Commercial Law

Commercial Law

 

 

 

Introduction

Sale of Goods contracts has emerged as the most vital and popular commercial contracts. The 1979 Sale of Goods Act sums up all the conditions that the seller and buyer have to fulfil in order to reach an agreement and form a contract.  The Act effectively unified the original 1893 Sale of Good Act as well as the succeeding legislation, which had helped to regulate and codify UK commercial law and English contract law in terms of goods bought and sold. Since 1979 however, the Act has undergone various statutory additions and amendments, including the 1995 Sale of Goods Act and more recently, the 2015 Consumer Rights Act. However, the original legislation is still the main law that buttresses B2B (business-to-business) transactions regarding buying/selling goods.  In a sale of goods contract, the property has to be passed from one party to another. A sale of goods contract must distinguish possession and property since ownership of the goods or property must be passed from the seller to the buyer. This is the case even where the seller still retains possession. However, recent legislation such as the 1995 Sale of Goods Act has endeavoured to indicate that there must be a willingness to pass property from the seller to the buyer.  Transfer of property or ownership is vital since it establishes who owns goods at a definite period of time during the contract. This is important, especially with regard to risk. Usually, risk transfer accompanies ownership depending on whether goods are specific or ascertained goods.  Risks follow ownership, regardless of whether the buyer has paid the price for goods or not, or whether delivery of goods has been made. While this has raised issues, separating the concepts of property, risk and possession would bring about unwarranted complications in the sales of goods contracts.

A contract of goods entails three key stages: (i) transfer of property namely, the goods from the seller to the buyer; (ii) transfer of possession from a seller to the buyer upon delivery of goods; and (iii) passing of risk. The principal goal of a contract of sale is to ensure that the property in goods has been transferred from the seller of the goods to the buyer. It is important to distinguish between 'property' of goods and 'possession of goods'. Whereas 'property of goods' implies ownership of goods, on the other hand, 'possession of goods' involves control or custody of goods. There is a need to ensure the passage of property or goods from the seller to the buyer due to several reasons. First, this passage of property is crucial since risks follow ownership. This is the case regardless of whether the buyer has paid the price for the goods or not or if the seller has delivered the goods or not. What this appears to suggest is that the owner of the goods bears the risk. S.26 of the 1979 Sale of Goods Act provides that unless stated otherwise, the seller assumes the risk attached to goods until the transfer of the risk has been made to the buyer.

Once the property of goods has been transferred to the buyer, he/she assumes the risk regardless of whether the seller has delivered goods, or not. Another reason why the transfer of property or goods happens is due to the action against third parties. In case goods are destroyed or damaged due to the action of third parties, the only person who can take legal action against such third parties is the owner of such goods. Also, the transfer of property helps to safeguard the goods passed from seller to buyer in case either party is insolvent. Transfer of property in goods is also crucial as the seller is not in a position to sue for the price of goods if at the property in the goods has not been transferred to the buyer. In order that the property in goods may be passed from the seller to the buyer, the goods in question must be ascertained; otherwise, the passing of property may not happen. Additionally, the intention of the parties involved must be such that they desire the passing of property to happen. Goods are either unascertained or specific. Specific goods refer to goods that have been identified and both parties are aware of the exact items being sold. Where this has not been done, we talk of unascertained goods.

Once the property is passed to the buyer, he/she bears the risk to such goods irrespective of whether the goods have been delivered to them. Should a loss ensue, the buyer has to bear it. Conversely, as long as the seller maintains ownership of the goods, he/she bears the risks involved with such goods. It is important to mention that at times, the sale of goods contract could be silent as regards who bears the risk. In such a case, except for two exceptions specifically addressed by ss(2) and 3, what usually happens is that the passing of risk is often tied to the passing of property. However, such an approach is flawed in the sense that passing of property is not just important in terms of ascertaining the passing of risk, but for other purposes too, such as  ‘the right of the relevant trustee in bankruptcy to take the goods in the event of one or other of them becoming bankrupt.’

Other purposes worth consideration include ‘the seller’s right to maintain an action for the price.’ However, in the event that the parties to the contract of sale of goods fail to include express provisions, then the rules in ss16-19 that touches on the passing of property, and s20 which is concerned with the passing of risk, seem especially flawed. The truth is that it would seem somewhat illogical to attach the passing of risk to the delivery of physical goods. The only exception would be if the parties concerned have unequivocally agreed otherwise. This assertion hinges on two reasons. To begin with, in most cases, the party in possession often bears the greatest responsibility in ensuring that the goods in their possession are not burnt, damaged, or stolen. In the event that this individual bears risk incurred by virtue of being in possession of goods, it follows that such an individual also bears an incentive to be more responsible and avoid the risk. Secondly, it could be relatively easier to minimise the risk of goods in your possession by securing insurance coverage. The idea of insuring goods whose property is with another party could elicit issues of whether 'the insured had in law an insurable interest.'

Ss 16-20 tie ownership of goods and passing of risk, in addition to clearly acknowledging that the passing of risk and/or property could happen separately from the delivery of goods. There seems to be an inconsistent under s20 which states in principle that it is irrelevant if delivery has occurred or not, and states that in case of delays in delivery owing to a fault on either party, any ensuing loss occasioned by the delays is to be assumed by the party responsible for such a delay.

The association between risk and property has also come under sharp criticism on grounds that it symbolises the Act's obsession with the significance of the property. Other legal systems have also associated the passage of risk to control or possession of goods. Nonetheless, the rule as spelled out by the Act is only prima facie in nature and is often subject to displacement by implied or express terms of the sale of goods contracts. In the case of international sales contracts, such as FOB and CIF contracts, the passage of property and risk are usually decoupled.

 In the same way, a seller may decide to hold on to the property in the goods up to such a time as when the buyer pays for the goods. However, the seller is less likely to retain the risk to which the goods are subjected, such as in case of damage or loss, and these are usually passed to the buyer. In certain cases, the risk of loss or damage of goods that are part of a larger bulk could be passed to the buyer, irrespective of the fact that the seller still retains the property in such goods. For instance, in FOB contracts, the risk relating to the unspecified section of an ascertained or specific cargo could be passed to the buyer upon the shipment of such goods. On the other hand, in CIF contracts, the buyer assumes the risk of loss to goods the minute the goods move past the ship's rail.  Such an agreement could be deduced from the prevailing circumstances. For example, in Sterns v Vickers, The Court of Appeal in issuing their judgement, interpreted that the parties involved had the intention to pass the risk to property from the buyer after the buyer had accepted the delivery warrant. The Court further held that notwithstanding if the property held in the undivided bulk of the cargo had passed, the minute the buyer of the specified goods accepted the delivery warrant, this constituted the passage of the risk to the goods as well. Consequently, the buyer was to bear the ensuing loss.

McKendrick notes that possession, as opposed to property, acts as the guiding principle in establishing the incidence of risk. To begin with, it makes a lot of business sense to have the party that has control over the goods by virtue of possessing them, to insure such goods. This is because such an individual is best placed to give information to the insurance firm regarding the conditions of transport, and storage of the goods, In addition, the person in possession of goods is also in a position to abide by the terms and conditions provided by the insurance firm as regards liability in relation to the conditions of storage of goods and security of goods, among other related issues, In addition, when possession is tied to risk, this blends in well with the expectations of most people in commercial enterprises. In the event that possession and property are separated, the risk is naturally passed with possession.

Moreover, delivery and payment occur concurrently. As such, it makes business sense to have the buyer pay for the goods regardless of whether the goods have been destroyed or damaged. Such risk should pass once the buyer's obligation to pay for the price of goods arises. Also, risk implies that should the seller bear the risk, he/she should also pay the buyer damages for non-delivery. Therefore, it makes sense to pass risk upon the delivery of goods, as opposed to on the passing of property. Furthermore, although the ruling principle remains the intentions of the parties, there could be significant doubt as regards the moment when property passes. Nonetheless, in spite of it being hypothetically inadequate, any flaws emanating from s20 (1) are mainly conquered by the actions of the parties in contracting out of this provision, along with the tendency of the court to rule that property with respect to definite goods passes upon payment or delivery o as opposed to when the parties involved enter into a contract. Additionally, the courts have demonstrated that they are willing to rule that the parties have reached an agreement that the risk shall pass at a definite time from the property, whenever it makes sense to rule so.

 

Conclusion

In sum, The Sale of Goods Act is important in defining commercial contracts. The key stages of the contract of goods are: the transfer of property; transfer of possession; and risk transfer. In particular, ownership and risk transfer are intertwined, and as such, separation would bring complications in determining who incurs the risk at any one given time. The person claiming ownership of goods also bears the risk to such goods, though at times this could be silent. In the case of specific goods, ownership passes once goods have been delivered and paid for since payment and delivery are almost concurrent. Therefore, separating the three stages of the contract of goods is likely to result in an avalanche of claims and counter-claims due to failure to apportion risk appropriately.  

 

Bibliography

Books

Burrows, Andrew, Principles of English Commercial Law (Oxford University Press 2015) 66.

Baskind, Eric, Osborne, Greg and Roach, Lee, Commercial Law (Oxford University Press 2016) 262.

Campbell, Dennis, Remedies for International Sellers of Goods (Lulu 2009) 2157.

Dobson, Allan P, Reddy, K.J. and Reddy, Jo, Commercial Law (Psychology Press 2003) 201.

Johnson, Howard and Reddy, Jo, Q&A Commercial Law 2009-2010 (Routledge 2009)70.

Lorenzon, Filippo, Sassoon, David M, Baatz, Yvonne and Skajaa, Lynne and, Nicoll, Lynn, C.I.F. and F.O.B Contracts (Sweet & Maxwell 2012) 32.

McDougall, Arundel and Popat, Prashant, International Product Law Manual (Kluwer Law International 2010) 379.

McKendrick, Ewan, Sale of Goods (LLP 2000)246.

Rao, Peddina M, Business Law (PHI Learning Pvt. Ltd 2013) 88.

Taylor & Francis Group and Reddy, Jo, Commercial Law Q and A 2003-2004 (Cavendish Publishing 2003) 65. 

Journal Articles

Coetzee, Juana,’ The Interplay Between Incoterms And The CISG’ (2013) 32 Journal of Law & Commerce 6. 

Case laws

Demby Hamilton v Barden [1949] 1 All ER 435.

Sterns, Limited. v. Vickers Limited. [1921. S. 683.] 

Stocks v Inglis (1884) 12 QBD 564

Pyrene Co Ltd v Scindia Navigation Co Ltd [1954] 2 QB 402, QBD

Leigh and Sillivan Ltd v Aliakmo n Shipping Ltd [1986] AC 785, HL     

Acts

The Sale of Goods Act 1979 (c 54) 

Sale of Goods (Amendment) Act 1995. (1995 c. 28)

The Consumer Rights Act 2015