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Passing of Risk in Sale of Goods Act

Updated: May 6


Passing of Risk in Sale of Goods
Passing of Risk in Sale of Goods

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Understanding the transfer of goods involves delving into the intricate interplay between property rights and risk allocation. Section 26 of relevant legal frameworks forms the bedrock upon which this understanding is built.


This section lays down the principle that, by default, the responsibility for goods rests with the seller until the property therein is transferred to the buyer. Only upon such transfer does the risk associated with the goods shift to the buyer.


However, this seemingly straightforward rule is accompanied by exceptions


Foundational Principle


The principle of risk follows property, as outlined in Section 26, establishes a fundamental concept in the transfer of goods. By default, the responsibility for goods rests with the seller until the property therein is transferred to the buyer.


Once the property is transferred, regardless of whether delivery has occurred, the risk shifts to the buyer.


This rule, enshrined in Section 26, dictates that the party in whom the property of the goods resides bears the loss associated with those goods. In essence, ownership determines liability.


It's crucial to note that this rule applies irrespective of possession; rather, it hinges on identifying the rightful owner at the time of the loss.

 
 

Exceptions

Exceptions to the general rule that "risk prima facie passes with property" are explicitly outlined within Section 26 itself. These exceptions allow for instances where the loss may be borne by a party other than the owner, thus separating "risk" from "property".


Intention of Parties


Express agreement is one such exception, as indicated by the phrase "Unless otherwise agreed" at the beginning of Section 26.


Parties can articulate their intentions contrary to the default rule, thereby stipulating that although the property hasn't been transferred, the buyer or seller assumes the responsibility for any loss or damage to the goods.


In the case of Rutter v Palmer (1922) 2 KB 87, for example, the owner of a motor car entrusted it to a garage keeper for sale on commission, under the condition that it was "at customer's risk". Despite the car being damaged by the garage keeper's servant, the keeper was shielded by this clause.


Trade Customs


Trade customs can also separate "risk" and "property". In Bevington v Dale (1902) 7 Comp Cas 112, furs were delivered to a buyer "on approval". According to a custom in the fur trade, the risk of loss fell upon the person ordering the goods on approval.


Even though the property hadn't passed to the buyer, when the furs were stolen before the approval period expired, the loss was borne by the buyer.


Delay

The first proviso to Section 26 addresses situations where there is a delay in the delivery of goods due to the fault of either party. In such cases, if the delay results in loss, the party at fault, defined as the one committing a wrongful act or default, must bear the loss.


In the case of Demby Hamilton & Co. Ltd. v Barden (1949) 1 All ER 435, the sellers entered into an agreement to supply 30 tons of apple juice based on samples provided. They promptly crushed 30 tons to match the samples and stored the juice in casks.


Despite delivering some instalments, the buyer refused further deliveries, leading to the apple juice spoiling. It was determined that while the property in the goods remained with the sellers, the loss had to be borne by the buyer.


Another consideration is when either the seller or the buyer acts as the bailee of the goods, as stated in the second proviso to Section 26.


This provision highlights that even if the seller or buyer isn't the legal owner of the goods, if they are in possession, they may be held responsible as the bailee.


Section 151 of the Contract Act imposes a duty of care on every bailee, requiring them to handle the goods with the same level of care as a prudent individual would with their own property.


Consequently, if the seller negligently allows the goods to be lost, damaged, or stolen, they are liable for the loss, regardless of whether the buyer is the legal owner of the goods.

 
 

Sale on Approval

Section 24 provides the rule for the transfer of property in cases where goods are delivered on approval, "on sale or return," or under similar terms. According to this section:


The property in the goods passes to the buyer when:


  • The buyer indicates approval or acceptance to the seller, or performs any action that confirms the transaction.


  • If the buyer retains the goods without notifying the seller of rejection, then:

  • If a specific time for the return of the goods has been established, the property passes upon the expiration of that time.

  • If no specific time has been designated, the property passes upon the lapse of a reasonable duration.


In essence, when goods are dispatched on approval, sale or return, or trial basis, the arrangement constitutes an agreement to sell.


During this period, the property and risk remain with the seller until the buyer takes one of the actions outlined in the section. Upon any of these actions being taken by the buyer, the transaction converts into a sale, and both the property and risk transfer to the buyer.


The crux of the rule lies in the passage of property either through acceptance or through the failure to return within a reasonable timeframe.





By Acceptance


The transfer of property occurs when the buyer expresses acceptance or approval of the transaction, or in any way confirms it. Acceptance can be either explicit or implied from the buyer's actions.


Adopting the transaction involves a buyer's act indicating they consider themselves the owner of the goods and engage with them accordingly.


For instance, using, pledging, or reselling the goods signifies implicit adoption, as it indicates the buyer relinquishes the ability to return the goods.


In the case of Kirkham v Attenborough (1897) 1 QB 201, a manufacturing jeweller supplied jewellery to Winter "on sale or return". Winter pawned the jewellery with the defendant, a pawnbroker, and subsequently failed to pay for it.


The plaintiff pursued the defendant (the pawnbroker) to reclaim the goods. However, the court ruled that the plaintiff should have sued Winter for the payment, not the defendant.


This decision stemmed from Winter's act of pledging the goods, which constituted an adoption of the transaction, thereby transferring the property to him.


In the case of Genn v Winkel (1912) 107 LT 434, the plaintiff entrusted diamonds to the defendant on a sale or return basis. Subsequently, the defendant passed these diamonds to X under the same terms. X, in turn, transferred them to Y, and they were subsequently lost.


The court ruled that by further transferring the diamonds, the defendant had effectively adopted the transaction. Consequently, the property in the diamonds had passed to the defendant, thereby making him liable to compensate for the loss.


By Failure to Return Within a Fixed Reasonable Time


The second scenario under which the property transfers to the buyer is when the buyer neglects to return the goods or provide notice of rejection within a reasonable timeframe, or if a specific time for return has been set, upon the expiration of that period.


Determining what constitutes a reasonable time is a matter of fact in each particular circumstance.


For instance, if A takes a horse on trial for 8 days and during this period neither confirms acceptance nor communicates rejection to the seller, but continues to retain the horse, A automatically assumes ownership of the horse upon the lapse of the 8-day period.


It's essential to note that in such instances, the property shifts to the buyer only upon the expiration of the agreed-upon period, and not before.


Conclusion

Within commercial transactions, the principle of risk following property, as outlined in Section 26, serves as a fundamental guideline. However, this principle isn't without exceptions and intricacies to cater to the varied requirements and practices of commercial participants.


Through explicit agreements, trade norms, and clauses addressing delays and bailee liability, legal structures evolve to mirror the practicalities of commerce, ensuring fair risk distribution and promoting the seamless movement of goods in the market.

 
 


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