The Effective Operation of Commerce

“For The Effective Operation Of Commerce, It Is Important To Be Able To Point To The Exact Time At Which Property In Goods Passes. However, Existing Legal Principles Do Not Always Make It Easy To Make That Determination.”

Discuss, By Reference To Both General Principles Of Law And The Sales Of Goods Ordinance.

Before evaluating the statement, the meaning of the term ‘property’ has to be defined. The term ‘property’ has several meanings. It can mean an asset that is an item of property or the interest the owner has in the asset. According to section 2 of the Sale of Goods Ordinance, ‘property’ means the general property in goods and not merely a special property. Taking into consideration of the whole statement, it is the second meaning which is being considered here. Hence, ‘property in goods’ is defined to be title to the goods and ownership of the goods.

In the commercial context, it is important to for the contractual parties to be able to determine the exact time at which property in goods passes mainly due to four reasons: in case of reassigning the goods, of insolvency of either parties, of the passing of risk, and of the action for the price,.

Firstly, section 23 provides that only owner can pass good title unless the actual owner of the goods approves. Thus, it is important to determine when the goods pass in order to plan for the reassigning of the goods.

Secondly, when one of the contractual parties becomes insolvency, it is important to make it clear when the goods passes in order to determine who owns the goods. If the seller becomes insolvent prior to delivery, or the buyer after delivery but before payment, the other party will be in a much stronger position if they can establish a claim over the goods. The problem has arisen most commonly in relation to the insolvency of the buyer, and section 21 does recognize the seller’s right to ‘reserve the right of disposal’ of the goods until payment has been made. It works as the seller can indicate that property is not to have been intended to pass.

Thirdly, it is important to note the time of passing of the title in case of goods damaged or lost in order to determine who have to bear the risk and be responsible for the loss and have the obligation of insuring them. According to section 22 of the Sales of Goods Ordinance, unless the parties have agreed to the contrary, risk passes when property passes even delivery or payment may have not yet been made. It is worth noting that this section contains two provisos. The first one says that if one of the parties is responsible for a delay in delivery, then the party is liable for the loss that delay causes. In Demby Hamilton & Co. Ltd v Barden, the seller agreed with the buyer to supply apple juice to a third party in weekly instalments. The third party asked the seller to delay some deliveries and the seller followed. The juice later turned bad. Although the property in the juice remained in the seller, the court held that the risk has passed to the buyer since he is liable to the delay. The second one says that if the loss or damage of the goods is due to the breach of duty by either parties as bailee, then the ordinary liability of the party as bailee applies. For example, if the party is holding goods as a bailee, he has to take reasonable care of the goods during the possession period notwithstanding that he is just doing voluntarily.

Fourthly, section 51 of the Ordinance makes it clear that it is only where property has passed that the seller may maintain an action for the price against the buyer. The rules relating to the transfer of ownership in a sale of goods contract are clearly defined by the Sale of Goods Ordinance provisions. This is important since, as has been indicated, the issue of if and when property has passed can be of vital importance in determining the rights and liabilities between buyer and seller.

We must now turn to the second issue that is whether the existing legal principals make it easy to make that determination. The Sale of Goods Ordinance has a part namely, ‘passing of property’, discussing the transfer of property. The laws are set out in section 19-22 of the Ordinance.

Where property in the goods is to pass by way of sale under Sales of Goods Ordinance, the classification of the goods is relevant in determining the point of time at which property passer from seller to the buyer. There are two types of goods, specific or ascertained goods. Section 18 states that property cannot pass unless the goods are ‘ascertained’. ‘Ascertained’ means that the goods are identified. Where goods are ascertained, it is clear at the time of the contract which particular items are being sold or are specific and section 19 says that property will pass when the parties intend it to pass. They may decide that possession will pass first and that property or title will not pass until payment in full has been made, or until some other condition is fulfilled. They may also decide that property will pass before delivery. Therefore, the intentions of the parties are the most important and will override any other rules. When there is a dispute between parties, the court determines the parties’ intentions by considering the terms of the contract, their conduct and the circumstances of the case. The intention must, however, be expressed prior the time when the contract was made.

Rule 1 states that under an unconditional contract, the property in specific goods which are in a deliverable state will pass when the contract is made, regardless of the time of payment or delivery. Goods are in a deliverable state if they are ready for delivery and do not require any work or repair to be done on them.

Rule 2 refers to specific goods which are not in a deliverable state when the goods are to be sold. Property will not pass until some steps are taken to put them into a deliverable state and the buyer is also duly informed. The contract is said to be a conditional one.

Rule 3 refers to specific goods which are in a deliverable state but need to be measured or by other way to ascertain the price. Property will pass when the steps are done and the buyer is informed.

Rule 4 regulates sales that are on an ‘on approval’ or ‘sale or return’ basis. Goods are delivered before he actually enters into the contract and he holds the goods in the position of a bailee. This rule provides guidelines for deciding when it should be deemed that the goods are going to be retained. Once it is clear that the goods are to be kept by the buyer, property will pass immediately.

Rule 5 deals with the problem of unascertained or future goods. It thus covers both the order for generic goods that are already in existence and the goods that have to be manufactured, or grown, for the contract. Rule 5 says that property passes when goods matching the contract description, and in a deliverable state, are ‘unconditionally appropriated’ to the contract by either party ‘with the assent’ of the other.

The Rules give rise to a number of complex questions. First, what is meant by ‘unconditional appropriation’? Every contract much contain at least one essential stipulation and most contracts contain a great many more. In every contract of sale there must be one fundamental condition or obligation, namely that of having goods ready for delivery to the buyer, and if this makes all contracts of sale conditional within Rule 1 it is deprived of all effect.

The goods will need also to be ‘ascertained’ at this stage, however, in order to fulfil the requirements of s16. Thus, in Healey v Howlett & Sons (1917), the contract was for 20 boxes of fish. The seller put 190 boxes onto a train, with instructions that 20 were to be delivered to the seller. It was held that in this case that delivery to the carrier did not amount to an unconditional appropriation. Such appropriation could only occur when the defendant’s 20 boxes were separated from the rest of the 190. The Ordinance gives no guidance on what amounts to ‘unconditional appropriation’. In Varley v Whipp, it was held that the sale of a reaping machine was not an unconditional sale despite the fact that it was clearly not subject to any conditions precedent, but no reasons were given for this part of the decision. Furthermore, it was relevant to ask whether the seller had done the ‘last act’ that he was obliged to do. Thus, in Aldridge v Johnson (1857), grain had been bagged following the buyer’s order before the collection by the buyer. Property was held to have passed. In Carlos Federspiel & Co SA v Charles Twigg & Co Ltd, however, although the goods had been packed, the seller had the obligation to ship them. Since the seller had not taken this last step, it was held that property had not passed.

Also, it is not clear as to what is meant by ‘assent’. Assent may be made expressly or impliedly, and may be given before or after the appropriation has taken place. It is clearly not necessary for the other party to be notified and to agree specifically; hence no mutual agreement is needed. Difficulty gives rise in case of sale by post. If a person orders goods by post and that the seller dispatches goods answering that description to the buyer, rule 5 states that would be a unconditionally appropriation but the rule does not have a certain answer that the buyer’s assent is deemed to have been given

Besides, there is different interpretation of ‘specific goods’ in different jurisdictions. In Kursell v Timber Operators & Contractors Ltd, the plaintiff sold the defendants all the trees in a forest and the court held that the property in the trees had not passed to the defendants as the goods are insufficiently identified. However, in an Australian case Joseph Reid Pty Ltd v Schultz in which a sale of all the millable or marketable timber on a certain area was held to be a sale of specific goods.

Furthermore, the way to define ‘deliverable state’ is unclear. In Underwood Ltd v Burgh Castle Brick & Cement Syndicate, the court held that the engine was not in a deliverable state since it was not yet detached from the floor and hence the property has not passed. However, in the case Philip Head & Sons Ltd v Showfronts Ltd, the court held that the carpet was not in a deliverable state apparently because it was a heavy bundle and difficult to move.

Besides the statue, there are general principles that regulate the transfer of property in goods. The general principle relevant to the passing of property or title to goods on the sale of goods, is nemo dat quod non habet (nemo dat rule), that is a seller cannot pass title if he does not have title. This means the ownership of goods will not pass by sale from true owner to another unless the true owner is involved in the transfer of ownership. Where the nemo dat rule operates, the law favours the true owner instead of the innocent bona fide buyer. However, this rule is subjected to exception as laid down in Sale of Goods Ordinance section 23-27 on the basis that there is something wrong in the true owner’s method of dealing with his goods.

The first exception is estoppel as laid down in section 23 which states that nemo dat will apply to sale of goods by a person not authorized to sell them, so as to retain title in the true owner ‘unless the owner of the goods is by his conduct precluded from denying the seller’s authority to sell’. There are mainly three estoppels which are estoppel by negligence in which the true owner have made a representation that the rogue has authority to sell, estoppel by representation in which the true owner by words or conducts misrepresents the innocent party that he does not own the goods and estoppel by non est factum in which it assists the signer of a document where the effect of the document differed in nature from which he though he was signing.

The second exception is sale under voidable contracts. Section 25 operates when the contract between the true owner and the rogue was affected by mistake, fraud or any other grounds that can render the contract voidable. In Car & Universial Finance Co. v Williams, the owner after discovering he had sold the car to a rogue reported to the police and kept on finding the car. The court held that the contract was rescinded since he had done all the things he could to find the car.

The third exception is seller in possession. Section 27(1) provides that if the sale is in the ordinary course of business of a mercantile agent, who is in the business of buying and selling goods, then the purchaser will obtain a good title which will defect the true owner. In Worcester Works Finance v Cooden Engineering Co. Ltd, the court held that the dealer was the owner at the time of transaction with the plaintiff and that he continued in possession of the car after that transaction. As the defendant did not know about the dealings with the plaintiff, the defendant was a bona fide purchaser and could keep the car.

The fourth exception is buyer in possession. Section 27(2) provides that the buyer who, before paying the seller, has been given possession of the goods under the contract of sale with the true owner, can pass good title to a bona fide buyer for a value without notice. In Gamer’s Motor Centre (Newcastle) Pty Ltd v Harvest Wholesale Australia Pty Ltd, the court even held that constructive delivery to the bona fide third party would be sufficient to give the third party protection.

In conclusion, it is agreed that it is very important to make it clear when is the time that property in goods passes due to the reasons of reassigning the goods, of insolvency of either parties, of the passing of risk, and of the action for the price. It is also agreed that the Sale of Goods Ordinance and the general principle do provide some rules to determine the time of transfer of the ownership, however, as examined above, some terms in the rules are blurred which may make it difficult to ascertain the exact time of transfer. It is suggested by scholars that reform of the rules surrounding the passing of the property in specific goods and unascertained goods, in particular for the application of rule 1 in order to fit the reality that the shop sales requires property to pass on payment.