Goods being sold remain at the seller's risk until the property in the goods is transferred to the one who buys the goods known as the buyer. Once this property is passed, the goods are at the buyer's risk even if the delivery has not been made.
This is what passing of risk means in the business world. To know further, we need to dive deep into this concept of ‘passing of risk’.
What is the Passing of Risk?
We buy and also sell things on a daily basis. There is no doubt that most of us assume we become the owner of those bought goods only when we take the risk of our purchase being damaged or destroyed. In our law, the passing of ownership and passing of risk differs in their concepts. While in our day-to-day lives, they are normally the same, legally they aren’t.
A buyer becomes the owner of a movable good only when it is “delivered” to him. Risk is however passed to the buyer on the conclusion of the contract of sale. In other words, if the bought goods are stolen or destroyed before taking the ownership, there will be a loss of both the goods as well as the price.
Passing of Risk Section 26
Section 26 of the Sale of Goods Act, 1930 talks about this passing of risk. It is stated about the goods that they are the owner’s risk if the property has not yet been transferred to the buyer. When the property has been transferred to the buyer, the goods are at the buyer’s risk. This provision is only applicable if there are no specific provisions that have been signed by the contracting parties in their agreement regarding this. This rule is applicable irrespective of the fact that the delivery of the goods or the services has been made or not.
This means that the risk is associated with the ownership and not with the mere possession of the property. To be sure whether the risk has been passed or not, we first need to ascertain whether the ownership of the property in goods has been passed or not.
Solved Example on Passing of Risk
Question: Pit agrees to sell 50 kilograms of potatoes to Miller to be delivered after 30 days. They also agree that the delivery will be made in two parts of 25 kilograms each on the consecutive days. This will make it easier for Pit to deliver the goods. Miller accepts the delivery on the first day. However, when Pit’s delivery boy goes to deliver the second lot, Miller is not available. Further, he does not receive any phone calls too. Consequently, the potatoes became unfit for consumption. Legally who will bear the loss?
Answer: Following the terms of the contract, Pit kept his promise and attempted delivery of potatoes on two consecutive days. Since Miller defaulted on his promise of accepting the delivery, he will have to bear the loss. It is explicitly mentioned in Section 26 – ‘The duties and liabilities of the seller or the buyer as bailee of goods for the other party remain unaffected even when the risk has passed generally.’
Passing of Risk Commercial Law
The passing of risk is one of the most complicated legal issues related to commercial laws. The word “risk” has become a monotonous concept in commercial law. Nevertheless, the main problem is understanding the exact meaning of “passing of risk”.
When goods or services suffer any kind of loss or damage by accident in between the time of the conclusion of the contract and its performance, the seller is free from its obligation to deliver the goods that have been lost or have been destroyed. However, does the buyer’s obligation to pay the price remain the same in the mentioned situation?
If yes, the buyer shall bear the risk of the loss or damage. In this situation, the buyer does not receive the goods as they are accidentally lost or damaged, he will only take over damaged goods. As we have seen that the seller is normally excused from the obligation to deliver other conforming goods.
Passing of Property and Risk
The passing of property is an important concept to determine the duties and rights of both the buyer and the seller. Once a ‘property’ is passed to the buyer, the ‘risk’ with the property also passes to the buyer and not the seller. This is true even when the goods are in the possession of the seller. The primary legal objective of a contract for the sale of goods is that - to transfer ownership from the seller to the buyer. Risk is however passed to the buyer on the conclusion of the contract of sale disregarding the fact that the good is in whose possession.