l good as t h e s e First,  analysis w i l l analytical narrowing  there  tools  are, t h e i r use presents  the f i e l d  simplified  certain  i s t h e r i s k t h a t t h e phenomena u n d e r  be o v e r s i m p l i f i e d  models.  theory  assumption.  by i t s i n s e r t i o n  T h i s paper attempted  into  to avoid t h i s  r i s k by  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 a s b e t w e e n t h e b u y e r a n d t h e s e l l e r damage quantum v a r i a b l e .  Second, t h e r e  a s s u m p t i o n s made i n t h e p r o c e s s will  advantage i n  o f a law and making q u a n t i t a t i v e comparisons t o  models and comparable s t a t e s . provides  concluded  f o r damage t o g o o d s i n  Economic a n a l y s i s p r o v i d e s t h e a d d i t i o n a l that  nor of  and i g n o r i n g t h e  i s the r i s k that the  of simplifying  bias the conclusions of the analysis.  t h e phenomenon  T h i s r i s k was  128 r e d u c e d by m i n i m i z i n g t h e number o f a s s u m p t i o n s made and ensuring,  as f a r as p o s s i b l e ,  their  neutral content.  C h a p t e r s T h r e e and F o u r c o n s i d e r e d t h e s t a n d a r d o f t h e modern c o m m e r c i a l set  environment.  the scene f o r the  environment  develop optimally environment In  addition,  r u l e s which  efficient  i s one  that  a  of the  realistic  t h e S a l e o f Goods A c t r u l e s rules.  The  i t provides a r e a l i s t i c governed the a l l o c a t i o n  for historical  voyage.  considered  ocean  and  transit  o f t h e most common t r a n s i t  l a t t e r point  liability  T h i s was  to test  damage t o g o o d s d u r i n g This  an i n d e p t h d e s c r i p t i o n  environment.  i n which  s u c h , t h e s e two c h a p t e r s  analysis.  Chapter Three provided ocean t r a n s i t  As  environments.  backdrop  i n which  t o view  of r e s p o n s i b i l i t y f o r  transit. i s b a s e d on two  reasons ocean  points.  The  s h i p p e r s have v e r y  f o r damage t o g o o d s o c c u r r i n g d u r i n g an T h i s means t h a t  first  limited  ocean  the other p a r t i e s t o the s a l e  almost a l l the r e s p o n s i b i l i t y in  c a s e s where t h e c a r r i e r  or  i s negligent  f o r damage t o t h e g o o d s .  failed  t o make t h e v e s s e l  i n stowage o f t h e c a r g o does  he  is  assume Only  seaworthy  incur  liability. The  second p o i n t  ocean t r a n s i t . specific  The  environment  indicates that  i s t h a t t h e S a l e o f Goods A c t  emphasizes  o n l y r e f e r e n c e made by t h e A c t t o a r e f e r s t o t h e ocean environment.  i n the nineteenth century, the d r a f t e r s  This of the  129 statute the  were p r e o c c u p i e d w i t h o c e a n t r a n s i t .  e f f o r t and  t h o u g h t went i n t o r u l e s  environment, t h i s area o f f e r s the interesting  regime of  risk rules  Chapter Four developed the which the  r u l e s were t e s t e d .  to usable variables their of  analysis  number o f  risk factors  of the  control  for  The  various  c a n n o t be  regarding  the  questions concerning the content of  purpose of  inefficiencies  of the defined  the  of  e f f i c i e n c y of  reduced to  conclusion a  large Indeed,  within  the  defined  the  efficient  the  Sale of our  and by  the  of Goods  Act  hypothetical  Sale of  Goods  Act  rules.  A n a l y t i c a l Method the  the  analysis  Sale of  r e a s o n s f o r them.  the  are  in  according  interesting  answered b o t h o f  aggregate v a l u e of the as  parties  r u l e as  e f f i c i e n c y of  optimally  Summary o f t h e  explain  r i s k s were  c o m p a r i s o n p r o m o t e d a number  These c o n c l u s i o n s  The  models  t h r o u g h Seven d e a l t w i t h b u i l d i n g  The  B.  the  clearly allocated.  S a l e o f Goods A c t .  the  t h u s most  i n Chapter Four i s t h a t  each category of  and  the An  comparing models of  rules.  and  ocean  parties.  Chapters Five  conclusions  of  eleven r i s k factors considered  of both  the  of  analysis.  structure  o v e r them.  contained  covering  most d e f i n e d  allocated to  effective control  the  five  and  S i n c e most  propensity  of  was  to  Goods A c t The  rules  f o c u s was  exchange. the  identify and the  the attempt  maximization  Efficiency  rule to protect  to  was  goods  from  130 damage d u r i n g t r a n s i t and t o r e d u c e t h e n e e d between t h e p a r t i e s responsibility.  f o r communication  regarding the d e t a i l s of respective  I t was assumed t h a t  reducing  actual  party  risk to  goods and t h e r e q u i r e m e n t o f communication reduced t h e n e t aggregate cost  o f t h e exchange t o t h e p a r t i e s .  Since the analysis the  only considered net aggregate  i d e n t i t y and a c t u a l  constant. general  v a l u e o f t h e g o o d s was assumed t o be a  Additionally,  t h e models d i d n o t d e a l  with the  economic consequences o f a l o s s n o r w i t h t h e  distributive  effects of i t s allocation.  T h e r e were two r e a s o n s f o r t h i s . the  value,  assumption that  legal rules  behavior of individuals individuals. holds that parties  The f i r s t  was b a s e d on  governing t h e commercial  ought n o t t o d i s t i n g u i s h between t h e  T h e s e c o n d was b a s e d on t h e C o a s e Theorem w h i c h  d i s t r i b u t i v e e f f e c t s a r e i r r e l e v a n t when t h e  are bargaining  communication c o s t s .  f r e e l y and have r e l a t i v e l y low The a n a l y s i s  assumed b o t h  points.  E a c h r u l e g o v e r n i n g r e s p o n s i b i l i t y f o r damage t o g o o d s i n transit  was c o n s i d e r e d  artificiality considered drafting  in isolation.  t o the analysis  i n t h i s fashion.  of a contract  This  added an  because t h e r u l e s  In every s i t u a t i o n i n v o l v i n g the  or the settlement of a dispute,  r u l e s w o u l d be u s e d w i t h o u t d i v i d i n g t h e r u l e s categories.  6  .  F o r example, a b u y e r n e g o t i a t i n g  See i n f r a ,  are rarely  p p . 29-30.  into  the  precise  a contract  may  131 require  a term t h a t d e f i n e s  t h e s t a t e o f t h e g o o d s upon  arrival  a t the buyer's l o c a t i o n .  This  b o t h t h e 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 defines  to  encompasses  damage c a t e g o r i e s .  It  m e r c h a n t a b l e q u a l i t y a n d a n t i c i p a t e d damage.  The that  one t e r m  second disadvantage o f t h i s  the j u s t i f i c a t i o n  a large  extent.  choice  o f approach  was  a n d e f f e c t o f t h e r u l e s were o v e r l a p p e d  This  encouraged  a redundancy  i nthe  analysis. The is  justification  twofold.  for  The f i r s t  simplification  artificiality goal  very rules  has g r e a t e r  efficient  ones.  importance than t h e r i s k o f  This  important f a c t  specific  required  i s that  about t h e S a l e  i n this  confusion, arrangement commercial delivery  This w i l l  The be  chapter.  t h e models looked  this  s i m p l i f i c a t i o n of  tested.  at a single sale  o f d e l i v e r y by t h e s e l l e r .  contract  indicated a  o f Goods A c t r u l e s .  and t h e r u l e s b e i n g  lawyers c a l l  design  e a c h r u l e be  the analysis  U s i n g models t o a n a l y z e r u l e s r e q u i r e d both t h e environment  r u l e s and  that  s u f f e r from a c a t e g o r i z a t i o n problem. later  The  scrutiny.  second j u s t i f i c a t i o n  discussed  The n e e d  and t h u s a b s t r a c t i o n o f t h e c o n c l u s i o n .  i n d e p e n d e n t and c l o s e The  the rules i n isolation  i s t o s i m p l i f y t h e models.  o f t h e a n a l y s i s was t o q u e s t i o n  optimally given  f o r considering  To  eliminate  i n v o l v i n g an  M e r c h a n t s and  a s a l e and arrangement  of  a n d i t i s t h e 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.  contracts  type of t r a n s a c t i o n expressed  of the  have t h i s  INCOTERM  The  Sale  1893  of the  these sections.  the  optimal  specifically  several  rules.  c a s e law  The  sources  of the  leading  Statute  have not  considered  h a v e two  objects.  operation  decrease the making the Dealing  The  other  of  statute cases  the was  enacted  b e e n amended  spans the  hand, u s e d  the  efficient efficient  first  of exchanges.  amount o f t h e  lifetime  The  object  with the  research  of the  efficiency  o f e x c h a n g e s by This  exchange.  and  first,  1 9 8  S a s s o o n , .  contract  effort  of  rules  i s t o promote  every  negotiation  Contract reducing  i s e f f e c t e d by  law  an  i s to required  this  Ibid.  supra,  p.  i n t o terms  and  the  need f o r r e s e a r c h  providing  n o t e 129,  exchange  assists  Q7 3  allocation  second o b j e c t  p a r t i e s ' t i m e and  latter point  conditions  -1  rules  exchange.  necessary  negotiation.  the  f o r damage. O p t i m a l l y  distinct  efficient  involves  m o d e l s , on  designed to optimize  responsibility  1  form  statute.  The  in  The  two  sections  r i s k t o goods s e c t i o n s  time.  on  Both sources r e f l e c t  development of the  and  since that  specific  w i t h damage t o g o o d s and  historical in  models r e l i e d  T h e y were t h e  interpreting  i n the  1 9 8  o f Goods A c t  information. which deal  'f.o.b.'  Frequently,  18.  r u l e s which  are  and  133 clear  and conform t o t h e e x p e c t a t i o n s  analysis contained of  a "clarity An  i n previous  and c o n f o r m i t y  obvious  difficulty  to  common e x p e c t a t i o n  by  clear  of the parties.  chapters  defined this  t o common e x p e c t a t i o n  i n assessing c l a r i t y  i s the question  a n d whose e x p e c t a t i o n  The i n terms  test".  and c o n f o r m i t y  o f e x a c t l y what i s meant  forms t h e s t a n d a r d .  T h e s e two  difficulties  a r e overcome t h r o u g h t h e u s e o f t h e r a t i o n a l  maximization  assumption.  and  o f a maximization  desirous  promote e f f i c i e n c y w i l l think appropriate. efficient The  people  a r e assumed t o b e r a t i o n a l  of resources,  then  a l w a y s m i r r o r what' r a t i o n a l  Thus, e f f i c i e n t  and w i l l  people  r u l e s a r e always c l e a r t o  meet t h e e x p e c t a t i o n s  assumption.  maximize t h e v a l u e  R a t i o n a l and m a x i m i z i n g p e o p l e  gained  from exchanges.  exchange t h e p a r t i e s would s e t t l e  want  Assuming p e r f e c t  knowledge and low communication c o s t s , i n e v e r y an  r u l e s which  f o r m e r p o i n t a l s o d e p e n d s on t h e r a t i o n a l  maximization to  I f people  negotiation of  on t e r m s t h a t p r o v i d e t h e  same amount o f p r o t e c t i o n f o r t h e g o o d s a s t h e p r o j e c t e d  cost  of  i n an  t h e c o n s e q u e n c e s o f t h e damages.  efficient  manner, t h e p a r t y b e s t  To g i v e t h i s  a b l e t o p r o t e c t t h e goods  should  b e t h e p a r t y r e s p o n s i b l e t o do s o .  risked  event  occurred,  w o u l d b e t h e one b e s t  the party  agreeing  able t o either  stevedores.  the potential  Additionally,  i f a  t o be r e s p o n s i b l e  absorb t h e l o s s o r  t r a n s f e r t h e l o s s t o an o u t s i d e p a r t y . situations,  effect  I n r i s k t o goods  outside p a r t i e s are the shipper or  134 The  logic  of the  extended t o cover behavior  s h i p p e r s by  As  due  of the  question  r u l e s on  a s k e d was  r e g a r d i n g which s h i p they h a v e an  rewarding  and  any  third  party  whether  an  An  to  be  Seller's  the behavior  of  good r e c o r d s w i t h a d d i t i o n a l  there  is a possibility  i s incorrect.  possibility  economic ones.  on  hired.  was  profit.  research,  foundation  to the  effect  ships with  therefore  with  theoretical be  The  p r a c t i c e s may  business  effect  assumption  o f r e s p o n s i b i l i t y would encourage s e l l e r s  more s e l e c t i v e hiring  the  as w e l l .  allocation  r a t i o n a l maximization  In t h i s  o f e x p l a n a t i o n by  example o f s u c h a v a l u e  that  case,  this  values i s the  the would  other  than  concept  of  justice. However, in the  i t i s not  r u l e s governing fact  t h a t the  i n t e r v e n t i o n by r e s u l t . " r a r e l y be as t h e  likely  t h a t j u s t i c e p l a y s a major p a r t  r i s k t o goods i n t r a n s i t . concept  of j u s t i c e p e r t a i n s to  concluded  r e q u i r e d t o c o n t r o l p u r e l y commercial o f law  reviewed  c o n c e r n s the use  in this  of  9  .  conclusions  pp.  13  to  emotive  17  activity  reached  assumptions.  such  by  this  A number  the models s u f f i c i e n t l y  d e v e l o p m e n t o f e q u i l i b r i u m and  infra,  an  paper.  factual  f a c t s were assumed t o s i m p l i f y f o r the  to  t h a t emotive i n t e r v e n t i o n would  Another caution regarding the  allow  i s due  c o u r t s o r l e g i s l a t u r e s t o p r o m o t e an  I t was  area  research  This  to  comparison.  of  135 Because of the value  of the  their  accuracy.  empirically a  d e p e n d e n c e on  factual  c o n c l u s i o n s of t h i s paper are dependent To  the  extent  substantiated, the  t h a t the  empirical testing  p o s s i b l e due  to the  dealing with  the  fact  of the  that there  not  accepted  are  settled  insurers. overseas  c o n c l u s i o n s was  i s limited  Apparently,  i n f o r m a l l y b e t w e e n m e r c h a n t s and  as  shipment o f goods g e n e r a l l y use  apparently  in their  contracts.  most  disputes  of the person  with  expressed  issues  i n c o n t r o l of the  of goods.  S a l e o f Goods  Act  C a t e g o r i z a t i o n Problem  Organizing  the  S a l e o f Goods A c t  uncovered a t h e o r e t i c a l  anticipated  and  their  the  C. Summary o f I n c o n s i s t e n c i e s Between t h e and O p t i m a l M o d e l s  Goods A c t  law  L i t t l e consideration  2 0 1  g i v e n t o t h e more complex  responsibility  The  not  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  2 0 0  INCOTERM f . o . b .  1.  case  r i g h t s between merchants i n s a l e  arrangement of d e l i v e r y c o n t r a c t s .  of  upon  assumptions are  c o n c l u s i o n s must be  the  priori. Further,  is  assumptions,  difficulty  divides risk  r u l e s i n models  with  into the three  the  rules.  categories  damage, u n a n t i c i p a t e d i n t e r n a l l y  The  Sale  of  c a u s e d damage  and  . 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 r e f o r m C o m m i s s i o n . R e p o r t on t h e S a l e o f Goods. V o l . 1. T o r o n t o : Queen's P r i n t e r , 1983, p. 11. 2 0 0  201 . S a s s o o n ,  supra  f  n o t e 129,  p.  18.  136 externally rules  c a u s e d damage.  f o r the  first  T h i s means t h a t t h e rules  covering  covering  two  categories are  Sale  o f Goods A c t  internally  c a u s e d damage and  c a u s e d damage.  damage and  unanticipated  The  that  identically.  a p p l i e s o n l y two  end  of the  internally  goods o f t h i s proportional  standard, to the  Anticipated decrease transit.  transit.  seller  of the  a spread  to  to  reach  provide  compensation  go  the  expected  during  a  normal  from p e r f e c t c o n f o r m i t y  uncompensated.  the  a n t i c i p a t e d t h r e s h o l d must be  the  damage.  Any  compensated  B o t h t h e m e r c h a n t a b l e q u a l i t y and standards  as  goods which o c c u r s  o f damage w h i c h w i l l  a r e m e a s u r e d by objective test  to  a  damage o v e r  i n proportion  to  the a n t i c i p a t e d  The  a b s t r a c t i o n of the  the  p e r f o r m a n c e t e r m t o accommodate any  the  eyes of the The  transit.  g o o d s must  fails  no  failure.  I t represents  deterioration  the  buyer i s e n t i t l e d  deterioration i s defined  i n value  rules  c a u s e d damage p r o v i d e s  standard  I f the  the  of  covering  i n a n a l y z i n g problems about r i s k t o goods i n  at the  sets  They a r e ,  rules  the  d i s t i n c t i o n between a n t i c i p a t e d  Merchantable q u a l i t y i s the  level  applied  damage t o g o o d s i n t r a n s i t .  externally  value  This analysis revealed  an  objective  allows  test.  courts to  reasonable  adjust  result  in  court.  p a r t i e s ' o b j e c t i v e l y determined expectation  b o t h a n t i c i p a t e d damage and  the  spread  allowed  by  defines  merchantable  137 quality.  B o t h c o n c e p t s may b e a r g u e d a s a d e f e n c e t o a damage  c l a i m made b y a n a g g r i e v e d b u y e r . is  t h e same.  what was a r g u e d  that  arguments  T h a t i s , t h e g o o d s d i d n o t d e t e r i o r a t e a n y more  than t h e buyer ought  Murrell  The form o f b o t h  (objectively)  i n the Bull  the s e l l e r  lost  case.  t o have e x p e c t e d . Alternatively,  on t h e p o i n t b e c a u s e  t h e goods had d e t e r i o r a t e d beyond  This i s  I n Marsh  the court  &  found  t h e buyer's reasonable  expectations.  A n o t h e r common f e a t u r e  i n the Bull  a n d Mash & M u r r e l l  d e c i s i o n s was t h a t b o t h c o u r t s c o n s i d e r e d t h e 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 b y c a u s a t i o n .  I n Mash & M u r r e l l  t h e C o u r t o f Queens B e n c h awarded t h e b u y e r damages b e c a u s e i t could not find meant t h a t damage.  an a b n o r m a l i t y i n t h e voyage.  another cause e x i s t e d which might  In Bull.  t h e c o u r t made a n e x p l i c i t  c a u s a t i o n by b a s i n g  i t s decision  natural  of shipping  consequence  Murrell.  It  iron  explain the reference to that  i n winter.  r u s t was a A s i n Mash &  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 t h e voyage.  i s c l e a r t h a t b o t h merchantable q u a l i t y and  anticipated tools  on t h e f a c t  Abnormality  damage p r o v i d e a n ex p o s t a d j u d i c a t o r w i t h t h e  t o a c c o u n t f o r damage a n t i c i p a t e d  transit.  t o occur during the  B o t h a r e b a s e d on a n o b j e c t i v e measurement o f t h e  parties  expectations.  B o t h p r o v i d e an ex p o s t o p p o r t u n i t y t o  correct  inefficiencies  i n contracts  of  goods.  f o r t h e s a l e and d e l i v e r y  138 I n summary, t h e  S a l e o f Goods A c t  contains  only  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 g o o d s i n t r a n s i t . concerns i n t e r n a l  damage and  responsible to provide transit  meet t h e  parties. that  The  completely  2.  second covers  absolved  optimal  two  sets.  of  the  seller  holds  is  of a l l r e s p o n s i b i l i t y .  Comparison  i n the  S a l e o f Goods A c t  S a l e o f Goods A c t  S a l e o f Goods A c t  holder  externally  important  of the  risk  rules  and  existence  the  of  rules.  r u l e s c o v e r i n g e x t e r n a l l y caused characteristics.  The  second  p a s s from t h e  one  o f a number o f p o i n t s d u r i n g  the  r e s p o n s i b i l i t y may perform  first  i s that this  seller the  i s that  r e v e r t back t o the  seller  of v e s s e l ;  risk  any  Moreover, i f he  satisfactory  cause a r e v e r s i o n of the  inappropriate choice  absolute  to the buyer at  transaction.  c e r t a i n duties i n a minimally  F a i l u r e s w h i c h may  The  i s absolutely responsible for a l l  c a u s e d damage.  r e s p o n s i b i l i t y may  i)  the  E x t e r n a l l y C a u s e d Damage  damage h a v e two  to  strictly  r u l e s r e v e a l e d a number o f d i f f e r e n c e s b e t w e e n  inefficiencies  the  expectations  These d i f f e r e n c e s i n d i c a t e d the  a)  is  e x t e r n a l l y c a u s e d damage and  c o m p a r i s o n between t h e  the  The  determined  seller  conclusion of  passed to the buyer, the  Summary o f t h e  The  that the  goods which a t t h e  objectively  once r i s k has  holds  One  are:  fails way.  139 ii)  failure  iii) The  delay  to give  f o r the  of r e s p o n s i b i l i t y  the is  i n the  are  Sale  variability  due  to the  at a l l connected with  prevention. could  and,  Indeed,  pass while  the  of the  passing  The  and  event which t r i g g e r s  f o r e x t e r n a l l y c a u s e d damage  the  i t i s very goods a r e  i n timing  a s s o c i a t i o n of r i s k  o f ,Goods A c t .  cessation of r e s p o n s i b i l i t y not  shipment;  i n s h i p m e n t w h i c h c a u s e s damage.  reasons  property  n o t i c e of  responsibility possible that  still  i n the  for i t s  responsibility  seller's  warehouse.  Obviously, transactions. insurance, increased By f o r the  this  This uncertainty  negotiation, risk  allocation  activities  the  seller's  durability  the  optimal  produces  model p o s s e s s e s o n l y  and  sales  for an  The  packaging to withstand  optimal  Instead,  reasonable  rule  care  set of a c t i v i t i e s  the  in under  sufficient  v o y a g e , and  the  stowage.  set, there  i s no  issue of the  i f e x t e r n a l l y c a u s e d damage c a n  is liable  one  f o r damage t o g o o d s i n  s e l l e r must u s e  under h i s c o n t r o l .  have r e s u l t e d i n p a r t seller  probably  to  costs  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  Under the  the  and  of r e s p o n s i b i l i t y  p r o p e r a r r a n g e m e n t o f s h i p and  of r i s k .  of uncertainty  causes i n c r e a s e d  research  I t i s that the  all  deal  o f e x t e r n a l l y c a u s e d damage.  contrast,  transit.  adds a g r e a t  from a f a i l u r e  of a s e l l e r ' s  f o r that p o r t i o n of the  harm.  passage  be  shown t o  duty, Under  then the  140 S a l e o f Goods A c t s e t o f r i s k that  r i s k had not passed  held blameless.  the  establish  or else the s e l l e r i s  a l l or nothing.  factor regarding  efficiency  i s that  under  S a l e o f Goods A c t t h e a c t u a l p a s s a g e o f r i s k h a s n o t h i n g  t o do w i t h seller's he  from t h e s e l l e r  I t i s either  A significant  r u l e s t h e b u y e r must  care  and c o n t r o l o f t h e goods.  interest  before  This presents the  o f a s a l e simply  to trigger  a property  event.  Once r i s k p a s s e s , disincentive transaction  the s e l l e r  t o p r o t e c t t h e goods. i s completed.  External  i s provided  a  relative  His part of the  Any a d d i t i o n a l l o s s  a c t i v i t y must b e n e g o t i a t e d  clearly  long  c o n s e q u e n c e s t h a t s e l l e r s may b e e n c o u r a g e d t o  manipulate t h e events passing  i t i s i nthe  t o a c t i v a t e t h e passage o f r i s k  h a s g i v e n up c o n t r o l o f t h e g o o d s .  obvious  Thus,  prevention  f o r and compensated by t h e buyer.  damage r u l e s u n d e r t h e S a l e o f Goods A c t a r e  inefficient.  due t o t h e v a r i a b i l i t y  o f time  of r i s k passage r e q u i r e s t h e 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  Confusion  transaction.  the p r e c i s i o n o f t h e event expectation, that there is  E v e n when t h e t e r m and t h e i m p r e c i s e  interpretation  facilitate  exchanges.  nature of  and c o n t r a c t t e r m i n o l o g y  i s always a p o s s i b i l i t y  not a desirable situation  i s defined,  o f ex p o s t  means  disputes.  f o r r u l e s which a r e designed  This to  141 b)  I n t e r n a l l y C a u s e d Damage  Internal the  Sale  against  damage p r e s e n t s  a less bold  o f Goods A c t t h e s e l l e r ' s internally  and  c a u s e d damage i s a b s o l u t e  within  bounds  and c a u s a t i o n .  Party  i s d e f i n e d by t h e c o n c e p t s o f m e r c h a n t a b l e q u a l i t y  a n t i c i p a t e d damage.  Causation  i s d e f i n e d by t h e c a t e g o r y  o f e x t e r n a l l y c a u s e d damage d i s c u s s e d By the  contrast, the optimal  same c r i t e r i a  seller  Use  s e t o f r u l e s b a s e s t h e d u t y on  a s e x t e r n a l l y c a u s e d damage.  to the limits  operationalized  by a r e d u c t i o n  reasonable  That  against  of transaction costs. and c o n f o r m i t y  They  t o common  i s , i t i s easier to visualize  l i m i t e d by b o t h a b i l i t y  foreseeability  responsibility  with  The ex a n t e a d v a n t a g e s a r e  possess a g r e a t e r degree o f c l a r i t y  responsibility  ease o f  f o r t h e p r o t e c t i o n o f t h e goods  c a u s e d damage.  expectation.  under h i s c o n t r o l  t h e r e q u i r e d p e r f o r m a n c e and c o n s i s t e n c y  duty r e q u i r e d  externally  i s , the  d u t y h a s a number o f  The advantages a r e r e l a t i v e  predetermining  That  of reasonability.  o f an o b j e c t i v e l y d e t e r m i n a b l e  advantages.  the  above.  i s required t o perform everything  according  Under  d u t y t o p r o t e c t t h e goods  d e f i n e d by t h e p a r t i e s ' e x p e c t a t i o n s expectation  comparison.  (causation)  and  than i t i s t o v i s u a l i z e  d e f i n e d b y t h e q u a l i t y o f g o o d s upon  l e s s m e r c h a n t a b l e q u a l i t y and t h i r d  arrival  party intervention.  142 The that  overall  the rules  d i f f e r e n c e between t h e two s e t s  i n t h e o p t i m a l model a r e b a s e d  s i m i l a r t o those used The  seller's  These  duties  i n tort  responsibility  i s defined  post that  i n terms  f l o w from both t h e s e l l e r ' s  the duty. the s e l l e r  on p r i n c i p l e s  law r a t h e r t h a n c o n t r a c t law.  t h e g o o d s a n d damage r e s u l t i n g breaches  of rules i s  of duties.  ability  to protect  t o t h e goods i f t h e s e l l e r  I f i t appears  ex a n t e o r c a n be shown ex  c o u l d n o t have p r o t e c t e d t h e goods u s i n g  r e a s o n a b l e c a r e t h e n t h e s e l l e r w o u l d n o t p o s s e s s a d u t y t o do so.  I f i t i s r e a s o n a b l e t h a t t h e goods a r r i v e  conforming  s t a t e then that defines the s e l l e r ' s  Alternatively,  i f the s e l l e r  arrive  t h e n he h a s b r e a c h e d  fact  at all,  cannot  duty.  ensure t h a t no d u t y  t h e goods  i f t h e y do n o t i n  arrive. Thus, under  responsibility The  i n a perfectly  the optimal rules,  a n a l y s i s would  a n ex p o s t damage  follow a typical  tort  analysis.  a g g r i e v e d b u y e r must p r o v e d u t y , b r e a c h a n d damage t o  succeed. ability  T h e e x i s t e n c e o f a d u t y w o u l d be b a s e d to protect.  assumed b e c a u s e  The r e s p o n s i b i l i t y  o f t h e commercial  on t h e  t o do s o w o u l d be  r e l a t i o n s h i p between t h e  parties. F o r h i s d e f e n c e t h e s e l l e r must show t h a t t h e 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 . w o u l d p r o v e t h a t he p e r f o r m e d standard.  t h e damage t o  To do t h i s  the s e l l e r  h i s duties to a reasonable  143 The  ex a n t e a n a l y s i s  process.  addressing the parts  and s e c o n d l y by a t t a c h i n g  r e a s o n a b l e manner i n f u l f i l l i n g  sale  a s two s e p a r a t e t r a n s a c t i o n s .  sale  o f t h e good.  i n an  of acting  in a  parts.  rules  i s t o v i s u a l i z e every  One t r a n s a c t i o n  The second t r a n s a c t i o n  guarantees.  i sthe  i s the sale of  w h i c h t r a v e l w i t h t h e goods t o t h e b u y e r ' s  These s e r v i c e s  perform  simple  o f t h e s a l e under t h e i r  a cost  their  A way o f v i e w i n g t h e o p t i m a l  services  an e q u a l l y  The p a r t i e s w o u l d d e t e r m i n e t h e i r c o s t s  exchange by f i r s t control  would f o l l o w  location.  a r e t h e s e l l e r ' s p r o m i s e s o f a c t i o n and  They a r e l i m i t e d by b o t h t h e s e l l e r ' s  capacity  to  and t h e p r i c e t h e b u y e r i s w i l l i n g t o pay f o r t h e  service. For a good  instance,  the sale  of a tractor  (passage o f p r o p e r t y and t i t l e )  1. t i m e l y  arrival  a t dock  involves  the sale of  and t h e s e r v i c e s o f :  side;  2. s e l e c t i o n o f a n a p p r o p r i a t e and,  means o f  transportation;  3. p r o p e r n o t i c e t o t h e b u y e r o f s h i p m e n t a n d documentation t o the shipper. 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 t h e t r a c t o r and packaging according t o the s e l l e r ' s reasonable expectation of the rigors of t r a n s i t . If the  damage r e s u l t s due t o a f a i l u r e  services,  the s e l l e r  i s liable.  passing of property or risk.  o f e i t h e r t h e goods o r  T h e r e i s no i s s u e  Nor i s t h e r e any c o n c e r n  of the over  144  V  the d e f i n i t i o n  o f merchantable q u a l i t y  or anticipated  deterioration. Both p a r t i e s  can e a s i l y  c a l c u l a t e t h e ex a n t e  costs of  t h e whole package o f goods and s e r v i c e s i n v o l v e d i n t h e transaction.  T h e ex p o s t 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 . factual  i s s u e t o c o n s i d e r would be t h e s e l l e r ' s  The o n l y  actual  control  o v e r t h e c a u s e o f t h e damage.  D. I n a p p r o p r i a t e n e s s  o f t h e 'Risk'  R i s k i s a n ambiguous t e r m .  Concept  I t h a s numerous m e a n i n g s none  of which d e a l with t h e e x i s t e n c e o f a duty. ranges  from  i t s i n s u r a n c e t o common u s a g e .  r i s k which a p p l i e s t o insurance f u t u r e n e g a t i v e event occurrence.  The u s e o f r i s k F o r example, t h e  i s the present value of a  multiplied  by i t s p r o b a b i l i t y o f  I t s common u s a g e d e s c r i b e s t a k i n g a c h a n c e o r  gambling.  B u y e r s a n d s e l l e r s may v i e w t h e i r with  risk  i n t h e common s e n s e .  w e l l be i n t e r e s t e d  t r a n s a c t i o n s as fraught  In addition,  i n reducing the potential  gamble t o a p r e s e n t v a l u e .  However,  t h e y may v e r y cost ofthe  i t s e r v e s no p u r p o s e t o  d e s c r i b e t h e r e l a t i o n s h i p between t h e p a r t i e s  i n terms o f  risk.  An  analysis  of the rights  and c o r r e s p o n d i n g  s a l e and arrangement o f d e l i v e r y use  of the risk  concept.  duties i n a  c o n t r a c t does n o t r e q u i r e t h e  The s e l l e r h a s t h e r i g h t  to receive  145 payment u p o n d e l i v e r y o f t h e g o o d s a n d t h e p e r f o r m a n c e o f h i s various  duties.  delivery  The b u y e r p a y s f o r t h e r i g h t t o r e c e i v e  o f t h e g o o d s and t h e p e r f o r m a n c e o f t h e s e l l e r ' s  duties. As  the seller  responsibility his  performs h i s d u t i e s h i s o v e r a l l  t o the buyer decreases.  responsibility will  occurs,  defined  E.  cease completely.  t h e b u y e r and t h e s e l l e r  relationship  defined  A t some f u t u r e But u n t i l  are involved  point  that  in a  by b o t h 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  as d u t i e s .  A D r a f t Wording o f t h e Optimal  Rules  The  rules f o r responsibility  s p e c i f i c wording o f optimal  o f damage t o g o o d s d u r i n g draftsmen expert statutory  transit  ought t o be l e f t t o  i n the rules of l e g i s l a t i v e  interpretation.  d r a f t i n g and  However, s i n c e t h i s  thesis  proposes  new r u l e s , a n o u t l i n e o f t h e r u l e s o u g h t t o b e p r e s e n t e d . f o l l o w i n g wording could the  event  optimal  responsible  be c o n s i d e r e d  r u l e s t o make t h e p a r t y  The  t o e f f e c t the goal of  best  able  t o perform  f o r performance.  Where t h e 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 t h e s e l l e r t o s h i p t h e goods by i n d e p e n d e n t c a r r i e r t o t h e b u y e r ' s l o c a t i o n , t h e s e l l e r must: 1. a r r a n g e a l l a s p e c t s o f s h i p m e n t o f t h e g o o d s i n s u c h a way t o r e a s o n a b l y e n s u r e t h e i r a r r i v a l a t t h e b u y e r ' s l o c a t i o n i n t h e c o n d i t i o n a n t i c i p a t e d b y t h e p a r t i e s when t h e c o n t r a c t was e n t e r e d i n t o , i n c l u d i n g w i t h o u t l i m i t i n g the g e n e r a l i t y o f the foregoing;  146  a) s e l e c t t h e c a r r i e r a n d t y p e o f s t o w a g e i n r e l a t i o n t o t h e f r a g i l i t y o f t h e 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 p r o p e r n o t i c e b u y e r ; and,  o f t h e shipment t o t h e  c) t r a n s m i t p r o p e r d o c u m e n t a t i o n w h i c h 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 o f t h e goods t o t h e c a r r i e r . 2. d e l i v e r g o o d s t o t h e c a r r i e r w h i c h a r e c a p a b l e o f withstanding the reasonably anticipated r i g o r s of the i n t e n d e d t r a n s i t t a k i n g i n t o a c c o u n t t h e good's d u r a b i l i t y a n d p a c k a g i n g , t h e t y p e and i d e n t i t y o f t h e c a r r i e r , t h e t i m e o f y e a r and t h e l e n g t h o f t h e v o y a g e .  F.  Conclusion  Summary  Optimal r u l e s confrontation. of  delivery  transfer  promote r e l a t i o n s h i p  Parties  who engage i n a s a l e  o f goods f o r p r o f i t .  goods a r r i v e  benefits It  mode o f b u s i n e s s a s s i s t s  a t the buyer's  intertwining integrated  i n the reduction of  interest that  conforming  location.  of rights  and d u t i e s  promotes a  business relationship.  Neither  party  from any a c t which r e d u c e s t h e v a l u e o f t h e a c t i v i t y .  i s i n the interest  relationship society  and arrangement  The p r o m o t i o n o f t h e  c o s t s by making i t i n b o t h p a r t i e s  vertically  than  agreement have as t h e i r o b j e c t t h e e f f i c i e n t  relationship  The  rather  o f both p a r t i e s  t o see that t h e  i s p r o d u c t i v e and p r o f i t a b l e .  as w e l l  as t h e p a r t i e s  In that  way  p r o f i t s by t h e e x e r c i s e .  147  BIBLIOGRAPHY  B a k e r , C.E. 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