Overview

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 property has transferred to the buyer.

Passing of Property (Sections 18 - 26) 

Passing of property  is a crucial aspect in a sale, as it signifies the transfer of ownership. When property passes to the buyer, the risk associated with the goods also transfers, even if the goods are still in the seller's possession. The rules governing the transfer of property from seller to buyer depend on two key factors:

 (a) Identification of Goods:  According to Section 18, in a contract of sale involving unascertained goods, ownership cannot pass to the buyer until the goods are identified. The buyer acquires ownership rights only when the goods are specific and ascertained.

 (b) Intentions of Parties:  Property in goods is transferred to the buyer when both parties intend for it to be transferred, as per Section 19(1). Section 19(2) outlines factors to consider in determining the parties' intentions, including the contract terms, conduct of the parties, and the circumstances of the case.

The main rules for determining the passing of property from seller to buyer are:

A. Passing of Property in Specific or Ascertained Goods 

• When there is a contract for the sale of specific goods, the ownership of those goods is passed to the buyer at the time that both parties involved intend it to be transferred. (sub-section 1)
• To understand what the parties intended, we should consider the following: 
  • The terms of the contract
  • The actions of the parties
  • The situation surrounding the case
  • (sub-section 2)
• Unless there is a clear intention that says otherwise, the guidelines outlined in Sections 20 to 24 help determine when the ownership of the goods is meant to pass to the buyer. (sub-section 3)

Stages of goods while passing of property

1. Specific Goods in a Deliverable State (Section 20) 

• When there is an unconditional contract for the sale of specific goods that are already in a deliverable state, the property in the goods transfers to the buyer at the time the contract is made.
• It does not matter if the payment or delivery is postponed. The key condition is that the goods must be ready for delivery.

 Example 1:  If a customer buys a television from a store and requests home delivery, the television becomes the buyer's property as soon as the contract is made, regardless of when the delivery occurs.

2. Specific Goods to Be Put into a Deliverable State (Section 21) 

• In cases where specific goods are sold, and the seller is required to perform certain actions to make the goods ready for delivery, the property does not pass to the buyer until these actions are completed and the buyer is notified.

 Example 2:  If a customer purchases a laptop that requires the installation of an operating system before delivery, the ownership of the laptop transfers to the buyer only after the installation is complete and the buyer is informed.

 3. Specific Goods in a Deliverable State with Price Determination (Section 22) 

• When specific goods are sold in a deliverable state, but the seller needs to perform actions such as weighing, measuring, or testing to determine the price, the property does not pass to the buyer until these actions are completed, and the buyer is notified.

Example 3: A sold carpets to the Company which were required to be laid. The carpet was delivered to the company’s premises but was stolen before it could be laid. It was held that the carpet was not in deliverable state as it was not laid, which was part of the contract and hence, the property had not passed to the buyer company.

B. Unascertained Goods 
In a contract for the sale of unascertained goods, the property in the goods is not transferred to the buyer until the goods are ascertained. This means that the buyer does not become the owner of the goods until they are specifically identified and set aside for the contract.

Sale of Unascertained Goods by Description and Appropriation 

• Appropriation of goods refers to the process of selecting goods with the intention of using them to fulfill a contract, with the mutual consent of both the seller and the buyer.
• For appropriation to be valid, certain conditions must be met:
• There must be a contract for the sale of unascertained or future goods.
• The goods should match the description and quality specified in the contract.
• The goods must be in a deliverable state.
• Appropriation must be unconditional, meaning the goods are not just intended to be appropriated but are actually set aside for the contract. This can be done by delivering the goods to the buyer, their agent, or a carrier.
• Appropriation can be made by either the seller with the buyer's consent or the buyer with the seller's consent. Consent can be express or implied and may occur before or after appropriation.

Delivery of Goods to the Carrier 

• When the seller delivers goods to the buyer or a carrier for transmission to the buyer, without reserving the right of disposal, it is considered an unconditional appropriation of the goods to the contract.
• This means that the seller is deemed to have transferred ownership of the goods to the buyer at the time of delivery to the carrier.

 Example 4: 

• When a bill of lading for a railway parcel is issued in the buyer's name and sent to them, ownership of the goods transfers from the seller to the buyer.
• If the goods are lost or stolen accidentally during this process, the seller may still hold some liability until the goods are delivered to the buyer, unless otherwise specified in the contract.

 Example 5: 

• When M orders a book from a bookseller in Mumbai and requests it to be sent by courier, with payment to be made by cheque, the seller's actions constitute unconditional appropriation of the goods.
• Even though the book is lost during transit, M becomes the owner of the goods as per Section 23(2).
• Consequently, M bears the risk of loss for the book during its journey.

C. Goods Sent on Approval or "On Sale or Return" (Section 24)
When goods are delivered to a buyer on approval or "on sale or return" terms, the ownership of the goods transfers to the buyer in the following situations:

•  Approval or Acceptance:  Ownership passes when the buyer signifies their approval or acceptance to the seller or takes any action that adopts the transaction.
•  Retention Without Rejection:  If the buyer retains the goods without rejecting them and a specific time for return has been agreed upon, ownership passes when that time expires. If no time has been fixed, ownership passes after a reasonable period.
•  Equivalent Action:  Ownership also transfers if the buyer takes an action that is equivalent to accepting the goods, such as pledging or selling them.

Example 6:  A buyer (P) purchases a musical instrument from a shop with the condition that he will buy it if he likes it. When the buyer decides to purchase the instrument, ownership is transferred to him.
A buyer under a 'sale or return' contract is considered to have accepted the goods when he demonstrates clear intent to buy by exercising control over the goods, such as pledging them with a third party. Simply failing to return the goods does not indicate acceptance.

Example 7:  When 'A' gives jewellery to 'B' on a sale or return basis, and 'B' pledges the jewellery with 'C', ownership transfers to 'B' because he has adopted the transaction by pledging the jewellery. 'A' cannot claim the jewellery from 'C'; he can only seek payment from 'B'.

Example 8:  In March 2020, A sends a water motor to B on approval or return. B is supposed to return it after a trial period, but when August 2020 arrives and the water motor has not been returned within a reasonable timeframe, A is not obligated to accept it, and B is required to pay the price for the water motor.

Sale for Cash Only or Return

• Under 'sale or return' terms, it is crucial to understand that goods remain the property of the seller until payment is completed.

Example 9:  When 'A' entrusts his jewellery to 'B' on a sale for cash only or return basis, the contract stipulates that the jewellery will stay with 'A' until payment is made. If 'B' pledges the jewellery with 'C' before making the payment, ownership has not transferred to 'B' at the time of the pledge. Consequently, the pledge is invalid, and 'A' has the right to reclaim the jewellery from 'C'.

D. Reservation of Right of Disposal (Section 25) 

• This section ensures that the seller retains the right to dispose of goods until the price is paid, even if the goods have been delivered.
• In cases of specific goods or goods appropriated to the contract, the seller can reserve the right to dispose of the goods until certain conditions are met, as per the contract or appropriation. This means that the property in the goods does not transfer to the buyer, even if the goods have been delivered to the buyer, a carrier, or another bailee for transmission, until the seller's conditions are fulfilled.

 Example 10:  If a seller sends furniture to a company with instructions to the driver not to deliver it until payment is made, the property in the furniture passes to the buyer only when payment is received, according to the sale agreement.

 Circumstances for Reserving Right of Disposal:  The seller is presumed to have reserved the right of disposal in the following situations:

• When goods are shipped or delivered to a railway administration for carriage, and the bill of lading or railway receipt indicates that the goods are deliverable to the order of the seller or their agent.
• When the seller draws a bill on the buyer for the price and sends it along with the bill of lading or railway receipt to secure acceptance or payment. If the buyer does not accept or pay the bill, they must return the bill of lading; otherwise, the property in the goods does not transfer to them.

It is important to note that Section 25 deals with “conditional appropriation,” which is different from “unconditional appropriation” addressed in Section 23 (2).

Risk Prima Facie Passes with Property (Section 26) 

• Section 26 states that, unless agreed otherwise, the goods are at the seller's risk until the property is transferred to the buyer. Once the property is transferred, the goods are at the buyer's risk, regardless of whether delivery has been made.
• However, there is an exception to the rule of "risk follows ownership." If the delivery of goods is delayed due to the fault of either the buyer or the seller, the goods are at the risk of the party at fault for any loss that could have been prevented but for such fault.
• Under normal circumstances, the buyer only bears the risk when the property in the goods transfers to him. However, the parties involved can agree that 'risk' will pass at a different time than 'property.'

Risk Generally Passes with Ownership:  The owner of the goods is responsible for any loss or damage unless there is an agreement to the contrary. According to Section 26 of the Sale of Goods Act:

• The goods are at the seller’s risk until the property passes to the buyer, unless agreed otherwise.
• After the property has passed, the goods are at the buyer’s risk, regardless of whether delivery has occurred.

 Seller’s Risk:  Until the property passes to the buyer.  Buyer’s Risk:  Begins after the property has transferred from the seller.

 Example 11:  A bids for an antique painting at an auction. When the auctioneer accepts the bid by striking his hammer, he accidentally damages the painting. The loss is borne by the seller because ownership has not yet passed to the buyer; it is contingent upon the auctioneer's acceptance, which signifies the sale.

 Qualifications to the Rule:   
1. Delayed Delivery:  If delivery is delayed due to the fault of either the seller or the buyer, the goods will be at the risk of the party who defaults for losses that would not have occurred but for the default.  
2. Duties as Bailee:  The duties and liabilities of the seller or buyer as a bailee of goods for the other party remain unaffected even when the risk has generally passed.

Example 12:  A contracted to sell 100 bales of cotton to B for delivery in February. B accepted part of the cotton but defaulted on accepting the remaining bales, causing the cotton to become unfit for use. The loss is borne by the buyer. However, the general rule does not impact the duties or liabilities of either party as a bailee of goods for the other, even when the risk has passed. They are obligated to care for the goods as a person of ordinary prudence would.

As mentioned earlier, the risk, meaning the responsibility to bear the loss in case the property is destroyed, damaged, or deteriorated, typically transfers with ownership. However, the parties involved have the option to agree otherwise. For example, they can decide that the risk will transfer at a different time than the property, either before or after the property has passed from the seller to the buyer.

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

Sale by Person Not the Owner (Section 27):  Generally, a seller can only sell goods of which he is the absolute owner. However, there are instances where a person may sell goods of which he is not the owner. In such cases, the question arises regarding the position of the buyer who has purchased the goods by paying the price. The general rule concerning the transfer of title is that the seller cannot transfer a better title to the buyer than he himself possesses. If the seller is not the owner of the goods, the buyer will not become the owner either. This means that the buyer's title will be the same as that of the seller. This principle is encapsulated in the Latin maxim “Nemo dat quod non habet,” which translates to “No one can give what he does not have.”
Example 13: 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. 
Example 14: P, the hirer of vehicle under a hire purchase agreement, sells them to Q. Q, though a bona fide purchaser, does not acquire the ownership in the vehicle. At the most he acquires the same right as that of the hirer

Exceptions to the Rule of No Title, No Ownership: To prevent innocent purchasers from suffering losses, several statutory exceptions allow non-owners to convey a better title to bona fide purchasers.

(i) Sale by a Mercantile Agent: A mercantile agent can pass a valid title to a buyer under the following conditions:

• The agent is in possession of the goods or documents with the owner's consent.
• The sale is made in the ordinary course of business as a mercantile agent.
• The buyer acts in good faith and without notice of the agent's lack of authority to sell.

 Example:  If a mercantile agent sells goods in the ordinary course of business, and the buyer is unaware of any issues with the agent's authority, the buyer receives a valid title.

(ii) Sale by One of the Joint Owners (Section 28): If one of several joint owners has sole possession of goods with the consent of co-owners, they can sell the goods to a buyer in good faith without notice of the seller's lack of authority.

 Example 15:  If A, B, and C jointly own a TV and VCR, and A sells them to P with B and C's consent, P acquires a good title.

(iii) Sale by a Person in Possession Under a Voidable Contract (Section 29): A buyer can acquire a good title to goods sold by a seller possessing them under a voidable contract if the contract was not rescinded before the sale due to coercion, fraud, misrepresentation, or undue influence.

Example 16: X fraudulently obtains a diamond ring from Y. This contract is voidable at the option of Y. But before the contract could be terminated, X sells the ring to Z, an innocent purchaser. Z gets the good title and Y cannot recover the ring from Z even if the contract is subsequently set aside.

 (iv) Sale by a Seller in Possession of Goods: According to  Section 30(1)  of the Sale of Goods Act, if a person sells goods but remains in possession of them or the documents of title, they can sell the goods to a third party. If the third party obtains the goods in good faith and without knowledge of the prior sale, they acquire a good title to the goods, even though the property had already passed to the first buyer.

Example 17:  During IPL matches, P buys a TV set from R. R agrees to deliver the same to P after some days. Meanwhile, R sells the same to S, at a higher price, who buys in good faith and without knowledge about the previous sale. S gets good title.

(v) Sale by a Buyer with Possession Before Property Vests: As per  Section 30(2)  , if a buyer obtains possession of goods with the seller's consent before the property in the goods has passed to him, he can sell, pledge, or dispose of the goods to a third party. If the third party receives the goods in good faith and without notice of the seller's lien or right, they acquire a good title to the goods.

Example 18:  Furniture was delivered to B under an agreement that the price was to be paid in two instalments, the furniture to become property of B on payment of the second instalment. B sold the furniture before the second instalment was paid. It was held that the buyer acquired a good title. (Lee Vs Butler)

Example 19:  A took a car from B under the condition of paying monthly hire charges of ` 5,000, with an option to purchase for ` 1,00,000 in 24 instalments. After the payment of a few instalments, A sold the car to C. B can recover the car from C since A had neither bought the car nor agreed to buy the car. He had only an option to buy the car.

(vi) Effect of Estoppel 

• When the owner is  estopped  by their conduct from denying the seller’s authority to sell, the transferee will obtain a good title against the true owner.
• However, for a good title by estoppel to be established, it must be demonstrated that the true owner has actively held out the other person as the true owner or as a person authorized to sell the goods.

 Example 20: 

• ‘A’ told ‘B’, a buyer, in the presence of ‘C’ that he (A) is the owner of the horse.
• But ‘C’ remained silent even though the horse belonged to him.
• ‘B’ bought the horse from ‘A’.
• In this case, the buyer (B) will obtain a valid title to the horse even though the seller (A) did not own it.
• ‘C’, by his conduct, is prevented from denying ‘A’s authority to sell the horse.
• ‘C’s silence led ‘B’ to believe that ‘A’ owned the horse.

(vii) Sale by an Unpaid Seller

• When an unpaid seller exercises their right of lien or stoppage in transit and resells the goods, the buyer acquires a good title to the goods against the original buyer.
• This is in accordance with Section 54 (3) of the relevant legal provisions.

(viii) Sale under the provisions of other Acts: 

•  Official Receiver or Liquidator's Sale:  When an Official Receiver or Liquidator sells a company, the purchaser receives a valid title to the goods.
•  Purchase from Finder of Goods:  Under certain conditions specified in Section 169 of the Indian Contract Act, 1872, a purchaser can acquire a valid title when buying goods from a finder.
•  Sale by Pawnee:  A pawnee has the right to sell goods and can convey a good title to the buyer, as outlined in Section 176 of the Indian Contract Act, 1872.

 Performance of the Contract of Sale 

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

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

Delivery: Definition and Importance 

• According to  Section 2(2)  of the relevant legal framework, delivery refers to the voluntary transfer of possession from one person to another. It is important to note that physical possession is not always necessary for delivery. What matters is that the buyer has the ability to exercise their rights over the goods.
• If possession is obtained through unfair means, such as fraud or deceit, the transaction cannot be considered a valid delivery. Delivery of goods can be carried out in any manner agreed upon by the parties involved, and this will be recognized as valid delivery.
• Valid delivery can also involve putting the goods in the possession of the buyer or any person authorized to hold the goods on the buyer's behalf.

Types of Delivery of Goods

• Actual Delivery:  This involves physically handing over the goods to the buyer or their authorized representative.
• Symbolic Delivery:  In this type, delivery is represented by giving something symbolic, like a key or a document, indicating that the buyer has taken possession of the goods.
• Constructive Delivery:  This occurs when the goods are made available to the buyer in such a way that they can take possession, even if the physical transfer has not taken place. For example, placing goods in a warehouse and informing the buyer.

Duties of Seller and Buyer: According to Section 31 of the Sale of Goods Act, 1930, it is the duty of the  seller  to deliver the goods and the duty of the  buyer  to accept and pay for them, following the terms of the contract of sale.

Concurrent Conditions of Payment and Delivery: As per Section 32 of the Sale of Goods Act, 1930, unless agreed otherwise,  delivery of goods and payment of the price are concurrent conditions  . This means:

• The  seller  must be ready to hand over the goods upon receiving payment.
• The  buyer  must be prepared to pay the price in exchange for possession of the goods.

Rules Regarding Delivery of Goods: 

The Sale of Goods Act, 1930 outlines various rules for the delivery of goods, including:

•  Part Delivery:  Rules regarding delivering goods in parts.
•  Buyer to Apply for Delivery:  The buyer may need to request delivery in certain situations.
•  Place of Delivery:  Determining where the goods should be delivered.
•  Time for Delivery:  Setting the timeframe for delivery.
•  Goods in Possession of a Third Party:  Rules for delivering goods held by a third party.
•  Expenses of Delivery:  Who bears the costs of delivery.
•  Delivery of Wrong Quantity:  Handling situations where the wrong quantity is delivered.
•  Instalment Deliveries:  Rules for delivering goods in installments.
•  Delivery to Carrier/Wharfinger:  Procedures for delivering goods to a carrier or wharfinger.
•  Deterioration During Transit:  Addressing issues of goods deteriorating during transit.
•  Buyer’s Right to Examine Goods:  The buyer’s right to inspect goods upon delivery.

Delivery of Goods Sold 

• Delivery of goods sold can be made by any action agreed upon by the parties as delivery or which effectively puts the goods in the possession of the buyer or a person authorized to hold them on the buyer's behalf. (Section 33)

Effect of Part Delivery 
Section 34  of the Sale of Goods Act states:

• Delivery of a part of goods as part of the whole has the same effect for passing property as a delivery of the whole.
• However, if part of the goods is delivered with the intention of severing it from the whole, it does not constitute delivery of the remainder.

 Example 21:  If certain goods lying at a wharf were sold in a lot and the seller instructed the wharfinger to deliver them to the buyer, who then accepted and took away part of them, it is considered delivery of the whole.

Buyer’s Right to Apply for Delivery 

• According to  Section 35  of the Sale of Goods Act, the seller is not obligated to deliver goods until the buyer requests for delivery, unless there is an express contract stating otherwise.

Place of Delivery 

• The place of delivery, whether it is the buyer's responsibility to take possession of the goods or the seller's obligation to send them, depends on the contract between the parties. 
• If there is no such contract, goods sold are to be delivered at the place where they are located at the time of sale, and goods agreed to be sold are to be delivered at the place where they are located at the time of the agreement to sell.

Time of delivery

• Where under the contract of sale, the seller is bound to send the goods to the buyer, but no time for sending them is fixed, the seller is bound to send them within a reasonable time. [Section 36(2)] 

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. Provided that nothing in this section shall affect the operation of the issue or transfer of any document of title to goods. [Section 36(3)] 

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)]. 

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)].

Delivery of Wrong Quantity 

• Delivery of Less Quantity:  If the seller delivers a quantity of goods less than what was contracted, the buyer has the right to reject the goods. However, if the buyer accepts the goods delivered, they must pay for them at the contract rate.
• Delivery of More Quantity:  If the seller delivers a quantity of goods larger than what was contracted, the buyer has the option to accept the goods included in the contract and reject the rest, or reject the whole delivery. If the buyer accepts the whole delivery, they must pay for the goods at the contract rate.
• Delivery of Mixed Goods:  If the seller delivers the contracted goods mixed with goods of a different description not included in the contract, the buyer can accept the goods that are in accordance with the contract and reject the rest, or reject the whole delivery.
• Subject to Usage of Trade:  The provisions regarding delivery of wrong quantity are subject to any usage of trade, special agreement, or course of dealing between the parties.
• Example 22: A agrees to sell 100 quintals of wheat to B at ₹ 1,000 per quintal. A delivers 1,100 quintals. B may reject the whole lot or accept only 1,000 quintals and reject the rest or accept the whole lot and pay for them at the contract of sale

Instalment Deliveries 

• Unless otherwise agreed , the buyer is not bound to accept delivery in instalments. The rights and liabilities in cases of delivery by instalments and payments thereon may be determined by the parties of contract. (Section 38)
• Example 23: There was sale of 100 tons of paper to be shipped in November. The seller shipped 80 tons in November and 20 tons in December. The buyer was entitled to reject the whole 100 tons

Delivery to 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)]

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) 
• Example 24: P sold to Q a certain quantity of iron rods which were to be sent by proper vessel. It was rusted before it reached the buyer. The rust of the rod was so minimal and was not effecting the merchantable quality and the deterioration was not necessarily incidental to its transmission. It was held that Q was bound to accept the goods.

Buyer’s right to examine the goods

• When goods are delivered to a buyer who has not examined them before, the buyer has the right to examine them to ensure they meet the contract terms. Unless agreed otherwise, the seller must allow the buyer a reasonable opportunity to inspect the goods if requested. (Section 41)

Rule Related to Acceptance of Delivery of Goods (Section 42):

• Acceptance of Goods: Acceptance by the buyer is considered to occur when:
• 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 agreed otherwise, if goods are delivered to the buyer and he refuses to accept them, he is not obligated to return them to the seller.
• It is sufficient for the buyer to inform the seller of his refusal to accept the goods.

Liability of Buyer for Neglecting or Refusing Delivery of Goods (Section 44):

• If the seller is ready and willing to deliver the goods and requests the buyer to take delivery, the buyer is liable for any loss caused by his neglect or refusal to take delivery within a reasonable time.
• The buyer is also responsible for a reasonable charge for the care and custody of the goods.
• This section does not affect the seller's rights if the buyer's neglect or refusal to take delivery constitutes a repudiation of the contract.