Sale of Goods and Agency

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.

Introduction- The Effect of Passing of Property

Commercial practises often allow buyers to obtain possession from the seller when he tenders the price or the seller agrees to supply the goods on credit. [1] If the buyer has actually possessed the goods but before the payment is made, he becomes bankrupt. The seller will become an unsecured creditor if the property has passed to the buyer. However, if property has not passed, seller is entitled to assert his rights in rem (proprietary rights) and reclaim his goods. This can be done with a prerequisite that the seller reserves the title and property and is only to pass on payment the seller is then able to recover the goods in the event of buyer’s insolvency. [2] Passing of property is also important where the seller becomes insolvent before delivery of the goods which the buyer has paid. A buyer’s rights to the goods seem to be greater if the property has passed to him. [3] It must be noted that in most circumstances risks of the goods passes with the property. The seller is not entitled to sue for the price of the goods unless property has passed. But, if the buyer refuses to accept delivery or repudiates the contract before passing of property, seller can only sue damages for non acceptance. [4]

One of the effects of passing of property is the availability of remedies for both the seller and the buyer to sue a third party who has damaged or destroyed the goods. However, property alone will seldom be the key. [5] It is usually combined with a right to possession or a contractual right against third party. [6] For goods damaged at sea, the person who is entitled to sue will be the one who holds the bill of lading [7] and that person has a contractual right both against the ship owner and the property. House of Lords has decided that a right of property is necessary to establish an action in tort against third parties. [8]

Another importance of passing of property can be seen in tracing. This right exists because of the impact of the Romalpa [9] case where the seller is able to obtain an equitable right to trace the proceeds from the buyer or subsequent recipients if the buyer sells goods which the property is still with the seller. [10]

Having discussed the significance of passing of property, the next part of this essay concerns the rules governing the transfer of property.

Types of Goods

It is vital to know whether the goods are specific or unascertained in order to know whether property has passed.

A) Specific goods

Specific goods are “goods identified and agreed on at the time a contract of sale is made”. [11] Specific goods might be in a bulk. For example a contract to sell all oil in a particular container is a contract of sale of specific goods. [12]

B) Unascertained Goods

Unascertained goods are those which are not known and settled on either at the time the contract is made or afterwards. According to Atiyah, it can include ‘future goods’ [13] and an unidentified portion of a specified bulk or whole [14] , an example of which is 300 tonnes out of a particular load of 1000 tonnes of flour.

What is the Legal Position?

The law governing the passing of property in specific goods is clear. Section 17 of the 1979 Act provides that on a sale of specific or ascertained goods, the property passes when the parties intend it to pass, and that intention is gathered from the terms of the contract, the conduct of the parties and the circumstances of the case. Section 18 sets out five Rules for ascertaining the intention of the parties. This section applies to both specific and unascertained goods.

However, section 16 of the 1979 Act plays a very important role in determining the transfer of goods in unascertained goods. Section 16 provides that:

‘‘[…] 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.’’ [15]

In fact, section 17 which has been discussed above only deals with a sale of ‘specific or ascertained goods’. Hence, there was no express provision covering the passing of property in unascertained goods. Regardless the intention of the parties, property could not pass until the goods are ascertained. In Karlshamns Oliefabriker v Eastport Navigation Corp. [16] Mustill J held that once the goods are ascertained, the passing of the property will depends on the intention of the parties and the circumstances of the case.

Section 18 Rule 5 [17] then provides that, subject to a contrary intention,

“Where there is a contract of the sale of unascertained or future goods by description, and goods of that description and in the deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or the buyer with the assent of the seller, the property in the goods then passes to the buyer; and the assent may be express or implied, and may be given either before or after the appropriation is made.” [18]

Hence, it can be observed that even though the buyer has paid for the unascertained goods, property is not passed unless and until the goods have been separated from the bulk and unconditionally appropriated to the contract.

Problems with Section 16

Prior to the amendments, there are a number of legal problems which arise from the sale of wholly specific goods or an unidentified part of a bulk. To identify the problems as a result of the application of section 16, one shall take into consideration the judicial approach and the decided case laws.

In the case of Re Wait [19] , the buyer paid in advance for 500 tonnes of wheat out of a ship’s cargo of 1000 tonnes and received a bill of lading in return. The seller then became bankrupt and the goods were not divided from the bulk. Due to this, the buyer lost his money and could not claim any proprietary rights to the unascertained goods. One can observe that this case shows the unfortunate position of the buyer as a result of the rule in section 16. It can also be seen that the rights of the seller’s creditors were being protected rather than the buyer and if there is a lesson to be learnt from this case by the buyer it was caveat emptor. [20] It is the buyer’s responsibility to take precautions or appropriate measures to avoid this misfortune through insurance or performance bonds [21] . Although buyer is able to protect themselves from a careful drafting of a contract, one must not deny that this process is costly, time-consuming and complicated.

Re Goldcorp Exchange Ltd [22] is a recent case that illustrates the important of section 16. The case involved claims to unallocated stocks of bullion and the company went into insolvency. The buyers claimed to be entitled a share in the bullion but their claim failed because there was no property attained as the seller could supply the unascertained goods from any source. The Privy Council refused to declare an effective trust or a claim for specific performance. The buyers were simply unsecured creditors in the company’s insolvency. It can be seen that this case has caused severe injustice to the buyers.

In the other case of The Gosforth [23] the judge had to apply the provisions of the section 16 because the contract was drafted in such a way that English Law was the governing law of that contract despite the fact that it was a Dutch case. The merchant ship was delivering a bulk cargo of citrus pellets. The first buyer agreed to buy the cargo from the seller in order to re-sell to a number of sub-buyers. The first buyer received a bill of lading for the unascertained goods but he did not pay in advance. The sub-buyers paid and were given a delivery order for their shares. But, the unpaid seller stopped the cargo to demand the first buyer to pay. The sub-buyers argued that they are the owner of the goods. The court held that due to the lack of proprietary interest (goods are unascertained) it had prevented them from obtaining the legal ownership. This case has also highlighted the problem of the bill of lading and other ‘document of title’. [24] It caused a lot of publicities amongst the commodity trader regarding the risk of section 16 involving purchases of quantity forming part of a bulk and thus resulted to a research on this area by the Law Commission. [25]

In contrast, property can also be transferred without unconditional appropriation as illustrated in the Karlshamns Oliefabriker [26] case. The fact of the case was plaintiffs bought 6000 tonnes of copra. The seller had 16000 tonnes in the ship including the part for the plaintiffs and other buyers. There was an extra quantity bought by another buyer and resold to the plaintiffs. Thus, the plaintiffs had a bill of lading of 6000 tonnes and for the extra quantity. The ship after discharging the copra to other buyers was left with the quantity for the plaintiffs. The fact that all the copra was shipped in an undivided bulk prevented the plaintiffs to acquire property of the goods. However, the court, suprisingly held that property had passed to the plaintiffs by a process of ‘exhaustion’. Mustill J in that case said that there is no independent third requirement that the goods should be unconditionally appropriated to the contract. The result of this case has lead to an amendment in the 1979 Act as problem that arises from a sale of a large cargo of goods has become a common incident than it used to be because the ships are larger, cargoes bigger and buyers therefore are more prompt to buy smaller quantities from a big bulk.

Re London Wine [27] is another example to illustrate the problem of section 16. In this case, a company sold wine to customers but retained the possession of the wine. The customers paid for the wine and the storage charges and were given ‘certificates of title’ but there was no actual earmarking or physical segregation of the wine sold to the different customers. The wine company then become insolvent and the receiver claimed that all the wine still belonged to the company. [28] There are 3 groups of buyers who have made separate claims. First group claimed that they have bought the whole stock of a particular kind of wine and could ascertain the property by ‘exhaustion’. Second group argued that they should be treated as co-buyer so that property could have passed to them jointly. The other group of buyers had actually been acknowledged by the company or from third party warehousemen who held the stock. However, all these three claims were failed as no ascertainment had taken place under section 16. This problem was also being identified in the Law Commission Report. [29]

However, it is worth observed that in the case of Re Stapylton Fletcher [30] and Indian Oil Corporation Ltd v Greenstone Shipping Co [31] the court departed from its usual decision and held that the buyers could be the owner in common for the unascertained goods, depending on the facts of the case. N.R. Campbell in his article commented that the judge of Re Stapylton was wrong to wrong to decide that the property had passed to the buyer and mentioned that he simply “failed to appreciate the significance of the factual differences in the Octavian bond (independent warehouse)”. [32] But it is humbly submitted that the judge in this case, having realised the difficulty of section 16 and the sensitivity of buyer’s needs for the past years, was trying to modernise the law through the special facts of the case.

Furthermore, section 16 prevents property in goods from passing before ascertainment but it does not prevent the risks from transferring to the buyer. It is common enough for the risk of loss of or damage to, the goods to pass to the buyer before the property passes. [33] A buyer who is prevented by section 16 from acquiring property in the goods of bulk may still have to bear the loss if the goods are lost or damaged because the risks will still pass on shipment. [34] This point is also raised by Law Commission in their Report. [35]

Nevertheless, the daring and brave judgment in Re Stapylton had resulted uncertainty in English Commercial Law. Some traders had considered changing the applicable law in their contracts to avoid the problems caused by Sale of Goods Act. This clearly created a threat to the insurance and shipping businesses in Britain. In reality, section 16 is an obstacle to freedom of contract. Both the seller and buyer, in common sense, would want the property to pass when purchase money has been paid. Clearly, section 16 prevents them from achieving this result and it is often used to benefit trustee in bankruptcy in the event of insolvency. In many cases, this is unfair, prejudice and “impracticable or uneconomic” [36] .

Reforms- The Sale of Goods (Amendment) Act 1995

As one can observe from the discussion above, the restrictive approach of section 16 has caused unfairness to the trader commodity. The Grain and Feed Trade Association, whose members often trade goods in bulk in the Baltic Exchange in London, asked the Law Commission for a reform in this area of law. [37] The Law Commission in England and Scotland then issued a Joint Report recommending changes in the law and subsequently the passage of The Sale of Goods (Amendment) Act 1995.

According to Atiyah, the 1995 Act does two things. Firstly, it put into statutory form the doctrine of ‘ascertainment by exhaustion’. [38] Secondly, it enables property in an undivided share forming part of an identified bulk to pass before ascertainment of the goods relating to the specific sales contract. [39] In addition, section 2 of the 1995 Act also provides that section 61(1) of the 1979 Act should provide definition of ‘bulk’. [40]

A) Section 18 Rule 5(3) and Rule 5(4)

Section 18 has now been expanded by the addition of two new sub-rules [41] , giving effect to ascertainment by exhaustion as developed by the previous case such as Karlshamns Oliefabriker. The main conditions for the passing of property laid down by the new sub-rules are that the buyer must have paid the goods in advance and the source of the goods must be indentified either in the contract or by subsequent agreement between the parties. [42]

Further effect of the section also include “…a bulk which is reduced to the aggregate of the quantities due to a single buyer under separate contracts relating to the bulk and he is the only buyer to whom goods are then due out of that bulk” [43] .

Tom Burns [44] identified the only difficulty for the buyer under the new section 18 would be if the seller, having sold an undivided share of 50 tonnes of wheat to one buyer from the bulk stock of 100 tonnes, then deliver the subsequent buyer 60 tonnes from the bulk before the first buyer obtained his goods. The fact that the first buyer’s shortfall would not be recoverable from the second buyer if the second buyer bought in good faith and had no notice of the first buyer’s legal right. He further mentioned that section 24 of SOGA 1979 may kick in as the statutory exception to the rule nemo dat quod non habet, this would destroy first buyer’s claim to the goods. However, the first buyer would however, have a right to sue for non-delivery.

Despite this minor difficulty, it is submitted that the introduction of the new rules have definitely reduced the uncertainty of English Commercial Law and have in fact, relax the rigidity of section 16 by introducing another method of ascertainment to unidentified goods.

B) Section 20A and section 20B

i) Section 20A

The 1995 Act inserts Section 20A and amended section 16 of 1979 Act. This was thought to be the most fundamental changes introduced by the 1995 Act. Section 20A(1) sets out the conditions [45] to be fulfilled before an interest is acquired under that section. Subjects to the contrary agreement and conditions being fulfilled, the parties may agree “property in an undivided share in the bulk is transferred to the buyer and the buyer becomes owner in common of the bulk.” [46] The Act also mentioned that part payment is to be treated as payment for the corresponding part of the goods [47] and delivery of goods to the buyer is to be regarded in the first place as a delivery of the goods being paid [48] . For the operation of section 20A(3), if the seller’s cargo has 100 tonnes of stock and subsequently sold 250 tonnes to 3 buyers before the cargo reaches its destination, the buyers would own the whole cargo in common. If the amount is reduced, buyers would share the goods according to their proportion to the quantity they ordered (25% each). They could however, bring a claim for a shortfall in delivery.

As one can observe, payment of price is a determining factor for the operation of that section. The 1979 Act provides that buyer who has not paid cannot be required to do so unless the seller is willing to deliver [49] . Academics argued that this would allow the insolvency officer to take advantage of market price movements to choose whether to perform the contract. [50] The officer would choose to perform the contract if the price of the goods has dropped and if it rises, the buyer will be left as an unsecured creditor to the goods. [51]

In addition, it should be noted that there is no requirement that the goods be in a deliverable state for the buyer to gain an undivided share. Commentators observed that this would be inappropriate where the buyer is acquiring an undivided share in a bulk. [52] The normal rule will be to pass property in original purchased goods when they are ascertained, unconditionally appropriated to the contract and in a deliverable state. [53] For example, if a seller agrees to sell 100 litres of spirit out of a tank of 1000 litres and to bottle it for the buyer, the buyer acquires an undivided share in the spirit as soon as he makes the payment. However, he would not “own any particular quantity until it is drawn off, bottled and appropriated to his contract.” [54] It is argued by Atiyah that goods forming an undivided part of share would never be in a deliverable state within the meaning of section 61(5) of 1979 Act. [55]

ii) Section 20B

Section 20B modifies the legal consequences of becoming owner in common so as to allow trading in bulk goods to proceed in the regular way. Subsection 1 enables the owners in common to deal freely with their shares as all co-owners of the bulk are deemed to have consented to any removal, dealing with, delivery or disposal of goods in bulk by any other owner. [56]

Some academics had identified problem where after one or more co-owners have removed their shares of the bulk, the last co-owner will have the burden to absorb the loss if the seller becomes insolvent. [57] There is no obligation to compensate other co-owner for any shortfall. [58] The Law Commission did mention a number of options for this situation [59] but they concluded that statutory schemes might be hard to monitor, costly to operate and could lead to uncertainty among trading community. [60] However, the co-owners could draft the arrangements themselves according to their needs. [61]

It is of my opinion that, in the absence of any arrangements by the co-owners to spread the burden, the proposal by the Law Commission to give discretionary powers to the judge to decide should be the next best alternative. [62] Judges should be able to decide based on different facts of the case in order to reach a fair arrangement to spread the burden.

Are the reforms satisfactory?

Apart from the difficulties which have been raised above, the 1995 Act has also omitted to answer few problems. Firstly, the Act is silent as to the allocation of the risk between the seller and the buyer where the goods damaged before delivery. [63] It was argued that the risk of loss passes either when the buyer acquires an undivided share of bulk or when property is passed. [64] It was also contended that the phrase “nothing… shall affect the right of any buyer under his contact” [65] to include buyer’s contract of sale with the seller. [66] The other solution for this is under section 14(2) of 1979 Act which provides that “…good supplied under contract are of satisfactory quality” and thus the damaged will breach the implied terms of contract. One can also frustrate the contract and to reject the goods. [67] However, it is submitted that the absence of express provision in this issue creates ambiguity in the law and it is worth a reform.

Janet Ulph in her article mentioned that there will be a risk of change of quality to the goods forming part of the identified bulk such as mixing the inferior to the superior wheat and also the change in nature of the goods. [68] It was argued that the “value should be taken account and the claims should be adjusted accordingly”. [69] This author also recognised that the 1995 act has turned the commercial difficulties to a trust problem [70] but must be “warmly welcomed” as it has provided a sensible solution to the needs of trader community. [71]

International Comparative Law

A) United States of America

In the States, the legislature have abandoned the concept of property and title and adopted the specific issue approach which is to deal each specific question such as the passing of risk, buyer’s ability to pass title to a third party, liability for the price and so on without the reference to the passing property. [72] This approach has been put into Article 2 of the Uniform Commercial Code. [73] Atiyah argues that although this approach has many attractions it could not solve new unforeseen problems by the law. [74] The author agrees that to some extent the traditional approach which is the property or title concept can be more effectively to be the solution of new problems but contends that “it is the deficiencies of our law of sale of goods that makes it useful to have a workhorse concept such as the ‘property in goods’.” [75]

Conclusions

The Sale of Goods (Amendment) Act 1995 maintains the concept of property but it modifies the 1979 Act to accommodate the rights in purchase of goods in an unidentified bulk. However, there are issues that require further exploration and investigation especially the allocation of risk. Some issues left untouched by the Commission would also lead to a future of mixing of quality in the goods forming the bulk. In this century of commerce, certainty in the law is paramount. The 1995 Act without doubt, has managed to resolve some problems caused by the restrictive approach of section 16. Nonetheless the reform presented a guarded rather than a dra