Transfer of Property in Goods: Significance, Rules

What is transfer of property in goods?

A contract of sale of goods is a contract whereby the seller transfers property in the goods to the buyer for a price. ‘Passing of property in goods means ‘transfer of ownership of the goods. When the goods are sold, it is the property in the goods that are transferred to the buyer.

It may be noted that there is a difference between ‘property in goods’ and the physical ‘possession of the goods. A person may be in possession of the goods but he may not be the owner of the goods.

For example, an agent, a servant, a hire purchaser, or a bailee may be in possession of goods, but none of them is the owner of those goods because the property in the goods does not vest in them, and each one of them holds the goods for his principal master, hire seller, or bailor respectively.

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Significance of Transfer of Ownership

The following reasons indicate the importance of this question and they are also the rules to be applied in the absence of an agreement (or arrangement or understanding) concerning these points:

1. Risk Prima Facie Passes With Ownership
2. Exercise of Proprietary Rights or Action Against Third Party
3. Seller’s Right for Price
4. Insolvency of the Seller or Buyer

Risk Prima Facie Passes With Ownership

It is the rule of law that risk, at first sight, or on the first impression, passes with the property. Therefore, if the property has passed to the buyer, he becomes the owner of the goods and then the risk of destruction, deterioration, damages or loss of goods is that of the buyer. He will have to bear the loss caused due to any reason.

Exercise of Proprietary Rights or Action Against Third Party

‘Proprietary right’ means a right to own and control like a proprietor or owner of some property (estate). On transfer of ownership, the buyer can exercise proprietary rights over the goods. For example, he can sue the seller if he refuses to deliver the goods and the buyer can also recover the goods from another person to whom the seller has resold the goods.

Moreover, if the goods are damaged or destroyed by an act of a third party, the buyer can take action against such a party. Thus, the owner alone can exercise proprietary rights.

Seller’s Right for Price

Seller’s right for price: The seller becomes entitled to recover the price of the goods from the buyer only when the property in the goods has passed to the buyer.

Insolvency of the Seller or Buyer

If the seller or buyer becomes insolvent, the question arises as to whether the Official Receiver or the Assignee can take over the goods from him or not. The answer depends upon the situation whether the property in the goods has passed to the buyer or not.

If the ownership has passed to the buyer and the buyer is declared insolvent by the Court, then the buyer’s Official Receiver shall have a right to take possession of the goods even though the goods are still lying with the seller.

On the other hand, if the goods are in the possession of the seller and he is adjudged insolvent, then the buyer has a right to take possession of the goods from the seller’s Official Receiver.

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Rules Regarding Transfer of Property

The rules regarding transfer of property determine the point of time when the property passes or ownership is transferred from the seller to the buyer. In fact, the whole question of transfer of ownership is left to the intention of the parties and they are free to fix up any time for the transfer of ownership from the seller to the buyer.

However, where the intention of the parties is not clear from the contract, the time of transfer of ownership depends mainly on the nature of the goods and is decided as follows:

1. Where Goods Are Specific or Ascertained
2. Rules for Ascertaining the Intention of the Partie
3. Where goods are unascertained, or future goods
4. Where Goods Are Sent on Approval or ‘on Sale or Return
5. Risk Prima Facie Passes With Property

Where Goods Are Specific or Ascertained

Specific goods mean those goods which are identified and agreed upon at the time of contract of sale. When the goods are identified after the contract of sale and then they become known to certain, such goods are called ascertained goods.

Section 19 of the Sale of Goods act provides that “Where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.

“As far as the question of intention of the parties is concerned, such intention shall be ascertained keeping in mind:

• The terms of the contract.
  
• The conduct of the parties.
  
• The circumstances of the case. It is to be noted that sale is a matter of mutual opinion or consensus, the law leaves the parties free to settle any terms (of course not to be illegal) they please. Therefore, in formulating their intention the parties may fix any time when the ownership is to be transferred.
  
• It may be the time of delivery of goods or the time of payment of price, or the time of contract, or any other point of time.

Rules for Ascertaining the Intention of the Partie

Where the goods are specific or ascertained, the following rules are to be applied for ascertaining the intention of the parties in regard to the time at which the property in the goods is to pass to the buyer:

1. Specific Goods in a Deliverable State
2. Specific Goods Not in a Deliverable State
3. Specific Goods Are in Deliverable State but the Seller Has to Do Something to Ascertain the Price

Specific Goods in a Deliverable State

‘Deliverable state’ means that state of goods in which the buyer shall be bound to take delivery of them. According to Section 20 of Sale of Goods Act, if (i) the goods are specific, (ii) the contract of sale is unconditional, i.e., there is no condition regarding the transfer of ownership of goods, and (iii) the goods are in a deliverable state, then in such a case, the ownership passes to the buyer at the time when the contract is made. It is immaterial whether the time of payment of price or the time of delivery of goods, or both, is postponed.

Specific Goods Not in a Deliverable State

‘Not in a deliverable state’ means that the seller has something yet to do to the goods for the purpose of putting them into a deliverable state. For example, packing filling the goods in containers, collecting the goods, separating or loading the goods, etc.

In such a case, according to Section 21 of Sale of Goods Act, “the property does not pass until such thing is done and the buyer has notice thereof.”

Specific Goods Are in Deliverable State but the Seller Has to Do Something to Ascertain the Price

If the specific goods are in a deliverable state but the seller is yet to weigh, measure, test or do some other act or thing in connection with the goods for the purpose of ascertaining the price, the ownership does not pass to the buyer until such act or thing is done and the buyer has notice thereof (Section 22 of Sale of Goods Act).

It means that in such a case, the ownership is transferred to the buyer at the moment when two conditions are fulfilled: (i) the seller has done the act or thing which is necessary for ascertaining the price of the goods, for example, taking weight, measurement, counting, etc.

Where goods are unascertained, or future goods

Unascertained goods are unidentified goods and they are defined by description or by sample only. Future goods are those which are yet to be acquired or manufactured. In case of such goods, the ownership is transferred to the buyer as soon as the two conditions are fulfilled: (1) the goods are identified or ascertained, and (2) the goods are appropriated or set apart for the purpose of delivery to the buyer.

These two points may be explained as follows:

1. Ascertainment of Goods
2. Appropriation of Goods

Ascertainment of Goods

Section 18 of Sale of Goods Act lays down the general rule that “No property in goods is transferred to the buyer unless and until the goods are ascertained.” Ascertainment of the goods is the process by which the identity of the goods to be delivered is established and recognised. The goods are ascertained by an appropriation also.

It may be noted that unless the goods are ascertained or appropriated, there is merely an ‘agreement to sell’. It will become ‘sale’ only when the necessary process of ascertainment or appropriation is completed. For example, X agrees to purchase a TV from the shop of Y. The ownership in TV shall not pass to X until and unless a particular piece of TV is identified from the many TVs kept in the shop.

Appropriation of Goods

Section 23(1) of Sale of Goods Act provides that where there is a contract for the sale of unascertained or future goods, the ownership in such goods passes to the buyer only when the goods have been unconditionally appropriated as per the requirements of the contract.

‘Appropriation’ means the process by which the goods are selected (or separated) with the common or mutual consent of the seller and the buyer so as to determine and identify the actual goods to be delivered. Thus, completion of this process leads to the ‘ascertainment’ of goods.

It may be noted that ‘ascertainment of goods’ is a unilateral act and is usually done by the seller alone, whereas in the case of ‘appropriation of goods’ the mutual consent of the seller and the buyer is necessary and therefore it turns out to be a bilateral act of the parties.

Where Goods Are Sent on Approval or ‘on Sale or Return

Section 24 of Sale of Goods Act provides that when goods are delivered to the buyer on approval or ‘on sale or return’ or other similar terms, the ownership in such goods passes to the buyer in any of the following situations:

1. When the buyer signifies (makes known) his approval or acceptance to the seller. In other words, when he sends the message of his acceptance to the buyer.
   
   
2. When the buyer does some act which amounts to ‘adoption of the transaction’, i.e., the acceptance of the goods. For example, he sells the goods to another party or pledges it with a third party for taking loan.
   
   
3. When the buyer fails to return the goods on the fixed time, namely, retains it beyond the fixed time without giving notice of rejection (ownership passes on the moment when the fixed time expires); or.
   
   
4. When no time has been fixed for the return of goods, the buyer fails to return the goods within reasonable time, namely, he retains the goods beyond the reasonable time without giving notice of rejection (ownership passes on the moment when the reasonable time expires).
   
   Reasonable time is a question of fact and will depend on the circumstances and facts of each and thus it will differ in different cases.

Risk Prima Facie Passes With Property

Section 26 of Sale of Goods Act lays down the general rule that “Risk prima facie (i.e., at first sight) passes with property (ownership).” In other words, ‘risk always follows ownership’. Thus, the owner has to bear the whole burden of loss, the payment of price or the possession of goods is immaterial in deciding the question of risk.

Whosoever is the owner, carries the risk. Therefore, it may be said that as a rule, the goods remain at the seller’s risk until the ownership therein is transferred to the buyer, and the goods are at buyer’s risk when their ownership is transferred to him whether their delivery has been made to him or not. The loss due to destruction or damage of the goods, therefore, has to be borne only by the owner of the goods.

Exception: The general rule that ‘the risk prima facie passes with ownership’ has certain exceptions. It means that in the following circumstances the ownership may lie with one party while the risk may remain with the other party.

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Transfer of Title by Non Owners

‘Property’ means ownership, while ‘title’ means right to ownership. From another angle, ‘property’ is absolute ownership and ‘title’ is qualified ownership. The term ‘title’ is usually used to denote a claim or right to ownership which means an assertion of the right to ownership.

This term particularly refers to the right of ownership when goods are sold by a person who is not the owner of those goods and who does not sell them under the authority or with the consent of the owner. However, in common parlance, both the terms are used to mean ownership.

It means that under the following circumstances the buyer gets a valid title, i.e., absolute ownership even if the seller is not the absolute or full owner:

1. Title by Estoppel
2.  Sale by Mercantile Agent
3. Sale by One of the Joint Owners
4. Sale by a Person Who Is in Possession of Goods Under a Voidable Contract
5. Sale by seller in possession of goods after sale
6. Sale by a Buyer Who Is in Possession of Goods Under a Contract of Sale
7. Resale by an Unpaid Seller
8. Sale under Provisions of other Acts

Title by Estoppel

When the owner of the goods, by his statement or conduct, lead the buyer to believe that the seller has the authority to sell, then subsequently he may be estopped from denying the seller’s authority to sell.

Sale by Mercantile Agent

According to Section 27 of the Sale of Goods Act, where a mercantile agent makes a sale of the goods or of a document of title to the goods, he shall pass a valid title to the buyer, or the buyer gets a better title if the following two conditions are fulfilled:

1. The sale must be made by a mercantile agent with the consent of the owner and such agent must be in possession of the goods or the documents. Moreover, the sale must be made by him when acting in the ordinary course of business of a mercantile agent.
   
2. The buyer, who purchased goods from a mercantile agent, must have acted in good faith and he must not have noticed or knowledge that such agent has no authority to sell.

Sale by One of the Joint Owners

Section 28 of the Sale of Goods Act provides that if one of the several joint owners of certain goods has the sole possession of the goods by permission of the other co-owners, the property (ownership) is transferred to any person who buys such goods from such joint owner (co-owner) if that person:

1. Buys the goods in good faith.
   
2. Has no notice or knowledge at the time of the sale that the seller has no authority to sell.

Sale by a Person Who Is in Possession of Goods Under a Voidable Contract

According to Section 29 of the Act, when the seller of the goods has obtained possession thereof under a voidable contract (i.e., on the ground of coercion, fraud, misrepresentation or undue influence) but the contract has not been rescinded (cancelled) at the time of the sale, the buyer acquires a good title to such goods if he:

1. Buys them in good faith.
   
2. Without notice of the seller’s defect of title. For example, X obtains a car from a vehicle dealer by playing a fraud upon him. The contract is voidable at the option of the dealer.
   
   But before the dealer rescinds the contract, X sells the car to Z who buys it in good faith and without notice of the defective title of X. Here, Z gets a good title.

Sale by seller in possession of goods after sale

Section 30(1) of the Sale of Goods Act lays down that where a person, who has sold the goods but continues to be in possession of them or of the documents of title to them, resells such goods or documents, then a third person (new buyer) will get a good title if he (i) buys them in good faith, and (ii) without any notice of the previous sale. A pledge or any other disposition of the goods or of the documents of title to them by such seller is also equally valid.

Sale by a Buyer Who Is in Possession of Goods Under a Contract of Sale

According to Section 30(2) of the Act, where a person, who has either bought or agreed to buy goods, obtains the possession of the goods or of the documents of title to them with the consent of the seller, then any person will get a valid title to them if he (i) buys them in good faith, and (ii) without notice of any lien or other right of the original seller in respect of such goods or documents. A pledge or any other disposition of such goods or the documents by the said buyer are also equally valid.

Resale by an Unpaid Seller

Section 54(3) of the Sale of Goods Act lays down that where an unpaid seller who has exercised his right of lien or stoppage in transit resells the goods, the buyer acquires a good title thereto as against the original buyer whether the notice of resale has been given to the original buyer or not (See for further details, Chapter 21).

Sale under Provisions of other Acts

1. Under certain circumstances, a finder of goods may sell them and convey a good title to their purchase (See for details, Section 169 of Contract Act under Chapter 14).
   
   
2. If a pledger makes a default in payment of the debt or performance of his promise at the stipulated time, the pledge has the right to sell the pledged goods after giving a reasonable notice to the pledger. Ii such a case, the pledge (seller) conveys a good title to the buyer even though the pledgee is not the owner of the goods (see for details, Section 176 of the Contract Act under Chapter 14).
   
   
3. The Official Receiver or the Official Assignee or Liquidator of a company is appointed by the Court to sell the properties of the insolvent persons. Though they are not the owners of the properties, a person buying goods from them gets a good title thereto.

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FAQ Related Transfer of Property in Goods