ICAI Notes 2.3 - Transfer of Ownership, Sale of Goods Act - 1930 CA Foundation Notes | EduRev

Mercantile Law for CA CPT

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CA Foundation : ICAI Notes 2.3 - Transfer of Ownership, Sale of Goods Act - 1930 CA Foundation Notes | EduRev

The document ICAI Notes 2.3 - Transfer of Ownership, Sale of Goods Act - 1930 CA Foundation Notes | EduRev is a part of the CA Foundation Course Mercantile Law for CA CPT.
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Learning Objectives

  • Understand how and at what point of time the ownership in goods which are the subject matter of a contract of sale passes to the buyer from the seller,
  • Be clear about what is appropriation of goods and how it affects the passing of property in goods,
  • Distinguish between passing of property and passing of title,
  • Understand the rule of ‘nemo dat quod non habet’ (no one can give what he has not got) and exceptions thereof,
  • Be familiar with the rules relating to delivery of goods and acceptance of goods.

2.18 PASSING OF PROPERTY (SECTIONS 18 – 24) 

Passing or transfer of property constitutes the most important element and factor to decide legal rights and liabilities of sellers and buyers. Passing of property implies passing of ownership. If the property has passed to the buyer, the risk in the goods sold is that of buyer and not of seller, though the goods may still be in the seller’s possession.

The primary rules relating to the passing of property in the sale of goods are:

(1) No property in the goods is transferred to the buyer, unless and until the goods are ascertained.
(2) Where there is a contract of sale of specific or ascertained goods, property passes to the buyer at the time when parties intend to pass it. For the purpose of ascertaining intention of the parties regard shall be had to the terms of contract, conduct of parties, and circumstances of the case. Where the intention of the parties cannot be ascertained, rules contained in Sections 20 to 24 shall apply.

For specific goods: Where there is an unconditional contract for the sale of specific goods in a deliverable state, property in the goods passes to the buyer when the contract is made (Section 20). Deliverable state means such a state that the buyer would under the contract be bound to take delivery of the goods. If the goods are not in a deliverable state, property does not pass until such a thing is done to put the goods in a deliverable state. This ‘something’ may mean packing the goods, testing, polishing, filling in casks etc. It should be noted that the property shall not pass when the goods are made in deliverable state but shall pass only when the buyer has notice of it (Section 21). But where they are in deliverable state, but the seller is bound to weigh, measure, test or do some other act or thing for the purpose of ascertaining the price, the property does not pass until such act or thing is done. When the seller has done his part the property passes even if the buyer has to do something for his own satisfaction. (Section 22).

Unascertained goods: Until goods are ascertained, there is merely an agreement to sell. The ascertainment of goods and their unconditional appropriation to the contract are the two preconditions for transfer of property from seller to buyer in case of unascertained goods. A seller is deemed to have unconditionally appropriated, where he delivers the goods to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer (Section 23).

Appropriation of goods: Appropriation of goods involves selection of goods with the intention of using them in performance of the contract and with the mutual consent of the seller and the buyer.

The essentials are:

(a) The goods should conform to the description and quality stated in the contract.
(b) The goods must be in a deliverable state.
(c) The goods must be unconditionally (as distinguished from an intention to appropriate) appropriated to the contract either by delivery to the buyer or his agent or the carrier.
(d) The appropriation must be made by:
(i) the seller with the assent of the buyer; or
(ii) the buyer with the assent of the seller.
(e) The assents may be express or implied.
(f) The assent may be given either before or after appropriation.

Goods sent on approval or “on sale or return”: When the goods are delivered to the buyer on approval or on sale or return or other similar terms the property passes to the buyer,
(i) when he signifies his approval or acceptance to the seller,
(ii) when he does any other act adopting the transaction, and
(iii) if he does not signify his approval or acceptance to the seller but retains goods beyond a reasonable time (Section 24).

Sale for cash only or Return: It may be noted that where the goods have been delivered by a person on “sale or return” on the terms that the goods were to remain the property of the seller till they are paid for, the property therein does not pass to the buyer until the terms are complied with, i.e., cash is paid for.

A buyer under a contract on the basis of ‘sale or return’ is deemed to have exercised his option when he does any act exercising domination over the goods showing an unequivocal intention to buy, e.g., if he pledges the goods with a third party. Failure or inability to return the goods to the seller does not necessarily imply selection to buy.

2.19 RESERVATION OF RIGHT TO DISPOSAL (SECTION 25)

Where there is contract of sale of specific goods or where the goods have been subsequently appropriated to the contract, the seller may, by the terms of the contract or appropriation, as the case may be, reserve the right to dispose of the goods, until certain conditions have been fulfilled. In such a case in spite of the fact that the goods have already been delivered to the buyer or to a carrier or other bailee for the purpose of transmitting the same to the buyer, the property therein will not pass to the buyer till the condition imposed, if any, by the seller has been fulfilled.

If the goods are shipped or delivered to a railway administration for carriage and by the bill of lading or railway receipt, as the case may be, the goods are deliverable to the order of the seller or his agent, then the seller will be prima facie deemed to have reserved to the right of disposal. 

Where the seller draws a bill on the buyer for the price and sends to him the bill of exchange together with the bill of lading or (as the case may be) the railway receipt to secure acceptance or payment thereof, the buyer must return the bill of lading, if he does not accept or pay the bill. And if he wrongfully retains the bill of lading or the railway receipt, the property in the goods does not pass to him. It should be noted that Section 25 deals with “conditional appropriation” as distinguished from ‘unconditional appropriation’ dealt with under Section 23(2).

2.20 PASSING OF RISK (SECTION 26) 

The general rule is, “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” (Section 26).

However, Section 26 also lays down in exception to the rule that ‘risk follows ownership.’ It provides that where delivery of the goods 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.

Thus in ordinary circumstances, risk is borne by the buyer only when the property in the goods passes over to him. However, the parties may by special agreement stipulate that ‘risk’ will pass sometime after or before the ‘property’ has passed.

Risk passes with property: The owner of goods must bear the loss or damage of goods unless otherwise is agreed to. Under Section 26 of the Sale of Goods Act, unless otherwise agreed, the goods remain at the seller’s risk until property therein has passed to the buyer. After that event they are at the buyer’s risk, whether delivery has been made or not.

The aforesaid rule is, however, subject to two qualifications:
(i) If delivery has been delayed by the fault of the seller or the buyer, the goods shall at the risk of the party in default, as regards loss which might not have arisen but for the default.
(ii) The duties and liabilities of the seller or the buyer as bailee of goods for the other party remain unaffected even when the risk has passed generally. As noted above, the risk (i.e., the liability to bear the loss in case property is destroyed, damaged or deteriorated) passes with ownership. The parties may, however, agree to the contrary. For instance, the parties may agree that risk will pass sometime after or before the property has passed.

2.21 TRANSFER OF TITLE (SECTIONS 27 – 30)

In general the seller sells only such goods of which he is the absolute owner. But sometimes a person may sell goods of which he is not the owner, then the question arises as to what is the position of the buyer who has bought the goods by paying price. The general rule regarding the transfer of title is that the seller cannot transfer to the buyer of goods a better title than he himself has. If the seller is not the owner of goods, then the buyer also will not become the owner i.e. the title of the buyer shall be the same as that of the seller. This rule is expressed in the Latin maxim “Nemo dat quod non habet” which means that no one can give what he has not got. 

For example, if A sells some stolen goods to B, who buys them in good faith, B will get no title to that and the true owner has a right to get back his goods from B.
If this rule is enforced rigidly then the innocent buyers may be put to loss in many cases. Therefore, to protect the interests of innocent buyers, a number of exceptions have been provided to this rule.

Exceptions: In the following cases, a non-owner can convey better title to the bona fide purchaser of goods for value.

(1) Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods for document of title to goods would pass a good title to the buyer in the following circumstances; namely;
(a) If he was in possession of the goods or documents with the consent of the owner;
(b) If the sale was made by him when acting in the ordinary course of business as a mercantile agent; and
(c) If the buyer had acted in good faith and has at the time of the contract of sale, no notice of the fact that the seller had no authority to sell (Proviso to Section 27).

(2) Sale by one of the joint owners: If one of the several joint owners of goods has the sole possession of them with the permission of the others, the property in the goods may be transferred to any person who buys them from such a joint owner in good faith and does not at the time of the contract of sale have notice that the seller has no authority to sell (Section 28).

(3) Sale by a person in possession under a voidable contract: A buyer would acquire a good title to the goods sold to him by a seller who had obtained possession of the goods under a contract voidable on the ground of coercion, fraud, misrepresentation or undue influence provided that the contract had not been rescinded until the time of the sale (Section 29).

(4) Sale by one who has already sold the goods but continues in possession thereof: If a person has sold goods but continues to be in possession of them or of the documents of title to them, he may sell them to a third person, and if such person obtains the delivery thereof in good faith and without notice of the previous sale, he would have good title to them, although the property in the goods had passed to the first buyer earlier. A pledge or other disposition of the goods or documents of title by the seller in possession are equally valid [(Section 30(1)].

(5) Sale by buyer obtaining possession before the property in the goods has vested in him: Where a buyer with the consent of the seller obtains possession of the goods before the property in them has passed to him, he may sell, pledge or otherwise dispose of the goods to a third person, and if such person obtains delivery of the goods in good faith and without notice of the lien or other right of the original seller in respect of the goods, he would get a good title to them [(Section 30(2)].

(6) Effect of Estoppel: Where the owner is estopped by the conduct from denying the seller’s authority to sell, the transferee will get a good title as against the true owner. But before a good title by estoppel can be made, it must be shown that the true owner had actively suffered or held out the other person in question as the true owner or as a person authorized to sell the goods.

(7) Sale by an unpaid seller: Where an unpaid seller who had exercised his right of lien or stoppage in transit resells the goods, the buyer acquires a good title to the goods as against the original buyer – Section 54(3).

(8) Sale under the provisions of other Acts:
(i) Sale by an official Receiver or liquidator of the Company will give the purchaser a valid title.
(ii) Purchase of goods from a finder of goods will get a valid title under certain circumstances.

2.22 RULES REGARDING DELIVERY OF GOODS (SECTIONS 33 - 39)

The Sale of Goods Act, 1930, prescribes the following rules of delivery of goods:

(i) Effect of part delivery: A delivery of part of goods, taking place in the course of the delivery of the whole, has the same effect for the purpose of passing the property in such goods as delivery of the whole. But such part delivery, with the intention of severing it from the whole will not operate as a delivery of the remainder, it will be construed as part delivery only (Section 34).

(ii) Buyer to apply for delivery: The seller of the goods is not obliged to deliver them until the buyer has applied for delivery, unless otherwise agreed (Section 35).

(iii) Place of delivery: If there is no contract to the contrary, goods must be delivered at the place where they were at the time of sale, and the goods agreed to be sold are required to be delivered at the spot at which they were lying at the time the agreement to sale entered into or if not then in existence, at the place where they would be manufactured or produced [Section 36(1)].

(iv) Time of delivery: When the time of sending the goods has not been fixed by the parties, the seller must send them within a reasonable time [Section 36(2)].

(v) Goods in possession of a third party: Where the goods at the time of sale are in possession of a third person, there is no delivery unless and until such third person acknowledges to the buyer that he holds the goods on his behalf. The issue or transfer of any document of title to goods operates as delivery, symbolic in character, even if the goods are in the custody of a third person without such attornment [Section 36(3)]. 

(vi) Time for tender of delivery: Demand or tender of delivery may be treated as ineffectual unless made at a reasonable hour. What is reasonable hour is a question of fact [Section 36(4)].

(vii) Expenses for delivery: The expenses of and incidental to putting the goods into a deliverable state must be borne by the seller, in the absence of a contract to the contrary [Section 36(5)].

(viii)Delivery of wrong quantity: In case of tender of lesser quantity of goods, the buyer may either accept the same and pay for it at the contract rate or reject it [Section 37(1)]. In case of excess delivery the buyer may accept or reject the delivery, if he accepts the whole of the goods, he shall pay for them at the contract rate [Section 37(2)]. In case the seller makes a delivery of the goods contracted mixed with goods of a different description, the buyer may accept the relevant goods and reject the rest or reject the whole [Section 37(3)]. Mixing of goods with inferior quality does not amount to a mixing of goods of different description.

(ix) Instalment deliveries: Unless otherwise agreed, the buyer is not bound to accept delivery in installments. The rights and liabilities in cases of delivery by instalments and payments there on may be determined by the parties of contract (Section 38).

(x) Delivery of carrier: Subject to the terms of contract, the delivery of the goods to the carrier for transmission to the buyer, is prima facie deemed to be delivery to the buyer [Section 39(1)].

(xi) Deterioration during transit: Where goods are delivered at a distant place, the liability for deterioration necessarily incidental to the course of transit will fall on the buyer, though the seller agrees to deliver at his own risk (Section 40).

(xii) Buyer’s right to examine the goods: Where goods are delivered to the buyer, who has not previously examined them, he is entitled to a reasonable opportunity of examining them in order to ascertain whether they are in conformity with the contract. Unless otherwise agreed, the seller is bound, on request, to afford the buyer a reasonable opportunity of examining the goods (Section 41).

2.23 ACCEPTANCE OF DELIVERY OF GOODS 

Acceptance is deemed to take place when the buyer
(a) intimates to the seller that he had accepted the goods; or
(b) does any act to the goods, which is inconsistent with the ownership of the seller; or
(c) retains the goods after the lapse of a reasonable time, without intimating to the seller that he has rejected them (Section 42).

Ordinarily, a seller cannot compel the buyer to return the rejected goods; but the seller is entitled to a notice of the rejection. Where the seller is ready and willing to deliver the goods and requests the buyer to take delivery, and the buyer does not take delivery within a reasonable time, he is liable to the seller for any loss occasioned by the neglect or refusal to take delivery, and also reasonable charge for the care and custody of the goods (Sections 43 and 44).

2.24 SUMMARY 

The students must note that property in the goods or beneficial right in the goods passes to the buyer at a point of time depending on ascertainment, appropriation and delivery of goods. Risk of loss of goods prima facie follows the passing of property in goods. Goods remain at the seller’s risk unless the property therein is transferred to the buyer, but after transfer of property therein to the buyer the goods are at the buyer’s risk whether delivery has been made or not.

An important rule regarding passing of title in goods is that the purchaser does acquire no better title to the goods than what the seller had. This rule again is not applicable under certain circumstances. Delivery of goods denotes the voluntary transfer of possession, which may be actual or even in some constructive form and which is again subject to various rules which help in deciding when the delivery becomes effective.

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