Transfer of ownership and transfer of risk are two distinct concepts that can take place at different points in time.  Transfer of ownership refers to the transfer of property rights, including ownership of the goods, from one party to another, whereas transfer of risk refers to the point at which liability for any damage or loss of goods passes from one party to another. 

Under South African common law, ownership of goods transfers under a contract of sale upon (1) payment for and (2) delivery of the goods, whereas risk passes once the contract has been properly concluded, with a price for the goods having been fixed and the goods having been identified. 

Of course, where one is dealing with an international sale, there is potential for a conflict of laws —i.e., which law applies —and that will depend on the circumstances.

The SA common law position regarding the transfer of risk seems illogical: the buyer assumes the risk of damage to the goods upon the conclusion of the contract —that is, once the thing to be sold and the price have been agreed. Thus, risk passes even before the goods are delivered to the buyer. This harsh provision has been tempered by the courts' finding that risk passes to the buyer save to the extent that the seller is at fault for any loss.

It is no doubt due to such common law provisions, the potential conflict of laws and the need for certainty that gave rise to the Incoterms 2020 ®, which is a set of 11 rules published by the International Chamber of Commerce (ICC) that define the responsibilities, costs, and risks of buyers and sellers in international trade transactions.  Agreeing on standardised terms facilitates international trade by clearly setting out what is expected of both the buyer and seller, thereby ensuring legal certainty, without reference having to be made to any national legal systems with differing contractual jurisprudence.  The Incoterms rules (and it is important to clearly indicate which version you wish to apply, e.g. Incoterms 2010 or 2020) stress that they do not deal with the transfer of ownership of property, transfer of title of property, payment terms (other than transport cost), breach, sanctions, governing law and jurisdiction, dispute resolution or regulatory obligations. 

When a contract of sale includes an Incoterm, the point at which risk passes is the point at which the goods are delivered in accordance with the specific Incoterm used.  It is thus possible for transfer of risk and transfer of ownership in the goods to occur at different points in time.  For example, if the ‘Ex Works’ Incoterm is utilised, delivery is deemed to take place when the seller places the goods at the disposal of the buyer at a named place.  Risk thus passes at this point.  The buyer, however, may not have paid the purchase price for the goods by this stage.  Transfer of ownership has therefore not occurred at this point. 

It is important that industry players understand this distinction, as any potential litigation will be impacted by it.  If we continue to use the above ex works example, should the seller cause damage to the goods while loading them into the buyer’s truck, the buyer will arguably still be liable for this damage as the risk in the goods had technically passed upon the seller making the goods available to the buyer at the named place.  This is so regardless of whether the buyer has taken ownership of the goods against payment for the goods.

Whether Incoterms are used or not, risk can pass before ownership, but ownership cannot transfer before risk with respect to movable goods.  Passing of risk is thus a prerequisite to passing of ownership, and if a party know that risk has not passed, they can safely assume ownership has not passed either.  A party cannot, however, assume the converse.

Regard should be had as to when the risk in goods passes during international sale contracts, as risk passing in the goods directly impacts which party’s insurable interests come into play.  When a party bears the risk in goods, they naturally must perform obligations to ensure the goods are safe and secure, and when the risk passes, the transferee must then perform these obligations.  It is at this transfer point that a party’s liability insurance would cover them, and industry players must be aware of this and plan accordingly.

One should therefore never leave the passing of risk in goods in international sale contracts to be regulated by the common law. Incoterms provide certainty regarding the point of delivery and the passing of risk. However, the parties would do well to further expressly state when ownership passes to ensure certainty.  In addition, parties should familiarise themselves with the distinction between passing of risk and transfer of ownership, the ensuing division of costs to be borne in the logistics process, and ensure that they understand which rights they can exercise throughout the carriage process and what their respective obligations are regarding liability for damage done to cargo in transit.