Risk of loss
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This article is written by Parth Makarand who is pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from Lawsikho.

Introduction

The performance of a contract for the sale of goods often requires that the goods that are sold, have to be transported over long distances. If due to various reasons, the goods are damaged while being delivered to the buyer, who is responsible for the same? This question is answered by the Sale of Goods Act, 1930, which regulates contracts in which goods are bought and sold. It has laid down provisions regarding the rights and liabilities of the buyer and the seller. The legislature has included within the Act the concept of “risk of loss”- that is, which party is responsible for the goods after they have been sold, but before they have been delivered to the buyer by the seller. This article shall attempt to explore the development and application of this concept from a bird’s eye view. 

What is the risk of loss?

Risk of loss is a term used in the law of contracts to determine which party should bear the burden of risk for damage occurring to goods when:

  • the sale of goods has been completed; and 
  • the delivery of the goods from the seller to the buyer is pending. During this period, the goods are said to be in transit.

Due to some unfortunate circumstances, the goods may be destroyed before the seller can deliver the goods to the buyer, without either of the parties being at fault. In such cases, the person who bears the risk of loss incurs the liability of paying for the destroyed goods. Such considerations generally come into play after the contract is formed but before the buyer receives goods, something bad happens. Before understanding how the risk of loss is determined, we must first understand the concepts of delivery of goods and transit.

What amounts to the delivery of goods?

Before proceeding further, we must first understand what amounts to the delivery of goods. According to Section 33, delivery of goods sold may be done by:

  • Anything which has the effect of putting the possession of the goods in the hands of the buyer (or a person authorized to hold them on his behalf); or 
  • Anything which the parties agree that shall be treated as delivery.

Taking a look at the three kinds of delivery

  1. Actual delivery

 Physical possession of the goods is given to the buyer.

  1. Constructive delivery

The buyer authorizes another person to receive the delivery on his behalf. The seller delivers the goods to this authorized person. The seller is deemed to have delivered the goods to the buyer.

  1. Symbolic delivery

 Something is delivered as a token of transfer of the goods. This type of delivery is done when the goods are inconvenient to move, or incapable of moving altogether.

Example

The seller handing over to the buyer the key to a warehouse in which bulky goods are kept amounts to a symbolic delivery. Although there is no physical delivery of the possession of the goods, a symbolic delivery is as good as an actual delivery in the eyes of the law.

What is transit?

In common terms, transit means carrying things from one place to another. Under the Sale of Goods Act, goods are said to be in course of transit: 

  • from the time the seller delivers them to a carrier or a bailee for transmission to the buyer; and
  • until the buyer or his agent takes delivery of the said goods.

Transit is described in detail under Section 51 of the Act. It envisions the exact time and conditions as to when transit commences and when it comes to an end. Examples of scenarios in which transit is said to come to an end are:

  • The buyer or his agent obtains delivery before the goods reach the destination. In such cases, the transit ends once the delivery is obtained.
  • Once the goods reach the destination and the carrier of bailee informs the buyer or his agent that he holds the goods, then the transit ends.
  • If the buyer refuses the goods and even the seller refuses to take them back the transit is not at an end.
  • In some cases, goods are delivered to a ship chartered by the buyer. Depending on the case, it is determined that if the master is functioning as an agent or carrier of the goods.
  • If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent, the transit ends.
  • If a part-delivery of the goods has been made and the unpaid seller stops the remaining goods in transit, then the transit ends for those goods. This is provided that there is no agreement to give up the possession of all the goods.

Determination of the risk of loss

The old civil law maxim of res perit domino means that “a thing is lost to its owner.” Thus, the person who is the owner of goods that were destroyed is the one who has to bear their loss. Applying this principle, Blackburn observed that where it can be shown that the property was passed, prima facie the risk of loss is on the person in whom the property came to pass. This principle has been duly enshrined by the legislature in Section 30 of the Sale of Goods Act, 1930, which talks of “Risk prima facie passes with the property.” Which in other words mean, the goods are at the risk of the party in whom the property is.

Section 26 lays down that unless otherwise agreed between the parties:

  • The goods remain at the seller’s risk until the property is transferred to the buyer;
  • Once the property has been transferred to the buyer, the goods are at the risk of the buyer, irrespective of whether the goods have been delivered or not.

This concept can be summarily explained by examining the case of Stern Ltd. V Vickers Ltd.:

  • In this case, there was a sale of 200,000 gallons of white spirit. Out of this, 120,000 gallons were stored in a tank belonging to a third party.
  • A delivery warrant was given to the buyer, and it was accepted by the owner of the tank. 
  • However, the buyer neglected to take the delivery of the goods for a couple of months after the acceptance of the delivery warrant. Due to this delay, the goods went bad. 
  • The loss of the goods was to be borne by the buyer. Although he did not have physical possession of the goods, the sale was complete and goods were constructively delivered to him. Thus, the goods were under his ownership, and the risk was his to bear.

Separation of risk from delivery of property

The general rule is that “risk” and “property” go hand in hand. However, this does not mean that the two are not separable. It is possible for the “risk” to be in one party and for the “property” to be in another. The first line of the section indicates that it is subject to a contrary agreement between the parties. It states that:

  • If the delivery has been delayed due to the fault of either the buyer or the seller, which causes a loss, then the party who was at fault shall be responsible for the loss caused by the fault.

Demby Hamilton & Co Ltd v Barden

In the case of Demby Hamilton & Co Ltd v Barden:

  • The buyer had contracted to obtain 30 tons of apple juice from the seller. 
  • The seller prepared 30 tons of apple juice by crushing all the apples they had for the season. 
  • The buyer paid for a part of the goods and received their delivery. 
  • The delivery of the rest of the goods would have been completed by the seller as everything was ready on their part. However, the buyer was instructed to hold off the rest of the deliveries for some time.
  • The buyer was supposed to give further instructions as to the delivery of the rest of the apples but failed to do so. During this hold up, the apple juice deteriorated.
  • It was held by the court that the default of the buyer caused the destruction of the goods, and thus the buyer shall incur the loss for the same.

The proviso to Section 26 also recognizes the possibility of separation of “risk” and “property” by agreement of the parties. 

Deterioration of goods during transit (Section40)

This section comes into play where:

  • the seller of goods agrees to deliver the goods at his own risk, and
  • the delivery is to be made at a place other than where the goods were when they were sold. This means that the goods have to be transported over a long distance by the seller.

When these conditions are fulfilled and unless agreed to the contrary, the section states that the buyer shall bear the risk of deterioration in the goods which happens naturally during the course of transit. Thus, the section propounds that the buyer undertakes the liability of deterioration of goods while they are being transported over a long distance, and the deterioration occurs naturally and incidentally during the course of transit. However, if the goods are otherwise damaged in a way that is not incidental to the nature of transit, the risk of loss rests on the seller.

How can parties reduce their liability?

The risk of loss arises from the contract between the buyer and the seller for the sale of goods. To reduce the liabilities of the parties, certain measures can be taken: 

  • There should be no ambiguity in the contract. 
    • It should clearly demarcate the responsibility of each individual party; and
    • It should further outline the exact moment as to when delivery is completed and the ownership of the goods passes.
  • The law assumes that prima facie, the risk passes with the property unless otherwise agreed by the parties. If the parties agree that risk shall not pass with the property, the contract must clearly state so. 
  • It should be ensured that both the parties negotiate the terms of the contract to suit their individual needs, and see eye to eye regarding each stipulation. The parties must be aware of the exact meaning of each term, and what are the consequences of including that term in the contract.

Remedies

If one party finds that the goods have been damaged while the risk of loss rested on the shoulder of the other party, let us see some of the remedies available in such a scenario:

  • He may bring a suit for damages/special damages against the other party. The right to do so is assured under Section 61 of the Sale of Goods Act, 1930. The damages claimed can be either liquidated or unliquidated, depending on the nature of the breach and the terms of the contract between the parties. The value of the damages is assessed in line with Section 73 of the Indian Contract Act, 1872.
  • He may bring a suit for a specific performance of the contract. This means that the party can request the court to compel the breaching party into performing the terms of the contract. This is generally available only to the buyer, under Section 58 of the Sale of Goods Act.

Conclusion

Thus, we have seen the meaning of delivery of goods and transit. The concept of risk of loss determines the party who is responsible after the goods have been sold, and before they can be delivered to the buyer. Prima facie, the person who is the owner of goods which were destroyed is the one who has to bear their loss. However, this is not a hard and fast rule and there are exceptions to it. The concepts of “risk” and “property” are distinct in nature and can be separated.     

References


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