Unit 3 Transfer of Ownership and Delivery of Goods Chapter Notes - Business

Introduction

The sale of goods involves the transfer of ownership from the seller to the buyer. It is crucial to determine the exact moment when this ownership passes from the seller to the buyer.

Importance of the Time of Transfer
The general principle is that risk passes with property. If goods are lost or damaged, the owner at the time of loss or damage bears the burden. If goods are damaged by a third party, the owner has the right to take action. The seller can only sue for the price once the property has been transferred to the buyer.

Passing of Property (Sections 18 - 26)

Passing of property means the transfer of ownership in goods from seller to buyer. When property passes, the risk prima facie passes with it, though parties may agree otherwise. The rules for determining when property passes depend mainly on:

• Identification (ascertainment) of goods: Under Section 18, in a contract for sale of unascertained or future goods, property cannot pass until the goods are ascertained or appropriated to the contract.
• Intention of the parties: Under Section 19(1), property passes when the parties intend it to pass. Section 19(2) lists factors relevant to intention: 
  (i) the terms of the contract, 
  (ii) the conduct of the parties,
  (iii) the circumstances of the case.
• If parties have not clearly fixed the time, Sections 20–24 give default rules to determine when property passes.

A. Passing of Property in Specific or Ascertained Goods

• Where the contract is for the sale of specific goods, property passes at the time when the parties intend it to pass. This is the general rule under Section 19(1).
• To determine the intention of the parties, regard is had to the terms of the contract, the conduct of the parties, and the circumstances surrounding the transaction (Section 19(2)).
• When there is no clear intention expressed, Sections 20–24 supply presumptions and rules to decide the time of passing property.

Stages of goods while passing of property

1. Specific goods in a deliverable state (Section 20)

• If there is an unconditional contract for the sale of specific goods which are already in a deliverable state, property passes to the buyer when the contract is made, regardless of whether payment or delivery is postponed.

Example 1: A customer buys a television from a shop and requests home delivery later. The television becomes the buyer's property as soon as the contract is made, even if delivery is arranged for a later date.

2. Specific goods to be put into a deliverable state (Section 21)

• Where the seller must do something to put the goods into a deliverable state (for example, perform finishing or installation), property does not pass until that act is completed and the buyer is notified.

Example 2: A laptop requiring installation of an operating system becomes the buyer's property only after installation is completed and the buyer is informed.

3. Specific goods in a deliverable state, but price to be ascertained (Section 22)

• If goods are in a deliverable state but the price is to be ascertained by weighing, measuring, testing, etc., property does not pass until those operations are completed and the buyer is notified.

Example 3: Carpets delivered to a buyer, but the contract requires them to be laid beforethe property passes. If carpets are stolen before laying, the property had not passed because laying was part of the contract.

B. Unascertained Goods

For a contract of sale of unascertained or future goods, property does not pass until the goods are ascertained-that is, specifically identified and appropriated to the contract.

1. Sale of unascertained goods by description and appropriation

• Appropriation is the act of identifying goods to a specific contract with the consent of both parties. It requires: a contract for unascertained or future goods; goods conforming to contract description and quality; goods in deliverable state; and appropriation being unconditional (i.e., goods set aside or delivered to buyer, buyer's agent, or carrier).
• Appropriation may be made by the seller or buyer with the other's consent; consent can be express or implied and may occur before or after appropriation.

2. Delivery of goods to a carrier

• Delivery of goods to a carrier for transmission to the buyer, without reserving the right of disposal, is an unconditional appropriation of the goods to the contract and will pass property to the buyer when made.

Example 4: Issue of bill of lading in buyer's name and its being sent to buyer indicates transfer of property to buyer.

Example 5: M orders a book to be sent by courier and requests payment by cheque. Seller sends the book by courier-this is unconditional appropriation. If the book is lost in transit, M (the buyer) is owner and bears the risk under Section 23(2).

C. Goods Sent on Approval or "On Sale or Return" (Section 24)

When goods are sent on approval or "on sale or return", property passes to the buyer in the following situations:
a. Approval or acceptance: When the buyer signifies approval or acceptance to the seller, or does some act adopting the transaction, property passes.
b. Retention without rejection: If the buyer retains the goods without rejecting them and a fixed time for return expires, or if no time was fixed but a reasonable time has passed, property passes.
c. Equivalent action: If the buyer does an act equivalent to acceptance-e.g., pledging or selling the goods-property passes.

Example 6: A tries a musical instrument at a shop on approval; when he decides to purchase it, ownership transfers.

Example 7: Jewellery given on a sale-or-return basis and then pledged by the recipient to a third party amounts to adoption of the transaction; property passes and the original owner cannot reclaim from third party-he can claim only against the intermediary.

Example 8: A sends a water motor to B on approval in March 2020; B fails to return it within a reasonable time by August 2020. Property passes and B must pay.

Sale for cash only or return: Under such terms goods remain the property of the seller until payment is completed. If buyer pledges goods prior to payment, he has no title to do so and pledge is invalid; seller may reclaim goods.

Example 9: Jewellery sent on "cash only or return" basis remains seller's property till payment; buyer pledging such jewellery prior to payment cannot pass valid title.

D. Reservation of Right of Disposal (Section 25)

• Section 25 recognises that the seller may reserve the right of disposal (i.e., conditionally appropriate goods) even where goods are delivered. In such cases, property does not pass until the condition is satisfied.
• Examples of presumed reservation include when a bill of lading or railway receipt is made deliverable to the order of the seller, or when the seller sends a bill of exchange for price along with documents of title to secure acceptance/payment; until the buyer accepts/pays and returns the document, property does not pass.

Example 10: Seller instructs driver not to deliver furniture until payment is made. Property passes only when payment is received.

Risk Prima Facie Passes with Property (Section 26)

• Unless agreed otherwise, goods are at the seller's risk until property passes to the buyer; after property passes goods are at the buyer's risk, even if delivery has not been completed (Section 26).
• If delivery is delayed because of the default of either party, the goods are at the risk of the party in fault for losses that would not have occurred but for that default.
• Parties may contract that risk passes at a different time from property: e.g., "risk passes on shipment" or "risk remains with seller until delivery".

Seller’s risk: Until property passes. Buyer’s risk: From when property passes.

Example 11: At an auction, when the auctioneer accepts a bid by striking the hammer, the sale becomes complete only on acceptance. If the auctioneer damages the painting accidentally while accepting, the loss is borne by the seller because ownership had not passed to the buyer before acceptance.

Qualifications to the rule
i. Delayed delivery: If delivery is delayed due to default of seller or buyer, the party at fault bears the risk for losses caused by that default.
ii. Duties as bailee: Even where risk has passed, the duties and liabilities of the seller or buyer acting as a bailee continue; they must take reasonable care of the goods.

Example 12: B accepts part delivery of cotton but defaults on accepting remaining bales which later become unfit; loss is borne by the buyer. The bailee duties (care of goods) are unaffected by passing of risk.

Parties may agree that the risk will pass at a different time than the property; such an agreement will govern.

Transfer of Title by Non-owners (Sections 27 – 30)

The general rule is encapsulated in the maxim Nemo dat quod non habet - a seller cannot pass a better title than he has. Thus, if the seller is not the owner, the buyer ordinarily does not obtain ownership. However, statute and law recognise exceptions to protect bona fide purchasers in certain situations.

Example 13: If A sells stolen goods to B, B (even if in good faith) does not get title; true owner can reclaim.

Example 14: Hirer under hire-purchase sells the vehicle; buyer obtains only the title the hirer had (no better title).

Exceptions to the general rule

(i) Sale by a mercantile agent

• A mercantile agent in possession of goods or documents of title with the owner’s consent can pass a good title to a buyer who purchases in the ordinary course of business and without notice of the agent’s lack of authority.

Example: A mercantile agent sells goods in the ordinary course; the buyer, unaware of a defect in authority, receives good title.

(ii) Sale by one of the joint owners (Section 28)

• If goods are owned jointly and one co-owner in sole possession (with consent of other co-owners) sells the goods to a buyer in good faith and without notice of lack of authority, the buyer acquires good title.

Example 15: A, B and C jointly own a TV; A (with consent) sells to P-P gets valid title.

(iii) Sale by a person in possession under a voidable contract (Section 29)

• If the seller is in possession under a voidable contract (for example, obtained by fraud) and the contract has not been rescinded before the sale, an innocent purchaser for value may obtain a good title.

Example 16: X fraudulently obtains a ring from Y (voidable). Before Y rescinds, X sells to Z, innocent purchaser. Z acquires good title.

(iv) Sale by a seller in possession of goods or documents of title (Section 30(1))

• If the seller, having sold the goods, remains in possession of them or of the documents of title and then sells them to a third party who buys in good faith and without notice of the prior sale, the third party obtains a good title.

Example 17: R agrees to deliver a TV to P later, but sells same TV to S who buys in good faith; S gets a good title.

(v) Sale by a buyer in possession before property vests (Section 30(2))

• If a buyer has possession of the goods with the seller’s consent before property has passed, the buyer may sell, pledge, or otherwise dispose of the goods; a third party who obtains them in good faith and without notice acquires a good title.

Example 18: Furniture delivered subject to payment in installments; buyer sells before paying last installment. The subsequent purchaser may acquire a good title (case law: Lee v Butler).

Example 19: Hirer A under hire-purchase sells car to C; B (owner/hirer) may recover the car because A never acquired ownership, only an option to buy.

(vi) Effect of estoppel

• If the true owner, by his conduct, represents another as owner or authorised to sell and thereby induces a purchaser to buy, the true owner is estopped from denying the other's authority; the purchaser obtains a good title by estoppel.

Example 20: A tells B in presence of C that A owns the horse; C remains silent though horse belongs to him. B buys from A. C is estopped by his silence and B obtains valid title.

(vii) Sale by an unpaid seller

• An unpaid seller who exercises rights of lien or stoppage in transit and then resells the goods under those rights will pass a good title to the subsequent bona fide purchaser.
• This is supported by provisions like Section 54(3) (relating to the rights of the unpaid seller).

(viii) Sale under provisions of other Acts

• Statutory sales by official authorities (e.g., Official Receiver, Liquidator) pass good title to purchasers.
• Purchase from finder: Under certain conditions (see Section 169, Indian Contract Act, 1872), a purchaser from a finder may obtain title.
• Sale by pawnee: A pawnee (one who holds goods as security) can sell and convey good title (see Section 176, Indian Contract Act, 1872).

Performance of the Contract of Sale (Sections 31 – 44)

A contract of sale is performed when the seller delivers the goods, the buyer accepts delivery, and the buyer pays the price, all in accordance with the contract terms.

Delivery: definition and importance

• Delivery means voluntary transfer of possession from one person to another (Section 2(2)). Physical handing over is not always necessary; what matters is that the buyer is enabled to exercise the rights of ownership or possession described by the contract.
• Delivery obtained by fraud or misrepresentation is not valid.
• Delivery may be to the buyer, to the buyer’s agent, or to a carrier or bailee as agreed by the parties; such delivery may be actual, symbolic, or constructive.

Types of delivery

• Actual delivery: Physical handing over of goods to the buyer or authorised agent.
• Symbolic delivery: Transfer by handing over something symbolic (e.g., keys, documents) representing the goods.
• Constructive delivery: Goods are made available in such a manner that the buyer can take possession (e.g., goods placed in a warehouse and the buyer is informed).

Duties of seller and buyer

• Under Section 31, the seller must deliver the goods and the buyer must accept and pay for them according to the contract terms.

Concurrent conditions of payment and delivery (Section 32)

• Except where agreed otherwise, delivery of goods and payment of price are concurrent conditions: the seller must be ready to deliver on receiving payment, and the buyer must be ready to pay in exchange for possession.

Rules regarding the delivery of goods

The Sale of Goods Act provides rules covering:

• Part delivery
• Buyer to apply for delivery
• Place of delivery
• Time for delivery
• Goods in possession of a third party
• Expenses of delivery
• Delivery of wrong quantity
• Instalment deliveries
• Delivery to carrier/wharfinger
• Deterioration during transit
• Buyer’s right to examine goods

(i) Delivery of goods sold (Section 33)

• Delivery may be effected by any action agreed between the parties or by acts which put the goods into the purchaser’s possession or into the possession of a person authorised to hold them on the purchaser’s behalf.

(ii) Effect of part delivery (Section 34)

• Delivery of part of the goods in fulfilment of a contract has the same effect as delivery of the whole, unless the part was delivered with intention of severing it from the whole.

Example 21: Goods lying at a wharf sold in a lot; buyer takes away part after wharfinger delivers - treated as delivery of whole.

(iii) Buyer’s right to apply for delivery (Section 35)

• Seller is not bound to deliver goods until buyer applies for delivery, unless the contract provides otherwise.

(iv) Place of delivery

• Where contract specifies, that place governs. If not specified, goods are to be delivered at the place where they are at time of sale; goods agreed to be sold are delivered at place where they are at time of agreement to sell.

(v) Time of delivery

• If no time is fixed for sending goods, seller must send them within a reasonable time (Section 36(2)).

(vi) Goods in possession of a third party (Section 36(3))

• If goods are in third party’s possession at time of sale, there is no delivery until the third party acknowledges to buyer that he holds goods on buyer's behalf. This does not affect transfer of documents of title.

(vii) Time for tender of delivery

• Demand or tender of delivery should normally be made at a reasonable hour; what is reasonable is a question of fact (Section 36(4)).

(viii) Expenses for delivery (Section 36(5))

• Expenses incidental to putting goods into a deliverable state must be borne by seller unless contract states otherwise.

(ix) Delivery of wrong quantity (Section 37)

• Less quantity: Buyer may reject the goods; if buyer accepts the lesser quantity, he pays at contract rate for accepted quantity.
• More quantity: Buyer may accept goods included in contract and reject rest, or reject whole. If buyer accepts whole delivery he must pay contract price for whole lot.
• Mixed goods: If contracted goods mixed with other goods not in contract, buyer may accept conforming goods and reject rest or reject entire delivery.
• Provisions subject to any usage of trade, special agreement, or course of dealing.

Example 22: A agrees to sell 100 quintals of wheat to B at ₹1,000 per quintal but delivers 1,100 quintals. B may reject whole lot, accept only 100 quintals, or accept whole lot and pay contract price for all.

(x) Instalment deliveries (Section 38)

• Unless agreed otherwise, the buyer is not bound to accept delivery by instalments. Rights and liabilities for instalment deliveries depend on the terms of the contract and the parties' agreement.

Example 23: Sale of 100 tons of paper to be shipped in November; seller ships 80 tons in November and 20 tons in December-buyer entitled to reject whole lot (where instalment shipments are essential to contract).

(xi) Delivery to carrier (Section 39)

• Subject to contract terms, delivery to the carrier for transmission to buyer is prima facie deemed delivery to buyer.

(xii) Deterioration during transit (Section 40)

• Where goods are delivered for distant transmission, liability for deterioration necessarily incidental to transit generally falls on the buyer even if seller agreed to deliver at his own risk.

Example 24: Iron rods sent by proper vessel rusted slightly but rust did not affect merchantable quality and deterioration was not necessarily incidental to transmission; buyer was held bound to accept.

(xiii) Buyer’s right to examine the goods (Section 41)

• When goods are delivered, and the buyer has not previously examined them, the buyer is entitled to a reasonable opportunity to examine them before acceptance. Seller must allow a reasonable time for inspection unless otherwise agreed.

Rule related to acceptance of delivery of goods (Section 42)

• The buyer informs the seller of the acceptance of the goods.
• The buyer acts in a way that is inconsistent with the seller's ownership of the goods.
• The buyer retains the goods after a reasonable time without notifying the seller of rejection.

Buyer not bound to return rejected goods (Section 43)

• Unless otherwise agreed, if the buyer refuses delivery, he is not obliged to return the goods; it suffices to inform the seller of the refusal.

Liability of buyer for neglecting or refusing delivery (Section 44)

• If the seller is ready and willing to deliver and the buyer neglects or refuses to take delivery within a reasonable time, the buyer is liable for any loss caused by such neglect or refusal and for reasonable custody costs.
• Section 44 does not affect the seller’s other rights if the buyer’s conduct amounts to repudiation of the contract.