The legal title plays an important role in commercial transactions. It refers to the formal ownership of a product rather than who has physical possession of the product. For example, a wholesaler may sell a piece of equipment to a customer on 30-day credit terms. Although the customer may take immediate possession of the product, the wholesaler typically retains legal title until full payment is received. In this context, the legal title signifies that the wholesaler remains the legal owner of the property until the customer pays in full. Furthermore, it allows the wholesaler the right to claim or repossess the product if they do not receive full payment within the agreed-upon timeframe.
A person or business that holds legal title of a product has the right to:
On the other hand, possession refers to the physical control over the product or property. It does not always mean the person or business in possession holds legal ownership or title of the property.
For instance, if a person buys a house, they gain legal title to the property. Nonetheless, the previous owners might continue to occupy the house and remain in possession of the property until settlement date.
Suppose there is a conflict between the legal title owner and the product’s possessor. In that case, the legal titleholder has the right to enforce their ownership rights or seek a remedy.
Generally, when a product is delivered or collected, the possession of the product is transferred from the seller to the buyer upon the physical delivery. While possession signals immediate control, the transfer of legal title may occur before or upon the physical delivery.
Risk in the product also transfers. In this context, risk refers to covering the risk of loss or damage to the product. The transfer of risk can occur either before or after the delivery or collection of the product.
The party exercising control over the goods is typically accountable for their safety. Accordingly, responsibility may shift to the possessor even if they do not hold legal title to the product. The terms of the agreement between the parties play a pivotal role in determining which party assumes title and risk at distinct phases.
When negotiating a contract, the parties will agree upon the Incoterms they wish to govern the agreement. For example, Delivered Duty Paid (DDP) means the seller bears all risks and costs until the products are delivered to the buyer’s location. Incoterms are silent on how title transfers, so international contracts must address when ownership of goods changes hands from the seller to the buyer.
The Personal Property Securities Register (PPSR) is a public record kept by the government that registers security interests in personal property, excluding land and fixtures. A commercial contract will provide a level of protection for parties. However, when a party registers their interest in the PPSR, they receive greater protection.
An agreement stating that the supplier retains title until the other party pays in full establishes the legal relationship. However, the supplier can better protect this interest by registering it on the PPSR. For example, suppose a customer becomes insolvent, and the product is not registered on the PPSR. In that case, the property could be lost, and an insolvency practitioner could sell the goods on the customer’s behalf. Having a registered security interest may give your claim priority over the claims of other creditors.
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When parties are clear on who has legal title, this helps to distinguish formal ownership from physical possession. Retaining legal title until a buyer makes full payment allows the seller to reclaim the product. A contract needs to set out not only how legal title works but also which party bears the risk in the products throughout delivery or collection.
Parties must make additional considerations when dealing with overseas sellers or buyers, especially when navigating international commercial terms (Incoterms). For added legal protection, legal titleholders can secure their position by registering their security interests over personal property on the PPSR.
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