BL/U3 Topic 7 Passing of Properties in Goods
A sale of goods or property implies a transfer or passing of ownership to the buyer. The passing of property is an important aspect to help determine the liabilities and rights of both the buyer and the seller. Once a property is passed to the buyer, then the risk in the goods sold is that of the buyer and not the seller. This is true even if the goods are in the possession of the seller. Let us learn more about the passing of property in the Sale of Goods Act.
Passing of Property
There are four primary rules that govern the passing of property:
- Specific or Ascertained Goods
- Passing of Unascertained Goods
- Goods sent on approval or “on sale or return”
- Transfer of property in case of reservation of the right to disposal
In this article, we will be looking at the first two rules.
Passing of Ascertained Goods
This is the first rule of the passing of property. It deals with the passing of specified goods and states that –Specific or ascertained goods pass when intended to pass. Section 19 of The Sale of Goods Act, 1930, has three sub-sections as follows:
- Sub-section (1): Imagine a contract for the sale of specific or ascertained goods with a clear mention of the time when the parties to the contract intend to transfer the property. In such cases, the property is transferred at the time mentioned in the contract.
- Sub-section (2): To understand the intention of the parties, the terms of the contract, the conduct of the parties, and the circumstances of the case are considered.
- Sub-section (3): Sections 20 to 24 of The Sale of Goods Act, 1930, contain rules to ascertain the intention of the parties. This intention is about the time at which the property in the goods will pass to the buyer. Let’s look at these sections
Section 20 relates to Specific goods in a deliverable state. It states that if the contract is unconditional for the sale of specific goods in a deliverable state, then the property in the goods passes to the buyer the moment the contract is made. This rule holds true even if the time of payment of price or delivery of the goods or both is postponed.
Example: Peter goes to an electronics store and buys a television set. He asks the shopkeeper to deliver it to his house. The shopkeeper agrees. The television immediately becomes the property of Peter.
Specific goods to be put into a deliverable state (Section 21) – Imagine a contract for the sale of goods where the seller has to do something before the goods are ready for delivery. In such cases, the passing of property happens only after the seller does the things and informs the buyer.
Example: Peter buys a laptop from an electronics store and asks for a home delivery. The shopkeeper agrees to it. However, the laptop does not have a Windows operating system installed. The shopkeeper promises to install it and call Peter before making the delivery. In this case, the property transfers to Peter only after the shopkeeper has installed the OS making the laptop ready for delivery.
Specific goods are in a deliverable state but the seller has to do something to ascertain the price – Imagine a contract of sale of goods which are in a deliverable state but the seller has to do something like weight, measure, test, or perform any other act on the goods to ascertain the price. In such cases, the property does not pass until the seller does the act and informs the seller.
Example: Peter sells a carpet to John and agrees to lay it in John’s house as a part of the contract. He delivers the carpet and informs John that he will lay it the next day. That night the carpet gets stolen from John’s premises. In this case, John is not liable for the loss since the property had not passed to him. According to the terms of the contract, the carpet would be in a deliverable state only after it is laid.
Passing of Unascertained Goods
If there is a contract for the sale of unascertained goods, then the passing of the property of the goods to the buyer cannot happen unless the goods are ascertained. This is specified under Section 18 of The Sale of Goods Act, 1930.
Further Section 23 lists two important rules for the passing of property of unascertained goods:
- Sale of unascertained goods by description: Imagine a contract for the sale of unascertained or future goods by description. If any goods of that description are appropriated to the contract either by the buyer or the seller with the consent of the other party, then the property of the goods passes to the buyer. The consent can be express or implied and given before or after the appropriation is made.
- Delivery to the carrier: If the seller delivers the goods to the buyer or a carrier or a bailee (whether named by the buyer or not) for the purpose of transmission to the buyer, but does not reserve the right of disposal, then he is deemed to have unconditionally appropriated the goods to the contract.
Some Points to Remember about the Appropriation of Goods:
If goods are selected with the intention of using them in performing the contract, with the mutual consent of the buyer and the seller, then it is called appropriation of goods. Here are some essentials:
- A contract for the sale of unascertained or future goods exists
- The goods conform to the quality and description stated in the contract
- They are in a deliverable state
- The goods are unconditionally appropriated to the contract either by delivery to the buyer of his agent or the carrier.
- The appropriation is made by the buyer with the assent of the seller or the seller with the assent of the buyer.
- The assent can be express or implied
- The assent can be given before or after the appropriation.
Passing of Property: Goods Sent on Approval
When a seller sends good to a buyer on approval basis or on terms similar to ‘on sale or return’, the property passes to the buyer only when:
- The buyer communicates his approval to the seller or does an act which signifies acceptance of the transaction.
- He does not give his approval or acceptance to the seller but accepts the goods without giving a notice of rejection. There are two possibilities here:
- A time has been fixed for the return of goods – In this case, if the approved time has elapsed, then the property is passed to the buyer.
- A time has not been fixed for the return of goods – In this case, the property is passed to the buyer once a reasonable time has elapsed.
- The buyer does something to the goods which signify acceptance of goods. For example, he sells the goods or pledges it.
Let us see an example. Peter is a jeweler. John visits his shop to buy a necklace for his wife Olivia. However, he is not sure if Olivia will like the necklace he has chosen. Peter agrees to deliver the necklace to John’s house on a sale or return basis.
If Olivia does not like the necklace, then John can return it to Peter without having to pay for it. When Peter reaches John’s house, another man called Chris is also present in the house. Olivia or John don’t express their approval to Peter but John pledges the necklace with Chris for a certain amount.
In this case, the ownership of the necklace transfers to John since his act of pledging the necklace shows his unequivocal intention to buy it. Peter can recover the price of the necklace from John.
Cash Only or Return
In some cases, the terms of sale can be cash or return. This means that the seller will deliver the goods to the buyer under the condition that the goods continue to remain the property of the seller unless the buyer pays cash for it. In such cases, the buyer needs to pay cash in order to transfer the property in his name.
In example 1 above, if Peter agrees to deliver the necklace to John under a cash only or return basis and John pledges the necklace with Chris before paying cash for it, the pledge is deemed invalid by law and Peter can recover the necklace from Chris.
Reservation of the Right to Disposal
Section 25 of The Sale of Goods Act, 1930 deals with the conditional appropriation of goods. It has three sub-sections as follows:
In case of a contract for the sale of specific goods or where goods are appropriated to the contract subsequently, then the seller can reserve the right of disposal of goods till certain conditions are met. These conditions must be specified in the contract or appropriation. Even if the goods are delivered to the buyer or a carrier or a bailee for transmission to the buyer, the property in the goods does not pass to the buyer until the conditions are met.
Let us take an example. Peter sends furniture to John’s company by a truck. He instructs the driver not to deliver the furniture until he confirms receipt of payment from the company. The truck reaches John’s company and the furniture is unloaded. However, the property passes to the company only upon receipt of the payment.
If the goods are shipped or delivered to the railway administration for carriage by railway and are deliverable to the order of the seller or his agent by the bill of lading or railway receipts, then the seller is deemed to have reserved the right of disposal.
A seller can draw on the buyer for the price and transmit a bill of exchange along with the bill of lading/ railway receipt, to secure acceptance or payment of the bill of exchange. If the buyer does not honor the bill of exchange, then he is liable to return the bill of lading/ railway receipt. Even if he wrongfully retains it, the property in the goods does not pass to him.