ABE Principles of Business Law 2008-1
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The Sale of Goods 1: The Contract, Property and Title 205
(b)the buyer becomes an owner in common of the bulk.
(3)Subject to subsection (4) below, for the purposes of this section, the undivided share of a buyer in a bulk at any time shall be such share as the quantity of the goods paid for and due to the buyer out of the bulk bears to the quantity of goods in the bulk at that time.
(4)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.
(5)Where a buyer has paid the price for only some of the goods due to him out of a bulk, any delivery to the buyer out of the bulk shall, for the purposes of this section, be ascribed in the first place to the goods in respect of which payment has been made.
(6)For the purposes of this section payment of part of the price for any goods shall be treated as payment for a corresponding part of the goods."
Section 20B deals with deemed consent by a co-owner to dealings in bulk goods and states as follows:
"(1) A person who has become an owner in common of a bulk by virtue of Section 20A above shall be deemed to have consented to -
(a)any delivery of goods out of the bulk to any other owner in common of the bulk, being goods which are due to him under his contract;
(b)any dealing with or removal, delivery or disposal of goods in the bulk by any other person who is an owner in common of the bulk in so far as the goods fall within that co-owner's undivided share in the bulk at the time of the dealing, removal, delivery or disposal.
(2)No cause of action shall accrue to anyone against a person by reason of that person having acted in accordance with paragraph (a) or (b) of subsection (1) above in reliance on any consent deemed to have been given under that subsection.
(3)Nothing in the section or Section 20A above shall -
(a)impose an obligation on a buyer of goods out of a bulk to compensate any other buyer of goods out of that bulk for any shortfall in the goods received by that other buyer;
(b)affect any contractual arrangement between buyers of goods out of a bulk for adjustments between themselves; or
(c)affect the rights of any buyer under his contract."
Note the concept of "undivided shares". If co-owners become owners in common, the interest of each co-owner is in a fixed share of the bulk. Although each owner in common has a fixed share, the bulk is not per se physically divided to give effect to those shares – hence it remains in undivided shares.
Reservation of the Right of Disposal, Commonly Called "Retention of Title"
S.19 of the 1979 Act permits the seller of specific goods, or of goods which are subsequently appropriated to the contract, to reserve the right of disposal of the goods until specified conditions are met. Notwithstanding delivery, the property in goods does not then pass until those conditions have been met.
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"Reserving the right of disposal" means that the seller has the right to prevent the buyer from dealing with the goods as if they were his/her own, notwithstanding that he/she has possession of them.
The usual condition is payment of the price. If the seller does this, then as between buyer and seller, if the buyer in breach of the contract does dispose of the goods by, say, selling them to a third party, then he will be liable to the seller for "conversion". But by virtue of S.25, as between the buyer and the third party, if the third party takes the goods without knowledge of the original seller's reservation of lien, then he, the third party, acquires a good title. The transaction has the same effect as if the buyer were a mercantile agent in possession of the goods, or document of title to the goods. A mercantile agent in such a situation can pass on a good title, notwithstanding any defect in his/her own title (Factors Act 1889).
That was, at least until 1976, quite straightforward. Provided you are dealing with an homogeneous product which is bought and sold in its existing state, no great problems arise. However, in 1976 the Court of Appeal upset the applecart!
In Aluminium Industrie Vaassen BV v. Romalpa Aluminium Ltd (1976), now always referred to as "Romalpa", the facts were as follows. A sold Romalpa aluminium foil, reserving the right of disposal with these conditions:
Property was to pass only when all sums owing to A had been paid.
Romalpa was to store the foil so that it was shown to be the property of A.
Articles manufactured from the foil were to become the property of A as surety for full payment.
Romalpa were to hold such articles for A in their capacity as "fiduciary owners", i.e. as it were, as trustees for A, their equitable owner.
Romalpa were entitled to sell such articles, but only on condition that they would hand over to A such rights as they possessed against sub-purchasers.
Romalpa duly manufactured articles from the foil, and sold them. Sub-purchasers paid Romalpa, but Romalpa went into receivership owing A money. A sought to recover unused foil, and claimed they had a charge over money received from sub-purchasers.
HELD: By reason of the relationship of bailor and bailee, a fiduciary relationship arose, and A were entitled to claim the proceeds of the sub-sales in priority to general creditors.
That case opened the floodgates and allowed unpaid sellers who had inserted appropriate "reservation of title" clauses in their contracts to claim money back from insolvent buyers long after the original goods had been turned into something quite different and sold. They are called "Romalpa clauses".
However, the courts soon realised that Romalpa went too far, and they have been frantically backtracking ever since. The reasoning used is esoteric in the extreme, and goes far beyond the requirements of your examination. But briefly there are two facts:
Depending on the precise wording of the Romalpa clause in each individual case, a seller may have reserved a "legal" title to the goods – that is, a title which is absolute and good against the whole world; or he/she may have reserved only an "equitable" title – that is, a title which is a fiduciary one only and which can be displayed by a person holding the legal title.
Or the seller may reserve both a legal and an equitable title.
Under the Companies Act 1985, S.395(1) (formerly the Companies Act 1948, S.95(1)), if a company creates a "charge" over its property, that charge is void against a receiver or creditor if it is not registered as such. In certain circumstances a buyer
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allowing reservation by a seller of an equitable title is deemed to have created a charge over his/her property. It is almost inconceivable that he/she would in fact register it as a charge.
The first shot fired in the battle was in Re Bond Worth Ltd (1980). In that case, the clause in the contract reserved only "equitable and beneficial" title to the seller. It was held void against the creditors for non-registration.
At much the same time came Borden (UK) Ltd v. Scottish Timber Products Ltd (1979). Resin was sold to a manufacturer of chipboard, and the seller purported to reserve to himself the ownership of the chipboard made from the resin, until he had been paid in full.
HELD: Once the resin had been incorporated in chipboard, it ceased to exist as such, and therefore the seller's title to it was destroyed.
Much the same result occurred in Re Peachdart Ltd (1983). Leather was sold with a reservation of title clause attached. The leather was made into handbags.
HELD: Once an individual piece of leather was appropriated to a handbag, it ceased to be the sole property of the seller, who then had only an equitable charge over it. This charge was void for non-registration.
However, in Hendy Lennox (Industrial Engines) Ltd v. Graham Puttick Ltd (1984), diesel engines were sold, and the buyer attached these engines to generators to produce diesel generator sets.
HELD: Provided the engines could be readily separated by merely unbolting them from the generators, the seller could effectively retain title to the engines.
The whole issue was described by Staughton J in Hendy Lennox as "a maze if not a minefield". The law is unclear; however, it is probably safe to assert that a seller can validly and effectively reserve title to goods sold if:
He/she expressly reserves the legal title, and not merely the equitable title;
He/she expressly or by implication creates the relationship of bailor and bailee, especially by requiring the goods to be stored separately from other goods;
The goods retain their existing state, and are not converted into other articles.
E. TRANSFER OF TITLE BY NON-OWNERS
"Nemo dat quod non habet"
Literally translated this means "no one may give what he does not have".
It is a general maxim of English law that no one can transfer a better title than he/she possesses him-/herself. There are, however, exceptions. In Bishopsgate Motor Finance Corporation Ltd v. Transport Brakes Ltd (1949), Denning LJ (as he then was) expressed it thus:
"In the development of our law, two principles have striven for mastery. The first is for the protection of property: no one can give a better title than he himself possesses. The second is for the protection of commercial transactions: the person who takes in good faith and for value without notice should get a good title. The first principle has held sway for a long time, but it has been modified by the common law itself and by statute so as to meet the needs of our own times."
The first principle stated by Lord Denning is partially enshrined in S.21(1) of the 1979 Act. "Subject to this Act, where goods are sold by a person who is not their owner, and who does not sell them under the authority or with the consent of the owner, the buyer acquires no
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better title to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller's authority to sell."
Estoppel
The last part of S.21(1) provides statutory force to the common law principle of estoppel. If a person leads someone to believe a certain fact, and that person reasonably acts on that belief, and suffers loss as a consequence, then the representor will be estopped from denying its truth.
In Eastern Distributors Ltd v. Goldring (1957) M owned a van and wanted to raise money on the security of it. He persuaded a car dealer to represent to the finance company that M wished to take the van on hire purchase. M signed all the necessary forms, including one stating that he had taken delivery of the van. The effect of this was to enable the dealer to represent to the finance company that he, the dealer, was the owner of the van, and had a right to sell it.
HELD: M, having consented to this, was by his conduct estopped from denying the dealer's apparent ownership. The finance company, therefore, acquired a good title under S.21(1) of the Act.
The courts have been reluctant to establish the principle that an estoppel can arise through negligence. To create such an estoppel the owner of the goods must have owed a duty of care to the buyer, who was misled into believing that someone else owned them. The notion was rejected in Moorgate Mercantile Co. Ltd v. Twitchings (1976). Here the prospective buyer of a car checked with H P Information Ltd, a company that keeps details of all hirepurchase agreements registered with it, to establish whether the car was subject to any hire purchase. No agreement had been registered and so the buyer bought the car. In fact, the car was subject to hire purchase in favour of M Ltd, but it had not been registered. M Ltd repossessed the car.
HELD: M Ltd could repossess the car. They owed no duty to T to register the hire-purchase agreement and the statement by H P Information Ltd that no agreement was registered could not constitute an estoppel. Registration was voluntary, not compulsory.
Sale under a Voidable Title
A "voidable title" is one whereby a person who is in possession of goods and is the apparent owner of them in fact does not possess a good title. The true owner can assert his/her better right to goods, and "avoid" the possessor's title.
S.23 of the 1979 Act gives protection to a person who buys in good faith and without notice of the seller's defective title, by providing that the buyer in such circumstances acquires a good title to the goods, provided the true owner has not at the time of sale avoided the seller's title.
Car and Universal Finance Co. Ltd v. Caldwell (1965)
Caldwell was fraudulently induced by N to sell him a car, which N paid for by cheque. The cheque was later dishonoured, whereupon Caldwell notified both the police and the AA. Neither of these were able to contact N. Meanwhile N sold the car to the finance company who acquired it in good faith and without notice of N's defective title.
HELD: Caldwell, having done all that was possible to avoid N's title, had effectively done so. Hence he retained title to the car.
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Mercantile Agents
The Factors Act 1889, S.1(1) defines a "mercantile agent" as follows:
"The expression 'mercantile agent' shall mean a mercantile agent having in the customary course of his business as such agent authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods".
The Factors Act then goes on to provide in S.2 that where a mercantile agent is in possession of goods with the owner's consent, any disposition of those goods in the ordinary course of his/her business as a mercantile agent shall be as valid as if he/she had been expressly authorised by the owner to make that disposition; provided, that is, that the person taking the goods under the disposition does so in good faith without notice of any lack of actual authority of the agent.
We shall be dealing in later study units with the law relating to agents, but from the point of view of sale of goods, this Act provides a statutory exception to the "nemo dat" rule. A person whose normal business is to sell, or buy, or consign goods for sale as an agent for another person (the principal) is a mercantile agent. If, therefore, such a person is in possession of a principal's goods, with the principal's consent, then she can give a good title to any third party (subject to good faith, etc.) for those goods, notwithstanding that she is not the owner of them, nor has the principal's authority to dispose of them. The reason for this exception is, of course, commercial necessity. If someone buys from an agent dealing in goods, he must know that it is safe for him to do so, and that his title to the goods he buys cannot be impeached by the true owner. Otherwise the whole mercantile system would collapse.
The definition of a mercantile agent is such that a clerk, a warehouseman or other bailee of goods, or a carrier, is not a mercantile agent. Such people cannot pass a good title under the terms of the Factors Act.
The Sale of Goods Act 1979, S.62(2) provides that the law relating to mercantile agents (amongst others) shall apply to contracts for sale of goods.
Seller in Possession of Goods
S.24 of the 1979 Act provides another exception to the "nemo dat" rule. This section reads as follows:
"Where a person having sold goods continues or is in possession of the goods or of the documents of title to the goods, the delivery or transfer by that person, or by a mercantile agent acting for him, of the goods or documents of title under any sale, pledge, or other disposition thereof, to any person receiving the same in good faith and without notice of the previous sale, has the same effect as if the person making the delivery or transfer were expressly authorised by the owner of the goods to make the same".
As we have seen, the usual rule is that the property in goods passes to the buyer when the contract is made. He/she is therefore the owner of them. But if after the contract of sale is made, but before delivery to the buyer, the seller, inadvertently or otherwise, sells the goods a second time, and delivers them to the new buyer, then that new buyer gets a good title to them. The seller has no title which he/she can pass, but, notwithstanding, the second buyer acquires a good title. The original buyer is, of course, left with a remedy of damages against the seller for breach of contract.
The essential things to remember are that the seller must remain in possession of the goods or documents of title to the goods (e.g. a bill of lading), and he/she must actually
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transfer the goods or the documents of title to the second buyer. Only then does the second buyer get a good title.
In Nicholson v. Harper (1895) a vendor sold wine to Nicholson which was stored in a warehouseman's cellars. He later pledged the wine with the same warehouseman as security for a loan.
HELD: S.24 of the Act did not apply, as there had not been any delivery or transfer to the warehouseman after the sale to Nicholson. The warehouseman did not therefore get any title, so the pledge was ineffective as security.
On the whole, more modern cases tend to take a more flexible approach to the interpretation of S.24. You can see this in the case of Worcester Works Finance Ltd v. Cooden Engineering (1974). G, a car dealer, bought a car from C. He later sold it to W under a hire-purchase agreement. Without W's knowledge or consent he retained possession of it. Meanwhile, since his cheque to C had bounced, he allowed C to recover possession of the car. W sued C.
HELD: The action failed.
At the time of the car being repossessed by C, the car dealer was a "person having sold goods" for the purposes of S.24. The fact that his continued possession was wrongful and was not known to W was irrelevant.
The necessary delivery which the seller in possession must make to the third party could arise where the third party seizes possession of the goods with the seller's consent.
Buyer in Possession of Goods
Exactly the same result obtains if a buyer has possession of goods with the seller's consent, and before the property has passed the buyer sells or disposes of them, or of documents of title, to a sub-buyer. Provided the sub-buyer acts in good faith without knowledge of any lien of the original seller, or lack of title of the buyer, then he/she acquires a good title if the goods, or documents of title to them, are actually transferred to him/her. This is provided for by S.25 of the 1979 Act. It has effect as if the buyer were a mercantile agent.
A good example of where two of the exceptions to the "nemo dat" rule potentially applied was Newtons of Wembley Ltd v. Williams (1965). Newtons agreed to sell a car to A, providing that the property in it should not pass until it had been paid for. A drew a cheque for the full price, and with Newtons' consent took possession of the car. The cheque was dishonoured, and Newtons forthwith purported to rescind the contract. Meanwhile, however, A sold the car to B in Warren Street car market. B resold it to Williams.
HELD (Court of Appeal) that:
B acquired a good title under S.25, as A was in possession of the car with the true owner's consent.
Williams had a good title, by virtue of B's title. However, even if B's title was defective, Williams's title was good, as he had bought in market overt (an established market where a buyer who purchased in good faith without notice of any defects in title acquired a good title to the goods). (Remember that market overt was abolished by the Sale of Goods (Amendment) Act 1994.)
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211 |
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Study Unit 9 |
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The Sale of Goods 2: Terms and Conditions |
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Contents |
Page |
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A. |
Frustration |
212 |
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Specific Goods that Perish |
212 |
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Unascertained Goods that Perish |
212 |
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Other Instances of Frustration |
212 |
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Consequences of Frustration |
213 |
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B. |
Delivery |
214 |
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General Points |
214 |
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Method of Delivery |
215 |
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Place of Delivery |
216 |
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Time of Delivery |
216 |
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Quality of Goods Delivered |
216 |
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Delivery by Instalments |
217 |
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C. |
Acceptance and Payment |
218 |
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Acceptance |
218 |
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Payment |
219 |
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D. |
Statements Relating to Goods |
220 |
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Statements not Involving Legal Liability |
220 |
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Statements Involving Legal Liability |
221 |
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E. |
Statutory Implied Terms as to Description and Quality |
222 |
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Correspondence with Description |
222 |
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Satisfactory Quality and Fitness for the Purpose |
224 |
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Satisfactory Quality |
224 |
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Fitness for the Purpose |
225 |
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Sale by Sample |
228 |
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F. |
Exemption Clauses |
229 |
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Introduction |
229 |
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Unfair Contract Terms Act 1977 |
230 |
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Unfair Terms in Consumer Contracts Regulations 1994 |
233 |
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Interpretation of Exemption Clauses |
233 |
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212 The Sale of Goods 2: Terms and Conditions
A. FRUSTRATION
You will remember from an earlier study unit on contract law that frustration of a contract occurs by operation of law, and not by agreement between the parties, when some outside event occurs without the fault of either party, and which could not reasonably have been foreseen, which renders the contract something totally different from what the parties had bargained for.
The principles of frustration apply to contracts for the sale of goods exactly as they apply to any other contracts. However, the Sale of Goods Act 1979 makes provision for a particular type of frustration. S.7 states:
"Where there is an agreement to sell specific goods and subsequently the goods, without fault on the part of the seller or buyer, perish before the risk passes to the buyer, the agreement is avoided ".
Specific Goods that Perish
S.7 applies only to specific goods, and only if they perish before the risk in them has passed. The section was inserted in the 1893 Act (and re-enacted by the 1979 Act) as a result of the decision in the following case.
Howell v. Coupland (1876)
Coupland agreed to sell to Howell 200 tons of potatoes to be grown on a specified field. Due to a partial failure of the crop, Coupland was able to deliver only 80 tons.
HELD: Coupland was relieved of liability to deliver the remaining 120 tons.
This section of the Act thus removes the difficulties which are apparent in the Howell decision. In the first place, when the contract was made, the goods were not specific; they were future goods. Secondly, 80 tons were actually delivered, so it was left open as to whether Howell could have refused to accept the quantity that was available and offered.
The consequence of frustration under S.7 is that the contract is avoided, and both parties are relieved of their obligations under it. If the price, or part of it, has been paid, it must be refunded. In the event that part of the goods under the contract have been delivered before the remainder perish, then the buyer is liable for the price of that part that he/she has accepted.
Unascertained Goods that Perish
It is very unlikely that the doctrine of frustration will be called into play in the event of unascertained goods perishing. The seller will normally be in a position to obtain alternative supplies from elsewhere. This is probably the reason why the Act makes no mention of the matter. It is only if it was the intention of the parties at the time of the contract that the goods were to come from one particular source, and no other, that the contract would be frustrated by the goods perishing before becoming ascertained.
Other Instances of Frustration
The four other likely causes of contracts for sale of goods being frustrated are as follows:
Owing to the outbreak of war. Under the Trading with the Enemy Act 1939, the supply of goods to or for the benefit of the enemy is a criminal offence; consequently contracts made before the outbreak of war, but which have not been fully executed, are frustrated.
Supervening illegality may cause a contract to be frustrated. If, after the contract is made, new legislation renders its performance impossible, or to be of such a character
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or duration as to make it something totally different from that contemplated by the parties, then frustration will ensue.
The imposition of import or export prohibitions may have the same effect. There are, of course, various parameters. The prohibition may be absolute, in which case the contract will be frustrated.
On the other hand, it may be only temporary, or make import or export subject to the possession of a licence, in which case the legal results will depend entirely on the circumstances.
Requisitioning of the goods will not normally cause the contract to be frustrated, unless they cannot be supplied from any other source, or it is an essential part of the contract that those particular goods, and no other, are the subject-matter.
Consequences of Frustration
The effect of the frustration of a contract for the sale of goods is forthwith to relieve the parties from further performance. The consequences are provided for in the Law Reform (Frustrated Contracts) Act 1943. However, this Act specifically exempts from its operation any contract to which the Sale of Goods Act 1979, S.7 (re-enacting the 1893 Act) applies. We have already mentioned the consequences flowing from S.7 frustration. Under the 1943 Act, which will therefore normally apply only to unascertained goods:
All sums paid or payable at the time of frustration shall be repaid, or cease to be due;
Any expenses incurred by the party to whom the sums were due (the seller) can be recovered subject to the court's discretion;
If a party (the buyer) has acquired a valuable benefit (other than money), then the value of the benefit is recoverable by the other party (the seller).
The effect of the Act is therefore to ensure firstly that no further liability arises, secondly that the price of goods paid for in advance is recoverable, thirdly that goods supplied prior to the frustrating event are paid for, and fourthly that reasonable expenditure may be recovered.
BP Exploration Co. (Libya) Ltd v. Hunt (No 2)(1979)
Hunt owned an oil concession in Libya. He agreed with BP that they would develop the concession at their own expense, and recoup part of the cost if and when the oil field came on stream from Hunt's share of production. Afterwards they were to share production and development costs. It was later agreed that BP's preliminary expenses would be reimbursed by receipt of 50 million barrels of oil, and that BP could not recover sums paid to Hunt. The field came on stream in 1967. In 1971, the Libyan government expropriated BP's interest, and in 1973 Hunt's. By that same time BP had received about one-third of the 50 million barrels.
HELD:
The contract was frustrated in 1971.
At the date of frustration, Hunt had obtained a valuable benefit, in that the value of his share had been enhanced by BP's contractual performance. This would be taken into account in calculating the sum due to him.
The sum due to BP would take into account the reimbursement oil already received by them.
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B. DELIVERY
General Points
S.27 of the 1979 Act states:
"It is the duty of the seller to deliver the goods, and of the buyer to accept and pay for them, in accordance with the terms of the contract of sale".
At first reading, this may well appear to be a particularly unnecessary statement of the obvious. But there is more to it than meets the eye.
In the first place, "delivery" in ordinary speech implies transportation – the physical act of moving the goods from seller to buyer. In law, this is not necessarily the case. S.61(1) defines “delivery” as the "voluntary transfer of possession from one person to another". So there is no need for any physical movement at all. If you buy something in a shop, it is "delivered" when it is handed to you after payment. Equally, goods lying in a warehouse are "delivered" when the seller signifies to the warehouse that they are to be held for or to the order of the buyer. If a document of title (e.g. a bill of lading) is transferred, it constitutes "delivery" of the goods.
Secondly, as we have already seen, the property in and possession of goods are not the same thing. Property may well have passed, but in order for the buyer to get physical possession, the act of delivery is necessary to complete the transaction. Further, the delivery must be voluntary. If the buyer just walks in and takes the goods, that is not delivery. At best it is "conversion", at worst theft!
Thirdly, the seller must deliver the particular goods contracted for, if the contract is one for the sale of specific goods. He/she cannot deliver other goods which are similar. However, if the contract is for unascertained goods, the seller is free to deliver any goods which are the same as those specified in the contract.
Fourthly, the buyer has a duty to accept the goods. The seller may be ready and willing to deliver, but if the buyer refuses to accept, the sale remains incomplete.
Fifthly, the buyer must pay for the goods. The time of payment depends on what has been agreed in the contract, or has become the usual time through a course of dealing. In other words:
The contract may specifically state the time of payment.
The buyer may have a previously agreed periodic (e.g. monthly) account.
It may have become customary over a period of previous trading that the buyer pays after a certain period; if the seller has consistently accepted this, that period will constitute the time of payment through a course of dealing.
However, in the event that no such prior agreement, express or implied, has been reached, then S.28 states:
"Unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions, that is to say, the seller must be ready and willing to give possession of the goods to the buyer in exchange for the price and the buyer must be ready and willing to pay the price in exchange for possession of the goods".
This is, of course, the normal arrangement when buying something from a shop.
Lastly, the expenses of putting the goods into a deliverable state, and expenses incidental to this, are, unless otherwise agreed, the responsibility of the seller (S.29(6)). You should note that this does not mean the costs of delivery, but merely the expense of preparing the goods for delivery. This includes packing costs. From a practical point of view, therefore, if
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