This article is written by Khushi Agrawal, a student of Symbiosis Law School, Noida. She has discussed the concepts of transfer of ownership under the Contract Act in detail.
Transfer time for the sale of goods involves the transfer of ownership of the property from the seller to the buyer. For the following reasons, it is necessary to determine the exact time at which ownership of the goods passes from the seller to the buyer:
- Risk passes through the property. The rule is, prima facie risk passes with the property. Where the goods are lost, damaged, accidentally or otherwise, the owner of the goods shall incur the loss, subject to certain exceptions at the time of loss or damage of the goods.
- Any action taken in connection with third parties. If a third party damages the goods, it is the owner who can take action.
- What are the implications of insolvency? In the case of either the buyer or insolvency of the seller, it is necessary to know if the official customer will take control of the goods. The answer depends on whether ownership of the goods is with the insolvent party.
- Price suit. The seller’s price suit will not lie unless the property has passed on to the buyer unless the contract provides for other reasons.
Law relating to the passing of risk in case of the sale of goods
The fundamental principle is the prima facie risk of ownership. According to Section 26, the goods remain at the risk of the seller until their property is transferred to the buyer unless otherwise decided. However, if the property is transferred to the purchaser, the goods are at risk, whether or not the delivery was made. Thus risk and property go hand in hand.
But separating the risk from ownership is open to the parties. For example, the parties may agree that the risk passes after or before the property passes.
You can do the following to separate risk from the property.
- First of all, the goods are at risk of failure of the party where delivery is delayed due to the seller or buyer’s fault.
- Second, a commercial custom can divide risks and goods.
- Third, the agreement between the parties can distinguish between risk and property.
When is property in the goods passed under The Sale of Goods Act?
Sections 18 to 25 of the Goods Sale Act set out the rules that determine when ownership of the property passes from the seller to the buyer. These rules can be summarized as follows:
- Transfer of property in unspecified goods
- Transfer of ownership in ascertained goods
- Transfer of property in ascertained goods
- Transfer of property in the sale by approval
- Transfer of property when the right of disposal is reserved
A. Transfer of property in unspecified goods
- In the case of an uncertain goods sale contract, the property in the goods shall not be transferred to the buyer until and unless it has been determined (see Section 18).
- How are the commodities determined? By a valid assumption, the goods contained in that description shall be passed on to the buyer under Section 23(1), in a description contract, by either the seller or the buyer in agreement with the consent of the seller if the goods contained in that description are unconditionally assumed under that contract. The goods are subject to appropriation verification. There is only a selling agreement until appropriation has been reached. Appropriation means, by mutual consent of the parties, the selection of goods.
The following are the appropriation essentials:
(A) The goods should confirm the description and quality stated in the contract.
(B) The goods must be in a deliverable condition.
(C) The goods must be unconditionally (as distinguished from the intention to be appropriate) appropriated to the contract either by delivery to the purchaser or his agent or carrier.
(D) The appropriation shall be by the seller with the purchaser’s consent or by the buyer with the seller’s consent.
(E) The consent may be expressed or implied.
(F) The consent may be given either before or after the appropriation.
Therefore if a person agrees to sell ‘B’ 20 tons of oil of a specific description in his cisterns and has in its cisterns over 20 tons of description oil, no property shall be sold to ‘B’ unless 20 tons is separated and suitable for the contract from others. Therefore, no property shall be allowed.
Delivery to the carrier [Section23(2)]– Where the seller delivers the goods to the carrier for transfer to the purchaser and does not reserve the right of disposal, the property shall be transferred to the purchaser. The carrier is the purchaser’s agent, and delivery to the purchaser amounts to risk.
The key elements of the carrier’s delivery are:
- The delivery, i.e. the goods must be in accordance with the contract description and quality.
- For transmission, to the buyer, the seller delivers products to the buyer or carrier or bailee. This must be in accordance with the contract.
- No right of disposal shall be reserved for the seller.
By the seller with the consent of the buyer
‘A’ of Madras orders certain goods from a Calcutta manufacturer ‘B’. When the goods have been ready, ‘B’ shall assign the goods to the contract informing ‘A’ that the goods are ready, on which ‘A’ requests ‘B’, after having affected the Insurance, to send them by rail to Madras. As soon as the goods after being insured are delivered to the Railway Authorities (the buyer’s consent after appropriation), the property on the goods shall pass from ‘B’ to ‘A’.
‘A’ sell 500 pounds of rice to ‘B’ and the rice is packed into the seller’s gunny bags and the words “wait orders from the buyer” are added to the gunny bags with buyer’s address. The decision was made that, despite the fact that the goods are in a deliverable state, the property did not change hands because the buyer did not have the agreement to this appropriation yet.
B. Transfer of property in ascertained goods
If an agreement exists for the sale of certain or ascertained goods, the property therein shall be transferred to the customer at the time the contracting parties intend to transfer the good [Section 19(1)]. The intention of the parties concerned must be determined-
- the terms of the contract,
- the conduct of the parties, and
- the circumstances of the case [Section 19(2)]
The rules laid down in sections 20 to 24 are applicable only if the parties’ intention cannot be judged on the basis of their contract or conduct or other circumstances [Section 19(3)]. The rules are as follows:
(a) Specific goods in a deliverable state [Section 20]
In the case of the unconditional contract for the sale in a deliverable state of the specific goods, the property transfers to the buyer and whether the date on which payments were made or the time the goods were delivered or both were delayed is irrelevant.
(b)Specific goods to be placed in a deliverable state [Section 21]
Where there is a contract to sell specific goods and the seller is bound to perform anything in order to put them in a deliverable condition, the property shall not pass into the goods until such things have been done and the buyer has received notice of it.
(c) Specific goods to be weighed or measured
- Section 22 in a contract for the sale of specific goods in a deliverable state,
- The property shall not pass on the property until the buyer has notified the seller,
- where the seller has the obligation to weigh, measure, test or do any other action or thing concerning those goods for price determination.
Here the ownership is transferred to the buyer in any of the following three ways:
- By acceptance.
- By adoption of the transaction.
- By failure to return the goods.
The buyer can accept the goods and inform the seller accordingly. The buyer shall transfer its ownership to the buyer if the buyer gives its acceptance to the seller.
Example: ‘A’, a seller of books, delivered “approval books” to ‘B’. Later, ‘B’ notified ‘A’ that the books had been accepted. In this case, the books are expressly approved and the property is transferred to ‘B’ upon its approval.
2. Adoption of the Transaction
The purchaser may adopt the transaction by acting in respect of the goods. When the buyer makes any act which shows that the goods have been adopted, ownership shall be transferred to the buyer on the adoption act. The implicit acceptance is known. It usually occurs when the buyer handles his own goods.
Example: ‘A’ on “sale or return” basis delivered certain golden ornaments to ‘B’. In similar terms, ‘B’ delivered them to ‘C’ and ‘C’ to ‘D’. During D’s custody, the ornaments were stolen. ‘B’ had taken the transaction in this case by supplying the ornaments to ‘C’. ‘B’ is therefore responsible for paying the price to ‘A’. ‘C’ also took the transaction by supplying the ornaments to ‘D’. And thus, ‘C’ is also liable to pay the price to ‘B’.
3. Failure to Return the Goods
Ownership is also transferred to the buyer if the goods are not returned to the seller. This is also implied acceptance of the goods.
C. Transfer of Property in the sale by approval
When goods are delivered on approval (Section 24), the property therein passes to the buyer when goods are delivered on an approval to the buyer, or on “on sale or return” or under a similar condition:
- Where the buyer expresses his consent or acceptance to the seller, or
- where the buyer does any other act that takes the form of transaction, e.g. pledges or resells the goods.
- the purchaser retains the goods after the time specified for the return of the goods, without notice of refusal or without time specified, over a reasonable time period.
‘A’ sells or returns a diamond to ‘B’. ‘B’ gives the same to ‘C’ on similar terms and ‘C’ provides the same to ‘D’ on sale or return. The diamond was lost from D’s custody. Since ‘B’ is unable to return the diamond to ‘A’, his act of giving the diamond to ‘C’ is tantamount to adopting the transaction. Similarly, if the buyer on sale or return pledges the goods to a third party, the act of pledge shall be taken as an act adopting the transaction.
Where the goods have been sent to the purchaser on sale or return within a fixed period of time within which to express his approval, the property shall pass to the purchaser as soon as that period expires although the purchaser does not give his approval or acceptance and if no such time is fixed upon the expiry of a reasonable period of time.
D. Transfer of Property When Right of Disposal is Reserved
The purpose of reserving the right of disposal of the goods is to ensure that the price is paid before the property passes to the purchaser. In the Vpp (Prepaid Value) system, for example, the buyer is owned until the seller retains control of the products when the price is paid against the delivery.
Section 25(1) stipulates that-
- In a contract to sell specific goods or where the goods are subsequently appropriated for the contract.
- The seller can, until certain conditions are met, reserve the right to dispose of the goods.
- the purchaser may not acquire ownership of the goods until conditions imposed by a seller are fulfilled, even if the goods are delivered either to the purchaser itself or to any carrier or other bailees for transmission to the purchaser.
- For example, X sends certain goods by lorry to Y and instructs the lorry driver not to deliver the goods until Y pays the lorry driver the price.
- When the price is paid. The seller is presumed to have reserved the right of disposal under the following circumstances:
- By taking a title document in his own name or his agent’s name [Section 25(2)]. The seller is presumed to have reserved the right of disposal when goods are shipped or delivered for carriage to railways but the seller takes the title document, i.e. the lading bill (in the case of carriage by sea) or the railway receipts (in the case of carriage by rail) in his own name or on behalf of his agent. Only when the buyer pays the price in exchange for a lading bill or receipt from the railway, the property passes over to the buyer.
Example: Some paper bales sold by rail to ‘B’ were to be sent to him. ‘A’ took the railway receipt in the name of ‘B’ and sent it to his own banker to be delivered to ‘B’ upon payment of the price. The goods were destroyed by fire before ‘B’ paid the price and received receipts from the railway. The court held that the seller should suffer the loss as he reserved the right of disposal and when the bales were destroyed, their ownership was not transferred to the buyer. [General Papers Ltd. v. V.P.] Mohideen & Bros. 1958 Madras 482.
- When the bills of exchange are sent along with the RR / bill of lading to the buyer. [Paragraph 25(3)]. Where a carriage (e.g. a shipping company or railway) receives the goods on behalf of the buyer and receives a lading bill or rr. However, the seller draws an exchange letter to the buyer for the price of the goods and sends it to the buyer to ensure price payment along with the loading letter or railway receipts. The goods will not be passed on to him until the buyer accepts the bill of exchange for the property or pays the price of the goods. If the goods are retained without accepting a bill of exchange or paying the price, the property will not pass.
Transfer of title
A Latin maxim says: ‘The Nemo dat quod non habet.’ That is the basic principle of the transfer of title. Section 27 to 30 of the Sale of Goods Act, 1930 states laws on the transfer of title. The Latin maxim says that no one can give what they don’t have.
Section 27 deals with the sale of a person who is not the owner. Imagine a sales contract where the seller-
- Is not the owner of the goods
- Does not have the owner’s consent to sell the goods
- Has not been given the owner’s authority to sell the goods on his behalf
In such cases, the buyer does not acquire a better title to the goods than the seller had, provided that the conduct of the owner precludes the authority of the seller to sell.
Let’s look at an example. Peter steals a mobile phone from his office and sells it to John, who buys it in good faith. John will not get a title on the phone and will have to return it to the owner when he asks, i.e. there is no transfer of title.
Now, it seems to be a very straightforward rule. However, enforcing this rule can mean that innocent buyers may suffer losses in most cases. Therefore, certain exceptions are provided to protect the interest of buyers.
Exceptions– In each of the following cases, a person who is not an owner may give the transferor a valid title to the goods:
1. Transfer of title by estoppel [(Section 27)]
If by his conduct or words or by any act or omission, the true owner of the goods leads the buyer to believe that the seller is the owner of the goods or has the authority to sell them, he can not subsequently deny the seller’s authority to sell them. The purchaser is better than the seller in such a case.
- ‘O’ who is the real owner of the goods, causes buyer ‘B’ to believe that ‘S’ has the authority to sell the goods. ‘O’ can’t question the seller’s desire for title on the goods.
- ‘A’ was the true owner of the goods. ‘B’ the seller told buyer ‘C’ that he owned the goods. ‘A’ was there but remained silent. ‘C’ bought the goods from the title ‘B.’ Can ‘A’ question ‘C’ over the goods?
2. Sale by a mercantile agent [Proviso to Section 27]
Goods are frequently purchased under joint ownership. In many cases, by the authorisation of co-owners, the goods are held by one of these joint proprietors. If the person (who only owns the goods) sells the goods, the property is transferred to the buyer in respect of the goods. The buyer does this in good faith and has no reason to believe that the seller does not have the right to sell the goods.
- Peter, John, and Oliver are three friends buying a 42-inch TV set to watch the upcoming World Cup cricket. They unanimously decide to keep the television set in the house of Oliver. Once the World Cup is over, the TV is still in his house.
- One day, Julia, Oliver’s office colleague, visits his house and sells the TV to her. She buys it in good faith and has no knowledge of the fact that it was purchased together. She gets a good TV title in this case.
3] Sale by a Person in Possession of Goods under a Voidable Contract (Section 29)
Consider a person who acquires possession of certain goods under a contract which is voidable on the grounds of coercion, misrepresentation, fraud or undue influence. The purchaser shall acquire the goods a proper title if the original owner of the goods sells the goods until the contract is terminated.
Peter fraudulently gets a ring of gold diamonds from Olivia. Olivia can waive the contract whenever she wishes. Peter sells the ring to Julia, an innocent buyer before she realizes the fraud. In this case, Olivia cannot recover the ring from Julia as she did not cancel the contract before the sale was made.
4] Sale by a Person who has already sold the Goods but Continues to have Possession [Section 30 (1)]
Consider a person who has sold goods but remains in possession of the goods or title documents. This person can sell the goods to another buyer.
If the purchaser acts in good faith and is not aware of the prior sale, a good title for the goods will be issued to the purchaser even if the property contained in the goods has been transferred to the first purchaser.
5] Sale by Buyer obtaining possession before the Property in the Goods has Vested in him [Section 30 (2)]
Consider a buyer who obtains possession of the goods before the property in them is passed on to him, with the seller’s permission. He may sell the goods to another person, make promises or dispose of them.
Where a second buyer receives goods in good faith and without notice or any other right from the original buyer, he gets a good title.
This rule does not apply to a contract for hire purchase that allows a person unless the sale has been agreed to own the goods and buy an option.
Peter takes a car from John under the conditions that he will pay Rs. 5,000 each month as rent for the vehicle and may choose to buy it for Rs. 100,000 to be paid in 24 equal installments. Three months Peter pays Rs. 5,000 and sells Oliver’s car. In that case, John is able to recover Oliver’s car because Peter didn’t buy it nor agreed to buy it. He had only one way to purchase a car.
If the conduct prevents a goods owner from denying the authority of the seller to sell, the buyer receives a good title. However, in order to obtain a good estoppel title, it must be proved that the original owner actively suffered or condemned the seller in question as a person authorized to sell the goods.
Let’s look at an example. Peter, John, and Oliver are having a conversation. Peter tells John that he owns the nearby parked BMW car that really belongs to Oliver. However, Oliver remains silent. Then Peter sells the car to John.
In this case, though the seller is Peter who has no title to it, John will get a good title to the car. Because Oliver did not deny Peter the power to sell the car through his conduct.
7] Sale by an Unpaid Seller [Section 54 (3)]
If a non-paid seller uses his lien or stop-in-transit rights and sells the goods to another purchaser, then the second purchaser receives a good title against the original purchaser. In such a case, therefore, the title will be transferred.
8] Sale under the Provisions of other Acts
- Sale by the Company’s Official Receiver or Liquidator will give the buyer a valid title.
- Under the circumstances [Section 169 of the Indian Contract Act, 1872] the sale of goods by a pawnee may convey a good title to the buyer [Section 176 of the Indian Contract Act, 1872].