Written by Garima Bothra, Associate at Samisti Legal
In commercial transactions involving the sale or supply of goods, the concepts of risk and title are often used interchangeably. However, in law, they represent two distinct rights with separate legal consequences. Understanding whether risk and title can transfer at different times is crucial, as improper allocation may result in unexpected financial exposure.
Understanding Risk and Title:
Title refers to legal ownership of the goods. The person holding title has proprietary rights, including the right to dispose of or encumber the goods. Under Section 2(11) of the Sale of Goods Act, 1930 (“SOG Act”), “property” in goods is defined to mean the general property in goods and not merely a special property. This statutory concept of “property” is what is commonly referred to as title. Accordingly, title signifies absolute ownership as distinguished from mere possession or custody. Further, Section 19 of the SOG Act provides that the property in goods passes from the seller to the buyer at such time as the parties intend it to pass. Therefore, title is a matter of legal ownership determined by contractual intention.
Risk, on the other hand, refers to responsibility for loss, damage or deterioration of the goods. The party bearing risk must absorb the financial consequences if the goods are destroyed or damaged. Under Section 26 of the SOG Act, risk is prima facie linked to ownership, providing that goods remain at the seller’s risk until property in them is transferred to the buyer, and thereafter at the buyer’s risk. However, the statute expressly recognises that this principle applies “unless otherwise agreed” by the parties.
Risk is not a proprietary right but a burden or liability attached to goods, determining who must suffer the economic loss when goods are destroyed or damaged without fault of either party. Unlike title, which confers dominion, risk imposes financial responsibility. Risk is thus a matter of loss allocation, not ownership. Consequently, a party may bear risk without having title, and conversely, may hold title without bearing risk, where contractual intention so provides.
Role of Incoterms:
Parties also often adopt Incoterms (International Commercial Terms) published by the International Chamber of Commerce. Incoterms primarily regulate:
- Transfer of risk
- Delivery obligations
- Cost allocation
- Transport responsibilities
Importantly, Incoterms do not govern transfer of title. Title must be separately addressed in the contract.
For instance, as per Incoterms 2020:
- Under EXW (Ex Works), risk passes when goods are placed at the buyer’s disposal at the seller’s premises.
- Under FOB (Free On Board), risk passes when the goods are loaded on board the vessel at the port of shipment.
- Under CIF (Cost, Insurance & Freight), passes when the goods are loaded on board the vessel at the port of shipment, even though the seller pays freight and insurance up to the destination port.
- Under DAP/DDP, risk passes at the destination when the goods are placed at the buyer’s disposal ready for unloading.
In all these cases, ownership may nevertheless remain with the seller until payment or other agreed conditions are fulfilled. Incoterms, therefore, regulate risk and delivery, not title.
Judicial Approach:
The Supreme Court of India in Phulchand Exports Ltd. v. OOO Patriot [MANU/SC/1217/2011] observed that:
“The title of Section 26 shows that the rule provided there under is the prima facie rule subject to the agreement otherwise between the parties. This is clearly indicated by the expression “unless otherwise agreed” with which the section begins. The parties to the contract are, thus, free to by-pass the prima facie rule provided in Section 26 by making agreement otherwise.”
Additionally, the Supreme Court examined the legal effect of a CIF contract governed by Incoterms-90 in an international sale of goods. The sellers argued that under CIF terms, both risk and property passed to the buyers upon shipment and negotiation of shipping documents, thereby terminating their liability when the goods failed to reach the destination port. The Court rejected this contention and held that where the sellers had breached the CIF contract at the threshold, it could not be concluded that title had transferred “out and out” to the buyers merely upon shipment or negotiation of documents. The sellers’ failure to discharge their primary contractual obligation relating to shipment was held to have resulted in a postponement of the transfer of title to the buyers.
Conclusion:
Risk and title are legally distinct concepts with different commercial consequences. While the SOG Act presumes that risk follows ownership, it equally preserves the parties’ freedom to contract otherwise. Incoterms further reinforce this distinction by regulating delivery and risk without determining ownership. The judicial approach confirms the distinction and further recognizes that neither Incoterms nor shipment of documents automatically effect a transfer of ownership unless contractual obligations are duly performed.
In commercial contracts, therefore, parties must expressly allocate risk and title through clear contractual provisions. Such clarity ensures certainty in loss allocation, prevents unintended financial exposure, and aligns commercial expectations with legal consequences. A failure to distinctly structure these transfers may lead to disputes, particularly in cross-border transactions where delivery, payment and performance occur across different jurisdictions.
