A Practical Guide for Seller – Navigating Title and Risk Transfer in Goods in Malaysia

In the world of commerce, understanding the transfer of property and risk is crucial for any business involved in the sale of goods. Whether you are a seasoned trader or new to the field, mastering these legal frameworks will equip you with the tools to navigate the complexities of sales transactions. This article delves into the legal frameworks established by the Sale of Goods Act 1957 (“SOGA”), providing a clear roadmap for seller to ensure that the transfer of title and risk aligns with its strategic goals.

The transfer of property, or title, in goods is heavily reliant on the intentions of the parties involved. Section 19 of the SOGA provides that the property in the goods is to pass as intended by the parties. The determining factor is the intention of the parties, which must be gleaned from:

  • The terms of the contract.
  • The conduct of the parties.
  • The circumstances surrounding the transaction.

Sections 20 to 24 of the SOGA provide default guidelines to ascertain the intentions of the parties, but they can be overridden by specific terms in the contract. A brief explanation of each section, along with sample examples, is as follows:

SectionExplanation  Example
Section 20 Specific Goods in a Deliverable StateWhen an unconditional contract is made for specific goods in a deliverable state, property in the goods passes to the buyer at the time of the contract.A furniture store sells a specific dining table displayed in its showroom. The contract does not specify any future actions to be taken by the seller. The title to the dining table passes to the buyer when the contract is made because the table is specific and in a deliverable state.  
Section 21   Specific Goods to be Put into a Deliverable State  If the goods require something to be done to make them deliverable by the seller, property in the goods passes when these actions are completed, and the buyer is notified.  A buyer purchases a custom-built computer, which needs to be assembled from parts in stock at the seller’s shop. The title passes only after the computer is fully assembled and the seller notifies the buyer.  
Section 22 Specific Goods in a Deliverable State When the Seller has to do Anything Thereto in Order to Ascertain Price  The property in goods only pass when the seller completes any necessary actions to ascertain the price, and the buyer is notified.A seller agrees to sell a bulk quantity of oil that needs to be measured to determine the final price. The title does not pass until the oil is measured and the buyer is informed of the quantity and total price.  
Section 23   Sale of Unascertained Goods and AppropriationUnascertained or future goods can be transferred through appropriation, where either the seller with the buyer’s consent or the buyer with the seller’s consent sets aside goods that match the contract description.A retailer orders 100 units of a new smartphone model from a distributor, but the phones are not yet designated. Title passes when the distributor designates 100 specific units from their stock and both parties agree that these units have been set aside for their order.  
Section 24  Goods Sent on Approval or “on Sale or Return”  The property in goods passes to the buyers when they signify their approval or acceptance, retain the goods beyond a fixed or reasonable time without rejecting them, or do any act adopting the transaction.  A jewellery store sends several pieces to a customer on approval for one week. Title passes when the customer either explicitly accepts the pieces (e.g., by a phone call or email stating the acceptance) or retains the pieces without rejection past the one-week period.  

Under Section 26 of the SOGA, risk typically passes with the goods. This legal principle establishes that unless otherwise agreed by the parties involved, the goods remain at the seller’s risk until the property is transferred to the buyer. Once the property is transferred, the risk immediately shifts to the buyer, irrespective of whether delivery has been made.

Knowing exactly when the property is transferred is crucial for the seller, as it clarifies the point at which the seller is no longer liable for the goods. For instance, if property passes to the buyer at the time of shipment, any damage or loss that occurs during transit thereafter becomes the buyer’s responsibility.

Once the property in the goods has passed to the buyer, the buyer becomes the owner and is generally free to deal with the goods. However, in many business transactions, especially when goods are delivered on credit, the seller may face increased financial risk. This risk arises because the buyer is allowed to pay for the goods during an agreed-upon credit term, which can sometimes lead to non-payment or delayed payment.

In such scenarios, retaining the right to dispose of the goods becomes critical to safeguard the seller’s interests. Section 25 of the SOGA recognising the seller’s reservation of the right of disposal. This right ensures the seller can recover possession or potentially resell the goods to another buyer if the original transaction fails.

An example of such a clause (sometimes called the Romalpa Clause or retention of title clause) is:

“Notwithstanding shipment and the passing of risk in the Goods, the property in the Goods shall not pass to the Buyer until the Seller has received in cash or cleared funds payment in full of the price of the Goods.”

This clause stipulates that transfer of title is contingent upon the full payment of the goods, clearly marking the receipt of funds as the point at which this condition is fulfilled. Thus, it safeguards the seller’s rights and financial interests even after the goods have been physically transferred to the buyer.

The legality of the Romalpa Clause have been upheld in Malaysian courts. For instance, in the case of Interdeals Automation (M) Sdn Bhd v Hong Kong Documents Sdn Bhd [2009] 5 AMR 816, Gopal Sri Ram JCA affirming that it is settled law that parties to a contract for the sale of goods may agree that ownership of the goods would only transfer from the vendor to the buyer once the latter has fulfilled all his obligations as outlined in the contract. The learned judge added that such a term has the effect of making the buyer a trustee or fiduciary of the goods for the seller thereby enabling the latter to trace them into the hands of third parties to whom the buyer may transfer them.

Transactions can vary significantly, and buyers often have specific preferences or demands that need to be accommodated. Understanding precisely when title and risk transfer from the seller to the buyer is crucial for customising the terms of sale. This knowledge enables seller to tailor its agreements based on the specific nature of the goods and the unique demands of each transaction.

If the seller wishes for the title and risk of the goods to transfer in a specifically agreed-upon manner and at a designated time, this intention must be explicitly documented in the sale of goods agreement to ensure clarity and avoid potential disputes. Seller may also consider including a Romalpa clause (retention of title clause) in its agreements to ensure that ownership of the goods remains with the seller until certain conditions is achieved.  

Failure to clearly articulate this intention and protect it through adequate contractual clauses may lead to the transfer of title and risk being governed by the default provisions under the SOGA. These default settings might not align with the seller’s or buyer’s expectations or business arrangement, potentially leading to conflicts or legal challenges.

Conclusion: Understanding the dynamics of property and risk transfer in goods is a strategic business practice that can impact the seller’s operational risk and financial security. By meticulously crafting the sale of goods agreements with clear, intention-specific clauses, the seller can manage risks more effectively and secure its financial stability.

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