When goods are bought and sold, it is important to understand who has the liability to bear the loss in case the property in the goods is destroyed or damaged. Does it transfer with the passing of property? Or are there some other rules governing it? Section 26 of the Sale of Goods Act, 1930 describes the different scenarios under which the passing of risk takes place.
Passing of Risk (Section 26)
When goods are sold, they remain at the seller’s risk until the property in the goods is transferred to the buyer. Once the property is passed, the goods are at the buyer’s risk even if the delivery has not been made.
There are some points that you need to remember about the passing of risk:
- It holds true unless the buyer and seller have agreed to some other terms.
- In cases where the delivery has not been made, if the delay in delivery is due to the fault of the seller, then the risk lies with the seller. If the delay is due to a fault of the buyer, then the goods are at the buyer’s risk.
- Regardless of the buyer or the seller bearing the risk, the duties and responsibilities of both of them as a bailee of goods for the other party, remain unaffected.
Hence, we can say that under ordinary circ*mstances, the seller bears the risk until the property is passed to the buyer which also passes the risk to him. The parties may, however, decide to pass the risk before or after passing the property in the goods to the buyer.
Let us take a look at an example. Peter is auctioning his great-grandfather’s wristwatch at a function. In a true auctioneer style, he manages to get a gavel (hammer used by auctioneers) and sets up a table inviting bids for the historical watch. He manages to get the highest bid of Rs 25,000.
As he strikes the gavel to signify acceptance of the bid, he accidentally damages the watch. In this case, the property had not passed to the bidder. Hence, the risk was Peter’s and he will have to bear the loss.
Learn the Auction sale here.
Solved Example onPassing of Risk
Question: Peter agrees to sell 50 kilograms of potatoes to John to be delivered after 30 days. They also agree that the delivery will be made in two parts of 25 kilograms each, on consecutive days. This will make it easier for Peter to deliver the goods
John accepts the delivery on the first day. However, when Peter’s delivery boy goes to deliver the second lot, John is not available. Further, he does not answer any phone calls too. Consequently, the potatoes become unfit for use. Who will bear the loss?
Answer: According to the terms of the contract, Peter kept his promise and attempted delivery of potatoes on two consecutive days. Since John defaulted on his promise of accepting the delivery, he will have to bear the loss. This 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.’
FAQs
What Is Risk Transfer? Risk transfer is a risk management and control strategy that involves the contractual shifting of a pure risk from one party to another. One example is the purchase of an insurance policy, by which a specified risk of loss is passed from the policyholder to the insurer.
What is an example of a contractual risk transfer? ›
For example, your company manufactures machinery and you hire contractors to install the machines at customer sites. You may want the contractor to be responsible for the risks associated with the work that they do on-site, so you enter into a contract to establish responsibility.
What does it mean when the risk passes to the buyer? ›
It determines whether the buyer must pay despite a complete or partial loss of the goods, or whether a seller should replace the goods if they have been damaged during transportation (CISG Article 66). As a rule, the risk passes when the ownership of the goods changes.
Does risk of loss transfer with title? ›
Risk of loss and title remains with the seller until the buyer indicates his or her approval of the goods (or after a reasonable time)., risk of loss (and title) remains with the seller until the buyer accepts, and the buyer's trial use of the goods does not in itself constitute acceptance.
What is an example of a risk transfer response? ›
Transfer – shifts the impact of the threat to as third party, together with ownership of the response. An example of this is insurance. Mitigate – act to reduce the probability of occurrence or the impact of the risk. An example of this is choosing a different supplier.
Which of the following is the most common way to transfer risk? ›
The most common way to transfer risk is through an insurance policy, where the insurance carrier assumes the defined risks for the policyholder in exchange for a fee, or insurance premium, and will cover the costs for worker injuries and property damage.
What is a simple example of transaction risk? ›
Buying company has to pay in dollars after 2 months. Suppose in 3 months, Euro gets depreciated against the USD; then the company has to pay out more currency in Euros to settle the USD transaction, which is a transaction risk.
What are the three basic common law categories of contractual risk transfer? ›
Contractual risk transfer manifests in various forms, with the most common types being indemnification clauses, hold harmless agreements, and insurance requirements.
What happens under a risk transfer agreement? ›
- Risk transfer takes place where an insurer lets a broker hold insurance monies on its behalf and by doing so transfers the 'credit risk' from the broker to the insurer. - Monies held under this arrangement by the broker are referred to as 'risk transfer money'.
How risk can transfer from seller to buyer? ›
Hence, we can say that under ordinary circ*mstances, the seller bears the risk until the property is passed to the buyer which also passes the risk to him. The parties may, however, decide to pass the risk before or after passing the property in the goods to the buyer.
Risk transfers to buyer upon handing goods over to the first carrier at the place of shipment in the country of Export. The Shipper is responsible for origin costs including export clearance and freight costs for carriage to named place (usually a destination port or airport).
What is the difference between title transfer and risk transfer? ›
This is what they usually means: Transfer of title (ToT): the ownership (of the entire turbine or of one of the component of the wind farm, such as the foundation) is transferred to the buyer. Transfer of risk (ToR): risk of damages and losses is transferred to the buyer.
What are the disadvantages of risk transfer? ›
A major disadvantage of risk transfer is that it creates an added expense for the one who has to manage the risk. In the example of a subcontractor who must possess coverage, they must pay for their policy out of their pocket.
Who bears the risk under a risk transfer agreement? ›
This ensures the protection of the money because the insurer bears the risk for any losses arising from either the firm failing to transfer the money or from the misappropriation of the client money by the firm. These agreements are often referred to as risk transfer agreements.
Which type of contract has the least amount of risk for the buyer? ›
Fixed Price Contracts
The buyer is in the least risk category since the price the seller agreed to is fixed.
What is the means of transferring risk? ›
Risk transfer refers to a risk management technique in which risk is transferred to a third party. In other words, risk transfer involves one party assuming the liabilities of another party. Purchasing insurance is a common example of transferring risk from an individual or entity to an insurance company.
Which of the following is an example of transition risk? ›
Navigating new ESG disclosure requirements, energy procurement practices, potential carbon taxes, the availability of capital, and even changing consumer preferences are all creating new risks for organizations; these are, of course, transition risks.
What is an example of a transaction risk? ›
Buying company has to pay in dollars after 2 months. Suppose in 3 months, Euro gets depreciated against the USD; then the company has to pay out more currency in Euros to settle the USD transaction, which is a transaction risk.
What is meant by transferable risk? ›
Transferable risks are those which can be transferred to another organisation or person, at a price. Ways of transferring these risks include hedging with risk management products, or buying insurance. In these ways and others, we can remove many transferable risks from our organisation, if we choose to.
