Day's notes: Transfer of Risk

TRANSFER OF RISK[1]
Risk involves the allocation of loss to goods due to an external event for which neither buyer or seller is responsible. These events may include acts of God, acts of third parties such as riots, insurrections etc.
The general rule under S. 20(1)[2] is risk passes with property. In the case of bulk shipments, a principle of proportionality could be applied where all parties divide risk amongst all those entitled to the bulk. This rule however, does not apply to overseas sale contracts conducted on FOB, CIF and other similar terms.

FOB CONTRACTS
Risk passes once the goods are put on board. Even though the seller may reserve the right of disposal, this does not affect the general rule that risk passes upon shipment.
In the case of dry commodities, the entire shipment must be loaded, for risk to pass. In Anderson v Maurice (1875) LR 10 CP 609 (Exch Ch.), Blackburn and Lush JJ; in an entire contract for sale of rice they declined to accept, in the absence of an agreement to the contract, that risk would pass incrementally to the buyer upon the loading of each bag.
On the contrary, oil contracts may provide for the passing of risk as the oil is loaded. Contracts may provide for transfer of property and risk when oil passes the permanent hose connection.
There are other rules which may affect the passing of risk. Where the seller is required to issue a notice to the buyer to procure insurance, failure to give such notice will result in the goods remaining at the seller’s risk.

Under S.32 (2)[3] the seller is under an obligation to procure a reasonable contract of carriage for the buyer having regard to the nature of goods and the circumstances. If he does so, then he will not be liable in the event that the carrier fails to perform the contract.
If the seller procures an unreasonable contract of carriage for example to the wrong destination, the buyer may refuse to treat delivery to the carrier as delivery to him, and may hold the seller responsible for damages. The buyer’s refusal to accept delivery permits the buyer to terminate the contract and sue for damages for non-delivery.

CIF CONTRACTS
In most cases, goods to be appropriated to a CIF contract are purchased afloat. The rule is that risk passes upon shipment. The event that triggers the retroactive transfer of risk to the buyer is the issuance of a binding notice of appropriation. Where seller issues a late notice, or a notice in the wrong form, and the buyer accepts without objection, then risk passes at this point.
With regard to oil contracts, where the seller has to nominate a vessel to arrive within a stated arrival range, risk passes as from the time that the buyer has a reasonable time to respond for this purpose, accepts the nomination.

CIF and FOB contracts are shipment contracts. That is unlike arrival contracts, they do not guarantee the delivery of the goods. Under FOB, seller delivers goods by shipping them and not discharging them at the destination port. Under CIF, the seller contracts for the carriage of the goods, without it being a term of the sale contract that the goods should be discharged in that port. However, in both instances the seller has to provide goods that conform to the quality and fitness standards set out in the contract.


[1] Reference made to Michael Bridge, The International Sale of Goods; Law and Practice (2nd Edn, 2007), Ch.8
[2] Sale of Goods Act Ch.54 1979
[3] Ibid

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.