THE PASSING OF RISK by Charles Shapiro

23 June 2009OF RISK by Charles Shapiro

23 une 2009
A fundamental legal principle which is generally not known, is the fact that there is a distinction
between the passing of risk and the passing of ownership in sale. In some systems of law, both
ownership and risk pass to the buyer at the same time, but this is not the case in South African
Law.
 
There are two salient rules of sale which must be understood and which effect every day
transactions, these rules are: -
 
- when the contract is complete, i.e. as soon as parties have agreed as to the thing to be sold
and the price to be paid, “the risk passes to the buyer, even though delivery has not been
made”;
- a complete sale gives rise to personal rights between the parties, but ownership which
creates real rights (rights against everybody) only passes: -
1. for immovable when there has been registration of transfer in the deeds registry;
2.for movables, there generally must be delivery of the item purchased.
3.for incorporeals, there must be an agreement to pass ownership, plus delivery of documents, if
any.
 
 The above principle can of course be varied by express agreement it must be in writing in
the case of immovable property.
 A practical and important example can be demonstrated when regard is had to any sale of
immovable property. The document should have a clause which states that the risk will pass to the
purchaser on registration, effectively passing risk to the purchaser at the same time as ownership.
If this clause is absent from the written agreement, then the purchaser notwithstanding the fact
that transfer has not been effected and that the purchaser is not the owner of the property, the risk
in and to the property and any damage to the property whether by natural causes or through theft
or vandalism will rest with the purchaser.
 
 In the case of movable property, even if the article is totally destroyed before delivery and
the purchaser can never become the owner of the article or item purchased, the purchaser must
nonetheless pay the purchase price.
 
 The risk comprises any form of deterioration or destruction of the thing that could not have
been prevented by the seller. Accordingly, apart from any negligence on the seller’s behalf risk
passes to the purchaser.
 
 In the case of immovable property risk includes also the liability to bear any loss or burden,
such as payment of rates and taxes. In the case of movables a tax imposed on goods sold
between the date of sale and delivery, will be for the purchaser’s account.
 
 It is naturally only equitable that advantages should follow the risk. The rule is of particular
importance with reference to the sale of buildings, for while all rates and taxes accruing between
the date of sale and the date of transfer are borne by the purchaser, all rentals accrue for the
purchaser’s benefit.
 
 There are numerous exceptions to the basic rule regarding the passing of risk and of
particular importance in this regard is the distinction between a suspensive condition in an
agreement and a resolutive condition in an agreement.
 
1. In the case of the suspensive condition, being one which suspends the operational
effect of one, or some, or all of the obligations under a contract until the conditions are fulfilled, the
risk will not pass until the suspensive conditions have been fulfilled.
2. The resolutive condition has a different effect. A sale subject to this type of condition
will result in the risk passing as soon as formalities required for the completion of a sale
agreement have been completed.
 The risk in conditional sales is as follows: -
 
1. in the case of a sale subject to a suspensive condition, the risk of total loss remains
with the seller until the condition is fulfilled (as indicated above the risk does not pass with
ownership). The reason the risk remains with the seller is due to the effect that a suspensive
condition suspends the whole sale and until such time as the condition is fulfilled, there is no sale,
thus risk cannot pass;
2. on the other hand, in the case of a sale subject to a resolutive condition, the risk of
total loss passes to the buyer immediately the contract has been concluded. As indicated above,
the sale operates immediately, with the result, that if the thing is destroyed before delivery, the
buyer must nevertheless pay the price in full, for the risk has passed to the buyer.
 
 The purpose of this article is to demonstrate the necessity to carefully scrutinise all
contracts of sale so as to determine your exposure in case of damage or destruction, if you are not
taking delivery of the property purchased, until a future date.

Copyright © 2023, Fluxmans Inc. All rights reserved, website hosted by StarBright