Sale of Goods Take Place Between the Buyer and the Owner of the Goods

In a typical case involving the nemo dat rule the seller (who is not the owner) will have sold goods to an innocent third party and then will have disappeared or become insolvent so that the two parties may not be able to seek a remedy from him. Either the owner or the third party must suffer loss, and the court will have to decide which. As Lord Justice Denning stated in Bishopsgate Motor Finance Corpn Ltd v Transport Brakes Ltd [1] :

“In the development of our law, two principles have striven for mastery. The first is for the protection of property: no one can give a better title than he himself possesses. The second is the protection of commercial transactions: the person who takes in good faith and for value without notice should get a good title. The first principle has held sway for a long time, but it has been modified by the common law itself and by statute so as to meet the needs of our own times.” [2]

The nemo dat rule is that the transferor of goods cannot pass a better title than he himself possesses. The rule represents the common law’s traditional favour of the preservation of property rights. [3] The rule is now stated in section 21(1) of the Sale of Goods Act as:

“Subject to this Act, where goods are sold by a person who is not their owner, and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller’s authority to sell.”

The rule can be demonstrated by the case of Greenwood v Bennett. [4] In this case the original owner of a Jaguar car (Bennett) entrusted it to a man named Searle for repairs to be carried out. Searle then used the car for his own purposes, crashed it and caused extensive damage. Searle then sold the car to Harper, who owned a garage, for £75. Harper did not realise that Searle was not the owner of the car. Harper then spent £226 repairing the car and sold it on to a finance company. It was held by the court that the car belonged to Bennett as Searle did not have title and could therefore not transfer that title to Harper. For the same reason, Harper could not transfer title to the finance company. Bennett was therefore able to recover the car but had to compensate Harper for the work done to it.

However, although the nemo dat rule in its essential form may be clear, it is not always fair, as it is an innocent party buyer who will suffer, and nor is it necessarily in keeping with the needs of modern commerce and trade. [5] Where goods are in question the buyer may be in a very difficult position. The owner, in voluntarily parting with the possession of the goods, takes upon himself the risk that something might happen to the goods. [6] The owner is in a position to check for himself the creditworthiness of the person to whom he gives possession of the goods and there is an argument that if the owner’s trust is in fact ill-founded then he ought not to put the consequences of his own mistaken judgment on to the shoulders of the innocent purchaser. [7] There is no way that the buyer can effectively investigate the title to chattels and if the goods are to move freely in the distribution chain then it is important that buyers are confident in their purchases. [8] Furthermore, goods may be perishable and there is a need for them to be dealt with quickly and efficiently. [9]

Because of the apparent harshness of the nemo dat rule, several exceptions to it were developed at common law and also have been added by statute. All of the exceptions will apply only in favour of a person who acquires the goods in good faith and without notice of the rights of the original owner. [10] The common law exceptions are around agency arrangements, estoppel and (previously) market overt.

In relation to agency, where the owner has, by his conduct, held out the agent as having authority to sell to the buyer, the owner is precluded from later denying that authority. [11] This will only be the case where an actual sale to the buyer has taken place, and not merely an agreement to sell. [12] Apparent authority will give rise to an exception to the nemo dat rule, but the mere appearance of authority will not. It is therefore necessary to establish the rather limited cases in which apparent authority will exist. In considering whether the third party can successfully invoke apparent authority, five factors are relevant: the status of the agent; the capacity in which he was instructed to act; whether he was given possession of the goods or indicia of title to them; the capacity and manner in which he in fact acted; and, whether the buyer acted in good faith and in the reasonable belief that the agent was authorised to sell. [13]

The status of the agent will be relevant because only professional agents will attract apparent authority for the purposes of the exception to the nemo dat rule. Where the agent is a ‘mercantile agent’ and is instructed as such by the owner, then the buyer is entitled to assume that the agent’s authority extends to all acts which would usually be performed by an agent in that agent’s position. Thus, the owner takes on a risk of the agent exceeding his authority by entrusting his business to a professional agent. [14] However, where the owner did not instruct the mercantile agent to act in his capacity as mercantile agent, but for some other purpose, the owner will not be bound by a transaction and the nemo dat rule will apply. Clearly, the buyer in these two circumstances is in exactly the same position in terms of knowledge and expectation, but in a completely different position in terms of the application of nemo dat. This would appear to be unfair and is an example of the inconsistency of the exceptions to the nemo dat rule.

Where the agent in question is not a mercantile agent, the common law exception to the nemo dat rule will not apply at all, and it will be the buyer who is taken to have accepted the risk. Thus, in Jerome v Bentley & Co [15] the plaintiff had entrusted a diamond ring to a man named Tatham to sell for £550. Tatham was to keep anything in excess of £550 but was to return it if not sold within seven days. Tatham sold the ring after eleven days for £175 and represented himself to the defendants as the owner. The defendants then resold the ring. The defendants were held not to be able to rely on usual authority because Tatham belonged to no well-known class of agent but was merely an individual entrusted with the sale of the ring. Tatham’s authority had expired after seven days and the defendants were not entitled to assume that he had authority.

The other form of agency exception at common law to the nemo dat rule is the situation where the owner holds out the agent as being himself the owner. In these circumstances the owner cannot claim not to be bound by the disposition unless the buyer did not act in good faith or in the belief that the agent was in fact the owner. [16]

Section 21 of the Sale of Goods Act 1979 also preserves the common law exception of estoppel, as it provides that the nemo dat rule applies ‘unless the owner of the goods is by his conduct precluded from denying the seller’s authority to sell’. As well as covering the agency agreements expolained above, this also covers other forms of representation made by the owner. For example, in Eastern Distributors Ltd v Goldring [17] the owner of a van wished to raise a loan on it and got together with a motor trader to deceive the finance company. They each filled in the forms as if the van belonged to the trader and as if the customer (the owner) wished to acquire the van on hire purchase. The finance company then bought the van from the trader and transferred it to the customer on hire purchase. The customer then sold the van to a third party. On discovering the fraud the finance company sought ownership of the van. The customer had maintained possession of the goods, which will be seen in the following section on statutory exceptions is important, but had lost his ownership to the finance company on the basis of estoppel.

There has, from time to time, been a suggestion that another exception to the nemo dat should exist at common law: estoppel by negligence. [18] However, it is clear that such a claim will very rarely, if ever, succeed. [19] The exception is based on a rule that the owner must not be so negligent in dealing with his own property so as to facilitate the seller’s fraud that he is the owner. Yet, in Moorgate Mercantile Co v Twitchings [20] the House of Lords held that inactivity on the part of the owner in relation to safeguarding his property, for example by failing to register a hire-purchase agreement, would not estop that owner from asserting his rights.

The statutory exceptions to the nemo dat rule are contained in the Factors Act 1889, the Sale of Goods Act 1979 and the Hire-Purchase Act 1964. Until 1995 the Sale of Goods Act provided an exception in the form of the ‘market overt’ rule which provided that where the buyer bought the goods in market overt in good faith he was entitled to take good title to them. However, the rule was developed at a time when most goods were sold at markets and private sales were discouraged as likely to involve stolen goods. [21] In modern times the market overt rule became perceived as aiding thieves and fences and has now been abolished. [22]

The first remaining statutory exception to the nemo dat rule is provided by section 23 of the Sale of Goods Act 1979. This provides that where the seller of goods has a voidable title which has not been avoided at the time of sale the buyer will acquire good title to them.

Another, important exception is provide by section 2 of the Factors Act 1889, which states: “Where a mercantile agent is, with the consent of the owner, in possession of goods or of the documents of title to the goods, any sale, pledge or other disposition of the goods, made by him when acting in the ordinary course of business of a mercantile agent, shall, subject to the provisions of this Act, be as valid as if he were expressly authorised by the owner of the goods to make the same; provided that the person taking under the disposition acts in good faith, and has not at the time of the disposition notice that the person making the disposition has not authority to make the same.”

Thus, where the conditions of that section are met the rule laid down in Jerome v Bentley (above) is reversed. [23] For the purposes of this section a ‘mercantile agent’ is an independent agent acting in a way of business to whom the owner entrusts goods and confers authority to sell etc. [24] This means that any professional agent who has been given possession of goods for some purpose connected with the sale will be able to pass good title to the buyer. Similarly, where the owner gives possession of goods to another person for the purpose of consignment or sale the consignee will be able to treat the goods as belonging to that other person. [25]

In some cases the seller may sell goods to one buyer and then, having retained possession of the goods, seek to sell them to another buyer. Section 24 of the Sale of Goods Act 1979 provides an exception to the nemo dat rule in these circumstances, as does the slightly wider section 8 of the Factors Act 1889. The section applies where the seller has already sold goods, rather than where the first disposition is an agreement to sell. It also applies only where the goods or documents of title are actually delivered or transferred to the second buyer. The exception provides that in these circumstances it will be the second buyer who obtains ownership of the goods.

There is also an exception to the nemo dat rule where the buyer is in possession of the goods and resells them to a second buyer. Section 25 of the Sale of Goods Act and the slightly wider Section 9 of the Factors Act 1889 provide that where the buyer has bought or agreed to buy goods and takes possession of the with the consent of the seller then the disposition of the goods to a third party, second buyer, who acts in good faith, will take title to the goods. Thus, this section is relevant where the buyer agrees to buy goods but title to them has not yet passed to him and he sells them to a second buyer, who will then take good title. This is particularly important in circumstances of conditional sale where the seller retains title until the buyer has paid for them. [26] However, it is narrow in that it will only apply where the fist buyer has bought or agreed to buy, and not for example hired, has the consent of the seller to be in possession, is in actual possession, and has actually delivered or transferred the goods to the second buyer. These conditions have led one commentator to conclude that: “As with other statutory exceptions to the nemo dat rule, the courts have consistently taken the view that s.9 [of the Factors Act 1889] must be strictly construed. This has resulted in such a restrictive and literal interpretation of s.9 that it has become extraordinarily difficult for any innocent party to bring himself within its provisions.” [27]

The final statutory exception to the nemo dat rule is provided by Section 27(1) of the Hire Purchase Act 1964, which provides that where a motor vehicle which is held under a hire purchase agreement is sold by the hirer before he has obtained title to it, the first private purchaser of the vehicle will take good title. However, the exception is “very restricted in scope”. [28] Firstly, the section only applies to motor vehicles. Secondly, the purchaser must be a private purchaser, and not a dealer or even a person simply seeking to make a profit on resale. [29] Most importantly, the seller must be someone who is hiring the vehicle under a hire purchase agreement or buying it under a conditional sale agreement. Thus, in Shogun Finance v Hudson a rogue took possession of a car under hire purchase terms using a stolen driving licence and then sold the vehicle to an innocent third party before disappearing. As the original contract was void for mistake the rogue was not a person hiring under a hire-purchase agreement and the buyer was unable to rely on the exception to the nemo dat rule.

The nemo dat rule, without the exceptions listed above, would be a very harsh rule indeed, as it would always punish the innocent third party and never the owner, despite any fault on the part of the owner. The exceptions should therefore be welcomed. However, the nemo dat rule will often leave innocent third parties without redress unless they can fit themselves precisely within one of the specific and narrow exceptions. [30] The exceptions are piecemeal and may be described as ‘confused’. [31] Furthermore, it has been stated that the statutory exceptions “have been so drafted and interpreted as to make their application depend not on principles of equity or justice but on fine technicalities which have little rhyme and less reason.” [32] For these reasons, it has sometimes been suggested that the area of law requires reform.

One solution suggested by Devlin LJ in Ingram v Little [33] is for apportionment of loss between the owner and the purchaser. However, this would be difficult where goods have passed through several hands. [34] An alternative, and perhaps more workable, solution is to replace the existing nemo dat rule and its exceptions with a principle of fairness. This would allow the courts to settle disputes relating to ownership with reference to this principle which could be supported by statutory guidelines. The court would then be able to grant title to the person who in its eyes it was more equitable to do so and could take into account factors such as general commercial fairness, the appropriate bearing of risk, the opportunity for the parties to verify the credentials of the fraudulent party, the business or private capacity of the parties, the ability to insure, and the bona fides of the parties. A power of apportionment could also be give. [35]

In conclusion, although the exceptions do go some way to limiting the harshness of the nemo dat rule, there is a need for further reform in the area to ensure that conflicts between owners and purchasers are resolved fairly.