Passing of Ownership
The moment of passing of ownership is important in the sale of goods. This is because the owner of goods can sell them and the seller only has a claim for the price. This is significant in the event of the buyer’s insolvency as the seller may only be unsecured creditor. For the above reasons, it is important to ensure that ownership of goods passes when the seller desires, preferably, when payment is made.
Ownership passes when it is intended to pass under the terms of the contract. The Sale of Goods Act states certain presumptions about what the parties intend unless otherwise stated in the contract. Where there is an unconditional contract for the sale of specific goods, the ownership passes when the contract is made. This may be surprising as this is likely to be before payment and delivery.
The Sale of Goods legislation distinguishes between specific ascertained goods and unascertained goods. Unascertained goods are those which are yet to be manufactured or grown or are of a generic type or are otherwise yet to be ascertained. Ownership of unascertained goods only passes once they have been ascertained and “appropriated” to the contract.
The importance of ownership of goods is that the owner (e.g. the purchaser) has a right to sell them without the consent of the seller notwithstanding that the seller may not have been paid.
There are certain situations in which a buyer of goods may be able to sell them even if he does not yet have ownership. These include sales by a buyer in possession of the goods, certain private sales of motor vehicles, and certain sales in certain markets.
When a person goes bankrupt or a company goes into insolvent winding up, assets owned by him or it are available for his creditors. “Reservation of title” to goods is frequently provided for in sales contract. This is a useful method of protecting the seller’s position against the risk of the buyer’s insolvency or default. See our separate note on reservation of title.
Retention of Title Clause
It is essential that there is a properly worded retention of title clause in the sale contract. Complications arise when goods become mixed up in other goods. .Under these circumstances there are limits to the extent to which it is possible to hold back ownership title. A valid reservation of title clause may make the difference between being paid and not being paid.
Under the Sale of Goods Act “default rules”, (which apply where nothing is agreed to the contrary) the ownership of goods may pass to the buyer before they are paid for. This carries the risk that goods are delivered to a buyer who subsequently becomes insolvent. If the buyer becomes insolvent, then the seller will be an unsecured creditor and is unlikely to be paid the full price or possibly anything by a liquidator or administrator.
It is possible and often desirable to provide in the sale contract that the seller retains title to the goods until he is paid in full The Sale of Goods Act allows this “reservation of title” because the contract may say when ownership passes. A well drafted retention of title clause can be critical in protecting the seller’s interests. The clause should specifically say that title (ownership) does not pass until the purchase money is paid in full.
It is possible that an innocent third party may obtain title to the goods if they are sold on by the buyer when he is in possession of the goods with the original seller’s consent. In this situation the original buyer would have committed a civil wrong and would be in breach of contract.
The seller should grant himself the right in the sale contract to go onto the buyer’s property in order to take the goods away. The buyer should be obliged to store the goods separately and distinguish them in order to maximise the chance of them being identified. There should be an obligation on the buyer to insure the goods and hold the sale proceeds on trust. It is desirable if the goods can be marked so as to be identifiable.
A retention of title clause may seek to go further and to enable the original seller to trace entitlement to the proceeds of sale. These clauses are more difficult to uphold. The buyer should be obliged to pay sale proceeds into a separate account and to keep them on trust. Complications arise if the proceeds are mixed up
Complications arise when goods are incorporated into other products. There is a limit on the extent which title can be retained in these situations. Many attempts to retain title in this situation fail, because the courts hold that the identity of the original goods is destroyed. The only way to retain security is to create a charge over the new goods. However the difficulty is that such charges are void if not registered within 21 days and cannot be enforced against a liquidator or creditors in the event of insolvency.
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