Passing of Property – Part 2

In our previous article, we learned about the first two rules governing passing of property to the buyer. Understanding all the rules is important since they help determine the rights and liabilities of both the seller and the buyer. In this article, we will look at the remaining two rules: ‘Goods sent on approval” and ‘Transfer of property in case of reservation of the right to disposal’.

Passing of Property

Goods Sent on Approval

When a seller sends good to a buyer on approval basis or on terms similar to ‘on sale or return’, the property passes to the buyer only when:

• The buyer communicates his approval to the seller or does an act which signifies acceptance of the transaction.
• He does not give his approval or acceptance to the seller but accepts the goods without giving notice of rejection. There are two possibilities here:
  • A time has been fixed for the return of goods – In this case, if the approved time has elapsed, then the property is passed to the buyer.
  • A time has not been fixed for the return of goods – In this case, the property is passed to the buyer once a reasonable time has elapsed.
• The buyer does something to the goods which signifies acceptance of goods. For example, he sells the goods or pledges it.

Let us see an example. Peter is a jeweler. John visits his shop to buy a necklace for his wife Olivia. However, he is not sure if Olivia will like the necklace he has chosen. Peter agrees to deliver the necklace to John’s house on a sale or return basis.

If Olivia does not like the necklace, then John can return it to Peter without having to pay for it. When Peter reaches John’s house, another man called Chris is also present in the house. Olivia or John don’t express their approval to Peter but John pledges the necklace with Chris for a certain amount.

In this case, the ownership of the necklace transfers to John since his act of pledging the necklace shows his unequivocal intention to buy it. Peter can recover the price of the necklace from John.

Cash Only or Return

In some cases, the terms of sale can be cash or return. This means that the seller will deliver the goods to the buyer under the condition that the goods continue to remain the property of the seller unless the buyer pays cash for it. In such cases, the buyer needs to pay cash in order to transfer the property in his name.

In example 1 above, if Peter agrees to deliver the necklace to John under a cash only or return basis and John pledges the necklace with Chris before paying cash for it, the pledge is deemed invalid by law and Peter can recover the necklace from Chris.

Reservation of the Right to Disposal

Section 25 of The Sale of Goods Act, 1930 deals with the conditional appropriation of goods. It has three sub-sections as follows:

Sub-section 1

In case of a contract for the sale of specific goods or where goods are appropriated to the contract subsequently, then the seller can reserve the right of disposal of goods till certain conditions are met. These conditions must be specified in the contract or appropriation. Even if the goods are delivered to the buyer or a carrier or a bailee for transmission to the buyer, the property in the goods does not pass to the buyer until the conditions are met.

Let us take an example. Peter sends furniture to John’s company by a truck. He instructs the driver not to deliver the furniture until he confirms receipt of payment from the company. The truck reaches John’s company and the furniture is unloaded. However, the property passes to the company only upon receipt of the payment.

Sub-section 2

If the goods are shipped or delivered to the railway administration for carriage by railway and are deliverable to the order of the seller or his agent by the bill of lading or railway receipts, then the seller is deemed to have reserved the right of disposal.

Sub-section 3

A seller can draw on the buyer for the price and transmit a bill of exchange along with the bill of lading/ railway receipt, to secure acceptance or payment of the bill of exchange. If the buyer does not honor the bill of exchange, then he is liable to return the bill of lading/ railway receipt. Even if he wrongfully retains it, the property in the goods does not pass to him.

Solved Example on Passing of Property

Q1. Peter sends a water motor to John on an approval or return basis in January 2018. John does not inform Peter of his intention to buy. He also does not return the motor to him. In July 2018, he attempts to return the motor to Peter. Is Peter bound to accept it?

Answer: No. Since John has not returned the water motor within a reasonable time, Peter is not bound to accept it. Also, John has to pay the price of the motor to Peter.