What is the Passing of Risk?
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’.
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.
Commerce is the process of exchanging Goods and services on a large scale. Commerce is an important academic stream that imparts detailed knowledge related to economy, finance, accounting, and other topics which you can easily relate to daily lives. Specifically, the subjects included in this stream are Economics, Business Studies, Accountancy, and English along with a choice of Maths or Computer Science. It is a very important subject that will help students learn about how the Business world actually works. Since Commerce involves a lot of processes to be completed it will have to employ lots of laborers in the process, thus it easily generates various employment opportunities in other areas such as Transport and Logistics, Banking, and Retail. Commerce overall is an essential component of National development and wealth creation which highly contributes to the Economy of the Country. Commerce Education is mainly aimed at giving adequate knowledge about the Wholesale Trade, Retail, Export Trade, Import Trade, and Entire- Port Trade. Moreover, it provides some knowledge about the movement of Goods, etc., Transport, Communication Insurance, Ware-housing, Money, Banking & Finance, and Mercantile Agencies.
Explanation
Passing of Risk in Commerce mean, when Goods or digital content suffer any kind of loss or damage by accident or due to no fault of either party in the period in between the transit of the Goods or services and before the time of the conclusion of the contract and its performance, the seller is discharged from its obligation to deliver the Goods that have been lost or destroyed during the transit process.
FAQs on Passing of Risk
1. What is the passing of Risk in a contract of sale?
Risk, however, passes to the buyer at the conclusion of the contract of sale, in other words, you could buy something and if it is stolen or destroyed before you take ownership, you could actually end up losing both the product and its purchase price. Hence it is highly Risky and problematic to the buyer than the seller himself.
2. Does Risk pass with the property or even before the property reaches the buyer?
If it is deemed that once the property has passed then Risk has passed also. Therefore the tiles are at the Risk of the buyer once delivery has been made. When a supplier dropped the box containing the coffee mugs, the Risk was still with him making him responsible for the damage but if the product is damaged even before we receive it when it is in the hands of the supplier then the buyer cannot be blamed.
3. Why is it important to know when property passes?
It is the natural known quality of the contract of sale of Goods, that after the sale of Goods, that particular property’s Risk passes on to the buyer. It determines when Risk in the Goods passes to the buyer hence the party is liable in the event of loss or destruction after it is been delivered by the seller. This turns out to be Risky and the buyer needs to bear the loss.
4. What happens if goods are destroyed before the Risk of loss passes to the buyer?
If the Goods are completely or partially destroyed before the Risk of loss has passed to the buyer, and the Goods have not been destroyed through the fault of either of the parties, the seller may be excused from performing. A seller may avoid performing only if the destroyed Goods were specifically identified when the sale was made during the transit or any other accidents happened suddenly.
5. How is commerce an easy-scoring subject?
Commerce is a subject where if you learn all the definitions, concepts and graphs well you can easily get high scores. Every subject needs prior preparation. Vedantu website provides lots of past years' question papers and other sample question papers with solutions as well for you to prepare more efficiently. By referring to them you can easily find out what are the most repetitive questions that appear every year and you can give more attention to them. Commerce is a subject where you can write without any limits but you should check the marks system and manage time as well because we can't be wasting time on one single question over the others.
6. What are property in goods?
'Property in Goods' means the ownership of goods. It is different from the 'possession of goods' which means physical control of the goods.
7. What is risk prima facie?
Unless agreed, the goods remain at the seller's possession and thus risk too until the property is transferred to the buyer. However, when the property is transferred to the buyer, the goods are at the buyer’s risk and not at the risk of the seller.
8. Who bears the risk of loss in the Sale of goods?
The party who currently or at present holds the “title” to the goods bears the risk of loss for those particular goods.
