Passing Of Property And Risk During the Sale of Goods

The passing of property and risk in the sale of goods

Question

Delicious Wines Ltd is the creator of innovative alcoholic products, and imports a large amount of ingredients in order to create manufacture these. However, June is a bad month for the Company, and a number of issues occur with some of their contracts.

Based on the rules regarding the passing of property and risk in sale of goods contracts, advise the Company on their rights or liability in the following circumstances:

1. Delicious Wines Ltd agreed with Grapes Grapes Grapes (“GGG Ltd”) for 5,000 tonnes of grapes to be shipped to their factory in Liverpool. GGG Ltd had packaged up all of the grapes at their factory in Chile, into one big container which had the Delicious Wine’s name and address written on it. However, prior to being loaded onto the carrier, GGG Ltd went into liquidation.
2. Delicious Wines Ltd had ordered 750 tonnes of potatoes from Potatoes Potatoes Potatoes Ltd (“PPP Ltd”) which were being shipped as part of a bulk of 2000 tonnes, over to Liverpool from France on the MV Badluck, under an F.O.B contract. Unfortunately, halfway across the English Channel, the vessel strikes an unexploded mine left in the sea following the Second World War, and sinks with all cargo being lost at sea.
3. Delicious Wines Ltd also spoke with Mr Logins, the managing director of Bottles Are US Ltd (“BAU Ltd”). He stated he had a 600 bottles available to sell them, but they were all different sizes. Delicious Wines Ltd stated they would take all of the bottles, and a contract was agreed to this effect. However, Mr Logins confirmed that in order to agree a price he would need to count up all the bottles and measure their sizes. Delicious Wines Ltd agreed this was ok. Mr Logins was given a week in which to ascertain the price of the bottles, but during this time, a freak earthquake struck the town in which his factory was based and all of the bottles had been destroyed.

Answer

Introduction

Delicious wines have contracted with three parties and wish to understand the nature of their liabilities under each of the contracts. Two of the contracts are international, on the basis that one of the parties to the contract is outside of the UK. The third contract does not determine the location of the seller. Ordinarily it would be necessary to determine which jurisdiction and law applies to each of the contracts. The United Nations Convention on Contracts for the International Sale of Goods 1980 (CISG) is widely accepted by countries as containing the law in international trade, and two of the contracting parties are from countries (Chili and France) that are signatories to CISG.^[1] In order for CISG to automatically apply, both parties must be from countries that are signatories to CISG.^[2] The United Kingdom is not a signatory to CISG, nonetheless CISG can still be held to apply where the parties have stipulated the law of a CISG member to apply to the contract.^[3] There is insufficient information available to determine the choice of law or the jurisdiction that the parties have chosen from the scenario. In a contractual situation such as this, there is significant uncertainty as to the jurisdiction that the courts will choose to apply.

English law and the jurisdiction of the English Courts are often chosen to represent international contracts, on the basis that it offers the parties greater certainty in its application. For these reasons, English law has been chosen for the purposes of assessing the rights and liabilities of Delicious Wines Under each of the contracts. The law determining passage of title and risk in the United Kingdom is the Sale of Goods Act 1979 (SGA). A brief assessment of the position under CISG will also be provided.

GGG Ltd

There are three key provisions which determine when property will pass from the seller to the buyer and these are located in sections 16 18 SGA.^[4] Section 16 SGA provides that goods must be ‘ascertained’ in order for the property to transfer from the seller to the buyer and this means that goods must be either identified or agreed at the time the contract was made, or by actions undertaken after the contract was entered into.^[5] Prior to the goods being ascertained there is no propriety right, meaning that the remedy available for a breach of contract would only be damages.^[6] Section 17 identifies that even where the goods are ascertained the title will not pass until such time as the parties intended it to pass.^[7] The courts will determine intention from the “terms of the contract, the conduct of the parties, and the circumstances of the case”.^[8] The application of section 18, rule 5(1) identifies that the seller’s action in allocating the goods to the contract is sufficient to determine this intention. This provision could therefore, if the contract is otherwise silent as to when title will transfer, determine the point in which the goods are transferred to the buyer under the contract.^[9]

In the contract with GGG, it is noted that GGG have allocated the 5,000 tonnes of grapes into a single container in preparation for the goods to be shipped to Delicious Wines. The container has also been labelled Delicious Wines. This separation and identification of the grapes is sufficient, in the absence of contrary intention, for the goods to have become ascertained under the contract. It is noted however, that it is not always necessary to label the goods for a specific customer provided that they are separated from the seller’s main stock and identifiable as belonging to that customer through some means.^[10] It therefore appears that the title will have transferred to Delicious Wines.^[11] There is no mention in the contract as to whether Delicious Wines have made payment for the grapes. Lack of payment will not prevent ownership from transferring to the buyer unless there is a provision in the contract retaining title until payment is made.^[12] These terms are often referred to as retention of title or Romalpa clauses.^[13] It is not possible to determine whether a retention of title clause was included in the contract between GGG and Delicious Wines and therefore it would appear that the ownership in the grapes has transferred to Delicious Wines.

GGG have become insolvent following the allocation of the grapes under the contract to Delicious Wines. This will prevent the insolvency practitioner from using the grapes to satisfy GGG’s creditors. If Delicious Wines have not already paid GGG under the contract, then the insolvency practitioner will be able to claim the outstanding balance from them directly. It is worthy of noting, that under CISG the liability under the contract would have passed at the point the goods were transferred to the courier and in this situation Delicious Wines would have incurred the loss of the grapes to the insolvency practitioner.^[14]

PPP Ltd

The second contract between Delicious Wines and PPP Ltd concerns the sale of 750 tonnes of potatoes that have been subsequently lost at sea. In this scenario, the potatoes for Delicious Wines have not been separated from the larger quantity of potatoes that were also contained on the shipment. Whilst the SGA stipulates that title in the goods will not transfer to the buyer until such time as they become ascertained;^[15] there is a further provision that enables title to transfer where the goods are capable of being ascertained from a bulk. This is a provision that has caused substantial debate under the common law, where it originally operated under the provisions of specific performance, estoppel and equity.^[16] Under these principles, property could transfer to the buyer where the goods formed part of an identified bulk despite the goods not being ascertained.^[17]

The Sale of Goods (Amendment) Act 1995 introduced a specific provision into the SGA for goods forming part of a bulk. The provision identifies that where buyer had paid (in full or part) for a specified quantity of goods, forming part of an identified bulk, then the title in those goods would transfer to the buyer.^[18] The effects of section 20 SGA on the contract with PPP appear to suggest that Delicious Wines would only be liable for the loss if they had made some form of payment under the contract. The goods in this instance were capable of being identified from a larger bulk located in a specified area.

It should be noted however, that risk is capable of transferring to the buyer even where the ownership in the goods is not transferred.^[19] The contract is stated to be F.O.B representing one of the standard trade terms. There are differing interpretations of the standard trade terms including FOB operating within certain countries and hence the International Chamber of Commerce (ICC) have sought to develop a standard set of trade terms (Incoterms) that are applied and interpreted consistently across jurisdictions.^[20] The Incoterms determine the precise point in which the risk transfers to the buyer under the contract. FOB under Incoterms means free on board and determines that the risk will pass to the buyer at the point the goods are loaded onto the courier ship.^[21] Once the goods are loaded onto the ship the buyer becomes liable for their loss or damage.

Whilst it is entirely possible that the parties had not intended to use the Incoterms within the contract, the mere use of a standard trade term has been deemed sufficient to incorporate Incoterms into the contract.^[22] In addition where a contract is silent as to the version of Incoterms to be used, the latest (2010) version will be applied.^[23] In this context it is likely that both ownership and risk in the goods passed to Delicious Wines at the point that they were loaded on board the ship. It is commonplace for buyers to protect against such risk with insurance and it is possible that Delicious Wines have insured against this risk. If they have failed to take out insurance then they will still be liable for any outstanding sums owed to PPP under the contract. It is possible that they may have a claim against the courier in negligence to recover the sums lost however, this is a distinctly separate matter. It is unlikely that the outcome of this scenario would be different under CISG as the risk passes as the goods are passed to the carrier and the goods are lost at sea when clearly in the hands of the courier.^[24]

BAU Ltd

The contract between Delicious Wines and BAU is a little more problematic. The key issue to resolve is whether the negotiations between Delicious Wines and Mr Logins are sufficiently complete to amount to a contract. It is noted, that there is an offer by Mr Logins to sell 600 bottles of varying sizes to Delicious Wines and this appears to have been agreed. Basic principles of contract law determines that there must be an offer and an acceptance of that offer in order to make a valid contract, in addition to consideration and an intention to be legally bound.^[25] Nonetheless, Stone rightly depicts that the courts will assess an agreement on the basis of whether its terms are capable of enforcement.^[26]

In this case, there is clearly some form of agreement however, on closer inspection there are a number of issues with the agreement that need be resolved before a formal contract will be formed. The price to be paid for the bottles and their precise number has not been determined by BAU; who were in the process of measuring and counting the bottles in order to ascertain the price to be paid. For a contract to be valid both parties must provide some value under the contract,^[27] which is often represented as quid pro quo; this value needs to be determined at the point the contract was made.^[28] At this stage there is no agreement in respect of the price to be paid under the contract and thus is unlikely that the terms are sufficiently precise as to form the basis of a contract. If the price had been determined, then it is possible that a legally binding contract would have been formed as section 61 SGA ascertains specific goods to mean that which was determined at the point the contract was made. As the agreement was for the bottles in possession this would be sufficient to identify the goods.^[29] Nonetheless as Section 18, rule 3 SGA determines that where price is to be ascertained by measuring, weighing, testing the items, the title in the property will not pass to the buyer until the price has been ascertained and the buyer has been notified that this has been done.

The fact that the subject matter of the contract has been destroyed could give rise to a claim under the doctrine of frustration.^[30] This is where the obligations under the contract would be set aside by the parties on the basis that they are no longer possible to perform.^[31] What is clear however, is that the goods were either destroyed before the contract was formed or before title passed to Delicious Wines. Therefore, Delicious Wine does not bear any risk under this agreement to enter contractual negotiations. If the contract had been formed the allocation of risk under the SGA would be determined on whether the goods were ascertained prior to the earthquake.^[32] They had not been delivered to a courier at this stage and hence risk will not have passed to Delicious Wines under CISG.^[33]

Conclusion

Contractual provisions can vary quite significantly under differing laws and jurisdictions. The United Kingdom is reluctant to adopt CISG, possibly as it is felt that this so would undermine the international standing of English laws and courts. As the cases demonstrate the certainty of contract should enable the parties to understand their risks and seek insurance to protect against the risks. All of this can be determined from the law and the jurisdiction in which it is applied and this is in itself can be quite complex. Incoterms in this regard, provide clarity in that they only determine when risk will pass in a contract and thus regardless of who owns the goods at the point risk passes the parties should understand their obligations.

Understanding the point in which the contract is made and the point in which the risk passes between the buyer and seller represents key aspects of contract law. Very few contracts will meet the requirements of the doctrine of frustration and hence when the goods are destroyed one party to the contract will inevitably face a loss. This process nonetheless becomes far more complex when a company is transacting across multiple jurisdictions. In this regard, Delicious Wines would be wise to state that their contracts will be subject to the law of the United Kingdom as the contract law principles are well established and unlikely to change.

Footnotes

^[1] P Viscasillas, ‘Applicable Law, the CISG, and the Future Convention on International Commercial Contracts’ [2013] 58 Villanova Law Review 733, 734.

^[2] United Nations Convention on Contracts for the International Sale of Goods 1980, Article 1(a).

^[3] Ibid, Article 1(b).

^[4] Sale of Goods Act 1979.

^[5] N R Campbell, ‘Passing of property in contracts for the sale of unascertained goods’ (1996) Journal of Business Law 199, pp 200-201.

^[6] W Hibbert, Sale of Goods: Overview [2014] Westlaw Insight, Available at: Click here to read the full article Accessed [25 September 2015] [11].

^[7] Sale of Goods Act 1979, Section 17.

^[8] Campbell, n5 [11].

^[9] Ibid.

^[10] Stapylton Fletcher Ltd. v In re Ellis, Son & Vidler Ltd [1994] 1 W.L.R. 1181

^[11] N McKay, ‘The Passing of Risk and s.20A Sale of Goods Act 1979’ (2010) 15(1) Coventry Law Journal 17, 19; Hanson and Another, v Meyer (1805) 6 East 614.

^[12] W Davies, Romalpa Thirty Years on – Still an Enigma? (2006) 4(2) Hertfordshire Law Journal 2, 3.

^[13] E McKendrick, Contract Law: Text, Cases, and Materials (5^th edn, Oxford University Press 2012) 395; Aluminium Industrie Vaasen BV v. Romalpa Aluminium Ltd [1976] 1 WLR 676.

^[14] N G Oberman, ‘Transfer of risk from seller to buyer in international commercial contracts: A comparative analysis of risk allocation under the CISG, UCC and Incoterms’ (Master of Law Thesis, Maître en droit 1997) Available at: Click here to read the full article accessed 25 September 2015 39; CISG Article 67(1).

^[15] Davies I, ‘Continuing Dilemmas with Passing of Property in Part of a Bulk’ [1991] Journal of Business Law 111, 112.

^[16] Capital and Counties Bank Ltd. v. Warriner-Bretherton Ford and Co (1896) 21 Comm. Cases 314; Leigh and Sillivan Ltd. v. Aliakmon Shipping Co. Ltd. (The Aliakmon) [1986] A.C. 785

^[17] E Peel, Treitel: The Law of Contract (13th edn, Sweet and Maxwell 2012). [21:024]; Ellis Son & Vidler Ltd [1994] B.C.C. 532 (Ch D)

^[18] Sale of Goods Act 1979, section 20A.

^[19] J Ramberg, ICC Guide to Incoterms 2010 (ICC 2011) 17.

^[20] I Carr, International Trade Law (4th edn Routledge Cavendish 2010) 6.

^[21] Chikwava K, Sustaining Contractual Business: An Exploration of the New Revised International Commercial Terms (Xlibris 2012) 26.

^[22] F Dasser, ‘Incoterms and Lex Mercatoria: Applicability of Incoterms in the Absence of Express Party Consent’ (Master of Laws Thesis, Harvard University 1990), Available at: Click here to read the full article accessed 25 September 2015, 71.

^[23] H Gabriel, ‘The International Chamber of Commerce INCOTERMS 1990 – A Guide to their Usage’ (1999) 3 Vindobona Journal of International Commercial Law and Arbitration 61, 61.

^[24] Oberman, n14, 39.

^[25] R Stone R, Modern Law of Contract (9th edn, Routledge 2011) 32.

^[26] Ibid.

^[27] Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 (CA)

^[28] Dunlop Pneumatic Tyre Co. Ltd v Selfridge & Co. Ltd [1915] AC 847.

^[29] Peel, n17, [21:025]

^[30] Pioneer Shipping Ltd v B.T.P. Tioxide Ltd (The Nema) [1982] AC 724 per Lord Roskill at 752).

^[31] J Poole, Casebook on Contract Law (11^th edn, Oxford University Press 2012) 513.

^[32] Sale of Goods Act 1979, section 16.

^[33] Oberman, n14, 39.