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4 Sale of goods: contract, property and risk

Contents4 1 4 2 4 3 4 4 4 5 4 6 4 7 Introdu

ction

56 The Sale of Goods Act

57 What is a contract of saleof 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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University of London External Programme

IntroductionThe 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. Thereare, however, some special features of sale contracts. The most significant arethe terms implied into the sale contract by the Sale of Goods Act 1979. In thischapter we look at the Sale of Goods Act, the definition of a sale contract, therules 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 hasbeen a breach of the contract. It is worth noting that in some aspects this Actdistinguishes between consumer and nonconsumer sale contracts. This part of thecourse concentrates on the latter, that is, on sales between business people.

Note: the Sale of Goods Act 1979 isreferred to here as `the Act' or `SGA'. Referenc

es to sections from the Act are merely notedby their section number: for example, `s.14(1)' refers tosection 14(1), Sale of Goods Act 1979.

Learning outcomesBy 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 readingThe 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.

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

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4.1 The Sale of Goods Act4.1.1 The ActThe original Sale of Goods Act 1893 was an attempt to codify much of the commonlaw on sale contracts. The Act, therefore, was shaped by the fact that the caselaw 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 contractsmight not serve the needs of consumers. In providing greater protection for theconsumer, 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 changein the main implied term as to quality. In the 1893 Act goods were required tobe 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 b

een reinforced by the Unfair Contract Terms Act 1977 and by the Sale and Supplyof Goods to Consumers Regulations 2002, which restrict the ability of sellers tocontract 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 confusio

n and to calls for separate codes for the different types of sale.

4.1.2 Interpreting the Sale of Goods Act 1979Essential 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 (forexample, 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 Excha

nge Act 1882: I think the proper course is in the firstinstance to examine the language of the statuteand to ask what is its rational meaning,uninfluenced by any considerations derived from the previous state of the law, and not to start withinquiring how the law previously stood, and then,assuming that it was probably intended toleave it unaltered, to see if the words ofthe enactment will bear an interpretation in conformity with this view. (Bank of England v Vagliano Brothe

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rs [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 Ido 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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University of London External Programmeis 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 ithad been established into a statutory code.' (Also Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd's Rep 240; Sealy and Hooley, pp.32022.) The mostrecent 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 theAct, including provisions drawn from the 1893 Act, was written at one time. Potter LJ explained (Stevenson v Rogers [1999] QB 1028): The [Sale ofGoods] Act of 1979 forms a single code; however,that is upon the basis simply that it consolidatesand enacts within one statute and without material amendment a number of disparate statutes previouslygoverning the field of sale of goods. While, inthe first instance, a consolidating Act is tobe construed in the same way as any other,if real doubt as to its legal meaning arises, itswords are to be construed as if they remainedin the earlier Act. Thus, in terms of the properconstruction of its provisions, the Act of 1979

is not to be regarded as more than thesum 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 thefreedom of the parties to engage in more sophisticated agreements than were envisaged by the courts in the nineteenth century. He urged that, the Actought not to be construed so narrowly asto force upon parties to contracts for the saleof goods promises and consequences different fromwhat they must reasonably have intended. Instead,[its provisions] should be treated as illustrations ofthe application to simple types of contract ofgeneral principles for ascertaining the common intention

of the parties as to their mutual promises andtheir consequences, which ought to be applied by analogyin cases arising out of contracts which do notappear to have been within the immediate contemplationof the draftsman of the Act in 1893I believethat the basic principle of the English common lawof contract, including that part of it whichis codified in the Sale of Goods Act 1893,is to give effect to the common intention ofthe parties as to their mutual promises in thesense that I have just described, I prefer todeal 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, beforeexamining the particular provisions of the codeupon which the parties rely. Go to your study pack and read the extractfrom Ashington Piggeries Ltd v Christopher Hill Ltd.

Activity 4.1What problems are posed by Lord Diplock's 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

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the problems are in Lord Diplock's approach. You should make your own analysis andgive your opinion. Universities want their students to be independent thinkerswho can express their own opinions based on the material they have studied. Thismeans making up your own mind about the principles and objectives that ought toguide 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 whatthey 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 viewthat civil law systems are superior to common law systems. You may decide thatthere are few, or no problems in Lord Diplock's 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 theseller transfers [called a sale: s.2(3)] or agrees totransfer [an agreement to sell: s.2(4)] the propertyin 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 salesContract of bailment This is where goods are delivered on terms requiring theirreturn 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 bywhich someone can buy goods by making payments over a period of time. However, i

t 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 occurif 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 saleif the contract stipulates that property will pass at some specified time in thefuture (Forthright Finance Ltd v Carlyle Finance Ltd [1997] 4 All ER 490; Sealyand Hooley, p.264). This will be an agreement to sell (s.2(5)) as opposed to acontract 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 aproprietary 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 Pand P has authorised or later ratifies the purchase, there is an agency contractbetween 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 Aand 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 agas fitter installs a new central heating boiler, one might be able to suggestthere are two contracts, one for the labour (contract for work) and one for theboiler (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 notbe 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 contractof 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 `onlyancillary' or if `the substance of the contract is the skill and experience of theartist in producing the picture.' (Robinson v Graves [1935] 1 KB 579; Sealy and Ho

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oley, 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 situationthere is a sale of goods because `the principal part of that which the parties aredealing 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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University of London External ProgrammeThis 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 tobe able to discern any clear principle. Problems have resulted from attempts insome 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 Upjohn's 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. Thishas been reinforced by the Supply of Goods and Services Act 1982, which impliesterms with respect to the goods supplied that largely match those implied intoa 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 intohire purchase contracts by the Supply of Goods (Implied Terms) Act 1973, although significant differences remain between sale and hire-purchase contracts.

SummaryA sale contract is defined by s.2(1) SGA. The components of that definition mustbe 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 contractsinvolving 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 contract

s involving the supply of goods.

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4.3 Components of the sale contractThe components of the definition in s.2(1) (see 4.2, above) are examined in thissection.

4.3.1 PriceEssential reading

Sealy and Hooley, Chapter 7: `Introduction and definitions', pp.25861, 272. The pricemust 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 inwhich case there is no contract (but see s.8, 9).

Activity 4.2a Jake wishes to buy a new car priced at 7,000 from Mary, a dealer. Mary agrees to take Jake's 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 `goodsn s.2(1) includes: all personal chattels other than thingsin action and moneyand in particular `goods' includesemblements, industrial growing crops, and things attachedto or forming part of the land which are agreedto be severed before sale or under the contractof sale; and includes an undivided share ingoods (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 tookthe 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 notesthemselves and not from their role as legal tender (Moss v Hancock [1899] 2 QB111). The Act does cover crops that are attached to the land, although these arealso land within the meaning of the Law of Property Act 1925, s.205 (Kursell vTimber 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 g

oods (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

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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 theother 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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University of London External ProgrammeProperty 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 anindividual and a thing: The touchstone of a propertyright is its universality: it can be assertedagainst the world at large and not, for example,only against another individual such as the contractingpartner. If, under a contract of sale, Iacquire the ownership of a chattel, my propertyright to the chattel may be asserted not justagainst the seller but against the whole world. (M. BridgePersonal Property Law. (Oxford: Oxford University Press, 2002),p.12. If A sells her car to B, B can assert the property right acquired, notonly against A, but also against others even though they are not parties to thecontract. 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 toown 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 isbeing transferred? According to s.61(1) it is `the general property in goods, andnot 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 seller's full legal interest does not constitute a sale: for example, bailment does not come within the SGA because it does not transfer the owner's 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.1

2(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 futureand as specific or unascertained. This categorisation occurs at the time of thecontract. Existing goods are those owned or possessed by the seller at the timeof the contract (s.5(1)). Future goods are to be manufactured or acquired by theseller 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 asale 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 arespecific goods (s.61(1)) if they are not identified at the time of the contractthey 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.

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Commercial law 4 Sale of goods: contract, property and riskTypically, future goods will be unascertained. If the buyer agrees to buy a newBentley 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 ReWait [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 andso 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 wasstored as part of the company's 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) [ISBN0199254761] particularly, pp.1215, 2627, 2831, 8093. Goode (2004), pp.3145.

SummaryThe 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 dealtwith in 4.4.8).

Go to your study pack and read `The concepts of property, title and owner used inle 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

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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 particularsecond-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 therelevant 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 propertyEssential reading

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

4.4.1 General principlesi `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] 2KB 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 titl

e 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 andthe circumstances of the case' (s.17(2)). Property may still pass even though thetime for payment or delivery has not arrived (but see the remarks of Diplock LJquoted 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 Brando

n in Leigh v Sillavan Ltd v Aliakmon Shipping Co Ltd, The Aliakmon [1986] AC 785): It would have been futile in a code intendedfor commercial men to have created an elaboratestructure of rules dealing with rights at law, ifat the same time it was intended to leave,subsisting with the legal rights, equitable rights inconsistent with, more extensive, and coming into existenceearlier than the rights so carefully set out inthe various sections of the code. Nevertheless, he did goon to say that the provisions in the Act have: no relevance whenone is considering rights, legal or equitable, whichmay come into existence dehors [outside] the contractfor 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 ordisposition of goods, the subject matter of sale; andhe may, of course, create such an equity as oneof the terms expressed in the contract ofsale. 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, andthe 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. Se

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e Re London Wine Co (Shippers) Ltd [1986] PCC 121, Sealy and Hooley, pp.29498; ReGoldcorp Exchange Ltd (in receivership) [1995] 1 AC 74). But see also Re Stapylton Fletcher Ltd [1995] 1 WLR 1181 (section 4.4.8).

Activity 4.4Why 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 yourspoken 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 stateWhere there is an unconditional contract for thesale of specific goods in a deliverable statethe property in the goods passes to the buyerwhen the contract is made, and it is immaterial whether the time of payment or the time ofdelivery, or both, be postponed. In spite of its wording, Diplock LJ remarked of this rule: `the governing rule is in s.17, and in moderntimes 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] 1QB 534). The phrase ùnconditional contract' cannot mean that a contract must not have conditions of any sort because all contracts of sale have conditions, such asthat the buyer will pay and the seller will deliver and the goods will be of satisfactory quality. Ùnconditional' must refer to something in the contract of salethat prevents the operation of rule 1, and this would include the situations inrules 2 and 3. Goods are ìn a deliverable state', `when they are in such a state thatthe 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 i

n a `deliverable state' until detached. It is only when the seller must do somethingthat 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 withfuture, specific goods, which would seem to come within rule 1. This is resolvedby 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 untilthe 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 4.5A 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 p

oint does the property in the trees pass?

4.4.3 Section 18, rule 2: goods not in deliverable stateWhere there is a contract for the sale of specific goods and the seller is boundto do something to the goods for the purpose of putting them into a deliverablestate, 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 ina 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 hasundertaken 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 cov

er 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 ascertainedIf the seller of specific goods in a deliverable state is required to carry outsome 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 wi

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ll 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 returnWhere 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 onthe 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 aretailer's uncertainty about demand for a product, which, in turn, may affect theability to pay and, hence, the element of credit (Atari Corporation (UK) Ltd vElectronics Boutique Stores (UK) Ltd [1998] QB 539. Contrast with reservation oftitle clauses, discussed at 6.3 below). Strictly, there is no contract of saleor agreement to sell, but only an offer by the `seller', which the `buyer' may accept oreject. Phillips LJ remarked that `the notice of rejection referred to by the Actof 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 wh

ch 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 reasonale care of them. The `seller' may not withdraw the offer to sell. The sale or returnmust 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 àn act adopting the transaction'; (ii) what amounts to a reasonable time; (iii) what constitutes a notice of rejection and what effect does it have?

i

What constitutes àn act adopting the transaction'? If an act indicates personal useby the `buyer', which goes beyond what is contemplated by the arrangement, this might amount to àn act adopting the transaction' (Poole v Smith's 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 Smith's Car Sales (Balham) Ltd [1962] 1 WLR 744; Sealy an

d 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 howthe `buyer' is to signify rejection of the goods, or what is the responsibility ofthe `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 withoutreturn of the goods. The `buyer' must make the goods available to the `seller' within

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reasonable period of time after rejection.

Activity 4.6a 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 cantake the horse for 10 days in order to determine its suitability. After a weekthe 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 andappropriationWhile 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 Lloyd's 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 specifywhat amounts to appropriation, but often the identification and assent will beby 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 sellerchanging their mind and substituting other goods. The seller must unconditionally appropriate the goods to the contract. This action is, usually, the last actof the seller, that is, delivery of the goods. This does not necessarily make matters straightforward because under the SGA the seller's act of delivery is presumed to be merely making goods available for collection by the buyer (see section5.2.2). There are some troublesome cases. In Aldridge v Johnson [1857] 7 E & B 8

85, there was appropriation before delivery when the seller placed the goods incontainers supplied by the buyer, even though the seller could have unpacked thegoods and replaced them with other goods. Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd's Rep 240, is more rigorous. There was no appropriation even though the seller packed the bicycles in crates marked with the buyer's 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 togo 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 acarrier for transmission to the buyer, without reserving the right of disposal,may amount to unconditional appropriation by the seller (rule 5(2); Wardar's (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 sec

tion 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 contractstipulates 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 4.7Acme 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 Acme'swarehouse 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): ascertainmentby exhaustionMustill J pointed out that ascertainment can be achieved by a method other thanthat in rule 5(1) (Karlshamns Oljefabriker v Eastport Navigation Corp: The Elafi[1981] 2 Lloyd's 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 ofa ship's cargo, the goods can be ascertained where the cargo is reduced by priordeliveries to the amount for which the buyer contracted, or where a single buyerpurchases the whole cargo in different lots, and the parties intend property topass. A agrees to buy 100 tons, which is part of a cargo of 1,000 tons on boardMV 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 theremaining 100 tons (assuming there is no contrary intention expressed in the sal

e contract). Mustill J's idea of ascertainment by exhaustion has been confirmed byrules 5(3) and 5(4), which were added to s.18 in 1995. Under rule 5(3): Wherethere is a contract for the sale of aspecified quantity of unascertained goods in adeliverable state forming part of a bulk which isidentified either in the contract or by subsequent agreement between the parties and the bulk isreduced to (or to less than) that quantity, then,if the buyer under that contract is the onlybuyer to whom goods are then due out of thebulk: a the remaining goods shall be taken asappropriated to that contract at the time whenthe bulk is so reduced, and b the property

in those goods then passes to the buyer. Rule 5(4) statesthat: Paragraph (3) above applies also (with the necessarymodifications) where a bulk is reduced to (orless than) the aggregate of the quantities dueto a single buyer under separate contracts relatingto that bulk and he is the only buyer towhom goods are then due out of that bulk.

4.4.8 Section 20A: unidentified part of identifiedbulkRule 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 atrisk 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 seller's 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 merchant's own stock to storage for t

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he customers. The Law Commission was asked to look into these issues. Its reportled 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, whohave paid.

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Commercial law 4 Sale of goods: contract, property and riskThe 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 saleof à 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 cae 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 à 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 areinterchangeable 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 buyer's 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 thebuyer 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 of100:900. If a second buyer pays for 100 litres and a third buyer pays for 800 li

tres the co-ownership ratio is 100 (first buyer): 100 (second buyer): 800 (thirdbuyer). The three parties are co-owners of the entire bulk and not owners of aparticular 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 havethe 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 beborne first by the seller: for example, if the seller had made only one sale of100 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 buyer's interest inthe 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 n

o more than is due to that person under the contract, is not liable to any otherco-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 hasoversold and delivery of the entire bulk has been made to the other co-owners, adisappointed co-owner will only have a remedy against the seller.

Reflection pointThink 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 deliveryto the buyer is àscribed 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 bu

yer's interest in the remaining bulk is calculated as follows: the 500 litres delivered are ascribed to the payment so the buyer's interest in the bulk is now 500:9500. This maintains the principle that the buyer's interest under s.20A is relatedto 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-owneris 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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SummaryWhere the goods are specific property will pass when the parties intend it to betransferred. If no intention is evident, the Act sets out the rules in s.18 fordetermining 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 4.8a Fred agrees to buy `all the hay' in Jane's barn at 100 per ton. Fred agrees to take he 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 Mary's 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 Jake's garage, which he locks. Someone breaks into the gara

ge 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 ReGoldcorp Exchange Ltd be decidedly differently in the light of s.20A?

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4.5 RiskEssential 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 seller's risk until property is transferred to the buyer.This rule applies irrespective of which party has possession of the goods. (Inpassing 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 seller's risk until delivery.) Thegeneral 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 willpass even though the goods are unascertained (Sterns Ltd v Vickers Ltd [1923] 1KB 78; Sealy and Hooley, pp.28081). The loss was caused by the fault of one part

y, 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 whichcase 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 pointIs 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 thegoods 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 4.9a 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 be

fore any of the wheat is delivered. Who bears the loss?

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4.6 Perishing of goods and frustration of contractEssential 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 perishingWhere there is a contract for the sale of specific goods, but the goods perishedbefore 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 acontrary 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, withoutany 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. Notethat 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 perishingSections 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 show

ing 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 landbelonging 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 therewas 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 aspecific place, if deliverable from that place.' (Howell v Coupland [1876] 1 QBD 2

58; 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 andwe 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 lawthat 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.)

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Commercial law 4 Sale of goods: contract, property and riskThere is an obvious difficulty with treating as different those goods that are drawn from an identified source (sometimes called quasi-specific goods). To somedegree 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 obligationunder the contract. It can, therefore, be said that all unascertained goods aredrawn from an identified and limited source.

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4.6.3 FrustrationAside from those situations already dealt with in which the goods are lost, thedoctrine 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 todo 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 4.10Why is it more useful to resolve cases like Howell v Coupland by the use of an i

mplied term than to use the doctrine of frustration?

SummaryThe general rule is that risk of loss passes with property, but the parties mayagree 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, withoutany 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 acontract 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 specifi

ed source when the courts may imply a term removing or modifying the obligationto perform in the event that this source is not available.

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4.7 Transfer of title4.7.1 The nemo dat ruleEssential 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 acquirerights 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 andthen 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 generalrule 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 buyeracquires 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 g

eneral rule. Denning LJ explained: In the development of ourlaw, two principles have striven for mastery. Thefirst is for the protection of property: noone can give a better title than he himself possesses. The second is for the protection of commercial transactions: the person who takes in good faithand 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 themost 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 turnto consider the nature of the exceptions.

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

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4.7.2 EstoppelEssential 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 quotedabove (section 4.7.1) is immediately followed by the words `unless the owner of the goods is by his conduct precluded from denying the seller's authority to sell'. Where the true owner of the goods represents to the buyer that the person sellingis 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 hecolluded in a transaction with a car dealer under which the car was representedto 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 ofgoods to another is usually not sufficient for this estoppel to arise because itwill not amount to a representation. Carelessness in handing over possession ofgoods 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 pers

on 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 partyand that this induced the third party to buy the goods so that the negligence was the proximate cause of the buyer's 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 negligen

t 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 witha 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 4.11Why 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 titleEssential 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 void

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able 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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University of London External ProgrammeThere are many illustrations of a voidable contract familiar to students of thelaw 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 inducedby a fraudulent misrepresentation, that only made the contract voidable. Sinceit 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 athird 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 thatthe dealer was not an agent of the finance company so that the latter did not have the dealer's 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 possessionEssential 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 haspassed to B, but the seller is still in possession of the goods or documents oftitle to the goods, and the seller sells them to C, who purchases in good faithand 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 8of 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: forexample, goods held by a warehouse owner to the order of the seller. The seller'spossession does not have to be in any particular capacity or even lawful: `It issufficient if he remains continuously in possession of the goods that he has sol

d 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 seller's possession had not been continuous (also, Pacific Motor AuctionsPty 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 possessio

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n of the seller, but it was held that the seller's acknowledgement to the financecompany that the machines were being held on its behalf amounted to a delivery.

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4.7.6 Sale under the Factors Act 1889, s.2Essential 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 representationthat 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 agent's own nameor 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 besuggested 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 whatcapacity the agent received possession of the goods. As in this whole area of nemo dat, we are confronted with Denning LJ's competing principles of public policyoutlined 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 agent's lackof authority (Heap v Motorists' Advisory Agency Ltd [1923] 1 KB 577; Sealy and Hooley, pp.35152).

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

4.7.7 Motor vehicles let under hire purchaseEssential 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 aprivate purchaser obtains title where they acquire a motor vehicle for value andwithout notice from someone who is in possession under a hire-purchase or conditional sale agreement.

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4.7.8 Powers of sale and resaleEssential 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 passtitle to the buyer. See Chapter 6 section 6.2.6, which discusses the seller's rights of resale where the buyer has failed to pay.

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Activity 4.13What general principle applies where someone acquires goods from a person who isnot their owner?

Useful further reading

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

SummaryThe general rule is that a buyer cannot acquire a better title than that of theseller. This rule can be overridden in particular situations where someone, whotakes 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 outcomesBy 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 firstis 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 sudents 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 beingsought is a discussion of Denning LJ's view that there is a battle between these `tw

o principles'. Thus, better candidates will go beyond a mere list of the rule andits exceptions and consider other matters. You need to show an understanding ofthe issues underlying this area of law. What is the law seeking to achieve? Whydo these rules exist in this form? Do they achieve their objective(s)? It is byengaging in analysis that you will demonstrate the thorough understanding of thelaw 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 Denning'sview of the relationship correct, or was Lord Goff closer to the truth when hesaid that those sections in the Act that followed s.21(1) `appear to be minor exceptions to that fundamental principle' (National Employers' Mutual General InsuranceAssocn 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 t

hird parties? Has there been a shift in favour of the latter and, if so, why hasthis 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.

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page 1

Reflect and reviewLook 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 torevise 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 cananalyse 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 ispassed. 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 torevise? Must revise 4.1 4.2 4.3 4.4 4.5 4.6 4.7 The Sale of Goods Act What is acontract of sale of goods? Components of the sale contract Passing of propertyRisk Perishing of goods and frustration of contract Transfer of title Revision done

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