1. General rule: Risk follows the ownership
Under section 22 of the Sales and Goods Ordinance (SOGO), unless otherwise agreed, the goods remain at the seller’s risk until the property therein is transferred to the buyer, but when the property therein is transferred to the buyer the goods are at the buyer’s risk, whether delivery has been made or not.
The general rule is that the risk of accidental loss/damage lies with the party who has property in the goods.
2. Exceptions to the “risk follows ownership” rule
However, there are 3 exceptions to the general rule:
1. “Unless otherwise agreed”
Parties are free to agree that risk passes before ownership when drafting the agreement. Usually, a “retention of title clause” will be included in the contract to clearly set out the intention of both parties.
2. Either party was at fault
Section 22 of SOGO stipulates that “provided that where delivery has been delayed through the fault of either seller or buyer, the goods are at the risk of the party in fault as regards any loss which might not have occurred but for such fault”.
3. Bailment
Under section 22 of SOGO, it is provided that “nothing in this section shall affect the duties or liabilities of either seller or buyer as a bailee of the goods of the other party”.
It is a general rule of bailment that the party (even though not the owner) in possession must take reasonable care of the goods. For instance, the seller must take reasonable care of the goods even though property in them has passed to the buyer.