Legal Considerations And Implications

Distinctions between the Passing of Property and the Passing of Risk

Transferring ownership from sellers to buyers is normally the primary legal objective of a contract for sale of goods. Whenever things go wrong, the transfer’s precise timing is always crucial. First, in the event of liquidation of either the seller or buyer when goods are in transit, the insolvent party`s creditor would always want to know who owns the goods as this would go a long way in determining whether these goods would form part of their estate. If this is the case, the sale contracts solvent party would have to approve their losses in the liquidation, together with any other creditors. Additionally, the rights of the merchants to enquire the goods’ value may be tagged if the asset has already been passes. Further, the rights of the buyer to sue the carrier for damage or loss of goods could be dependent on establishment of ownership. Finally, determination of the allocation of risk is important in passing of property.

Passing of property implies passing the ownership and title of a good to a buyer from a seller. Usually, passing of property and passing of possession are normally independent. And while at the time of execution property could pass to the buyers from the sellers, acquisition in the real sense does not comes with a buyer when transit involves transhipping of goods to destinations that are different. Section 19 part 1 of the Sale of Goods Act, 1979 indicates that items passes only when the individuals involved intend it to pass. As such, parties are always at will to incorporate their intentions into a contracts terms and it is only through having recourse to the contract’s terms, circumstances of cases as well as conduct of the parties that this can be ascertained.

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In line with commercial practices, a buyer can always obtain possession from the seller whenever the seller agrees to supply goods on credit or the buyer tenders the price. In case a buyer has already possessed some goods but becomes bankrupt before payments are made, automatically, the seller becomes the unsecured creditor. The seller is however, allowed to assert his rights and further reclaim his goods in the event the property has not passed. It is possible to do this with the prerequisite that the property and the tittle are reserved by the seller and they could also be able to recover goods in case of insolvency of the buyer. In the instance sellers become insolvent before goods that have already been paid for by the buyers are delivered to them, passing of property is also becomes necessary. In the event that property has already passed to a buyer, their rights to the goods are greater. It is worth noting that in most instances, the goods risk passes with the property. Under no circumstances can a seller sue for the price of a good if the property is yet to pass. However, in the event the buyer repudiates or refuses to accept the contract before passing of property, sellers are only in a position of suing for non-acceptance damages2.

The presence of remedies for both the buyer and the seller for purposes of sing third parties who destroy their goods is one of the effects brought about by passing of property. However, seldom will property alone be the major factor. Usually, it is liked with a contractual right against a third party or a right to possession. For example, for goods that are damaged while being shipped, the person who holds the bill of lading is the person who is entitled to sue. Such a person has contractual rights against the owner of the ship and also against the property. A right of property is crucial in establishment of torts against third parties. This is a requirement by the House of Lords.

It is always important to have it in mind that there exist different categories of goods whenever dealing with passing of risks as well as property. The Sale of Goods Act 1979 contains a large division of goods that are either unascertained or specific. Section 61 of the Act says that specific goods are those goods that are normally those goods that are specified as well as further agreed on during the making of a contract of sale. Unascertained goods are those goods that are not specific in any way. That implies that in no way have they been identified at the time of conclusion of a contract. Identification of goods ascertains them. Ascertainment involves identification of goods. In line with section 16 part 1 of the Sale of Goods Act, those goods that are unascertained can never pass unless they are ascertained. Passing of property requires ascertainment. In the case of Re Wait, Lord Atkin held that if someone could be able to identify a contracts subject matter before they got into a contract, which would specify the goods. The case of the Elafi further points out that ascertainment is also possible by either exhaustion or deletion. For example, if sellers purchase cargo in bulk, for four different buyers P, Q, R, and S, and takes turns to deliver the goods to them, ascertaining which part of the bulk belongs to who will not be possible. When goods are delivered to P, Q, and R, ascertainment of their share of the bulk is made and the share of S is ascertained by the goods that are left from the initial bulk. That is what is known as ascertainment through deletion.

After ascertainment of goods, section 17 of the Sale of Goods Act requires that property can only be transferred when both of the parties to a contract require it to be transferred. In the event that the parties involved intents cannot be established, there are rules in section 18 which need to be followed so as to determine when a property will pass. In the event the goods are specific, the first four rules are followed and in the instance the goods are unascertained, the fifth rule is put into consideration.

The first rule stipulates that whenever there exists a contract for goods sells in a way that is deliverable, only when a contract is made does a property pass. Postponement of either delivery or payment is immaterial. The second rule prevents the passing of specific goods whenever such goods are in a state that is not deliverable when the contract is created. It is the responsibility of sellers to place their goods in a state that is deliverable. The third rule requires that property does not pass initially, when there is lack of clarity on what the buyer is required to pay. It is up to the seller to do something to see that the goods are ascertained. According to this rule, the seller is bound, for the purposes of ascertaining price, to either test, weigh or even measure the good. Property cannot pass unless ascertainment has been done. The fourth rule deals with goods that are on return or on sale. The fifth rule is normally concerned with goods that are unascertained. Unconditional appropriation is required to pass property in unascertained goods. In goods that are ascertained, this will involve unilaterally marking or setting aside of goods which the seller intend to use when they get into contracts with particular buyers. There is no commitment in existence that this could be possibly undone. On the other hand, appropriation is where both of the parties to a contract are in agreement that the goods are contract goods; this is a bilateral agreement which could in no way be undone.

Sellers are given the right to reserve ownership by section 19 of the Sale of Goods Act. Part 2 of section 19 posits that if the seller order is used to make the Bill of Lading, then the seller reserves retaining of title and ownership. There is no possible way that such a property could pass unless the seller passes it to the buyer.

On the other hand, passing of risk is involved with passage of liability of loss or damage of products from a supplier to a client, regardless of passing of the title or not. Based on section 20 of the Sale of Goods Act, risk prima facia passes with the property. This is however, a rule which is general and could always be subject to exception and always created through the parties’ agreement. In the event of a sales agreement where there is delay in the delivery of goods as a result of a fault from either of the parties, any subsequent risk of damage or loss is normally upon the party that faults. Parties are also always at will to agree upon different times for transfer of property and risk.

According to section 25 of the act, sellers also have the rights of keeping goods at their disposal until the buyers fulfil certain conditions that have been set. In the event the seller reserves such rights of disposal, the risk is passed on to the client at such a period when goods would have passed had there been no reservation of right for disposing the products. What this means is that whenever the option of reservation of right is practiced, the products remains at the sellers’ disposal and does not pass until condition precedent are fulfilled.

Free on Board contracts are good examples of contracts where property and risk pass during shipment. However, in the event the disposal right of the property is maintained by the merchant to the time the full payment is done, property passes once the full payment has been done but risk will pass during the time of shipment. In the event a buyer pays in full for goods before they are shipped, then the property and risk pass together during shipment. Likewise in Cost, Freight as well as insurance contracts, there exist a general assumption that product only gets to pass once its delivered and accepted. On the other hand, risk come to pass when goods are being shipped. This implies that risks could pass before property in CIF contracts.

In the case of Mitsui & Co Ltd and Another v Flota Mercante Grancolombiana, after the buyers made an 80% payment, shipment of cartons of prawns was done. FOB terms were contained in the contract which required property and risk to pass during the time of the shipment. The prawns were found to be damaged during discharge. In the final ruling, it was clear that the buyer lacked the title to sue as at the time of damage of the products as well as goods’ ownership had not passed. This was after the ship owner brought up an objection. In the court of appeal, it was held that the goods had been damaged while on transit and only the individual having the products at that period was in a position of suing the owner of the ship. Their however, was no evidence of payment of the remaining 20% which was the condition precedent and as such, there was a discovery that the goods had not yet reached to the client. The judges at the court of appeal reversed the claim of the buyer that had been admitted at the trial level.

As such, property and risk could always pass separately to buyers from sellers and in such instances where risk get to pass before the property, the liability for damage and loss is borne by the buyer even if they are yet to be the owners. On the contrary, in the event there is a delay in the delivery of goods as a result of mistakes either by the merchant or individuals agree or else the liability of damage and loss is borne by the seller even if he has lost ownership of the good. In the case of Sterns Ltd v Vickers Ltd, the seller sold 120 gallons of white spirit. These gallons were part of a larger quantity that was in a tank that was owned by a storage company.

A delivery warrant was issued by the seller to the buyer, whereby the storage company undertook to deliver to the buyer or any assignees the buyer would appoint. It was up to the buyer to make their own arrangements with the storage company in connection to factors like storage insurance. The buyer’s assignees did not want the spirit to be delivered immediately and as such paid the storage company so that it could hold the spirits for them. Few months later, it was established that the spirits quality had deteriorated as a result of volatile elements and also due to natural evaporation. Seeking to recover damages from the seller, the assignees claimed damages from the buyer. In the court of Appeals ruling, it was held that even though the property in the goods was yet to pass, the deterioration risk had already been transmitted to the buyer once they got the warrant of delivery.

It is important to distinguish allocation of risk from passing of ownership as between buyers and sellers even though it is possible to simultaneously transfer the two. According to section 20 of Sale of Goods Act 1979, risk will always pass with property unless it has been agreed otherwise6. This is however, not always the case in contracts across borders. Particularly, and this is in contrast to ownership, usually risk can pass even before the ascertainment of goods, at any rate when the products are part of a bigger bulk that is also identified. In most CIF and FOB contracts, regardless of whether property passes at this stage, risk will pass on shipment8. This is also the case whenever parcels that are unsegregated are used to ship goods. There are three situations that require special mention however, and these are

In, In and out contracts whereby, sellers are normally obliged to deliver goods at discharge ports physically; often, risk will pass at this stage. In the event gods are sold afloat, the undertaking of a C.I.F seller regarding quality may relate back to the point in time when the shipment took place and this would place the risk of deterioration on the buyer even if during the conclusion of the sale contract the goods had already deteriorated. That implies that, in effect, risk can retrospectively pass or ‘as from shipment.’ Under most C.I.F types, oil contracts, often, the period of delivery normally refers to the arrival period at the port of discharge but not the time of shipping the goods. However, even with this, the risk of deterioration or contamination will always fall on the buyer. However, in the event that there is an absolute obligation that the ship for instance is to arrive at the port of discharge within a specific time, in effect, the risk of delay of the ship may end up falling on the merchant. The contract wording determines if the seller’s obligation of the vessel’s arrival within the specified time is absolute. In Wise, the contract availed: ‘Delivery: Vessel TBN. Arrival: March 20- March 30’ and wa

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Cases

  • Mitsui & Co. Ltd v Flota Mercante Grancolombiana SA
    Re Wait
    Sterns Ltd v Vickers Ltd
    The Elafi
  • 'A Brief Overview to the Sale of Goods Act 1979 accessed 29 January 2019
  • England, Sale of Goods Act 1979 (SiSU 1979) 'Sale of Goods Act' (Consumer Rights, 2019) accessed 29 January 2019 'Sale of Goods Act 1979 (As Amended)' (BBC) accessed 29 January 2019 'Sale of Goods Act 1979' (legislation.gov.uk) accessed 29 January 2019

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