The significance of property in commercial transactions. - Justin Santiago
Property as a concept is not the physical goods themselves but the proprietary right or legal interest in the goods. The importance of property pertains to the passing of property and correspondingly the passing of risk and the rights of buyers and sellers.
The Sale of Goods Act sets out the rules for determining when property passes from the seller to the buyer. The importance of determining when the property passes is :-
i) that the risk of accidental loss or damage passes to the buyer when the property passes unless otherwise agreed.
ii) once the ownership passes the owner can sue for the price, under the provisions of s49 (1). S.O.G.A.
iii) If the seller resells the goods once ownership has passed then the subsequent buyer does not take title to the goods unless he comes under an exception to the Nemo Dat Rule under s24 S.O.G.A.1979.
In the case of the passing of risk Section 20(1) in SOGA states, "Unless otherwise agreed, the goods remain at the seller’s risk until the property in them is transferred to the buyer, but when the property in them is transferred to the buyer the goods are at the buyer’s risk whether delivery has been made or not." Therefor we need to know whether property can pass, when does property pass and implications for buyers and sellers.
Whether Property Can Pass
The state that the goods are in will determine whether property can pass - if it is identified or scertained at the time the contract is made, then it is one for the sale of specific goods. If they are not identified at the time of the contract they are unascertained goods : Re London Wine Shippers. In this case the company was an insolvent wine dealer which had stocks of wine in several warehouses. Some of the wine had been sold to customers for laying down or investment purposes. Although it was clearly contemplated that the wine would belong to the purchasers and would be stored by the company, no appropriation from the bulk of the wine in storage had been made to answer any particular contracts. In the absence of appropriation by earmarking or otherwise setting aside each purchaser’s wine, legal property did not pass under S16 of SOGA 1979. Accordingly nor had the company created a completely constituted trust sufficient to pass the equitable title.
Property will only pass when it is know to what the property refers to as per Lord Mustill’s dictum in Re Goldcorp Exchange. The time for ascertainment is at the time the contract was made. However under Section 20A, a buyer who has paid all or part of the price of an unidentified part of an identified bulk will be an owner in common of the bulk.
When Does Property Pass
If the goods are specific or ascertained, the parties are free to make whatever agreement they like about when property is to pass S(17) which can be inferred from the terms of the contract, conduct of the parties and circumstances of the case. This is in line with the basic freedom of contract philosophy where the parties are free to decide for themselves what contract to make and what terms to incorporate.
If the terms are not clear then intention will be a governing factor. If this intention is not apparent there are several rules under S18 Rules 1 to 5 to determine this intention :-
Rule 1 : Goods in a deliverable state : Underwood Ltd v Burgh Castle – a machine that was attached to a factory floor and therefor was not in a deliverable state was deemed not to be intended to pass.
Rule 2 : Goods not in a deliverable state
Rule 3 : Price to be ascertained
Rule 4 : Sale or return
Rule 5 : Unascertained goods and appropriation : Unconditional appropriation – irrevocable identification of the goods and beyond the power fo the seller to substitute goods – Carlos Federspiel & Co SA v Charles Twigg & Co Ltd.
Another provision S35 SOGA 1979 provides that property must finally pass when the buyer has accepted the goods or where he indicates to the seller that he as accepted the goods or when the goods have been physically delivered and the buyer has had a reasonable chance to examine them and after a reasonable lapse of time keeps the goods not having said he is rejecting them or there is inaction : Pignataro v Gilroy.
Implication for buyers, sellers
The passing of property also has implications for the type of action that can be brought by the seller against the buyer.
If the property has passed to the buyer, the seller has either the right to sue for the price S49(1) if the buyer has accepted the goods or sue for damages if the buyer has not accepted or refuses to accept the goods. If property has not passed then the seller can only sue for breach of contract.
The passing of property would also have important implications in the passing of risk. If property is passed, the risk is passed along with the property and the party to whom the property passes bears the risk i.e. bears any loss should anything happen to the goods - lost or damage.
However the general rule will not apply in the following instances :-
1. Where parties have explicitly agreed that the risk should pass even thogh property has not passed : Head v Tatersall;
2. Where it involves a CIF contract which is an exception to the general rule in S20 - the goods are deemed to be at the buyer’s risk from the time of shipment even though property passes at the time the contract is made which may be after the shipment;
3. Where the seller has done all that he had undertaken to do by enabling the buyers to take delivery even if the goods are unascertained : Sterns v Vickers;
4. Where one party is the bailee of the goods and the loss occurs through their lack of reasonable care in which case that party will be liable : Wiehe v Dennis Bros.
Implications for third parties
The right of property can also have an effect on third parties - determines the ability of the party to bring an action under negligence against third parties who has carelessly inflicted damages upon the goods : Leigh & Sullivan Ltd v Aliakmon Shipping Co Ltd. However right of property alone will rarely be decisive. Usually it is combined either with a right to possession or with a contractual right against the third party for example the person who is entitled to sue in respect of goods damage at sea is usually the person who holds the bill of lading and that person has a contractual right both against the carrier and also the property.
Where the seller is required by contract to send goods to the buyer via a carrier, delivery to the carrier is presumed to constitute a delivery to the buyer and the buyer bears the risk of the loss S 32(1) – delivery to carrier buyer bears loss, S33 – delivery to a distant place and deterioration in the goods buyer bears loss.
The approach to passing of property as the determining factor in the allocation of risk has been abandoned by the Uniform Commercial Code (UCC) in the US. It was felt that there was an over reliance on property as the central organizing concept. The location of title was used to determine the risk of loss, insurable interest and place and time for measuring damages. The single title or “lump” title concept proved unsatisfactory because of the different policy considerations involved in each of the situations that title was made to govern. Furthermore the concept of single title although it worked well for cash on the barrel type sales it did not reflect modern commercial practices with the introduction of deferred payments, security arrangements, financing from third parties or delivery by carrier which required a fluid concept of title. The classic example of this was the rule
that property cannot pass to the buyer where he purchases goods in an undivided bulk – S16 SOGA 1979. The result of this statutory rule in cases where the seller has become insolvent is that the buyer loses both the money he has paid for the goods and the goods themselves to the seller’s creditors – hardly a just result – this was the reason for S20A.
It would be logical to link the passing of risk with physical possession of the goods :-
1. It is the person in possession who has the greatest ability to take care of the goods to see that they are not stolen, burnt, damaged, etc. If he has to bear the risk of any loss then he has the consequent incentive to exercise that care.
2. It is likely to be much easier to secure insurance cover for goods on your own premised or otherwise within your own possession.
- Justin Santiago
- Justin Santiago, BAppSc (Hons), MBA, LLB (Hons) comes from a journalism, market research, intellectual property and strategic communications consulting background. Now based in Melbourne he spends his time advising businesses on how to communicate to their customers as well as writing on various subjects of interest in this blog.
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