Property II: passing of property in unascertained goods: Lecture notes PDF

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Property II: passing of property in unascertained goods: Lecture notes...

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Commercial Law 2016 Lecture 7 1

Property II: passing of property in unascertained goods

Unascertained goods

Remember that by virtue of S16 SGA, no property can pass in unascertained goods until they become ascertained. What does this mean? The answer varies according to the form that the unascertained goods take. First of all, unascertained goods can be defined as goods that are not identified and agreed upon when contracting, the goods are e.g. still in a bulk. If the goods are to be manufactured by the seller, ascertainment occurs as a result of the process of manufacture. If goods are sold by a generic description e.g. 100 tons of wheat, they become ascertained when 100 tons of wheat are delivered (usually simply made available) to the buyer. Third, the goods may be part of an undivided bulk. In this case the goods become ascertained only when it can be established which bit of the bulk is going to be given to the buyer. In all these examples the later events referred to make the goods ascertained, the events can never make the goods into specific goods, because the nature of goods is determined when the contract is made. In all these examples the goods were unascertained when the contract is made. Once ascertained, the passing of property will depend on the parties’ intentions (S17 SGA). But there will be many contracts for the sale of goods where the parties do not express their intention as to when property shall pass, so reliance must be made on the rules of presumed intention in S18. Rule 5 applies to unascertained goods. In practice this is the most important of the rules as most commercial contracts involve unascertained goods. S18 Rule 5 (1)

Where there is a contract for the sale of unascertained or future goods by description, and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer, or by the buyer with the assent of the seller, the property in the goods then passes to the buyer; and the assent may be express or implied, and may be given either before or after the appropriation is made

(2)

Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee or custodier (whether named by the buyer or not) for the purpose of transmission to the buyer, and does not reserve the right to disposal, he is taken to have unconditionally appropriated the goods to the contract

In this session we will mainly look at Rule 5(1), which contains two basic requirements for property to pass in unascertained goods - goods complying with the contract must be unconditionally appropriated to the contract; secondly the other party must give his assent. 2

Meaning of unconditional appropriation

Atiyah -‘Some ascertained and identified goods must be irrevocably attached or earmarked for the particular contract in question.’ One of the commonest and simplest ways in which unconditional appropriation occurs is by delivery. If the seller actually delivers goods answering the contract description, this is an appropriation which, subject to the question of assent, will pass property to the buyer. Rule 5(2) gives another illustration of an unconditional appropriation i.e. delivery to a carrier like DHL. But Rule 5(2) must still be read in conjunction with S16 because it is clear that if the

Commercial Law 2016 seller delivers the goods to a carrier still mixed with other goods, no property can pass, because the goods are still unascertained A very good case to illustrate an act of appropriation is Healey v Howlett [1917] 1 KB 337 B ordered 20 boxes of mackerels from S, a fish exporter in Ireland. S despatched 190 boxes and instructed the railway officials to earmark 20 of the boxes for B. The train was delayed before B’s boxes were earmarked, and by the time this was done the fish had deteriorated. Held -Property in the fish had not yet passed to B, the boxes were still at S’s risk when they deteriorated. Because it was not possible to say which boxes belonged to B until they were earmarked, no goods had been appropriated to individual contracts. There are many cases on the meaning of unconditional appropriation, which indicate the variations possible depending on the type of goods and circumstances of the case. The case of Carlos Federspiel & Co v Twigg [1957] 1 Lloyd’s Rep 240 turned on the question whether the goods had been unconditionally appropriated. The sellers manufactured bicycles to the buyers order. The bicycles were made and packed in containers with the buyer’s name and address on them, but before the goods could be shipped, the sellers became insolvent. Held -Property had not yet passed, for the following reasons: (i) (ii) (iii) (iv) (v)

A mere setting apart by the seller of the goods is not enough. If that was all, he could change his mind and use those goods in some other contract. Instead the parties must have had an intention to attach the contract irrevocably to those goods. It is by agreement of the parties that the appropriation is made. An appropriation by the seller with the assent of the buyer may be said always to involve an actual or constructive delivery. If the goods are still at the seller’s risk that is prima facie an indication that the property has not passed to the buyer. Usually the appropriating act is the last act to be performed by the seller.

The case law is therefore very strict on what constitutes an unconditional appropriation. You can maybe think of it in a way that once goods have become unconditionally appropriated, there is no way back for the seller to sell to the buyer. Once the goods are unconditionally appropriated to the contract with the buyer, the seller cannot change his mind anymore. 3

Meaning of assent

Assent is usually not a problem in this context as it can even be implied/inferred from the circumstances. Implied assent and the application of Rule 5 was discussed in Pignatoro v Gilroy & Son [1919] 1 KB 459 S sold some rice to B from a specified parcel at a particular place, and sent B a note of appropriation. B failed to reply for a whole month. Held - B’s assent was implied from his failure to reply. 4

Transfers other than by unconditional appropriation – ascertainment by exhaustion

Although unconditional appropriation is the usual way in which ownership is transferred to the buyer, it is not the only possible way. Instead appropriation may also occur by ‘exhaustion’ i.e. all other orders have been removed, thus ascertaining the remaining goods as belonging to the buyer, so ascertainment and appropriation occur at the same time. This situation is specifically provided for by S18 Rule 5 (3) which states:

Commercial Law 2016 S18 Rule 5 (3) Where there is a contract for the sale of a specified quantity of unascertained goods in a deliverable state forming part of a bulk which is identified either in the contract or by subsequent agreement between the parties and the bulk is reduced to (or less than) that quantity, then, if the buyer is the only buyer to whom goods are then due out of the bulk (a)

the remaining goods are to be taken as appropriated to that contract at when the bulk is so reduced; and

(b)

the property in those goods then passes to the buyer.

the time

A good case to illustrate ascertainment and appropriation by exhaustion is Karlshamns Oljefabriker v Eastport Navigation Corp [1982] 1 All ER 208 The buyer bought 6.000 tons of copra from the seller. The sellers shipped 16.000 tons of copra on one ship, part of which was intended for the buyer and part for other buyers. The ship called first at Rotterdam and then at Hamburg, discharging all the copra meant for other buyers, so that at this stage the only copra left was that destined for the buyer. Held -At this final stage, property passed to the buyer because the goods had become ascertained by a process of ‘exhaustion’. Rule 5(3) expressly states the principle of ascertainment and appropriation by exhaustion, identified in the Karlshamns case. Property passes to the buyer at the moment the bulk is reduced to the quantity to which the buyer is entitled, provided that: i) The goods are in a deliverable state. ii) The buyer is the only buyer remaining entitled to goods from the bulk in question. iii) The buyer assented to the appropriation. (but in the absence of evidence to the contrary, assent will be implied from the mere fact that B agreed to buy from the specific bulk ) Having discussed the different ways in which unascertained goods can become ascertained, we will finally we have to look at the important issue of the passing of risk in a contract of sale. 5

When does risk pass?

Remember, when we first talked about the importance of determining when ownership passes from the seller to the buyer, we said it was in part because other issues turned on ownership. The most important of these issues is risk i.e. the question of which of the seller or buyer is responsible for any loss of or accidental damage to the goods. As with ownership questions, the parties may expressly agree in their contract who is to suffer loss, but very frequently they fail to make provision for this eventuality. As one or other of the parties may not have insurance to cover the loss you can see that disputes frequently arise over this issue. The basic rule is set out in S20 Sale of Goods Act 1979: S20(1) SGA

Unless otherwise agreed, the goods remain at the seller’s risk until the property in them is transferred to the buyer, but ,when the property in them is transferred to the buyer the goods are at the buyer’s risk whether delivery has been made or not.

Commercial Law 2016 Remember that in a contract for the sale of specific goods in a deliverable state S18 Rule 1 says that property passes when the contract is made. Thus the problem can arise that the buyer acquires the ownership of the goods whilst they are still in the possession of the seller, if those goods are then destroyed without the seller being at fault, responsibility for their loss falls on the buyer. Atiyah describes this legal position as ‘grotesque’ and suggests that a more reasonable rule would have been to link risk with control, for the person in control of the goods (usually by being in physical possession) is best able to take proper steps for their protection and to cover loss by insurance. For this reason the basic rule on risk has been changed in consumer cases by the Sale and Supply of Goods to Consumers Regulations 2002. Thus, S20SGA has been amended accordingly: S20(4)SGA

In a case where the buyer deals as a consumer….subsections (1) to (3) above must be ignored and the goods remain at the seller’s risk until they are delivered to the consumer.

This is an important provision which students often overlook. Please remember that in a consumer contract risk passes on delivery according to S20A SGA. 6

Exceptions to the general rule of risk

The basic rule in S20(1)SGA is subject to qualification S20(1)

Unless otherwise agreed, the goods remain at the seller’s risk until the property in them is transferred to the buyer, but ,when the property in them is transferred to the buyer the goods are at the buyer’s risk whether delivery has been made or not.

S20(2)

But where delivery has been delayed through the fault of either buyer or seller the goods are at the risk of the party at fault as regards any loss which might not have occurred but for such fault.

S20(3)

Nothing in this section affects the duties or liabilities of either seller or buyer as a bailee or custodier of the goods of the other party.

. Thus the general rule on risk is varied where – i) ii)

It is displaced by contrary agreement between the parties. Even where risk is prima facie on one party, it may be shifted, wholly or partly, as the result of fault by the other. iii) Where the seller is authorised to send the goods, the Act provides special rules for the risks of transit. 7 Contrary agreement Many sales contracts expressly separate the passing of risk and property. Commonly, in standard terms and conditions of sale, the seller will provide that risk is to pass on delivery but property is not to pass until the goods have been paid for(this is called a retention of title clause, we will consider these in another lecture). Obviously the seller does not want the inconvenience of insuring the goods once delivered, but must retain ownership of them as security against not being paid. Agreement can sometimes be inferred –

Stern v Vickers (1923)

Commercial Law 2016 The sellers had 200,000 gallons of white spirit in a tank belonging to a storage company. They sold 120,000 gallons to the buyers, giving them a delivery warrant. The effect of the warrant was that the storage company undertook to hold the white spirit subject to the buyers order. The buyers sold on to a sub-purchaser who asked the storage company to store it on his behalf, paying rent for storage. The spirit then deteriorated before it was delivered. Held -Although there was no agreement between the parties, express or implied, the risk had passed from the original seller to the buyer even though property had not yet passed. Emphasis was placed on the delivery warrant since once the buyers had it they were immediately able to obtain delivery of the spirit. Because the reason why property did not pass to the buyer was a deliberate decision by the buyer, the Court’s view was that risk should pass to the buyer even though they chose not to take immediate possession of the goods. 8

Delivery delayed through fault of one party

Risk is concerned only with accidental destruction or deterioration and thus does not extend to cover damage to the goods caused by the fault of one of the parties in delaying delivery: Demby Hamilton v Barden (1949) The buyer was supposed to take delivery of some apple juice in weekly loads. The buyer held up delivery and the juice went off as a result. Held -The buyer must bear the loss. 9

Bailee or custodier of the goods of the other party

S20(3) requires that any person in possession must take reasonable care of the goods even if the ownership is with the other party. So if the goods are damaged or stolen because of his negligence he will have to bear the loss even though at the time he was not the owner. So if the seller’s driver negligently crashes his delivery van this might render the seller liable for the loss of the goods even though the buyer was now the owner of them. 10

Special rules for the sale of an unidentified part of an identified bulk

The historical problems with S16 related to sales from an identified bulk. Bulk is defined in S61 SGA S61 SGA defines bulk as a mass or collection of goods of the same kind which a) is contained in a defined space or area; and b) is such that any goods in the bulk are interchangeable with any other goods therein of the same number or quantity. Property could not pass until the part sold had been physically separated or ‘earmarked’ (ascertained). Thus a buyer could find that although goods had been paid for he had no property/ownership rights in them because they were still unascertained. If the seller should become insolvent before ascertainment the buyer would rank merely as an unsecured creditor and typically recover nothing. The point is illustrated by the following case Re London Wine Co (Shippers) Ltd (1986) PCC 121 S sold wine to several buyers who paid for the wine, and also for S to store it. They each received ‘certificates of title’ although the wine remained stored as one bulk. S became insolvent and the liquidator claimed the wine still belonged to the company. Held -The liquidator’s claim was upheld, property remained with the company.

Commercial Law 2016 The question of what proprietary interest the buyer gets in the bulk before property passes under Rule 5(3) and (4) is dealt with in the new S20A. To understand its impact it is necessary to first consider an important pre-emptive case decision Re Staplylton Fletcher [1994] 2 BCLC 681 Customers bought and paid for wine but did not take delivery. The wine was moved from the general stock area to the customer reserve but not marked as belonging to individual customers. The seller became insolvent. Held -Property in the wine had passed to the buyers by common intention, thus each buyer was a tenant in common in proportion to their order. This decision proved an important move towards recognising ‘quasi-specific’ goods as different from wholly unascertained goods. The thrust of the decision is in S20ASGA

S20A(1)

This section applies to a contract for the sale of a specified quantity of unascertained goods if the following conditions are met -

(a)

the goods or some of them form part of a bulk which is identified either in the contract or by subsequent agreement between the parties; and

(b)

the buyer has paid the price for some or all of the goods which are the subject of the contract and which form part of the bulk

Under S20A property passes in a sale of a specified quantity of an identified bulk as soon as the buyer pays the price. Issues arising from S20A S20A is subject to contrary agreement by the parties, either that it will not apply at all, or that property will pass at some point after payment. For S20A to apply, the bulk must be identified and fall within the statutory definition. Moreover the agreement must be for a specified quantity (eg 20 tons) not a contract to purchase a fraction or percentage of the whole (these now being specific goods). The tenancy in common subsists whilst the bulk remains. If only the buyer’s goods are left he has complete property in the bulk by virtue of S18 Rule 5(3). A final issue to consider is insufficient quantity in the bulk.The new Act considers the ways in which such a situation could arise, and the effect. The Act creates the ‘proportionate reduction rule’ in S20A SGA:

S20A(4)SGA Where the aggregate of the undivided shares of buyers in a bulk determined under subsection (3) above would at any time exceed the whole of the bulk at that time, the undivided share in the bulk of each buyer shall be reduced proportionately so that the aggregate of the undivided shares is equal to the whole bulk.

11

Risk and undivided bulks

We have seen how a buyer can now acquire ownership rights in an identified bulk when he pays for the goods. But when does risk pass? There is no express provision in the new Act dealing with the transfer of risk. The accepted view is that risk remains with the seller until actual delivery to the buyer i.e. not the earlier point when the buyer becomes a tenant in common. Key learning points 

Property cannot pass in unascertained goods until ascertained S16

Commercial Law 2016 Ascertainment and appropriation may happen at the same time Once ascertained property passes when goods are unconditionally appropriated or ascertained by exhaustion S18 Rule 5  Buyer must assent to appropriation expressly or impliedly  Buyer who pays price of goods in identified bulk becomes tenant in common S20A  Risk passes with Property S20  General rule on risk can be displaced by contrary agreement, delay in delivery due to fault of party, damage to goods when with carrier . Risk does not pass when buyer in identified bulk acquires tenancy in common, only later when goods unconditionally appropriated.  ...