fon + Gl Ooh CHAPTER 10 Sale of Goods and Ownership A contract can be for a sale of goods. Other contracts such as a service contract may also involve sale of goods. Goods and sale of goods feature prominently in most contracts. A sale of goods is a special form of contract. It is an agreement for the seller to transfer ownership of the goods to the buyer for a price in cash. The consideration for the buyer is the transfer of ownership and for the seller, the price in cash. When the owner performs his duty and transfers the ownership, the agreement matures in a sale. It is now called a sale of goods. It stands to reason that only the owner or a person authorized by the owner can transfer the ownership. The risk of destruction or damage of goods falls on the owner. Ownership and possession are two different things. Delivery is an integral aspect of sale. Delivery is the voluntary transfer of possession from the seller to the buyer. Applying the above principles, decide whether the statements below are correct or not. 1. A contract of sale is formed when the seller receives the payment of price.Sale of Goods and Ownership 2. A contract of sale is formed when an offer of transfer of ownership in goads for a price in cash is accepted. : In a gift, ownership transfers but there is no sale. 4. A thief stole a car. He has acquired the ownership of the car. 5. A thief stole a car and brought it home. He has the possession of the car. 6. A lent his book to B. B is now the owner of the book. 7. Agave his cycle to B for repairing. B, under a mistake that it was his own cycle, sold it to C. C is now the owner of the cycle. 8. A carrier has the possession of the goods but not the ownership. 9. An auctioneer transfers the ownership in goods as he has the authority from the owner to sell. 10. An authorized employee of a company can sell its goods. w A contract is formed when an offer is accepted, The seller transfers the ownership and the buyer pays as they have a contract. Statement 1 is untrue that a sale contract is made when the buyer pays the money. Statement 2 is correct. Statement 3 is also correct. A person offers to give something to another man for free. The other person can reject or accept the offer. If the person accepts it, an agreement to gift is formed. The agreement is not binding and nor is it a contract as there is no consideration for the parties. However, following the agreement, if the owner transfers the ownership, a gift is made. The ownership 89Contract Terms Are Common Sense cannot now be reversed. However, the transfer is not a sale as it was not for a price. The owner continues to be the owner till he voluntarily transfers the ownership to another. Others can only have possession of the goods, it is not ownership. A thief does not. get the ownership in goods but only the possession. Statement 4 is incorrect, and 5 and 6 are correct. Only the owner or a person authorized by the owner can transfer ownership. Statement 7 is incorrect. A does not have the permission of the owner to sell his cycle. C only gets the possession of the cycle, not its ownership. Statement 8 is correct. A carrier only has the possession of the goods but not the ownership. Statement 9 is correct. An auctioneer transfers the ownership in goods as he has the authority from the owner to sell. Similarly, a company is a legal person. It sells by authorizing an employee to sell for it. Statement 10 is correct. Sale of Goods—Ascertained and Unascertained Goods The transfer of ownership is central to a sale contract. Only the owner can transfer the ownership in goods. Further, the risk of the goods getting lost or damaged falls on the owner. It is important for the parties to settle the © point of time at which ownership transfers to the buyer. The principles on transfer of ownership are different depending on whether the sale agreement is for the sale of specific/ascertained goods or unascertained goods. If the contract is for the sale of specific or ascertained goods, then the agreement is for the sale of specific goods. 90Sale of Goods and Ownership If not, the agreement is for the sale of unascertained goods. A sale where the goods are described or where they would come into being in the future are for unascertained goods. In other words, unless we can point to a specific item as the goods for sale, the sale is for unascertained items. Let us rehearse the concept of ascertained and unascertained goods. In the following sale agreements, classify the sale contract as ascertained goods or unascertained goods: 1, X Ltd entered into a sale contract to sell all the fifty computers being used in its office. 2. A dealer entered into a contract with a retailer to sell 1000 pieces of HP 4GB pen drive. 3. An auctioneer knocked down a painting in favour of a bidder. 4, A newspaper vendor has a contract to supply a copy of the Times of India daily. The vendor leaves a copy outside the door of the customer every morning. 5. Through a tender, a power company entered into a contract to be supplied with a specified quantity of coal every week. 6. A garment manufacturing company entered into a contract with a fabric manufacturing company to be supplied with 1000 metres of fabric. 7. A laptop manufacturer took an order from a customer on the Internet to manufacture and supply him a laptop of a specific configuration. 8. A manufacturer was under a contract to supply 1000 bottles of mineral water to a hotel. It sent 1000 bottles and the hotel received it and paid the money. 91Contract Terms Are Common Sense 9. A painter entered into an agreement that he would sell the next painting that he makes to a buyer. 10.A car manufacturing company entered into a contract to supply the first car that will come out of its manufacturing premises on the tenth of the next month, In the above cases, only 1 and 3 involve the sale of ascertained goods. In 1, specifically fifty computers are being sold. In.3, the auctioneer is selling a particular painting. In 9 and 10, the goods are future goods. In 9, the painting is yet to be made. In 10, the car does not exist. It will get manufactured in the future. So these involve the sale of unascertained goods. The other cases are of sale where the goods are described, and are therefore the sale of unascertained goods. Principles for Transfer of Ownership We can now-explore the principles for transfer of ownership in goods. The principles are based on certain basic premises. The first is: a person can be the owner of only a specific thing. A person can be the owner of a particular laptop. He cannot be the owner of any one of the several laptops. The second principle is contracts are voluntarily formed. It is for the parties to decide when the ownership changes. However, if the contract is silent, the court would need to provide the default time for the transfer of ownership. In the case of the sale of ascertained goods, it is the very point of time the contract gets formed. In the case of unascertained goods, it will 92Sale of Goods and Ownership be at a point of time, the goods got ascertained in the course of performance of the contract. The principle can be summarized as follows. Ascertained goods Unascertained goods A. Does the contract provide in express terms the time of the transfer of ownership? If yes, follow it. If not, B. Does the contract provide in implied terms the time of the transfer of ownership? If yes, follow it. If not, C. The ownership transferred Follow the same questions as in the left column and settle on the answer to be A, B or C. Ownership can never transfer in unascertained goods. Add this a8 a qualification to the answer. The clock is ticking. Transfer of ownership will have to wait till the goods get appropriated (committed or put to) to the the very point of time at which | contract. the contract was made. Applying the above principles, decide the following cases. The auction of an antique vase: An auctioneer was auctioning an antique vase. The vase was put on a table for display. The auction was being done on the following terms: 1. The successful bidder will pay immediately on the closure of the auction. 2. The buyer can take delivery of the vase on or after the third day of the auction. 3. The ownership will transfer to the buyer when the buyer takes the delivery. 93Contract Terms Are Common Sense The auction took place on 1 June. The successful bidder paid the money. He collected the vase from the auctioneer on 5 June. For the application of a newly introduced tax on sale of antique goods, it became important to decide whether the ownership transferred to the buyer on 1 June or 5 June. When did the ownership transfer to the buyer? The purchase of second-hand machine: A buyer in Hyderabad bought a second-hand machine from a seller in Mumbai. The terms of the contract provided were: 1, The goods will be despatched by the seller solely at the risk and responsibility of the buyer. 2. The seller takes no responsibility or liability as to delayed despatches, losses due to theft, pilferage, rain or damage. 3. The buyer should insure the goods at his own cost. A question arose in relation to taxation whether the ownership transferred to the buyer in Mumbai or on its arrival to the buyer’s location in Hyderabad. Where did the ownership transfer to the buyer? The auction of painting: A painter drew a sketch during a lecture demonstration, and on the request of the organizers agreed to an impromptu auction of the sketch in the small gathering. (There were no terms to the auction.) There were several bids. In response to the last bid of M for Rs 2500, he said, ‘It is yours’. A sale contract got formed between the parties. When does the 94Sale of Goods and Ownership ownership pass to the buyer? (Recall: the question is a revisit from an earlier session.) The sale of ‘August’: An online webstore put on sale a painting by an up and coming artist. The painting was named ‘August’ and signed by the artist with the date. Within the terms of the contract, the buyer was to collect the painting from the art gallery of the webstore. The purchase was to be done by paying at the website through a credit card. On the payment of the amount, the site generated the following document: ‘Payment successfully made and order confirmed. Kindly collect the painting from the below mentioned art gallery . . .’ A sale contract was formed between the parties and the buyer paid the price. Before the buyer could collect the painting, it was destroyed in an earthquake. It is a general principle that risk of loss or destruction of goods falls on the owner of the goods. Who was the owner of the goods when it got destroyed? Bus sale: Under the terms of a contract, a dealer was to sell one bus of a particular make to a buyer. The bus was to be delivered to the buyer on 10 July. The dealer was to be paid on 20 July. The ownership of the bus was to transfer to the buyer only after the payment had been made. The dealer delivered a bus to the buyer on 10 July. The buyer had not paid the dealer till then. He further sold the bus on 14 July. The validity of the second sale was in dispute. It is a principle of sale of goods that only an owner can transfer the ownership of goods. Had thé ownership got transferred from the dealer to the buyer by 14 July? 95Contract Terms Are Common Sense Shalimar Chemical Works: Shalimar Chemical Works Ltd, in its manufacturing unit in Hyderabad, manufactures coconut oil from coconut kernel. It bought the coconut kernel from a dealer in Kerala. Every month, the dealer was to supply 50,000 kg of coconut kernel. The terms of the contract provided were: 1) The goods will be despatched by the seller solely at the risk and responsibility of the buyer. 2) The seller takes no responsibility or liability as to delayed despatches, losses due to theft, pilferage, rain or damage. 3) The buyer should insure the goods at his own cost. A question arose in relation to taxation whether the ownership transferred to the buyer in Kerala or Hyderabad. Where did the ownership transfer to the buyer? Sale of a print of ‘Monsoon’: An online webstore put on sale the prints of a painting titled ‘Monsoon’ by a famous artist. The ‘print’ of a painting is a:good quality print on paper that is the same as the one used in the original painting. Several prints are made and sold for the benefit of the enthusiasts who cannot afford the original painting. Within the terms of the contract, a buyer was to collect the purchased goods from the art gallery of the store. The purchase was to be done by paying at the website through a credit card. On the payment of the amount, the webpage generated the following document: “Payment successfully made and order confirmed. Kindly 96Sale of Goods and Ownership collect the purchased goods from the below mentioned art gallery . . .’ Before the buyer could collect his purchase, the art gallery got destroyed in a fire. All the goods stored in the gallery were destroyed. It is a general principle that risk of loss or destruction of goods falls on the owner of the goods. The store was neither willing to give a print of the painting nor refund the money. It claimed that the customer should bear the loss as he had become the owner of the print. Who was the owner of the print when it got destroyed? Gold coin certificates: A company came up with an arrangement where a person could buy gold from it at the prevailing market price but instead of receiving gold in its physical form, the buyer would get a certificate of ownership. The gold was to be bought in units of gold coins. As declared in the brochure and the contract document, the company did not buy and store coins separately for each certificate holder. Instead, the company maintained an inventory of gold coins. At all times, it maintained an inventory of 30 per cent of the total coins held by the certificate holders. The certificate holder could sell his gold by surrendering the certificate to the company. The company would pay him at the prevailing market rate for gold. A certificate holder could apply to the company to take a physical delivery of his gold by surrendering the certificate. In this case, the company gave the coins to the certificate holder from the inventory. The company went under liquidation. The certificate holders claimed that they were the joint owners of the inventory of gold while the creditors to the 97Contract Terms Are Common Sense company claimed that the gold belonged to the company and they had a right over it. Who was the owner of the inventory of gold coins? Let us analyse the cases. In each case, we will ask questions in the following sequence: (1) is it a sale of ascertained goods or unascertained goods? (2) have the parties provided in express terms on the transfer of ownership? (3) if not, have the parties provided it in implied terms? (4) if not, the default principles will apply. Case 1 is a sale of specific goods and the parties have provided the transfer of ownership in express terms. The ownership transferred on 5 June when the buyer took the delivery. Case 2 is a sale of specific goods and the parties have not provided the transfer of ownership in express terms. However, it is implied in the contract that the ownership will transfer when the goods are given to the carrier. The ownership transferred in Mumbai when the goods were given to the carrier. Case 3 is a sale ofa specific painting. However, the contract is completely silent on the transfer of ownership. The ownership transferred the very moment the contract was made. This was when the painter announced: ‘It is yours.’ Case 4 is the sale of a specific painting. The contract is completely silent on the transfer of ownership. The ownership was transferred when the contract was made on the webpage. The buyer will bear the risk of damage to the goods. In case 5, the coconuts are not ascertained. It is the sale of unascertainied goods. The contract had implicitly provided that the ownership will transfer when the goods are handed over to the carrier. At this point of 98~ Sale of Goods and Ownership time, the goods also got ascertained. So the ownership passed on to the buyer when the goods were handed over to the carrier. In case 6, the sale is of unascertained goods. There are several prints of the painting. The ownership in a print will pass only when one is ascertained and committed to the buyer. As no print had been committed to the contract, the seller continues to be the owner. The risk of damage will fall on the seller. In case 7, the buyer has bought gold and he could take delivery of them. In this case, the specific piece of gold would be ascertained and sent to him. On receiving the delivery, he will become the owner of the gold. Till this point of time, the gold is unascertained and continues to be the property of the company. To bring certainty to the question of ownership, the contract provides in clear terms as to when the ownership will transfer. The concern of the seller is he should not lose the ownership till he gets paid. To this end, a common clause is: ‘The title in the goods will remain with the seller till the purchase price for the goods is paid in full and received by the seller.’ A longer version of the term is as follows. ‘The title in the goods shall remain with the seller and shall not pass on to the buyer until the purchase price for the goods has been paid in full and received by the seller. Until the title in the goods passes: 1. The seller shall have authority to retake, sell or otherwise deal with and/or dispose of all or any part of the goods. 99Contract Terms Are Common Sense 2. The seller and its agents and employees shall be entitled at any time, and without the need to give notice, to enter any property upon: which the goods or any parts are stored, or upon which the seller reasonably believes them to be kept. 3. The buyer shall store or mark the goods in a manner reasonably satisfactory to the seller indicating that title to the goods remains vested in the seller. 4. The buyer shall insure the goods to their full replacement value, and arrange for the seller to be noted on the policy of insurance as the loss payee. Irrespective of whether the title to the goods remains vested in the seller, risk in the goods shall pass on to the buyer upon delivery. - Title is another word for ownership. The terms emphasize that the ownership will not transfer to the buyer till the full price is received by the seller, even if the buyer has got the possession of the goods. Till then, the buyer should not mix up the goods and take care of them. 100