Passing of Risk
The Sale of Goods Act provides that the risk in respect of the goods passes with the property unless otherwise agreed. Ideally, the buyer would wish to ensure that the risk does not pass until delivery. In consumer contracts, the risk does not pass until delivery under EU derived law
In business to business contracts, the buyer may seek to ensure that risk only passes upon delivery of conforming goods. The seller may wish for the risk to pass earlier.
Where there is a contract of carriage, the contract should deal with the issue. See the separate sections on exporting and carriage, and the types and forms of contractual obligations. Risk is a key variant in the case of contracts of carriage.
Passing of Property
The property in goods passes when it is intended to do so. Other the ultimate default rules, the property passes when the contract is made when the contract is unconditional, and the goods are identified and ascertained. This applies to specific goods in a deliverable state.
This position is anomalous in that title may pass before payment is made. It may also pass before the goods have left the buyer’s premises.
The second default rule provides there where specific goods are in] deliverable state, and the seller must do something to put them in that state, the properly passes when they have been put into that state, and the buyer has been notified.
Where goods are in a deliverable state, and the seller has to do something such as to measure or weigh them in order to ascertain the price, the property passes when the required thing is done, and notice has been given to the buyer.
Where the goods are delivered on approval on a sale or return basis, the property passes when the buyer indicates acceptance or does something which adopts the transaction. If he does not do so either the property passes within a reasonable time or upon expiry of the due date for return.
Appropriation to the Contract
Where there are unascertained goods, the property passes when they are unconditionally appropriated to the contract. This covers goods which are to be manufactured or acquired by the seller after the date of the contract.
An appropriation to the contract implies an earmarking, setting aside or even consignment. Something may need to be done to make the goods unconditionally appropriated to the contract. The application of the concept will depend on the nature of the goods and the particular circumstances. Work may be required on the goods before they can be said to be appropriated.
Where goods are part of an identifiable bulk, and a buyer buys part of the bulk leaving another buyer only the remaining bulk, it is deemed appropriate to that other contract where the remaining bulk is broken into the remaining quantity ordered by the buyer. The title passes at that point,
Retention of Title
A seller may seek to retain title to the goods until payment, if possible. Given the statutory default position, this must be done by specific condition whereby the title to the goods is reserved. This is not a security interest. The goods are never owned. The arrangement is not registrable. This is because title to the goods has not passed to the buyer.
A difficulty with reservation of title is that the property in the goods is lost once their identity is destroyed, such as when the goods are sold and incorporated into other goods. In this case, an extended title retention clause may be required to provide security over the substituted goods. This requires registration and in many such circumstances the clauses are not registered by inadvertence and the further security is void and invalid.
Retention of title clauses use various techniques to seek to avoid and minimise this risk. They may provide that the goods are to be kept and retained separately, that they are to be retained as agent on behalf of the seller, that the buyer is to be accountable for the proceeds of the sale.
Limiting Conformity Obligations
The seller may wish to restrict its warranty in relation to the conformity of the goods. There may be a warranty that the goods conform to the contract specification and sample. It may be provided that the seller is to have no liability for an alleged failure to conform unless it is brought to the seller’s attention within a specified period. The contract may provide that if such a notice is given in that period, the seller has the option to replace the goods or reduce the price by a proportionate amount in respect of goods found not to be in conformity.
The seller may expressly not warrant that the goods are fit for any particular purpose. It may provide that the seller has no liability for any defect in the quality of the goods due to their failure to correspond with their description or sample or to be fit for any other purpose. All warranties and liabilities may be excluded to the extent permitted by statute.
It may be specifically declared that the seller is not liable for any economic loss suffered as a result of the failure of the goods to conform with the contract, including loss of profits, business, goodwill and other consequential loss. The seller’s obligations may be limited to replacement, repair or refund.
Exclusion of Liability I
The seller will commonly seek to exclude or limit its liability. In consumer contracts, many limitations of liability will constitute unfair contract terms and be thereby void. Others may be contrary to the mandatory conditions in the Sale of Goods Act.
The seller may more effectively limit liability than exclude it entirely. Commonly liability is limited to a percentage of the original purchase price, e.g. twice the price. This may be the limit of the seller’s liability under general contract principles in many cases. However, by limiting liability, it removes issues in relation to the loss that naturally and probably arises from a breach, which may be otherwise a contested matter.
In the United Kingdom, certain exclusion clauses are void under legislation which has no direct equivalent in Ireland. An exclusion clause which purports to exclude liability for negligence in respect of death or personal injury is void. Liability for damage to property may be excluded or restricted to the extent that the clause is reasonable.
In a business to business contract, the seller may wish to exclude the statutorily implied conditions. The exclusion must be fair and reasonable in accordance with the statutory tests where it relates to the key statutory implied terms.
Exclusion of Liability II
Clauses which purport to exclude or restrict liability for misrepresentation or limit remedies in contracts for the sale of goods are valid only insofar as fair and reasonable. This is applicable to both consumer and business to business contracts.
The Sale of Goods Act and EU regulations make provision for guarantees. A consumer does not lose his rights against a manufacturer or distributor in negligence under the terms of the guarantee. The guarantor must set out in plain and intelligible language the terms of the guarantee, the requirements for making claims, the duration and scope. The guarantee should have written in the language of the country of sale.
If a clause purports to limit liability to a specific amount, the courts will consider if it is reasonable under the circumstances. It will consider whether the party who would otherwise be liable is in a position to meet claims from its resources in the circumstances. It will consider whether it is in a position to obtain insurance and whether it is reasonable to do so, having regard to its cost.
Central to the Sale of Goods Act is the reasonableness test in respect of certain exclusions of liability, business to business contracts and in certain other contracts. The burden of proof is on the person in whose favour the clause is made. Cases are very much specific to their circumstances.
There are statutory matters which were taken into account including
- the relative bargaining position of the parties taking account of alternative means by which the customers’ requirements could have been met;
- whether an inducement was given to agree on the terms;
- whether the buyer had the opportunity of entering a similar transaction with others without such a term;
- whether the customer knew or ought to have known of the existence or extent of the term having regard to the custom of the trade and the previous course of dealing;
- where the term excludes or restricts liability where some condition is not complied with, whether it is reasonable at the time to expect compliance;
- whether the goods are manufactured, processed or adapted to the special order of the customer.
The courts have indicated that in commercial matters generally when the parties are in an equal bargaining position, in particular where the risk is normally borne by insurance, courts that the parties are free to apportion the risk as they see fit in the circumstances.
Trade Terms I
Commonly businesses incorporate the terms and conditions of the trade association. It may be that in a particular trade, the contracting terms are known to all participants. When dealing with third party customers and consumers, it is necessary to bring those terms and conditions clearly to their attention, if they are to be incorporated in the contract.
Trade terms may be more likely to be held to be reasonable if they are widely accepted in the trade, and they reflect in the normal allocation of risk.
The courts have a very marked tendency to interpret exemption and limitation clauses against the interests of businesses in favour of customers. This tendency has dated back many years and pre-dates the advent of modern consumer legislation.
Trade Terms II
The courts tend to focus on the party who has put forward or proffered the particular terms and conditions. Accordingly, the principles will be applicable in business to business contracts or one personal standard form or proffered contract is used.
The statutory consumer protection rules are very comprehensive and overlay much of contract law in the context of contracts between consumers and traders. Most such terms are mandatory and take precedence over the terms of the contract and common law rules.
Case law has held limitation clauses in consumer contracts to a higher standard. The courts take into account that the consumer all things being equal is in a weaker position.
The seller may specify that the price paid is for delivery ex-works and that it is the buyer’s duty to take delivery of the goods at the seller’s premises. It may be provided that once the goods are ready for collection, the seller gives notice to the buyer and that the buyer must thereupon collect them within a certain specified period or give instructions for delivery at the buyer’s expense.
Provision may be made for the case where the buyer fails to collect the goods or to give instructions. It may be provided that this may be treated by the seller as a repudiation of the contract, giving him a right to dispose of the goods, retain any prepayments and recover any costs, expenses and loss incurred.
It may be provided alternatively that the seller may store the goods at the buyer’s risk and cost. In this event, storage fees and costs must be paid by the buyer. There may be a further provision that the seller may give notice to collect the goods and if this does not occur within a set time, the provisions for disposal, termination of the contract and recovery of the costs takes effect.
Seller Limiting its Delivery Obligations
The seller may undertake only to endeavour to have the goods ready by the relevant date. It may be specifically declared that the buyer cannot terminate the contract if the goods are not ready.
The seller may provide for where circumstances outside its control arise. It may be provided that the seller may give notice to the buyer of the reasons for the delay and that the seller shall thereby have no liability for late delivery. The seller’s duty to deliver may be postponed for so long as the cause of the delay persists. The seller may have the right to give notice to terminate its obligations in such circumstances, without liability to the buyer for any losses whatsoever.
The seller may provide that it is entitled to deliver the goods in instalments of any size and in any order. It may provide that if less (or more) than the relevant quantity is delivered, the seller shall have no liability unless notice is given of the shortfall (or excess) within a certain period. It may be provided that if the buyer does give such notice, the seller is to make arrangements to make good the shortfall or retrieve the excess. The seller may be given the option of reducing the purchase price proportionately where there is a shortfall.
The buyer may have the right to accept the excess goods and to pay at the contract rate for all goods in conformity with the specification, regardless of the other non-conforming goods.
It may be provided that there is a reduction in price due to a shortfall in the quantity delivery, but that it must be paid. It may be provided that the buyer is to pay for the full quantity and delivered, without any deduction, set off or abatement on the grounds of any alleged shortfall in delivery, defect in quality or failure to conform.
It may be declared that the seller has the right to bring an action for the price notwithstanding that the property in the goods has not passed. This is necessary where there is a reservation of title clause.
Interest at a specific rate may be payable on late payment. The seller will wish to confirm that the goods are at the buyer’s risk until delivery.
Reservation of Title
A reservation of title clause may provide that the property (title) in the sold goods does not pass until the buyer has paid all sums due to the seller in respect of the goods and on any other account. This is arguably inconsistent with insolvency legislation in some circumstances.
The reservation of title clause may provide that until the property in the goods has passed, the buyer is to hold them as bailee for the seller and store them separately. It may be provided that the buyer may resell the sold goods. It may be provided that the sale is effected as an agent of the seller and on the basis that the buyer has no authority to create privity contract between the seller and any person to whom the goods are sold. It may be declared that the buyer is to hold the proceeds of resale as trustee for the seller in a separate identifiable account.
It may be declared that if the buyer becomes insolvent, that its right to possession of the goods terminates. The buyer may grant the seller its agents and employees an irrevocable license to enter the buyer’s premises to retrieve the goods.
The seller may provide in relation to intellectual property that it is not aware of a breach of any third-party’s intellectual property rights. It may provide that if any infringement is alleged, the buyer is to notify the seller promptly and to allow the seller to take steps to defend proceedings at its expense. The buyer may be required not to make any admission of liability which might purport to bind the seller.
The buyer may require an indemnity in relation to the infringement of intellectual property rights. It may seek to make the seller liable to indemnify the buyer for all resulting losses, expenses and liabilities.
References and Sources
Encyclopaedia of Forms and Precedents (5th Edition) Vol 7(2)
Drafting and Negotiating Commercial Contracts (2016) 5th Ed Mark Anderson, Victor Warner
- Passing of Risk
- Passing of Property
- Appropriation to the Contract
- Retention of Title
- Limiting Conformity Obligations
- Exclusion of Liability I
- Exclusion of Liability II
- Reasonableness Test
- Trade Terms I
- Trade Terms II
- Seller Limiting its Delivery Obligations
- Reservation of Title
- Intellectual Property
- References and Sources