Property I: passing of property in specific goods: Lecture notes PDF

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Property I: passing of property in specific goods: Lecture notes...

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Commercial Law 2016 Lecture 6 1

Property I: passing of property in specific goods Introduction

Some key concepts -

Ownership v. possession

At common law there are two categories of legal property rights in goods: ownership and possession. Within the context of the SGA 1979, “ownership” corresponds with the “general property” in goods. The starting point, therefore is that property or ownership in goods is separate from possession of goods. The passing of property or ownership in goods is important to determine because from that moment risk (responsibility for loss or damage to the goods) usually passes to the buyer (S20 SGA 1979) , the buyer can sue in tort if a third party damages the goods, and he will have good title to the goods if the seller becomes insolvent. The mere fact that property in the goods has passed does not confer on the buyer possession or even the right to possession as against the seller. Once a buyer has paid for the goods, he will acquire an immediate right to possession. But he will only acquire possession of the goods when he has gained control over the goods. Thus, a sale of specific goods (for example, a horse) may have the following consequences: i)

ii)

Property in the horse usually passes to the buyer at the moment of sale. From that moment, risk is presumed to pass to the buyer, he is protected if the seller becomes bankrupt, and he can sue in tort if the horse is damaged by a third party. Once the buyer has paid for the horse, he will have an immediate right to possession and can sue either the seller or a third party in conversion if they interfere with his right to possession.

But the buyer does not yet have possession of the horse. He will not acquire possession of the horse until it is actually delivered to him or there is a constructive delivery to him (for example, by the seller attorning to him). For the next two lectures we will deal with the rules of English law which decide when ownership (or property, we are using the term property and ownership synonymously) is to pass from the seller to the buyer. In order to be able to decide when property passes, we first have to assess whether the goods are either specific or unascertained. This session will focus on specific goods, unascertained goods will be discussed in the following session. To emphasize again, why is it important to know the exact point when ownership passes? You would think that the buyer would be much more concerned with delivery of the goods and the seller with payment of the price. There are two reasons why it is so important: (i) English law makes some other questions turn on the passing of ownership. The most important of these is the issue of risk (who bears responsibility for accidental loss or damage to the goods); another issue is the seller’s right to sue for the price under S49(1) SGA. Other systems of law have developed rules about the passing of risk which are totally separate from their rules on passing of property. The advantage of the English system is perhaps a certain economy of effort in dealing with two questions at the same time. (ii) It is important to know who owns the goods in the event that either the seller or the buyer becomes insolvent. Sellers, for instance, often offer credit to their customers, i.e. they deliver goods before they have been paid. If the buyer has received not only the goods but also becomes their owner before having paid for them, then the seller’s only remedy is to prove in the liquidation procedures and this will usually mean that he or she will not be paid in full, if at all.

Commercial Law 2016 2

Determining the point when property/ownership passes

The Sale of Goods Act 1979 contains a detailed code, with a series of rules, set out in SS1619, concerned with the transfer of property (remember the SGA talks of property rather than ownership) from the seller to buyer. Students should have a close look at the following provisions of the SGA: S16 Goods must be ascertained Where there is a contract for the sale of unascertained goods no property in the goods is transferred to the buyer unless and until the goods are ascertained S17 Property passes when intended to pass (1)

Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred

(2)

For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case

Thus, the first rule is that property cannot pass if the goods are unascertained, which makes the distinction between specific and unascertained goods essential. The rule in S16 is absolute and cannot be excluded, even by agreement of the parties. It is applicable to both wholly unascertained goods and unascertained goods from an identified source. The second rule is that if the goods are specific or ascertained, the parties are free to make whatever agreement they like about when property passes. This also means that where the goods are ascertained or specific, transfer of property is totally separate from questions of delivery and payment! In international sales the parties will often provide that payment is to be ‘cash against documents’ and this will usually mean that the property is to pass when the buyer takes up the documents and pays against them. It is crucial to remember that the rules for passing property in the goods assess their type at the time of the contract. Where the contract is for the sale of unascertained goods, those goods will subsequently become ascertained i.e. identified as going to the buyer. It may appear at this later stage that the unascertained goods could now be described as specific but this cannot be the case because goods obtain their label ‘specific’ or ‘unascertained’ when the contract is made, the rules applicable to specific goods have no bearing even though the once unascertained goods are now ascertained. I cannot emphasise enough the importance of understanding this issue as it is fundamental to getting to grips with the way the rules work to pass ownership. The common criticism of the rules is that they are ‘highly technical, prejudicial to consumers and out of touch with what happens in practice’ and have been outpaced by modern developments in commercial practice with the consequence that their application can cause great practical difficulties. As we shall see therefore, the 1979 SGA has been amended several times to bring the rules in line with consumer needs and modern commercial practices. 3

The rules of presumed intention and the classification of goods

The basic rule in S17 specifies that property is to pass when the parties intend it to pass. The parties intention can be determined by looking at the terms of the contract, or the conduct of the parties, or any relevant circumstances (e.g. letters between the parties or a previous course of dealings).

Commercial Law 2016 However, as the parties often do not express their intention, even in commercial contracts, the SGA helps to solve this potential problem. S18 sets out five rules of presumed intention, what Professor Furmston calls ‘determinative clues.’ The S18 rules are used to determine the intention of the parties regarding the point when property is to pass when it is not clear from their contract. You must be clear that S18 Rules 1-3 relate to specific goods, Rule 4 relates to goods on sale or return, and rule 5 relates to unascertained goods (which will be discussed in the following session). Before looking at S18 SGA and the rules 1-4 on presumed intention we have to be able to distinguish SPECIFIC goods from unascertained goods. Here, you should refer to S61 SGA which gives the following definition (the definitions are in alphabetical order): ‘Specific Goods are those identified and agreed upon at the time of the contract’ In addition, the definition also includes a share of a bulk expressed as a Percentage or fraction (i.e. one tenth or 10%)

You can see from this definition that specific goods are those that the buyer possibly has especially selected from the seller’s stock. So far as the passing of property is concerned, future goods can never be specific. Once we are certain that we deal with specific goods, we can look at the following rules in order to determine which one might apply in our case at hand. S18 Rule 1

Where there is an unconditional contract for the sale of specific goods, in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment or the time of delivery, or both, be postponed

This means that when the provisions of rule 1 are fulfilled, i.e. we have an unconditional contract and the goods are in a deliverable state, the property passes at the time of the contract! Under Rule 1 we have to assess whether there is an unconditional contract and the goods are in a deliverable state. (i)

‘Unconditional contract’

Within the meaning of this rule, unconditional means a contract not subject to a condition precedent or subsequent. In this context unconditional is taken to mean that the contract does not contain any term which suspends the passing of property until some later event. However the cases have not always made this clear: Varley v Whipp [1900] 1 QB 513 The contract was made for a second-hand self-binding reaper, new the previous season, but which had not been seen by the buyer. When it arrived the buyer found it to be old and much used. Held - Property had not passed since the contract was not ‘unconditional’. This decision was surprising as the sale was clearly not subject to any conditions precedent, but the judge gave no reasons for this part of the decision. See also Richard Anderson v Havana Horse Ltd [1999] A contract for the sale of a car was unconditional although the payment by cheque had not yet cleared. (ii) Deliverable state

Commercial Law 2016 The second issue arising from Rule 1 is the meaning of ‘deliverable state’. A definition can be found in S 61 SGA again: Goods are in a deliverable state within the meaning of this Act when they are in such a state that the buyer would under the contract be bound to take delivery of them Remember that although the buyer is not bound to take delivery of defective goods, it does not follow that all defective goods are not in a deliverable state within the meaning of S61 otherwise property would never pass in defective goods. The words ‘deliverable state’ can instead be confined to the performance by the seller of duties, such as packing, repair, dismantling, and servicing between the contract and delivery. An example is: Underwood Ltd v Burgh Castle Cement and Brick Syndicate [1922] 1 KB 343 The contract was to sell a 30 ton condensing engine which at the time of the contract was standing bolted to a concrete floor. It was an expensive and time consuming task to remove it. In the contract the seller had agreed to do this and undertook to see that the engine was conveyed to and loaded onto a train for transport to the buyer (known as free on rail f.o.r.). Held - Rule 1 did not apply because the machine was not, at the time of the contract, in a deliverable state since it still had to be removed from the concrete emplacement. Again, under Rule 1 we have to assess whether there is an unconditional contract and the goods are in a deliverable state. If so, property passes at the time the contract was made.

S18 rule 2

Where there is a contract for the sale of specific goods, and the seller is bound to do something to the goods, for the purpose of putting them into a deliverable state, the property does not pass until the thing is done, and the buyer has notice that it has been done

In contrast to Rule 1 which deals with the unconditional sale of specific goods, Rule 2 (and 3 and 4) deal with the conditional sale of specific goods. The meaning of ‘deliverable state’ has already been explored in relation to Rule 1. It is important to note however that once goods have been put into a deliverable state, the buyer must be given notice of this before the property will pass under Rule 2. This notice is actual not constructive Jerome v Clements Car Sales Ltd [1958] OR 738 In this case property did not pass when the seller completed repairs to a car (i.e. did something to the goods to put them in a deliverable state) but failed to inform the buyer. Under rule 2 you have to discuss whether seller and buyer have agreed on something the seller has to do in order to put the goods into a deliverable state, AND whether the seller has notified the buyer that he has done whatever was agreed. If so, property passes once the buyer has received notice. S18 Rule 3

Where there is a contract for the sale of specific goods, in a deliverable state, but the seller is bound to weigh, measure, test, or do some other act or thing with reference to the goods for the purpose of ascertaining the price, the property does not pass until the act or thing is done, and the buyer has notice that it has been done

Commercial Law 2016 Rule 3 is another example of a conditional sale of specific goods, but a fairly limited example. Rule 3 only applies to acts done by the seller and only very specific act, such as weighing, measuring or testing in order to determine the price of the goods. The case example that is often given on rule 3 is Nanka Bruce v Commonwealth Trust Ltd [1926] AC 77. Look at this case carefully! The reason why rule 3 did not apply was due to the fact that it was the buyer who had to weigh the goods and not the seller. A sold cocoa to B at an agreed price per 60lb, it being arranged that B would resell the goods and that the cocoa would then be weighed by the purchasers in order to ascertain the total amount due from B to A. Held -The weighing did not make the contract conditional and the property passed to B before the price was ascertained. 4

Sale or return

The rules on sale or return will only apply if it is clear from the contract that buyer and seller have agreed on a sale or return contract. Students don’t need to worry about identifying a sale or return contract as this will be specifically made clear in an exam question. Have a look at S18 rule 4: S18 Rule 4 (a) (b)

When goods are delivered to the buyer on approval or on sale or return or other similar terms the property in the goods passes to the buyer when he signifies his approval or acceptance to the seller or does any other act adopting the transaction or, if he does not signify his approval or acceptance to the seller but retains the goods without giving notice of rejection, then if a time has been fixed for the return of the goods, on expiration of that time and, if no time has been fixed, on the expiration of a reasonable time.

. What do we mean by sale or return? If you buy something, later change your mind and the seller agrees to give you a refund, this is not sale or return within the rule 4 meaning. Under the rule 4 meaning, the buyer loses the right to return the goods if he approves or accepts them or otherwise adopts the transaction. If you decide to hold a party and the wine merchant lets you have 100 glasses on sale or return for one week, you can return up to 100 glasses for that one week period. You cannot return any that are broken, as this will amount to an adoption and if you delay return beyond a week you have to keep them all and pay for 100 glasses as you will be deemed to have accepted them. We will explore these concepts in turn: The buyer’s acceptance The acceptance of the buyer that concludes the contract of sale or return under Rule 4 may take three forms: (a) (b) (c)

A declared acceptance Conduct that is consistent with an intention to accept the offer (’does any other act adopting the transaction’) Retention of the goods beyond the time stipulated by the seller, or beyond a reasonable time.

The first mode of acceptance is straightforward, but it can be difficult to know whether the buyer has done an act adopting the transaction, as is required, for the second mode of acceptance. The matter was considered in Kirkham v Attenborough [1897] 1 QB 201 The buyer of goods on sale or return pledged them with a pawnbroker. Held - At the very moment of the pledge the property in the goods passed from the seller to the buyer, the pledge amounted to adoption of the transaction.

Commercial Law 2016 In Kirkham, the factor that impressed the court most was that the act of pledging the goods was inconsistent with the buyer’s ‘free power’ to return the goods to the seller. Yet the pledged goods could always have been redeemed by the buyer and returned to the seller within the stated time or a reasonable time. Therefore the decision is not well suited to a pledge of goods, but would apply to a sub-sale by the buyer which seems to be the very transaction contemplated by the sale or return Rule. Another complicated situation which can arise is where the buyer of goods on sale or return, himself resells them to a sub-buyer on sale or return: Genn v Winkel (1912) 107 LT 434 Buckley L.J held that ‘If A delivers goods to B and B delivers them to C in each case on sale or return and the reasonable time be, say 14 days, and C after 4 days sells the goods or elects to buy the goods, I think property will have passed, because C will have done an act which renders it impossible for B to return the goods to A.’ The third alternative mode of acceptance is by retention beyond the agreed time, or beyond a reasonable time. Retention beyond the agreed time will pass property without the need for a communication of acceptance. Where no time has been agreed for the return of the goods, the question of what is a reasonable time arises Poole v Smith’s Cars (Balham) Ltd (1912) 107 LT 434 There was a sale or return between two car dealers. Held - The time for return of the car had elapsed. The court considered a number of factors, including the declining secondhand car market at that time of year, the rapid depreciation of the car; the seller’s repeated requests for the return of the car, and the evidently temporary arrangement character of the transaction. Where the buyer serves a notice of rejection of goods supplied on sale or return he must clearly indicate that he is rejecting the seller’s offer and exercising his right to return the goods. Atari Corp Ltd v Electronics Boutique [1998] 1 All ER 1010 The seller supplied computer games to the buyer on a sale or return basis. The agreement provided for payment in full by November 1995, but allowed for sale or return by 31 January 1996. On January 19 1996, the buyer notified the seller that certain stock was being withdrawn and that following return of the product from all the stores the seller would be presented with a list. The seller claimed for the price of all the goods supplied. Held - Any notice of rejection had to clearly indicate this, although it need not set out in detail the precise goods but could refer to them generically. Nor did it matter that the goods were not available for collection at the time the notice was served.

Key learning points         

Important to determine when ownership passes as other issues turn on it (eg risk) The SGA determines the issue based on nature of goods – specific or unascertained The nature of goods is determined when contract is made. The parties intention may determine ownership transfer S17 SGA 1979 If not look to rules of presumed intention in S18 SGA S17 & S18 subject to S16-no property passes in unascertained goods until ascertained S18 rules 1-3 cover specific goods, which rule applies depends if contract unconditional, goods in deliverable state, or something to be done by seller. Rule 4 sale or return, property passes if buyer accepts, adopts, keeps beyond agreed time or beyond reasonable time. Buyer must clearly indicate rejection un...