Reforms of the Sale of Goods

The linkage between passing of property and the ascertainment of the contractual goods as required by section 16 of the Sale of Goods Act 1979 (as amended) presented major problems for buyers of bulk shipments or bulk consignments of goods. These problems have now been largely resolved as a result of the reforms introduced by the Sale of Goods (Amendment) Act 1995.’

Transfer of Property: The Significance

Ss 16-19 of the Sale of Goods Act 1979 set out the rules regarding transfer of property. The importance of the passing of property is not merely a fundamental obligation of the contract [1] , it also affects a wide range of rights of buyers and sellers.

Firstly, until the property passes to the buyer or possession has been delivered to him, his rights appear to rest solely in contract and have no interest of any kind in the goods pending acquisition of the legal title. [2]

S 20 also illustrates that risk passes with property, for instance if the goods are damaged or lost, if property has passed, the buyer will have to bear the liability and pay for the goods.

Furthermore, if there is a contract and buyer refuses to accept delivery, buyer may sue for the price if property has passed [3] . Otherwise, seller may only be entitled for damages for non-acceptance.

In the event of liquidation of either seller or buyer, the rights over the goods will depend on whether property has passed. If the seller becomes bankrupt without having delivered the goods, and property remains with seller at the date of commencement of bankruptcy, the buyer is only left being an unsecured creditor in competition with other creditors. Conversely, if property has passed, but the buyer has not paid for the goods before he goes bankrupt, the seller is entitled to assert his property rights and repossess the goods.

It is only until the buyer has the ownership in the goods that he can transfer the ownership to any further person. If a buyer sells goods to a third party and property has passed to him from the seller, despite that he has not paid for them, the seller will still be unable to recover the goods from the third party. Subject to certain exceptions, the general rule is that only the owner of goods can dispose of them to another so as to pass a good title, also known as nemo dat quod non habet. [4] Hence it denotes that a buyer will only have a right to disposal when the property passes to him, and the seller will only have an action in tort against third parties only when he has a proprietary or possessory interest in the goods at the time of the act complained of [5] .

The next significance will be the seller’s tracing rights. If the buyer sells goods which still belong to the seller, the seller may have a common law personal right to follow the proceeds into the hands of the buyer and subsequent recipients and/or an equitable right to trace, as a result of the Romalpa [6] case. [7]

Operation of the Law

As stipulated in the statement under discussion, Ss 16-19 application differs according to the different types of goods. There are generally two types of goods, namely ‘specific’ and ‘unascertained’ goods. S 61 provides specific goods means goods identified and agreed on at the time of a contract of sale is made. [8] On the other hand, unascertained goods are goods not identified at the time of the contract but depend on some subsequent agreed act of appropriation usually from the seller if not the buyer. [9] It is not until the act of appropriation has been made, the contract goods will remain unascertained.

Goode has identified that the SGA 1979 is not helpful in defining ‘unascertained goods’, which also fails to distinguish between two quite different categories namely ‘wholly unascertained goods’ and ‘quasi-specific goods’. [10] He further explained that ‘wholly unascertained goods’ means that the parties have not even designated a source of supply in their contract, where as they may be partially identified as a result of agreement between seller and buyer that they shall be supplied from an identified bulk in the case of ‘quasi-specific goods’. [11] Hence, there is a staged progression, from unascertained to quasi-specific and then to ascertained goods through appropriation from that bulk. [12] If the bulk goods is specific or becomes ascertained, there is no hassle transferring the property so long as there is an intention to transfer, the problem arises particularly with regards to unascertained goods which is caught by S 16 of the Act that we are concerned with now.

S 16 provides ‘…where there is a contract for sale of unascertained goods no property in goods is transferred to the buyer unless and until the goods are ascertained’. Dobson and Stokes have suggest that it is no more than common sense that until the parties have identified the goods which the buyer is to have, no property can pass from seller to the buyer for the simple reason that it is impossible to tell in which goods the property is passing. [13] However, this section presents major problems especially for buyers of bulk shipments and consignment of goods which we shall turn to later, and the Sale of Goods (Amendment) Act 1995 introduces S 20A to resolve these problems. S 20A provides for a kind of special proprietary interest to pass even before the goods have become ascertained. [14]

Intention to pass-S 17, S18

Property does not pass as soon as it is ascertained; it passes when the parties intend it to. Hence, the next step is to determine whether there was an intention to pass. S 17 applies to ascertained goods and specific goods which states that property of this kind passes at such time as the parties intend it to be transferred, either by conduct or circumstances of the case [15] . In the absence of clear intention, S 18 kicks in. It provides 5 different presumptive rules catering for different circumstances where intention can be inferred, specifically rule 5 for unascertained goods. However, this presumed intention can be excluded expressly or impliedly by the contrary intention of the parties.

Position pre-1995

Prior to 1995, the result from S 16 that goods cannot pass until it is ascertained presents various major problems in the actual practice of commercial law for buyers who buy in bulk.

Seller’s insolvency

A buyer who had paid for goods which remains unidentified and not transferred to him, he would probably assume that he had become the legal owner of the goods, especially if he is given a bill of lading [16] . He wouldn’t probably be worried even if the seller becomes insolvent and that the goods would still be separated from the bulk and delivered to him rather than going to the seller’s receiver or liquidator. [17] Unfortunately, this is not the case. S 16 offers inadequate statutory protection to the buyer, leaving contracts with millions of pounds being concluded regularly in the commodity markets of the United Kingdom at grave risk when the seller becomes insolvent. [18] The buyer therefore acquired no proprietary interest in the goods and was merely an unsecured creditor for the return of the price he paid. Furthermore, buyers cannot opt out of S 16 by contracting out of this section. [19] The buyer would not be in a position to check the credit-worthiness of the seller, a point noted by the Law Commission in their consultation. [20] This was seen as the most serious problem resulting from S 16.

This can be illustrated from the case Re London Wine Co. (Shippers) Ltd [21] , where a company had executed a debenture giving a floating charge to its bank secured over all its assets; and the bank, acting under a power conferred by the charge instrument, had appointed a receiver. The wine company sold wine to customers, while retaining possession of the wine. The customers paid for the wine and storage charges, and the seller gave the buyers ‘certificate of title’, but there was no actual earmarking or physical segregation of the wine sold to the different customers. The wine company later became insolvent, and the receiver claimed that all the wine still belonged to the company. Oliver J held that the property had not passed to the buyer and the bank’s security interest therefore prevailed, and the buyers were simply unsecured creditors for the return of the money which they had paid.

However, had the wine merchants who retained the wine in store kept detailed records of the wine bought by each customer and customers’ wine was kept totally separate from the company’s own stock, despite individual cases were not marked with the names of individual customers, it was nevertheless held that the wine was sufficiently ascertained to enable property to pass when it was separated from the company’s trading stock for storage. This was the case in Re Stapylton [22] , a tenancy in common was found. However it was still considered to be inconvenient for the buyers as they wouldn’t have any idea of whether the seller will keep such record.

For some years it was an open question whether equitable rule was applicable to contracts in sale of goods to get round S 16. This was tested in Re Wait [23] , Wait bought 1,000 tons of wheat which was expected to be loaded on the Challenger, the following he contracted to sell 500 tons to X. X paid Wait but later Wait went bankrupt. When the ship arrived, Wait’s trustee claimed the whole 1,000 tons as assets in bankruptcy while X claimed he had an equitable assignment on the 500 tons, or he was entitled specific performance [24] . The court decided against both grounds, and the goods were not sufficiently identified even in equity, if S 16 is not satisfied, the buyer was left as an unsecured creditor. The Privy Council in Re Goldcorp Exchange Ltd [25] upheld the same argument and held that a declaration of trust would inhibit the company’s freedom to deal with its stock and been inconsistent with the terms of the contract. The buyer is hence caveat emptor and should take whatever precautions he could in terms of arranging for insurance cover and bargaining for appropriate protective contractual terms. [26] Therefore, we can observe that if seller becomes insolvent and property has not passed, the court has been reluctant to use equity rules to get round the problem and thus causing difficulties for buyers.

Risk could pass before property

As suggested in the Law Commission Report, although S 16 prevents property in goods forming part of a bulk from passing before ascertainment, it does not prevent risk from passing before property [27] , as seen in Sterns Ltd v Vickers Ltd [28] . Hence, a buyer of goods out of bulk who is prevented by S 16 from acquiring property in the goods may still have to bear the loss if the goods are lost or damaged. [29] Until the goods became ascertained, the buyer could not acquire legal ownership or possessory title to sue in tort for damage to the goods. [30]

No Reflection of Commercial Expectation

A point noted by the Law Commission and Bradgate [31] . Traders who often buy in bulk purport to pledge them to banks under financial arrangements, in the expectation that they were acquiring property in them, which is often not the case due to S 16. [32] When bank eventually realized that the pledge offered for security, for instance bill of lading, are actually worthless if property was not passed to the buyer because it was not ascertained, will not be willing to offer loan to the buyers. The buyers who could not own the goods could never offer real security and were faced with financial difficulties in their business.

Impediment to Freedom of Contract

S 16 was also seen as an impediment to freedom of contract where it prevented parties from achieving results which they wanted to achieve. Both parties to a contract for the sale of bulk goods will want the property to pass when the price is paid in exchange for documents. [33] The parties may nonetheless still wish to obtain some form of proprietary interest in the property despite the goods was unascertained would mean the property could not pass. [34] However, S 16 prevented this from happening. As suggested by the Law Commission, this was ‘impracticable or uneconomic’. [35]

Unjust for Prepaid Buyer

The Law Commission Consultation comments revealed that it was unjust and anomalous that a buyer who had paid for goods forming part of an identified bulk should have no proprietary interest in the bulk and should stand to lose both the price and the goods on the seller’s insolvency. [36] This situation can be seen in the case of The Gosforth [37] , which we shall discuss later, this was the significant move for reform for S 16 in the United Kingdom.

Drawbacks of precautious measures developed

There were measures developed to get round of it. The buyers of goods forming part of a bulk would contract to acquire the risk of damage to or loss of the unascertained goods, which would give them an insurable interest in the goods and to take out the appropriate insurance. [38] Buyers could also use the law of trusts to protect their interest, like what happened in Re Kayford Ltd (Liquidation) [39] . These measures however, were costly in terms of time, money and convenience and require careful drafting. [40] They made contract more sophisticated and made concluding agreements slower which do not meet the commercial needs of the commodity trade. [41] As Law Commission Consultation revealed, international traders may be unwilling to trade on the basis of complex terms to get round S 16 and may be asked why the law should require parties to resort to complicated arrangements to achieve commercially sensible results which an amendment of S 16 could achieve in a direct way. [42]

Time to reform, perhaps?

It wasn’t until late 1980s that serious pressure began to mount for a reform in the law, which mainly stem in part from the changes in transportation and commercial practices, increasing the sale of goods in undivided bulk to increase and made more buyers of bulk goods suffered loss as a result of the unreformed law. [43]

As mentioned before, the Gosforth [44] case formed a significant move for reform on S 16. The sub-purchasers of goods forming part of a bulk had paid for the merchant’s delivery orders but found that the goods still belonged to the seller because property had not passed and could be arrested by an unpaid creditor who was suing the seller. It was evident from Law Commission Report that it was nothing new in this view but it gave massive publicity in Britain, especially commodity traders. [45] The traders here chose English law as the governing law for the contract instead of otherwise such as German Law which would give them ownership in common. As a result, later some traders considered changing the applicable law to other jurisdictions and this posed a threat to shipping business in Britain. [46]

Finally, one of the leading international commodity trade associations approached the Law Commission to consider examining the law in this area and introduce reforms. [47] Accordingly, the Sale of Goods (Amendment) Act 1995 was passed and introduced a few important sections.

The Reformed Law

The reform does three things: a) it enables property in an undivided share forming part of an identified bulk to pass before ascertainment of the goods relating to specific sales contracts and becomes tenant in common; b) all the co-owners should accordingly deemed to consent to certain dealings with and deliveries out of the bulk, they are also not liable to other co-owners who receive short delivery c) it puts into statutory form the doctrine of ‘ascertainment by exhaustion’. [48]

The new Act introduces S 20A, S 20B, S18 Rule 5(3) and Rule 5(4) into the Sale of Goods Act 1979. S 16 is amended by the insertion of the words ‘Subject to section 20A below…’.

S 20A(1) states:

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

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

(b) the buyer has paid the price for some or all of the goods which are the subject of the contract and which form part of the bulk.”

The effect of this section is that property will transfer to the buyer and the buyer becomes an owner-in-common of the bulk as soon as the conditions are satisfied. [49] It follows that if the bulk shrinks by natural wastage or destruction so that there is insufficient to meet the claims of all the co-owning buyers, the value of each co-owning buyer’s interest abates in proportion. [50] In order for S 20A to apply, the following conditions must be satisfied: a) the contract must specify quantity of goods to be sold; b) goods must form part of an identified bulk [51] ; c) the buyer must have prepaid; d) It does not apply where parties agree otherwise [52] .

S 20B modifies the legal consequences of owning goods in common so as to enable trading in bulk goods to continue in the normal way. [53] The usual rule of ownership in common in property law does not apply here and each owner is deemed to have consented to deliveries to the other co-owners of the quantities due to them. [54] Those co-owners who take delivery out of the bulk are not liable under the new law to account to the other co-owning buyers who may receive short delivery. [55]

Furthermore, the Act also confirmed the doctrine of ‘ascertainment by exhaustion’. [56] This is to give effect to cases like Wait and James v Midland Bank [57] , where English court held that there could be a transfer of property without unconditional appropriation by a process called ‘ascertainment by exhaustion’. [58] S 18, Rule 5(3) provides where there is a contract for the sale of goods from a bulk identified either in the contract or by later agreement and the bulk is reduced to, or to less than, the quantity due to the buyer under his contract, then provided that the buyer is the only buyer to whom goods are then due out of the bulk, the remaining goods are taken to be appropriated to the buyer’s contract and property in them passes to the buyer. This is even so if it arises under separate contracts so long as he is entitled to the whole of the remaining bulk. [59]

Have problems solved?

Undoubtedly, these reforms provide remarkable changes to the law. It addresses the problems of S 16 which prevented property from passing, and enables buyers to acquire co-ownership in property before ascertainment. ‘S 16 is no longer an impediment to buyers acquiring property in goods forming part of an identified bulk’ [60] , said Burns. Hence, problem 4 addressed above is confidently solved. Bradgate also agreed that it offers some protection to buyer to that extent have improved the law, especially in relation to commercial dealings from bulk in the commodity and similar trades. [61] This is especially so for prepayment buyers, it is submitted that fairness is achieved because they will be protected from seller’s insolvency. It strengthens the concept of ‘property’ in sales law by adapting it to meet modern requirements of trade and commerce. [62] Furthermore, the new rules in S 18 also ease transactions by allowing concept of ‘exhaustion’ to sustain.

Effective? Think again.

Despite the advantages brought about by the reforms, it is not without its problems. This is advanced from Bradgate who suggests that the reforms have no application where the contract is for wholly unascertained goods and no agreement is made to satisfy the contract from any particular bulk source. [63] There is a distinction between sale from general stock and sale from particular bulk source. [64] The Law Commission expressly intended to exclude a seller’s general stock [65] , in order not to inhibit a trader’s right to deal with his stock as he sees fit because a trader will not normally commit himself to use his existing stock to fulfil the contract as stock by its nature fluctuates from time to time. [66] However, Bradgate suggests that,

‘Given the growth in mail order and distance selling of all kinds, especially boosted by the development of e-commerce, there is an urgent need to devise some method to protect consumers and others who contract for wholly unascertained goods and pay for them prior to delivery in order to boost and maintain commercial confidence.’ [67]

Nonetheless, he also opined that perhaps such protection must be considered in the context of insolvency law and not commercial. [68] One can also support the importance of ‘identified bulk’ rather than ‘wholly ascertained goods’ by looking at Roy Goode’s perception. Goode suggested that identification in quasi-specific goods is important to test a number of factors such as whether they are still in-existence or whether the seller has wrongfully parted with possession. [69]

S 20B allows deemed consent by all co-owners and they are not liable to any co-owners of any shortfall. Problems may then arise when the co-owners have removed his share of the bulk, and the remainder is found to contain insufficient goods to satisfy the claims of the last owner [70] , and will possibly make the last person who takes delivery who is most likely to suffer any shortfall. However, one can rebut this by suggesting that the Act does not alter any of his contractual rights against the seller. [71] Furthermore, S 20B(3) allows the parties to make contractual arrangements to make adjustments between themselves and this helps to mitigate the problem.

Additionally, Bradgate and White have also noted one omission in the reform. First, there is nothing in the Act which proposed about the allocation of risk between seller and buyer where the goods deteriorate before the buyer takes delivery of his share. [72] There is only an indication under S 20B(3)(c) that nothing shall affect the rights of any buyer under his contract, but this was seen as inadequate. [73]

The difficulty under the S 18 Rule 5 was raised by Burns in an example he provided. [74] If the seller sold an undivided share of 50 tons of wheat to A from his 100 tons in stock, but proceeded to sell another 60 tons to B before A had received his share. The Act would reduce A’s share to 40 tons. The shortfall of 10 tons may not be recovered from B if he bought the goods in good faith and had no notice of A’s legal right to the goods as owner-in-common. [75] S 24 of SGA 1979 operates as a statutory exception to nemo dat rule, and this will defeat A’s claim to the goods. [76] This was also supported by Janet Ulph in her article, she suggests that seller may often neglect to arrange his affairs so neatly considering the fact that the identified bulk fluctuates and such difficulty may arise. [