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Sale of goods: contract, property and risk

Contents
4 1 4 2 4 3 4 4 4 5 4 6 4 7 Introduction 56 The Sale of Goods Act 57 What is a contract of sale of goods? 59 Components of the sale contract 61 Passing of property 64 Risk 71 Perishing of goods and frustration of contract 72 Transfer of title 74 Reflect and review 81

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Introduction
The contract for the sale of goods is at the centre of this course. Sale contracts are a branch of the general law of contracts and the principles that you studied in the Elements of the law of contract subject guide apply here. Indeed, many of the cases you studied as part of that course involve sale contracts. There are, however, some special features of sale contracts. The most significant are the terms implied into the sale contract by the Sale of Goods Act 1979. In this chapter we look at the Sale of Goods Act, the definition of a sale contract, the rules on the passing of property and risk, and transfer of title. Chapter 5 considers delivery and acceptance of the goods and the implied terms in a sale contract. Chapter 6 deals with the remedies available to the parties where there has been a breach of the contract. It is worth noting that in some aspects this Act distinguishes between consumer and nonconsumer sale contracts. This part of the course concentrates on the latter, that is, on sales between business people.

Note: the Sale of Goods Act 1979 is referred to here as the Act or SGA. References to sections from the Act are merely noted by their section number: for example, s.14(1) refers to section 14(1), Sale of Goods Act 1979.

Learning outcomes
By the end of this chapter and the relevant readings you should be able to:

discuss the approach taken to interpretation of the Sale of Goods Act analyse the components of the definition of a contract of sale explain the circumstances in which property in goods is passed identify how risk is passed understand the nemo dat rule discuss and illustrate the exceptions to the nemo dat rule.

Essential reading
The main reading is Sealy and Hooley, but you should be aware that a number of books on contracts of sale are available and are worth consulting.

Atiyah, P.S., J. Adams and H. MacQueen The sale of goods. (London: Longmans, 2005) [ISBN 9780582894085]. Bridge, M. The sale of goods. (Oxford, Oxford University Press, 1998) [ISBN 9780198765355]. McKendrick, E. (ed.), Sale of goods. (London: LLP Professional Publishing, 2000) [ISBN 9781859783058]. For the issues raised in this chapter of the subject guide you can also consult Bradgate, pp.21944, 365437.

Commercial law 4 Sale of goods: contract, property and risk

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4.1 The Sale of Goods Act


4.1.1 The Act
The original Sale of Goods Act 1893 was an attempt to codify much of the common law on sale contracts. The Act, therefore, was shaped by the fact that the case law on sales was mainly concerned with sale for the purpose of trading (for example, a manufacturer of goods selling to a retailer of goods) rather than for consumption (for example, a sale by a retailer to a consumer). By the late twentieth century there was recognition that the principles derived from such contracts might not serve the needs of consumers. In providing greater protection for the consumer, the Sale of Goods Act 1979 was part of a shift from the general principle of caveat emptor, according to which it was for the buyer to ensure goods did not suffer from any defects (see s.14(1), discussed in 5.5 below), to a position where the seller is obliged to ensure that goods do not suffer from certain types of defects, or that the buyer is made aware of such defects before the sale. This shift affects all buyers, including business people. The change of emphasis from sale for trade to sale for consumption is also illustrated by the change in the main implied term as to quality. In the 1893 Act goods were required to be of merchantable quality, which assessed quality according to their value in trade. This has been replaced by a requirement that goods be of satisfactory quality (s.14(2)), which emphasises issues of consumption. This shift in the Act has been reinforced by the Unfair Contract Terms Act 1977 and by the Sale and Supply of Goods to Consumers Regulations 2002, which restrict the ability of sellers to contract out of their obligations and which give greater protection to consumers (as opposed to commercial buyers, who are, however, not ignored by the 1977 Act). Yet it would be wrong to characterise the recent history of sales law as simply concerned with the problems of buyers. For instance, there has been some relaxation of the rules in the context of sales between business people: for example, s.15A (introduced into the SGA in 1994) has made it more difficult for the non-consumer buyer to reject defective goods (see Chapter 6). In spite of the development of distinctions between the law applying to commercial (business-to-business sales) and the law applying to consumer sales (business-to-privatebuyer sales), the rules remain mixed together in the same legislation: the SGA and related statutes, such as the Unfair Contract Terms Act 1977. This has led to confusion and to calls for separate codes for the different types of sale.

4.1.2 Interpreting the Sale of Goods Act 1979


Essential reading

Sealy and Hooley, Part III: Domestic sales law, Chapter 7: Introduction and definitions, pp.24547. The Sale of Goods Act 1893 was meant to codify the common law on contracts for the sale of goods, although in truth it is only a partial code because key areas of contract law are not fully covered or are entirely omitted (for example, formation and misrepresentation). The general principles of contract law are, therefore, still relevant (see s.62(2)). The approach to interpreting codifying statutes was laid down by Lord Herschell in a case on the Bills of Exchange Act 1882: I think the proper course is in the first instance to examine the language of the statute and to ask what is its rational meaning, uninfluenced by any considerations derived from the previous state of the law, and not to start with inquiring how the law previously stood, and then, assuming that it was probably intended to leave it unaltered, to see if the words of the enactment will bear an interpretation in conformity with this view. (Bank of England v Vagliano Brothers [1891] AC 107). Atkin LJ confirmed that this was the correct approach to the SGA: Inasmuch as we are now bound by the plain language of the Code I do not think that decisions in cases before 1893 are of much value (Re Wait [1927] 1 Ch 606; Sealy and Hooley, p.246). Yet, what this means

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is not always clear. Indeed, Atkin LJ followed the statement quoted above by referring to two pre-1893 cases. In Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454, Lord Upjohn explained, Your Lordships were properly referred to authorities in the nineteenth century, for section 14(2) only put the common law as it had been established into a statutory code. (Also Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyds Rep 240; Sealy and Hooley, pp.32022.) The most recent version of the Act was passed in 1979 and that Act has been amended in 1994, 1995 and 2002. Interpreting the legislation rests on the pretence that the Act, including provisions drawn from the 1893 Act, was written at one time. Potter LJ explained (Stevenson v Rogers [1999] QB 1028): The [Sale of Goods] Act of 1979 forms a single code; however, that is upon the basis simply that it consolidates and enacts within one statute and without material amendment a number of disparate statutes previously governing the field of sale of goods. While, in the first instance, a consolidating Act is to be construed in the same way as any other, if real doubt as to its legal meaning arises, its words are to be construed as if they remained in the earlier Act. Thus, in terms of the proper construction of its provisions, the Act of 1979 is not to be regarded as more than the sum of its parts. Lord Diplock (Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441) proposed a different method of interpretation. He drew attention to the danger of not allowing the law to develop and so restrict the freedom of the parties to engage in more sophisticated agreements than were envisaged by the courts in the nineteenth century. He urged that, the Act ought not to be construed so narrowly as to force upon parties to contracts for the sale of goods promises and consequences different from what they must reasonably have intended. Instead, [its provisions] should be treated as illustrations of the application to simple types of contract of general principles for ascertaining the common intention of the parties as to their mutual promises and their consequences, which ought to be applied by analogy in cases arising out of contracts which do not appear to have been within the immediate contemplation of the draftsman of the Act in 1893I believe that the basic principle of the English common law of contract, including that part of it which is codified in the Sale of Goods Act 1893, is to give effect to the common intention of the parties as to their mutual promises in the sense that I have just described, I prefer to deal with each appeal by considering first the transaction between the buyer and the seller in the light of common sense and good faith in business, before examining the particular provisions of the code upon which the parties rely. Go to your study pack and read the extract from Ashington Piggeries Ltd v Christopher Hill Ltd.

Activity 4.1
What problems are posed by Lord Diplocks approach to interpreting the SGA?

Giving your own views


In response to Activity 4.1, we expect you to make your own judgment as to what the problems are in Lord Diplocks approach. You should make your own analysis and give your opinion. Universities want their students to be independent thinkers who can express their own opinions based on the material they have studied. This means making up your own mind about the principles and objectives that ought to guide legal processes. Perhaps you are not sure what your views are? If so: note down the main issues and see how they relate together; ask other students what they think; discuss and argue your views with them. Students who simply list all their knowledge, or repeat model answers will not receive good marks in the examinations. Higher education is about thinking as well as learning. You do not have to accept the standard views and explanations of any subject. For example, although the LLB degree explains and supports the common law, you may take the view that civil law systems are superior to common law systems. You may decide that there are few, or no problems in Lord Diplocks approach. This is perfectly acceptable, if you can support this view with reasoned arguments. No-one will object to that provided that you can produce logical arguments and evidence for your views. The only requirement is that you must be able to argue your position with supportive evidence and reasons. See being an independent learner and critical thinking in the Learning skills for law guide.

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4.2 What is a contract of sale of goods?


Essential reading

Sealy and Hooley, Chapter 7: Introduction and definitions, pp.25772. The SGA defines a contract of sale of goods as: a contract in which the seller transfers [called a sale: s.2(3)] or agrees to transfer [an agreement to sell: s.2(4)] the property in goods to the buyer for a money consideration, called the price (s.2(1)). It is worth noting that property refers to the title to the goods and not the goods themselves. Before looking more closely at this definition, it is worth considering some transactions that are excluded.

Transactions that are not sales


Contract of bailment This is where goods are delivered on terms requiring their return to the owner or to another party. Although the person holding the goods under such a contract has certain rights and obligations, there is no intention that property will pass. Contract of hire purchase Typically, this is a means by which someone can buy goods by making payments over a period of time. However, it is not a sale because, while the intention is that the buyer will own the goods when all the payments have been made, the passing of property will only occur if the buyer chooses to exercise an option under the contract to that effect. There is no obligation on the buyer to exercise this option (Helby v Matthews [1895] AC 471; Sealy and Hooley, pp.26364). This does mean that there will be a sale if the contract stipulates that property will pass at some specified time in the future (Forthright Finance Ltd v Carlyle Finance Ltd [1997] 4 All ER 490; Sealy and Hooley, p.264). This will be an agreement to sell (s.2(5)) as opposed to a contract of sale where the property passes at the time of the contract (s.2(4)), but both are within the SGA (see section 4.3.3, below). See the criticism of the distinction between hire-purchase and sale contracts made by Sealy and Hooley, p.265. Security interests Where someone (the chargor) grants an interest in goods in favour of another (the chargee) as security for a loan or some other form of credit, the chargor retains property in the goods. The chargee does acquire a proprietary interest in the goods, which will cease when the debt is paid (Sealy and Hooley, p.266). Agency contracts Where A buys goods from T on behalf of P and P has authorised or later ratifies the purchase, there is an agency contract between P and A and a sale contract between P and T. Contrast this with the situation where A acts as a principal so that there a sale contract between T and A and another between A and P. (See Chapter 2 above.) Contract for work and materials This is a contract involving skill and labour as well as the transfer of property in goods, such as the painting of a portrait by an artist (Sealy and Hooley, pp.26670). Where the work element can be separated from the goods, as where a gas fitter installs a new central heating boiler, one might be able to suggest there are two contracts, one for the labour (contract for work) and one for the boiler (contract of sale). The problem arises where the work done by the fitter is very defective and the householder wishes to reject the boiler. This may not be possible because the boiler is not defective and there is, therefore, no breach of the sale contract, only a breach of the contract for labour. Where the goods and labour are mixed together, the test applied to decide if it is a contract of sale or a contract for skill and labour is to look at its substance. If an artist is commissioned to paint a portrait, the fact that materials, such as paint and canvas, will also pass under the contract does not make it a contract of sale of goods. Greer LJ thought the test involved determining if the skill is only ancillary or if the substance of the contract is the skill and experience of the artist in producing the picture. (Robinson v Graves [1935] 1 KB 579; Sealy and Hooley, pp.26869). The distinction in that case was between the portrait painter and the maker of a set of dentures: it was concluded that in the latter situation there is a sale of goods because the principal part of that which the parties are dealing with is the chattel which will come into existence when such skill as may be necessary to produce it has been applied.

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This makes it seem as though the distinction rests on an assessment of what is and is not skill or art. The test might be, do the goods in question acquire the bulk of their value from the work applied in making them so that the goods are increased to an extent that substantially exceeds their value in a raw state? But this is too vague: dentures are made up from cheap raw materials and it is the process of forming these into dentures that adds value. Moreover, such a general rule contradicts some of the things said in one leading case (Lee v Griffin [1861] 30 LJQB 591). In truth, the judgments in Robinson were, perhaps, too loose to be able to discern any clear principle. Problems have resulted from attempts in some cases to work up a specific set of facts into a general rule so as to legitimise an outcome when really the distinction between these types of contract depends on the particular nature of each individual contract (Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454, Lord Upjohn). The significance of the distinctions between some of these contracts has diminished, although not entirely vanished. In Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454 (but contrast Lord Upjohns approach with that of Lord Wilberforce), the House of Lords took the view that, as far as possible, the same principles should be applied whether goods were supplied under a sale contract or a contract for work and materials. This has been reinforced by the Supply of Goods and Services Act 1982, which implies terms with respect to the goods supplied that largely match those implied into a contract for the sale of goods. That Act also imposes on the supplier the duty to exercise reasonable care and skill in respect of the service that is supplied (Supply of Goods and Services Act 1982, s.13). Similar terms are implied into hire purchase contracts by the Supply of Goods (Implied Terms) Act 1973, although significant differences remain between sale and hire-purchase contracts.

Summary
A sale contract is defined by s.2(1) SGA. The components of that definition must be present, so where there is no transfer of property it is not a sale. The importance of the distinctions between sale contracts and other types of contracts involving goods has been reduced but has not entirely vanished because, in so far as is possible, the same principles are applied to different types of contracts involving the supply of goods.

Commercial law 4 Sale of goods: contract, property and risk

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4.3 Components of the sale contract


The components of the definition in s.2(1) (see 4.2, above) are examined in this section.

4.3.1 Price
Essential reading

Sealy and Hooley, Chapter 7: Introduction and definitions, pp.25861, 272. The price must be a money consideration. This includes payment by credit card, but excludes contracts of barter (for example, the exchange of goods involving no payment). If the parties have not fixed a price, they may not have reached agreement in which case there is no contract (but see s.8, 9).

Activity 4.2
a Jake wishes to buy a new car priced at 7,000 from Mary, a dealer. Mary agrees to take Jakes old car and to reduce the price of the new car by 1,000. How would you characterise the transaction? b If goods are sold for 10 pence plus three wrappers from a chocolate bar, does the transaction fall within SGA?

4.3.2 Goods
Essential reading

Sealy and Hooley, Chapter 7: Introduction and definitions, pp.24854. The word goods in s.2(1) includes: all personal chattels other than things in action and moneyand in particular goods includes emblements, industrial growing crops, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale; and includes an undivided share in goods (s.61(1)). The Act does not apply to land (real property), nor shares and cheques (choses or things in action) or bank notes (money). Computer software has caused some difficulties and may not be covered by the SGA. Glidewell J took the view that the SGA does not apply, but went on to imply terms into the contract, which resembled those implied by the SGA, and so imposed strict liability for a defective software programme (St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481). The sale of bank notes that are not legal tender would be subject to the Act since their value derives from the notes themselves and not from their role as legal tender (Moss v Hancock [1899] 2 QB 111). The Act does cover crops that are attached to the land, although these are also land within the meaning of the Law of Property Act 1925, s.205 (Kursell v Timber Operators and Contractors Ltd [1927] 1 KB 298; Sealy and Hooley, p.253). Under s.61(1) goods includes an undivided share in goods so that a contract of sale includes the sale of part of a larger, undivided bulk of goods. We will discover the significance of this when we come to discuss the passing of property in goods (see section 4.4 below).

Emblement = the profits of sown land, particularly annually harvested grass, grain or fruit, etc.

4.3.3 Transfers or agrees to transfer the property


Essential reading

Sealy and Hooley, Chapter 7: Introduction and definitions, pp.25157. While the price is the benefit received by the seller, the buyer receives both the goods and property in the goods. If one party becomes insolvent the question of who owns the goods or, in the words of the Act, has property in them determines whether the other party joins the ordinary creditors or is able to claim the goods themselves. In addition, since risk usually runs with property (s.20(1); section 4.5 below), who has property will often settle the question of who bears the loss if goods are damaged or destroyed (see Sealy and Hooley, pp.27477).

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Property The concept of property in English law is elusive and there is not sufficient space in this guide to consider all its nuances. Nevertheless, it is worth making one or two observations. A property right is the connection between an individual and a thing: The touchstone of a property right is its universality: it can be asserted against the world at large and not, for example, only against another individual such as the contracting partner. If, under a contract of sale, I acquire the ownership of a chattel, my property right to the chattel may be asserted not just against the seller but against the whole world. (M. Bridge Personal Property Law. (Oxford: Oxford University Press, 2002), p.12. If A sells her car to B, B can assert the property right acquired, not only against A, but also against others even though they are not parties to the contract. Contrast this with contractual rights, which have only a limited impact on third parties because of the doctrine of privity. But what does it mean to own goods? With a few exceptions, such as ships and aircraft, there is no register for the ownership of goods, so how does someone establish ownership? It is established through possession: the owner is the person with the best possessory title to the goods. Property in SGA Section 2 refers to sales as contracts where the seller:

i transfers, or ii agrees to transfer property in goods. The Act covers two distinct aspects, the contract to transfer and the transfer itself: in (i) these occur simultaneously, while in (ii) they are separated. What is the property that is being transferred? According to s.61(1) it is the general property in goods, and not merely special property. This means the seller is transferring, or agreeing to transfer, the absolute legal interest in the goods, so the transfer of something less than the sellers full legal interest does not constitute a sale: for example, bailment does not come within the SGA because it does not transfer the owners absolute legal interest in the goods, it just transfers possession. But absolute legal interest does not mean the transfer of perfect legal title. Indeed, various parts of the Act are concerned with situations in which a buyer acquires title where the seller had a defective title or no title at all (for example, ss.12(3) and 2126, see 4.7 below). Categorisation of goods The passing of property is connected with the way the Act categorises goods as existing or future and as specific or unascertained. This categorisation occurs at the time of the contract. Existing goods are those owned or possessed by the seller at the time of the contract (s.5(1)). Future goods are to be manufactured or acquired by the seller after the making of the contract (s.5(1)). So, if the goods do not yet exist or exist but are the property of someone other than the seller, they are future goods: for example, the sale by Jake to Pugwash of a Bentley motor car is a sale of future goods if Jake does not own the car at the time of the contract, but intends to acquire it (Varley v Whipp [1900] 1 QB 513). There cannot be a sale of future goods, only an agreement to sell (s.5(3)), but this still falls within the SGA (s.2). Specific or unascertained goods Existing and future goods will also be specific or unascertained goods. Under s.16, property will not pass in goods that are not ascertained (Re Wait [1927] 1 Ch 606; Sealy and Hooley, p.246; but see s.20A discussed in section 4.4.8). The distinction between specific and unascertained goods depends on when they are identified:

if the goods are identified and agreed upon at the time of the contract they are specific goods (s.61(1)) if they are not identified at the time of the contract they are unascertained goods. The sale of my Bentley is a sale of existing and specific goods if I only have one Bentley. I cannot perform the contract by substituting another Bentley, even if it has precisely the same specifications.

Commercial law 4 Sale of goods: contract, property and risk


Typically, future goods will be unascertained. If the buyer agrees to buy a new Bentley from a dealer, who does not have what is required in stock, this is a sale of future and unascertained goods. However, goods that exist and are identified in the contract, but are owned by a third party, are both future goods (because the seller has not acquired them) and specific goods (because they are identified at the time of the contract) (Varley v Whipp [1900] 1 QB 513): for example, the sale by Jake to Pugwash of the Bentley, which is at the time of the contract owned by Mary from whom Jake intends to acquire it, is a sale of future, specific goods. Ascertained goods Where there is a contract for the sale of unascertained goods, once the goods are identified and connected by consent of the parties to the contract (appropriated: section 4.4.6 below), they become ascertained goods. The significance of this is that while goods are unascertained no property in them can pass to the buyer and the buyer has, therefore, only a contractual right against the seller and has no rights in any goods (see section 4.4.1). Property can only pass when the goods become ascertained. The rules on passing of property are discussed below (see 4.4). For the moment it is worth noting one of the problems with the rule that property cannot pass in unascertained goods. In Re Wait [1927] 1 Ch 606 (Sealy and Hooley, p.246), 500 tons of wheat were sold from a cargo of 1000 tons that was on board a ship, Challenger. When the seller went into liquidation, the court held that the sale was of unascertained goods and so under s.16 property had not passed to the buyer at the time of the contract. The buyer could not, therefore, claim the goods and merely joined the other general creditors. Similarly, in Re Goldcorp Exchange Ltd (in receivership) [1995] 1 AC 74, customers of a company purchased bullion for future delivery on terms that they were buying non-allocated metal, which meant it was not set aside but was stored as part of the companys general stock. Under the agreement, an investor had the right to take physical delivery of bullion from that stock. The company became insolvent. The Privy Council held that the goods were unascertained and property had not passed because the company was free to decide what bullion to allocate to a particular investor.

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Useful further reading

Bridge, M. Personal property law. (Oxford: Oxford University Press, 2002) [ISBN 0199254761] particularly, pp.1215, 2627, 2831, 8093. Goode (2004), pp.3145.

Summary
The passing of property is determined, in part, by the categorisation of the goods as either existing or future and as either specific or unascertained. Into which categories goods fall depends on the situation at the time of the contract. Existing goods are owned by the seller, while future goods are not. Specific goods are identified at the time of the contract, while unascertained goods are not. Unascertained goods become ascertained when they are appropriated to the contract with the consent of both parties. These rules are important because, normally, property will not pass in unascertained goods (subject to an exception dealt with in 4.4.8).

Go to your study pack and read The concepts of property, title and owner used in the Sale of Goods Act 1893 by G. Battersby and A.D. Preston and A reconsideration of property and title in the Sale of Goods Act by the same authors.

Activity 4.3
How would you categorise the following (put your answers into the grid): a 100 tons of wheat to be harvested from a particular field next summer. b A particular second-hand reaping machine owned by someone other than the seller. c A book ordered from an internet bookseller. d A bag of flour taken from the shelf in a supermarket by a customer. Specific Existing Unascertained

Future Think of other goods that you have bought recently and put them into the relevant parts of the grid.

Go to your study pack and read the extract from Personal property law by M. Bridge.

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4.4 Passing of property


Essential reading

Sealy and Hooley, Chapter 8: Passing of the property in the goods as between buyer and seller, pp.293327.

4.4.1 General principles


i The right of property and the right of possession are distinct from each other; the right of possession may be in one person, the right of property in another. (Tarling v Baxter [1827] 6 B & C 360, Sealy and Hooley, p.303, Bayley J). The distinction is demonstrated by the facts of Dennant v Skinner and Collom [1948] 2 KB 164 (Sealy and Holley, pp.303304), in which Roche J also notes that a seller, who, while not having property, remains in possession of the goods, has rights against a buyer who fails to pay (see 6.2).

ii 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. (s.16) This is based on what Lord Mustill called a priori common sense, which dictates that the buyer cannot acquire title until it is known to what goods the title relates (Re Goldcorp Exchange Ltd (in receivership) [1995] 1 AC 74). But this general principle is subject to an important exception in s.20A (discussed in 4.4.8 below). iii Where the goods are specific or ascertained property will pass when the parties intend it to be transferred (s.17(1)). To determine their intention regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case (s.17(2)). Property may still pass even though the time for payment or delivery has not arrived (but see the remarks of Diplock LJ quoted in section 4.4.2 below). iv If no such intention can be discerned, the Act provides rules in s.18 to resolve the issue of when the property is to pass (see section 4.4.2 below). With the exception of rule 5, these rules are concerned with the passing of property in specific goods. v The courts have always rejected the idea that under a sale contract the buyer may acquire an equitable interest in the goods. Atkin LJ said in Re Wait [1927] 1 Ch 606 (see also Lord Brandon in Leigh v Sillavan Ltd v Aliakmon Shipping Co Ltd, The Aliakmon [1986] AC 785): It would have been futile in a code intended for commercial men to have created an elaborate structure of rules dealing with rights at law, if at the same time it was intended to leave, subsisting with the legal rights, equitable rights inconsistent with, more extensive, and coming into existence earlier than the rights so carefully set out in the various sections of the code. Nevertheless, he did go on to say that the provisions in the Act have: no relevance when one is considering rights, legal or equitable, which may come into existence dehors [outside] the contract for sale. A seller or a purchaser may, of course, create any equity he pleases by way of charge, equitable assignment or any other dealing with or disposition of goods, the subject matter of sale; and he may, of course, create such an equity as one of the terms expressed in the contract of sale. The parties may, therefore, agree in the sale contract that the goods are to be held by the seller on trust for the buyer. The parties must intend to create a trust and to limit the freedom of the seller to deal with the goods, and the goods must be clearly identified. An attempt to establish a trust in relation to unascertained goods would fail to satisfy the second of these criteria. See Re London Wine Co (Shippers) Ltd [1986] PCC 121, Sealy and Hooley, pp.29498; Re Goldcorp Exchange Ltd (in receivership) [1995] 1 AC 74). But see also Re Stapylton Fletcher Ltd [1995] 1 WLR 1181 (section 4.4.8).

Activity 4.4
Why did the court not give full recognition to the apparent intention of the parties in Re Blyth Shipbuilding and Dry Docks Co Ltd [1926] Ch 494? Practise your spoken english We would advise you to make an oral answer in response to this activity.

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4.4.2 Section 18, rule 1: goods in a deliverable state


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. In spite of its wording, Diplock LJ remarked of this rule: the governing rule is in s.17, and in modern times very little is needed to give rise to the inference that property in specific goods is to pass only on delivery or payment (RV Ward Ltd v Bignall [1967] 1 QB 534). The phrase unconditional contract cannot mean that a contract must not have conditions of any sort because all contracts of sale have conditions, such as that the buyer will pay and the seller will deliver and the goods will be of satisfactory quality. Unconditional must refer to something in the contract of sale that prevents the operation of rule 1, and this would include the situations in rules 2 and 3. Goods are in a deliverable state, when they are in such a state that the buyer would under the contract be bound to take delivery of them (s.61(5)). In Underwood Ltd v Burgh Castle Brick & Cement [1922] 1 KB 123 (Sealy and Hooley, pp.306307), a machine was attached to a factory floor and, therefore, was not in a deliverable state until detached. It is only when the seller must do something that this rule may prevent property from passing and not if, for example, a contract term requires the buyer to detach the machine. There is a difficulty with future, specific goods, which would seem to come within rule 1. This is resolved by s.5(3), which states that a contract to effect a present sale of future goods is treated as an agreement to sell goods so that property will not pass until the seller acquires title or the buyer acquires title through an exception to the nemo dat rule (Goode (2004), p.232. On the meaning of the nemo dat rule see section 4.7 below).

Activity 4.5
A farmer agrees to sell all of the trees on his land; the trees are to be cut down a month after the agreement and payment is to be made at that time. At what point does the property in the trees pass?

4.4.3 Section 18, rule 2: goods not in deliverable state


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. This covers the situation where the goods are not in a deliverable state at the time of the contract and so property does not pass under rule 1, but they are later put into a deliverable state. Once the seller has undertaken the work necessary to render the goods deliverable, property will pass when the buyer has been given such notice as the contract specifies or, failing that, such notice as a reasonable person would require. The rule does not cover the situation where the contract requires the buyer to put the goods into a deliverable state and so in that situation property may pass, unless there is a contrary intention in the agreement.

4.4.4 Section 18, rule 3: price to be ascertained


If the seller of specific goods in a deliverable state is required to carry out some procedure to ascertain the price, such as weighing or measuring, property will not pass until that has been done and the buyer notified. If the contract stipulates that someone other than the seller is to undertake this task, rule 3 will not apply and property will pass under rule 1 (Nanka-Bruce v Commonwealth Trust [1926] AC 77; Sealy and Hooley, p.310).

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4.4.5 Section 18, rule 4: sale or return


Where goods are delivered to the buyer on approval or sale or return, property passes when the buyer:

signifies acceptance, or does an act adopting the transaction (rule 4(a)), or retains the goods beyond the time fixed by the agreement for a decision without giving notice of rejection, or, if no time is fixed, retains the goods beyond a reasonable time (rule 4(b)). This rule covers situations where goods are supplied on the understanding that the sale is dependent on the person in receipt of the goods adopting the transaction. Such agreements might be entered into because of a retailers uncertainty about demand for a product, which, in turn, may affect the ability to pay and, hence, the element of credit (Atari Corporation (UK) Ltd v Electronics Boutique Stores (UK) Ltd [1998] QB 539. Contrast with reservation of title clauses, discussed at 6.3 below). Strictly, there is no contract of sale or agreement to sell, but only an offer by the seller, which the buyer may accept or reject. Phillips LJ remarked that the notice of rejection referred to by the Act of 1979 is no more than the notice that an offeree can always give that a contractual offer is rejected. (Atari Corporation v Electronics Boutique Stores [1998] QB 539) What are the obligations of the buyer and the seller up to the point at which the sale is concluded? According to Phillips LJ:

The buyer holds the goods under a contract of bailment. This means that the risk of damage to the goods remains with the seller, although the buyer must take reasonable care of them. The seller may not withdraw the offer to sell. The sale or return must be distinguished from a contract of sale in which the buyer acquires property and risk in the goods but there is a term allowing their return (Elphick v Barnes [1880] 5 CPD 321). Other issues that have caused difficulty in sale or return agreements have been: (i) what is meant by an act adopting the transaction; (ii) what amounts to a reasonable time; (iii) what constitutes a notice of rejection and what effect does it have?

What constitutes an act adopting the transaction? If an act indicates personal use by the buyer, which goes beyond what is contemplated by the arrangement, this might amount to an act adopting the transaction (Poole v Smiths Car Sales (Balham) Ltd [1962] 1 WLR 744; Sealy and Hooley, pp.31415. Also, Kirkham v Attenborough [1897] 1 QB 201).

ii What amounts to a reasonable time? This depends on the agreement and the nature of the goods (Poole v Smiths Car Sales (Balham) Ltd [1962] 1 WLR 744; Sealy and Hooley, pp.31415). iii What constitutes a notice of rejection and what effect does it have? Often contracts for sale or return do not address the issues of how the buyer is to signify rejection of the goods, or what is the responsibility of the buyer once the goods have been rejected. Subject to any agreement to the contrary, rejection can be notified in any form. Such notice is only effective if given before property has passed, that is, before acceptance after acceptance the buyer will have the normal remedies that any buyer under a sale contract would have if the goods are defective. Subject to any agreement to the contrary, if the buyer wishes to reject the goods, a notice of rejection will be sufficient without return of the goods. The buyer must make the goods available to the seller within a reasonable period of time after rejection.

Activity 4.6
a Jake has expressed an interest in buying for 1000 a particular horse owned by Mary, if it is suitable for his young daughter to ride. Mary agrees that Jake can take the horse for 10 days in order to determine its suitability. After a week the horse becomes ill and dies. Is Jake liable for the price? b How might your answer to (a) have differed if Jake had used the horse himself on a number of occasions and had ridden it in a race?

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4.4.6 Section 18, rule 5: unascertained goods and appropriation


While rules 1 to 4 are concerned with specific goods, rule 5 concerns unascertained goods. No matter what the parties may wish property does not pass until the goods are ascertained (s.16, but see s.20A in 4.4.8 below). Once the goods are ascertained property passes when the parties intend (s.17). If no such intention can be determined, rule 5 applies. Property in the goods passes to the buyer where (rule 5(1)):

there is a contract for the sale of unascertained goods 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 (assent may be given before or after the appropriation). The chief difficulty lies in the means by which goods are unconditionally appropriated. Appropriation requires (Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyds Rep 240):

an irrevocable identification of the goods that are the subject of the contract (Sealy and Hooley, pp.31724) the assent of both parties. The contract can specify what amounts to appropriation, but often the identification and assent will be by the seller physically taking the goods to the buyer and the buyer accepting them, or the buyer going to the seller who hands over the goods. It is not sufficient for the seller merely to label goods or to store them separately (unless this is specified in the contract) since this leaves the possibility of the seller changing their mind and substituting other goods. The seller must unconditionally appropriate the goods to the contract. This action is, usually, the last act of the seller, that is, delivery of the goods. This does not necessarily make matters straightforward because under the SGA the sellers act of delivery is presumed to be merely making goods available for collection by the buyer (see section 5.2.2). There are some troublesome cases. In Aldridge v Johnson [1857] 7 E & B 885, there was appropriation before delivery when the seller placed the goods in containers supplied by the buyer, even though the seller could have unpacked the goods and replaced them with other goods. Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyds Rep 240, is more rigorous. There was no appropriation even though the seller packed the bicycles in crates marked with the buyers name. The only substantial distinction between this case and Aldridge is that in the latter the containers were supplied by the buyer, but that would not seem to go to the core of the matter, which should be that there is no appropriation until it is beyond the power of the seller to substitute goods. Handing goods to a carrier for transmission to the buyer, without reserving the right of disposal, may amount to unconditional appropriation by the seller (rule 5(2); Wardars (Import & Export) Co Ltd v W Norwood & Sons Ltd [1968] 2 QB 663; Sealy and Hooley, pp.32224). Such an action is also presumed to constitute delivery (s.32(1); see section 5.2.2). If the seller attaches conditions to the appropriation, property will not pass even though the goods are ascertained: for example, if the contract stipulates that the seller retains property in the goods until the buyer has paid, property will only pass when the condition has been met (see s.19 and also 6.3). Appropriation is only complete if the buyer signifies assent by, for instance, agreeing to take delivery of the goods. Unless the parties agree otherwise, the assent of the buyer does not have to take a particular form and can be implied. Where goods of the correct quality and description are appropriated by the seller to the knowledge of the buyer, the buyer cannot delay the passing of property by inaction (Pignataro v Gilroy [1919] 1 KB 459; Sealy and Hooley, p.320).

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Activity 4.7
Acme agrees to sell to Ecma 100 tons of wheat to be delivered on 31 August. On 31 August, Acme notifies Ecma that 100 tons of wheat have been set aside in Acmes warehouse and urges them to collect the wheat. The wheat is stolen from the warehouse on 10 September. Advise Acme.

4.4.7 Section 18, rules 5(3) and 5(4): ascertainment by exhaustion


Mustill J pointed out that ascertainment can be achieved by a method other than that in rule 5(1) (Karlshamns Oljefabriker v Eastport Navigation Corp: The Elafi [1981] 2 Lloyds Rep 679; Wait & James v Midland Bank [1926] 31 Com Cas 172; Sealy and Hooley, pp.300301). All that is necessary is that the goods should be ascertained and the parties intend property to pass. Where there is a sale of part of a ships cargo, the goods can be ascertained where the cargo is reduced by prior deliveries to the amount for which the buyer contracted, or where a single buyer purchases the whole cargo in different lots, and the parties intend property to pass. A agrees to buy 100 tons, which is part of a cargo of 1,000 tons on board MV Challenger. The rest of the cargo is bought by other purchasers. The ship delivers 900 tons to those other buyers. At that point A acquires property in the remaining 100 tons (assuming there is no contrary intention expressed in the sale contract). Mustill Js idea of ascertainment by exhaustion has been confirmed by rules 5(3) and 5(4), which were added to s.18 in 1995. Under 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 to less than) that quantity, then, if the buyer under that contract is the only buyer to whom goods are then due out of the bulk: a the remaining goods shall be taken as appropriated to that contract at the time when the bulk is so reduced, and b the property in those goods then passes to the buyer. Rule 5(4) states that: Paragraph (3) above applies also (with the necessary modifications) where a bulk is reduced to (or less than) the aggregate of the quantities due to a single buyer under separate contracts relating to that bulk and he is the only buyer to whom goods are then due out of that bulk.

4.4.8 Section 20A: unidentified part of identified bulk


Rule 5(3) does not deal with the situation where the buyer has bought an unidentified part of a specified bulk and the rest of the bulk remains intact: for example, 500 tons of wheat from a cargo of 1,000 tons on board the MV Challenger (Re Wait [1927] 1 Ch 606). The goods are unascertained and property cannot pass (s.16). A buyer, who has paid for the goods, will merely rank among the unsecured creditors if the seller becomes insolvent. On the other hand, the buyer is not at risk if the goods are lost (although see section 4.5 below). It makes no difference if two buyers together bought the entire 1,000 tons, although it is possible to create a tenancy in common. In Re Stapylton Fletcher Ltd [1995] 1 WLR 1181, wine was sold to customers and, although held by the seller, it was kept separately from the sellers own wine. It was not possible to identify which customer owned which wine, but it was held that the customers were tenants in common: the wine was ascertained by the transfer from the merchants own stock to storage for the customers. The Law Commission was asked to look into these issues. Its report led to ss.20A, 20B, which created a new species of property interest. The buyer, who has paid, can acquire co-ownership of the bulk with any other buyers, who have paid.

Commercial law 4 Sale of goods: contract, property and risk


The buyer will be an owner in common of the bulk (unless the parties agree otherwise s.20A(2)) if all the following circumstances are present: i There is a sale of a specified quantity of unascertained goods that form part of a bulk. A specified quantity is 500 tons of wheat and not half the cargo of wheat. In the latter case the buyer does not come within s.20A, but might be a tenant in common at common law.

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ii The bulk is identified in the contract or by subsequent agreement (s.20A(1)(a)). The bulk is 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 (s.61(1)). Examples given by the Law Commission of a bulk included wheat on a named ship, oil in a specified tank, or a specified roll of carpet from which a particular length is to be cut. iii The buyer has paid all or part of the price (s.20A(6)). Note that s.16 still applies to those goods for which the buyer has not paid so that property in them cannot pass until they become ascertained. The size of the buyers share of the bulk depends on the ratio that the quantity of goods paid for and due to the buyer bears to the bulk (s.20A(3)). This means that if the buyer has agreed to buy 100 litres of oil from a specified tank containing 1,000 litres and has paid, the buyer becomes a co-owner of the bulk in the ratio of 100:900. If a second buyer pays for 100 litres and a third buyer pays for 800 litres the co-ownership ratio is 100 (first buyer): 100 (second buyer): 800 (third buyer). The three parties are co-owners of the entire bulk and not owners of a particular part of the bulk. Where the bulk has diminished through, for example, natural wastage, or where the seller has sold more goods than are in the bulk, the total shares will exceed the size of the bulk. Here each co-owner will have the same interest in the reduced bulk (s.20A(4)). Taking our oil tank, if half of the bulk has been lost, the ratio will be 50:50:400. Goode (2004, p.227) suggests that where part of the bulk is not sold any diminution of the bulk should be borne first by the seller: for example, if the seller had made only one sale of 100 litres (for which the buyer paid) and the bulk is diminished to 980 litres, the loss should be entirely borne by the seller, so that the buyers interest in the bulk would be 100:880. Under s.20B(1), all the co-owners are deemed to consent to any delivery from the bulk to another co-owner. A co-owner, who receives no more than is due to that person under the contract, is not liable to any other co-owner for taking delivery and is not liable to compensate where there is a shortfall in the delivery to another co-owner (s.20B(2), (3)). If the seller has oversold and delivery of the entire bulk has been made to the other co-owners, a disappointed co-owner will only have a remedy against the seller.

Reflection point
Think about the difficulties explained in the paragraph above. Can you suggest any ways in which the rules might be improved? Record your thoughts in your Skills portfolio. If part of the price has been paid by the buyer, any part delivery to the buyer is ascribed in the first place to the goods in respect of which payment has been made (s.20A(5)). If the buyer of 2000 litres from a bulk of 10,000 litres has paid half the price and subsequently 500 litres are delivered, that buyers interest in the remaining bulk is calculated as follows: the 500 litres delivered are ascribed to the payment so the buyers interest in the bulk is now 500:9500. This maintains the principle that the buyers interest under s.20A is related to the payment made. Finally, under s.20B(1), all the co-owners are deemed to consent to any disposition of the goods by a co-owner and a sale by the co-owner is a contract of sale of goods because goods includes an undivided share in goods (s.61(1)), which is what a co-owner has under s.20B. This provision allows buyers to deal in goods while they are in transit.

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Summary
Where the goods are specific property will pass when the parties intend it to be transferred. If no intention is evident, the Act sets out the rules in s.18 for determining when property will pass. If the contract is for the sale of unascertained goods, no property in the goods is transferred to the buyer until the goods are ascertained (s.16). However, the parties may be tenants in common at common law or co-owners under s.20A.

Activity 4.8
a Fred agrees to buy all the hay in Janes barn at 100 per ton. Fred agrees to take the hay to a neighbouring farm where it can be weighed. Has property passed to Fred? b Mary agrees to buy 100 bags of hay from John. The price is fixed at 1,000 on the understanding that the bags contain in total 10 tons of hay. Mary later weighs the bags and discovers that they contain 9 tons. Has the property in the hay passed to Mary? c Jake goes into Marys furniture shop. He agrees to buy a set of kitchen units, which will be delivered on Monday. It is also agreed that workers employed by Mary will construct and fit the units on Tuesday. The units are delivered and placed in Jakes garage, which he locks. Someone breaks into the garage and steals the units on Monday night. Mary refuses to replace the units and demands payment from Jake. Did property pass to Jake before the theft? d Would Re Goldcorp Exchange Ltd be decidedly differently in the light of s.20A?

Commercial law 4 Sale of goods: contract, property and risk

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4.5 Risk
Essential reading

Sealy and Hooley, Chapter 2: Basic concepts of personal property, pp.7782. Which party bears the consequences of loss or damage to the goods? The general rule is that risk follows property: the owner of the goods bears any loss. Under s.20(1), the goods remain at the sellers risk until property is transferred to the buyer. This rule applies irrespective of which party has possession of the goods. (In passing we may note that the Sale and Supply of Goods to Consumers Regulations 2002, regulation 4, introduced s.20(4) to the Act, which provides that where someone buys as a consumer the goods remain at the sellers risk until delivery.) The general rule will not apply where:

The parties have agreed that risk should pass (for example, Head v Tattersall (1871) LR 7 Exch 7; Sealy and Hooley, p.278). The parties may agree that risk will pass even though the goods are unascertained (Sterns Ltd v Vickers Ltd [1923] 1 KB 78; Sealy and Hooley, pp.28081). The loss was caused by the fault of one party, in which case that party bears the loss (s.20(2); Demby Hamilton & Co Ltd v Barden [1949] 1 All ER 435, Sealy and Hooley, pp.27980). One party is the bailee of the goods and the loss occurs through their lack of reasonable care, in which case that party will be liable (s.20(3); Wiehe v Dennis Bros [1913] 29 TLR 250). The seller is required by the contract to send goods to the buyer, in which case delivery to a carrier is presumed to constitute delivery to the buyer, who, therefore, bears the risk of loss in transit (s.32. See also s.33).

Reflection point
Is this arrangement fair? Could the rules be improved? Where risk has passed before the buyer acquires the property in the goods or possession of them, and the goods are damaged through the negligence of the carrier, the buyer will not be able to sue the carrier (The Aliakmon [1986] AC 785). This rule has been effectively reversed where goods are carried by sea (Carriage of Goods by Sea Act 1992), but remains in other forms of transit.

Activity 4.9
a What risks do the seller and buyer run and which risks are dealt with under s.20(1) of the Act? b Acme contracts to buy 1,000 tons of wheat from a bulk of 10,000 tons held by Ecma in its warehouse and has paid. The warehouse burns down before any of the wheat is delivered. Who bears the loss?

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4.6 Perishing of goods and frustration of contract


Essential reading

Sealy and Hooley, Chapter 8: Passing of the property in the goods as between seller and buyer, pp.28293.

4.6.1 Specific goods perishing


Where there is a contract for the sale of specific goods, but the goods perished before the contract without the knowledge of the seller, the contract is void (s.6). Section 6 may apply even if only part of the goods has perished (Barrow, Lane & Ballard Ltd v Phillip Phillips & Co [1929] 1 KB 574; Sealy and Hooley, p.285). Under the contract one party (the seller or the buyer) may have agreed to take the risk that the goods do not exist at the time of the contract; in which case that party will be liable should the risk arise. Section 6 might seem to resemble the doctrine of common mistake in the general law of contract, but goods that have never existed cannot be said to have perished (as to whether s.6 reproduces the decision in Courturier v Hastie [1856] 5 HL Cas 673, see Sealy and Hooley, p.28384). The goods will have perished where they exist but have lost their commercial character: for example, dates perished where underwater for 2 days and impregnated with sewage (Asfar v Blundell [1896] 1 QB 123. The problem with this case is that it was not a decision under the Sale of Goods Act and there is a contrary if rather dubious authority, Horn v Minister of Food [1948] 2 All ER 1036). Under s.7, where there is an agreement to sell specific goods and, without any fault on the part of either party, the goods perish subsequent to the agreement and before the risk has passed to the buyer, the agreement is avoided. Note that this section does not apply where there is a contract of sale (for the difference between an agreement to sell and a contract of sale, see 4.2 above).

4.6.2 Unascertained goods perishing


Sections 67 do not apply to contracts for the sale of unascertained goods. If unascertained goods are sold by description (for example, 500 tons of wheat), the seller is obliged to deliver. The seller cannot seek to excuse non-delivery by showing that goods of that description were not available at the time of delivery. The seller takes the risk of this eventuality and must pay damages in the event of their being unable to deliver (Blackburn Bobbin Co Ltd v TW Allen & Sons Ltd [1918] 2 KB 467; Sealy and Hooley, p.287). The parties may, however, include a term (a force majeure clause) to excuse failure to deliver that is the result of certain events, such as war. Moreover, they may agree that the contract is to sell goods drawn from an identified source, such as from the cargo on a named ship. Where there was a contract of sale for 200 tons of regent potatoes grown on land belonging to [the farmer] in Whaplode, and, through no fault of the farmer, disease prevented the land from producing more than 80 tons, it was held that there was no breach. It was not an absolute contract of delivery under all circumstances, but a contract to deliver so many potatoes, of a particular kind, grown on a specific place, if deliverable from that place. (Howell v Coupland [1876] 1 QBD 258; Sealy and Hooley, p.289, Lord Coleridge CJ.) Note that, although the court held that this was a contract for specific goods, they were not identified and agreed on at the time of the contract and so are not specific goods under the subsequent Sale of Goods Act. If they are not specific goods, ss.67 do not apply and we must fall back on the common law. In other words, this decision might be treated as outside the framework of the Act and, therefore, as a rule of common law that has survived under s.62(2). (For an explanation of this decision, see HR & S Sainsbury Ltd v Street [1972] 1 WLR 834; Sealy and Hooley, pp.29092.)

Commercial law 4 Sale of goods: contract, property and risk


There is an obvious difficulty with treating as different those goods that are drawn from an identified source (sometimes called quasi-specific goods). To some degree all contracts for unascertained goods involve an identified source: the sale of a Bentley motor car restricts the pool of goods from which the appropriation can be made; the sale of a certain number of lengths of Norwegian timber identifies the only eligible source so that Swedish timber will not meet the obligation under the contract. It can, therefore, be said that all unascertained goods are drawn from an identified and limited source.

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4.6.3 Frustration
Aside from those situations already dealt with in which the goods are lost, the doctrine of frustration arises in sale contracts in the same way as in other types of contract: for example, through supervening illegality or impossibility caused by an unforeseen event. But it should be remembered that the courts are reluctant to invoke this doctrine and, in particular, have shown a disinclination to do so in sale contracts involving unascertained goods. Moreover, the doctrine of frustration will not apply where one party has agreed to run the risk of a particular loss or is responsible for that loss occurring.

Activity 4.10
Why is it more useful to resolve cases like Howell v Coupland by the use of an implied term than to use the doctrine of frustration?

Summary
The general rule is that risk of loss passes with property, but the parties may agree otherwise. Where there is a contract for the sale of specific goods and the goods perished before the contract without the knowledge of the seller, the contract is void. Where there is an agreement to sell specific goods and, without any fault on the part of either party, the goods perish subsequent to the agreement and before the risk has passed to the buyer, the agreement is avoided. In a contract for the sale of unascertained goods, the seller will not be excused from performance, unless the contract requires the goods to be drawn from a specified source when the courts may imply a term removing or modifying the obligation to perform in the event that this source is not available.

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4.7 Transfer of title


4.7.1 The nemo dat rule
Essential reading

Sealy and Hooley, Chapter 9: Transfer of title, pp.32831. Here we are concerned with situations in which someone, who has either no property or their rights are defective, disposes of the goods in circumstances that enable the buyer to acquire rights to the exclusion of the true owner. A thief sells a stolen car to an innocent purchaser, a rogue deceives the owner of goods into parting with them and then sells them to an innocent buyer, or a person misguidedly sells to an innocent buyer a car that is the subject of a hire purchase contract and is, therefore, the property of the finance company. In each of these cases the question is, who has title to the goods? At the outset it must be emphasised that the general rule is: where the 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 better title to the goods than the seller had (s.21(1)). This is known as the nemo dat quod non habet rule (or simply nemo dat). The owner can bring an action under the Torts (Interference with Goods) Act 1977 against anyone who has wrongful possession of the goods. Nevertheless there are exceptions to this general rule. Denning LJ explained: 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. (Bishopsgate Motor Finance Corporation Ltd v Transport Brakes Ltd [1949] 1 KB 322; Sealy and Hooley, pp.33031.) While the first principle (nemo dat) can be overridden by the second, the courts have, for the most part, clung to its fundamental importance. Lord Goff, after referring to the nemo dat rule in s.21(1), pointed out, The succeeding sections enact what appear to be minor exceptions to that fundamental principle (National Employers Mutual General Insurance Assocn Ltd v Jones [1990] 1 AC 24). Remembering this, we turn to consider the nature of the exceptions.

Nemo dat quod non habet (Latin): No-one (can) give what he or she has not got.

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4.7.2 Estoppel
Essential reading

Sealy and Hooley, Chapter 9: Transfer of title, pp.33142. The first exception to the nemo dat rule is contained in s.21(1) itself. The part of that section quoted above (section 4.7.1) is immediately followed by the words unless the owner of the goods is by his conduct precluded from denying the sellers authority to sell. Where the true owner of the goods represents to the buyer that the person selling is acting as an agent with authority to sell or is the owner, the owner may be estopped from denying that authority to sell and the buyer acquires good title (Henderson & Co v Williams [1895] 1 QB 521; Sealy and Hooley, pp.33435). A car owner, who wished to raise money on his car without selling it, was estopped when he colluded in a transaction with a car dealer under which the car was represented to a finance company as belonging to the dealer (Eastern Distributors Ltd v Goldring [1957] 2 QB 600; Sealy and Hooley, pp.33234). Merely handing possession of goods to another is usually not sufficient for this estoppel to arise because it will not amount to a representation. Carelessness in handing over possession of goods or documents of title is not enough because, a man who owns property is not under any general duty to safeguard it and he may sue for its recovery any person into whose hands it has come (Moorgate Mercantile Co Ltd v Twitchings [1977] AC 890, Lord Wilberforce; Central Newbury Car Auctions Ltd v Unity Finance Ltd [1957] 1 QB 371; Sealy and Hooley, pp.33738). It may be otherwise if it can be shown that the owner has breached a duty of reasonable care owed to the third party and that this induced the third party to buy the goods so that the negligence was the proximate cause of the buyers loss. In Mercantile Credit Co Ltd v Hamblin [1965] 2 QB 242 (Sealy and Hooley, pp.33940), the owner of a car signed forms in blank, without reading them, in the belief that they would enable a car dealer, who appeared to be respectable, to raise money on the security of the car. In fact, the dealer fraudulently used the forms to sell the car to a finance company. The Court of Appeal held that a duty of care existed between the owner and the finance company, but that there was no breach of that duty because she knew the dealer and reasonably believed him to be respectable, so that it was not negligent for her to sign the forms in blank. Moreover, two of the judges thought that, even if there had been negligence, it was not the negligence of the owner but the fraud of the dealer which caused the loss. On the other hand, by analogy with a case on the sale of land (Spiro v Lintern [1973] 1 WLR 1002), unreasonable behaviour by the owner in failing to correct a misrepresentation that the owner knows has been made to the seller could create an estoppel, if the seller acts on the basis of the misrepresentation and suffers loss as a consequence. In Shaw v Metropolitan Police Commissioner [1987] 1 WLR 1332, the Court of Appeal took a rather narrow view of the use in s.21(1) of the word sold as meaning that the estoppel principle did not apply where there was only an agreement to sell.

Activity 4.11
Why were Farquharson Bros not estopped from denying the title of the third party in Farquharson Bros & Co v C King & Co [1902] AC 325 (Sealy and Hooley, pp.33536)?

4.7.3 Sale under a voidable title


Essential reading

Sealy and Hooley, Chapter 9: Transfer of title, pp.35355. By s.23, the buyer, who buys in good faith and without notice of any defect in the title of the seller, will acquire good title if the goods are bought from a seller whose title is voidable but, at the time of the sale, it has not been avoided (Cundy v Lindsay [1878] 3 App Cas 459; Sealy and Hooley, pp.32829).

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There are many illustrations of a voidable contract familiar to students of the law of contract. To take one example, in Kings Norton Metal Co Ltd v Edridge, Merrett & Co Ltd [1897] 14 TLR 98, a manufacturer of metal received an order from Hallam & Co and in consequence sent goods. It turned out that Hallam & Co did not exist. The rogue resold the goods. It was held that the intention had been to contract with the writer of the order, and, although this intention had been induced by a fraudulent misrepresentation, that only made the contract voidable. Since it had not been avoided before the goods were resold to a third party, title passed to the latter. The first issue is whether property has passed from A (the original seller) to B (the rogue, who later sells the goods to C, the innocent buyer). If it has not s.23 will not operate. Where property has passed to B, A is likely to face some difficulty in avoiding the contract before title passes to a third party. This can be done by notifying B, but where B is a rogue this may not be possible. In Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 (Sealy and Hooley, pp.35455), it was held that if the rogue renders it impossible to make contact, the true owner need merely take such steps as the reasonable owner would take to recover the goods. Caldwell, a car owner who had been the victim of fraud, informed the police and the Automobile Association. After doing these things, the car was sold by the rogue to a car dealer. The dealer had had previous dealings with the rogue, which ought to have enabled them to infer that this transaction was fraudulent. The dealer then sold the car to a finance company, who bought in good faith and without notice. The Court of Appeal concluded that the dealer was not an agent of the finance company so that the latter did not have the dealers knowledge, but that Caldwell had done sufficient to avoid the contract by informing the police before the sale to the dealer. The value of this decision has been restricted by Newtons of Wembley Ltd v Williams [1965] 1 QB 560 (Sealy and Hooley, pp.36263. Two of the judges who sat in Caldwell also heard this appeal), where it was held that, even if the owner avoided the contract before the resale, title passed because the rogue was a buyer in possession and the sale was made in the ordinary course of business of a mercantile agent, that is, at a market for used cars (see s.25(1); section 4.7.5 below).

4.7.4 Seller in possession


Essential reading

Sealy and Hooley, Chapter 9: Transfer of title, pp.35559. This is where A, the seller, having sold the goods to B, then sells the same goods to C. If property has passed to B, but the seller is still in possession of the goods or documents of title to the goods, and the seller sells them to C, who purchases in good faith and without notice of the sale to B, this second transaction passes title to C. B has only an action for breach of contract against the seller (s.24. Section 8 of the Factors Act 1889 is almost identical). Possession includes where goods are not in the physical possession of the seller, but are under their control: for example, goods held by a warehouse owner to the order of the seller. The sellers possession does not have to be in any particular capacity or even lawful: It is sufficient if he remains continuously in possession of the goods that he has sold to the purchaser (Worcester Works Finance Ltd v Cooden Engineering Co Ltd [1972] 1 QB 210, Lord Denning MR). Lord Denning thought the section might not apply where the sellers possession had not been continuous (also, Pacific Motor Auctions Pty Ltd v Motor Credits (Hire Finance) Ltd [1965] AC 867; Sealy and Hooley, pp.35658. But Bridge (1998), pp.45759). For the second buyer to acquire good title, the seller must deliver possession of the goods or documents of title: merely contracting a second sale is not sufficient to give title to the second buyer. In Michael Gerson (Leasing) Ltd v Wilkinson [2001] QB 514, machinery was sold to a finance company and leased back to the seller, who then sold it to a second finance company and leased back; at all times the machinery remained in the possession of the seller, but it was held that the sellers acknowledgement to the finance company that the machines were being held on its behalf amounted to a delivery.

Commercial law 4 Sale of goods: contract, property and risk


By documents of title is meant those documents used in the ordinary course of business as proof of the possession or control of goods, or authorising or purporting to authorise, either by indorsement or delivery, the possessor of the document to transfer or receive goods (s.61(1), see also Factors Act 1889, s.1(4). See Sealy and Hooley, pp.35859). Note SGA gives the seller the right to resell goods and pass property to the new buyer where the seller retained possession and the price has not been paid by the original buyer (see 6.2).

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4.7.5 Buyer in possession


Essential reading

Sealy and Hooley, Chapter 9: Transfer of title, pp.35968. In this situation it is the buyer who has acquired possession of the goods and sells to a second buyer. Where a person having bought or agreed to buy goods obtains, with the consent of the seller, possession of the goods or 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 any lien or other right of the original seller in respect of the goods, has the same effect as if the person making the delivery or transfer were a mercantile agent in possession of the goods or documents of title with the consent of the owner. (s.25(1)) Section 9 of the Factors Act 1889 is similar (but see DF Mount Ltd v Jay & Jay (Provisions) Co Ltd [1960] 1 QB 159; Sealy and Hooley, pp.36567). The goods or documents of title (4.7.4 above) must have been obtained under a sale or agreement to sell (bought or agreed to buy), so a void contract is insufficient, as is acquisition as a bailee or under a hire-purchase contract or under a sale or return agreement (s.18, rule 4). The provision that the transaction will have the same effect as if the person making the deliverywere a mercantile agent means that the buyer in possession is placed in the position of a mercantile agent and the second buyer must show that the sale was in the ordinary course of business of a mercantile agent (Newtons of Wembley Ltd v Williams [1965] 1 QB 560; Sealy and Hooley, pp.36163. On mercantile agents see section 2.2.2 above). The words with the consent of the owner at the end of s.25(1) prevent the nonsense of a thief starting the whole chain of events and still passing good title. There can only be a buyer in possession where possession of the goods or documents of title has been obtained with the consent of the owner (National Employers Mutual General Insurance Assocn Ltd v Jones [1990] 1 AC 24; Sealy and Hooley, pp.36364). Yet, it matters not how that consent was obtained fraud is enough even though this may amount to theft (Pearson v Rose & Young Ltd [1951] 1 KB 275; Sealy and Hooley, p.346). On the meaning of disposition in s.25(1), see P4 Ltd v Unite Integrated Solutions plc [2006] EWHC 2640 (TCC).

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4.7.6 Sale under the Factors Act 1889, s.2


Essential reading

Sealy and Hooley, Chapter 9: Transfer of title, pp.34252. Merely being in possession of goods or documents of title does not, in itself, amount to a representation that the possessor has authority to sell those goods and to pass good title (see 4.7.2 above). However, where the person in possession is a factor (now normally called a mercantile agent), the buyer may acquire good title. A mercantile agent is an agent who is entrusted with the possession of goods or documents of title to goods and who is allowed to dispose of them, either in the agents own name or as a principal (see 2.2.2 above). Under Factors Act 1889, s.2(1), a sale, pledge, or other disposition shall be as valid as if expressly authorised by the owner of the goods where all the following are present:

The disposition is by a mercantile agent (Jerome v Bentley [1952] 2 All ER 114; Sealy and Hooley, p.330). The mercantile agent is in possession of goods or of the documents of title to goods with the consent of the owner (see s.2(2), (3)). The owner must have specifically consented to the person having possession in their capacity as mercantile agent and not in some other capacity (for example, handing over goods for repair). Consent is given even though obtained by deception (Folkes v King [1923] 1 KB 282; Sealy and Hooley, p.349). It might plausibly be suggested that such consent is not consent at all, but the courts have tended to protect the innocent third party in such situations (but Pearson v Rose & Young Ltd [1951] 1 KB 275). Once consent has been given it continues, in spite of the owner terminating such consent, unless the person dealing with the agent has notice of that termination (s.2(2)). The problem for the buyer is to know in what capacity the agent received possession of the goods. As in this whole area of nemo dat, we are confronted with Denning LJs competing principles of public policy outlined in Bishopsgate Motor Finance Corporation (4.7.1 above). The disposition is made when acting in the ordinary course of business of a mercantile agent. The person taking under the disposition must have acted in good faith and that at the time of disposition must not have had notice of the mercantile agents lack of authority (Heap v Motorists Advisory Agency Ltd [1923] 1 KB 577; Sealy and Hooley, pp.35152).

Activity 4.12
Why did the buyer in Pearson v Rose & Young Ltd [1951] 1 KB 275 not acquire good title to the car? Note: you will need to read the case to answer the question.

4.7.7 Motor vehicles let under hire purchase


Essential reading

Sealy and Hooley, Chapter 9: Transfer of title, pp.36869. Part III of this act (substantially re-enacted by the Consumer Credit Act 1974, schedule 4) means that a private purchaser obtains title where they acquire a motor vehicle for value and without notice from someone who is in possession under a hire-purchase or conditional sale agreement.

4.7.8 Powers of sale and resale


Essential reading

Sealy and Hooley, Chapter 9: Transfer of title, pp.352 and 368. Section 21(2)(b) provides that nothing in the Act affects the validity of any contract of sale under any special common law or statutory power of sale or under the order of a court of competent jurisdiction. This retains powers of sale granted to pledgees, bailees, innkeepers, pawnbrokers, liquidators and others, which enable them to pass title to the buyer. See Chapter 6 section 6.2.6, which discusses the sellers rights of resale where the buyer has failed to pay.

Commercial law 4 Sale of goods: contract, property and risk

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Activity 4.13
What general principle applies where someone acquires goods from a person who is not their owner?

Useful further reading

Bridge, M. Personal property law. (Oxford: Oxford University Press, 2002), pp.11536.

Summary
The general rule is that a buyer cannot acquire a better title than that of the seller. This rule can be overridden in particular situations where someone, who takes in good faith and for value without notice, will acquire good title and will, therefore, be able to resist the claims of the original owner. It must be emphasised that these are narrow exceptions and that, on the whole, the courts have had greater regard for the general rule.

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Reminder of learning outcomes


By this stage you should be able to:

discuss the approach taken to interpretation of the Sale of Goods Act analyse the components of the definition of a contract of sale explain the circumstances in which property in goods is passed identify how risk is passed understand the nemo dat rule discuss and illustrate the exceptions to the nemo dat rule.

Sample examination question


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. (Denning LJ) Discuss. Advice on answering the question Many students would tackle such a question by explaining the nemo dat rule in s.21(1) and then listing the exceptions in the Act and the Factors Act. While you would certainly get credit for this, it is important always to address the question asked and here the question does not ask for a straightforward list. What is being sought is a discussion of Denning LJs view that there is a battle between these two principles. Thus, better candidates will go beyond a mere list of the rule and its exceptions and consider other matters. You need to show an understanding of the issues underlying this area of law. What is the law seeking to achieve? Why do these rules exist in this form? Do they achieve their objective(s)? It is by engaging in analysis that you will demonstrate the thorough understanding of the law which will enable you to obtain higher marks. You might tackle this question by looking at the following questions. What are the two principles? Is Dennings view of the relationship correct, or was Lord Goff closer to the truth when he said that those sections in the Act that followed s.21(1) appear to be minor exceptions to that fundamental principle (National Employers Mutual General Insurance Assocn Ltd v Jones [1990] 1 AC 24)? Do the exceptions undermine the nemo dat principle too much? Is the nemo dat principle too rigid? Why has parliament (and the courts?) given protection to (a) the owner and (b) the interests of innocent third parties? Has there been a shift in favour of the latter and, if so, why has this happened (again see Denning LJ)? How is the balance to be struck between the interests of the owner of the goods and those of the innocent third party? What problems exist in this area and what reforms might be suggested? What do we mean by discuss? A discussion between two friends is different to the meaning of the word in an exam questions. Write down your thoughts in your Skills portfolio.

Commercial law 4 Sale of goods: contract, property and risk

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Reflect and review


Look through the points listed below: Are you ready to move on to the next chapter? Ready to move on = I am satisfied that I have sufficient understanding of the principles outlined in this chapter to enable me to go on to the next chapter. Need to revise first = There are one or two areas I am unsure about and need to revise before I go on to the next chapter. Need to study again = I found many or all of the principles outlined in this chapter very difficult and need to go over them again before I move on. Tick a box for each topic. Ready to move on I can discuss the approach taken to interpretation of the Sale of Goods Act. I can analyse the components of the definition of a contract of sale. I can explain the circumstances in which property in goods is passed. I can identify how risk is passed. I can understand the nemo dat rule. I can discuss and illustrate the exceptions to nemo dat rule. Need to revise first Need to study again

If you ticked need to revise first, which sections of the chapter are you going to revise? Must revise 4.1 4.2 4.3 4.4 4.5 4.6 4.7 The Sale of Goods Act What is a contract of sale of goods? Components of the sale contract Passing of property Risk Perishing of goods and frustration of contract Transfer of title Revision done