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In a contract of sale, the precise moment at which property or ownership in goods passes from the seller to the buyer is of great importance because, it has multiple legal ramifications. This is so because it is the ownership or title in goods that dictates the legal course in several extraordinary circumstances. The significance of transfer of ownership in goods can broadly be studied under the following four heads.
- Risk ‘Prima-facie’ passes with property
- Action against third party
- Suit for price
- Insolvency of the buyer or seller.
Risk ‘Prima-Facie’ Passes with Property:
The general rule of law is that the ‘risk‘ prima-facie follows ownership. If goods are lost or damaged by some accident or otherwise, then, subject to certain exceptions, whosoever is the owner of the goods at the time of loss or damage, shall bear the loss. In other words, it is the owner of the goods at the time of loss who suffers the risk of loss and not the person who is merely in possession of the goods.
The following situation presents some examples to help understand how risk ‘Prima-Facie’ passes with property.
Risk follows ownership
Example 1 : A purchased a suit length from B’s Shop. But he left the cloth in B’s shop to be collected by him later on. Incidentally fire broke out in the shop as a result of which, the suit length was gutted. The loss would fall on A because at the time of loss of cloth he had become its owner.
Example 2 : A hired a van from B. As a result of an accidental fire, the van was totally damaged while it was in the custody of A. The loss would be borne by B because at the time of loss he was the owner of the van.
However the parties to a contract of sale may agree that the risk will pass at the time different from the time of passing of property in the goods. The case studies below drive home the point.
Passing of risk can be different from passing of property
Example 1: In Consolidated Coffee Ltd vs Coffee Board, one of the terms adopted by the coffee board for auction of coffee was that property in coffee knocked down to a bidder would remain with the seller but at the buyer’s risk. In such cases, the property and risk pass on at two different stages.
Example 2: In Multanmal Chempalal vs Shah & Co, certain goods were delivered by the seller from Bombay to Bellary through a public carrier. One of the terms of the contract was that the goods were to remain the property of the seller until the price was paid although the risk was to pass to the buyer immediately after they were conveyed to the public carrier for dispatch. However, the goods were subsequently lost before the payment of the price. It was held that since the goods were lost consequent to the passing of property therein to the buyer, the loss was to be borne by the buyer.
The guiding rule is resperit demino which means the loss falls on the buyer. Thus, it is immaterial whether the price has been paid by the buyer and the goods have been delivered to him.
Action against third party in transfer of ownership
If after the contract of sale, there is a risk of the goods being damaged by the action of third parties, it is generally the owner who can take action and not the person who is merely in possession of the goods.
Suit for price in transfer of ownership
Price being an integral part of a contract of sale, the seller can sue the buyer for the price when the property in goods or the ownership of goods is transferred to the latter. Here it is important to note that the seller is not bound to accept the price in any form or mode except in legal tender money unless there is an agreement, express or implied, to the contrary. Hence, he cannot be compelled to accept by cheque.
Insolvency of the Buyer or Seller in transfer of ownership
If the buyer or seller becomes insolvent, it is necessary to ascertain whether the goods can be taken over by the ‘official receiver‘ or ‘official assignee‘. This depends upon whether the property in the goods was with the party adjudged insolvent. If the buyer is adjudged insolvent, the buyer’s official receiver or official assignee shall be entitled to take the possession of the goods even though the goods have not been delivered by the seller. On the other hand, if the seller becomes insolvent before effecting delivery of the goods but the property in goods has already passed to the buyer who has paid the price, the seller’s official receiver shall have no claim against the goods.