TRANSFER OF RISK AND OWNERSHIP

Steps for the reader: (please follow them for eventual conceptual clarity)

a) In each of the following situation decide whose loss is it and why? You could
apply common sense or your awareness on these issues. Write your answers down
on a piece of paper with reasons.
b) Please go to Page 7 and read the basic concepts applicable in a sale of goods
contract. Read them carefully and understand them.
c) Revisit the above situations and apply those concepts and decide whose loss is it
and why?

Situation 1

Prema and Pradeep go Diwali shopping on a Friday. At the furniture shop they notice a
new sofa set with a sign displayed. The sign said “For display cum sale – Rs20,000/-“.
They negotiate with the shopkeeper and since they were paying ready cash a sum of
Rs18,000/- was agreed. Payment was made and receipt obtained.
The shopkeeper explained that since his staff were at present busy, he would be able to
deliver the sofa on the coming Sunday. Since there was no urgency the duo agreed.
On Saturday there was a fire in the showroom and the entire furniture was destroyed
including the sofa.

Situation 2

Sunil goes with his family to buy a refrigerator. At the showroom his children who watch
more TV than Sunil select the model of their choice. Sunil negotiates with the shopkeeper
and a sum of Rs 20,000/- is agreed upon inclusive of exchange of old refrigerator. In
addition Rs 3000/- is charged for stabilizer and Rs 500/- for the stand. The bill now
comes to Rs 23,500/- The shopkeeper enquires about place of delivery and based on
distance charges Rs 450/- for transportation and since Sunil lived on the second floor
( with no lift) an additional Rs 40/- was charged for cartage bringing the total sum to Rs
23,990/-.
Sunil took out his credit card to pay. The shopkeeper asked for Rs 490/- in cash
separately (i.e cartage and transportation). Sunil requests that the entire sum be charged to
the credit card but the shopkeeper does not agree. Being a trivial issue Sunil does not
insist and tries to bargain a little and is informed that the best price has already been
given.
Payment made and bill for refrigerator obtained, Sunil is informed by the shopkeeper that
they are currently out of stock and that delivery would take place the following week and
that they would inform by telephone when the fridge arrives for our approval at the
showroom and then delivery would be done. Since Sunil was traveling, he requested the
shopkeeper to send a good piece (fridge) as soon as it arrives.
The next week the fridge arrives and when the fridge is being carried up to the second

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floor it falls down and is damaged.

SITUATION 3

Asha goes to buy a painting to gift her father on his sixtieth birthday. When she visits the
gallery she finds a wonderful painting. She enquires about the price and is told that it
costs Rs 40,000/-. Now Asha is an expert on paintings and immediately realizes that the
painting is worth more. She negotiates with the gallery owner who agrees to sell it for Rs
35,000/-. Asha takes out her cheque book but the shopkeeper insists on cash or credit
card. (Asha was not carrying either her card or sufficient that day). Asha informs the
shopkeeper that she will just get the money from the nearby ATM and come back.
Before Asha comes back another customer walks into the gallery and finds the painting
attractive, agrees to pay Rs 40,000/- , pays cash and takes away the painting with the
gallery owner very happy.
Asha returns with the money from the ATM and is told by the gallery owner that the
painting is sold. Asha is very unhappy and wants to sue the shopkeeper for selling what
she believes was her painting.

SITUATION 4

Bunty is in a hurry. His parents are to come over for a few days to stay in his bachelor
pad and he wants it to be more equipped. So he goes to the consumer durable showroom
and identifies a particular model of washing machine for his pad. The amount is paid by
credit card and the shopkeeper tells that a fresh stock of washing machines would arrive
in a few days. And the washing machine would be dispatched the coming Thursday.
On Thursday Bunty receives a phone call from the shopkeeper. The shopkeeper says that
the tempo (van) carrying four similar washing machines to different customers including
Bunty, has met with an accident and all the washing machines has been destroyed.

SITUATION 5

Harpal is a connoisseur of good wine. He agrees to buy 50 crates of some select wine
from a local cellar. He pays the required sum. But before the wine is packed and
transported the cellar owner becomes bankrupt
(Insolvent).

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Essentials in a contract of sale

Transfer of ownership of goods

SELLER CONTRACT BUYER

betwee
Consideration or Price

Transfer of ownership also means that there is a transfer of risk

which means that loss or damage of goods also transfers with
ownership. The essential question in all the situations listed
earlier is when does ownership and risk transfer?

The ownership and risk transfers when the parties intend to. Most often it is
specified or understood.

There is a contract between buyer and seller.

When the goods are identified ( or ascertained)

By identified we mean that out of a lot of many the specific goods meant for the buyer
are identified or ascertained.

Example: When we buy six eggs from the shopkeeper the shopkeeper selects six from the
lot. That means the eggs meant for the buyer have been identified. Here it is understood
that transfer of ownership takes place simultaneously on payment of price and the act of
giving the eggs. However the act of payment itself may not happen if there are credit
terms. In which case the risk transfers once the eggs are identified for the buyer.

In the case of a departmental store however the contract is at the counter when the offer
to purchase is indicated by the buyer by placing the goods on the counter and the seller
accepts by entering them onto his computer for taking out the bill.

When are the goods identified/ascertained?

When they are in a deliverable state. By deliverable we mean that the

buyer is in a position to take delivery.

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 If some work remains to be done such as packing then the goods are not
identified. So in the case of eggs in a departmental store till the goods are
packed they are not identified and the risk is with the seller.
If the buyer has indicated a quality check or inspection in the contract then
again the goods are not yet identified.

Who can identify/ascertain the goods?

Normally it is the buyer who identifies the goods. But he may ask the
seller to do so on his behalf.

NOW using the above principles please evaluate the situations mentioned earlier on Page
5 and reconsider your earlier answers. Please follow the law and not your instinct or
common sense.

Let’s take each situation and analyze them using the above concepts:

Is there a contract …. yes
Are the goods identified
….yes
Therefore the loss of sofa is
for the buyers.
Is there a contract … yes
Are the goods identified …
yes the buyer gave the
responsibility of
identification and selection
to the seller.
Therefore the loss of the
goods is that of the buyer.
The promise of delivery was not an integral part of the
contract. For example in a Pizza Hut order both home
delivery and timely delivery are integral parts of the
contract. See Section19 and Section 20. Specific goods we
mean goods identified and agreed upon at the time a
contract of sale is made;
Here the seller has very cleverly separated the two
contracts. The sale of the fridge and the delivery of the
fridge thus preventing delivery from being integral to the
contract. The very idea of separating the two payments was
to emphasize the difference. Here the seller by agreeing to
transport and carry has actually acted as the agent on behalf
of the buyer by hiring a transporter and men to carry the
fridge. And therefore the fridge that was being transported
and carried was the buyers’ fridge and hence the buyer’s
loss. See Section 18. Once the fridge is ascertained by the
seller risk and property get transferred. See Section 23 (1)
also. "Future goods" means goods to be manufactured or
produced or acquired by the seller after making of the
contract of sale;

Is there a contract ….yes
Are the goods identified
….yes
Therefore the buyer can
sue.
In other words there was an agreement to sell and thus the
buyer has rights in personam against the buyer. Agreed that
price is not paid and therefore the seller is an unpaid seller
and need not hand over the painting. But he has no right to
sell it to another customer because a) he has already entered
into a contract and

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 b) the goods are specific and identified.
Students often wonder what if the buyer does not come
back. Then the seller can also sue the buyer in case he has
retained the painting exclusively for the buyer and avoided
other sale. But since going to courts are cumbersome the
seller normally insists on a token money payment in lieu
which gets forfeited in case the buyer does not turn up.
Section 4 and Section 20.
Is there a contract …. Yes If the washing machines were specified or ascertained by
Are the goods identified … stating the machine number on the invoice then the goods
No could be said to be identified. But there is no such mention
Loss is that of the seller in the situation. Section 18
Is there a contract …. Yes In case the goods had been identified and packed for
Are the goods identified … delivery then the wine bottles would have belonged to the
No buyer. Here the buyer can only claim his dues along with
other creditors. Section 4 and Section 18

Provisions from the Sale of Goods Act 1930 which substantiate the above
discussions:
S 4. Sale and agreement to sell
(1) A contract of sale of goods is a contract whereby the seller transfers or agrees to
transfer the property in goods to the buyer for a price. There may be a contract of sale
between one part-owner and another.
(2) A contract of sale may be absolute or conditional.
(3) Where under a contract of sale the property in the goods is transferred from the seller
to the buyer, the contract is called a sale, but where the transfer of the property in the
goods is to take place at a future time or subject to some condition thereafter to be
fulfilled, the contract is called an agreement to sell.( explained in detail on Page 17)
(4) An agreement to sell becomes a sale when when the time elapses or the conditions are
fulfilled subject to which the property in the goods is to be transferred.

S 26. Risk prima facie passes with property

Unless otherwise agreed, the goods remain at the seller's risk until the property therein is
transferred to the buyer, but when the property therein is transferred to the buyer, the
goods are at the buyer's risk whether delivery has been made or not:
PROVIDED that, where delivery has been delayed through the fault of either buyer or
seller, the goods are at the risk of the party in fault as regards any loss which might not
have occurred but for such fault:

S 18. Goods must be ascertained

Where there is a contract for the sale of unascertained goods, no property in the goods is
transferred to the buyer unless and until the goods are ascertained.

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 S 19 Property passes when intended to pass

(1) Where there is a contract for the sale of specific or ascertained goods the property in
them is transferred to the buyer at such time as the parties to the contract intend it to be
transferred.
(2) For the purpose of ascertaining the intention of the parties regard shall be had to the
terms of the contract, the conduct of the parties and the circumstances of the case.
(3) Unless a different intention appears, the rules contained in sections 20 to 24 are rules
for ascertaining the intention of the parties as to the time at which the property in the
goods is to pass to the buyer.
S 20. Specific goods in a deliverable state

Where there is an unconditional contract for the sale of specific goods in a deliverable
state, the property in the goods passes to the buyer when the contract is made, and it is
immaterial whether the time of payment of the price or the time of delivery of the goods,
or both, is postponed.
S 21. Specific goods to be put into a deliverable state

Where there is a contract for the sale of specific goods and the seller is bound to do
something to the goods for the purpose of putting them into a deliverable state, the
property does not pass until such thing is done and the buyer has notice thereof.

S 22. Specific goods in a deliverable state, when the seller has to do anything thereto
in order to ascertain price

Where there is a contract for the sale of specific goods in a deliverable state, but the seller
is bound to weigh, measure, test or do some other act or thing with reference to the goods
for the purpose of ascertaining the price, the property does not pass until such act or thing
is done and the buyer has notice thereof.

S 23. Sale of unascertained goods and appropriation

(1) Where there is a contract for the sale of unascertained or future goods by description
and goods of that description and in a deliverable state are unconditionally appropriated
to the contract, either by the seller with the assent of the buyer or by the buyer with the
assent of the seller, the property in the goods thereupon passes to the buyer. Such assent
may be expressed or implied, and may be given either before or after the appropriation is
made.
(2) Delivery to carrier-Where, in pursuance of the contract, the seller delivers the goods
to the buyer or to a carrier or other bailee (whether named by the buyer or not) for the
purpose of transmission to the buyer, and does not reserve the right of disposal, he is
deemed to have unconditionally appropriated the goods to the contract.

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 CASE LAWS

CASE LAW M/S. Escorts JCB Limited, Commissioner Of ... vs

Commissioner Of Central Excise 2002 .. Supreme Court

Background

Excise duties are levied on manufactured goods. Since the duty is on the value of the
good the question that often crops up is which value. Whether the value at the factory
gate (seller’s) or at the buyer’s place. For this reason it is important to determine where
does the sale occur? Or where does the transfer of property and risk take place?

In this case involving M/s JCB ESCORTS (assessee) the facts are as under :

M/s JCB manufacture Excavators Loaders at its factory at Ballabgarh, Faridabad, which
are sold to various buyers. All sales are made at the factory gate. Some buyers arrange for
the transportation of the goods as well as for transit insurance themselves but some
require M/s JCB to arrange for transportation and transit insurance, in which case M/s
JCB recover the freight charges and "insurance charges" from the buyers. According
to various clauses of the terms and conditions of sale which has been placed on record as
Annexure P-1 indicating that the prices are "ex-works" at Ballabgarh exclusive of freight,
insurance, octroi etc. The first clause under the heading `Terms of Payment' shows
that 30% of the quoted price is payable in advance along with the order and the balance
amount against delivery Ex-works Ballabgarh. The next clause under the heading
"Delivery" provides that all deliveries are Ex-works Ballabgarh, Haryana. Under the
heading `Transit Risk and Insurance' it is indicated that risk of the goods will be that of
the buyer from the time Escorts JCB Ltd. hands over the equipment to the buyer's
representative or carrier or from the time goods leave Escorts JCB Ltd. premises. Under
the heading `Mode of Transport', delivery by train is indicated or in the alternative if the
buyers so desire, by road, and in such an event, it would be necessary for the buyer to
make the payment at Ballabgarh prior to despatch of goods. It is submitted that where the
customers so desire or request the transit insurance and transport is arranged by M/s JCB
for which they would separately charge the customer. Some of the copies of the orders
placed indicating that a request was made by the customers to M/sJCB for making
arrangement for transport with transit insurance are also there on record.. Such orders
also indicate acceptance of general conditions of sale. Some of the Transport receipts
show despatch of the goods in the name of the customers as consignee and invoices
indicate separate charge towards transit insurance and freight apart from value of the
goods.

The Central Excise officers of Anti Evasion Branch, Faridabad on visit to the premises
of the manufacturer(M/sJCB) found that the amount of "transit insurance" charges was
not added to the value of the goods sold, hence issued a show cause notice dated 24.3.98

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to M/s JCB saying that an open policy for transit risks in the name of M/s. Escorts JCB
Ltd. and their bankers appear in the column for the name of Assured but there is no
mention of the buyer or its name in the column for "insured". Notice also indicates that
`freight' and "transit insurance" were charged from the buyers but no central excise duty
was paid on these two elements, and by not including above noted elements in the
normal price as per Section 4 of the Central Excise Act 1944 and by mis-declaring the
place of removal as factory gate instead of buyer's place where the goods were to be
sold after their clearance from the factory as described in sub clause (iii) and clause (b) of
sub-Section 4 of the Central Excise Act 1944, the company (M/s JCB) has suppressed
the necessary facts.

M/s JCB contested the show cause notice saying that the sale is affected at the factory
gate at Ballabgarh in the State of Haryana. The freight and arranging for insurance during
transit of goods have no material bearing on the point of place of sale or removal of
goods.

The Commissioner of Central Excise, Delhi II however confirmed the demand holding
that the factum of "transit insurance" by the manufacturer shows that the transaction of
sale is complete only on delivery of goods to the buyer otherwise there was no good
reason for the manufacturer taking responsibility of the risk involved in transportation of
the goods to the buyer's place. The case of the company that sale takes place and it is
completed at the factory gate was not found acceptable

Decide where is the sale being affected and where is the transfer of
risk and ownership based on the concepts discussed in this chapter.

Answers at end of Chapter.

CIT, Delhi vs. Mewar Textile Mills Ltd. (91 ITR 542) (2).

In this case Mewar Textile Mills Ltd put on rails in Bhilwara (outside British India),
certain bales of cloth and took the railway receipts in the names of consignees
(purchasers) who were dealers in British India and sent the railway receipts to them by
post. The purchasers could collect the goods from the Railways on production of the
Railway receipts. The purchasers paid the sale price to a banker in British India who was
also the banker of the Mewar Textile Mills Ltd. The question for consideration of the
Hon'ble Supreme Court was, whether the profits earned by those sales were taxable in
British India. In other words was the sale in British India or outside?

M/s Marwar Tent vs. Union Bank of India

Marwar tent Factory won a tender to supply tents to the defense establishment in Kanpur.
As a part of the contract, tents were to be inspected at the premises of Marwah Tent

12
Factory at Jodhpur. After the tents were passed by the inspector, the tents were to be
dispatched to the Commandant, C.O.D., Kanpur. Tents were to be put on rails at Jodhpur
under the terms of ‘f.o.r.Jodhpur’. Delivery note was to be sent to C.O.D. Kanpur by
registered post. On receipt of the delivery note C.O.D. was to pay 95% of the price to
Marwah Tent Company. The remaining 5% was to be paid after receipt of goods in good
condition by the C.O.D. Kanpur. A consignment of 1500 tents was dispatched by the
Marwah Tent Company. As a result of pilferage in transit, C.O.D. Kanpur received only
1276 tents. It, thus deducted for the loss of 224 tents from the payment to Marwah Tent
Company.
Marwah Tent Company is arguing that under the terms of the ‘f.o.r.’ contract, the
ownership in tents got transferred once the tents were loaded on the train. While C.O.D.
is arguing that ownership could get transferred only on delivery. ‘f.o.r.’ is a standard
means by which parties buy and sell. It stands for ‘Free on Rail’, literally speaking, the
seller will bear the costs up to putting goods on rails. Thereafter the buyer needs to pay
the expenses.
The court examined the meaning of ‘F.O.R.’ contracts.

Vasantha Vishwanathan vs. V.K.Elayawar

Vasantha Vishwanathan had 19 bus permits issued by the Government of Tamil Nadu.
Apprehending that the government is going to limit the permits to 10 per person, she
agreed to sell 5 buses covered by the permit to Elayawar.
The government bought in an ordinance limiting the number of permits to 10 but the
transport authority refused to accept the transfer to Elayawar because Vasantha was
required to surrender the excess permits and not sell them.
Elayawar challenged the ordinance in the courts and in the meantime wrote to Vasantha
that the sale, the price and other details could only be decided after the permits were
transferred in his name.
The government then passed an Act canceling the ceiling on the permits and Elayawar
promptly got the permits transferred to his name and with the help of the police got
possession of the buses. Vasantha challenged stating that the property in the goods was
still with her.
Decide.

(i)FEDERSPIEL & Co SA vs Twigg & CO ltd

(ii) Western Canada Pulpwood

There was a contract for the sale of bicycles “FOB Liverpool” from an English seller to a
Costa Rican company (buyers and plaintiffs). Here FOB means that the seller has
responsibility till the goods are placed with the chosen transporter at Liverpool. The
plaintiffs paid for the goods in full. The sellers had marked the consignment boxes with
the port of destination and the name of the buyer. The sellers became insolvent before

13
they could ship the goods. The buyers claimed property in the goods as it had been
appropriated (in other words ascertained for them).
Now contrast this with the Western Canada Pulpwood Case where the buyer had a
written contract to purchase 5000 cords of wood to be chopped and delivered to the
buyer. The seller went bankrupt and could not deliver the last 900 pieces although they
were fallen, marked and stacked. The question was whose wood was the last 900 , the
sellers or the buyers.

Answer

Answer : The contention is that the fact that the company ( JCB) arranged for the transit
insurance would in no way lead to an inference that the ownership in the goods was
retained by the seller(JCB)during the period of the transit until the delivery of the goods
at the place of the buyer. The terms and conditions of the sale are clear that the sale is Ex-
works at Ballabgarh, Haryana. The payment is to be made before despatch of the goods
from the factory premises. The machinery, handed over to the carrier/transporter is as
good as delivery to the buyer in terms of Section 39 of the Sale of Goods Act apart from
terms and conditions of sale.

Answer: It was held that the property in the goods passed ( the railway receipt in the
name of the purchaser was in effect a transfer of title) to the purchasers in Bhilwara
outside British India and the income from the sales did not accrue in British India and
that since the banker functioned only as the agent of the purchasers no part of the income
was realized in British India.

Answer : The parties by deciding on F.O.R as terms of delivery have agreed that the
seller has to deliver the goods to the railways and thus the cost and risk is up to this point
with the seller and thereafter it is with the buyer.

Answer : As per Section 19 of the Act the property in the goods gets transferred when
the parties intend to. Here Elayawar clearly stated through his letter that the terms of the
sale would be decided after the decision of the government regarding the transfer. Which
means that there was no contract and as such the property in the goods do not transfer.
The transfer of permits are not in any way linked to the transfer of property in the buses.
In fact it would be the other way around that the transfer would become effective only on
sale and transfer of property.

Answer As per the terms of the contract which is “FOB” Liverpool it means that
ownership and risk will transfer when it is shipped. Mere setting aside and labeling would
not mean that the risk has transferred.

Now contrast this with the Western Canada Pulpwood. Here there was no mention of
delivery and transfer such as FOB. Hence when the goods were ascertained and kept
aside it was held that property had passed and the buyer had title over it.

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Main Points

In a sale there must be a contract. The terms and conditions of sale establish when the
risk and ownership transfer from the seller to the buyer.

In case it is not specifically stated then the test is to determine whether the goods are
identified / ascertained for the sale purpose. In case they are then the risk and ownership
is transferred from seller to buyer. The goods must be in a deliverable state.

It does not matter whether actual delivery (S 26) or payment of price has taken place
(S20) or not.

Such identification or ascertainment or appropriation of goods in favour of the buyer can

be done by the buyer himself or by the seller with the consent of the buyer.

Property differs from possession. The transfer of ownership is not dependent on delivery
or possession. That is handing over physical custody or control of goods. Ownership and
possession may or may not coexist. For example: A buyer buys furniture from the seller’s
furniture store. It is agreed that the furniture be delivered and paid for in a month’s time
when the buyer moves into a new house. The seller’s show room is destroyed by fire
before the month is up. All the contents are destroyed. The seller is not to blame for the
fire. See Section 20 above. So the buyer will be responsible for payment. Simultaneously
if the seller sells the furniture in contravention of the contract the buyer can sue for
breach but cannot claim the furniture in view of the exceptions listed under the heading
exceptions to "Nemo dat quod non habet" .

Property/Ownership/Title have been used synonymously.

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