Day's Notes: Right of Disposal

The Seller reserves the right of disposal to prevent the passing of property to the buyer until payment has been made for goods shipped. A seller who does not reserve the right of disposal incurs a significant insolvency risk and will suffer loss if the buyer becomes insolvent and property has been passed, but payment has not been made.

The seller can do this by:
1. Having the bill of lading drawn out to delivery of the buyer, but retaining possession of the bill
2. Having the bill drawn out to the order of the seller or the seller’s agents, pending receipt of payment by the buyer, acceptance of draft or fulfillment of any other conditions laid down by the seller

An FOB seller who reserves the right of disposal pending payment by the buyer, will not be in breach of his duties to load goods free on board the vessel. Reservation of the right of disposal in CIF contracts hardly arises because goods are usually appropriated to a contract by way of a notice of appropriation when afloat. Further, unlike other cases when property passes upon shipment such as FOB and FAS, property in CIF passes upon payment against shipping documents.

If a buyer is in wrongful possession of a bill of lading, property does not pass to him. However, he will be able to pass a good title to a sub-buyer.

The Day's Notes: Passing of Property

Passing of Property Rules

Sale of goods involves a contract and conveyance. Conveyance is the passing of property by the seller to the buyer.

ASCERTAINED GOODS
According to the Sale of Goods Act (1979) S.17, property in specific or ascertained goods passes when the parties in the contract intend it to pass.
If the contract does not indicate when the parties intend that property should pass, the presumptive Rules that govern the passing of property in ascertained goods are laid down under Section 18(1-4) of the SOG Act 1979:

Where there’s an unconditional contract for the sale of specific goods in a deliverable state, property passes at the time when the contract is made. If the seller needs to do something to put the goods in a deliverable state, then property does not pass until this act is done and buyer given notice
Where goods are in a deliverable state, but the seller is bound to do something eg weigh them to ascertain the price, then property does not pass until this act is done and buyer given notice
If the goods are delivered to the buyer for approval, or on sale ore return or other similar terms, property passes when buyer signifies approval or does any act adopting the transaction, or retains the goods without rejection after the lapse of the expiration, or if none, then upon the lapse of reasonable time

Ascertained goods are specific and cannot be replaced even though they are of the same contractual standard.

UNASCERTAINED GOODS
The seller is free to appropriate the goods that answer to the contractual description. This usually applies to most commodity contracts. Generally, if the seller intends to provide buyer with goods from a bulk, seller had to earmark goods by a physical act to ascertain them. Failure to do so, would lead to the failure to pass property to the buyer. Ascertainment does not occur just because seller says it has happened or promises it will happen.

As stated, there was no protection for the buyer in bulk unless the goods were specifically identified and physically earmarked. The (Sale of Goods (Amendment) Act 1995 (S. 19, 20A and 20B of the Sale of Goods Act 1979)now recognizes the rights of buyers in bulk; simply summarized as rights in the bulk are proportional to the amount that he has paid for the goods.

FOB CONTRACTS
If the seller delivers the goods to the carrier and does not reserve the right of disposal, property passes upon shipment of the goods, or once the goods cross the ship’s rail.

DELIVERY
Property passes when the parties intend it to. The general rule is that property passes once payment is made against the shipping documents. The practice of release of the goods by the carrier upon receipt of a letter of indemnity does not change this. The following two situations would arise:
The buyer takes possession of the goods and sells them to a third party. Property in the goods did not pass upon their delivery. (What is the seller’s recourse against the buyer where buyer disposed of the goods in the domestic market?)
As against a third party who was unaware that the seller had reserved the right of disposal, the seller may be unable to recover against such third party.

PAYMENT BEFORE LOADING
If buyer pays before property passes to him, and the seller becomes insolvent, the buyer is likely to lose both the payment and the goods.

CIF CONTRACTS
Property passes once the buyer pays against the shipping documents, consistent with the parties’ intention, and not upon shipment. When buyer pays against the documents, passing or property won’t be dependent on documents being conforming documents.