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Commercial law

Rick Canavan
Philip Rawlings
This module guide was prepared for the University of London by:

uu Rick Canavan, Associate Head (International Development), Faculty of Business &


Law, Manchester Metropolitan University

uu Philip Rawlings, Professor of Law and Graduate Tutor, Faculty of Laws, University
College London.

This is one of a series of module guides published by the University. We regret that
owing to pressure of work the authors are unable to enter into any correspondence
relating to, or arising from, the guide.

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Commercial law  page i

Contents
Module descriptor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 What is commercial law? . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 The function and ethos of commercial law . . . . . . . . . . . . . . . . . . 4
1.3 Learning outcomes for Commercial law . . . . . . . . . . . . . . . . . . . . 5
1.4 Approaching your study . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.5 Study skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.6 The examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

2 Personal property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1 Ownership and possession . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.2 Legal and equitable interests . . . . . . . . . . . . . . . . . . . . . . . . 19
2.3 Types of personal property . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.4 The transfer of title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.5 Bailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

3 Sale of goods: contract, property and risk . . . . . . . . . . . . . . . . 25


Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
3.1 The legislative picture . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.2 The scope of the Sale of Goods Act . . . . . . . . . . . . . . . . . . . . . . 30
3.3 The scope of the Consumer Rights Act . . . . . . . . . . . . . . . . . . . . 30
3.4 What is a contract of sale of goods under the SGA? . . . . . . . . . . . . . . 31
3.5 The sale contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.6 ‘Transfers or agrees to transfer the property’ . . . . . . . . . . . . . . . . . 36
3.7 Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3.8 Perishing of goods and frustration of contract . . . . . . . . . . . . . . . . 46
3.9 Transfer of title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

4 Sale of goods: performance and implied terms . . . . . . . . . . . . . 57


Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
4.1 Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
4.2 Delivery and payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
4.3 Implied terms as to title and quiet possession: s.12 . . . . . . . . . . . . . 63
4.4 Implied term as to description: s.13 . . . . . . . . . . . . . . . . . . . . . 66
4.5 Implied terms as to quality: ss.14–15 . . . . . . . . . . . . . . . . . . . . . 70
4.6 Implied term as to satisfactory quality: s.14(2) . . . . . . . . . . . . . . . . 71
4.7 Implied term as to fitness for particular purpose: s.14(3) . . . . . . . . . . . 77
4.8 Implied terms in sales by sample: s.15 . . . . . . . . . . . . . . . . . . . . 80
4.9 Limitation or exclusion of liability for breaches of the implied terms
under the SGA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
4.10 Terms implied by the Consumer Rights Act . . . . . . . . . . . . . . . . . 83
4.11 Limitation or exclusion of liability in consumer contracts . . . . . . . . . . 84
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
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5 Sale of goods: acceptance, remedies and retention of title . . . . . . . 87


Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
5.1 Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
5.2 Remedies of the buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
5.3 Remedies of the seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
5.4 Consumer remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
5.5 Retention of title by the seller . . . . . . . . . . . . . . . . . . . . . . . 100
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

6 Money and banks . . . . . . . . . . . . . . . . . . . . . . . . . . . 109


Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
6.1 Bills of exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
6.2 The bank/customer relationship . . . . . . . . . . . . . . . . . . . . . . 118
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

7 Credit and security, financing the sale of goods . . . . . . . . . . . . 125


Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
7.1 Nature and forms of credit . . . . . . . . . . . . . . . . . . . . . . . . . 127
7.2 Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
7.3 Personal security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
7.4 Assignments of choses in action . . . . . . . . . . . . . . . . . . . . . . 137
7.5 Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
7.6 Common law controls over credit . . . . . . . . . . . . . . . . . . . . . 144
7.7 The regulation of consumer credit . . . . . . . . . . . . . . . . . . . . . 145
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

8 Agency 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
8.1 What is an agency? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
8.2 Types of agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
8.3 Creation of agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
8.4 The actual authority of the agent . . . . . . . . . . . . . . . . . . . . . 164
8.5 Apparent authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
8.6 Usual authority: Watteau v Fenwick . . . . . . . . . . . . . . . . . . . . . 169
8.7 Ratification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
8.8 Agency of necessity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
8.9 Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178

9 Agency 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
9.1 Relationship with third party: disclosed agency . . . . . . . . . . . . . . 181
9.2 Relationship with third party: undisclosed principal . . . . . . . . . . . . 185
9.3 Relationship between principal and agent . . . . . . . . . . . . . . . . . 189
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194

Feedback to activities . . . . . . . . . . . . . . . . . . . . . . . . . . . 195


Using feedback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
Chapter 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
Chapter 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Chapter 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
Chapter 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
Chapter 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
Commercial law  page iii

Module descriptor
GENERAL INFORMATION

Module Title
Commercial law

Module Code
LA2017

Module Level
5

Contact email
The Undergraduate Laws Programme courses are run in collaboration with the
University of London. Enquiries may be made via the Student Advice Centre at:
https://enquiries.londoninternational.ac.uk

Credit
30

Courses on which this module is offered


LLB, EMFSS

Module Pre-requisite
None

Notional Study Time


300 hours

MODULE PURPOSE AND OVERVIEW


This module is offered as an option to students studying the LLB.

MODULE AIM
The module will provide an understanding of the application of legal principles to
particular commercial transactions and the practical issues involved. Commercial law
is concerned with obligations between parties to commercial transactions and the
relationship with rules of personal property. Emphasis is placed on both knowledge
of principles and the ability to apply the rules of law to achieve practical solutions to
practical problems. Students will become familiar with a range of issues including:
ownership of or title to goods; transfers of title and its effect on third parties; passing
of property between buyer and seller.

LEARNING OUTCOMES: KNOWLEDGE


Students completing this module are expected to have knowledge and understanding
of the main concepts and principles of Commercial law. In particular, they should be
able to:

1. Demonstrate a critical understanding of origins and sources of commercial law and


the forces that shape commercial law today;

2. Explain the difference between possession and ownership and legal and equitable
interests in personal property, the different forms of personal property and the
different contracts under which they are transferred including sale, gift, hire-
purchase and bailment;
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3. Demonstrate a detailed understanding of the nature of a sale of goods and
distinguishing features of a business-to-business sale versus a trader-to-consumer
sale and how the law has evolved to create these two distinct regimes;

4. Explain the statutory framework within England and Wales governing contracts for
the sale of goods between businesses and to consumers with particular regard to
the terms implied by the legislation, the passing of property and the nemo dat rule
and select the relevant legal principles to synthesise solutions to problems;

5. Analyse the nature of the buyer’s and seller’s rights under a contract of sale and
the remedies available when these contractual rights have been breached and the
efficacy of attempts to exempt liability for a breach of such contractual rights;

6. Demonstrate understanding of the legal conception of the bank/customer


relationship and the nature, function and features of bills of exchange;

7. Show understanding of the nature and commercial function of credit, security and
the different forms security takes and the mechanisms by which things in action
may be transferred by assignment;

8. Understand and critically analyse the consumer credit regime;

9. Demonstrate an understanding of how agency relationships are created, the scope


of an agent’s authority and the rights and obligations of agents, principals and third
parties in relation to each other; analyse instances of agency that arise without the
parties’ explicit consent.

LEARNING OUTCOMES: SKILLS


In addition to the skills developed at Level 4 students are expected to be able to:

1. Apply their knowledge to analyse complex legal questions and synthesise


responses to problems;

2. Critique standard legal materials and arguments;

3. Conduct complex research exercises and use research evidence appropriately to


support arguments;

4. Work with others on a learning task, including providing effective feedback and
responding positively to suggestions and criticism from others.

BENCHMARK FOR LEARNING OUTCOMES


Quality Assurance Agency (QAA) benchmark statement for Law (2015).

MODULE SYLLABUS
(a) Personal property. Define the concepts of property, ownership and possession, the
types and nature of personal property, interests in personal property, different
contracts for the transfer of interests in personal property.

(b) Sale of goods. Distinguish between commercial and consumer sales. Discuss the
approach taken to the interpretation of the Sale of Goods Act 1979. 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. Explain
the duties of the seller to deliver and the buyer to accept goods. Discuss the
implied terms in ss.12–15 of the Sale of Goods Act 1979. Discuss the relationship
between the different implied terms. Outline the limits imposed on attempts
by the seller to exclude or restrict liability for breach of the implied terms.
Understand and discuss the rules on acceptance. Explain the remedies available
to the buyer and the seller where there is a breach of the sale contract. Explain the
use of retention of title clauses and the limits of such clauses. Discuss the distinct
approach taken by the Consumer Rights Act 2015 and the residual importance of
the Sale of Goods Act 1979. Discuss the regime of implied terms and the range of
remedies available in consumer sales.
Commercial law  page v
(c) Payment mechanisms. Describe the nature of the banking business including
describing the distinguishing features of a bank at law. Discuss the nature and
function of bills of exchange and how they are defined by law with particular focus
on the rules around the negotiation of bills.

(d) Credit and security. Understand and distinguish the concepts of credit and security.
Explore various mechanisms for financing and securing sales including real security
(charge, lien, mortgage, pledge) and personal security (surety and guarantee), the
requirements of assignment at both law and equity and an overview of consumer
credit.

(e) Agency. Define the term ‘agent’. Explain how an agency is created. Discuss the scope
of the agent’s authority. Explain the rights and obligations owed by the principal
and by the agent to the third party. Explain the rights and obligations owed by the
third party to the principal and to the agent.

A student is permitted to bring into the examination room the following specified
documents: one copy of each of the following: Factors Act 1889; Misrepresentation Act
1967; Supply of Goods (Implied Terms) Act 1973; Unfair Contract Terms Act 1977; Sale
of Goods Act 1979; Supply of Goods and Services Act 1982; Consumer Protection Act
1987; Sale and Supply of Goods Act 1994; Sale of Goods (Amendment) Act 1995 and Core
statutes on commercial & consumer law 2018–19 (Palgrave Macmillan).

LEARNING AND TEACHING

Module guide
Module guides are the student’s primary learning resource. The module guide covers
the entire syllabus and provides the student with the grounding to complete the
module successfully. It sets out the learning outcomes that must be achieved as
well as providing advice on how to study the module. It also includes the essential
reading and a series of self-assessment activities together with sample examination
questions, designed to enable students to test their understanding. The module guide
is supplemented each year with the pre-exam update, made available on the VLE.

The Laws Virtual Learning Environment


The Laws VLE provides one centralised location where the following resources are
provided:

uu a module page with news and updates, provided by legal academics associated
with the Laws Programme;

uu a complete version of the module guides;

uu pre-exam updates;

uu past examination papers and reports;

uu discussion forums where students can debate and interact with other students.

The Online Library


The Online Library provides access to:

uu the professional legal databases LexisLibrary and Westlaw;

uu cases and up-to-date statutes;

uu key academic law journals;

uu law reports;

uu links to important websites.


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Core reading
Students should refer to the following core texts and specific reading references are
provided for this text in each chapter of the module guide:

¢¢ Clarke, M.A., R.J.A Hooley, R.J.C. Munday, L.S. Sealy, A.M. Tettenborn and
P.G. Turner Commercial law: text, cases and materials. (Oxford: Oxford University
Press, 2017) fifth edition [ISBN 9780199692088].

ASSESSMENT
Formative assessment is conducted through tasks in the module guide, which include
self-assessment activities with feedback. The formative assessment will prepare
students to reach the module learning outcomes tested in the summative assessment.

Summative assessment is through a three hour and fifteen minute unseen


examination. Students are required to answer four questions out of eight.

Permitted materials
Students are permitted to bring into the examination room the following specified
documents: one copy of each of the following: Factors Act 1889; Misrepresentation Act
1967; Supply of Goods (Implied Terms) Act 1973; Unfair Contract Terms Act 1977; Sale of
Goods Act 1979; Supply of Goods and Services Act 1982; Consumer Protection Act 1987;
Sale and Supply of Goods Act 1994; Sale of Goods (Amendment) Act 1995 and one copy
of Core statutes on commercial & consumer law 2018–19 (Palgrave Macmillan).
1 Introduction

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

1.1 What is commercial law? . . . . . . . . . . . . . . . . . . . . . . . . . 3

1.2 The function and ethos of commercial law . . . . . . . . . . . . . . . . 4

1.3 Learning outcomes for Commercial law . . . . . . . . . . . . . . . . . . 5

1.4 Approaching your study . . . . . . . . . . . . . . . . . . . . . . . . . . 6

1.5 Study skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

1.6 The examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13


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Introduction
This module guide provides a structure for your study of commercial law. It gives an
overview of the various topics of which this module is comprised and is a guide to
the Essential and Further reading materials. It is not a substitute for those reading
materials. You should work through each chapter and the associated readings and you
should undertake the activities as a means of deepening your understanding of the
subject. At the end of each chapter, you should pause to consider whether you have
achieved the learning outcomes.

While commercial law is based in contract law, it also includes elements of tort,
equity and property law. The resources on which a commercial lawyer draws include
legislation, cases and international agreements. This module, therefore, builds on
knowledge acquired through your study of law and it develops your skills of analysis
and synthesis.

You should use a notebook or ring binder as you study this module. This should be
used for recording answers to activities and making working notes. It is not the same
as your Skills portfolio, which should contain the evidence that you are acquiring
learning and legal skills. See Section 1.4.3 for more details.

Learning outcomes
By the end of this chapter and the relevant readings, you should be able to:
uu approach the study of commercial law in a systematic way
uu understand how this module guide is organised and the various elements of
which it is comprised
uu understand how to develop your learning skills
uu understand how to approach the examination.
Commercial law  Chapter 1  Introduction page 3

1.1 What is commercial law?


Commercial law is a dynamic and exciting area. It must be flexible in order to keep
pace with the rapid changes in business and with the globalisation of markets. At the
same time, it must deliver the certainty that business requires.

Commercial law is a subject that is difficult to define, and, unlike in many jurisdictions,
there is no code in English law (although, as will be seen, there are codifying statutes
on particular aspects of commercial law). Commercial law could be defined very
broadly to encompass all aspects of commercial life and so include the law of contract,
property, trusts, company, agency, sale of goods, banking, intellectual property,
competition, taxation and insurance. This module does not seek to cover all of these
subjects. The object is to look at certain areas in order to acquire an understanding of
the main themes, principles and practices of commercial law.

This module is, therefore, organised around the contract of sale. In this it reflects the
view of one leading writer, Professor Sir Roy Goode, who remarked that commercial
law comprises ‘that branch of law which is concerned with rights and duties arising
from the supply of goods and services in the way of trade’ (Goode, p.8 – see Section
1.4.1 below). The syllabus comprises:

uu the law of personal property

uu the law of sale of goods

uu money and banking

uu credit and security

uu the law of agency.† †


For a set of learning
At this stage, you might have reached the view that commercial law is not a separate outcomes relating to the
subject but a number of distinct areas of law that have been gathered together. syllabus, see Section 1.3
below.
Indeed, you might, with Professor Goode (p.1347), ask, ‘Does commercial law exist?’
Although the answer to that question must be evident for those of his readers who
have read through the preceding 1,346 pages, it is a question that you should think
about while you are studying.

The roots of modern commercial law can be traced to the lex mercatoria or ‘law
merchant’ (see Sealy and Hooley, Chapter 1 ‘An introduction to commercial law’ – see
Section 1.4.1 below). This was, broadly, the law applied to mercantile transactions
or by merchants in their own courts, and to some extent these rules applied across
national borders. Many of the rules developed in these courts were incorporated into
the common law, particularly by judges such as Sir John Holt and Lord Mansfield in
the 17th and 18th centuries. In the late 19th century there were attempts to follow the
practice of civil law jurisdictions by codifying the principles generated by cases – the
Bills of Exchange Act 1882, the Sale of Goods Act 1893 (now 1979), the Marine Insurance
Act 1906 and the Partnership Act 1890, all of which either remain in force or continue
to influence current law. Since these statutes arose out of the decisions of the courts
(even if they did not always reproduce those decisions), they tended to reflect the fact
that the bulk of those decisions concerned disputes between merchants. This meant
that, broadly speaking, the legislation did not seek to interfere with the freedom of
merchants to make contracts and to organise their business as they saw fit.

Yet this view of contract law as not intervening can be taken too far. The Sale of Goods
Act 1893 imposed various obligations on sellers and buyers, including implied terms as
to description and quality (see Chapter 4). Moreover, even if non-intervention tended
to dominate the development of the law relating to contracts of sale, there had always
been an element of consumer protection through the criminal law, which had imposed
penalties for false measures and the adulteration of food and drink. By the second half
of the 20th century there was pressure to improve protection for consumers, not just
through the criminal law but also through the strengthening of consumer rights. The
way in which commercial law had developed through litigation between merchants had
meant little consideration was given to the needs of private consumers. As a result of
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the growth of the consumer movement, legislation began to emerge to regulate various
aspects of the relationship between consumers and merchants. This included:

uu the contract itself (e.g. the Unfair Contract Terms Act 1977, Unfair Terms in
Consumer Contracts Regulations 1999) – both of which are now replaced by the
Consumer Rights Act 2015

uu the goods and services supplied (e.g. regulating the production of certain types of
goods to improve safety and quality)

uu the merchants who supplied particular goods and services (e.g. through licensing).

The aims were to provide consumers with additional rights to those enjoyed by
merchants, to prevent certain goods and services from reaching the marketplace and
to control suppliers.

Study pack reading


¢¢ Goode, R. ‘Rule, practice and pragmatism in transnational commercial law’
(2005) 54(3) International and Comparative Law Quarterly 539–62.

The concerns and objectives of the law relating to transactions between merchants
(commercial law) differed from those relating to transactions between merchants and
consumers (consumer law). This distinction between commercial law and consumer
law is not always clear. In the past, the tendency was to combine in a single statute
the different rights and obligations relating to commercial (merchant–merchant)
transactions and to consumer (merchant–consumer) transactions. This combining of
often very different rules, which existed for different purposes, was often regarded as
problematic and led to a good deal of debate over whether or not it might be preferable
to create separate codes of law for commercial sales and for consumer sales (Bridge,
M. ‘What is to be done about sale of goods?’ (2003) 119 LQR 173). With the passing into
law of the Consumer Rights Act 2015, such a separation has now been achieved and this
change is reflected in this module guide, which deals separately with contracts between
businesses and contracts between ‘traders’ (Chapters 3–5) and consumers (Chapter 6).
However, it is important to state at the outset that the focus in this module guide is
primarily on commercial sales.

The other problem is that the incorporation of the lex mercatoria into the common law
meant that it lost its international flavour. This prompted a call for the harmonisation
of rules relating to international sales. Within the European Union some strides
towards such harmonisation have been made, although much of the focus has been
on consumer legislation. In addition, various international treaties and conventions
have been drawn up which seek to bring some unity to international commercial
law, either through adoption by states (for example the Vienna Convention of the
International Sale of Goods) or by incorporation into contracts by parties (e.g. the
Uniform Customs and Practice for Documentary Credits). It does not take much
thought to recognise the difficulty of drafting international agreements on such
issues so that they can apply in jurisdictions operating under quite different systems
of law, or to understand the problems domestic courts around the world may have in
construing and applying such agreements in such a way as to maintain consistency
with courts in other countries. More successful, perhaps, are the various standard-
form contracts issued by international trade organisations and adopted by merchants
(see Chapter 7).

For further discussion of all of these issues, read Sealy and Hooley, Chapter 1 ‘An
introduction to commercial law’. See also Bradgate, pp.3–20. (See Section 1.4.1 below.)

1.2 The function and ethos of commercial law


As discussed above, a fixed definition of commercial law is illusive. Commercial
law cuts across numerous discrete areas of law but it will become apparent as you
study that is has at its core the fundamental goal of both responding to commercial
innovations and giving effect to those as legal rules. This means that commercial
Commercial law  Chapter 1  Introduction page 5
practice is in itself a source of law, and it means that the approach of the law is to
facilitate commerce. This does not mean that legal rules are not rigid but it can mean
that there is a tension between creating rules which provide certainty for commercial
people but which can also provide reasonable and commercially realistic outcomes to
disputes. In particular, it means that doctrines of commercial law can be best regarded
not as being absolute and fixed but more as a toolkit which commercial lawyers use
for solving commercial disputes and for developing new legal rules in a way that is
intelligible and makes sense to commercial people.

This approach is almost inevitable when one considers the nature of commercial
law and how it traces its roots to the lex mercatoria. The importance of commercial
practice as a source of law and the corresponding desire of commercial law to give
effect to commercial transactions is well evidenced in both the case law (for example,
Atkin J in Groom v Barber [1915] 1 KB 316, at 325, Goff LJ in Clough Mill v Martin [1984] 3 All
ER 982 at 987, Lord Hoffmann in Re BCCI (No 8) [1997] 4 All ER 568 at 578), and in extra-
judicial writings (for example, Goff ‘Commercial contracts and the Commercial Court’
(1984) LMCLQ 382; Steyn ‘The reasonable expectations of honest men’ (1997) 113 LQR
433; Staughton ‘How do the courts interpret commercial contracts?’ (1999) CLJ 303;
and Devlin ‘The relation between commercial law and commercial practice’ (1951) 14
MLR 249).

1.3 Learning outcomes for Commercial law


When you have finished studying this module, you should be able to demonstrate
that you have studied the following topics in depth: agency; sale of goods; aspects of
international trade; and payment through documentary credits. The learning outcomes,
and relevant chapters of the module guide, for each of these topics are as follows.

I. Personal property (Chapter 2)

uu introduction

uu ownership and possession

uu legal and equitable interests

uu types of personal property – choses in possession – choses in action

uu the transfer of title (e.g. sale, gift).

II. The sale of goods – business to business and trader to consumer (Chapters 3–5)

uu discuss the approach taken to interpretation of the Sale of Goods Act 1979

uu analyse the components of the definition of a contract of sale

uu explain the circumstances in which property in goods is passed

uu identify how risk is passed

uu understand the nemo dat rule

uu discuss and illustrate the exceptions to the nemo dat rule

uu explain the duties of the seller to deliver, and the buyer to accept, goods

uu discuss the implied terms in ss.12–15 of the Sale of Goods Act 1979

uu discuss the relationship between the different implied terms

uu outline the limits imposed on attempts by the seller to exclude or restrict


liability for breach of the implied terms

uu understand and discuss the rules on acceptance

uu explain the remedies available to the buyer and the seller where there is a
breach of the sale contract

uu explain the use of retention of title clauses and the limits of such clauses
page 6 University of London
uu discuss the scope and applicability of the Consumer Rights Act 2015

uu understand how property and risk are passed in trader-to-consumer contracts

uu explain the obligations of trader and supplier (in respect of the quality and
correspondence of the goods) under the Consumer Rights Act 2015

uu outline the approach taken to unfair contract terms in consumer contracts

uu analyse the remedies of the consumer under the Consumer Rights Act 2015
and contrast them with those under the Sale of Goods Act 1979.

III. Payment – money and banks (Chapter 6)

uu bills of exchange

uu the bank/customer relationship.

IV. Credit and security – financing the sale of goods (Chapter 7)

uu forms of credit

uu real security

uu personal security

uu assignments of choses in action

uu common law controls over credit – misrepresentation, mistake, undue


influence

uu the regulation of consumer credit (Consumer Credit Act 1974 as amended).

V. Agency (Chapters 8 and 9)

uu define the term ‘agent’

uu explain how an agency is created

uu discuss the scope of the agent’s authority

uu explain the rights and obligations owed by the principal and by the agent to
the third party

uu explain the rights and obligations owed by the third party to the principal and
to the agent

uu explain the rights and obligations arising between the principal and the agent.

1.4 Approaching your study


This guide is designed to direct you through your study of commercial law. You should
work through each chapter in turn. The guide has been written to enable you to build
up your knowledge. Each chapter is written on the assumption that you have read and
understood previous chapters. You should not, therefore, dip into the guide: your aim
is to understand the whole subject. This requires the ability to stand back and see the
structure of commercial law. Indeed, you will find it much easier to understand and
remember cases and statutes if you can see them as part of this larger structure rather
than treating them as unconnected rules. Commercial law has its eccentricities but,
overall, it works because it has been built up in response to the needs and practices of
business people.

You should read each chapter carefully. In each chapter there are activities which
provide an opportunity to think about, reflect on and understand the material you
have been covering. Feedback to these activities is provided at the end of this guide,
however, you should work through each activity yourself before looking at the
feedback. You should read the Essential reading listed for each chapter and then look
at the cases and Further reading. Make sure you understand each piece of reading
and each case before moving on. If you do find a case or piece of reading difficult to
Commercial law  Chapter 1  Introduction page 7
understand, go back to the module guide and textbook and read about the topic
again, then return to the piece of reading or case. Reflect on whether you do fully
understand each part. Ask yourself difficult questions. Finally, you should attempt the
sample examination questions.

Commercial law is a rapidly developing area, so you must keep up to date. How you
can do this is discussed below. Access to a good law library is, of course, very helpful,
but for those who do not have such access the internet provides a rich source of
information, if it is used carefully. You will also find many useful resources in the Online
Library, and in the Commercial law area of the Virtual Learning Environment (VLE).

1.4.1 Essential reading


Commercial law textbooks fall into two broad groups: those books that seek to cover
a wide area of the subject and those that focus on a particular topic, such as agency
or sale.

Primary textbook
¢¢ Clarke, M.A., R.J.A. Hooley, R.J.C. Munday, L.S. Sealy, A.M. Tettenborn and
P.G. Turner Commercial law: text, cases and materials. (Oxford: Oxford University
Press, 2017) fifth edition [ISBN 9780199692088].

This book will be referred to throughout the guide as ‘Sealy and Hooley’. It resembles
a portable library in that it contains extracts of leading cases, legislation, articles and
editorial commentary. It also contains useful questions at the end of each section,
which you should attempt to answer in order to test your understanding of passages
that you have studied. Remember that, while this excellent book has been compiled
by leading commercial lawyers, it is only their particular view of what is important.

Much of your study will be devoted to the readings from this book, although at various
points you will be directed to other materials. You should also try to read as many
of the leading cases in their original form as possible; they are not only the primary
source of law but they also give you insight into the judicial approach to commercial
law and commercial law problems. Cases are also a good opportunity to build your
commercial awareness by gaining insight into the commercial transactions that shape
commercial law.

Where a case cited in this guide is included in Sealy and Hooley, this reference is given
along with the case citation. However, as mentioned above, you should try and read
the leading cases in their original form.

Most cases are available in the Online Library, although you may need some practice in
locating them.

It is important to note that, while there are new editions of some books mentioned
in this guide which include the more recent changes in the law (Consumer Rights Act
2015 as noted in Section 1.1 above), others do not. The recent changes often amounted
to transplanting the substance of existing consumer sales rules into a discrete statute.
This means much of the pre-Consumer Rights Act 2015 case law and analysis will likely
remain applicable; however, it is essential that you understand and refer to the current
law and understand that a divergent approach could emerge.

Study pack
As well as this module guide, you are also provided with a study pack. This contains
a number of important readings that you might otherwise have found difficult to
source. The study pack readings are also available on the VLE.

As you follow the chapters in the guide you will be referred to materials in the study
pack as and when appropriate. You should read these articles and extracts from books
and cases carefully.
page 8 University of London

Other texts to consult


There are a number of excellent books on the general area of commercial law which
will be referred to in this guide. These include:

¢¢ Bradgate, R. Commercial law. (London: LexisNexis Butterworths, 2000) 3rd


edition [ISBN 9780406916039]. Despite not being updated for some years this
remains a comprehensive text offering accessible and insightful analysis of the
law.

¢¢ McKendrick, E. Goode on commercial law. (London: LexisNexis, 2016) 5th edition


[ISBN 9781405798617].

This is an important work by one of the leading commercial lawyers of the last 30
years. It will be referred to as ‘Goode’ throughout this guide.

In addition, there are books that cover particular aspects of commercial law. These are
referred to in the relevant chapters.

Statute books
Legislation is frequently amended, so it is important to refer to an up-to-date statute
book. UK legislation is also available at www.legislation.gov.uk/

Legal journals
The module guide and the textbooks refer to articles published in various journals in
the UK and abroad. You should try to read those referred to in the module guide, but
you should also try to follow up references to journal articles cited in the textbooks
where appropriate. Many of these journals will be available through the Online Library.

1.4.2 Websites
Used with care, the internet is a valuable resource. As well as the VLE and Online
Library, you may find the following sites useful.

Cases and legislation


uu www.bailii.org/
The British and Irish Legal Information Institute is an excellent site that provides
access to full texts of recent cases and legislation from Britain and Ireland, and it
gives access to similar sites in other common law jurisdictions.

Recent UK legislation is also available through a government site:

uu www.legislation.gov.uk/

1.4.3 Your portfolio/learning journal


Any student studying with the University of London programme who wishes to obtain
a Qualifying Law Degree (QLD) for England and Wales must develop and present a Skills
portfolio for assessment in their final year. This is to ‘demonstrate’ the subject-specific
and transferable skills students will attain. We are not saying that students who do not
complete a portfolio do not have these skills but such students will not formally have
demonstrated these skills in an assessed mode.

However, a portfolio can also mean something more simple – a learning journal
which would be worthwhile building, whether or not you are going to submit your
Skills portfolio for assessment. This can be as simple as getting a notebook or ring
binder and using it to record answers to activities and make working notes. Making
entries in this will give the opportunity to reflect on your learning, to map out
the process you have followed and gauge whether you are meeting the learning
objectives for the subject.

At the end of each chapter, this guide asks you to reflect on and review your
understanding of the issues contained in that chapter. You are strongly advised to
carry out this review and to go over any points which you still feel unsure about before
proceeding to the next chapter.
Commercial law  Chapter 1  Introduction page 9
We hope that using the ‘Reflect and review’ sections in the guide, and your portfolio or
learning journal, will help you become used to reflecting on your study. We believe that
reflection is essential for authentic self-understanding and learning processes that last.

The following section provides further advice about some of the skills you will need to
develop as you study this module.

1.5 Study skills


Successful law students are able to demonstrate a broad range of skills. You will
already have developed many of these during your study so far, and resources such as
the laws VLE and your portfolio/learning journal will also help you build on these (see
Section 1.4.3 above). In this section, we draw attention to some key points to bear in
mind as you work through this module.

1.5.1 Deep learning


Demonstrating ‘deep learning’ is essential to doing well in examinations. However,
many of the answers we receive in the assessment every year appear to reflect surface
learning rather than deep learning.

Some of the deep learning skills that we expect you to acquire are the ability to:

uu discern themes and patterns in large amounts of disparate information

uu scan large amounts of written materials to draw out the threads of specific
arguments

uu explain the different sides of a controversial issue

uu make, apply and criticise precise distinctions

uu rapidly separate the relevant from the irrelevant

uu think logically

uu think critically

uu research

uu plan

uu communicate and argue fluently, concisely and persuasively, both orally and on
paper

uu concentrate, working with speed and stamina

uu work independently with initiative and self-confidence

uu work cooperatively, to lead and to support with sensitivity.

Self-reflective skills are also essential. These include the ability to:

uu learn from experience

uu gauge how the learning experience is working and to identify weaknesses

uu use the above skills to evaluate your knowledge

uu use those skills to analyse and solve problems.

As you progress with your studies, you should think about how you can develop,
practise and apply these skills.

1.5.2 The need for a critical approach


Activity 8.7 asks:

Is the decision in Watteau v Fenwick wrong?


In English law, judges’ decisions are always open to critical assessment. To become an
LLB graduate, you need to demonstrate critical qualities.
page 10 University of London
Criticism is not about pointing out minor errors in a person’s position – such as a
spelling mistake or inserting the wrong year for a case. It is about demonstrating a
unique personal position on something. It is also about demonstrating your ability
to use your knowledge and understanding of law to make meaningful comments. As
Anne Thompson says in her book Critical reasoning: a practical introduction (London:
Routledge, 2009) [ISBN 9780415445870]:

Critical reasoning is centrally concerned with giving reasons for one’s beliefs and
actions, analysing and evaluating one’s own and other people’s reasoning, devising and
constructing better reasoning. Common to these activities are certain distinct skills,
for example, recognising reasons and conclusions, recognising unstated assumptions,
drawing conclusions, appraising evidence and evaluating statements, judging whether
conclusions are warranted; and underlying all of these skills is the ability to use language
with clarity and discrimination.

Your ability to develop and apply critical reasoning is vitally important. Make sure
you note what you have done – and your reflections on what you have done – in your
portfolio or learning journal.

1.5.3 ‘Giving your own views’


Activity 3.1 asks:

What problems are posed by Lord Diplock’s approach to interpreting the SGA?
In responding to this and similar activities and examination questions, we expect you
to make your own analysis and give your opinion.

Universities want their students to be independent thinkers who can express their
own opinions based on the material they have studied. This means making up your
own mind about the principles and objectives that ought to guide legal processes.

If you are not sure what your views are on a topic, note down the main issues and
see how they relate to each other. Ask other students what they think. Discuss – and
argue – your views with them. Students who simply list everything they know about a
subject, 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 view that civil law systems
are superior to common law systems. You may decide that there 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.

1.6 The examination


Important: the information and advice given in the following section is based on the
examination structure used at the time this guide was written. However, the University
can alter the format, style or requirements of an examination paper without notice.
Because of this, it is essential for you to check the instructions on the paper you
actually sit.

1.6.1 Preparation
You need to start your examination preparation at the beginning of the module
and not leave it until the period just before the examination starts. As you proceed
through your studies you should try to summarise the key points in each section. The
sample examination questions in this guide will give you some indication as to how
to approach different types of examination questions, but there is no substitute for
Commercial law  Chapter 1  Introduction page 11
practice. You should, therefore, practise old LLB examination questions (available on
the VLE). Put yourself under examination conditions. Give yourself only 45 minutes
to answer each question, including reading the question and planning time. Do this
throughout your module to familiarise yourself with writing examination answers.

You should plan out each week of study in advance, using a diary, allowing at least
eight hours of study for commercial law each week. You should also allow time for a
review of the week’s work and at the end of the month allow some time for a wider
review of what you have achieved in the preceding month. At the same time, you need
to balance your studies. You will not be able to study or to perform in the examination
unless you are physically and mentally well, so do not overwork. It is important that
you take time away from your studies.

Two months before the examination you should draw up a revision schedule. At this
point you should have a good set of notes from which to revise. Students are often
tempted to try to guess what questions will appear on the examination paper on the
basis of previous years and limit their revision to those topics. This is always dangerous
because you limit the choice of questions that you can do and because examiners can
mix different topics into one question: for example, an agency issue may be mixed in
with a question on a sale contract. It is also dangerous to try to identify the format of
future examination papers on the basis of past Commercial law papers because the
syllabus may have changed in the intervening years.

1.6.2 On the day of the examination


Try to make sure that you take the night before the examination off and do something
relaxing. If you have to revise make sure you finish at a reasonable time, do something
else and then get a good night’s sleep. Remember that your brain can get tired,
like your body. If you ran a marathon you would not expect to be able to repeat
the exercise the next day. The same is true of the brain: if you exhaust yourself the
day before, you are likely to find yourself unable to perform in the examination. On
the morning of the examination go over your revision notes briefly then go to the
examination without them. Make sure you give yourself plenty of time to travel to the
examination. It is also advisable to eat and drink normally before an examination.

When the examination starts read the whole paper question by question very carefully
and then decide which questions to attempt. Take your time over this. Do not just
pick your favourite topic: consider whether another question is easier to answer
even though it might not be your favourite topic. Make sure that you attempt four
questions. Before you begin to write your answers, make a brief plan about how you
will answer each question.

It is important to be strict with yourself about how much time you spend on each
question. Do not make the mistake of giving yourself too little time to answer the last
question. Allow 5–10 minutes to read the examination paper and then 40 minutes for
each question, including 5 minutes for planning your answer. Do not go over this 40
minute time limit. Students often fail to realise that it is much harder to improve your
mark on a question that you have been answering for 40 minutes than to score marks
on a new question. At the end you will have about 10 minutes to go over your answers.

1.6.3 Answering the question


It cannot be emphasised enough that you must answer the question that has been
asked and not one that you hoped would have been asked. You may get no marks
at all or seriously endanger your ability to pass a question if you do not observe this
simple rule. You must ask yourself, ‘What is this question seeking to discover?’ It will be
rare for you to be asked simply to describe an area of law or provide a list of rules. As
a lawyer you are being tested on your ability to analyse and to argue. Lawyers do not
provide unsubstantiated opinion, they reason from authority. They acknowledge the
weaknesses and strengths in the arguments they present. They are also looking to see
how the law might develop.
page 12 University of London
In general, you will encounter two types of questions, the problem and the essay. The
sample examination questions in this guide provide illustrations of both types and in
the feedback to those questions you will find guidance about the approach you should
take in answering them.

In problem questions you are required to apply the law to the facts of the question.
Work through each word of the problem. Identify the issues and apply the relevant law
to them. If you think there is absolutely nothing of interest in a sentence, you may well
have missed the point. The other difficulty with problem questions is that the law may
be uncertain or you may not be given quite enough facts. This requires you to discuss
the various possibilities. Where appropriate, you can point out defects in existing
rules. Finally, the question may ask you to advise a particular person identified in the
problem. This simply means that you should answer the question by looking at it from
the perspective of that person: do not, as some students do, write this person a letter.

While problem questions lead you to the areas of law that the examiner wishes you
to discuss, essay questions provide more scope for discussion. You must, therefore, be
careful to focus on the question being asked. You must identify what it is that the essay
question is seeking. Often you are invited to discuss an assertion about the state of the
law. Do not simply say to yourself, ‘Oh good! This is a question on the nemo dat rule and
its exceptions’, and then set about a description of the rule and the exceptions. It is
unlikely that this is what the question is asking you to do. (See Chapter 3 for the nemo
dat rule and a sample examination question.)

Whether it is a problem or an essay question, you should constantly ask yourself if you
are answering the question that has been asked.

Finally, a lawyer argues from authority (case, statute, academic writing, etc.) and
you must cite the authorities on which you rely. You do not need to give the actual
reference of the source as long as you make it clear which source you are using (e.g.
providing the name of a case without giving its date or report reference is enough).
Students often worry about how many cases, statutes, etc. they should cite. Studying
commercial law does involve reading a lot of cases, but in the examination do not try
to impress the examiner with a long list of case names. Often a point can be made
through citing one or two cases. Remember that the examination primarily tests your
understanding of the issues and not your ability to memorise dozens of case names.
Commercial law  Chapter 1  Introduction page 13

Reflect and review


Look 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 to revise
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 Need to Need to
move on revise first study again

I can approach the study of commercial law in a


systematic way.   

I understand how this module guide is organised


and the various elements of which it is comprised.   

I understand how to develop my learning skills.   

I understand how to approach the examination.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

1.1 What is commercial law?  

1.2 The function and ethos of commercial law  

1.3 Learning outcomes for commercial law  

1.4 Approaching your study  

1.5 Study skills  

1.6 The examination  


page 14 University of London

Notes
2 Personal property

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2.1 Ownership and possession . . . . . . . . . . . . . . . . . . . . . . . . 17

2.2 Legal and equitable interests . . . . . . . . . . . . . . . . . . . . . . . 19

2.3 Types of personal property . . . . . . . . . . . . . . . . . . . . . . . . 19

2.4 The transfer of title . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

2.5 Bailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24


page 16 University of London

Introduction
Defining the boundaries of commercial law is often difficult. What can be said, though,
is that a great deal of what we refer to as ‘commercial law’ is concerned with property
and agreements which transfer some or all of the rights in that property either for a
limited period or indefinitely. Specifically, commercial law is concerned with rights in
and title to personal property (also referred to as ‘personalty’ and ‘chattels personal’).
This chapter will explore the different types of personal property, the different
interests that parties can have in property and explain why those distinctions are
significant.

Learning outcomes
By the end of this chapter and the relevant readings you should be able to:
uu explain the distinction between ownership and possession and describe its
significance
uu distinguish between legal and equitable interests in property
uu distinguish between choses in possession and choses in action
uu understand how property rights are fundamental in distinguishing between sale,
gift and bailment.
Commercial law  Chapter 2  Personal property page 17

2.1 Ownership and possession

Essential reading
¢¢ Sealy and Hooley, Chapter 2 ‘Basic concepts of personal property’.

2.1.1 The nature of ownership


In ‘Ownership’ in Oxford essays on jurisprudence (Sealy and Hooley, Chapter 2 ‘Basic
concepts of personal property’), Honoré defines ownership as ‘the greatest possible
interest in a thing which a mature system of law recognises’. This means primarily
rights in a thing but includes some obligations. These rights include ‘the right to
possess, the right to use, the right to manage, the right to the income of the thing,
the right to the capital, the right to security, the rights to incidents of transmissibility
and the absence of term, the prohibition of harmful use, liability to execution and the
incident residuary’.

An owner does not have to have all of those; for some things and in some
circumstances it is just not possible. An owner is characterised by having more of
those rights than any other person does. Having ownership of a thing allows a person
to grant lesser rights to others in that thing. For example, if you agree to lend someone
a book you own for a week, they do not acquire all of the rights that you have. They
gain only a lesser right of possession. All the other rights in the book remain with you.
These are called ‘residual rights’ in the goods. These residuary rights that are left with
the owner of a thing, when lesser rights have been granted to others, are the essence
of ownership.

2.1.2 Interest and title


Another important distinction when talking about ownership is the distinction
between interest and title. Anyone with any rights in a thing has an interest in it. For
example,with the book you lend to your friend, both you and your friend have an
interest in it, whereas a total stranger has no interest in it at all. You could both defend
your interest in the book against a stranger who tried to take it from you.

Despite having an interest, as identified above, your friend would still only have
possession. This is where the concept of title comes in. Title is the strength of your
interest, relative to someone else’s. As the owner of the goods, you have all possible
rights in those goods and so you have the best possible title. Your title would therefore
‘defeat’ the lesser title of your friend. Similarly, if your friend were to sell your book
they would only pass on the possessory title that they had and the buyer could not
resist your claim for the return of the book as its owner.

2.1.3 Co-ownership
Two or more people may be the co-owners of a thing both at law and in equity. For
example, where the owners of various cargoes of grain store them together in a grain
store they do not lose their individual legal ownership (as was the case in Mercer v
Craven Grain Storage [1994] CLC 328, see also Indian Oil Corporation v Greenstone Shipping
SA [1988] 1 QB 345). There can be both tenancy in common (ownership of a specified
share) and joint tenancy (joint ownership of the whole together with others). The
concept of co-ownership is discussed in relation to passing of property (see Chapter 3).

2.1.4 Possession
Possession, as discussed above, is very different to ownership – it is very limited
right in a thing. As Sealy and Hooley observe, in legal terms it lacks a clear definition.
Like ownership, possession is indivisible. In contrast to ownership, however, not all
property may be possessed. Goods, money and documents of title can be possessed
but purely intangible things cannot. This may include software or other digital
‘content’. The essence of possession is physical control of the goods. Even if the goods
have been stolen, for example, and therefore wrongly possessed, the thief is still
page 18 University of London

in possession because they have control over them. This underlines an important
distinction between possession in fact and possession in law. Possession in law
requires both the fact of possession – actually having control of the goods – and
‘dominion’ over the thing – the right to exclude others from it (for example, see The
Tubantia [1924] All ER 615). The fact of possession, however, can be merely symbolic, for
example, having the key to a car. When the fact of possession is evidenced in this way,
it is referred to as constructive possession.

Possession is important in commerce and commercial law because it is a strong


indicator both in law and in practice of ownership, despite being very different.
Transfer of possession will not usually pass property but that is not always the case. A
gift will not be complete without the transfer of ownership and in the exceptions to
the nemo dat rule (see Chapter 3) the fact of possession is often pivotal. An action for
trespass to goods or conversion can only be brought by a person in possession or with
an immediate right to it.

2.1.5 The rights of finders


One particular issue in relation to possession arises when an object, which is owned by
someone but that has then become lost, is found by another. The question then arises
as to whether the finder has any interest in the property.

The problem is illustrated in Armory v Delamirie (1722) 1 Str 505. In Armory, a chimney
sweep found a jewel while working on the premises of another. He took the jewel to
be valued. When he went to collect it, the jeweller refused to return it to him and the
chimney sweep sued the jeweller in trover (a lawsuit brought to recover the value of
wrongfully taken property). The jeweller defended the claim, arguing that the chimney
sweep had no title to the jewel. Pratt J famously set out that, ‘the finder of a jewel,
though he does not by such finding acquire an absolute property or ownership, yet he
has such a property as will enable him to keep it against all but the rightful owner’.

Armory therefore illustrates well how the concept of title is relative. Both the true
owner of the jewel and the finder have an interest in the same thing and both have
title but the title of the true owner is absolute and will defeat that of a finder, who has
a mere possessory interest and yet that mere possessory interest is still better than the
title any other person has in the same chattel.

Note, however, that when an object is found in or on the land of another (e.g. at
the bottom of a pool (South Staffordshire Water Co v Sharman [1896] 2 QB 44) or in a
prehistoric boat buried in the ground (Elwes v Brigg Gas Co (1886) 33 Ch D 562)) there
is a presumption that any object found is already in possession of the owner of the
land, notwithstanding that the owner may not have caused it to be there, or known
of its existence. The result is that the individual who unearths the object will have a
lesser title than the owner of the land. However, this is subject to the requirement that
the owner or occupier of the land or building must manifest an intention to exercise
control over it. This is easily proven on wholly private land but is very much harder in a
public space.

As well as clarifying and confirming the law in this area as a whole, this is the particular
issue raised by Parker v British Airways Board [1982] 1 QB 1004. In Parker a passenger
using a British Airways executive lounge found a valuable bracelet that had been
lost by another passenger. Parker handed the bracelet to an employee and asked
that it be returned to him if the owner could not be found. The owner was not found
and the airline subsequently sold the bracelet. Parker then sued the airline. British
Airways contended that they had a superior title to Parker by virtue of them being
occupiers of the lounge, which they leased from the airport. Donaldson J clarified
that this was the case, ‘but only if, before the chattel is found, he has manifested an
intention to exercise control over the building and the thing that may be upon it or in
it’. Otherwise, the occupier could be said to have come into possession of the goods
before the finder.
Commercial law  Chapter 2  Personal property page 19

2.2 Legal and equitable interests

Essential reading
¢¢ Sealy and Hooley, Chapter 2 ‘Basic concepts of personal property’.

Commercial transactions are normally concerned with the transfer of legal ownership of
goods, although transactions can sometimes give rise to claims that equitable property
rights have also been created. Equitable rights are sometimes regarded as disruptive
to the certainty required in commercial dealings and the courts are often reticent to
acknowledge them (Re London Wine [1986] PCC 121, Re Wait [1927] 1 Ch 606).

2.2.1 Legal and equitable ownership distinguished


A thing may be owned both equitably and legally. A person can have both equitable
and legal ownership of a thing, or equitable and legal ownership may be held by
different people, for example when a thing is held on trust.

The two fundamental differences between legal and equitable ownership are that
equitable ownership creates only personal rights and may be overridden by a
disposition of legal ownership and that legal ownership cannot be split. If a thing
owned by one person is loaned to another for a fixed period, this does not transfer
or divide ownership; it just gives that person possession of it. By contrast, equity
recognises that an unlimited number of interests can subsist in a single thing.

2.3 Types of personal property

Essential reading
¢¢ Sealy and Hooley, Chapter 2 ‘Basic concepts of personal property’.

Property may be divided into real property (property in land) and personal property
(property in chattels). Chattels can be divided into chattels real and chattels personal.
Chattels personal can be further divided into tangible movables (choses in possession)
and intangible movables (choses in action).

2.3.1 Choses in possession


Choses in possession are physical, tangible items of property. Choses in possession
include all goods.

2.3.2 Choses in action


Choses in action are intangible property. Choses in action (that include intellectual
property rights, which are not considered in this module) are not a closed class of
assets, although not all intangibles are choses in action (see e.g. Goel v Pick [2006]
EWHC 833). What particularly defines choses in action is that as intangibles, while they
can be sold they cannot be delivered, and so the structure of the transaction is distinct
from that of a sale of goods. Choses in action are transferred by assignment, which is
considered in detail in Chapter 7.

The classical statement of what amounts to a chose in action in given by Channell J in


Torkington v Magee [1902] 2 KB 427:
‘Chose in action’ is a known legal expression used to describe all personal rights of
property which can only be claimed or enforced by action, and not by taking physical
possession. It is an expression large enough to include rights which it can hardly have
been intended should be assignable by virtue of the [Judicature Act 1873, s.25(6)], as, for
instance, shares, which can only be transferred as provided by the Companies Acts. It is
probably necessary, therefore, to put some limit upon the generality of the words; but I
think that the necessary limitation is shewn by the considerations to which I have already
referred, and also by the words of subsection 6 itself. I think the words ‘debt or other legal
chose in action’ mean ‘debt or right which the common law looks on as not assignable
by reason of its being a chose in action, but which a Court of Equity deals with as being
assignable’.
page 20 University of London

Choses in action, while a single class of property, are usually divided into equitable choses
in action and legal choses in action. Equitable choses are things which historically could
only be sued for in a court of equity, such as a right to a share in a trust fund (a trust being
an equitable device). Whereas a legal chose in action is something which historically
could only be sued for in a court of law, for example the right to be paid a debt.

2.4 The transfer of title

Essential reading
¢¢ Sealy and Hooley, Chapter 2 ‘Basic concepts of personal property’.

Transfer of title is the essence of many commercial contracts. A contract for sale is a
contract whereby a seller undertakes to transfer ownership (i.e. all of their rights in the
goods) to the buyer. By contrast, a contract for hire or hire-purchase, for example, is a
contract only to transfer possession of the goods, the latter with an option (but not a
promise) from the seller to transfer ownership at a later time. Delivery (i.e. the giving
of possession) will not usually be the thing that gives ownership, in fact the two things
may be entirely unrelated, except in relation to gifts.

2.4.1 Transfer of legal title


Someone may acquire ownership of goods by simply taking possession of goods
that have no owner or by creating new goods, although the situation may be more
complex where something is made from goods that are owned by someone else (see
retention of title clause in Chapter 5).

Typically, the transfer of legal title results from the consensual transfer of title from the
existing owner, usually a seller, to another, usually a buyer, under a contract of sale. A
contract of sale stands out from other contracts, in that a sale of property that is to be
acquired by the seller after the contract is made (for example, something that is to be
made or grown) will be given effect to (Sale of Goods Act 1979 (SGA) s.2(5), s.6). Under a
contract of sale, the parties are free to determine when ownership (property) will pass
from seller to buyer (s.17 SGA, subject to s.16) and in the absence of party intention
the passing of property is determined by the rules of presumed intention found in s.18
SGA. In limited circumstances, a transfer of goods may override the owner’s legal title
without their consent. This will be the case when the goods are acquired by a party
who buys them in good faith without notice of the owner’s interest in the goods and
can prove that their title is extinguished under one of the exceptions to the nemo dat
rule (see Chapter 3).

In the case of a gift of a chattel there must also be a clear intention to make the gift,
delivery (i.e. a consensual transfer of title accompanied by a transfer of possession)
and acceptance of the gift (Re Cole [1964] 1 Ch 175). In the case of a gift of intangibles
there must be a grant (deed), see Milroy v Lord [1861–73] All ER Rep 783, subject to the
exception in Strong v Bird [1874] LR 18 Eq 315 and Re Rose [1952] Ch 499.

2.4.2 Transfer of equitable title


An equitable title will be transferred (Sealy and Hooley, p.68) either by an agreement
to transfer it (which must comply with s.53(1)(c) of the Law of Property Act 1925),
where the transferor has only that title to transfer in the first place, when there is a
declaration of a trust, or a defective transfer of legal ownership. Except where there
is a contract for an agreement to sell goods (distinct from a contract of sale, an
agreement to sell concerns goods which are not owned by the seller at the time the
contract is made), a purported transfer of an after-acquired asset will only take effect
in equity and so amounts to a transfer of an equitable title.

2.4.3 Transfer of possession


Transfer of possession is usually effected by the ‘voluntary transfer effected by actual
or constructive delivery’ (Sealy and Hooley). Actual delivery is simply the actual
Commercial law  Chapter 2  Personal property page 21

transfer of possession. Constructive delivery is a little more complex. Constructive


delivery can occur in a number of situations (explained in detail in Sealy and Hooley,
p.78), most notably where a party who is in actual possession of the thing agrees
to hold it as bailee (Michael Gerson (Leasing) Ltd v Wilkinson [2001] QB 514) or where
a document of title or something which gives symbolic control over the goods is
transferred to the deliveree, or where a seller of goods transfers them to a carrier for
delivery to the buyer (SGA s.32(1)).

2.5 Bailment

Essential reading
¢¢ Sealy and Hooley, Chapter 3 ‘Bailment’.

Bailment arises where a chattel is delivered up by one person, the bailor, who will
usually be the owner, to the bailee, such that the bailee will be put in possession of the
chattel but there is no transfer of ownership to the bailee by the bailor. An agreement
to rent a car or the borrowing of a book from a library would both be examples of
bailment. Bailment is not inherently contractual and can therefore arise without any
contractual relationship between the parties. That being said, most bailments do
involve a contract and the contract will supplement the underlying legal principles
that govern and define the relationship.

The relationship is characterised by possession. The bailee must be in possession of


the chattel. This is illustrated in a number of cases, for example in Ashby v Tolhurst
[1937] 2 KB 242, where the owner of a car sued the owner of a car park from where their
car had been taken unlawfully, arguing that the owner of the car park was bailee of the
car. The court found that the true nature of the relationship was one of licensor and
licensee and so the owner of the car park did not owe the owner of the car the same
range of duties as a bailee and was able to rely on an exclusion clause to avoid liability
for negligence.

Possession by the bailee is not the only requirement for bailment. The bailor must
retain a superior interest in the chattel to that of the bailee, and the bailee must
consent to taking possession of the chattel. The first requirement relates to the
bailee’s obligation to restore the goods to the bailor when the bailment ends and
the second relates to the obligations that are imposed on the bailee as a result of
taking possession of the goods. Equally, both requirements have been conceptually
stretched by the courts. In Mercer v Craven Grain Storage [1994] CLC 328 the House of
Lords accepted that an arrangement where the bailee was able to supply substitute
goods (as a result of co-mingling with other goods of the same type) to the bailor
was nonetheless still a bailment. Similarly, there are a number of cases of involuntary
bailments (The Pioneer Container [1994] 2 AC 324 and East West Corp v DKBS 1912 [2003]
EWCA Civ 83).

2.5.1 Types of bailment


The classic and still widely accepted categorisation of bailment can be found in
the decision of Holt CJ in Coggs v Bernard (1703) 2 Ld Raym 909. Holt identifies six
categories of bailment, setting out that:

The first sort of bailment is, a bare naked bailment of goods, delivered by one man to
another to keep for the use of the bailor; and this I call a depositum, and it is that sort of
bailment which I mentioned in Southcote’s case (1601) Cro Eliz 815.

The second sort is, when goods or chattels that are useful, are lent to a friend gratis, to be
used by him; and this is called commodatum, because the thing is to be restored in specie.

The third sort is, when goods are left with the bailee to be used by him for hire; this is
called locatio et conductio, and the lender is called locator, and the borrower conductor.

The fourth sort is, when goods or chattels are delivered to another as a pawn, to be a
security to him for money borrowed of him by the bailor; and this is called in Latin vadium,
and in English a pawn or a pledge.
page 22 University of London

The fifth sort is when goods or chattels are delivered to be carried, or something is to be
done about them for a reward to be paid by the person who delivers them to the bailee,
who is to do the thing about them.

The sixth sort is when there is a delivery of goods or chattels to somebody, who is to
carry them, or do something about them gratis, without any rewards for such his work or
carriage, which is this present case. I mention these things, not so much that they are all of
them so necessary in order to maintain the proposition which is to be proved, as to clear
the reason of the obligation, which is upon persons in cases of trust.

While the basis for Holt’s categorisation is perhaps not wholly clear, it is a
categorisation that has stood the test of time and is acknowledged as such. Each
form of bailment has developed through the case law and in some cases, for example
contracts for the hire of goods, may be the subject of legislation that defines, in part at
least, the terms of the bailment.

Bailments can also be categorised as being either gratuitous (i.e. ones for which the
bailee receives no reward or payment) or for reward (where the bailee is paid).

The circumstances in which bailments may arise are many and varied. This is
exemplified by two recent decision of the English courts: Pennington v De Wan [2017]
EWHC 4 (Ch) and Tongue v Royal Society for the Prevention of Cruelty to Animals [2017]
EWHC 2508. These two cases, while no more than applications of the law, demonstrate
the commonplace and wide-ranging nature of bailments in a contemporary context,
and in the case of De Wan demonstrate the consequences of the bailee failing in their
duties in respect of the goods.

2.5.2 Liability of the bailee


A duty of care in respect of the goods is owed by the bailee to the bailor as the owner
of the goods. The question that must usually be addressed in practice therefore is
what is the relevant standard of care owed by any one particular bailee? Historically,
the answer is primarily contingent on whether or not the bailment is gratuitous or for
reward. However, the judgment of the Court of Appeal in Houghland v R Low (Luxury
Coaches) Ltd [1962] 1 QB 694 held that this distinction was not a sustainable one and
that the standard required of the bailee, whether a bailee for reward or not, was
the standard appropriate to the facts of the particular case. In Houghland the Court
of Appeal considered the standard applicable to a business that was transporting
passengers and their luggage on holiday by coach. The luggage of one passenger was
lost or stolen while being transferred from one coach to another. The coach operator
made little attempt to ensure the luggage was secure or to ensure that the correct bag
was taken by the correct passenger.

As Sealy and Hooley observe, however, the distinction remains. The decision of the
Privy Council in Port Swettenham Authority v TG Wu & Co Sdn Bhd [1979] AC 580 suggests
that the distinction was too well engrained to be swept away and the law continues to
draw distinctions in practice. For example, the Supply of Goods and Services Act 1982
and Consumer Rights Act 2015 apply only to instances of contractual bailment.

2.5.3 Third parties


A difficult situation can arise when the chattel of the bailor, in the possession of the
bailee, is damaged or destroyed by a third party. The bailee clearly has an interest in
the chattel but, with only a possessory interest, to what extent can they recover its
value? It was held in The Winkfield [1902] P 42, which reviewed much of the very old
case law, that the bailee, by virtue of having possession of a chattel, can bring an action
for conversion or trespass or can sue in negligence for the full value of the chattel. The
bailee must then reimburse the bailor for the value/diminution in value of the chattel.
As a result, assuming the claim by the bailee recovers for the entire amount of the
damage or loss sustained, the bailor is then barred from bringing an action to recover
further (Nicolls v Bastard (1835) 2 Cr M & R 659).
Commercial law  Chapter 2  Personal property page 23

Core comprehension
1. How is the concept of ownership defined?

2. What rights does ownership include?

3. What is the concept of title? How does it differ from ownership?

4. What are the features of possession?

5. How is legal title passed in goods?

Applied comprehension
6. If B stole a book from A and C stole it from B, could B recover it from C?

7. Why does the concept of possession cause such difficulty?

8. If a seller attempted to transfer property in a thing that was not goods, which
they did not own at the time of the contract of sale, what would be transferred
to the buyer?

Core comprehension answers


1. Ownership is essentially all of the rights that a person can have in goods.

2. Honoré suggests these rights include: the right to possess, the right to use, the
right to manage, the right to the income of the thing, the right to the capital, the
right to security, the rights to incidents of transmissibility and the absence of term,
the prohibition of harmful use, liability to execution and the incident residuary.

3. Title is the measure ‘of the strength’ (Goode) of someone’s interest, relative to that
of someone else, as demonstrated in Parker v British Airways Board [1982] 1 QB 1004
where a passenger found a valuable bracelet in an airline departure lounge. While
his title as finder was much weaker than that of the true owner, it was stronger
than that of the airline in whose lounge it was found.

4. Possession is concerned with control over property (it is therefore only applicable
to choses in possession (tangible personal property)) either by actual physical
possession or by physical possession of some sort of token relating to the goods
such as a key to a car. Legal possession requires both control and dominion over
the goods (i.e. being able to exclude others).

5. Except in relation to a gift, legal title is passed by a voluntary act by the owner,
passing title to another. This is usually done by a seller to a buyer under a contract
of sale.

Applied comprehension answers


6. A thief will have almost the weakest possible title but a thief who steals from a thief
will have a weaker title still. Even if the thief does not have lawful possession of the
item their title will still defeat that of the person who stole it from them (Costello v
Chief Constable of Derbyshire Constabulary [2001] EWCA Civ 381).

7. The term possession is used in a very fluid way to mean different things in different
contexts both within and outside of the law. In essence, possession means control
over property. Possession can mean both physical control of the goods but also
legal possession, which includes a concept of dominion over the goods. This is very
fact-sensitive as the extent to which anyone can have dominion over the goods
may vary (e.g. a shipwreck drifting at sea or on the seabed will be exceptionally
difficult to have dominion over, as opposed to something on a piece of private land
which the person claiming possession can lawfully access). Moreover, possession
in law includes constructive possession, which does not require physical control,
merely the ability to readily obtain it.

8. The seller would have transferred an equitable title to the goods. In a sale of goods,
the SGA permits the seller to sell goods which do not yet exist or which the seller is
to acquire (s.2(6), s.5).
page 24 University of London

Reflect and review


Look 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 to revise
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 Need to Need to
move on revise first study again

I can explain the concepts of ownership and title,


things in action and things in possession.   

I can distinguish between the concepts of ownership


and possession.   

I can explain the distinction between equitable and


legal interests in property.   

I understand how equitable and legal title and


possession are transferred.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

2.1 Ownership and possession  

2.2 Legal and equitable interests  

2.3 Types of personal property  

2.4 The transfer of title  

2.5 Bailment  
3 Sale of goods: contract, property and risk

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

3.1 The legislative picture . . . . . . . . . . . . . . . . . . . . . . . . . . 27

3.2 The scope of the Sale of Goods Act . . . . . . . . . . . . . . . . . . . . 30

3.3 The scope of the Consumer Rights Act . . . . . . . . . . . . . . . . . . 30

3.4 What is a contract of sale of goods under the SGA? . . . . . . . . . . . . 31

3.5 The sale contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

3.6 ‘Transfers or agrees to transfer the property’ . . . . . . . . . . . . . . . 36

3.7 Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

3.8 Perishing of goods and frustration of contract . . . . . . . . . . . . . . 46

3.9 Transfer of title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56


page 26 University of London

Introduction
The contract for the sale of goods is at the centre of this module. Sale contracts are a
branch of the general law of contracts and the principles that you studied in Contract
law apply here. Indeed, many of the cases you studied as part of that module involve
sale contracts. There are, however, some special features of sale contracts. The most
significant are the terms implied into the sale contract by the Sale of Goods Act 1979
(SGA 1979).

In this chapter we look at the Sale of Goods Act and the definition of a sale contract,
the rules on the passing of property and risk, and transfer of title under that Act.
Chapter 4 considers delivery and acceptance of the goods and the implied terms in a
sale contract. Chapter 5 deals with the remedies available to the parties where there
has been a breach of the contract.

Historically, the Sale of Goods Act distinguished between consumer and non-
consumer sales. Certain provisions were added to the SGA which applied only to
consumer sales and other provisions were applicable only to business-to-business
contracts. The passing into law of the Consumer Rights Act 2015 (CRA) dramatically
changed the structure of the law, creating separate two regimes, one, the SGA, for
business-to-business sales and one, the CRA, for trader-to-consumer sales. An account
of the new law can only be found in the most recently published/updated textbooks.
It is important therefore that you read and ensure you understand the CRA and the
provisions in respect of the sale and supply of goods.

Despite the creation of two regimes, there remain similarities between the two.
For example, the substance of the implied terms as to the quality of goods remains
the same although the wording has changed. The two regimes also remain closely
connected because the CRA is not a complete code. On matters such as the passing
of property, for example, the CRA simply refers to the SGA provisions, and, while a
separate body of case law may ultimately emerge, for the time being it seems that in
resolving disputes on consumer matters, SGA case law will continue to be applicable.

The focus of this module is on sales between businesses; however, the corresponding
provisions for consumer sales will be explored under separate headings in each
chapter. The CRA has a much wider ambit than the SGA, encompassing not just sales
but other supply transactions such as hire-purchase, exchange and barter, contracts
for work and materials and contracts for the supply of digital content. Those contracts
will not be considered in detail in this module other than to distinguish them from the
contract of sale.

Please note: the Sale of Goods Act 1979 is referred to throughout these chapters
as ‘the SGA’. References to sections from the SGA are merely noted by their section
number: for example, ‘s.14(1)’ refers to section 14(1), Sale of Goods Act 1979. The
Consumer Rights Act 2015 is referred to as the CRA and where reference is made to the
CRA it will be made clear that this is a reference to the CRA.

Learning outcomes
By the end of this chapter and the relevant readings you should be able to:
uu discuss the approach taken to interpretation of the Sale of Goods Act and
Consumer Rights Act
uu compare the approach and scope of the SGA and CRA
uu analyse the components of the definition of a contract of sale
uu explain the circumstances in which property in goods is passed
uu identify how risk is passed
uu understand the nemo dat rule
uu discuss and illustrate the exceptions to the nemo dat rule.
Commercial law  Chapter 3  Sale of goods: contract, property and risk page 27

Further reading
Essential reading from Sealy and Hooley is given at various points within this
chapter, but you should be aware that a number of books on contracts of sale are
available and are worth consulting.
For the issues raised in this chapter you can also consult:
¢¢ Bradgate, pp.219–44, 365–437.

¢¢ Twigg-Flesner, C., R. Canavan and H. MacQueen Atiyah and Adams’ sale of goods.
(London: Pearson, 2016) 13th edition [ISBN 9781292009339] (referred to as
‘Atiyah’).

3.1 The legislative picture

3.1.1 The Sale of Goods Act


The original Sale of Goods Act 1893 was an attempt to codify the common law on sale
contracts. In addition to the United Kingdom, it was adopted with some modifications
in many jurisdictions of the then Commonwealth of Nations. As a code, it necessarily
reflected the sort of cases that came before the courts in the 19th century, which were
mainly concerned with agriculture products and trading rather than goods bought
for consumption. By the late 20th century there had emerged a recognition that
principles derived from commercial sales might not serve the needs of consumers.
In providing greater protection for the consumer, the Sale of Goods Act 1979 (as
amended) and other legislation, such as the Unfair Contract Terms Act 1977 (UCTA),
became part of a shift from the general principle of caveat emptor (buyer beware)
– according to which it was for the buyer to ensure goods did not suffer from any
defects (see s.14(1), discussed in Section 4.5 below) – to a position where much of the
burden is shifted on to the seller to ensure that goods being sold do not suffer from
certain types of defects, or that the buyer is made aware of such defects before the
sale. At the same time, in the area of commercial sales the law has given some support
to the seller. For example, ss.15A and 30(2A)–(2B) meant that the non-consumer buyer
could no longer reject defective goods or a delivery of an incorrect quantity of goods
where the breach is so slight as to make rejection unreasonable.

In spite of the development of distinctions between the law applying to commercial


(business-to-business) sales and applying to consumer sales (business-to-private-
buyer), the rules remained mixed together in the same legislation: the SGA and related
statutes, such as the UCTA 1977. This resulted, especially in the minds of consumers, in
some degree of confusion and calls to create separate codes for the different types of
sale.

3.1.2 The Consumer Rights Act


The Consumer Rights Act 2015 (CRA 2015) came into force on 1 October 2015 and made
major changes to the law concerned with the sale of goods in the United Kingdom.
The primary purpose of the CRA was to create two separate statutory regimes: one,
concerned with business-to-business contracts, is governed by the SGA 1979 (SGA
1979); the second, concerned with trader-to-consumer contracts, is governed by the
CRA 2015. A major effect of the CRA is to remove contracts for the sale of goods to a
consumer (‘an individual acting for purposes that are wholly or mainly outside that
individual’s trade, business, craft or profession’, s.2(3) CRA) from the ambit of the SGA.

The CRA and SGA compared


The contrasts between the CRA and SGA will be an on-going theme over these chapters
but it is worth briefly summarising some of the key differences between them at the
outset. The first notable difference is the scope (discussed in detail at Section 3.2).
The CRA is much wider in scope than the SGA. It is intended to be a single code which
applies a common set of rules to all consumer contracts involving the sale or supply of
goods, services and digital content. The SGA, as you will see below, is limited in scope
page 28 University of London

to contracts for the sale of goods alone. The CRA also includes its own regime for unfair
terms in consumer contracts, whereas unfair terms in business-to-business sales are
addressed by the UCTA (except in relation to international sales of goods). The CRA also
includes a wider range of remedies for consumer buyers of goods than are available to
buyers under the SGA. This module will focus on Chapter 2 of the CRA, which deals with
contracts for the supply of goods.

3.1.3 Interpreting the Sale of Goods Act

Essential reading
¢¢ Sealy and Hooley, Chapter 8 ‘Introduction and definitions’.

The Sale of Goods Act


The Sale of Goods Act 1893 (oddly, it has always been dated 1893, although passed
in 1894) was meant to codify the common law on contracts for the sale of goods –
indeed, its title was ‘An Act for codifying the Law relating to the Sale of Goods’. In
truth, however, it is only a partial code because key areas of contract law are not fully
covered or are entirely omitted (for example, formation and misrepresentation). The
general principles of contract law are, therefore, still relevant (see s.62(2)).

Since the Sale of Goods Act 1893 codifies the common law, the first question that arises
in interpreting its meaning is how far is it legitimate to consider the cases decided
before 1893? In broad terms, the Act should be treated as superseding the case law,
so that the courts should simply interpret the words in the Sale of Goods Act 1893
according to their ordinary meaning. Indeed, to do otherwise would be dangerous
since the Sale of Goods Act 1893 may have altered the earlier law. The approach to
interpreting codifying statutes was laid down by Lord Herschell in a case on the Bills of
Exchange Act 1882 (Bank of England v Vagliano Brothers [1891] AC 107):

Atkin LJ confirmed that this was the correct approach: ‘Inasmuch as we are now
bound I think the proper course is in the first instance to examine the language of the
statute and to ask what is its rational meaning, uninfluenced by any considerations
derived from the previous state of the law, and not to start with inquiring how the
law previously stood, and then, assuming that it was probably intended to leave
it unaltered, to see if the words of the enactment will bear an interpretation in
conformity with this view. by the plain language of the code I do not think that
decisions in cases before 1893 are of much value’ (Re Wait [1927] 1 Ch 606 (Sealy and
Hooley, pp.298–99)). Yet, what this means is 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 it had been established into a statutory code.’ (Also Carlos
Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd’s Rep 240; and Cehave NV v
Bremer Handelsgessellschaft mbH, The Hansa Nord [1976] QB 44.)

Since the Sale of Goods Act 1893 was passed there have been a large number of cases
in which its meaning has been explored, so it is increasingly difficult for a court to go
back to the words of the statute without also taking into account later case law. The
words of Lord Herschell should now be understood in light of the remarks of Lord
Diplock (Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441 at 501–02). He drew
attention to the danger of not allowing the law to develop and so restrict the freedom
of the parties to engage in more sophisticated agreements than were envisaged by the
courts in the 19th century. He said:
Because of the source of the rules stated in the Sale of Goods Act 1893 the classification
adopted is by reference to the promises made in relatively simple types of contracts for
the sale of goods which were commonly made in the nineteenth century and had been
the subject of judicial decision before 1893. But although the language in which the rules
are expressed is appropriate to these simple types of contracts, it has to be applied today
to promises made in much more complicated contracts which cannot be readily allotted
to any single class of contract which appears to be primarily envisaged by a particular
section or subsection of the code. Unless the Sale of Goods Act 1893 is to be allowed to
Commercial law  Chapter 3  Sale of goods: contract, property and risk page 29

fossilise the law and to restrict the freedom of choice of parties to contracts for the sale of
goods to make agreements which take account of advances in technology and changes in
the way in which business is carried on today, the provisions set out in the various sections
and subsections of the code ought not to be construed so narrowly as to force upon parties
to contracts for the sale of goods promises and consequences different from what they must
reasonably have intended. They should be treated rather as illustrations of the application
to simple types of contract of general principles for ascertaining the common intention of
the parties as to their mutual promises and their consequences, which ought to be applied
by analogy in cases arising out of contracts which do not appear to have been within the
immediate contemplation of the draftsman of the Act in 1893. My Lords, since I believe that
the basic principle of the English common law of contract, including that part of it which is
codified in the Sale of Goods Act 1893, is to give effect to the common intention of the parties
as to their mutual promises in the sense that I have just described, I prefer to deal 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, before examining the particular provisions of the
code upon which the parties rely.

Study pack reading


¢¢ Extract from Ashington Piggeries Ltd v Christopher Hill Ltd.

As against the codification project of the 1893 Act, the objective of the SGA was to
consolidate the various pieces of the legislation, including the 1893 Act, which had
been passed on this subject. The approach taken to the interpretation of a
consolidating Act is that it should be given its natural meaning, although it is
presumed that the intention is to bring together all the law and not to alter it. Potter LJ
explained (Stevenson v Rogers [1999] QB 1028):
The [Sale of Goods] Act of 1979 forms a single code; however, that is upon the basis simply
that it consolidates and enacts within one statute and without material amendment a
number of disparate statutes previously governing the field of sale of goods. While, in the
first instance, a consolidating Act is to be construed in the same way as any other, if real
doubt as to its legal meaning arises, its words are to be construed as if they remained in
the earlier Act. Thus, in terms of the proper construction of its provisions, the Act of 1979 is
not to be regarded as more than the sum of its parts.

The SGA has been followed by further legislation in 1994 and 1995. The approach to the
interpretation of these amendments is less clear; however, it seems that the courts
will give effect to the words used, while considering the intention of the amendments
in light of the earlier law that is being amended.

The Consumer Rights Act


At the time of writing, there are no reported CRA cases on the sale or supply of goods
let alone any that set out the approach that courts should take in interpreting the
new statute. However, unlike the SGA, the CRA has extensive explanatory notes
which should assist in resolving uncertainties arising from the drafting. Moreover,
as so many of the provisions are effectively restatements of the provisions that they
replace, it seems very likely that the old SGA case law, particularly that which relates
to consumer sales, will continue to be referred to as a matter of course, especially in
relation to implied terms (SGA ss.12–15, CRA ss.9–14). Equally, this earlier case law is
often ‘commercial’ in nature, reflecting both commercial practice and a sense of how
‘commercial people’ transact. It is therefore a matter of debate whether the courts,
mindful that this is now a consumer-only statute, may seek to develop a slightly
different approach in their interpretation of the CRA.

Activity 3.1
What problems are posed by Lord Diplock’s approach to interpreting the SGA?

Further reading
¢¢ Atiyah, Chapter 1 ‘Sources of the law of sale of goods’.
page 30 University of London

3.2 The scope of the Sale of Goods Act

Essential reading
¢¢ Sealy and Hooley, p.300.

The SGA defines a contract of sale of goods as:


a contract in which the seller transfers [called a sale: s.2(3)] or agrees to transfer [an
agreement to sell: s.2(4)] the property in goods to the buyer for a money consideration,
called the price (s.2(1)).

(The word ‘property’ refers to the title to the goods and not to the goods.)

The 1893 Act applied the same rules to all types of contract (with a few exceptions,
such as auction sales: s.57 SGA 1893), but the changes introduced by the SGA and
associated legislation have created significant distinctions in the rules governing
different types of transactions. The statute developed to include distinctions between
commercial sales (business-to-business sales) and private sales (business/private (non-
business) seller-to-private buyer): ss.1(3), 5, 6(2), 6(3) with corresponding distinctions
in the UCTA; ss.14, 15(2)(c) SGA. As a result, the SGA could no longer be regarded as a
single code applying to all contracts of sale. This module guide will focus on the rules
relating to sales between businesses.

Notwithstanding that some protections remain in place for commercial buyers


under the UCTA, with the passing into law of the CRA, the SGA can now be regarded
as perhaps a more complete code in respect of business-to-business sales, with s.1(5)
disapplying many provisions to consumer sales.

The scope of the SGA will now be contrasted with that of the CRA before we go on to look
in detail at the various aspects that make up the contract of sale as defined in s.2 SGA.

3.3 The scope of the Consumer Rights Act


In terms of the transactions that it applies to, the CRA has a much wider scope than
the SGA. The CRA applies to all contracts for the supply of goods as well as contracts for
services and contracts which contain elements of both. It also extends to supplies of
digital content such as music, apps and software.

Contracts for the supply of goods are dealt with in Chapter 2 of the CRA. The CRA has a
much wider ambit than the SGA, as it deals with all contracts for the supply of goods:
sales, hire, hire-purchase and any other contract for the ‘transfer’ of goods.

In respect of sales, the scope of the CRA is set out in s.5(1) which provides:

A contract is a sales contract if under it—

(a) the trader transfers or agrees to transfer ownership of goods to the consumer, and

(b) the consumer pays or agrees to pay the price.

A ‘consumer’ is defined in s.1(3) CRA and ‘trader’ in s.1(2) CRA. Goods are defined in
s.2(8) as ‘any tangible moveable items, but that includes water, gas and electricity if
and only if they are put up for supply in a limited volume or set quantity’.

As will be seen below, the substance of the sales contract under the CRA is necessarily
the same as that contained within the SGA – the key feature of a sale being the transfer
of ownership. That is to say, the transfer of all rights that the seller has in the goods, to
the buyer. The concept of ‘ownership’ under the CRA is analogous to that of ‘property’
in the SGA.

In respect of sales contracts, the CRA then goes on to stipulate the standard that
the goods supplied under the contract must reach. These are considered alongside
the SGA implied terms in Chapter 4. It is important to note, however, that the CRA is
perhaps a less complete scheme than the SGA in the sense that it does not have its own
provisions in relation to the passing of property. Section 4 of the CRA provides that the
scheme in SGA ss.16–20B applies. This scheme is considered in Section 3.6 below.
Commercial law  Chapter 3  Sale of goods: contract, property and risk page 31

3.4 What is a contract of sale of goods under the SGA?

Essential reading
¢¢ Sealy and Hooley, Chapter 8 ‘Introduction and definitions’.

3.4.1 Freedom of contract


The first point to make is that the SGA adheres to the principle of freedom of contract:
under s.55(1) ‘where a right, duty or liability would arise under a contract of sale of
goods by implication of law, it may (subject to the Unfair Contract Terms Act 1977) be
negatived or varied by express agreement, or by the course of dealing between the
parties, or by such usage as binds both parties to the contract.’ Moreover, the SGA
often refers to the right of the parties to vary the impact of particular provisions.

There are, however, restrictions on this freedom. The sub-section does not allow
the parties to vary the principles of contract law determining matters such as what
constitutes a binding contract or the effect of misrepresentation and illegality.
Furthermore, it is clear that certain provisions in the SGA cannot be varied, even
though the SGA does not expressly exclude this possibility, for example, the rule in s.16
that no property can pass in unascertained goods (see Section 3.6) or the rules that
enable a third party to obtain good title to goods under ss.21–26 (see Section 3.9).

3.4.2 Transactions that are not sales


The SGA applies only to sales of goods and not to other types of contracts dealing with
goods. It is, therefore, worthwhile considering the distinction between these different
contracts, although the courts have sought to apply similar rules to all of them (see
also the Supply of Goods and Services Act 1982, which drew on the SGA with respect
to contracts for the supply of services). Distinctions are not always easily made, but
the general approach taken by the courts is to look at the substance of the transaction
and not its form – in other words, is it a sale even though the parties may refer to it as
something else? Conversely, as was the case in PST Energy 7 Shipping v OW Bunker Malta
(The Res Cogitans) [2015] EWCA Civ 1058, a contract may be regarded as a sale but in
essence is something else.

Gift
A gift involves the transfer of property in goods without consideration being given in
exchange (i.e. there is no price). A promise to give goods is not enforceable, unless by deed.

Barter
Here the consideration takes the form of goods or services and not money (which is
required under the SGA: see Section 3.5.2). Where goods are transferred to the seller
in part exchange by the buyer (e.g. A agrees to sell to B a car, which is priced at £5,000,
for £2,000 plus B’s existing car), this may be construed as two sales – B buys A’s car for
£5,000 and A buys B’s car for £3,000 (see Aldridge v Johnson (1857) 7 E & B 885).

Contract of bailment
This is where goods are delivered to the bailee on terms requiring their return to the
owner (the bailor) 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 to the bailee. There is, therefore, no bailment if the intention of the parties is
that property passes to the other party, even if the terms of their agreement stipulate
that on the occurrence of an event the property in the goods must be conveyed back
to the original owner (South Australian Insurance Co v Randell (1869) LR 3 PC 101).

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
page 32 University of London

property in the goods. The chargee does acquire a proprietary interest in the goods,
and the charge will cease when the debt is paid. There are various ways in which
a charge may be created in relation to goods: the owner may or may not hand
possession of the goods or documents of title to the other party to secure the debt
(pledge), or may transfer legal title to the goods to the creditor under terms that
require the creditor to convey that title back to the debtor on payment of the debt.
The creditor will have the right to sell if the debt is not paid. The SGA does not apply
to a transaction in the form of a sale that is intended to operate by way of security
(s.62(4)).

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. Where the work element can be
separated from the goods, as where a gas fitter installs a new central heating boiler,
one might be able to suggest there are two contracts; one for the labour (contract
for work) and one for the boiler (contract of sale). The problem arises where the work
done by the fitter is defective and the householder wishes to reject the boiler. This
may not be 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.

The courts will distinguish between a contract for sale and one for work and materials
by looking at the substance, but this does not always supply a useful guide to where
the line is drawn between them. Greer LJ thought the test involved determining if the
skill is ‘only ancillary’ or if ‘the substance of the contract is the skill and experience of
the artist in producing the picture’ (Robinson v Graves [1935] 1 KB 579). 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 situation there is a sale of goods because ‘the principal
part of that which the parties are dealing with is the chattel which will come into
existence when such skill as may be necessary to produce it has been applied’.

This 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. The assumption that
a contract must be in substance either a contract of sale or of work and materials
may work well if there is a clear separation between the supply of goods and the
performance of some service (such as fitting the goods), but may not be so easy
where the work is inseparable from the goods (as in a painting or a restaurant meal)
and leads to what often appear rather arbitrary designations of contracts. In truth,
the judgments in Robinson v Graves were, perhaps, too loose to be able to discern
any clear principle. Problems have arisen from attempts in some cases to transform
a specific set of facts into a general rule so as to legitimise an outcome when really
the distinction ‘depends on the particular nature of each individual contract’ (Lord
Upjohn, Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454).

The significance of the distinctions between some of these contracts has diminished,
although not entirely vanished. In Young & Marten Ltd v McManus Childs Ltd, 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 (but contrast Lord Upjohn’s approach with that of Lord Wilberforce). This
has been reinforced by the Supply of Goods and Services Act 1982, which implies terms
with respect to the goods supplied that largely match those implied into a 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). For the wide scope of the Supply of Goods and Services Act
1982, the decision in Wood v TUI Travel plc [2017] EWCA Civ 11 provides some guidance.
Commercial law  Chapter 3  Sale of goods: contract, property and risk page 33

Agency contracts
Where A buys goods from T on behalf of P and P has authorised or later ratifies the
purchase, there is an agency contract between 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 is a
sale contract between T and A and another between A and P. The test as to whether
someone sells/buys as principal or agent is determined by the substance of the
transaction (in essence, what did the parties intend) and not the form it took (e.g. the
words used to describe the transaction).

Option to buy
Where X agrees to grant an option to Y to buy goods, this is an enforceable contract
if supported by consideration, but it does not fall within the SGA until and unless Y
exercises the option to buy (Helby v Matthews [1895] AC 471). A sale-or-return contract
arises where X delivers goods on terms that allow Y to accept or reject them within
a particular period of time. This is an option to buy because Y has a choice. While Y is
considering whether to exercise this option there is a contract of bailment. The SGA
does have provisions that apply to sale-or-return contracts, but, as will be seen, the
offer of goods on such a basis does not mature into a sale contract unless accepted by
the person to whom the offer is made (see Section 3.6).

Conditional contract
The SGA applies to conditional contracts (s.2(3)). This term is not defined. It cannot
mean an agreement expressed to be ‘subject to contract’ because this is not a
contract. It refers to a contract where some or all of the obligations are conditional on
some fact or event (e.g. the parties agree that the sale of a car is subject to it passing a
test of roadworthiness). The parties are bound if the condition is fulfilled. The parties
may agree that the condition is promissory (if the condition is not fulfilled one party
will be liable in damages to the other) or that it is non-promissory (neither party
promises that it will be fulfilled). It may be that neither must obstruct the possibility
of the condition being fulfilled (Mackay v Dick (1881) 6 App Cas 251) – for example, the
seller of the car must allow it to be submitted for the test and a refusal will constitute
a breach of contract.

Contract of hire-purchase
Typically, this is a means by which someone can buy goods by making payments over
a period of time. However, it 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 occur if 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). Contrast this with the situation where the contract stipulates that
property will pass at some specified time in the future, which will be an agreement to
sell (Forthright Finance Ltd v Carlyle Finance Ltd [1997] 4 All ER 490). See the criticism of
the distinction between hire-purchase and sale contracts made by Sealy and Hooley,
p.318. Most hire-purchase contracts are regulated by legislation, especially the Hire-
Purchase Act 1965 and the Consumer Credit Act 1974, and terms similar to those implied
by the SGA apply by virtue of the Supply of Goods (Implied Terms) Act 1973, although
significant differences remain.

Further reading
¢¢ Atiyah, Chapter 2 ‘The contract of sale’.

Summary
A sale contract is defined by s.2(1) SGA. The components of that definition must be
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 contracts involving 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 contracts involving the supply of
goods.
page 34 University of London

3.5 The sale contract


The components of the definition in s.2(1) (see Section 3.2 above) are examined in this
section.

3.5.1 Sale or agreement to sell


As has been seen, the SGA applies to both a sale and an agreement to sell. The word
‘sale’ includes both types of contract, and buyer/seller includes someone who has
agreed to buy/sell (s.61(1)).

Agreement to sell is where the transfer of property (roughly, the transfer of ownership;
also called title) in the goods does not take place at the same time as the contract is
agreed. Contrast the purchase of a newspaper in a shop, when the contract of sale is
agreed and the property in the goods passes at the same time, with an airline agreeing
to buy an aircraft that has not been built, when the contract of sale is agreed a long
time before property in the goods passes to the buyer. If the seller fails to deliver the
aircraft, the buyer has no property rights, merely an action for breach of contract;
whereas the buyer of the newspaper acquires property rights in the goods and rights
under the contract.

It is worth emphasising these points: the sale involves both a contract and the
conveyance of title to goods, whereas the agreement to sell does not convey title,
although it does include promises as to conveyance. A contract can still be construed
as an agreement to sell even if at the outset it is known that the seller may not be
able to acquire the goods in order to convey the title, as demonstrated in Hughes v
Pendragon Sabre Ltd [2016] EWCA Civ 18.

3.5.2 Price

Essential reading
¢¢ Sealy and Hooley, pp.325–26.

The price must be in money, either paid or promised. This includes payment by
cheque, credit card or other forms of money transfer. The price may be fixed in the
contract (s.8(1)), or left to be determined in a manner agreed by the contract, or by
some measurement (e.g. weight), or by a third party (see s.9). If the parties have left
the price to be agreed upon later by the parties, there is usually no contract on the
grounds of uncertainty, unless the court can infer an intention that a reasonable price
is to be paid (s.8(2)). If the contract stipulates that the price is to be fixed by a third
party and that party fails to act, neither party has any remedy under the contract,
except, perhaps, the return of goods or money transferred – the courts cannot
intervene to appoint another person to fix the price or to set a reasonable price.

Activity 3.2
a. 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?

Further reading
¢¢ Atiyah, pp.31–35.

3.5.3 ‘Goods’

Essential reading
¢¢ Sealy and Hooley, pp.312–25.
Commercial law  Chapter 3  Sale of goods: contract, property and risk page 35

The word ‘goods’ in s.2(1) includes:


…all personal chattels other than things in action and money… and in particular ‘goods’
includes emblements,† industrial growing crops, and things attached to or forming part †
Emblement = ‘the profits
of the land which are agreed to be severed before sale or under the contract of sale; and of sown land’, particularly
includes an undivided share in goods (s.61(1)). annually harvested grass,
The SGA does not apply to land (real property), nor shares and cheques (choses or grain or fruit, etc.
things in action) or bank notes (money). The sale of bank notes or coins, which are
legal tender (that is, can be used in the settlement of debts) but also have a value to
collectors above their face value, may fall within the SGA if the parties intend their
transaction to be on the latter basis (Moss v Hancock [1899] 2 QB 111).

Computer software has caused some difficulties and may not be covered by the SGA.
Glidewell J took the view that the SGA does apply where the software is carried on
a disc and both are sold to the consumer, but not if the software is simply licensed
(which is the normal method). However, he added that terms regarding the quality of
the software would be implied which resembled those arising under the SGA (St Albans
City and District Council v International Computers Ltd [1996] 4 All ER 481. See also Beta
Computers (Europe) Ltd v Adobe Systems (Europe) Ltd 1996 SLT 604; Adams, J.N. ‘Software
and digital content’ (2009) JBL 396; Niranjan, V. ‘A software transfer agreement and
its implications for contract, sale of goods and taxation’ (2009) JBL 799; Green, S. and
D. Saidov ‘Software as goods’ (2007) JBL 161).

The view that software supplied on a physical medium is a form of goods is further
supported by dicta in London Borough of Southwark v IBM UK Ltd [2011] EWHC 549 (TCC)
and Fern Computer Consultancy v Intergraph CADWorx [2014] EWHC 2908 (Ch).

As software is increasingly supplied via downloads, this will likely become less of
an issue for the SGA as this cannot be regarded as goods. However, this will mean
potentially very little protection for the non-consumer buyer of software.

There is no decision on whether energy (e.g. in the form of electricity, heat or refrigeration)
is within the SGA and logic would suggest that it is not since it cannot be possessed in the
same way as physical objects like cars – it can only be stored by changing the physical or
chemical state of other property, such as a battery. It is likely, however, that similar terms
will be implied into a contract for the supply of energy as apply under the SGA.

The distinction between goods and land is not easily made. The SGA does cover crops
that are attached to the land, although these are also land within the meaning of the
Law of Property Act 1925, s.205 (Kursell v Timber Operators and Contractors Ltd [1927] 1 KB
298). Whether goods have been affixed to – and so become part of – land often depends
partly on the degree of annexation (how easily can the goods be detached?) and partly
on the purpose of annexation (what was the intention of the parties in attaching the
goods to the land?): so bricks are goods that become land when formed into a wall
on land. A building is land, but can become goods by demolition or detachment from
the land. Therefore, if the owner of land agrees to demolish a building and sell the
materials, this is a contract of sale of goods. Things attached to or forming part of the
land – buildings, fixtures, crops, minerals and soil – which are agreed to be severed
before sale or under the contract of sale, are declared to be goods by s.61(1).

The law recognises no right of property in a dead body or any part thereof, so human
remains cannot ordinarily be considered goods capable of being bought and sold.
But in Dobson v North Tyneside Health Authority [1996] 4 All ER 474 the court appears
to have concluded that once a person has, by the lawful exercise of work or skill,
so dealt with a human body or part of a human body that it has acquired some
attributes distinguishing it from a mere corpse awaiting burial (or part thereof), it
can be the subject of property rights like other types of goods, for example, stuffing
or embalming a corpse or preserving an anatomical or pathological specimen for a
scientific collection, education or exhibition (Egyptian mummies can, therefore, be
the subject of a contract of sale). In Yearworth v North Bristol NHS Trust [2010] QB 1, the
Court of Appeal sought to distance itself from this idea that the application of skill
transformed body parts into goods, but did not provide a satisfactory substitute (see
Quigley, M. ‘Property: the future of human tissue’ (2009) 17(3) Med Law Rev 457).
page 36 University of London

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, such as a one-half share in
a horse or boat. We will discover the significance of this when we come to discuss the
passing of property in goods.

3.6 ‘Transfers or agrees to transfer the property’

3.6.1 Property

Essential reading
¢¢ Sealy and Hooley, Chapter 2 ‘Basic concepts of personal property’ and pp.305–12.

Study pack reading


¢¢ Battersby, G. and A.D. Preston ‘The concepts of “property”, “title” and “owner”
used in the Sale of Goods Act 1893’.

¢¢ Battersby, G. ‘A reconsideration of “property” and “title” in the Sale of Goods


Act’.

While the price is the benefit received by the seller, the buyer receives both the goods
and property in the goods. If the goods, which were the subject of the sale contract,
are in the possession of the seller and the seller becomes insolvent, the question of
who owns the goods – or, in the words of the SGA, has property in them – determines
whether the other 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 3.7
below), who has property will often settle the question of who bears the loss if goods
are damaged or destroyed.

The concept of property in English law is elusive and there is not sufficient space in this
module guide to consider all its nuances. Nevertheless, it is worth making one or two
observations. A property right is the connection between an individual and a thing:
The touchstone of a property right is its universality: it can be asserted against the world
at large and not, for example, only against another individual such as the contracting
partner. If, under a contract of sale, I acquire the ownership of a chattel, my property right
to the chattel may be asserted not just against the seller but against the whole world.
(Bridge, M. Personal property law. (Oxford: Oxford University Press, 2015), p.12.)

If A sells a car to B, B can assert the property right acquired, not only against A, but also
against others even though they are not parties to the contract. Contrast this with
contractual rights, which have only a limited impact on third parties because of the
doctrine of privity.

Section 2 SGA refers to sales as contracts where the seller transfers, or agrees to
transfer, property in goods. In other words, the SGA covers two distinct aspects: the
contract to transfer and the transfer itself. Where there is a sale, the contract and
the transfer occur simultaneously; where there is an agreement to transfer they are
separated because the transfer of property in the goods is delayed.

What is the ‘property’ that is being transferred? According to s.61(1) it is ‘the general
property in goods, and not merely special property’. The same definition is adopted
by s.4(1) CRA. 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 SGA are concerned with situations in
which the seller has a defective title or no title at all (for example, ss.12(3) and 21–26,
see Section 3.8 below). The centrality of the obligation to pass property to the contract
of sale is illustrated in the Supreme Court decision in PST Energy 7 Shipping v OW Bunker
Malta (The Res Cogitans) [2015] EWCA Civ 1058.
Commercial law  Chapter 3  Sale of goods: contract, property and risk page 37

PST Energy 7 Shipping also demonstrates how the complexities of modern commercial
dealings still make determinations as to whether or not property has passed, or
was ever intended to pass, complex and ‘live’ issues in litigation. A very different
illustration of the issues posed when determining whether property has passed (and
the consequences of that determination) can be found in Wood v TUI Travel plc [2017]
EWCA Civ 11, a case under the Supply of Goods and Services Act 1982 (SGSA 1982) (which
would now be argued under the Consumer Rights Act 2015) where the claimant sought
redress as a result of food poisoning contracted on an ‘all inclusive’ holiday (one where
the traveller makes a single contract for travel, accommodation and all food and drink
consumed within their hotel). In order to prove their claim, the claimant had to argue
a breach of terms implied by SGSA 1982. The Court of Appeal considered whether
the provision of food was a provision of a service or a supply of goods. If a supply of
goods, property in the goods must pass to the claimant. The Court of Appeal offered a
detailed analysis of the transactions, concluding that property had passed, providing a
remedy to the claimant under the Act.

3.6.2 Categorisation of goods


In order to understand the principles governing the passing of property, which
are discussed in the next section, it is necessary to understand the way the SGA
categorises goods as existing, future and specific or unascertained. This categorisation
occurs at the time of the contract.

Existing goods
Existing goods are those owned or possessed by the seller at the time of the contract
(s.5(1)).

Future goods
Future goods are to be manufactured or acquired by the seller 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 a sale of future goods if Jake does not own the car at
the time of the contract (Varley v Whipp [1900] 1 QB 513). There can be a sale of future
goods even if there is uncertainty as to whether the seller will be able to acquire the
goods (Hughes v Pendragon Sabre Ltd [2016] EWCA Civ 18). 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 or future goods will also be specific or unascertained goods. The significance
is that property will not pass where the goods are not ascertained (s.16; but see s.20A,
discussed in Section 3.6.10 below) and a court cannot make an order for specific
performance in respect of unascertained goods (s.52). The distinction between specific
and unascertained goods depends on when they are identified:

uu If the goods are identified and agreed upon at the time of the contract they are
specific goods (s.61(1)).

uu If they are not identified at the time of the contract they 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.

Typically, future goods will be unascertained. If the buyer agrees to buy a new Bentley
from a dealer who does not have what is required in stock, this is a sale of future and
unascertained goods. However, if the buyer agrees to buy from the dealer a particular
Bentley, which at the time of the contract is owned by another person, this is a sale of
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).
page 38 University of London

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.
Property can only pass when the goods become ascertained. Although the rules on
passing of property are discussed in more detail in the next section, it is worth noting
one of the problems with the rule that property cannot pass in unascertained goods. In
Re Wait [1927] 1 Ch 606, 500 tons of wheat were sold from a cargo of 1,000 tons that was
on board a ship, Challenger. When the seller went into liquidation, the court held that
the sale was of unascertained goods and so 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 Goldcorp Exchange Ltd [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 was stored 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.

There are three main categories of unascertained goods:

uu Generic goods, or goods referred to only as being of a particular kind or


description: the sale of ‘100 tons of barley’.

uu Goods not yet in existence, which are to be manufactured or produced or acquired


by the seller: the sale of a reaping machine owned by a third party at the time of
sale.

uu A part, which is as yet unidentified, of a specified bulk: ‘500 tons out of the 1,000
tons on board Challenger’.

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’, see
Section 3.6.8 below), they become ascertained goods.

Study pack reading


¢¢ Bridge, M. Personal property law. (Oxford: Oxford University Press, 2015) [ISBN
9780198743088] Chapter 6 ‘Transfer of title’, pp.195–227.

Activity 3.3
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 particular second-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 Unascertained

Existing

Future

Think of other goods that you have bought recently and decide which part of the
grid you would put them in.

Further reading
¢¢ Atiyah, pp.52–59, 272–78.

¢¢ Bridge, M. Personal property law. (Oxford: Oxford University Press, 2015)


[ISBN 9780198743088], Chapter 1 ‘Property rights and classes of property’.
Commercial law  Chapter 3  Sale of goods: contract, property and risk page 39

¢¢ Goode (2016), pp.28–50.

¢¢ Merrett, L. ‘The importance of delivery and possession in the passing of title’


(2008) CLJ 376.

3.6.3 Passing of property

Essential reading
¢¢ Sealy and Hooley, Chapter 9 ‘Passing of the property in the goods as between
seller and buyer’.

The key principles relating to the passing of property in sales contracts are
summarised below. Because s.4 of the CRA invokes ss.16–20B of the SGA to determine
when property passes in consumer sales, these principles apply equally to business-to-
business and trader-to-consumer contracts.

a. ‘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, Bayley J).

b. ‘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 title relates’
(Goldcorp Exchange Ltd [1995] 1 AC 74). But this general principle is subject to an
important exception in s.20A (discussed below).

c. 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 and the circumstances
of the case’ (s.17(2)). Property may still pass even though the time for payment or
delivery has not arrived (but see the remarks of Diplock LJ quoted in Section 3.6.4
below).

d. If no such intention can be discerned, s.18 provides rules to resolve the issue of
when the property is to pass (see below). With the exception of rule 5, these rules
are concerned with the passing of property in specific goods.

e. 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 Brandon in Leigh and Sillavan Ltd v Aliakmon Shipping Co Ltd, The
Aliakmon [1986] AC 785):

It would have been futile in a code intended for commercial men to have created
an elaborate structure of rules dealing with rights at law, if at the same time it was
intended to leave, subsisting with the legal rights, equitable rights inconsistent with,
more extensive, and coming into existence earlier than the rights so carefully set out
in the various sections of the code.
Nevertheless, Atkin LJ did go on to say that the provisions in the SGA have:
…no relevance when one is considering rights, legal or equitable, which may come
into existence dehors [outside] the contract for 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 or disposition of goods, the subject matter of sale; and he may, of
course, create such an equity as one of the terms expressed in the contract of sale.

The parties may, for example, 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, and the 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. See Re London Wine [1986]
PCC 121 (Sealy and Hooley, pp.331–34); Goldcorp Exchange Ltd [1995] 1 AC 74. But see
also Re Stapylton Fletcher Ltd [1995] 1 WLR 1181 (see Section 3.6.8 below).
page 40 University of London

Activity 3.4
Why 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?
You are encouraged to practise your spoken English by making an oral answer in
response to this activity.

3.6.4 Section 18, rule 1: goods in a deliverable state


Where there is an unconditional contract for the sale of specific goods in a deliverable
state the property in the goods passes to the buyer when the contract is made, and it is
immaterial whether the time of payment or the time of delivery, or both, be postponed.

In spite of its wording, Diplock LJ remarked of this rule: ‘the governing rule is in s.17, and
in modern times 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] 1 QB 534).

The phrase ‘unconditional contract’ cannot mean that a contract must not have
conditions of any sort because all contracts of sale have conditions, such as that the
buyer will pay and the seller will deliver and the goods will be of satisfactory quality.
‘Unconditional’ must refer to something in the contract of sale that prevents the
operation of rule 1, and this would include the situations in rules 2 and 3.

Goods are ‘in a deliverable state’, ‘when they are in such a state that the 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, p.304), a machine was attached
to a factory floor and, therefore, was not in a ‘deliverable state’ until detached. It is only
when the seller must do something that this rule may prevent property from passing and
not if, for example, a contract term requires the buyer to detach the machine (see also
Kulkarni v Manor Credit (Davenham) Ltd [2010] EWCA Civ 69).

There is a difficulty with specific goods that are also future goods (such as the machine
in Varley v Whipp [1900] 1 QB 513), which would seem to come within rule 1. This is
resolved by 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 until the seller
acquires title or the buyer acquires title through an exception to the nemo dat rule
(Goode (2016), p.251. On the meaning of the nemo dat rule see Section 3.9 below).

Activity 3.5
A farmer agrees to sell all of the trees on their land. The trees are to be cut down a
month after the agreement and payment is to be made at that time. At what point
does the property in the trees pass?

3.6.5 Section 18, rule 2: goods not in deliverable state


Where there is a contract for the sale of specific goods and the seller is bound to do
something to the goods for the purpose of putting them into a deliverable state, 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 in a 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 has undertaken 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 cover 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.

3.6.6 Section 18, rule 3: price to be ascertained


If the seller of specific goods in a deliverable state is required to carry out some
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 will not apply and
property will pass under rule 1 (Nanka-Bruce v Commonwealth Trust [1926] AC 77).
Commercial law  Chapter 3  Sale of goods: contract, property and risk page 41

3.6.7 Section 18, rule 4: sale or return


Where goods are ‘delivered to the buyer on approval or sale or return’, property
passes when the buyer:

uu signifies acceptance, or

uu does an act adopting the transaction (rule 4(a)), or

uu 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 on the understanding that the
sale is dependent on the person in receipt of the goods adopting the transaction.
Such agreements are common in certain trades and might be entered into because,
for example, a retailer is uncertain about demand for a product (Atari Corporation
(UK) Ltd v Electronics Boutique Stores (UK) Ltd [1998] QB 539). This arrangement must
be distinguished from a contract of sale in which the seller retains property in the
goods (see Section 5.5) or the buyer acquires property in the goods but there is a
term allowing their return (Elphick v Barnes [1880] 5 CPD 321). In sale or return there
is no contract or agreement to sell; there is only an offer by the ‘seller’, which the
‘buyer’ may accept or reject. Thus, Phillips LJ observed that ‘the notice of rejection
referred to by the SGA of 1979 is no more than the notice that an offeree can always
give that a contractual offer is rejected’ (Atari Corporation (UK) Ltd v Electronics
Boutique Stores (UK) Ltd).

What are the obligations of the ‘buyer’ and the ‘seller’ up to the point at which the sale
is concluded? According to Phillips LJ:

uu 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
reasonable care of them.

uu The ‘seller’ may not withdraw the offer to sell, except as the contract permits.

Other issues that have caused difficulty in sale or return agreements have been:

a. What constitutes ‘an act adopting the transaction’? If an act indicates personal
use by the ‘buyer’, which goes beyond what is contemplated by the arrangement,
this might amount to ‘an act adopting the transaction’ (Poole v Smith’s Car Sales
(Balham) Ltd [1962] 1 WLR 744 (Sealy and Hooley, pp.348–50). Also, Kirkham v
Attenborough [1897] 1 QB 201).

b. 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).

c. What constitutes a notice of rejection and what effect does it have? Often
contracts for sale or return do not address the issues of how the ‘buyer’ is to signify
rejection of the goods, or what is the responsibility of the ‘buyer’ once the goods
have been rejected. Subject to any agreement to the contrary, rejection can be
notified in any form and does not require return of the goods, although the ‘buyer’
must make them available to the ‘seller’ within a reasonable period of time after
rejection. 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.

Activity 3.6
a. Jake has expressed an interest in buying a particular horse owned by Mary for
£1,000, if it is suitable for his young daughter to ride. Mary agrees that Jake can
take the horse for 10 days in order to determine its suitability. After a week the
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?
page 42 University of London

3.6.8 Section 18, rule 5: unascertained goods and appropriation


While 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 Section 3.6.10 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)):

uu there is a contract for the sale of unascertained goods or future goods by


description, and

uu 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:

uu an irrevocable identification of the goods that are the subject of the contract

uu the assent of both parties.

(Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd’s Rep 240. Applied and
further discussed in the more recent decision in Kulkarni v Manor Credit [2010] EWCA
Civ 69.)

The contract can specify what amounts to appropriation, but often the identification
and assent will be by the seller physically taking the goods to the buyer and the buyer
accepting them, or the buyer going to the seller and collecting 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 seller changing their
mind and substituting other goods. The seller must unconditionally appropriate the
goods to the contract. This action is, usually, the last act of 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 Section 4.2.2).

There are some troublesome cases. In Aldridge v Johnson [1857] 7 E & B 885, there
was appropriation before delivery when the seller placed the goods in containers
supplied by the buyer, even though the seller could have unpacked the goods and
replaced them with other goods. Carlos Federspiel & Co SA v Charles Twigg & Co Ltd
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 to go 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. Yet, it might be that in Aldridge there was an implied term in the contract
permitting the seller to appropriate by their act of loading the goods.

Handing goods to a carrier 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). Such an
action is also presumed to constitute delivery (s.32(1); see Section 4.2.2 below).

If the seller attaches conditions to the appropriation, property will not pass even
though the goods are ascertained. For example, if the contract stipulates that the
seller retains property in the goods until the buyer has paid, property will only pass
when the condition has been met (s.19 and see also Section 5.5 below).

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
Commercial law  Chapter 3  Sale of goods: contract, property and risk page 43

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).

Activity 3.7
Acme 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’s
warehouse and urges them to collect the wheat. The wheat is stolen from the
warehouse on 10 September. Advise Acme.

3.6.9 Section 18, rules 5(3) and 5(4): ascertainment by exhaustion


Mustill J pointed out that ascertainment can be achieved by a method other than that
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). 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 of a ship’s cargo, the goods can be ascertained where the cargo
is reduced by prior deliveries to the amount for which the buyer contracted, or where
a single buyer purchases the whole cargo in different lots, and the parties intend
property to pass.

Mustill J’s idea of ascertainment by exhaustion has been confirmed by rules 5(3) and
5(4), which were added to s.18 in 1995.

3.6.10 Section 20A: unidentified part of identified bulk


Rule 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.
However, the buyer is not at risk if the goods are lost (although see Section 3.7 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 the customers.

The Law Commission was asked to look into these issues. Its report led to ss.20A and
20B, which created a new species of property interest, enabling the buyer to acquire
co-ownership of the bulk with other buyers.

The 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.

uu There is a sale of ‘a 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 case the buyer does not come within s.20A, but might be a tenant in
common at common law.

uu The bulk is identified in the contract or by subsequent agreement (s.20A(1)(a)).


The bulk is ‘a 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 are interchangeable 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.

uu 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.
page 44 University of London

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 the
buyer 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 of 100:900 (in
other words, the buyer’s share is 100 and the seller’s 900). If a second buyer pays for
100 litres and a third buyer pays for 800 litres the co-ownership shares are 100 (first
buyer): 100 (second buyer): 800 (third buyer).

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 have the same interest in the reduced bulk
(s.20A(4)). Taking our oil tank, if half of the bulk has been lost, each buyer will have a
tenth of the reduced bulk. Goode (2016, p.281) suggests that where part of the bulk is
not sold, any diminution of the bulk should be borne first by the seller.

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 a co-owner is 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 allows buyers to deal in goods while they are in transit. A co-owner,
who receives no more than is due under the contract, is not liable to any other co-
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)). The disappointed co-owner will only
have a remedy against the seller.

If part of the price has been paid by the buyer, any part delivery to the buyer is
‘ascribed in the first place to the goods in respect of which payment has been made’
(s.20A(5)). If the buyer of 2,000 litres from a bulk of 10,000 litres has paid half the price
and subsequently 500 litres are delivered, that buyer’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 500:9,500. This maintains the principle that the
buyer’s interest under s.20A is related to the payment made.

Activity 3.8
a. Fred agrees to buy ‘all the hay’ in Jane’s barn at £100 per ton. Fred agrees to take the
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 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 garage 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 Goldcorp Exchange Ltd be decidedly differently in the light of s.20A?

Activity 3.9
Think about the reasons why reform of the law was introduced in respect of
contracts for the sale of part of an identified bulk. Do the rules resolve the
problems? Do they create new problems? Can you suggest any ways in which the
rules might be improved? Record your thoughts in your portfolio.
There is no feedback for this activity.

Further reading
¢¢ Atiyah, pp.272–78.
Commercial law  Chapter 3  Sale of goods: contract, property and risk page 45

Summary
Property in specific goods passes when the parties intend it to be transferred. If no
intention is evident, the SGA sets out the rules in s.18 for determining 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), unless the
goods are part of an identified bulk of which the buyer is a tenant in common at
common law or a co-owner under s.20A.

3.7 Risk

Essential reading
¢¢ Sealy and Hooley, pp.361–67.

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 (s.20(1)). This rule
applies irrespective of which party has possession of the goods.

The general rule will not apply where:

uu the parties have agreed that risk should pass (for example, Head v Tattersall (1871)
LR 7 Exch 7). The parties may agree that risk will pass even though the goods are
unascertained (Sterns Ltd v Vickers Ltd [1923] 1 KB 78).

uu the loss was caused by the fault of one party, in which case that party bears the loss
(s.20(2); Demby Hamilton & Co Ltd v Barden [1949] 1 All ER 435).

uu one party is the bailee of the goods and the loss occurs through their lack of
reasonable care, in which case that party will be liable (s.20(3); Wiehe v Dennis Bros
[1913] 29 TLR 250).

uu 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).

Activity 3.10
Is this arrangement fair? Could the rules be improved?
There is no feedback for this activity.
Where risk has passed before the buyer acquires the property in the goods or
possession of them, and the goods 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 relation to other forms of transit.

Activity 3.11
a. What risks do the seller and buyer run and which risks are dealt with under
s.20(1) of the SGA?

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

Further reading
¢¢ Atiyah, pp.279–85.
page 46 University of London

3.7.1 Risk in consumer contracts


In a sales contract under the CRA, by contrast to the SGA, there is no link between the
passing of property and the passing of risk. Risk passes in accordance with the rules set
out in s.29. The default rule in s.29(2) is that risk passes when the goods come into the
physical possession of the buyer (s.29(2)(a)) or a person identified to take possession
on their behalf (s.29(2)(b)). Risk will only pass prior to this point if under s.29(3) the
buyer arranges for the carriage of the goods.

3.8 Perishing of goods and frustration of contract

Essential reading
¢¢ Sealy and Hooley, Chapter 9 ‘Passing of the property in the goods as between
seller and buyer’.

3.8.1 Specific goods perishing


Where there is a contract for the sale of specific goods (not unascertained goods or
goods that form part of a bulk), but the goods perished before the contract without
the knowledge of the seller, the contract is void (s.6). Under the contract one party
(the seller or the buyer) may have agreed to take the risk that the goods perished
before the contract, so that, in the event of the goods having perished, s.6 will not
apply and that party will be liable (McRae v Commonwealth Disposals Commission (1950)
84 CLR 377).

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.
Howerver, where the goods are part of a larger bulk and the bulk has perished, then,
while s.6 does not apply, the doctrine of common mistake (where both parties
contracted on the assumption that the bulk existed) or frustration (where the bulk
perished and neither party was responsible for the loss or had assumed the risk of it
occurring: Section 3.8.3) might apply under the general principles of contract law.

The goods may have perished where they exist but have lost their commercial
character. For example, dates perished when underwater for two days and
impregnated with sewage, even though they had commercial value (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 1893 and there is a contrary – if rather dubious – authority, Horn v Minister
of Food [1948] 2 All ER 1036. The subject matter may have perished if part only has been
lost: e.g. where 109 bags of a specified parcel of 700 bags were stolen (Barrow, Lane
& Ballard Ltd v Phillip Phillips & Co Ltd [1929] 1 KB 574). In addition, since specific goods
includes an undivided share of goods (s.61(1)), if the goods perish, s.6 may apply.

Under s.7, where there is an agreement to sell specific goods and, without 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. Note that 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 Section 3.5.1 above.)

3.8.2 Unascertained goods perishing


Sections 6–7 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 showing
that goods of that description are not available at the time of delivery. The seller takes
the risk of this eventuality and must pay damages in the event of being unable to
deliver (Blackburn Bobbin Co Ltd v TW Allen & Sons Ltd [1918] 2 KB 467).

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. They may agree that the
contract is to sell goods drawn from an identified source, such as from the cargo on a
Commercial law  Chapter 3  Sale of goods: contract, property and risk page 47

named ship. Where there was a contract of sale for ‘200 tons of regent potatoes grown
on land belonging 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 there
was 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 a specific
place, if deliverable from that place’ (Howell v Coupland [1876] 1 QBD 258, Lord
Coleridge CJ). There is a difficulty with this case: the court held that this was a contract
for specific goods, but the potatoes were not identified and agreed on at the time of
the contract and so are not specific goods as defined by the subsequent Sale of Goods
Act 1893. This means that if these facts were to be repeated ss.6–7 would not apply. But
the decision may survive as a rule of common law by virtue of s.62(2). (For discussion of
this case, see HR & S Sainsbury Ltd v Street [1972] 1 WLR 834.)

There is an obvious difficulty in treating as different those goods that are drawn from
an identified source (sometimes called quasi-specific goods). To some degree 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 obligation under the contract. It
could, therefore, be said that all unascertained goods are quasi-specific in that they
are drawn from an identified and limited source.

3.8.3 Frustration
Aside from those situations already dealt with in which the goods are lost, the
doctrine 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 to do 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.

The decision in CTI Group Inc v Transclear SA [2008] EWCA Civ 856 illustrates the
operation of the doctrine of frustration. Both parties were aware that the ability of T
to supply cement to C under the sale contract depended on T being able to procure a
source of cement, in spite of opposition from a monopolist company in the country
into which C was to import the cement. T was unable to find an alternative source
of supply, but the Court of Appeal held that the seller had entered into a personal
obligation to supply the goods and had taken the risk that it would be unable to fulfil
this obligation.

Activity 3.12
Why is it more useful to resolve cases like Howell v Coupland by the use of an
implied term than to use the doctrine of frustration?

Further reading
¢¢ Atiyah, pp.285–96.

Summary
The general rule is that risk of loss passes with property, but the parties may agree
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, without fault of either party,
the goods perish subsequent to the agreement and before the risk has passed to the
buyer, the agreement is avoided. In a contract 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 specified source when the courts may imply a term removing or
modifying the obligation to perform in the event that this source is not available.
page 48 University of London

3.9 Transfer of title

3.9.1 The nemo dat rule

Essential reading
¢¢ Sealy and Hooley, Chapter 10 ‘Transfer of title’.

Where someone, who has either no property or whose rights are defective, disposes of
goods, does the buyer acquire title to the exclusion of the true owner? Denning LJ
remarked:
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 for the protection of commercial transactions: the person who takes in good
faith and for value without notice should get a good title. (Bishopsgate Motor Finance
Corporation Ltd v Transport Brakes Ltd [1949] 1 KB 322.)

But, in truth, is there a struggle between two equal principles? The SGA states: ‘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 buyer acquires no better
title to the goods than the seller had’ (s.21(1)). This is known as the nemo dat quod non †
Nemo dat quod non habet
habet† rule (or simply nemo dat) and Lord Goff, after referring to this rule, said, ‘The
(Latin): ‘No-one (can) give
succeeding sections enact what appear to be minor exceptions to that fundamental
what he or she has not got.’
principle’ (National Employers’ Mutual General Insurance Association Ltd v Jones [1990] 1
AC 24). It is important not to lose sight of this when considering the nature of the
exceptions.

3.9.2 Estoppel

Essential reading
¢¢ Sealy and Hooley, Chapter 10 ‘Transfer of title’.

The first of the exceptions to the nemo dat rule is contained in s.21(1) itself. The part of
that section quoted above 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 selling is
the owner or is acting as an agent with authority to sell, the true owner is estopped
from denying that authority to sell and the buyer acquires good title (Henderson
& Co v Williams [1895] 1 QB 521). A car owner, who wished to raise money on his car
without selling it, was estopped when he colluded in a transaction with a car dealer
under which the car was represented to a finance company as belonging to the dealer
(Eastern Distributors Ltd v Goldring [1957] 2 QB 600). Although this does not create title
in the purchaser, it prevents the owner from asserting their own title and so has the
same effect.

There must be a representation, which may be by words and/or conduct. Merely


handing possession of goods and/or documents of title is usually not sufficient, even
if this has been done in a way that might be regarded as careless because, ‘a man
who owns property is not under any general duty to safeguard it and…he may sue
for its recovery any person into whose hands it has come’ (Moorgate Mercantile Co
Ltd v Twitchings [1977] AC 890, Lord Wilberforce; see also Central Newbury Car Auctions
Ltd v Unity Finance Ltd [1957] 1 QB 371). In Industrial and Corporate Finance Ltd v Wyder
Group Ltd t/a Ducati (2008) 152(37) SJLB 31, it was argued that there was an obligation
on a finance company to register its interest in motorcycles, which meant a failure
to register amounted to an estoppel under s.21(1). Yet, in spite of the defendant’s
allegation that it was standard trade practice to register their interest, the court was
not persuaded that the finance company had any such duty.

In Mercantile Credit Co Ltd v Hamblin [1965] 2 QB 242, 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
Commercial law  Chapter 3  Sale of goods: contract, property and risk page 49

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 negligent 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.
Howerver, by analogy with a 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 by an agent 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 3.13
Why were Farquharson Bros not estopped from denying the title of the third party
in Farquharson Bros & Co v C King & Co [1902] AC 325?

3.9.3 Sale under a voidable title

Essential reading
¢¢ Sealy and Hooley, Chapter 10 ‘Transfer of title’.

Under s.23, ‘When the seller of goods has a voidable title to them, but his title has not
been avoided at the time of the sale, the buyer acquires a good title, provided he buys
them in good faith and without notice of the seller’s defect of title’ (see also, Cundy v
Lindsay [1878] 3 App Cas 459).

There are many illustrations of a voidable contract involving misrepresentations as to


identity, which will be familiar to students of the law 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 had been induced by a fraudulent misrepresentation, that only made the contract
voidable. Since it had not been avoided before the goods were resold to a third party,
title passed to the latter.

The first issue is whether the seller (S) acquired title to the goods from the original
owner (O), which will not be the case where S represents themselves to O as X and
O’s intention is to sell to X and no one else. Here the contract of sale between O and
S is void for mistake and S cannot pass title to the second buyer (B). But the courts
are reluctant to reach this view and typically conclude that the intention is to sell to
the person who made the purchase whatever their identity (Lewis v Averay [1972] 1 QB
198; contrast with Ingram v Little [1961] 1 QB 31, which is discussed in Lewis and is a rare
example where the contract was void).

If the contract is merely voidable, the original owner must communicate their
intention to rescind to the first buyer (S) within a reasonable period of time, and
they cannot do this if they have done anything to affirm the contract with full
knowledge of the relevant facts. Where S is a rogue, O is likely to face some difficulty
in communicating their intention. In Car and Universal Finance Co Ltd v Caldwell
[1965] 1 QB 525, it was held that 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,
which bought in good faith and without notice. The Court of Appeal concluded that
the 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. Upjohn LJ remarked:
page 50 University of London

If one party [the rogue], by absconding, deliberately puts it out of the power of the other
to communicate his intention to rescind which he knows the other will almost certainly
want to do, I do not think he can any longer insist on his right to be made aware of the
election to determine the contract. In these circumstances communication is a useless
formality. I think that the law must allow the innocent party to exercise his right of
rescission otherwise than by communication or repossession.

The court must be able to discern that it was the intention of the original owner
to rescind the contract and that this intention was formed before the resale took
place – in Caldwell notification to the police and the Automobile Association provided
sufficient evidence.

The decision in Caldwell was, to some extent, limited by the Court of Appeal in Newtons
of Wembley Ltd v Williams [1965] 1 QB 560 (two of the judges who sat in Caldwell also
heard this appeal). It was held that, even if the owner had avoided the contract before
the resale, title passed because the rogue was a buyer in possession and the sale had
been made in the ordinary course of business of a mercantile agent, that is, at a market
for used cars (see s.25(1); Section 3.9.5 below).

Although s.23 states that the new buyer will not acquire title if they bought with notice
of the voidable contract, this does not amount to a requirement that the original
owner communicate their intention to rescind to the new buyer before the contract.
In other words, there are two separate possibilities in s.23: first, that the original owner
rescinds the contract before the resale; second, that the new buyer is aware (from
whatever source) of the defect in the seller’s title at the time of the resale.

3.9.4 Seller in possession

Essential reading
¢¢ Sealy and Hooley, Chapter 10 ‘Transfer of title’.

If property in the goods has passed to B, but A remains in possession of the goods or
documents of title and sells them to C who purchases in good faith and without notice
of the sale to B, title passes to C, leaving B with only an action for breach of contract
against A (s.24; s.8 of 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: for example, goods held by a warehouse owner to the order of
the seller. The seller’s possession does not have to be in any particular capacity or even
lawful: ‘It is sufficient if he remains continuously in possession of the goods that he has
sold 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 (see also Pacific Motor Auctions Pty Ltd
v Motor Credits (Hire Finance) Ltd [1965] AC 867).

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 it back. At all times the
machinery remained in the possession of the seller, but it was held that the seller’s
acknowledgement to the finance company that the machines were being held on its
behalf amounted to a delivery to that company.

By ‘documents of title’ is meant those documents ‘used in the ordinary course of


business as proof of the possession or control of goods, or authorising or purporting
to authorise, either by indorsement or delivery, the possessor of the document to
transfer or receive goods’ (s.61(1), see also Factors Act 1889, s.1(4)).
Commercial law  Chapter 3  Sale of goods: contract, property and risk page 51

3.9.5 Buyer in possession

Essential reading
¢¢ Sealy and Hooley, Chapter 10 ‘Transfer of title’.

In this situation the buyer has acquired possession of the goods and sells to a second
buyer.
Where a person having bought or agreed to buy goods obtains, with the consent of
the seller, possession of the goods or the documents of title to the goods, the delivery
or transfer by that person, or by a mercantile agent acting for him, of the goods or
documents of title, under any sale, pledge, or other disposition thereof, to any person
receiving the same in good faith and without notice of any lien or other right of the
original seller in respect of the goods, has the same effect as if the person making the
delivery or transfer were a mercantile agent in possession of the goods or documents of
title with the consent of the owner. (s.25(1))

Section 9 of the Factors Act 1889 is similar (but see DF Mount Ltd v Jay & Jay (Provisions)
Co Ltd [1960] 1 QB 159).

In P4 Ltd v Unite Integrated Solutions plc [2006] EWHC 2640 (TCC) Ramsey J summed up
the requirements of these provisions as:

a. a delivery under a disposition (s.25) or agreement for a disposition (s.9)

b. the recipient had no notice of any right of the true owner

c. the recipient acted in good faith.

The goods or documents of title must have been obtained by the buyer under a sale
or agreement to sell (‘bought or agreed to buy’), so this provision will not apply where
the original sale contract is void or where possession is obtained under a bailment or
hire-purchase or sale-or-return contract. The provision that the transaction will have
‘the same effect as if the person making the delivery…were a mercantile agent’ means
that the buyer in possession is placed in the position of a mercantile agent and the
second buyer must show that the circumstances of the sale would have been in the
ordinary course of business of a mercantile agent (Newtons of Wembley Ltd v Williams
[1965] 1 QB 560. On mercantile agents see Section 8.2.2).

The words ‘with the consent of the owner’ at the end of s.25(1) prevent the nonsense
of a thief starting the whole chain of events and still passing good title. There can
only be a buyer in possession where possession of the goods or documents of title
has been obtained with the consent of the owner (National Employers’ Mutual General
Insurance Association Ltd v Jones [1990] 1 AC 24). Yet, it matters not how that consent
was obtained – fraud is enough even though this may amount to theft (Pearson v Rose
& Young Ltd [1951] 1 KB 275).

On the meaning of ‘disposition’ to a third party in s.25(1), see P4 Ltd v Unite Integrated
Solutions plc [2006] EWHC 2640 (TCC), where Ramsey J pointed out that it did not
require ‘a full transfer of property in the goods’ (at [116]).

3.9.6 Sale under the Factors Act 1889, s.2

Essential reading
¢¢ Sealy and Hooley, Chapter 10 ‘Transfer of title’.

Merely being in possession of goods or documents of title does not, in itself, amount to
a representation that the possessor has authority to sell those goods and to pass good
title (see Section 3.9.2 above). However, where the person in possession of the goods
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 name or as a principal (see Section 8.2.2).
page 52 University of London

Under the 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.

uu The disposition is by a mercantile agent (Jerome v Bentley [1952] 2 All ER 114).

uu 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, since, although it might plausibly be suggested that such consent
is not consent at all, the courts have tended to protect the innocent third party
(but see 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 what capacity the agent received possession of the goods.

uu The disposition is made when acting in the ordinary course of business of a


mercantile agent.

uu The person acquiring the goods under the disposition must have acted in good
faith and without notice of the mercantile agent’s lack of authority (Heap v
Motorists’ Advisory Agency Ltd [1923] 1 KB 577).

Activity 3.14
Why did the buyer in Pearson v Rose & Young Ltd [1951] 1 KB 275 not acquire good title
to the car?
Note: you will need to read the case to answer the question.

3.9.7 Motor vehicles let under hire-purchase

Essential reading
¢¢ Sealy and Hooley, Chapter 10 ‘Transfer of title’.

Part III of the Hire-Purchase Act 1964 (substantially re-enacted by the Consumer Credit
Act 1974, schedule 4) means that a private purchaser obtains title where they acquire
a motor vehicle for value and without notice from someone who is in possession
under a hire-purchase or conditional sale agreement. (Someone acquiring the vehicle
by another means, such as a form of barter, cannot benefit from this protection (VFS
Financial Services Ltd v JF Plant Tyres Ltd [2013] 1 WLR 2987).)

3.9.8 Powers of sale and resale

Essential reading
¢¢ Sealy and Hooley, Chapter 10 ‘Transfer of title’.

Section 21(2)(b) provides that nothing in the SGA 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 under pledges
(where goods are delivered to someone – such as a pawnbroker – as security for a
loan) or bailments, or to innkeepers, liquidators and others, which enable them to
pass title to the buyer.

The SGA gives the seller the right to resell goods and pass property to a second buyer
where the seller retained possession and the price has not been paid by the original
buyer (see Section 5.3).

Activity 3.15
What general principle applies where someone acquires goods from a person who
is not the owner of the goods?
Commercial law  Chapter 3  Sale of goods: contract, property and risk page 53

Further reading
¢¢ Bridge, M. Personal property law. (Oxford: Oxford University Press, 2015), Chapter
6 ‘Transfer of title’, pp.195–227.

Summary
The general rule is that a buyer cannot acquire a better title than that of the seller.
This rule can be overridden in particular situations where someone who takes in good
faith and for value without notice will acquire good title and, therefore, will 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.

Core comprehension
Read Sealy and Hooley, Chapter 9 ‘Passing of the property in the goods as between
seller and buyer’ and answer the following questions:
1. What is meant by the term ‘property’ under the SGA?

2. How are specific and unascertained goods defined in the SGA? What would be
an example of a contract for specific goods and a contract for unascertained
goods?

3. What must occur before any property in unascertained goods can pass from
seller to buyer?

4. Under the SGA, what is the default rule for determining how and when property
is to pass between buyer and seller?

5. At what point are goods said to be in a deliverable state?

6. When does the SGA specify that risk in the goods is to pass? Can the parties
stipulate when risk is to pass?

Applied comprehension
7. What two requirements are made of the seller under s.18, r.2 of the SGA? Why is
the second requirement found in rule 2 but not in rule 1?

8. Section 18, r.5 requires that in order for property to pass the goods must be
unconditionally appropriated. What do we mean by this term? It has been
suggested that the precise meaning of this term is hard to grasp. With reference
to the case law, suggest why this might be the case.

9. From reading Re Wait identify the difficulties that are faced by a buyer of
unascertained goods in bulk who pays for the goods at the time the contract is
made.

10. Considering cases such as Re London Wine, what attempts have been made to
protect a buyer of unascertained goods who pays for the goods at the time the
contract is made? Why did they fail?

11. What is the scheme of ss.20A and 20B of the SGA, and does it fully address all
issues in relation to purchases of unascertained goods?

Core comprehension answers


1. Property is defined in s.61(1) SGA as ‘the general property in goods, and not merely
a special property’. It is generally taken that this means all of the rights that the
seller has in the goods, what would usually be referred to as ‘ownership’. The
difficulty is that the Act uses the term ‘property’ seemingly interchangeably with
other terms such as ‘title’. This is the subject of an interesting analysis by Battersby
(1972) 35 MLR 268 and a subsequent critique from Ho (1997) 56 CLJ 571.

2. Specific goods are defined in s.61(1) as ‘goods identified and agreed on at the time
a contract of sale is made’. Unascertained goods are in fact not defined in the SGA.
page 54 University of London

3. Section 16 makes clear that before any property in goods can pass from buyer to
seller, the goods must become ascertained.

4. Under the SGA, primacy is given to the intentions of the parties. This is set out in
s.17. The rules set out in s.18 are engaged only when the parties are silent as to their
intention or no clear intention can be ascertained from the contract.

5. ‘Deliverable state’ is defined by s.61(5) SGA. However, that definition, that goods are
in a deliverable state when ‘they are in such a state that the buyer would under the
contract be bound to take delivery of them’, is not regarded as comprehensive and
evidence of the parties’ contrary intentions may therefore be taken into account.
A more detailed understanding can be gleaned from the decisions in Underwood v
Borough Castle Cement Syndicate [1922] 1 KB 343 and Philip Head & Son Ltd v Shopfronts
Ltd [1970] 1 Lloyd’s Rep 140, which indicate that the goods must be movable and
not in need of any fundamental changes. A better illustration can be found in the
more recent decision of Kulkarni v Manor Credit Ltd [2010] EWCA Civ 69.

6. As stated by s.20(1) SGA, unless otherwise stated, risk in the goods passes at the
same time as property passes. This allows the seller and buyer to agree that risk
should pass at some other time, although in many cases both seller and buyer
will obviously be reluctant to do so. In some contracts, for example a CIF (cost,
insurance and freight) sale, risk and property pass independently of each other.

Applied comprehension answers


7. Section 18, r.2 requires the seller to put the goods into a deliverable state and
give notice to the buyer of the goods. Notice here takes on its usual meaning. The
second requirement is necessary to ensure that the risk does not pass in the goods
without the buyer’s knowledge, hence risk (and property) remain with the seller
until this has been done.

8. For property to pass under s.18, r.5, the goods must first be put into a deliverable
state. They must also be ascertained as this is an indispensable prerequisite
of property passing at all. In addition, there must also be unconditional
appropriation. It is important to read the sub-rules to fully understand what is
meant by unconditional appropriation but it is with r.5(1) that difficulty is generally
found. The meaning of the term is explored in Carlos Federspiel v Twigg & Co [1957]
1 Lloyd's Rep 253, Hendy Lennox Ltd v Graeme Puttick Ltd [1984] 1 WLR 485, Healey v
Howlett [1917] 1 KB 337 and Wardars (Import & Export) Co Ltd v Norwood & Sons Ltd
[1968] 2 All ER 607.

What is clear is that merely earmarking the goods is not sufficient. However strong
the intention of the seller is to use those goods to fulfil the contract, that will
not be sufficient. Effectively, it seems to require something akin to ‘constructive
delivery’ of the goods, such that there is no means by which the seller can use
other goods to fulfil the contract. It will often be a question of fact in an individual
case as to when this has occurred.

Rules 5(2) and (3) are relatively more straightforward, applying when the seller
delivers the goods to buyer (or carrier, custodian, etc.) or when the goods are
ascertained by exhaustion retrospectively.

9. The paying buyer of unascertained goods in bulk faces the risk that despite having
paid for the goods, without the goods having become ascertained, unconditional
appropriation is impossible and therefore no property can pass to them. The
paying of the price is in no way linked to the passing of property, unless the parties
decide that it should be. If the seller becomes insolvent, as in Re Wait, the buyer
will have no claim to the goods and has little prospect of recovering the purchase
moneys.
Commercial law  Chapter 3  Sale of goods: contract, property and risk page 55

10. In Re London Wine, Re Stapylton Fletcher Ltd, Goldcorp Exchange, etc. it was argued
that while a legal interest in property clearly could not be obtained by the
buyers, they could instead be regarded as beneficial owners of the good in bulk
and therefore insulated from the effects on the seller’s insolvency. However, this
argument generally failed as the requirements for a tenancy of the respective
‘bulks’ could not be met. Particularly problematic is how individual buyers could
deal with their individual shares when they are not aware of the existence or
identity of others.

11. Section 20A creates an interest in the bulk, a statutory form of tenancy in common
for anyone buying a quantity (not a proportion) of a named bulk and paying at
least some of the purchase price. In the event of a shortfall in the bulk, the loss is
apportioned proportionately to the size of each share. Section 20B addresses the
relationship between co-owners, providing that each buyer, as a result of their
original contract of sale, continues to have the right to withdraw all goods due to
them and each buyer is deemed to consent to this such that no buyer may have a
right of action against the other. The notable gap in these provisions is in relation
to risk and who is to bear it. It is presumed that risk remains with the seller as no
property as such has passed.

Sample examination question


‘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 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 students would tackle such a question by explaining the nemo dat rule in s.21(1)
and then listing the exceptions in the SGA and the Factors Act 1889.

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
being sought is a discussion of Denning LJ’s view that there is a battle between these
‘two principles’. Thus, better candidates will go beyond a mere list of the rule and its
exceptions and consider other matters. You need to show an understanding of the
issues underlying this area of law. What is the law seeking to achieve? Why do these
rules exist in this form? Do they achieve their objective(s)? It is by engaging in analysis
that you will demonstrate the thorough understanding of the law 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’s view of the relationship correct, or was Lord Goff closer
to the truth when he said that those sections in the SGA that followed s.21(1) ‘appear
to be minor exceptions to that fundamental principle’ (National Employers’ Mutual
General Insurance Association 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 third parties? Has there been a shift in favour of the latter and, if so, why
has this 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?
page 56 University of London

Reflect and review


Look 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 to revise
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 Need to Need to
move on revise first study again

I can discuss the approach taken to interpretation of


the Sale of Goods Act.   

I can analyse 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 is passed.   

I understand the nemo dat rule.   

I can discuss and illustrate the exceptions to the


nemo dat rule.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

3.1 The legislative picture  

3.2 The scope of the SGA  

3.3 The scope of the CRA  

3.4 What is a contract of sale of goods under the SGA?  

3.5 The sale contract  

3.6 ‘Transfers or agrees to transfer the property’  

3.7 Risk  

3.8 Perishing of goods and frustration of contract  

3.9 Transfer of title  


4 Sale of goods: performance and implied terms

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

4.1 Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

4.2 Delivery and payment . . . . . . . . . . . . . . . . . . . . . . . . . . 60

4.3 Implied terms as to title and quiet possession: s.12 . . . . . . . . . . . . 63

4.4 Implied term as to description: s.13 . . . . . . . . . . . . . . . . . . . 66

4.5 Implied terms as to quality: ss.14–15 . . . . . . . . . . . . . . . . . . . 70

4.6 Implied term as to satisfactory quality: s.14(2) . . . . . . . . . . . . . . 71

4.7 Implied term as to fitness for particular purpose: s.14(3) . . . . . . . . . 77

4.8 Implied terms in sales by sample: s.15 . . . . . . . . . . . . . . . . . . 80

4.9 Limitation or exclusion of liability for breaches of the implied terms


under the SGA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

4.10 Terms implied by the Consumer Rights Act . . . . . . . . . . . . . . . . 83

4.11 Limitation or exclusion of liability in consumer contracts . . . . . . . . . 84

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86


page 58 University of London

Introduction
Subject to contrary agreement by the parties, the basic duty of the seller is to deliver
the goods to the buyer and of the buyer to accept and pay for goods that conform
to the contract. The seller must deliver exactly the quantity stipulated and the buyer
is not obliged to accept a delivery that either falls short or exceeds the stipulated
amount. The goods delivered must comply with the express terms set out in the
contract, but they must also comply with the terms implied into the sale contract by
ss.12–15 of the SGA. In contracts where goods are sold to consumers, the equivalent
terms are implied into the contract by ss.9–17 of the CRA. The terms implied by the CRA
are dealt with at Section 4.10. The remainder of this chapter focuses exclusively on
business-to-business sales of goods and all references in these sections are to the SGA
unless otherwise stated.

Learning outcomes
By the end of this chapter and the relevant readings you should be able to:
uu explain the duties of the seller to deliver and the buyer to accept goods
uu discuss the implied terms in ss.12–15
uu discuss the relationship between the different implied terms
uu outline the limits imposed on attempts by the seller to exclude or restrict
liability for breach of the implied terms
uu discuss the terms implied by ss.9–11 and 17 of the CRA.
Commercial law  Chapter 4  Sale of goods: performance and implied terms page 59

4.1 Terms

Essential reading
¢¢ Sealy and Hooley, Chapter 11 ‘Seller’s obligations as to quality’.

Implied terms
The SGA contains a number of terms that may be implied into the contract and in this
and the next chapter we examine many of these.

Express terms
While the focus of this module guide is on these implied terms, the parties can agree
to vary or negative an implied term, subject to the provisions of the Unfair Contract
Terms Act 1977 (s.55(1) SGA).

The breach of an implied or express term gives rise to a remedy, although the nature of
that remedy depends on the significance of the term, unless the parties have stipulated a
remedy. The law of contract categorises terms as conditions, warranties and innominate

terms,† although the SGA only refers to the first two categories. Whether a stipulation in a Innominate terms = terms
sale contract is a condition or a warranty depends on the construction of the contract of a contract that cannot be
(s.11(3)). This is a question of law for the court, except where the SGA designates a term as considered conditions or
a condition or warranty (for example, s.12, discussed in Section 4.3.1 below). The court will warranties.
look at the substance and not the form: in other words, a term is not a condition or a
warranty merely because it is labelled as such by the parties.

A condition is a term of such importance to the contract that its breach entitles the
innocent party to treat the contract as discharged (s.11(3)) and so reject the goods
and demand the repayment of the price. The buyer can waive the breach or treat
it as a breach of warranty (s.11(2)) – it may be that, in spite of the defect, the buyer
wishes to retain the goods – and will lose the right to reject after acceptance of the
goods (s.11(4); see Section 5.2.1). The seller may be able to repair a breach of condition
through a fresh delivery of goods that comply with the contract, although usually
whether or not the seller has this opportunity will depend upon whether there is time
under the contract for delivery (see Section 4.2).

A warranty is a less significant term. Its breach entitles the innocent party only to
damages for loss suffered (ss.11(3), 53), but does not excuse that party from performing
their obligations under the contract.

The SGA does not mention the third way in which the courts have classified
contractual terms, namely innominate terms. In Cehave NV v Bremer
Handelsgesellschaft mbH [1976] QB 44, the Court of Appeal held that the categorisation
in the SGA of terms as conditons and warranties did not exhaust the possibilities.
Fourteen years earlier, in a case on the hire of a ship (Hong Kong Fir Shipping Co Ltd
v Kawasaki Kisen Kaisha [1962] 2 QB 26), it had been decided that some terms could
not be classified at the time of the contract as conditions or warranties and that the
significance of these terms could only be assessed at the time of the breach. The court
in Cehave adopted this idea in relation to a sale contract, arguing that s.62(2) preserves
the common law and, therefore, the law relating to innominate terms. In this case
the goods, although damaged, were ultimately used for their intended purpose. The
innocent party, which wished to reject the goods because the market had fallen and
the goods could be obtained more cheaply, argued that the damage amounted to a
breach of a condition implied into the contract by the SGA and a breach of an express
term that the goods should be in ‘good condition’. The court held that the term
implied by the SGA had not been breached and the express term was an innominate
term, so that, since the damage was only minor, the innocent party was only entitled
to damages. It is odd that the breach of the express term and of the implied term were
seen as having different consequences when both referred to the condition of the
goods: in other words, the court held that the goods were in good condition for the
purposes of the SGA, but not for the express term. The views of the Court of Appeal
were approved by Lord Wilberforce in Reardon Smith Lines Ltd v Hansen Tangen [1976] 1
page 60 University of London

WLR 989. It is worth noting that this anomaly might be dealt with now by s.15A (which
was introduced in 1994), under which a buyer can lose the right to reject where the
breach is so slight that it would be unreasonable to reject the goods.

Further reading
¢¢ Atiyah, Chapter 4 ‘The types of obligation created’.

4.2 Delivery and payment

Essential reading
¢¢ Sealy and Hooley, Chapter 12 ‘Performance of the contract’.

4.2.1 Delivery, acceptance and payment


According to s.27, ‘It is the duty of the seller to deliver the goods, and of the buyer to
accept and pay for them, in accordance with the terms of the contract of sale.’ These
concurrent duties (to deliver and to accept and pay) mean that, unless otherwise
agreed, ‘the seller must be ready and willing to give possession of the goods to the
buyer in exchange for the price and the buyer must be ready and willing to pay the
price in exchange for possession of the goods’ (s.28). This might seem odd since s.2(1)
defines a sale contract in terms of passing property and not possession, but it would
be even more curious if there were no obligation to pass possession to the buyer. Note
that the right of the buyer to demand delivery can be defeated by the unpaid seller’s
lien (see Section 5.3.4). The seller need not have tendered delivery before suing for
the price where it is clear that the buyer is not going to pay and the seller is ready
and willing to deliver. Similarly, the buyer, who is ready and willing to pay, need not
tender payment before suing for non-delivery. The innocent party can, therefore, elect
to accept or refuse the other party’s anticipatory repudiation – acceptance means
the contract is terminated, refusal means all the obligations (including those of the
innocent party) remain (see Gill & Duffus SA v Berger & Co Inc [1984] AC 382; Fercometal
SARL v Mediterranean Shipping Co SA [1989] AC 788).

4.2.2 Delivery
Delivery by the seller is defined as merely the ‘voluntary transfer of possession’
(s.61(1)). This means that the buyer collects the goods from the seller or, in the case
of specific goods, from the place where the goods are kept (s.29). This implies that
the buyer bears the cost of delivery; although the seller pays to put the goods into
a deliverable state (s.29(6)). Where the seller is authorised to deliver the goods to
a carrier for conveying to the buyer, handing the goods to the carrier constitutes
delivery to the buyer (s.32(1)). These presumptions may be displaced by the contrary
agreement of the parties. They may agree that the seller will take the goods to the
buyer, or retain them as agent or bailee for the buyer, or hand to the buyer the means
of controlling the goods (for example, keys to a warehouse in which the goods are
held), or instruct someone to hold the goods for the buyer (attornment: s.29(4)),
or give the buyer the document of title to the goods (for example, the bill of lading
where goods are on board ship, see Chapter 7).

Transfer of possession of goods involves both seller and buyer (for example, see s.61(1)
and ss.27–29). The seller must pass control over the goods to the buyer and must
intend to relinquish control, and the buyer must intend to assert control. Both parties
must, therefore, consent. The seller’s act in offering to pass control to the buyer is
not sufficient for delivery to be completed because the buyer’s consent is lacking. Yet,
the buyer’s refusal to take delivery is likely to constitute a breach where the goods
meet the contract requirements and may entitle the seller to treat the contract as
repudiated (s.37). There is a general obligation that when tendering delivery the seller
will afford the buyer a reasonable opportunity to examine the goods in order to
ascertain whether they conform to the contract (s.34). The SGA does not set out the
consequences of a breach of this provision, but, presumably, the buyer would not be
obliged to accept delivery or to pay.
Commercial law  Chapter 4  Sale of goods: performance and implied terms page 61

What goods must be delivered? This will depend on the agreement between the
parties. In a contract for the sale of specific goods (goods identified and agreed upon
at the time of the contract), the seller’s duty is to deliver those goods and cannot
substitute others – if S agrees to sell to B her Volkswagen Golf, S cannot later deliver
another VW Golf, even if it is exactly the same specification, colour, etc. However,
where the contract is for the sale of unascertained goods (goods not identified and
agreed upon at the time of the contract), the duty is to deliver goods that comply
with the contract – if S is a car dealer and agrees to sell to B a Volkswagen Golf of a
certain colour and specification but has no such cars in stock and so will have to order
from the manufacturer, then S’s obligation is to deliver a Volkswagen Golf of that
description and not a particular Volkswagen Golf.

4.2.3 Quantity
It is a breach of an implied condition to deliver less or more than the contracted
quantity of goods (s.30), or, unless agreed, to deliver in instalments (s.31(1)). The
courts have always permitted short or long (i.e. over) delivery where the deviation is
microscopic (Margaronis Navigation Agency Ltd v Henry W Peabody & Co Ltd [1965] 2 QB
430). Section 30(2A), introduced in 1995, states that where the seller is able to show
(s.30(2B)) that the excess or shortfall is ‘so slight that it would be unreasonable’ to
reject the goods, the buyer must accept delivery.

The buyer may, of course, reject a short delivery, but may elect to accept the goods
and pay at the contract rate (s.30(1)). Where there is over-delivery, the buyer may
reject, or accept the contracted amount and reject the rest (s.30(2)), or accept the
lot and pay for the excess at the contract rate (s.30(3)). All of these provisions are
subject to ‘any usage of trade, special agreement, or course of dealing between
the parties’ (s.30(5)). There are problems with s.30(3), although these may be more
theoretical than practical. For example, if the contract is for the sale of a wardrobe
and by mistake S delivers two wardrobes, the common law rules on mistake are
preserved by s.62(2), so B cannot accept the second wardrobe because S did not
intend to contract for its sale.

The presumption is that delivery will be in one load. Delivery of part of the load
followed by a later attempt to deliver the rest is deemed short delivery and falls within
s.30. The buyer can, therefore, reject the lot, accept the first delivery and reject the
second, or waive the breach and accept the lot. In Behrend & Co Ltd v Produce Brokers Co
Ltd [1920] 3 KB 530, the sellers delivered part of the agreed goods in London, then went
to Hull to discharge other goods and returned to London to deliver the rest of the
goods. The buyers were entitled to reject the later delivery, while retaining the earlier.

Where the contract provides for delivery by instalments, which are to be paid for
separately, and the seller makes a defective delivery with respect to one or more
instalments, or the buyer fails to accept delivery, or the buyer fails to pay for one or
more instalment, what is the consequence? According to s.31(2), the terms of the
contract and the circumstances of the case determine whether the breach can be
treated by the other party as repudiation of the contract, or whether it is severable
from the other contractual obligations (either to deliver the other instalments or to
pay) so that the contract can continue and there is only a claim for damages. It has
been suggested that the court should consider, ‘first, the ratio quantitatively which
the breach bears to the contract as a whole and secondly, the degree of probability
or improbability that such a breach will be repeated’ (Maple Flock Co Ltd v Universal
Furniture Products (Wembley) Ltd [1934] 1 KB 148, Lord Hewart CJ). Later, in a case where
it was claimed that the buyer’s refusal to accept delivery amounted to repudiation
of the contract, Donaldson J said that the question was, ‘Has the buyer evinced an
intention to abandon or refuse to perform the contract?’ (Warinco AG v Samor SPAi
[1979] 1 Lloyd’s Rep 450). This case was overturned on appeal, but Donaldson J’s
statement of the law (at 588) was not challenged. See also Regent Ohg Aisenstadt und
Barig v Francesco of Jermyn Street Ltd [1981] 3 All ER 327.

There is a close relationship between these provisions and the seller’s duties regarding
the description and quality of the goods, which are discussed below. If S agrees to
page 62 University of London

sell 1,000 tons of wheat and 100 tons are not of satisfactory quality, there is a short
delivery since only 900 tons conform to the goods agreed and this entitles B to reject
the entire consignment. Alternatively, B could reject on the grounds of breach of the
term implied by s.14(2), which requires all the goods to be of satisfactory quality. The
same principle will apply where the parties agree delivery by instalment since each
instalment must be of the right quantity and quality. If this route is taken, s.15A may
apply (see Section 4.6.4 below).

4.2.4 Time
What are the consequences of the contract setting times for delivery and/or payment?
The SGA states that it is for the parties to determine the consequences of a failure to
perform on time (s.10(2)).

Delivery
The general principle is that, ‘In ordinary commercial contracts for the sale of goods
the rule clearly is that time is prima facie of the essence with respect to delivery’
(Hartley v Hyams [1920] 3 KB 475, McCardie J). This means that the buyer can reject the
goods and treat the contract as terminated where delivery is delayed. The reasoning
behind this is that in commercial contracts the buyer may have contracted to sell the
goods to another buyer and, therefore, be under an obligation to deliver, which they
will breach if the seller does not deliver on time. Where the prima facie rule operates,
late delivery constitutes a breach of condition and the buyer can, therefore, refuse to
accept the goods, even if they suffered no loss. Early delivery will have the same effect
(Bowes v Shand (1877) 2 App Cas 455). Where a period is stipulated, rather than an exact
date – for example, ‘delivery in August’ – delivery must be made sometime within that
period.

The prima facie rule can, of course, be displaced by the parties. The lack of any time for
delivery in the contract indicates that time is not of the essence. In such a situation
delivery must be within a reasonable time (ss.29(3), 59), which will be determined
by the circumstances: for example, are the goods perishable, did the weather delay
delivery? It is commonplace for a contract to stipulate that the seller must deliver
goods as required by the buyer. The courts will construe this obligation in such
a way as to provide the seller with a reasonable time within which to deliver (Cie
Commerciale Sucres et Denrée v Czarnikow Ltd: ‘The Naxos’ [1990] 3 All ER 641).

The buyer can waive the condition as to delivery because of s.11(2) (Hartley v Hymans
[1920] 3 KB 475) or because the buyer is estopped from pleading the late delivery
(Charles Rickards Ltd v Oppenheim [1950] 1 KB 616). In practice, it is difficult to see the
difference between these two approaches or why judges sometimes chose one rather
than the other. In both, the buyer must have given a clear representation in words
and/or conduct that they do not insist on compliance. The buyer can set a new date by
giving reasonable notice (Charles Rickards Ltd v Oppenheim).

This discussion raises another issue: is the duty of the buyer to accept delivery (s.27)
a condition or a warranty? It can be argued that since the seller cannot deliver unless
the buyer accepts and since the seller’s obligation to deliver on time is a condition of
the contract, the buyer’s obligation to accept should also be a condition.

Payment
A contractual stipulation that the buyer must pay at a particular time is not presumed
to be of the essence of the contract (s.10(1)), so late payment by the buyer does not
mean that the seller can avoid the obligation to deliver on time. Yet this presumption
may be displaced, for example, where the time at which the parties agreed to accept
and pay for the goods coincide. If in such a situation time of payment is not of the
essence, the seller would presumably not be obliged to deliver the goods since
delivery and payment are concurrent conditions under s.28. Leaving that situation
aside, there will come a time when payment is so late that the seller can treat the
contract as terminated.
Commercial law  Chapter 4  Sale of goods: performance and implied terms page 63

Activity 4.1
Under a sale contract, the buyer agrees to provide a vessel at a port nominated
by the seller so that the goods can be loaded. The contract stipulates that the
goods are to be loaded by 30 June and the buyer is required to give the seller 15
days’ notice of the vessel’s readiness for loading. The buyer does not give notice of
readiness until 17 June. Can the seller repudiate the contract?

Further reading
¢¢ Atiyah, pp.119–40.

4.3 Implied terms as to title and quiet possession: s.12

Essential reading
¢¢ Sealy and Hooley, Chapter 11 ‘Seller’s obligations as to quality’.

4.3.1 Implied condition as to title: s.12(1)

In a contract of sale…there is an implied term on the part of the seller that in the case of a
sale he has a right to sell the goods, and in the case of agreement to sell he will have such a
right at the time when the property is to pass (s.12(1)).

This is a condition of the contract (s.12(5A)). As with s.13 (but not s.14), there is no
requirement that the seller act in the ordinary course of business, so this implied
condition applies to a private seller. The section does not require that the seller has
title to the goods; only that the seller has the right to sell. The provision in s.12(1)
would be satisfied where the seller agreed to sell goods owned by another person and
the seller arranges for title to be transferred to the buyer, either through the seller or
directly from the third party.

In Rowland v Divall [1923] 2 KB 500, A sold a car to B for £334. B used the car for two
months, during which time he also repainted it. B then sold it for £400 to C who used
it for a further two months. The car turned out to have been stolen before it came into
A’s possession and was, therefore, taken away from C by the police. The effect of the
nemo dat rule (see Section 3.9) is that the buyer can acquire no better title than the
seller, so neither A nor B had title to the car. C recovered the purchase price from B and
B recovered the purchase price from A without any allowance for the use of the car
(see also Karflex Ltd v Poole [1933] 2 KB 251; Butterworth v Kingsway Motors Ltd [1954] 1
WLR 1286).

The reasoning behind such decisions was summed up by Atkin LJ in Rowland v Divall.
He said, ‘there can be no sale at all of goods which the seller has no right to sell’:

The whole object of a sale is to transfer property from one person to another…It seems
to me that in this case there must be a right to reject, and also a right to sue for the price
paid as money had and received on failure of the consideration, and further that there
is no obligation on the part of the buyer to return the car, for ex hypothesi the seller had
no right to receive it…The buyer has not received any part of that which he contracted
to receive – namely, the property and right to possession – and, that being so, there has
been a total failure of consideration.

Rowland elevates the status of the implied term in s.12(1) above that of the other
implied terms. Under s.35 the buyer loses the right to reject for a breach of an
implied condition where there has been acceptance of the goods (see Section 5.1).
This provision certainly applies to a breach of the implied conditions in ss.13–15, and
there is nothing in s.35 to suggest that it does not also apply to a breach of s.12. If
s.35 did apply and the goods had been accepted, the buyer would only be entitled
to an action for damages (s.11(4)) and a deduction could be made from the damages
for the use of the car. Atkin LJ, however, removed this argument by implying into
all contracts of sale that ‘a breach of the condition that the seller has a right to sell
the goods may be treated as a ground for rejecting the goods and repudiating the
page 64 University of London

contract notwithstanding the acceptance’. In other words, the rules on acceptance do


not apply to s.12. This does leave s.53(1), which provides that where the buyer elects
or is compelled to treat a breach of condition as a breach of warranty only damages
covering the loss suffered may be recovered. However, in the same case Bankes LJ
thought this would only apply if ‘the buyer got some part of what he contracted for’
and this was not the case here because the buyer contracted for ‘a car to which he
would have title’.

The case presents other difficulties. Substitute for the car a bag of fruit. If the fruit is
consumed, the buyer is still entitled to the return of the full purchase price. Of course,
it could be argued that the buyer may be liable if an action for conversion were
brought by the true owner of the fruit, but the court in Rowland did not make the right
of the buyer dependent on their liability to the true owner. This leads to the following
curiosity. If A sells the fruit to B and B eats it, C, who is the true owner, can choose to
sue A or B for conversion; if C sues A, A will pay damages to the value of the fruit to
C and can also be required by B to repay the price of the fruit. Atiyah suggests that
a solution to this would be that A would not have to pay B because, on repudiating
the contract, B must return the goods and B’s consumption of the fruit makes this
impossible. The problem with that solution is C might sue B for conversion, in which
case B will pay damages to C and will not be able to reclaim the price from A. Atiyah
argues that this could be dealt with by allowing B to claim an indemnity from A under
the Civil Liability (Contribution) Act 1978.

Why is title given this fundamental status? Why not treat a breach of the implied
terms on quality in s.14 (see Sections 4.6 to 4.8) as rendering a contract of sale not
a contract of sale? After all, goods are often bought primarily with a view to their
consumption, so buyers might regard quality as at least as important as title. Indeed,
the possibility that food is poisonous or the car is unroadworthy (both matters of
quality) may be of greater significance to the buyer, who does not intend to buy goods
in that state, than that the goods were stolen. Aityah suggests that the decision ‘rests
on a fallacy. The object of a contract of sale is surely to transfer to the buyer the use
and enjoyment of the goods free from any adverse third-party claims. If the buyer
has such use and enjoyment and no third party claim is made against him, it seems
unrealistic to talk of a total failure of consideration.’ But does this represent what the
buyer expects they are acquiring? Do buyers really not care about their title to the
goods they are consuming?

The definition of a contract for sale in s.2(1) does support the idea that the passing
of property is the key issue (although, as will be seen below, s.12(1) is not simply
concerned with passing property). So the seller, who does not pass title, has not
supplied that for which the buyer bargained and, therefore, there has been a total
failure of consideration. In addition, the risk of damage to the goods is presumed
to follow property; the seller may, generally, only sue for the price of the goods if
property has passed to the buyer; and the right of the buyer to bring an action in
conversion against third parties, who have acquired the goods, depends on the
buyer having a superior right to possession, which in turn is, normally, determined by
ownership of the goods.

The provision in s.12(1) goes beyond the question of whether the seller passes good
title. Although the sub-heading for s.12 is ‘Implied terms about title, etc’, the section
makes no mention of title. Instead it refers to the right to sell. Typically, this is regarded
as the same as title, but there are differences. The seller need not have title as long as
they have the right to sell: for example, the owner consents to the sale. However, there
will be a breach if the seller is not able to pass the right to sell, even though they are
the owner of the goods. In Niblett v Confectioners’ Materials Co [1921] 3 KB 387, tins of
preserved milk, which had been sold by CM, an American company, to N were detained
by customs on arrival in England because the labels appeared to infringe the trademark
of an English company. Since the English company could have obtained an injunction
preventing the sale of the tins in England, it was held that CM had no right to sell them,
even though they owned the tins.
Commercial law  Chapter 4  Sale of goods: performance and implied terms page 65

Finally, where the seller does not have title to the goods, the buyer may, nevertheless,
acquire good title under one of the exceptions to the nemo dat rule (see Section 3.9),
but the seller is in breach of s.12(1) because they have no right to sell (Barber v NWS
Bank plc [1996] 1 WLR 641).

Activity 4.2
X obtains possession of a car under a contract for hire-purchase. Under such a
contract title remains with the hire-purchase company until all the payments have
been made and the hirer (X) has exercised an option under the contract. Before
completing the payments and exercising the option under this contract, X sells
the car to KM, a car dealer, who sells it to B. Neither KM nor B is aware of the hire-
purchase contract. B uses the car for almost a year before discovering all of these
facts.

Advise B.† Note that you are asked to
‘advise B’. Concentrate on
4.3.2 Limited title: s.12(3), (4) this task as a lawyer would.
In an examination problem
Under s.12(3) and (4), where the seller contracts to pass only ‘such title as he or a third question you will lose marks
person may have’, there is an implied term that the seller has disclosed all charges or for advising X or KM.
encumbrances before the contract. In other words, where there is uncertainty as to
the seller’s title, the parties can agree to the sale of such title as they have on the basis
that such defects as are known to the seller are disclosed.

4.3.3 Implied warranties as to encumbrances and quiet possession:


s.12(2)
There is an implied warranty in s.12(2)(a) that, ‘the goods are free, and will remain
free until the time when the property is to pass, from any charge or encumbrance not
disclosed or known to the buyer before the contract is made’ (see s.12(5A)). Unlike
s.12(1), the consequence of such a breach is that the buyer will only be entitled to
damages (ss.53, 61). There is also an implied warranty (s.12(2)(b), (5A)) that ‘the buyer
will enjoy quiet possession of the goods except so far as it may be disturbed by the
owner or other person entitled to the benefit of any charge or encumbrance so
disclosed or known’. This protects the buyer against the actions of the seller or of any
third party, although, presumably, in the latter case only where the third party asserts
some lawful right over the goods that has been acquired before the sale (Athens Cape
Naviera SA v Deutsche Dampfschiffahrts-Gesellschaft Hansa AG (The Barenbels) [1985] 1
Lloyd’s Rep 528).

In practice, the scope for application of the term in s.12(2)(a) is restricted since most
situations will be covered by s.12(1) which establishes an implied condition and so
gives the buyer a more powerful remedy. Similarly, s.12(2)(b) has only limited value.
In Mason v Burningham [1949] 2 KB 545 the buyer of a typewriter, which turned out to
have been stolen, had spent money on repairs before the true owner reclaimed it.
The buyer sought damages under the old version of s.12(2)(b) for the price plus the
cost of the repairs because the latter was a ‘loss directly and naturally resulting, in the
ordinary course of events, from the breach of warranty’ (s.53(2)). Yet, the action might
have been brought under s.12(1) because, in spite of Rowland v Divall, it is difficult
to see why the buyer could not elect to treat a breach of condition as a breach of
warranty (s.53(1)).

Section 12(2)(b) does have a role where, although property has passed and there is
no breach of s.12(1), there has been some subsequent interference with the seller’s
use of the goods. It does not matter whether the disturbance of the buyer’s quiet
possession comes from the seller or a third party (unless in the latter case this was the
consequence of a charge disclosed to the buyer before the contract: s.12(3), (4)).

While the buyer’s knowledge of the seller’s lack of title is irrelevant under s.12(1), it is
relevant in relation to the implied warranties of freedom from encumbrances and of
quiet possession. This is because the buyer agreed to take subject to those issues of
which they were aware.
page 66 University of London

Study pack reading


¢¢ Bridge, M. ‘The title obligations of the seller of goods’ in Palmer, N. and E.
McKendrick (eds) Interests in goods. (London: LLP Professional Publishing, 1998)
[ISBN 9781859781777] pp.303–27.

Activity 4.3
R supplied a computer system and property passed to U. There then arose a dispute
between the parties and U refused to hand over money owed. R responded by
activating a ‘time lock’, which prevented the system from being used.
Advise U.

Further reading
¢¢ Atiyah, pp.85–96.

Summary
There is an implied condition that the seller has a right to sell the goods. This is
regarded as fundamental to the contract of sale, so that where the seller is in breach
of this condition the buyer is entitled to the return of the entire purchase price
irrespective of the fact that the buyer may have had use of the goods or cannot return
them. The seller may be in breach of this condition even though they are the owner
of the goods: for example, where they had no right to sell because of a breach of
trade mark laws. There is also an implied warranty that the goods are free from any
encumbrance and that the buyer will enjoy quiet possession.

4.4 Implied term as to description: s.13

Essential reading
¢¢ Sealy and Hooley, Chapter 11 ‘Seller’s obligations as to quality’.

4.4.1 Implied term as to description


Where there is a contract for the sale of goods by description, there is an implied
condition that the goods correspond with the description (s.13(1), (1A)). Unlike s.14
(see Section 4.5 below), there is no need to show that the sale was ‘in the course of
business’, so s.13 applies to sales by private individuals, which helps to explain its use in
Beale v Taylor [1967] 1 WLR 1193.

The strictness of the obligation is illustrated by Arcos v Ronaasen [1933] AC 470 where
the contract for half-inch thick wooden staves was breached when most of the
staves failed to meet this requirement. The staves were commercially suitable for
the construction of barrels, for which they had been ordered, and the buyers’ reason
for bringing the action was to escape from the contract because a fall in the price of
timber meant they could obtain the staves more cheaply elsewhere. The House of
Lords held that the reason for rejecting the goods was irrelevant: the staves did not
conform to the description and that entitled the seller to reject. In Re Moore & Co Ltd
and Landauer & Co Ltd’s Arbitration [1921] 2 KB 519, there was a breach when the seller,
who was required to deliver 3,000 tins in boxes of 30 tins, delivered around half in
boxes of 24 tins, even though again the buyers would have suffered no disadvantage.

In Arcos, Lord Atkin said, ‘If the seller wants a margin he must and in my experience
does stipulate for it’. In Re Moore, Scrutton LJ, commenting on the argument that the
buyer suffered no commercial disadvantage, said, ‘a man who has bought under a
contract thirty tins to the case may have sold under the same description, and may
be placed in considerable difficulty by having goods tendered to him which do not
comply with the description under which he bought, or under which he has resold’.
Only minor, commercially insignificant deviation is allowed: ‘No doubt there may be
microscopic deviations which business men and therefore lawyers will ignore’ (Arcos v
Ronaasen [1933] AC 470, per Lord Atkin).
Commercial law  Chapter 4  Sale of goods: performance and implied terms page 67

The courts have sought to shift away from such a literal interpretation of contracts and
thereby soften the impact of the strict liability rule. That is not to say that the courts
will judge compliance against a detailed description of the goods, if that is what the
parties have adopted in their contract as opposed to a general or generic description
which might allow more deviation (see the Singaporean decision of Chai Cher Watt v
SDL Technologies Pte Ltd [2011] SGCA 54 for discussion). In Steel & Busks Ltd v Bleecker Bik
& Co Ltd [1956] 1 Lloyd’s Rep 228, the contract was for the delivery of goods ‘quality as
previously delivered’, but the court held that there was no breach of s.13, in spite of
the goods containing a chemical not present in earlier deliveries. It was reasoned that
the evidence indicated that the goods were within the description as understood by
the trade. Similarly, in Peter Darlington & Partners Ltd v Gosho Co Ltd [1964] 1 Lloyd’s Rep
149, it was held that canary seed conformed with a description in the contract that the
seed would be ‘pure’ even though only 98 per cent pure because the trade accepted
that no canary seed was 100 per cent pure and 98 per cent represented the highest
standard of purity. In his discussion in Reardon Smith Lines Ltd v Hansen-Tangen: The
Diana Prosperity [1976] 1 WLR 989, Lord Wilberforce seemed content with Arcos, but
called Re Moore ‘excessively technical and due for fresh examination in this House’. In
addition, s.15A may now excuse a slight breach.

4.4.2 Description
Most contracts of sale will contain some description of the goods. This description
may be express, such as words said or labelling on packaging, or it may be implied
from the circumstances of the sale – a banana-like object on display among bananas
is, probably, being described as a banana. A contract for the sale of unascertained or
future goods will always be a sale by description and there is no appropriation where
the goods do not correspond to their description in the contract. Where there is a sale
of specific goods, there will be a sale by description ‘so long as it is sold not merely as
the specific thing, but as a thing corresponding to a description’ (Grant v Australian
Knitting Mills [1936] AC 85, Lord Wright). It may seem curious that in a sale of specific
goods there could be breach of s.13 when by definition the sale is of goods that have
been identified and agreed upon by both parties. Yet, often the buyer of specific goods
has relied on a description: where a shopper picks a bag of flour off a supermarket
shelf they are entering into a contract for specific goods, but they are doing so in
reliance on the description of the goods as flour (see s.13(3)). In other words, in a sale
of specific goods the description does not identify the goods, it defines what it is that
the seller has agreed to deliver: the bag of flour must contain flour.

But what constitutes a description? The problem for the court to determine is
whether the parties intended a particular statement to form part of the description
of the goods. It has been suggested that a distinction should be drawn between a
statement by the seller concerning the essence of goods, which forms the description,
and one concerning their mere qualities, which does not. The problem with this is that
the distinction is not easy to make if one takes the view that goods are the sum of their
qualities.

In Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441, the sale contract stipulated,
‘Norwegian Herring Meal fair average quality of the season, expected to analyse not
less than 70% protein, not more than 12% fat and not more than 4% salt.’ Lord Hodson
said that, ‘a term ought not to be regarded as part of the description unless it identifies
the goods sold’. He added, ‘Although quality could be used, no doubt, as part of a
description it is, I think, not so used in this case; there is a warranty of quality but no
more.’ Lord Guest’s view was that, ‘Where goods are unascertained, “description”
implies a specification whereby the goods can be identified by the buyer’. On this
ground he thought the measurement in Arcos v Ronaasen [1933] AC 470 was part of the
description. He also acknowledged that quality might be part of the description. He
referred to Varley v Whipp [1900] 1 QB 513, where statements that a reaping machine was
a year old and had cut only 50–60 acres were part of the description because, according
to Lord Guest, they identified the goods as a nearly new machine. In his view the words
‘fair average quality’ in the Ashington Piggeries contract did not specify the goods so as to
enable them to be identified, and, therefore, they merely went to the issue of quality.
page 68 University of London

In this case, Lord Diplock observed:

The ‘description’ by which unascertained goods are sold is, in my view, confined to those
words in the contract which were intended by the parties to identify the kind of goods
which were to be supplied. It is open to the parties to use a description as broad or narrow
as they choose. But ultimately the test is whether the buyer could fairly and reasonably
refuse to accept the physical goods proffered to him on the ground that their failure to
correspond with that part of what was said about them in the contract makes them goods
of a different kind from those he had agreed to buy. The key to s.13 is identification.

Similarly, Lord Wilberforce rejected the idea that s.13 depended on a chemical analysis
of the goods:

The test of description…is intended to be a broader, more common sense, test of a


mercantile character. The question whether that is what the buyer bargained for has to
be answered according to such tests as men in the market would apply, leaving more
delicate questions of condition, or quality, to be determined under other clauses of the
contract or sections of the Act. Perhaps this is to admit an element of impression into the
decision, but…I think that buyers and sellers and arbitrators in the market, asked what this
was, could only have said that the relevant ingredient was herring meal and, therefore,
that there was no failure to correspond with description.

The court in Reardon Smith Lines Ltd v Hansen-Tangen: The Diana Prosperity [1976] 1 WLR
989 emphasised that the key issue is what the parties contemplate as forming part of the
description. The contract was for ‘Newbuilding motor tank vessel called Yard No 354 at
Osaka Zosen’ and laid out the specifications of the vessel. In the event, Yard No 354 was
too small so the vessel was built at a yard 300 miles away. Although this was not a sale
contract, Lord Wilberforce explicitly sought to apply principles consistent with those in
sale contracts. He concluded that the location of the yard was not of importance to the
parties and was not part of the description:

It is one thing to say of given words that their purpose is to state (identify) an essential
part of the description of the goods. It is another to say that they provide one party with a
specific indication (identification) of the goods so that he can find them and if he wishes
sub-dispose of them. The appellants wish to say of words which ‘identify’ the goods in the
second sense, that they describe them in the first.

The words ‘Yard No 354 at Osaka Zosen’ were: ‘simple substitutes for a name, serving
no purpose but to provide a means whereby the charterers could identify the ship. At
the dates when these insertions were made no importance could have been attached
to the matters now said to be so significant – they were not a matter of negotiation,
but of unilateral declaration.’ If the contract refers to ‘the newbuilding motor tank
vessel at Yard No 354 at Osaka Zosen’, the descriptive words are ‘newbuilding motor
tank vessel’, so there will be a breach if it is not a vessel or it is not newly-built, but not
merely because it was built at another yard.

The application of Lord Diplock’s approach set out in Ashington Piggeries can be seen in
the decisions in Brewer v Mann [2012] EWCA Civ 246 (discussing the equivalent terms in
relation to a hire-purchase agreement), where it was held that there was no breach where
a car advertised as ‘1930 Speed Six Bentley’ had a rebuilt 1927 engine, and in Proton Energy
Group SA v Orlen Lietuva [2013] EWHC 2872 (Comm), where the court emphasised that
description is normally limited simply to the identification of the product.

Words of description are construed according to the usual principles applied to contract
construction (Peter Darlington & Partners Ltd v Gosho Co Ltd [1964] 1 Lloyd’s Rep 149).

4.4.3 Representation or term?


The final issue concerns the requirement that there must be a sale by description.
This means that the section does not apply where the statement as to description was
merely a representation that induced the buyer to enter the contract and not a term
of that contract (Heilbut, Symons & Co v Buckleton [1913] AC 30). This is slightly curious in
that it amounts to saying that there is an implied term (s.13) that the seller will comply
with an express term (the description), although it does make clear that a breach is a
breach of condition.
Commercial law  Chapter 4  Sale of goods: performance and implied terms page 69

The problem is to determine when any description provided amounts to a term


and when it is merely a representation: in T & J Harrison v Knowles and Foster [1918] 1
KB 608 a statement that two ships had a capacity of 460 tons was made before the
contract but not included in the written contract, and the court held that this was a
mere representation. However, in Beale v Taylor the phrase ‘1961 Herald’ was treated
as a contract term. In Harlingdon & Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd
[1991] 1 QB 564, Nourse LJ explained:

The description must have a sufficient influence in the sale to become an essential term
of the contract and the correlative of influence is reliance. Indeed, reliance by the buyer
is the natural index of a sale by description…For all practical purposes, I would say that
there cannot be a contract for the sale of goods by description where it is not within the
reasonable contemplation of the parties that the buyer is relying on the description.

Sellers LJ agreed with the result but not the reasoning. He pointed out that, unlike
misrepresentation, an action for breach of contract did not depend on showing actual
reliance. It was his view that whether something amounted to description depended
on the parties’ intentions: that the buyer did or did not rely on a statement only
provided evidence of such intentions.

In that case the seller labelled a painting as by Gabriele Münter (1877–1962), a German
Expressionist painter. This attribution was based on an auction catalogue in which it
was so described and also on the opinion of the auctioneers, Christie’s. The seller told
the buyer that he had not heard of Münter and did not care for the painting. The buyer
dealt in Expressionist paintings, but he did not have the expertise to tell if this was by
Münter, nor would any reasonable examination have revealed whether it was or not.
After the sale, it emerged that the painting was a forgery. The Court of Appeal held
that the profession of ignorance by the seller meant it was not within the reasonable
contemplation of the parties that the buyer would rely on the statement as to the
painter’s identity and, therefore, this was not a sale by description – or, at least, a sale
in which the description was that this was a painting by Münter.

The decision might be criticised because it encourages sellers to avoid the implied
condition in s.13 by providing ‘descriptions’, but removing their contractual value by
professing ignorance as to their accuracy. It seems difficult, however, to see this as a
useful business strategy: how many customers will go to the car dealer who boasts
an ignorance of cars? More to the point, the seller told the buyer he believed it to be
a painting by Münter, the seller believed it was by Münter and the price supported
that this was their shared belief. In other words, this does look like a contract in
which the intention of the parties was to buy and sell a painting by Münter, so that
this attribution went to the essence of this contract and, if that is the case, it seems
difficult to argue it was not a breach of s.13.

Nourse LJ observed that where the buyer inspected goods before the contract and
the particular characteristics later complained of would have been apparent on a
reasonable examination of those goods, it is unlikely that those characteristics were
intended by the parties to form part of a contractual description. This will not be so
where the description related to something not apparent on inspection: so, in Beale v
Taylor, it seems not to have been apparent from the inspection carried out by the buyer
that the car was constructed from two different vehicles. This seeks to get around the
curious fact that s.13 does not allow for the possibility of the seller not being liable
where the buyer has inspected the goods and should have realised they did not comply
with the description provided – a provision to this effect is included in s.14(2).

4.4.4 Is s.13 really necessary?


The effect of cases such as Reardon Smith Lines Ltd v Hansen-Tangen: The Diana Prosperity
and Harlingdon & Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd is to reduce the
scope of s.13. As has been observed, it is difficult to see how a promise concerning
the description, which the court treats as a term of the contract, cannot simply be
enforced as such, and the ordinary rules of contract law would provide a good deal
more flexibility than s.13, which makes a description a condition. The buyer in Beale v
Taylor would not suffer since the contract surely contained an express term by which
page 70 University of London

the seller expressly promised to deliver a car of a particular date and model, so there
was no need to resort to the uncertainties of s.13. Similarly, the question of whether or
not the buyer promised to deliver a painting by Münter can be resolved without s.13. It
is also worth remembering that if the buyer was induced to enter the contract on the
basis of a false representation, they may have remedies for misrepresentation.

Activity 4.4
a. Read Reardon Smith Lines Ltd v Hansen-Tangen: The Diana Prosperity [1976] 1
WLR 989. In what circumstances might the words ‘Yard No 354 at Osaka’ have
amounted to a description within the terms of s.13?

b. Pugwash is selling a painting which he attributes to van Rayntol, an imitator of


van Gogh’s work. Jake regards himself as an expert on van Gogh and decides to
buy the painting because he thinks it is by van Gogh himself. After the sale he
discovers that it was actually painted by Fred Bloggs. Is there a breach of s.13?

Summary
Where there is a contract for the sale of goods by description, those goods must
correspond with that description. If, however, the words of description amount to
a representation and not a term, the normal remedies for misrepresentation will
be available if that description proves false. The comparison between the goods as
described and the goods as delivered is made according to the assessment of an
ordinary buyer rather than someone with highly specialised or technical knowledge,
although the parties may choose to describe the goods in technical terms if they
choose. Section 13 will not apply if there is no expectation of reliance because it
is clear that the seller is merely expressing an opinion as to the description of the
goods, or the buyer is not influenced by the description. In determining whether the
term constitutes a description for the purposes of s.13 it is necessary to distinguish
something that states or identifies an essential part of the description of the goods
from something that merely acts as a means of identification – the name of a ship does
not describe an essential part of the goods, it merely enables one to know which ship
is the subject of the contract. Contrasting cases such as Arcos v Ronaasen and Re Moore
with Beale v Taylor and Harlingdon & Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd,
it is clear that in a sale of unascertained goods the description takes on a significant
role and the seller must strictly comply with that description. Where the sale relates
to specific goods the court exercises more discretion as to what constitutes part of the
description. Finally, it is worth considering whether s.13 performs a useful function.

Further reading
¢¢ Atiyah, pp.123–36.

4.5 Implied terms as to quality: ss.14–15


Sections 14 and 15 contain implied terms as to quality, but they are prefaced with the
caveat emptor (let the buyer beware) principle. Section 14(1) states that, aside from
those sections, ‘there is no implied term about the quality or fitness for any particular
purpose of goods supplied under a contract of sale’. This does not prevent the parties
including express terms relating to quality or such terms being implied by usage
(s.14(4)). Moreover, the exceptions to the caveat emptor principle contained in ss.14–15
are so broad that it might be suggested the principle should be reformulated as ‘let
the seller beware’ (caveat venditor).

The obligations in ss.13–15 are often lumped together as defining (along with any
express terms) the seller’s duty to provide goods of a particular quality. Yet, there is
a disconnection between the terms implied in s.13 and those in ss.14–15. Goods may
conform to description and be of poor quality, or they may be of good quality and not
conform to description. However, quality and description may be difficult to separate:
the description of goods often refers to quality and the issue of quality is often linked to
the description of the goods (for example, s.14(2A); and see Section 4.4 above).
Commercial law  Chapter 4  Sale of goods: performance and implied terms page 71

Further reading
¢¢ Brown, I. ‘The swing of the pendulum from caveat venditor to caveat emptor’
(2000) 116 LQR 537.

4.6 Implied term as to satisfactory quality: s.14(2)

Essential reading
¢¢ Sealy and Hooley, pp.435–41.

4.6.1 From merchantability to satisfactory quality


There is an implied term that the goods supplied under the contract are of satisfactory
quality (s.14(2)). This replaces the requirement of merchantable quality in the 1893 Act
and in the original 1979 Act. The concept of merchantability indicated the origins of the
legislation in commercial sales. It imported the notion of goods being bought for resale.
The 1893 Act left the meaning of ‘merchantability’ to the judges – and much fun they had
with it. An amendment in 1973 sought to provide some clarification, although whether or
not it succeeded is a matter of debate. It was only in an amendment to the 1979 Act that
the notion of ‘satisfactory quality’ was introduced. It includes indications about meaning,
but Parliament did not seek to provide a precise definition because of the certain
knowledge that no matter how carefully drawn it would never cover all situations.

The shift from ‘merchantability’ to ‘satisfactory quality’ encompasses some of the


problems confronting the SGA. The attempt was to bring clarity to the SGA and to
reflect a shift towards consumer protection – remember that the 1893 Act codified case
law that originated principally in transactions between commercial parties. However,
how far ‘satisfactory quality’ moves us on is debatable. Moreover, the shift towards
consumer protection may make the SGA less relevant to commercial transactions.
Equally, it is notable that despite the fact the SGA now applies solely to business-to-
business sales, there has been no attempt to revert to the old standard. This is probably
further evidence that the original change was not really one of substance and this has
been borne out by the willingness of the courts to continue to refer to the previously
satisfactory quality case law in determining s.14(2) matters.

4.6.2 Sale in the course of a business


Unlike s.13, s.14(2) and s.14(3) (see below) apply only to sales ‘in the course of a
business’. This means they do not apply where the seller is a private person and no
terms as to quality will be implied (s.14(1)), although, of course, the parties to such
a sale can agree to terms similar to those in s.14. Section 14(2) (and 14(3)) will apply
if an agent, who is acting in the course of business, sells on behalf of an undisclosed
principal, who is not selling in the course of business, unless the buyer knows these
facts or reasonable steps were taken to bring them to the buyer’s attention before the
contract (s.14(5); Boyter v Thomson [1995] 2 AC 628). An auctioneer should, therefore,
notify prospective purchasers that a sale is on behalf of a private individual.

What constitutes ‘in the course of a business’ (see s.61(1))? The sale does not have to
be for the purpose of the business, nor is it necessary that the goods being sold are
those in which the business normally deals. In Stevenson v Rogers [1999] 1 All ER 613,
a fisherman operated one vessel and for only the second time in 20 years he sold
a vessel. In determining whether this was a sale in the course of business, Potter LJ
observed, ‘it seems a most curious result that the sale by a seller of the very asset
without which he could not carry on his business, with the intention of purchasing
a replacement for the purpose of continuing that business, should not be regarded
as a sale made in the course of a business’. In MacDonald v Pollock [2012] CSOH 12, the
Scottish courts endorsed the approach taken in Stevenson v Rogers.

In other jurisdictions, an even broader test has been applied whereby if a company
treats a sale as in the interests of its business it will constitute a sale in the course of
business (Orix New Zealand Ltd v Milne [2007] NZHC 507 (New Zealand); Alberta Pacific
Leasing Inc v Petro Equipment Sales (1995) 10 PPSAC (2d) 69 (Canada)).
page 72 University of London

However, it is slightly curious that a delivery firm which sells its vans will come within
s.14 even if they have no expertise, while a private seller, who is a car enthusiast and
who has lovingly maintained their car, is not covered by that section. But distinctions
are hard to make, so sometimes lines must be drawn rather crudely.

4.6.3 Goods supplied under the contract


Section 14(2) refers to ‘goods supplied under the contract’, so not just the subject
matter of the contract, but also anything that is supplied with those goods must be of
satisfactory quality. A glass bottle in which mineral water was supplied was required
to be of merchantable quality under the old provision, even though it remained the
property of the seller (Geddling v Marsh [1920] 1 KB 668). The same principle applied
where an explosive was delivered with coal that was otherwise of merchantable
quality (Wilson v Rickett Cockerell & Co Ltd [1954] 1 QB 598). There may also be a breach
where goods are rendered unsatisfactory by virtue of defective instructions.

4.6.4 Satisfactory quality


The definition of ‘satisfactory quality’ provided in s.14(2A) seems unhelpful:

…goods are of satisfactory quality if they meet the standard that a reasonable person
would regard as satisfactory, taking account of any description of the goods, the price (if
relevant) and all the other relevant circumstances.

In other words, goods are satisfactory if a reasonable person would regard them as
satisfactory.

The reasonable person is someone ‘who is in the position of the buyer, with his
knowledge’ (Bramhill v Edwards [2004] EWCA Civ 403). The test does not involve
asking whether the reasonable person would have rejected the goods since such a
person might regard them as unsatisfactory and yet choose to retain them (Clegg v
Olle Andersson T/A Nordic Marine [2003] EWCA Civ 320. See also s.35(6)(a) and Section
5.1 below). But, ‘the evidence should go beyond the simple assertion that [the buyers]
were not satisfied with the [goods]; instead, it is necessary to establish that the [goods]
were objectively of unsatisfactory quality…’ (Wyman-Gordon Ltd v Proclad International
Ltd (No 2) [2007] CSOH 11 at [46]).

Section 14(2A) states that in defining satisfactory quality, account should be taken
of ‘any description of the goods, the price (if relevant) and all the other relevant
circumstances’. The test of satisfactory quality is, therefore, concerned with what the
parties agreed the seller was to deliver. Supplying a car without an engine would be a
breach if the seller agreed to deliver a new car, but not if the buyer was told that the
car had no engine. We should ask, what would the reasonable person in the position of
the buyer expect?

Further assistance is provided by s.14(2B), which states that:

…the quality of goods includes their state and condition and the following (among
others) are in appropriate cases aspects of the quality of goods:

a fitness for all the purposes for which goods of the kind in question are commonly
supplied

b appearance and finish

c freedom from minor defects

d safety, and

e durability.

The words ‘in appropriate cases’ indicate that not all the factors in s.14(2B) will always
be relevant. It depends on what a reasonable person would regard as relevant. The
significance of one factor may depend on another. The inclusion of ‘fitness for all the
purposes’ is a shift from the previous position under which goods that had several
purposes were of merchantable quality if fit for one purpose. The aim was also to
Commercial law  Chapter 4  Sale of goods: performance and implied terms page 73

separate the test of fitness for the common purposes (s.14(2)) from fitness for an
uncommon purpose (s.14(3)). However, it is not clear that this has been achieved
because the purposes for which goods of the kind are commonly supplied will be
determined by their description and so forth. The buyer of a car for scrap cannot claim
that it is not fit for driving – the common purpose of a car of that description is to be
used for scrap. In short, if the goods are for an unusual purpose, they will be described
as such and so a claim arises under s.14(2) and s.14(3). If the unusual purpose is not
mentioned, no claim will arise under either section if they are not fit for that purpose.

Whether flaws render goods unsatisfactory may depend on the description and the
price, and the fact that the defect does not affect the function of the goods is not
necessarily decisive. A scratch on the bodywork may render a car unsatisfactory where
it is new, although the result may be different where the car is second-hand (Rogers v
Parish (Scarborough) Ltd [1987] QB 933 (a case on merchantability)). In Shine v General
Guarantee Corpn Ltd [1988] 1 All ER 911, it was held that a car that had been submerged in
water and written off by an insurance company (that is, the cost of repair was greater
than the value so the insurance company simply paid the value to the owner) was
unmerchantable even though it had no defects and was roadworthy. A slight defect
may not render the goods unsatisfactory, but the cumulative effect of a number of such
defects may do so. In Bernstein v Pamson Motors (Golders Green) Ltd [1987] 2 All ER 220 (a
case on merchantability), Rougier J observed in relation to defects in a new car:

Now is this the sort of thing that a new car buyer must accept as being part of the
inevitable teething troubles, or is it a defect which goes beyond any such description and
renders the car either not reasonably fit for its purpose or not as fit for its purpose as it is
reasonable to expect in all the circumstances so as to render it unmerchantable?

He added that if a defect fell into the latter category, then the goods would be
unmerchantable, even if the defect were easily repairable. Goods that are unsafe are
more likely to be regarded as unsatisfactory, but again reasonable expectations play a
role. For example, a car that, as both parties know, needs work to render it roadworthy
is not unsatisfactory merely because it is unroadworthy. The buyer is expected to have
a reasonable knowledge of how to use the goods safely, nor will they be unsafe if the
seller has made reasonable efforts to instruct the buyer on their proper use.

A more recent illustration can be seen in Peebles v Rembrand Builders Merchants Ltd
[2017] SC DUN 28 which concerned the sale of cement roof tiles with a surface dressing
applied to imitate the appearance of natural slate. Over several years, the surface
covering was weathered away but the goods, while unattractive, remained wholly
effective as roof tiles. The court in this case found them to be of satisfactory quality. This
case also raises a difficult question of how long a breach remains actionable.

For the purposes of the implied conditions, the quality of the goods is determined at
the time of the contract, so that where faults emerge later the buyer must show they
were present at that time. The durability of the goods is a separate issue. None of this
means the goods must be capable of being put to use immediately. It will depend
on what has been agreed. If the contract is for the sale of flat-pack furniture (that is,
furniture which must be constructed by the buyer from the parts supplied), the goods
are not unsatisfactory merely because the buyer must put them together. Compare
Heil v Hedges [1951] 1 TLR 512, where the court held that uncooked meat was not
unmerchantable because the parties intended that the buyer would cook it, with Grant
v Australian Knitting Mills [1936] AC 85, where underwear that required washing before
it could be worn was unmerchantable because the buyer would not have expected
to have to wash it. Where the goods are to be transported, it may be a breach if their
condition at the time of the contract means they are not of satisfactory quality when
they arrive at their destination, unless the buyer agrees to take the risk, or the goods
deteriorate through exceptional circumstances encountered during the journey.

Where part of a consignment of goods is of unsatisfactory quality, the buyer may reject
for breach of s.14(2) (subject to s.15A, where the defect is slight) or on the basis that
there has been a short delivery of goods (Jackson v Rotax Motor & Cycle Co Ltd [1910] 2 KB
937; see Section 4.2.3).
page 74 University of London

4.6.5 Examples
In Rogers v Parish (Scarborough) Ltd [1987] QB 933, Mustill LJ discussed the
interrelationship of factors similar to those in the present s.14(2). The case concerned
the sale of a new Range Rover car. This decision discusses the importance of price but
also considers how a brand name, particularly as in this case a premium brand, might
‘conjure up a particular set of expectations’.

Starting with the purpose for which ‘goods of that kind’ are commonly bought, one would
include in respect of any passenger vehicle not merely the buyer’s purpose of driving the
car from one place to another but of doing so with the appropriate degree of comfort,
ease of handling and reliability and, one might add, of pride in the vehicle’s outward and
interior appearance. What is the appropriate degree and what relative weight is to be
attached to one characteristic of the car rather than another will depend on the market at
which the car is aimed.

To identify the relevant expectation one must look at the factors listed in the subsection.
The first is the description applied to the goods. In the present case the vehicle was sold
as new. Deficiencies which might be acceptable in a second-hand vehicle were not to be
expected in one purchased as new. Next, the description ‘Range Rover’ would conjure up a
particular set of expectations, not the same as those relating to an ordinary saloon car, as
to the balance between performance, handling, comfort and resilience. The factor of price
was also significant. At more than £14,000 this vehicle was, if not at the top end of the
scale, well above the level of the ordinary family saloon. The buyer was entitled to value for
his money.

Cembrit Blunn Ltd v Apex Roofing Services LLP [2007] EWHC 111 (Ch) involved the sale
of roof tiles described as having ‘an appearance close to that of natural slate. Its
attractive riven surface makes it an ideal solution for situations where presentation
is important’. However, description may be only one consideration and in this case
the Hon Mr Justice Kitchin concluded that in light of the fact that these tiles were
one-fifth the price of natural slate, the reasonable buyer would not expect them to
be indistinguishable from natural slate. In addition, he said that compliance with an
industry standard does not necessarily mean the goods are of satisfactory quality – the
standard may not have contemplated the defect. One of the issues raised in Cembrit
Blunn by the defence (although rejected by the judge) is commonly put forward by the
sellers: namely, that the problem lies not with the goods but with their installation.

Goods – even new goods – need not be perfect. In Darren Egan v Motor Services (Bath)
Ltd [2007] EWCA Civ 1002, a wheel on a new car was not fitted according to the
manufacturer’s specification and the buyer argued that a minor defect rendered the
goods unsatisfactory by virtue of s.14(2B)(c). Smith LJ rejected this. He said (at [47]), in
reference to s.14(2A):

This is an objective test and is a matter of judgment for the judge on the individual facts
of each case. However, it seems to me unlikely that a buyer will be entitled to reject goods
simply because he can point to a minor defect. He must also persuade the judge that a
reasonable person would think that the minor defect was of sufficient consequence to
make the goods unsatisfactory. Of course, if a car is not handling correctly, one would
expect any reasonable person to say that it is not of satisfactory quality…But, the
mere fact that a setting is outside the manufacturer’s specification will not necessarily
render the vehicle objectively unsatisfactory. The reasonable person may think that the
minor defect is of no consequence. It may be, I do not know, that the fact that a wheel
setting is outside specification might lead to uneven tyre wear in the long term. If there
were evidence of that, it may be that a reasonable person would regard the vehicle
as unsatisfactory. But there was no evidence of that in this case. This case was about
abnormal handling. The judge held that the handling was not abnormal and that was fatal
to the appellant’s case.

Conversely, the standard than can be expected of goods that are not new must
necessarily be lower: Thain v Anniesland Trade Centre [1997] SLT (Sh Ct) 102; Richford v
Parks of Hamilton (Townhead Garage) Ltd [2012] WL 1555343.
Commercial law  Chapter 4  Sale of goods: performance and implied terms page 75

In Hazlewood Grocery Ltd v Lion Foods Ltd [2007] EWHC 1887 (QB), L supplied H with
chilli powder that contained a minute amount of an industrial dye. A term in the sale
contract set out the parameters for possible contaminants, but otherwise required
the powder to be free from ‘foreign and extraneous matter’. Before the contamination
was discovered the powder was used by H in the manufacture of food. The court held
that the express term requiring the powder to be free from extraneous matter was
an absolute obligation (see Arcos Ltd v EA Ronaasen & Son [1933] AC 470). Moreover, the
powder was not of satisfactory quality (s.14(2), nor fit for its purpose under s.14(3))
because products made with it were liable to be posted on the website of the Foods
Standards Agency (the statutory regulator for the food industry) and subject to recall.
The FSA’s action in recalling the product was, therefore, foreseeable and reasonable.
(See also Webster Thompson Ltd v J G Pears (Newark) Ltd [2009] EWHC 1070 (Comm).)

In Lowe v Machell Joinery [2011] EWCA Civ 794, the court considered whether a staircase
supplied by a joiner with minor defects, which put the staircase in breach of building
regulations, met the standard of satisfactory quality. It held that as they failed to
comply with the regulations, which they were required to do by law, it did not. It is
worth noting that if they had been compliant with the regulations, the minor defects
would probably not have amounted to a breach of the implied term.

Activity 4.5
In view of the health risks in smoking cigarettes, could a smoker argue that
cigarettes are not of satisfactory quality?

4.6.6 Defects of which the buyer is aware and latent defects


There will be no breach of s.14(2):

(a) [‘where the defect is] specifically drawn to the buyer’s attention before the contract is
made’

(b) where the buyer examined the goods before the contract is made, [any defect] which
that examination ought to reveal

(s.14(2C))

In Bartlett v Sydney Marcus Ltd [1965] 1 WLR 1013, the buyer was told before the contract
that the car had a defective clutch. Therefore, although it cost more to repair than
expected, the fact of the defective clutch could not render it unmerchantable (as was
the standard at the time): in effect, the buyer agreed to purchase a car with a defective
clutch. In such a situation the buyer might be able to sue on a collateral warranty by
the seller that the clutch will only cost a certain amount to repair.

These s.14(2) provisions are problematic. With regard to (a), what responsibility does
the seller have when drawing the buyer’s attention to defects? Is it sufficient merely to
point out the problem and leave it to the buyer to investigate its extent? Each case will
depend upon its particular facts, but it may not be enough that the seller has disclosed
such information as they have about the defect. The seller will not be able to excuse
their liability merely on the ground that they were unaware of the extent of the defect
(see below) because the provision requires complete information about the defect
whatever the state of the seller’s knowledge.

The buyer is not required to make any examination, but if they do then (b) only
imputes knowledge of those defects that would have been noticed by a reasonable
person undertaking the same examination as the buyer. The buyer is not required
to have undertaken the sort of examination that a reasonable person would
have conducted, they are merely taken to have used reasonable skill and care in
undertaking the examination that was actually conducted. It might be unwise for
the buyer of a second-hand car merely to sit in the driving seat, but if that is the only
examination they undertake, then the test is what would a reasonable person sitting
in the driving seat have discovered? Since they would, presumably, not have noticed
from the driving seat that the underside of the car was badly rusted, such knowledge
page 76 University of London

is not imputed to the buyer. Bramhill v Edwards [2004] EWCA Civ 403 illustrates the
operation of this principle. In this case a motorhome was sold which was too wide to
be legally driven on UK roads under normal circumstances. The buyers were aware
of the internal dimensions of the motorhome and it was held that this should have
alerted them to its external dimensions.

Where the seller promises to repair the goods, but fails to do so, the buyer will be
aware of the defect. However, there will be an action for breach of an express term of
the sale contract or for breach of a collateral warranty (that is, the seller promised to
repair in exchange for the buyer’s promise to enter into the main contract of sale).

The impact of a latent defect (that is, one of which neither seller nor buyer was aware)
will be tested by asking whether the reasonable buyer would have accepted the goods
as of satisfactory quality if they had known of the latent defect. The seller cannot plead
that they were unaware of the defect (Henry Kendall & Sons v William Lillico & Sons Ltd
[1969] 2 AC 31). Where goods, such as medicines, are dangerous when sold without
appropriate instructions, it might be suggested that if the defect had been known to
the reasonable buyer they would have been able to use them safely and, therefore,
they are of satisfactory quality. However, the instructions are part of the goods so that
their absence means there is no need to be driven to this conclusion. Where the goods
cannot be safely used without the instructions, they are defective if those instructions
are not supplied. The problem with this entirely logical view arose in Henry Kendall &
Sons v William Lillico & Sons Ltd (see also Aswan Engineering Establishment Co v Lupdine
Ltd [1987] 1 WLR 1). Animal feedstuff was made with groundnut extract, which, while
fit for cattle, was poisonous to pheasant and partridge chicks. The House of Lords held
that the feed was not unmerchantable, even though no warning had been given to
the buyers. The majority of their lordships took the view that if the reasonable buyer
had full knowledge of the facts, including the toxic nature of the feed, they would
have accepted the goods. The problem with this reasoning is that it was the lack of
warning that rendered the goods unsafe – like medicines, electrical goods and the
underwear in Grant v Australian Knitting Mills Ltd, the feed would have been safe if a
warning had been provided. This curious approach may be a result of the strictness of
the law where there is a breach of condition, no matter how slight; but s.15A removes
this issue because it prevents the buyer from rejecting the goods where the breach
is so slight as to render that remedy unreasonable. It might be argued that changes
have affected the law, such as the reference in s.14(2B)(c) and (d) to ‘freedom from
minor defects’ and to safety; although if the reasoning in Henry Kendall were applied
these would make no difference because the goods would be acceptable if the
shortcomings were known.

There is another problem. Where, at the time of the contract, both parties are aware
that the goods possess a particular characteristic, but only later does it emerge
(for example, because of advances in scientific knowledge) that this characteristic
amounts to a defect, what is the effect of this discovery? (For example, the sale of
building materials containing asbestos before the dangers of that material were
discovered.) Take the reverse situation. The parties were not aware at the time of sale
of a particular characteristic of the goods which render them unsatisfactory. By the
time the parties do become aware of this characteristic, science has shown it to be
harmless. Are these matters to be determined according to the state of knowledge
at the time of the contract, or can later discoveries be taken into consideration?
In Henry Kendall, after the sale of animal feed it was found that certain ingredients
were toxic. However, before the trial further research discovered that, although
toxic, the ingredients could be used in small quantities for cattle feed. It was held
that knowledge acquired between the sale and the trial was relevant, so the latest
information was admitted to show that the feed was of merchantable quality. (Note
that the case was brought under the old s.14(2) when it was only necessary to show
that the goods were fit for one of the purposes for which such goods were commonly
supplied.) The logic of these positions is that if the buyer rejects goods because
according to current knowledge they are unsatisfactory, the buyer will be liable for
damages if a change in knowledge, which occurs after that rejection, shows that
the goods were not of unsatisfactory quality. It seems wrong to focus on whether
Commercial law  Chapter 4  Sale of goods: performance and implied terms page 77

the buyer would retain goods once the defect has been discovered, rather than on
whether the buyer would have accepted the goods if they had known the defect at the
time of the contract or the date of delivery.

Activity 4.6
Why was the yacht in Clegg v Olle Andersson T/A Nordic Marine [2003] EWCA Civ 320
deemed to be of unsatisfactory quality?

Further reading
¢¢ Atiyah, pp.136–73.

Summary
There is an implied condition that goods supplied under a contract of sale are of
satisfactory quality, except in respect of those defects that have been drawn to the
buyer’s attention before the contract or, where the buyer elected to examine the
goods before the contract, those defects that the examination undertaken ought
to have revealed. The determination of whether or not goods are of satisfactory
quality does not depend on asking if the reasonable person would reject such goods.
Parliament recognised that reasonable people might decide not to reject goods, even
though they did not come up to the standard of satisfactory quality.

4.7 Implied term as to fitness for particular purpose: s.14(3)

Essential reading
¢¢ Sealy and Hooley, Chapter 11 ‘Seller’s obligations as to quality’.

4.7.1 Fitness for particular purpose


There will be a breach of the implied condition in s.14(3):

(a) where the seller sells goods in the course of a business, and

(b) either the buyer makes known, expressly or by implication, the purpose(s) for which
the goods were to be used, or it was reasonably foreseeable to the seller that the
buyer might use the goods for such purpose(s), and

(c) the goods are not reasonably fit for one of those purposes.

There will not be a breach where the seller is able to show the buyer did not rely,
or that it was unreasonable for the buyer to rely, on the seller’s skill or judgement.
If the particular purpose was known to, or foreseeable by, the seller, the reliance of
the buyer on the seller is assumed. It is for the seller to show that there was no such
reliance or that, if there was reliance, it was unreasonable. The mere fact that the
seller is made aware of the buyer’s intention with regard to the goods does not mean
that the buyer relies on the seller. For example, it may be that the buyer mentions
their intention to export the goods to a particular country, but this does not mean the
seller is liable if the necessary import licence is not granted since the seller may have
no knowledge of the relevant legal requirements (Teheran-Europe Corpn v ST Belton Ltd
[1968] 2 QB 545).

The seller’s obligation is absolute: a dairy was liable when the presence of typhoid in
milk made it unfit for drinking even though there was no suitable test for detecting
the presence of the germ (Frost v Aylesbury Dairy Co Ltd [1905] 1 KB 608. See also
Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31; Ashington Piggeries Ltd v
Christopher Hill Ltd [1972] AC 441). Where there is a string of contracts in which goods
are sold and resold, the seller will not escape liability merely because the defect in
those goods originated with an earlier party and, therefore, the reliance is on the
skill and judgement of that earlier party with whom the buyer has no contractual
relationship (Britvic Soft Drinks Ltd v Messer UK Ltd [2002] EWCA Civ 548). Liability can
be passed back up the chain: if A sells to B and B sells to C, C can sue B and B can sue A
(assuming the elements of liability under s.14(3) are present).
page 78 University of London

If there is only partial reliance, the seller will be liable in so far as the defect is traced
to that aspect. Where a shipbuilder ordered a propeller and specified some of its
dimensions, the manufacturer was liable for a defect that originated in the thickness
of the blades, which was a matter that had been left to the manufacturer (Cammell
Laird & Co Ltd v Maganese Bronze & Brass Co Ltd [1934] AC 402). If the defect had been
within the specifications set out by the shipbuilder, the manufacturer would not have
been liable. In Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441, CH, who had no
expertise concerning mink food, made up the food according to a formula provided by
AP, who were experts in mink nutrition. AP, therefore, did not rely on CH with regard
to the formula, but did rely on CH using suitable ingredients. Since the loss was caused
not by the formula but by the use of a particular type of herring meal which contained
toxin, CH were liable. Crucial to the decision was that this toxin was harmful to other
types of animals and that CH were in the business of making animal feed.

As with s.14(2), the fitness of goods for their particular purpose may be linked to the
adequacy of the instructions accompanying the goods. In Heil v Hedges [1951] 1 TLR
512, the court took the view that it was common knowledge among consumers that
pork needed to be cooked more thoroughly than other types of meat, so a seller could
not reasonably foresee that the buyer would not cook it thoroughly and, therefore,
the goods were fit for purpose without the need for instructions (see also Balmoral
Group Ltd v Borealis (UK) Ltd [2006] EWHC 1900). Conversely, the buyer of underwear
could not be expected to know that it would require washing prior to wearing in
order to remove harmful additives from the cotton (Grant v Australian Knitting Mills Ltd
[1936] AC 85). In Wormell v RHM Agriculture (East) Ltd [1987] 1 WLR 1091, instructions on
tins containing agricultural weed-killer warned against spraying on crops at a certain
stage of crop growth. The farmer thought this was to prevent crop damage and,
deciding to take a risk, sprayed throughout the year to little effect. It was held that
the weed-killer was fit for its purpose if applied in the right conditions and according
to the instructions. There may, however, be some difficulties with this case since the
instructions were open to different interpretations. While the principle must be right
that the seller can discharge the obligation to provide guidance so that the goods are
rendered fit for their purpose, it should also be the case that where the instructions
are ambiguous and the buyer adopts a reasonable interpretation which leads them to
use the goods wrongly, then they are not fit for their purpose.

There is no obligation on the buyer to examine goods and, indeed, a failure to


conduct an examination might reinforce the idea that the buyer has relied on the
seller’s skill and judgement. Even if the buyer does examine the goods, this does not
necessarily mean that the buyer does not rely on the seller’s skill and judgement:
the car buyer may have looked under the car’s bonnet but have been reassured by
the seller’s statement that the engine was in good order. Whether or not there is
such reliance will depend on the individual circumstances. If the buyer is aware that
the seller does not have skill in relation to the goods, there can be no reliance. But
remember that it is for the seller to show that the buyer did not rely, or that it was
unreasonable for the buyer to rely, on the seller.

The goods need only be fit at the time of the contract, although if a fault develops more
quickly than might be expected, that might indicate they were defective at the time of
the contract (Wyman-Gordon Ltd v Proclad International Ltd (No 2) [2007] CSOH 11 at [46]).

4.7.2 Particular purpose


The particular purpose need not be mentioned by the buyer where the goods normally
have only one purpose. For example, a hot water bottle should be fit for filling with
hot water and the buyer need not ask if it is (Priest v Last [1903] 2 KB 148). If the goods
can be used for several purposes, the buyer must make known to the seller which
purpose is intended, otherwise the seller will not be in breach if the goods fulfil one
of the purposes (although goods that do not fulfil all of the purposes for which they
are commonly supplied may not be of satisfactory quality: s.14(2B)(a)). In Ashington
Piggeries Ltd v Christopher Hill Ltd, CH purchased herring meal from X. X knew that the
herring meal was going to be used for animal feed, but did not know that it was to be
Commercial law  Chapter 4  Sale of goods: performance and implied terms page 79

used for feeding mink. Did the herring meal have to be fit as animal feed or fit as mink
feed? It was held that X knew the herring meal was required for animals and knew, or
ought to have known, that herring meal was commonly used in mink feed.

Where the purpose is unusual, then the buyer needs to specify what it is. A tweed
jacket must be fit for wearing and there is no need to specify that purpose. If it is
bought by someone with unusually sensitive skin who does not make this fact known
to the seller, the seller will not be liable for dermatitis contracted by the buyer
(Griffiths v Peter Conway Ltd [1939] 1 All ER 685. See also Slater v Finning [1997] AC 473).
The outcome would, usually, be the same even if the buyer of the jacket were unaware
of their own sensitivity (see Activity 4.7(b)). But should a seller, who is aware that some
people will contract dermatitis through wearing tweed, caution all buyers? The court
acknowledged the difficulty of drawing a line between ‘abnormality’, of which the
seller is not assumed to be aware, and ‘normality’, of which the seller is assumed to be
aware. The test may be, what can the seller reasonably be expected to foresee? The
answer will depend on the information that the seller has or ought to have acquired
both from the buyer and from other sources to which the seller might reasonably
be expected to have access (e.g. knowledge circulating within the seller’s trade).
Vacwell Engineering Co Ltd v BDH Chemicals [1969] 3 All ER 1681 concerned the sale of a
chemical in glass containers. This chemical would explode on contact with water, but
the seller failed to warn the buyer of this danger. The buyer washed the containers
and, during this process, one broke leading to an explosion. It was held that this was
reasonably foreseeable and the seller should, therefore, have provided a warning. In
Slater v Finning the House of Lords held that a seller of a camshaft could not be aware
of the particularities of the boat into which it was fitted and so was not liable for its
premature wear. In J Murphy & Sons Ltd v Johnston Precast Ltd [2008] EWHC 3024 (TCC)
the buyer ordered a glass pipe without mentioning that it was to be installed into
foam concrete and so the seller was not liable when the concrete caused the pipe to
break, although if the seller knew or ought reasonably to have known that the use of
concrete might create problems for the pipe, they would have been obliged to warn
the buyer. In Trebor Bassett Holdings Ltd v ADT Fire & Security plc [2011] EWHC 1936 the
seller was held not to be liable under the equivalent terms implied by the Supply of
Goods and Services Act 1982 (s.4) for the shortcoming of a fire suppression system as
the buyer had not provided sufficient detail about the popcorn production line where
it was to be fitted.

The seller’s knowledge of the purpose and the buyer’s reliance on the skill of the seller
are connected, for, as Lord Reid put it, the purpose must be ‘stated with sufficient
particularity to enable the seller to exercise his skill or judgement in making or
selecting appropriate goods’ (Henry Kendall & Sons v William Lillico & Sons Ltd). In that
case, Lord Pearce remarked, ‘If a particular purpose is made known, that is sufficient
to raise the inference that the buyer relies on the seller’s skill and judgement unless
there is something to displace the inference’.

In Henry Kendall, Brazilian groundnut extract was sold by K to G, who resold it to X. X


used it in the manufacture of poultry feed, which was sold as feed for pheasants. The
latent presence of a fungus in the groundnut extract made the feed poisonous and
killed many of the pheasants. On the question of K’s liability, K knew that G intended
to resell the extract to a manufacturer of animal feed, but not whether it would be for
cattle or poultry. It was held that K must be taken to have asserted that it would be
suitable for cattle and poultry and that G relied on K to supply material that was fit for
this purpose. K was, therefore, in breach when the extract proved poisonous to both
cattle and poultry, even if in differing degrees. If K could have shown that the effect of
groundnut extract on poultry was well known, it might have been reasonable for K to
assume that a buyer, who bought the extract for animal feed, would not be using it for
poultry.

By contrast, in Jewson Ltd v Kelly [2003] EWCA Civ 1030, it was held that the defendant
could not reasonably rely on the judgement of the claimant seller when taking their
advice as to the efficiency of gas boilers in a building he was converting to apartments.
The seller’s expertise could be relied upon in general terms but advice about how the
goods would perform in a particular environment was a matter for the buyer.
page 80 University of London

Activity 4.7
a. Distinguish between the requirements that goods be fit for purpose in s.14(2)
and in s.14(3).

b. Might the outcome have been different in Griffiths v Peter Conway Ltd if the
buyer had not been aware that they had the skin condition, but it was well
known in the clothing industry that some people did suffer from such a reaction
on wearing tweed?

c. What if in (b) the buyer had known of their condition but went ahead with the
purchase?

d. Acme contract to buy machinery from Ecma for resale in Ruritania. It later
transpires that under Ruritanian law the sale of these machines is illegal. Can
Acme claim that there has been a breach of s.14(3)?

Further reading
¢¢ Atiyah, pp.173–87.

Summary
There will be a breach of the implied condition in s.14(3) where the seller sells goods in
the course of a business, and the buyer makes known, expressly or by implication, the
purpose(s) for which the goods are to be used, or it is reasonably foreseeable that the
buyer would use the goods for such purpose(s), and the goods are not reasonably fit
for one of those purposes. There is no breach if the seller shows the buyer did not rely,
or it was unreasonable for the buyer to rely, on the seller’s skill or judgement.

4.8 Implied terms in sales by sample: s.15

Essential reading
¢¢ Sealy and Hooley, Chapter 11 ‘Seller’s obligations as to quality’.

It is a normal practice in some areas of commercial activity for the seller to show the
buyer a sample of the goods on sale. This is especially the case where the goods are
sold from or in bulk (e.g. wheat, oil) or where a seller keeps only minimal stock of the
goods that they sell.

In a contract of sale by sample there are implied conditions ‘that the bulk will
correspond with the sample in quality’ (s.15(2)(a)) and ‘that the goods will be free
from any defect making their quality unsatisfactory which would not be apparent on
reasonable examination of the sample’ (s.15(2)(c)).

It is important to recognise that a contract of sale by sample does not arise simply
because the seller has shown some part of the goods to the buyer. It must be intended
by the parties that the sample constitutes the contractual basis of the sale (s.15(1)), so
the parties can agree that the seller does not promise that the bulk will correspond
with the sample or that the buyer will inspect the bulk to see if it does correspond.
Where someone decides to buy, for instance, a television after seeing one in operation
in a shop, they will, usually, not be supplied with the exact television that they
examined. This is not a sale by sample because there is no bulk, although, presumably,
there will be an implied term that the seller is obliged to provide a television of the
same specification and, of course, the provisions of ss.13 and 14 will apply.

Section 15 deals only with apparent quality. Lord Macnaghten said that the role of the
sample:

is to present to the eye the real meaning and intention of the parties with regard to the
subject matter of the contract which, owing to the imperfection of language, it may be
difficult or impossible to express in words…But [the sample] cannot be treated as saying
more than such a sample would tell the merchant of the class to which the buyer belongs
(Drummond v Van Ingen [1887] 12 App Cas 284).
Commercial law  Chapter 4  Sale of goods: performance and implied terms page 81

In other words, differences between the bulk and the sample will be irrelevant unless
they would have been detectable from the sample by a reasonable merchant, even if
the actual buyer subjected the sample to a more intensive examination (Steels & Busks
Ltd v Bleecker Bik & Co Ltd [1956] 1 Lloyd’s Rep 228).

The goods must comply with the implied conditions in ss.13–14. Under s.14(2C)(c), if
the goods are of unsatisfactory quality the seller will not be liable where the defect
‘would have been apparent on a reasonable examination of the sample’. It makes no
difference that the buyer has failed to undertake a reasonable examination of the
goods (contrast this with the position in relation to sales not by sample: see Section
4.6.4 above). A buyer who has not previously examined the goods is not deemed to
have accepted until they have had a reasonable opportunity to examine them by
comparing the bulk with the sample (s.35(2)(b)).

It is difficult to understand the purpose served by s.15. If the sample does not conform
to the bulk, there is a breach of contract because the parties must have intended that
it would conform. If there is a breach of description or the bulk is of unsatisfactory
quality or not fit for purpose, there is a breach of s.13 or s.14.

Further reading
¢¢ Atiyah, pp.187–89.

4.9 Limitation or exclusion of liability for breaches of the


implied terms under the SGA

Essential reading
¢¢ Sealy and Hooley, Chapter 11 ‘Seller’s obligations as to quality’.

Under s.55(1), where a right, duty or liability would arise by implication of law, it may
be negatived or varied by an express term, or by a course of dealing between the
parties, or by a trade usage. This enshrines the general principle that parties should be
free to determine the terms of their contract.

Where one business sells to another (or in more limited circumstances when one
private individual sells to another), the parties may seek to limit or exclude their
liability, but can only do so where the alleged clause is part of the contract, and subject
to the Unfair Contract Terms Act 1977 (UCTA). Section 6 UCTA restricts the ability to limit
or exclude liability for breach of the terms implied by ss.12–15 SGA. Liability under s.12
cannot be excluded or limited in any contract covered by UCTA. Liability under ss.13–15
can only be excluded or limited as against a buyer in so far as the clause satisfies the
test of reasonableness (defined in UCTA, s.11(1), Sch.2). In relation to s.14(2) and (3),
a seller can offer goods on the basis that the buyer takes them subject to specified
defects. This is also different from selling the goods without pointing out a defect and
including a clause purporting to limit or exclude liability for that defect.

The nature of the test is such that decisions tend to turn on their individual facts and
so the wording of a clause is particularly important. Undoubtedly, the clause needs
to be absolutely clear that it is the intention of the parties to exclude liability and
cases such as The Mercini Lady [2010] EWCA Civ 1145 have gone so far as to require the
contract to explicitly exclude implied conditions rather than merely terms (although
the court accepted the intention was sufficiently clear without this in Air Transworld
Ltd v Bombardier Inc [2012] EWHC 243 (Comm)).

Beyond this, as the decisions in cases such as George Mitchell v Finney Lock Seeds, RW
Green Ltd v Cade Bros Farm, The Zinnia, Messer (UK) Ltd v Britvic Ltd and Air Transworld Ltd
v Bombardier Inc show, the outcome, as suggested above, hinges almost entirely on
the facts of the particular case, with often minor differences being pivotal (e.g. George
Mitchell, see also RW Green). Although it should be noted that courts have continually
made clear that there should be no sense that, where a properly drafted clause is used
in the absence of inducement or a disparity of bargaining power, it will not succeed. Air
Transworld is a clear example of this. Here, the clause was held to be a reasonable one
page 82 University of London

as, among other things, there was found not to be a disparity of bargaining power, the
contract had been negotiated by the respective legal teams of buyer and seller, and the
seller had put in place a very comprehensive scheme to rectify any defects in the goods
for an extended period instead of their statutory rights (this can be contrasted with the
decision in Avrora Fine Arts v Christie, Manson & Woods Ltd [2012] EWHC 2189).

In respect of other terms, ss.3 and 17 of UCTA state that where A deals on B’s written
standard terms of business, B cannot be reference to a contract term to exclude or
restrict liability for breach, or claim to be entitled to render performance substantially
different from that which was reasonably expected, or render no performance at all,
unless the term satisfies the requirement of reasonableness. The question of whether
a seller’s standard terms may be amended by negotiation while still remaining within
the ambit of s.3 is a recurring one, but one ultimately addressed by the Court of Appeal
in African Export-Import Bank v Shebah Exploration and Production Co Ltd [2017] EWCA Civ
845, where the court set out that it was necessary to inquire whether there had been
more than insubstantial variations to the standard terms that might otherwise have
been habitually used by that party.

UCTA does not apply where the sale contract is an ‘international supply contract’
(defined in s.26 UCTA). As a result, in these sales, the common law rules on terms which
limit or exclude liability will apply.

Further reading
¢¢ Atiyah, Chapter 10 ‘Exclusion of seller’s liability’.

Sample examination question


The railway operator, Track plc (Track), has decided to discontinue some of its
railway services. It dismantles the track and sells the rails to the Foxglove Railway
Society (Foxglove). Foxglove uses the rails to build a non-profit making railway
for train enthusiasts. Subsequently, one of Foxglove’s trains leaves the tracks
and is damaged. An investigation into the incident reveals that some of the rails
are suffering from gauge corner cracking, a fault that creates a risk of derailment
proportional to the speed of the train.
Advise Foxglove of its rights (if any) against Track.

Advice on answering the question


There would seem to be no breach of s.13 here and little point in devoting more
than a few lines to the issue. It is a sale of specific goods (identified at the time of
the contract). Such a sale is commonly by description, but even if this is a sale by
description there would seem to be no breach since, presumably, Foxglove and Track
agreed the sale of rails and that is what passed under the contract.

More useful is s.14. The first question is, has there been a sale in the course of business?
Although Track’s business may be characterised as running a railway and not the sale
of rails, in Stevenson v Rogers [1999] 1 All ER 613 the court took a broad view of this
requirement and it seems likely that the transaction would fall within s.14.

Are the rails of satisfactory quality under s.14(2)? Remember that the factors listed in
s.14(2B) apply only ‘in appropriate cases’ (Rogers v Parish (Scarborough) Ltd [1987] QB
933, although this case was decided under the old law). The test involves comparing
the state of the goods as delivered with the standard that a reasonable person would
find satisfactory, taking into account their description, the price (if relevant) and all
other relevant circumstances. It is not a test based on whether or not the reasonable
person would reject the goods (s.14(2A); Clegg v Olle Andersson T/A Nordic Marine
[2003] EWCA Civ 320, Hale LJ). If the buyer tells the seller that they only intend to use
the rails for scrap, they cannot complain that the rails are unfit for another common
purpose, namely, running trains. Similarly, the price paid by the buyer may be so low
as to indicate that they took the risk that the goods might be defective. Did Foxglove
examine the rails and what did that examination reveal or what ought it to have
revealed (s.14(2C))?
Commercial law  Chapter 4  Sale of goods: performance and implied terms page 83

Are the rails fit for their particular purpose under s.14(3)? What was the particular
purpose that the buyer had in mind? Was the seller told of – or should they have
reasonably foreseen – that purpose (Griffiths v Peter Conway Ltd [1939] 1 All ER 685),
and did the buyer rely on the seller? If Track were (or should have been) aware that
the rails were being bought for use in a railway, were they aware that the railway was
recreational so that they might expect the rails to be subject to less intensive use than
might be the case on a normal railway, and was the rail subsequently used in this way?
The speed of the train might be relevant – what expectations about speed of trains on
this line might Track have reasonably had?

Note: the issues above are the main focus of this question and, on the basis of your
study so far, they are all you can discuss, but there are other issues. You will see from
Chapter 5 that, if there is a breach of an implied condition by Track, there is an issue
as to remedies. Can Foxglove reject the rails and claim the return of the price paid
together with damages for any loss (for example, damage to the train), or are they
limited to an action for damages? See the discussions of s.35 in Section 5.1 below on
acceptance and rejection, and of s.53 in Section 5.2.4 on the measurement of damages.
In relation to the damage to the train, we might ask whether it was being driven at
an appropriate speed when it crashed. In other words, was the cause of the crash the
defect in the rail or the speed at which the train was driven? If it was the latter, the
seller may be not liable for the damage to the train (see Lambert v Lewis [1982] AC 225,
discussed in Section 5.2.4 below).

When you have studied Chapter 5, return to this problem and consider these
additional issues.

4.10 Terms implied by the Consumer Rights Act

Essential reading
¢¢ Atiyah pp.497–505.

As discussed in the previous chapter, the CRA creates a separate regime for consumer
sales with a separate set of implied terms for consumer contracts. We will consider
those terms and statutory controls placed on them in detail.

4.10.1 When does the CRA apply?


The CRA implies terms when there is a contract for the sale of goods between a trader
and a consumer. As in the SGA, the term ‘contract’ takes on its usual legal meaning. The
definition of ‘goods’ also takes on a familiar definition (s.2(8) CRA), encompassing any
‘tangible movable item’ and explicitly including things such as water and gas when
sold in a limited volume or set quantity.

A consumer is defined in s.2(2) CRA as ‘an individual acting for purposes that are wholly
or mainly outside that individual’s trade, business, craft or profession’.

In the majority of cases, this definition ought not to prove problematic, especially
in relation to the ordinary private consumer of goods. Some difficulty may arise,
however, where an individual purchases goods and uses them for purposes outside
of their trade, craft or profession but then makes some use of them in the course of
their trade, craft or profession. Prior to the CRA, this was a matter for UCTA. The courts,
when assessing whether a business was ‘dealing as a consumer’ when it bought goods
that were used for both commercial and non-commercial purposes (see R&B Customs
Brokers v UDT Finance Ltd [1988] 1 WLR 321), looked at whether the goods were central
to the business being carried out. The CRA approach looks purely at the balance of
usage, whether the goods are used more for a commercial purposes or more for non-
commercial purposes. The new approach may have the benefit of clarity but it perhaps
ignores the fact that the buyer is unlikely to be able to bring forward any meaningful
evidence of how the goods have been used. Moreover, it is wrong to assume that
merely because the goods are used in the course of a business that the buyer is buying
page 84 University of London

them with a higher degree of skill and knowledge and bargaining power than an
ordinary consumer. The old test was sufficiently flexible to take account of this.

A trader is defined in s.2(2) CRA as ‘a person acting for purposes relating to that
person’s trade, business, craft or profession, whether acting personally or through
another person acting in the trader’s name or on the trader’s behalf’.

4.10.2 Terms included in a contract for the supply of goods


Where the CRA applies, various terms are included in the supply contract. Some are
new and not found in the SGA. Of those that are not new, the substance of terms
remains apparently unchanged, although the language used differs, in line with the
objective to make the legislation more intelligible to the average consumer.

Set out below are the terms included, with reference to the relevant portions of the
Explanatory Notes (EN) and the similar provision which existed in the SGA. In the
absence of any decided sale or supply transactions under the CRA, the words of the
Act are best understood through the EN and in appropriate cases to the SGA case law,
which should provide clear guidance on the meaning of the terms where appropriate.

uu Trader has the right to supply the goods: s.17 CRA (EN paras 83–87; SGA s.12).

uu No other requirement to treat term about quality or fitness as included: s.18 CRA
(EN para.87; SGA s.14(1)).

uu Goods are to be of satisfactory quality: s.9 CRA (EN paras 64–67; s.14(1) SGA).

uu Goods to be fit for particular purpose: s.10 CRA (EN paras 68–69; SGA s.14(3)).

uu Goods to be as described: s.11 CRA (EN paras 70–73; SGA s.13).

uu Pre-contract information to be included in the contract: s.12 CRA (EN paras 74–76;
no SGA provision but see Consumer Contracts (Information, Cancellation and
Additional Charges) Regulations 2013 (SI 2013/3134)).

uu Goods to match sample: s.13 CRA (EN paras 77–78; SGA s.15).

uu Goods to match model seen or examined: s.14 CRA (EN paras 79–80; no similar
provision in the SGA).

uu Installation as a part of the contract to be in conformity with the goods: s.15 CRA
(EN para.81).

uu Goods do not conform to the contract if the digital content does not conform: s.16
CRA (EN para.82).

Breach of the terms implied by the CRA gives a consumer buyer remedies also found in
the CRA; these are discussed in Chapter 5.

4.11 Limitation or exclusion of liability in consumer contracts

Further reading
¢¢ Atiyah, pp.516–19.

The UCTA previously contained provisions which rendered ineffective any attempt to
exclude liability for breach of the SGA implied terms. Equivalent provisions are now
found in s.31 of the CRA, which sets out that any term which seeks to exclude liability
for breach is, ‘not binding on a consumer’. Section 31(2) adds that terms which seek
to exclude, limit or restrict a consumer for accessing a remedy under the CRA are
also not binding.

Part 2 of the CRA contains the latest attempt to transpose the European Directive on
Unfair Terms in Consumer Contracts into English law. As such, the earlier domestic and
European cases interpreting and applying the Directive and the earlier British attempts
to transpose the Directive remain good precedents. You will notice that the language
employed in the CRA sounds familiar.
Commercial law  Chapter 4  Sale of goods: performance and implied terms page 85

As with the implied terms, Part 2 of the CRA only applies to contracts between a trader
and a consumer (and consumer notices). The Act requires contract terms and notices
between a trader and a consumer to be fair; where they are unfair they are not binding
upon the consumer (s.62 CRA).

A term is defined as unfair ‘if, contrary to the requirement of good faith, it causes a
significant imbalance in the parties’ rights and obligations under the contract to the
detriment of the consumer’ (s.62(4) CRA). A number of elements are important in the
determination of whether or not the term is unfair:

1. the determination of unfairness is to take into account the nature of the contract’s
subject matter and by reference to all the circumstances existing when the term
was agreed and to the other terms in the contract or other contracts upon which it
depends (s.62(5)); and

2. Schedule 2, Part 1 of the CRA provides an indicative and non-exhaustive list of


terms which may be regarded as unfair. This list, often referred to as the ‘grey list’,
of terms reproduces those set out in the UTCCR and adds some new ones. These
are: (a) para.5, which describes terms which have the object or effect of requiring
the consumer to pay the trader a disproportionate amount of money where the
consumer decides not to conclude or perform the contract; (b) para.12 sets out
terms which have the object or effect of permitting the trader to determine the
characteristics of the subject matter after the consumer has become bound by the
contract; and (c) para.14 sets out terms which have the object or effect of giving
the trader the ability to set the price payable by the consumer after the contract
has become binding (subject to paras 23, 24 and 25).

Certain types of terms and notices are outside the CRA. As with the UTCCR which it
replaces, the CRA excludes from the assessment of fairness under s.62 ‘core terms’
which either specify the main subject matter of the contract or an assessment of the
appropriateness of the price payable under the contract (s.64). You will recall the
important, albeit conflicting, decisions of the House of Lords and the Supreme Court
concerned with these ‘core terms’ in Director General of Fair Trading v First National
Bank plc [2001] UKHL 52 and Office of Fair Trading v Abbey National plc [2009] UKSC 6.
While the House of Lords took a restrictive view of what constitutes a ‘core term’ in
2001, the Supreme Court took a more generous view in 2009. As with the UTCCR, Part
2 of the CRA does not apply to contractual terms or notices which reflect a mandatory
statutory or regulatory provision or the provisions of an international convention to
which the United Kingdom or the European Union is a party (s.73).

Section 65 of the CRA effectively reintroduces s.2(1) of UCTA as it had applied to


consumers. A trader cannot, by a contractual term in a consumer contract or a
consumer notice, exclude or restrict liability for personal injury or death.

There are a number of other provisions in the CRA which have the effect of extending
the protection afforded to consumers from the use of unfair terms:

uu A trader must ensure that a written term of a consumer contract or a consumer


notice in writing is transparent (‘expressed in plain and intelligible language and it
is legible’) – s.68.

uu Where a consumer contract term or consumer notice might have different


meanings, the one most favourable to the consumer shall prevail – s.69.

uu It is the duty of the court to decide whether or not a term is unfair, regardless of
whether or not the matter is raised by the parties – s.71.

In conclusion, the CRA effectively introduces statutory schemes for trader-to-


consumer contracts and business-to-business contracts. In the case of a business-
to-business contract, terms may be implied under the SGA and the UCTA regulates
exemption clauses within these contracts. In the case of a trader-to-consumer
contract, terms will be included by the CRA and the regulation of the terms of such
contracts for fairness will be considered under the same Act.
page 86 University of London

Reflect and review


Look 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 to revise
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 Need to Need to
move on revise first study again

I can explain the duties of the seller to deliver and the


buyer to accept goods.   

I can discuss the implied terms in ss.12–15.   

I can discuss the relationship between the different


implied terms.   

I can outline the limits imposed on attempts by the


seller to exclude or restrict liability for breach of the
implied terms.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

4.1 Terms ¢ ¢

4.2 Delivery and payment ¢ ¢

4.3 Implied terms as to title and quiet possession: s.12 ¢ ¢

4.4 Implied term as to description: s.13 ¢ ¢

4.5 Implied terms as to quality: ss.14–15 ¢ ¢

4.6 Implied term as to satisfactory quality: s.14(2) ¢ ¢

4.7 Implied term as to fitness for particular purpose: s.14(3) ¢ ¢

4.8 Implied terms in sales by sample: s.15 ¢ ¢

4.9 Limitation or exclusion of liability for breaches of ¢ ¢


the implied terms under the SGA

4.10 Terms implied by the Consumer Rights Act ¢ ¢

4.11 Limitation or exclusion of liability in consumer contracts ¢ ¢


5 Sale of goods: acceptance, remedies and retention
of title

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

5.1 Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

5.2 Remedies of the buyer . . . . . . . . . . . . . . . . . . . . . . . . . . 91

5.3 Remedies of the seller . . . . . . . . . . . . . . . . . . . . . . . . . . 95

5.4 Consumer remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

5.5 Retention of title by the seller . . . . . . . . . . . . . . . . . . . . . . 100

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . 108


page 88 University of London

Introduction
This chapter looks at the rules on acceptance and the remedies available to the buyer
and to the seller in the event of a breach of the sale contract under the SGA and
the CRA. It then deals with retention of title clauses, where they are used and their
limitations.

For the issues raised in this chapter, in addition to Sealy and Hooley you can consult
Bradgate, Chapter 12 ‘The buyer’s remedies’ and Chapter 18 ‘Buyer’s duties and seller’s
remedies’.

Learning outcomes
By the end of this chapter and the relevant readings you should be able to:
uu understand the rules on and significance of acceptance under the SGA
uu explain the remedies available under the SGA to the buyer and the seller where
there is a breach of the sale contract
uu explain the remedies available under the CRA and how they differ to those under
the SGA
uu explain the use of retention of title clauses and the limits of such clauses.
Commercial law  Chapter 5  Sale of goods: acceptance, remedies and retention of title page 89

5.1 Acceptance

Essential reading
¢¢ Sealy and Hooley, Chapter 12 ‘Performance of the contract’.

Under the SGA scheme, the commercial buyer loses the right to reject the goods if
all, or part, of the goods are accepted, unless the contract permits rejection after
acceptance (s.35). The right to reject defective goods is the most powerful remedy
available to the commercial buyer so the loss of the right to reject can be very
significant. The consumer buyer also has the right to reject defective goods, although
the regime for rejection in consumer contracts is very different in that it dispenses
with the SGA concept of acceptance. It is governed by ss.21–24 CRA, discussed below at
Section 5.4.

Acceptance in s.35 has a different meaning from that in s.27, and acceptance under s.27
does not mean there has been acceptance under s.35. Having said this, the buyer cannot
accept goods if there has been a breach of s.12(1) (the implied condition that the seller
has the right to sell: see Section 4.3). Moreover, the contract may contain express terms
regulating the buyer’s right to reject, which will apply in preference to those contained in
s.35, subject to the possible application of the Unfair Contract Terms Act 1977 (UCTA) (see
Sections 4.9 and 5.2.3).

The buyer will have accepted the goods when:

uu ‘he intimates to the seller that he has accepted’ the goods (s.35(1)(a))

uu the buyer does some act in relation to the goods ‘inconsistent with the ownership
of the seller’ (s.35(1)(b)).

It is necessary to ignore the likelihood that property may have passed to the buyer
before acceptance, and to construe this provision as referring to some act that is
inconsistent with the return of ownership to the seller. More significant are the
problems in determining whether an act is ‘inconsistent’. Possibly, substantial use of
the goods will be sufficient to constitute acceptance, although the buyer may need
to use them in order to conduct a reasonable examination of them. Rejection is not
possible where the buyer has resold the goods and is unable to recover them.

In relation to these two situations there is another requirement. Where goods are
delivered which the buyer has not previously examined, they are not deemed to have
been accepted until ‘he has had a reasonable opportunity of examining them’ in order
to ascertain whether they conform with the contract and, in a sale by sample, whether
the sample conforms with the bulk (s.35(2)). This means that signing a delivery note
will not by itself constitute acceptance. Conversely, the opportunity to examine may
be reasonable even though it would not enable the buyer to discover a defect. The
right to examine the goods can be waived or excluded by the contract (s.35(3)). Yet
the fact that the buyer has examined the goods does not amount to acceptance; they
must also have intimated acceptance or done some act that is inconsistent with the
ownership of the seller.

The buyer will be deemed to have accepted, ‘when after the lapse of a reasonable time
[the buyer] retains the goods without intimating to the seller that he has rejected
them’ (s.35(4)). In determining that a reasonable time has elapsed consideration
is given to whether the buyer has had a reasonable opportunity of examining the
goods for the purposes mentioned in s.35(2) (s.35(5)). The courts are keen to see sales
transactions finalised and to balance the interests of the parties: for example, the time
allowed to the buyer should be balanced against the wish not to prejudice the ability
of the seller to resell.

In Truk (UK) Ltd v Tokmakidis GmbH [2000] 1 Lloyd’s Rep 543, in respect of goods that
were sold for resale, it was held that a reasonable time would, usually, be the actual
time it took to resell the goods plus a reasonable period within which the sub-buyer
could conduct an examination (see also Clegg v Olle Andersson T/A Nordic Marine [2003]
EWCA Civ 320; Jones v Gallagher [2004] EWCA Civ 10; Whitecap Leisure Ltd v John H Rundle
page 90 University of London 

Ltd [2008] EWCA Civ 429). The assessment of what constituted a reasonable time will
also be determined by the complexity of the goods, so more time would be given to
examine a nuclear submarine than a bicycle. In Truk (UK) Ltd, Judge Jack QC said:

a. a reasonable time would balance the interests of the buyer and seller

b. a reasonable time could not be less than was required for examining the goods and
might be longer and could be affected by negotiations between the parties (e.g.
regarding repair)

c. there was only one period of reasonable time and not separate time periods for
different defects.

In that case rejection was permitted nine months after delivery and in Roger v Parish
(Scarborough) Ltd [1987] QB 933 six months after delivery. In Fiat Auto Financial Services v
Connelly (Sheriff Court (Glasgow)) 2007 SLT (Sh Ct) 111, it was held that the right to reject
had not been lost even though the car had been used as a taxi for about 10 months,
covering about 40,000 miles, because the buyer had been in regular contact with the
seller about the problems with the car and had delayed making a decision whether
to accept or reject while awaiting information from the seller. The time period for
rejection stopped when the seller first tried to repair the car and did not restart until
it had been repaired and returned. Note Bernstein v Pamston Motors (Golders Green) Ltd
[1987] 2 All ER 220 was held no longer to represent the law on this point: Clegg v Olle
Andersson T/A Nordic Marine [2003] EWCA Civ 320. Hale LJ in Clegg also went so far as to
suggest that so long as the buyer is waiting for information from the seller in order to
make an informed choice about whether they wish to reject goods, the right to reject
cannot be lost, although Buxton LJ in Jones v Gallagher [2004] EWCA Civ 10 did question
whether this was the true meaning of her Ladyship’s words.

Section 35(6) provides that the buyer will not be deemed to have accepted goods
merely by agreeing to their repair (s.35(6)(a)), or by reselling them (s.35(6)(b)). This
does not preclude the possibility that one of the methods of acceptance comes into
play independently of resale or repair (Jones v Gallagher [2004] EWCA Civ 10, Buxton
LJ). If the buyer agrees to the repair of the goods and the repair is properly effected
so that the goods conform to the contract, the buyer will have lost the right to reject
(J & H Ritchie Ltd v Lloyd Ltd 2005 SLT 64). Note that in J & H Ritchie Ltd v Lloyd Ltd it was
held that there was an additional contract to repair the goods and this contained an
implied term that the seller would explain the defect that had been repaired. When
the seller refused to do so, this amounted to repudiation of the repair contract, which
returned the parties to the position before the repair contract and so allowed the
buyer to reject the goods.

Can the buyer reject part of the goods and accept the rest? Section 11(4) begins,
‘Subject to section 35A below, where a contract of sale is not severable, and the buyer
has accepted the goods or part of them…’ Section 35A(1)(b) states that where the
buyer accepts part, they do not lose the right to reject the rest. Thus it would seem
that if the contract is not severable the buyer may accept those goods that comply
with the contract and reject those that do not. A contract will be severable if goods
are delivered in instalments separately paid for (s.31(2)) or, perhaps, merely if the
obligation is to deliver in instalments.

Once the buyer has accepted goods, they cannot later reject them on the grounds that
at the time of acceptance the buyer was unaware of certain facts (s.11(4): Whitecap
Leisure Ltd v John H Rundle Ltd [2008] EWCA Civ 429). However, if the right of rejection is
lost under s.35 because the buyer chooses to retain the goods in spite of the defects
of which they are aware, the seller’s continued failure to remedy those defects may
constitute a repudiation of the contract, which the buyer can accept, and the buyer
may also seek damages for losses incurred (Gregg & Co (Knottingley) Ltd, Allied Glass
Containers Ltd v Emhart Glass Ltd [2005] EWHC 804 (TCC)).

Finally, even if the goods have been accepted and the right of rejection is lost, the
buyer may still have a remedy in damages (s.11(4), Section 5.2.4), unless the right has
been waived (Section 5.2.6).
Commercial law  Chapter 5  Sale of goods: acceptance, remedies and retention of title page 91

Activity 5.1
a. Jake contracts to buy 12 bottles of brandy and the seller delivers eight bottles of
brandy and four bottles of whisky. What can Jake do under the SGA?

b. Jake is the managing director of Acme and wishes to buy office furniture. Having
seen a display in Ecma’s showroom, he agrees to buy a quantity of desks and
chairs. These are delivered on 1 January in an unassembled state (as agreed by
the parties). Due to business pressures, it is not possible for Acme to have the
furniture assembled until 1 February at which time they discover that there
are scratches on some of the desks and a leg is missing from some of the chairs.
Ecma agrees to make repairs, but they never come to collect the furniture. It is
1 April and Jake is very angry; what advice can you give him about action Acme
might take under the SGA?

5.2 Remedies of the buyer

Essential reading
¢¢ Sealy and Hooley, Chapter 14 ‘Remedies of the buyer’.

5.2.1 Rejection of the goods


The buyer can reject goods where there is:

uu late tender of the goods where either time is of the essence of the contract or the
delay is such as to amount to repudiation by the seller

uu breach by the seller of a condition (express, implied, or implied by the SGA)

uu breach of an innominate term (that is, a term that is neither a condition nor a
warranty) where the consequences of that breach are serious (Cehave NV v Bremer
Handelsgesellschaft mbH: The Hansa Nord [1976] QB 44).

The motive for rejection is irrelevant (Arcos Ltd v EA Ronaasen & Son [1933] AC 470).

5.2.2 Loss of the right to reject


The right of rejection is lost or will not be available where:

uu the buyer has accepted the goods (s.11(4); see Section 5.1 above)

uu the breach of ss.13–15 or s.30 is so slight as to make it unreasonable to reject


the goods (s.15A(1)(b); Truk (UK) Ltd v Tokmakidis GmbH (2000) 1 Lloyd’s Rep 543;
s.30(2A), (2B))

uu the contract restricts the right to reject: the UCTA permits a reasonable restriction
in contracts, including in relation to terms implied by the SGA, except that liability
for breach of the condition implied by s.12(1) SGA cannot be excluded or limited in
any contract (s.6(1) UCTA)

uu there is a breach of a warranty, or a breach of an innominate term (where, in the


latter, the consequences of the breach are not sufficiently serious to entitle rejection).

5.2.3 Remedies where the buyer has the right to reject

(a) Rejection and repudiation


If the buyer has the right to reject for breach of condition a number of possibilities
arise. The buyer could reject the goods (see s.36) and, if appropriate, repudiate the
contract and claim the return of the price paid (if any) and damages for any additional
loss caused by the breach (see Section 5.2.4). However, the right to reject does not
necessarily mean the buyer can repudiate the contract. It may be that the contract
allows the seller to remedy the fault and re-deliver the goods (Borrowman Phillips &
Co v Free & Hollis [1878] 4 QBD 500; The Kanchenjunga [1990] 1 Lloyd’s Rep 391); this is
commonly found in international sales contracts. Where the contract is for the sale
page 92 University of London 

of specific goods, it is, of course, not possible for the seller to tender different goods,
so the only means of curing a defective delivery would be, if acceptable to the buyer,
by the repair and redelivery, assuming this is possible within the time limits set by the
contract and the goods conform to the contract.

Repudiation is only possible if the breach goes to the root of the contract and this
will be where there is a breach of condition or where there has been a sufficiently
serious breach of an innominate term. But certain observations must be made. First, it
is important to remember the effect of the implied conditions of ss.15A and 30(2A) on
such rights, although these provisions do not affect the rights of the buyer in relation to
other conditions or innominate terms (e.g. where the breach relates to a breach of an
express term relating to the seller’s obligation to deliver at a particular time). Second,
under s.55(1) the parties can agree to exclude liability for breach of the terms implied by
the Act, including those in ss.13–15, subject to the application of the UCTA (see Section
4.9 above). Third, it seems likely that express terms providing the buyer with the right
to terminate the contract will not fall within the UCTA, in spite of the potential breadth
of ss.3(2)(b) and 17(1)(b) – the aim of that Act is only to regulate clauses that exclude or
limit liability or that grant an indemnity (but in Atiyah, the authors suggest the UCTA
may apply here).

The buyer may be able to reject the entire consignment of goods, or accept all the
goods that conform to the sale contract and reject those that do not conform, or take
some of the defective goods and reject the rest (ss.11(4), 35A(1)). This would seem to
apply whether or not the contract is for delivery by instalment (s.35A(2)), in spite of the
wording in s.31(2), which refers only to repudiation or a claim for damages, although
this possibility was not considered in Regent Ohg Aisenstadt und Barig v Francesco
of Jermyn Street Ltd [1981] 3 All ER 327. In this case suits were to be delivered in five
instalments; one instalment was delivered one suit short. It was held that the breach
was unlikely to be repeated, so the buyer could not repudiate the whole contract.

The rules on rejection concern the contractual rights of the buyer to reject the goods.
They do not determine whether property has passed to the buyer. Where the buyer
rejects the goods, the property in them revests in the seller (Kewi Tek Chao v British
Traders & Shippers Ltd [1954] 2 QB 459 at 487). If the buyer wrongly rejects goods, the
seller can treat this as a repudiation of the contract and, if property has passed to the
buyer, it will revest in the seller.

(b) Damages
The buyer can treat the breach as a breach of warranty and claim damages (s.11(4); see
Section 5.2.4).

(c) Waiver
The buyer can waive the breach (see Section 5.2.6).

Activity 5.2
Acme agrees to buy from Ecma 1,000 planks of wood for boat building, each plank
to measure 15 centimetres in width. When delivered 250 planks are 14 centimetres
wide, 250 are 16 centimetres and the rest are as ordered. All the planks are suitable
for Acme’s purposes, but Acme has now found an alternative, cheaper supply of
wood and wants to escape from its obligations under the contract with Ecma.
Advise Acme.

5.2.4 Damages
In discussing any claim the buyer may have for damages a distinction must be made
between a claim for failure to deliver and a claim relating to goods that have been
delivered.

Where the failure to deliver causes loss, the buyer can bring an action for damages,
whether or not property has passed (contrast with the seller’s remedies: Section 5.3).
The rules are in s.51.
Commercial law  Chapter 5  Sale of goods: acceptance, remedies and retention of title page 93

a. If there is an available market for the goods: under s.51(3) the presumption is that
the measure of damages is the difference between the contract price and the
market price at the time the goods ought to have been delivered or (if no time was
fixed) at the time of the refusal to deliver. The fact that the buyer has contracted to
resell at a different price from the market price is irrelevant (Williams v Agius [1914]
AC 510). But see the special circumstances of R & H Hall Ltd v WH Pim Junr & Co Ltd
(1928) 30 LLR 159, where the parties contemplated that the buyer would resell the
particular cargo so that the buyer could not mitigate their loss by substituting a
cargo bought in the market. The buyer was awarded loss of profits on the resale.
Under s.54, the buyer can claim special damages – that is, the loss arising from
particular circumstances of which the seller was aware at the time of the contract
(the so-called second limb of the rules on remoteness of damage laid down in
Hadley v Baxendale (1854) 9 Ex 341; see Koufos v Czarnikow Ltd (The Heron II) [1969] 1
AC 350).

b. If there is no available market: under s.51(2), the buyer may claim ‘the loss directly
and naturally resulting, in the ordinary course of events, from the seller’s breach’.
This means that the loss must have been caused by the breach (causation) and
have been reasonably foreseeable (remoteness).

Where the goods are delivered and the buyer elects not to reject them (s.11(2)), or
where the contract is not severable and the buyer has accepted the goods or part of
them (s.11(4), subject to s.35A (see Section 5.2.2 above)), or where the breach does not
give rise to the right of rejection, it is treated as a breach of warranty and the buyer may
deduct damages from the unpaid price (and can sue for any further loss caused by the
breach: s.53(4)), or bring an action for damages (s.53(1)). The measure of damages is the
loss ‘directly and naturally resulting, in the ordinary course of events, from the breach’
(s.53(2)).

In the case of a breach of an implied term the loss is presumed to be the difference
between the value at delivery and the value if the warranty had been fulfilled (s.53(3)).
Where the circumstances of the case displace the application of this presumption the
court applies s.53(2) (Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87). In
general, the market price of the goods is ignored, although that price may indicate the
value of the goods if they had conformed to the contract.

The buyer may claim damages for consequential loss if the loss was caused by the
breach of contract and was a type of loss that was foreseeable (Hadley v Baxendale; The
Heron II) or for which the party in breach must have accepted responsibility (Transfield
Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48). In GKN Centrax
Gears Ltd v Matbro Ltd [1976] 2 Lloyd’s Rep 555, the seller was aware that the buyer
was reselling the goods to customers who, if satisfied, would place further orders.
The seller was, therefore, liable for the loss suffered when the repeat orders were not
forthcoming because of defects in the goods. Conversely, in Lambert v Lewis [1982] AC
225, the seller of a defective towing coupling was liable for the breach of s.14(3), but
not for the damages the buyer had to pay to a third party who was injured when the
buyer continued to use the coupling in spite of knowing it was defective. Similarly,
where yarn was delivered to the buyer in damaged cartons and that damage must
have been obvious to the buyer, the seller was not liable for the additional loss arising
from the yarn being shipped by the buyer in those cartons (Commercial Fibres (Ireland)
Ltd v Zabaida [1975] 1 Lloyd’s Rep 27). The buyer’s action broke the chain of causation.
There is no break in the chain of causation where the buyer is not aware of the defect
in the goods that causes the loss, even if the reasonable buyer would have been aware
of that defect, as long as the buyer does not ignore what is obvious (Trac Time Control
Ltd v Moss Plastics Parts Ltd [2005] All ER (D) 6).

The rule that damages are assessed as at the date of breach might not be applied
where overridden by the principle that damages should not exceed the value of the
contractual benefits lost by the claimant (Golden Strait Corpn v Nippon Yusen Kubishika
Kaisha [2007] UKHL 12) a position affirmed by the Supreme Court in Bunge v Nidera
[2015] UKSC 43 (where the scope for ‘contracting out’ of the common law rules of
damages is also considered). If, at the time of the breach, there is a real possibility of
page 94 University of London 

an event happening that would terminate the contract or reduce its benefit, it may
be appropriate for the court to reduce the damages to reflect the likelihood of that
possibility. Where this event occurred after the breach but before the time came for
the assessment of damages, the court should consider what happened and not award
damages for the period after the event.

Activity 5.3
a. In January, Acme contracts to sell 100 tons of wheat to Ecma at £100 per ton,
delivery on 31 August; Acme is aware that Ecma is buying for resale. In March,
Ecma contracts to resell this wheat to Mace at £120 per ton with delivery
31 August and requests Acme to deliver to Mace. Acme fails to deliver. On 3
September, Ecma purchases wheat at £120 per ton to fulfil its obligation to Mace.
The market price on 31 August is £90.

Advise Ecma. How might your answer differ if the price in August is £110?

b. How might your answer to (a) differ if there was no delivery date in the contract
and on 31 August Acme wrote to Ecma repudiating the contract?

5.2.5 Other remedies


A total failure by the seller to deliver will constitute a failure of consideration and will
release the buyer from the obligation to pay, or if they have paid, payment can be
recovered by a claim for money had and received. Aside from this, delivery and payment
are concurrent conditions (s.28), so the buyer may withhold payment where the seller
is not ready to deliver the goods. Where the buyer rightly repudiates the contract or the
seller wrongfully repudiates, the buyer is entitled to the return of the price paid and the
goods are returned as the termination has occurred because of the seller’s breach.

In an action for breach of contract to deliver specific or ascertained goods, the court has
the discretion to direct that the contract be performed specifically upon such terms
and conditions (if any) as to damages, payment of price, etc. as seem just to the court
(s.52). For a case where such an order was made in relation to unascertained goods, see
Sky Petroleum Ltd v VIP Petroleum Ltd [1974] 1 WLR 576; but see Re Wait [1927] 1 Ch 606.
The general principle is that specific performance will not be ordered if damages are
an adequate remedy. This means it is rarely awarded in commercial contracts involving
goods traded in the market. The fact that the contract concerns specific goods does not
mean that damages will be held to be inadequate. This rather unsatisfactory approach
to specific performance means that the buyer may be left to cope with considerable
inconvenience for which damages may not be an adequate remedy (for example, Société
des Industries Métallurgiques SA v Bronx Engineering Co Ltd [1975] 1 Lloyd’s Rep 465).

Remedies may be available for contractual misrepresentation (rescission; possibly


damages: Misrepresentation Act 1967), or in the torts of deceit (Derry v Peek (1889)
14 App Cas 339), negligent misstatement (Hedley Byrne & Co Ltd v Heller & Partners Ltd
[1964] AC 465) or conversion (Torts (Interference with Goods) Act 1977).

5.2.6 Waiver
A party (buyer or seller) may waive the right to a remedy for breach. The obligation,
which has been broken, may revive later. For example, if the buyer waives the seller’s
breach of a promise to deliver on a particular date, they are not expected to wait
forever and a new delivery date can be asserted by the buyer giving reasonable notice
to the seller (Charles Rickards Ltd v Oppenheim [1950] 1 KB 616). The revocation of a
waiver cannot occur where the other party has changed their position in reliance and
cannot now perform as was originally envisaged.

Activity 5.4
Jake, a wine merchant, buys a case of wine from a producer. Jake sells this case of wine
to a customer, who subsequently complains that on opening one of the bottles it
proved to be defective. The customer returns the other bottles, and Jake refunds the
purchase price to the customer. Jake now seeks to return the wine to the producer.
Advise Jake.
Commercial law  Chapter 5  Sale of goods: acceptance, remedies and retention of title page 95

Study pack reading


¢¢ Adams, J.N. ‘Damages in sale of goods: a critique of the provisions of the Sale
of Goods Act and article 2 of the Uniform Commercial Code’ (2002) Journal of
Business Law 553–56.

¢¢ Extract from Bridge, M. Chapter 10: ‘The remedies of the buyer and seller’ from
The sale of goods. (Oxford: Oxford University Press, 1998) [ISBN 9780198765355]
pp.486–98.

Further reading
¢¢ Atiyah, Chapter 20 ‘Rejection of the goods, rescission and specific performance’.

Summary
The buyer can reject goods for defective delivery, breach of an implied or express
condition, or serious breach of an innominate term, unless they have accepted the
goods or, in some situations, where there is only a minor breach. Rejection does
not necessarily constitute rescission of the contract and it may be possible for the
seller to cure a defective delivery. Wrongful rejection may be treated by the seller as
repudiation of the contract.

The buyer may be able to withhold payment of the price where the seller fails
to deliver, or to bring an action for damages for non-delivery or if the goods are
defective (this may be in substitution of, or in addition to, the right to reject). In rare
circumstances the court may grant specific performance.

5.3 Remedies of the seller

Essential reading
¢¢ Sealy and Hooley, Chapter 13 ‘Remedies of the seller’.

Where there is a breach by the buyer, the seller may have real remedies (see Sections
5.3.3 and 5.3.6) and personal remedies (Sections 5.3.1 and 5.3.2). The personal remedies
are an action for the price of the goods, or an action for damages for non-acceptance.

5.3.1 Action for the price


An action for the price is an action in debt, which arises:

uu if property has passed and the seller has wrongfully failed to pay according to the
terms of the contract (s.49(1)). See Stein, Forbes & Co v County Tailoring Co [1916] 86
LJKB 448; Colley v Overseas Exporters Ltd [1921] 3 KB 302). The time for payment must
have arrived and the buyer must have no right to reject the goods

uu if the contract stipulates a date for payment irrespective of delivery and the buyer
wrongfully fails to pay (s.49(2))

uu if risk has passed to the buyer, whether or not property has passed. This is not
contemplated expressly by s.49.

Although in these situations the buyer could sue for damages (s.50(1)), the action for
the price has advantages: it provides certainty about how much the seller is entitled to
receive; the remoteness rule (that loss must be reasonably foreseeable) applies only
to damages; the seller is not required to show that the breach caused the loss or to
mitigate or prove the amount of the loss.

In addition to the action for the price, the seller could bring an action for damages
under s.54 in respect of any reasonably foreseeable loss caused by the buyer’s breach.
The seller could also claim under s.37(1) for ‘any loss occasioned by [the buyer’s]
neglect or refusal to take delivery, and also for a reasonable charge for the care and
custody of the goods’. The seller cannot displace s.49 by reference to a term in their
agreement with the buyer (FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd
[2013] EWCA Civ 1232).
page 96 University of London 

Activity 5.5
Acme agrees to sell one of its machines to Ecma, but property is only to pass when
Ecma has unbolted the machine from the factory floor. Ecma fails to unbolt the
machine and does not pay Acme.
Can Acme bring an action for the price?

5.3.2 Action for damages


Under s.50(1), ‘where the buyer wrongfully neglects or refuses to accept and pay for
the goods’, the seller will have an action for damages for non-acceptance. This will be
the buyer’s only remedy if the property has not passed and it is an alternative remedy
to the action for the price if the property has passed. The measure of damages is the
loss ‘directly and naturally resulting in the ordinary course of events, from the buyer’s
breach of contract’ (s.50(2)). The loss must have been caused by the breach and be
reasonably foreseeable. The seller is obliged to mitigate their loss (for example, by
reselling the goods) and cannot claim loss attributable to a failure to mitigate.

If there is a market for the goods the presumption is that the amount of the damages
will be the difference between the contract price and the market price at the time
when the goods ought to have been accepted, or, if no time was fixed for acceptance,
at the time of the refusal to accept (s.50(3)). Where such a price can be determined,
the seller does not face the difficulties involved in the rules relating to causation,
remoteness and mitigation under s.50(2). If the seller suffers loss because of the
buyer’s wrongful delay in accepting the goods, there will be an action for damages
under s.37 (see Section 5.3.1).

Finally, where the buyer is in breach and is liable in damages, but those damages are
less than the amount of a payment already made by the buyer, the court will deduct
the amount of damages from the payment (Dies v British International Mining [1939]
1 KB 724), unless the parties agreed in their contract that the payment was non-
returnable (‘a payment by way of earnest’).

Activity 5.6
Acme agrees to sell a particular machine, collection to be made by Ecma. Ecma
never collects the machine and does not pay.
Advise Acme.

5.3.3 Rights of the unpaid seller


An unpaid seller is a seller to whom the whole of the price has not been paid or
tendered (s.38(1)). Generally, the reason for this is irrelevant: for example, it does not
matter that the time for payment has not arrived. Accepting payment by a negotiable
instrument (for example, a cheque or bill of exchange) will, usually, operate as a
conditional payment and the unpaid seller’s rights will be suspended until the
negotiable instrument is not paid (for example, the bank refuses to pay because the
customer does not have sufficient funds: s.38(2)).

The seller’s action for the price or for damages is a right in personam, that is, a right
against the buyer under the contract. But the unpaid seller may also have certain rights
in rem, which are exercised directly against goods. These are contained in ss.39–48 and
are discussed in the next parts of this guide. The rights can be exercised even though the
property in the goods has passed to the buyer (s.39(1)), although not where delivery has
been made to the buyer (but see Section 5.5). Note that merely being an unpaid seller
does not mean that all of these rights arise. For example, the unpaid seller’s lien will only
arise if the seller is in possession of the goods (see Section 5.3.4 below).

5.3.4 Unpaid seller’s lien


The unpaid seller’s lien is the right to retain possession of the goods until payment,
even if property has passed to the buyer. It provides a defence to an action brought by
the buyer for failure to deliver the goods. The property in the goods does not return to
the seller, although there is a separate right of resale (see Section 5.3.6 below).
Commercial law  Chapter 5  Sale of goods: acceptance, remedies and retention of title page 97

The lien is available where an unpaid seller is in possession of the goods and (s.41(1)):

uu the goods have not been sold on credit, or

uu the goods have been sold on credit and the term of credit has expired, or

uu the buyer has become insolvent: that is, the buyer has either ceased to pay their
debts in the ordinary course of business or cannot pay their debts as they become
due: s.61(4).

Where some of the goods have been delivered, the lien may be exercised against the
undelivered part, unless that delivery indicates an agreement to waive the lien (s.42).
In a contract where the parties agree that delivery is to be made in instalments, the
unpaid seller can claim a lien over any part of the goods and not just that instalment
on which payment is due (see Re Edwards, ex parte Chambers (1873) 8 Ch App 289).

The lien is not lost in any of the following circumstances.

uu Where part of the price has been paid (s.38(1)(a)).

uu Where the seller has obtained judgment for the price of the goods (s.43(2)).

uu Where the seller is in possession of the goods as agent or bailee for the buyer
(s.41(2)), although holding as such may amount to evidence that the seller has
waived the lien.

uu Where there has been a disposition by the buyer (for example, sale), unless the
seller assented to it in such a way as to show an intention to renounce rights
against the goods (s.47(1); Mordaunt Bros v British Oil and Cake Mills Ltd [1910] 2 KB
502; DF Mount Ltd v Jay & Jay (Provisions) Co Ltd [1960] 1 QB 159).

The lien will be lost:

uu where the buyer has paid or tendered the whole of the contract price (s.38(1)(a))

uu where the seller delivers the goods to a carrier, bailee or custodier for transmission
to the buyer without reserving the right of disposal (s.43(1)(a); see s.32(1) and
Section 4.2.2)

uu where the buyer lawfully obtains possession of the goods (s.43(1)(b)). The lien does
not revive if the seller regains possession (Valpy v Gibson (1847) 4 CB 837), unless this
occurs as the result of an exercise of the right of stoppage in transit (see Section
5.3.5). The lien subsists if the buyer wrongfully takes the goods (and the buyer will
not be able to pass title under s.25(1), see Section 3.9.5 above)

uu by waiver of the lien (s.43(1)(c)), such as consenting to resale by the buyer (s.47(1)).
It may be that consent here is as broadly interpreted as in s.25(1) (see Section
3.9.5 above), which would mean it includes the contradictory notion of consent
obtained by deceit

uu if the document of title to the goods has been lawfully transferred to a new buyer,
who takes in good faith (s.47(2)).

Activity 5.7
Find five cases where the lien has been lost and comment on the reasons.
As this is a research question, no feedback is provided for this activity.

5.3.5 Right of stoppage in transit


If the buyer of goods is insolvent and the goods have not been delivered, the unpaid
seller may exercise the right of stoppage by taking possession or by giving notice of
the claim to the carrier, bailee or custodier to whom they have been delivered for the
purpose of transmission (ss.44–46). The method of stoppage is outlined in s.46.

The requirements are that:

uu the seller is unpaid (see Section 5.3.3 above)

uu the buyer is insolvent

uu the goods are in transit.


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The transit ends and the right of stoppage is lost:

uu if the buyer or their agent obtains delivery before the arrival of the goods at their
destination (s.45(2); Reddall v Union Castle Mail Steamship Co Ltd [1914] 84 LJKB 360)

uu if, after arrival at the destination, the carrier, bailee or custodier acknowledges to
the buyer that the goods are held on their behalf and that person continues in
possession for the buyer (s.45(3))

uu if the carrier (etc.) wrongfully refuses to deliver the goods (s.45(6))

uu if a document of title has been transferred to the buyer and there has been a
further disposition, for example, to a new buyer, who acts in good faith (s.47(2)).

The transit will not have ended:

uu if there has been part delivery – the remainder of the goods may be stopped in
transit, unless that delivery has been made under such circumstances as to show
an agreement to give up possession of the whole of the goods (s.45(7))

uu if the buyer rejects goods and the carrier (etc.) continues in possession of them
(s.45(4)).

Although s.32(1) states that delivery to a carrier is presumed to constitute delivery to


the buyer (see Section 4.2.2), this does not apply in respect of the right of stoppage.
Only actual delivery to the buyer or to a carrier who is acting as the buyer’s agent will
terminate the right (see s.45(1) and (5)).

Under the Regulation of Investigatory Powers Act 2000 (s.1) it is illegal to intercept
communications transmitted by a public postal service, except if undertaken with the
authority of a warrant or in the circumstances set out in s.3.

5.3.6 Rescission and resale


A contract of sale is not rescinded by the exercise of the rights of lien or stoppage
(s.48(1)). Indeed, the buyer may be able to require delivery on tendering payment of
the price. Furthermore, where the property in the goods has passed to the buyer, it
will not revest in the seller merely because they exercise the right of lien or stoppage.
Property will revest if the seller terminates the contract or exercises the right of resale.
In RV Ward Ltd v Bignall [1967] 1 QB 534, the court took the view that the seller resold
the goods as their owner, and that the revesting of property in the seller occurred as a
result of rescission of the contract following the buyer’s breach. The seller’s election to
rescind was made by the act of reselling the goods.

The right of resale arises:

a. where the seller expressly reserves that right in the event that the buyer defaults,
in which case the original sale contract is rescinded (s.48(4))

b. where an unpaid seller, who has exercised the right of lien or stoppage, resells (by
implication of s.48(2)). The seller may also claim damages for loss caused by the
breach

c. where there is an unpaid seller, and either the goods are perishable or the seller
gives notice of the intention to resell, and the buyer does not pay or tender the
price within a reasonable time (s.48(3))

d. where the buyer repudiates the contract and the seller accepts this repudiation. If
property has passed to the buyer, refusal to accept delivery and to pay will amount
to repudiation, which, if accepted, means the property will revest in the seller,
who may resell and sue the buyer for any loss arising from the breach. Where the
seller does not accept the repudiation, the right to resell will only arise if one of the
circumstances mentioned in (a)–(c) is present.

The unpaid seller may resell the goods and recover from the original buyer damages
for any loss caused by this breach. The consequence of the resale by the unpaid seller
is that the new buyer acquires a good title as against the original buyer (s.48(2)).
Commercial law  Chapter 5  Sale of goods: acceptance, remedies and retention of title page 99

Note that the use of the word ‘rescission’ in the SGA does not conform to modern
judicial thinking, as set down in Johnson v Agnew [1980] AC 367, where the House of
Lords distinguished between: (a) recission ab initio for invalidity, such as fraud or
mistake, which means, in effect, the transaction is entirely unwound so that money
and goods are returned to the parties; (b) termination of the contract following
breach, which does not affect the past or accrued claims, but merely gives rise to
claims for damages for the breach and ends obligations to perform in the future.

5.3.7 Waiver
See the discussion at Section 5.2.6 above.

Activity 5.8
Why was the seller unable to exercise the seller’s lien in Valpy v Gibson [1847] 4 CB 837?

Further reading
¢¢ Adams, J.N. ‘Damages in sale of goods’ (2002) JBL 553.

¢¢ Atiyah, pp.108; 385–423.

Summary
The seller can bring actions against the buyer for the price where property has passed
and the buyer has wrongfully failed to pay, or for damages where the buyer wrongfully
fails to accept and pay for the goods. The seller may also have rights in relation to the
goods: the unpaid seller’s lien permits the seller to retain possession of the goods until
payment; the right of stoppage allows the unpaid seller to stop goods in transit where
the buyer has become insolvent; and the seller may be able to exercise the right of resale.

5.4 Consumer remedies

Essential reading
¢¢ Atiyah, pp.506–12.

Prior to the CRA, consumers already enjoyed a wider range of remedies than
commercial buyers of goods under the SGA, namely the right to require repair or
replacement of goods, in addition to the right to reject goods where they were in
breach of the implied conditions and had not been accepted by the buyer.

The result was a somewhat unclear hierarchy of remedies for the consumer buyer.
The consumer remedies have now been removed to the CRA, although s.19(11) CRA is
explicit that the remedies outside of the CRA continue to be available as an alternative
to the CRA remedies.

Where a seller breaches a term implied by ss.9, 10, 11, 13, 14 and 16 a consumer has four
remedies available: short-term right to reject; repair or replacement; price reduction
and a final right of rejection (s.19(3) CRA). Where there is a breach of s.15, the short-
term right to reject is not available (s.19(4) CRA). Where a seller does not have the
right to supply the goods, the only remedy is rejection (not restricted by time limits)
(s.19(6) CRA). Following rejection, the seller must refund the consumer (s.20(7)(a) CRA)
without undue delay (s.20(15) CRA).

As seen above at Section 5.1, the SGA links the right to reject the goods with the
acceptance of the goods by the buyer. The point in time when this has occurred is not
always clear. The CRA approach is different. If there is a breach of one of the implied terms
as to the quality of the goods, s.22(3) CRA provides that unless it is incompatible with the
nature of the goods (s.22(4) CRA), the buyer has the right to reject the goods within 30
days of both property passing to the consumer and the goods being delivered.

A consumer may choose instead to exercise their right to have the goods repaired
or replaced (s.23 CRA). This must be done by the seller within a reasonable time,
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without significant inconvenience and at no cost to the consumer (s.23(2) CRA). The
seller can refuse to repair or replace the goods where it would be impossible or
disproportionate (s.23(3) CRA).

If the seller is unable to bring the goods into conformity after one repair or
replacement, or if the seller cannot repair or replace the goods within a reasonable
time or without significant inconvenience (s.24(5) CRA), or the consumer is not
entitled to repair or replacement (s.23(3) CRA), the consumer has the right to request a
reduction in the price paid or reject the goods and obtain a refund.

5.4.1 Delivery
Under the CRA, the seller is under an obligation to deliver the goods to the consumer
(s.28(2) CRA), without undue delay (s.28(3) CRA). Section 28(6) CRA provides that
the buyer can reject the goods where the seller has failed to deliver the goods
entirely (s.28(6)(a) CRA) or, echoing the flexible approach taken to s.29 SGA, where
time was of the essence (s.28(6)(b) CRA) or the seller was told that time was of the
essence (s.28(6)(c) CRA).

The consumer can reject a delivery of goods that are in excess (s.25(2) CRA) of the
contract quantity or short of it (s.25(1) CRA). By contrast to s.15A SGA there is no de
minimis exception, although one could perhaps be found by reference to s.25(4) CRA
which makes rejection subject to the terms of the contract and the circumstances of
the case, or s.25(8) CRA which makes the section ‘subject to any usage of trade, special
agreement, or course of dealing between the parties’.

5.5 Retention of title by the seller

Essential reading
¢¢ Sealy and Hooley, Chapter 13 ‘Remedies of the seller’.

It is normal commercial practice for goods to be supplied on credit: a manufacturer


may need to sell the goods they have produced before being able to pay a supplier
of the raw materials. This can create problems for the supplier because if the buyer
becomes insolvent before payment and after property in the raw materials has
passed, they become part of the buyer’s general assets and the seller will simply rank
alongside other unsecured creditors, which will involve expense in lodging proof of a
claim and may yield little or no benefit.

To some extent the seller can guard against this possibility by not passing the property
in the goods to the buyer. If the parties do not intend the property to pass, it will not
do so, even if the buyer obtains possession (s.17; Tank and Vessels Industries Ltd v Devon
Cider Co Ltd [2009] EWHC 1360 (Ch)). Commonly, the sale contract seeks to assert this
by a retention (or reservation) of title clause in the sale contract. This is sometimes
called a Romalpa clause after the leading case, Aluminium Industrie Vaasen BV v
Romalpa Aluminium Ltd [1976] 1 WLR 676. Such a clause is contemplated by s.19(1) (see
also ss.2(3) and 17). Where there is a contract for sale of specific goods or where, in a
contract for unascertained goods, the goods have been appropriated to the contract,
the seller may reserve the right of disposal of the goods until such conditions as are
laid down in the contract have been fulfilled (for example, payment of the price).
Property will not pass to the buyer until the conditions are met, even if the goods have
been delivered. Such a clause aims to prevent the goods becoming part of the buyer’s
assets in the event of insolvency. Moreover, since the goods are not the property of
the buyer they will not be subject to any security granted to another creditor by the
buyer. But, while these attributes make the clause attractive to the seller, they can
disadvantage other creditors who may be unaware that goods in the possession of the
buyer are subject to such a clause.

There is an important distinction to be made between:

uu a retention of title clause by which the seller retains property in the goods and the
goods do not form part of the buyer’s general assets on insolvency
Commercial law  Chapter 5  Sale of goods: acceptance, remedies and retention of title page 101

uu a charge by which the buyer, who has property in the goods, grants to the seller a
proprietary interest in them as security for a debt. Here the seller can look to those
goods in the event that the debt is unpaid. But where a company is the debtor the
charge will be void against creditors unless registered under the Companies Act 2006,
s.860 (by s.878 charges over goods must be registered). In addition, by creating a
charge the debtor company may be in breach of agreements with other creditors. For
a clause that only created a charge, see Re Bond Worth Ltd [1980] Ch 228.

A retention of title clause provides only limited protection. If the buyer, who is in
possession of the goods or documents of title, resells, the new buyer may acquire
good title under s.25.

Types of clauses
It is relatively easy to write a clause into a sale contract by which the seller retains
property in the original goods, but it may be that the only way the buyer can pay for
the raw materials is to manufacture them into a product which is sold. The seller of
steel to a carmaker will be aware that some of that steel will be stored for later use
and some will be mixed with other goods (plastic, rubber, etc.) to make cars and the
cars will be sold. It may not be in the interests of the seller, who wishes to be paid, to
obstruct the ability of the buyer to use the goods, but if it is contemplated that before
payment the goods will lose their identity or leave the possession of the buyer, how
can the seller protect their position?

Attempts have been made to draft clauses that transfer the seller’s rights in the goods
sold to any product made with those goods or any money received from the sale of
the goods or the product. There are several possibilities.

1. A clause by which the seller retains property in the original goods.

2. A clause that gives the seller proprietary rights to the proceeds of the resale of the
original goods by the buyer.

3. A clause that gives the seller proprietary rights in the product manufactured by
mixing the original goods with other goods.

4. A clause giving the seller proprietary rights in the proceeds of the sale of any
product manufactured with the original goods.

5. An ‘all moneys’ clause (Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339), which


reserves the seller’s property in the original goods supplied and, perhaps, rights in
the proceeds of resale, the manufactured product and the proceeds of the sale of
the manufactured product until all the debts owed by the buyer to the seller (that
is, not just the price owed for one particular sale) are met.

These clauses often also require the goods to be stored separately from other goods
in the possession of the seller, permit the seller to enter the buyer’s premises and
remove the goods in which the seller has property, require the buyer to keep the
proceeds of any resale in a special account separate from other funds, and purport to
place the buyer under a fiduciary duty to the seller.

Are these clauses successful?


The clauses have, generally, been effective in reserving title to the original goods, but
failed in so far as they have sought to extend the rights of the seller beyond the goods
supplied under the particular contract. As shown in Fairfax Gerrard Holdings Ltd v Capital
Bank plc [2007] EWCA Civ 1226, it is often the case that even though goods are sold subject
to a retention of title clause it is evident that the intention was to permit the buyer to
resell those goods. As Simon Brown J pointed out in Four Point Garages v Carter [1985] 3
All ER 12, it would be curious if no such implied right existed in a contract where there is
a simple retention of title clause where the purpose of the transaction is to enable the
buyer to obtain goods for resale. This reasoning led the court in Re BA Peters plc [2008]
EWHC 2205 (Ch) to conclude that the seller had relinquished the property in the goods
and had a mere charge, which was unenforceable because it had not been registered.
page 102 University of London 

The problem is that once the goods have been resold or a new product has been
manufactured out of the goods the attempt to reserve title in the resale proceeds
or the product is, usually, characterised as a charge (Borden (UK) Ltd v Scottish Timber
Products Ltd [1981] Ch 25). It has been suggested that ‘where the contract seeks to
confer upon the seller a right to look for satisfaction of the price to property which
is worth more than that amount (or to a sum of money which exceeds the price
which he is owed), the courts will construe the transaction as one involving a charge’.
Attempts to transfer to the seller property in the product manufactured from the
original goods will amount to a charge because ‘it is hardly credible that the parties
would have intended that the buyer should abandon to the seller the value which he
has added to the original sale goods’. There are other issues: has the retention clause
been incorporated into the sale contract; can the seller identify the goods that are
subject to the clause?

Where goods are mixed with other goods in a manufacturing process, the seller will be
able to retain title as long as the identity of the goods sold remains. In Hendy Lennox
(Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1 WLR 485 the contract involved
engines which were then used in the manufacture of generators. It was held that the
seller retained title to the engines because the process could be easily reversed so the
engines had not lost their identity. Where the manufacturing process cannot be easily
reversed, property will pass to the buyer and the clause will create a mere charge
(Borden): for example, leather made into handbags (Re Peachdart Ltd [1984] Ch 131). In
an Australian case, Associated Alloys Pty Limited v Metropolitan Engineering and
Fabrications Pty Limited (1996) ACSR 205 at 209, it was said:

The question of whether goods which have been used in some manufacturing process
still exist in the goods produced by that process, or have gone out of existence on being
incorporated in the derived product is, in my opinion, a question of fact and degree not
susceptible of much exposition. When wheat is ground into flour it is reasonably open
to debate whether the wheat continues to exist; when flour is baked into bread there
could be little doubt that the flour does not. Many examples might be encountered
or imagined and each must be addressed separately. Where goods of a homogenous
character are mixed, co-ownership might be a correct conclusion...whether goods are
reducible to the original materials is not simply a matter of physics. Other perspectives
have to be considered, including the economic perspective. The scraps of leather
produced by cutting up a manufactured shoe could not in reality be regarded as the
original leather from which the shoe was manufactured. The steel which would be
produced by cutting up the pressure vessel and flattening and the cylindrical parts would
not be the steel which Associated Alloys delivered under the sale; it would be scrap steel.

An ‘all moneys’ clause may not resolve the difficulties. In Aluminium Industrie Vaasen
BV v Romalpa Aluminium Ltd the court held the clause effective to enable the seller
to trace into the proceeds from sales of the goods by the buyer and found that there
existed a fiduciary relationship between seller and buyer, which is necessary to
establish tracing in equity. This aspect of the decision has been doubted and in later
cases courts have imposed constraints making such clauses ineffective. At the core
of the difficulties is that the parties cannot designate the buyer as a fiduciary or as an
agent where in reality they are engaged in a sale (Re Andrabell [1984] 3 All ER 407; Hendy
Lennox; E Pfeiffer Weinkellerei-Weinenkauf GmbH v Arbuthnot Factors Ltd [1988] 1 WLR 150;
Compaq Computers Ltd v Abercorn Group Ltd [1991] BCLC 484 602).

It is certainly the case, as emphasised by the court in Sandhu (t/a Isher Fashions UK) v
Jet Star Retail Ltd [2011] EWCA Civ 459 that previously decided cases on retention of
title clauses are invariably of limited use, that each case turns on the meaning of the
particular clause used in the particular contract.

Activity 5.9
Why might it be important for the seller to reserve title rather than merely to have
a charge over the goods? How might this distinction affect the buyer?
Commercial law  Chapter 5  Sale of goods: acceptance, remedies and retention of title page 103

Further reading
¢¢ Atiyah, pp.406–16.

¢¢ Webb, D. ‘Title and transformation: who owns manufactured goods?’ (2000)


JBL 513.

Summary
Where goods are sold on credit, the seller may seek to guard against the insolvency
of the buyer by a retention of title clause. The aim of this is to prevent property from
passing to the buyer until the conditions set out in the clause have been met (payment
by the buyer), even though there has been delivery of the goods to the buyer. The
clause may also purport to give the seller a proprietary interest in the proceeds of sale
of the goods, and, if the goods are to be mixed with other goods in a manufacturing
process, the seller may attempt to extend the clause to the manufactured product
and the proceeds of the sale of that product. The further these clauses seek to extend
the rights of the seller over things other than the original goods, the less chance there
is of them succeeding. Where the buyer has acquired the property in the goods, the
proprietary interest created by the clause will constitute a charge over the goods or
proceeds of sale, which will require registration. The other difficulty is that someone
purchasing from a buyer, who is in possession of the goods, may acquire title in spite
of the retention of title clause in the original sale contract.

Core comprehension
Read the relevant parts of Sealy and Hooley, Chapter 13 ‘Remedies of the seller’ and
answer the following questions:
1. What is a retention of title clause? What is its legal basis?

2. Why do contracting parties use retention of title clauses?

3. How can a charge be defined?

4. How has it previously been argued that a retention of title clause was in fact a
form of charge?

5. Why would a buyer of goods be keen to argue that a retention of title clause
should in fact correctly be construed as a charge?

6. If a retention of title clause is incorporated and construed as retaining title and


not as a charge, how long can the seller’s title continue to exist in the goods?

7. How does an ‘all monies clause’ differ from a clause?

8. What is the potential result for a buyer buying goods under contracts which
contain an ‘all monies’ clause?

9. How does the House of Lords reason that all monies clauses are enforceable?

Applied comprehension
10. Do the judgments in Armour v Thyssen Edelstahlwerke AG [1990] 3 AER 481 and in
the New Zealand case of Pongakawa Sawmill Ltd v New Zealand Forest Products
Ltd [1992] 3 NZLR 304 suggest that very small changes to goods may not destroy
the title of the seller?

11. Under what circumstances could a buyer who has bought goods subject to a
valid retention of title clause give good title when re-selling the same goods?

12. Which cases consider the validity of a retention of title clause which seeks
to trace the seller’s interest in the proceeds of the sale of the goods or goods
manufactured from them?

13. Why have courts invariably rejected claims to the proceeds of sale?
page 104 University of London 

Core comprehension answers


1. A retention of title clause is a contractual term which a seller of goods incorporates
(or attempts to incorporate) into a contract, the result of which is that the seller
continues in ownership of (i.e. retains title in) the goods despite possession of
the goods being transferred to the buyer of goods. Section 19(1) permits the
seller to place restrictions on the passing of title, including making it contingent
on payment. The validity of retention of title clauses (including on its facts an
extremely wide-ranging clause) was confirmed by the Court of Appeal in Aluminium
Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676.

2. Retention of title (RoT) clauses are used by sellers of goods because they are a
convenient ‘self-help’ remedy to protect against a buyer who cannot pay for goods
– effectively a protection against a buyer’s insolvency. Aside from a RoT clause,
the seller otherwise has two options for limiting or avoiding a loss in the event of
the seller’s insolvency. They may seek to claim unpaid sums using the remedies
set out in the SGA, although these remedies are often regarded as technical and
do not address the fundamental problem that the unpaid seller is a low-ranking
creditor and the insolvent seller is simply unlikely to have the means to pay. The
alternative is to take a charge over the goods but the cost of doing this may be
disproportionate to the underlying transaction as the creation of a valid charge
requires, among other things, that it must be registered and, in any case, the buyer
may not be willing to agree to this. The use of a RoT clause potentially allows all
such difficulties to be circumvented by ensuring that the ownership of goods
remains with the seller so that, in the event of insolvency, they may simply be
reclaimed from the buyer. In the event that the original goods no longer exist, have
lost their character or have been fundamentally changed, a RoT clause may seek
to claim either goods manufactured from or incorporating those supplied or the
proceeds from their sale. The validity of such clauses is far less clear and at least in
so far as such clauses have been tested in the case law, with the notable exception
of the judgment in Romalpa, have largely failed.

3. The concept of an equitable charge is considered in many cases but in the context
of RoT is helpfully considered by Slade J in Re Bond Worth where he defines it as ‘any
contract which, by way of security for the payment of a debt, confers an interest in
property defeasible or destructible upon payment of such debt, or appropriates
such property for the discharge of the debt, must necessarily be regarded as
creating a mortgage or charge, as the case may be’.

4. If a RoT clause were construed as a charge it would require registration. If the


intention was simply to retain title but, on its true construction, a term was in fact
an attempt to create a charge, such a charge would be void unless registered as
required by s.859H of the Companies Act 2006.

5. A buyer, or more often the buyer’s representative in insolvency, will seek to


maximise the assets available for dispersal to creditors. One way they will do this
is to argue that a RoT clause was in some way ineffective to begin with (i.e. it did
not retain property in the first place), meaning property has passed and the goods
can be freely disposed of by the buyer. There are many lines of argument that can
be used. If it is successfully argued that the agreement was a charge and not a
RoT clause, this would lead to the conclusion that property must have passed to
the buyer because, in order for a charge to be created, the goods must be owned
by the buyer for the buyer to grant a security interest (charge) in the goods for
the benefit of the seller. It is not possible to both retain title and create a charge.
Alternatively, it may be be argued that the RoT clause was not in fact a term of
the contract at all, that for some reason it was not incorporated. It could also be
argued that the term, while incorporated, when interpreted correctly, taking into
account its meaning in the context of the contract as a whole, did not in fact retain
property. In both cases, the result will be the same – the buyer owns the property
and can dispose of or deal with it freely. A further argument is that the term, while
incorporated, does not on its proper construction retain property, instead it allows
property to pass but claims a continuing interest in the goods, which will continue
until the goods are paid for.
Commercial law  Chapter 5  Sale of goods: acceptance, remedies and retention of title page 105

6. As confirmed by Clough Mill v Martin [1985] 1 WLR 111, if the parties expressly agree,
it is conceptually possible for the seller’s interest to continue almost indefinitely,
even if the goods have been incorporated into other goods, mixed, changed, etc.
So, at one level it is simply a matter of determining from the wording used in the
contract whether parties intended that the seller’s title should persist or not.
This underscores the importance of careful analysis of individual terms in all RoT
cases, a point also made in Clough Mill. However, the reality is somewhat different.
The seller’s title can only continue to exist in the goods for as long as the goods
themselves remain identifiable and mixing, incorporation into other goods or
manufacturing processes, even being stored with goods of the same type supplied
by different sellers, may cause them to lose their identity. Successive judgments
have taken the view that even small changes to goods (e.g. Re Peachdart [1984]
Ch 131; Modelboard Ltd v Outer Box Ltd [1993] BCLC 623), or irreversible mixing (e.g.
Borden v Scottish Timber Products [1981] Ch 25; see also Re CKE Engineering Ltd [2007]
BCC 975) will result in the goods no longer being reducible to their original form
and as soon as this change occurs, title to the goods will vest in the buyer. This
conclusion is reinforced by the fact that subjecting the goods to a manufacturing
process of almost any kind will add value to them. If the seller were allowed to
reclaim goods which had been subjected to a manufacturing process they would
therefore benefit from a windfall, recovering a greater value than the value of the
goods supplied. It is difficult to foresee that this could ever be the mutual intention
of buyer and seller. So in conclusion, while every clause must be construed
individually, it can be said that as a general rule the seller’s title will continue as
long as the goods remain identifiable and in the same condition as they were
supplied. As soon as the goods are changed in some way and are no longer the
goods as they were supplied and, especially if any value has been added to them,
title will almost certainly have vested in the buyer. Only in the exceptional cases
such as Hendy Lennox v Grahame Puttick [1984] 2 Lloyd’s Rep 422, where the goods as
supplied continue to be identifiable in the goods they have been incorporated into
but can be removed without damage (in Goff LJ’s words ‘reducible to the original
materials’) or Re CKE Engineering where there is no material change or value added
and the goods remain identifiable despite mixing (which is wholly reversible), will
the seller continue to have title in the goods.

7. A RoT clause retains title in goods supplied under a single contract with title passing
on payment for those goods. By contrast, an ‘all monies clause’ retains title in all
goods supplied under all contracts until all sums due on those contracts are payable.

8. A serious difficulty could potentially arise where a buyer and seller deal
frequently with each other and as a result there are always sums outstanding
to the seller. Despite the fact that all goods supplied previously may have been
paid for, as long as there are any sums outstanding, in principle, the buyer has
no title in any goods whatsoever.

9. The House of Lords does not engage with the issue noted in question 8; instead,
the House of Lords simply regards this type of clause as an extension of a typical
retention of title clause and therefore one which is provided for by s.19(1) of the
SGA. As this clause is capable of retaining title in all goods supplied, it is therefore
impossible for it to be construed as a charge and the House of Lords is satisfied that
it is not.
page 106 University of London 

Applied comprehension answers


10. In both of these cases, the goods have been subject to some changes, namely
cutting into more workable lengths. In Armour there is no consideration of what
effect this has on the value or character of the steel and in the New Zealand case
it is accepted that this is a necessary step that has to be taken to make the timber
workable for any purpose. As a Scottish case which does not fully engage with
the issue, and a New Zealand case which is at best persuasive (and setting aside
the distinct case of reversible mixing which is considered in Re CKE Engineering,
applying the principles in relation to mixing set out in The Ypatianna [1988] 1 QB
345) these cases offer a glimpse of a possibility that there is scope for a successful
claim to be made to goods when the change made to them is so slight that they
are not regarded as materially different from the thing supplied and presumably
not appreciably ‘economically’ different or more valuable than the thing supplied.

11. Where a seller sells goods that have been supplied to them subject to a retention
of title clause, the buyer of those goods can obtain a good title to the goods by
virtue of s.25. This is another reason why a seller may be keen to trace their interest
into the proceeds of that sale as the resale will invariably destroy their title.

12. Clauses which seek to trace the seller’s interest into the proceeds of sale are
considered in a number of cases, notably the decisions in: Aluminium Industrie
Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676; Re Bond Worth Ltd [1980] Ch
228; Re Andrabell [1984] 3 All ER 407; Hendy Lennox v Grahame Puttick [1984] 2 Lloyd’s
Rep 422, and of particular relevance: Compaq Computers Ltd v Abercorn Group Ltd
[1991] BCC 484 and Pfeiffer GmbH v Arbuthnot Factors [1988] 1 WLR 150.

13. Among other requirements, in order to successfully claim for the proceeds of
sale, a seller would have to demonstrate that there was a fiduciary relationship
between seller and buyer. Invariably this has proven, upon a true construction
of the relationship between buyer and seller, not to be the case, even where the
contract of sale expresses that this is the nature of the relationship. As Mummery J
explains (citing the judgment of Slade J in Re Bond Worth) in Compaq Computers Ltd
v Abercorn Group Ltd [1991] BCC 484 ‘[o]nce it is accepted that the beneficial interest
in the proceeds of sale was determinable on the payment of debts, Compaq is
faced with the difficulty that the rights and obligations of the parties were in reality
and in substance characteristic of those of the parties to a charge and not of those
in a trustee/beneficiary or other fiduciary relationship’.

Sample examination question


For some years Hot Steel Ltd (Hot Steel) has sold steel to Canz Ltd (Canz), which sells
some of the steel to other companies and uses the rest in the manufacture of metal
containers for sale to various companies in the food trade. The dealings between
Hot Steel and Canz have been on the basis of payment 30 days after delivery, but
Hot Steel has heard rumours that Canz is facing financial problems. Hot Steel is,
therefore, concerned about receiving payment for future deliveries.
How might Hot Steel protect itself by using a retention of title clause?

Advice on answering the question


In effect, this question is asking about the dangers posed to Hot Steel by sales on
credit because this enables you to consider how effectively Hot Steel can protect itself.

You might begin your answer by explaining what a retention of title clause is; what, in
general terms, it seeks to achieve; the basis of such a clause in the Act (ss.17, 19); the
difficulties of distinguishing between a clause that reserves title to the seller and one
that merely creates a charge over the goods; and why the distinction is important.
All of this will enable you to discuss the value of such a clause to Hot Steel. You would
then go on to discuss the effectiveness of the different types of clause in relation to the
original goods still in the possession of Canz, the proceeds of the sale of those goods
to other companies, the product manufactured using those goods (metal containers),
Commercial law  Chapter 5  Sale of goods: acceptance, remedies and retention of title page 107

the proceeds of the sale of a manufactured product and an ‘all moneys’ clause, which
reserves the seller’s property in the original goods supplied (and, perhaps, rights in
the proceeds of resale, the manufactured product and the proceeds of the sale of the
manufactured product) until all the debts owed by the buyer to the seller (i.e. not just
the price owed for one particular sale) are met. You should note that these clauses often:

uu require the goods to be stored separately from other goods in the possession of
the seller

uu permit the seller to enter the buyer’s premises and remove the goods in which the
seller has property

uu require the buyer to keep the proceeds of any resale separately and place the
buyer under a fiduciary duty to the seller.

You should discuss the legal viability of each of these clauses by reference to relevant
case law. Sometimes the discussion can be clarified by distinguishing a case where the
clause was effective (for example, Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick
Ltd) from a case where it was not effective (Re Peachdart Ltd), although with most of these
clauses there are no cases in which the clause has been upheld. Note that students often
begin their answer to this type of question with a discussion of the seller’s other rights
against the buyer. This wastes time because the question directs you to discuss retention
of title clauses and not other rights or remedies the seller may have.
page 108 University of London 

Reflect and review


Look 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 to revise
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 Need to Need to
move on revise study
first again

I understand the rules on acceptance. ¢ ¢ ¢

I can explain the remedies available to the buyer and


the seller where there is a breach of the sale contract. ¢ ¢ ¢

I can explain the use of retention of title clauses and


the limits of such clauses. ¢ ¢ ¢

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

5.1 Acceptance ¢ ¢

5.2 Remedies of the buyer ¢ ¢

5.3 Remedies of the seller ¢ ¢

5.4 Consumer remedies ¢ ¢

5.5 Retention of title by the seller ¢ ¢


6 Money and banks

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

6.1 Bills of exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

6.2 The bank/customer relationship . . . . . . . . . . . . . . . . . . . . 118

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . 124


page 110 University of London

Introduction
Allied to all commercial dealings is a promise by one party to pay another. Making a
profit (or at least avoiding a loss) is usually the primary reason for entering into the
transaction in the first place. Parties are therefore keen to ensure that they are paid
and this will shape the contract they enter into. The contract will usually indicate how
and when payment is to be made and whether it will be made by the party personally
or by a third party (usually a bank) acting for them. The parties can choose from a
variety of payment mechanisms each with its own advantages and disadvantages in
terms of the guarantee of payment it carries with it and the cost and complexity of
using it. Banks have a crucial role as ‘paymaster’ in many payment mechanisms.

The law relating to money and banks is very extensive. This chapter will look at two
important aspects of it: bills of exchange and the relationship between bank and
customer. For ease, the Bills of Exchange Act 1882 will be referred to as ‘the BEA’
throughout, so where no other reference is made in this section, it can be assumed to
be a reference to the BEA.

Learning outcomes
By the end of this chapter and the relevant readings you should be able to:
uu explain the commercial function of a bill of exchange and define its fundamental
legal characteristics
uu describe how bills of exchange are transferred
uu describe the rights of a holder of a bill of exchange
uu define a bank by reference to its commercial functions and legal characteristics
uu identify the duties owed by a bank to its customers.
Commercial law  Chapter 6  Money and banks page 111

6.1 Bills of exchange

Essential reading
¢¢ Sealy and Hooley, Chapter 19 ‘Bills of exchange’.

When goods are bought and sold commercially, immediate payment may be made.
Payment in cash, particularly for large sums, carries with it a number of practical
problems, especially historically. The bigger problem is credit and how one party (a
seller of goods say) can provide a period of credit to another (e.g. a buyer of goods)
while at the same time having an assurance that at the end of the period they will
be paid. This is particularly a problem for international sales, where the payment
obligation is often deferred and the sums concerned may be substantial. The seller
may be prepared to rely on the buyer’s personal contractual promise to pay but this
carries with it at least some degree of risk and dealing at a distance, particularly across
borders, presents both practical and legal problems when taking action to enforce
payment. Sellers therefore often instead insist on payment being by bill of exchange
which, depending on the form it takes, may provide a much more robust guarantee of
payment, as payment (and before payment, the promise that payment will be made)
will ultimately come from a bank or some other source whose solvency is more or
less guaranteed. With certainty that payment will be made on presentation, the bill
itself, or rather the promise it contains, has a value (it is worth at least as much as the
debt that is to be repaid) in much the same way that bank notes do (bank notes are
a promissory note that historically promised to pay the bearer the face value of the
note in gold; this promise is what gave them value). Much like bank notes, which have
a fixed value, a bill of exchange is regarded as essentially as good as cash and the law
has evolved to preserve and ensure that they can be treated and regarded in this way.
Moreover, like cash, they can be readily transferred (negotiated, see Sealy and Hooley,
Chapter 18) with no notice being given to the original parties. The result is that the
holder can be assured of payment and they can be readily transferred (negotiated)
between parties, with parties to whom they are negotiated having the same (or
indeed even better) rights to payment as those who have held the bill previously.

This section of the guide explores the characteristics of bills of exchange, how they are
transferred and the rights and liabilities created by them. Each section is significant. A
document which does not meet the requirements to be a bill of exchange, if it has any
effect at all, will likely take effect as a much weaker instrument such as a promissory
note. Transfer and the forms of holding that result are significant because different
holders have differing rights to enforce the promises on the bill and the ability to
negotiate (transfer) it and the frequency with which this can occur means it is essential
that parties can ascertain their rights. Liability is important because the enforceability
of the bill – the promise to pay money – relies on the bill binding both the drawer (the
person who creates the bill) and the drawee (the party who will pay the money due
under the bill). Without the formalities being complied with, the holder of the bill may
find it essentially worthless if the parties are not in fact bound to it.

6.1.1 Key features of bills of exchange


The most important characteristic of a bill of exchange is that it is a not a promise by
one person to pay another but an order by one person to another to make payment to
a third. The promise to pay money to this third party has value and the third party can
transfer (perhaps to settle another debt) or sell the promise for cash so that another
party will be able to take the benefit of the bill. That party may then transfer it again
and so on, indefinitely. Promissory notes, which are a promise by one person to pay
another, and include bank notes, rely on the creditworthiness of the individual making
the promise, whereas a bill of exchange creates an order and therefore an obligation
to pay, usually by a bank, who can usually be assumed to be a reliable paymaster, such
that a bill of exchange is regarded as being as good as cash and does not depend on
the ability or willingness of, for example, a buyer of goods to pay for them.
page 112 University of London 

6.1.2 The parties to a bill of exchange


A bill of exchange will always involve the following parties:

uu Drawer – the person writing the bill and making the order for payment to be made.

uu Drawee – the person who is obliged to make payment on the bill, usually a bank.
Once the bill has been accepted for payment by the drawee, the drawee becomes
known as the acceptor.

uu Payee – the person to whom payment is to be made under the bill.

6.1.3 Definition

Essential reading
¢¢ Sealy and Hooley, Chapter 19 ‘Bills of exchange’.

Before setting out the definition, it is important to set out the terminology used for
the parties to a bill of exchange.

The law on bills of exchange is found in the codifying BEA. Section 3(1) defines a bill of
exchange as:

…an unconditional order in writing, addressed by one person to another, signed by the
person giving it, requiring the person to whom it is addressed to pay on demand or at a
fixed or determinable future time a sum certain in money or to the order of a specified
person or to bearer.

It is important to fully understand the particular meaning ascribed to terms used in


this definition and so they will be analysed individually.

Section 3(2) goes on to clarify that ‘an instrument which does not comply with these
conditions, or which orders any act to be done in addition to the payment of money,
is not a bill of exchange’. It is crucial then that an instrument purporting to be a bill of
exchange meets these criteria.

Each of the requirements in s.3 is important and must be complied with in order for
an instrument to be treated as a bill of exchange. It should be noted that cheques are
a form of bill of exchange but are differentiated by the fact that the drawee must be a
bank (s.73). The content of each requirement is considered below.

1. Unconditional offer – this means that the bill of exchange must contain an order
to the drawee and there must be no conditions on the drawee making payment,
for example, from a specified fund or ‘providing funds are available’.

2. In writing – a bill of exchange may be written or printed (s.2) on any material and
there is no standard form, although standard forms are generally used for ease.
The definition excludes electronic bills of exchange; however, the recently enacted
s.89A provides that an instrument may be presented for payment to a bank by
presenting an electronic image of it rather than the instrument itself. Many banks
now accept cheques in this way with customers using their phone to capture an
image of the cheque and sending to their bank through a mobile banking app.

3. Addressed by one person to another – further defined by s.6, the drawer and
drawee must be different people. The promise of payment cannot come from the
drawer as this would be a promissory note instead (see Section 6.1.1) under s.5(2).
Under s.6 the drawee must be indicated with ‘reasonable certainty’.

4. Signed by the person giving it – the drawer must sign the bill and will not be liable
on it until this is done. The bill does not need to be signed personally and can be
signed through an agent. That the agent is signing as an agent must be clear to
avoid the agent being personally liable on it.

5. Payable on demand or at a fixed or determined future time – requires that


payment be made on the bill as soon as it is presented for payment (a cheque is
only payable on demand). Alternatively, it must be payable on or after a fixed date
in the future as defined by s.11. The requirement is necessarily strict as a lack of
Commercial law  Chapter 6  Money and banks page 113

certainty may undermine the payment obligation but there is some discretion
where the intention of the parties is clear (see Hong Kong Shanghai Banking
Corporation v GD Trade Ltd [1998] CLC 238; Sealy and Hooley, p.664). Where the bill is
payable in the future, the payee will often sell the bill before this date for cash. The
amount of cash paid will be less than the amount payable under the bill. This is a
process known as discounting. The payee will endorse the bill to the discounter so
that the discounter can then present it for payment or further transfer it.

6. The bill must order payment to, or to the order of, a specified person or bearer
– further defined by s.7, means that the bill of exchange can be payable to a named
person, to a person nominated by that person, or to anyone (a bearer) to whom
the bill has been transferred. If a person is specified by name, s.7(1) provides that
they need to be identifiable with reasonable certainty so an exact name is not
essential and their title, for example, would suffice (s.7(2)). A bill made out to ‘X or
bearer’, for example in MK International Development Co Ltd v Housing Bank [1991]
Banking LR 74, was held to be valid and the courts have shown willingness to try
to construe the writing on an instrument to give effect to it so far as possible
(Chamberlain v Young and Tower [1983] 2 QB 206).

7. The order must be to pay a ‘sum certain in money’ – further defined by s.9, the
amount to be paid must be certain. Money includes foreign currency.

6.1.4 Transfer of bills of exchange

Essential reading
¢¢ Sealy and Hooley, Chapter 19 ‘Bills of exchange’.

Bills of exchange are negotiable. This means that a bill can be transferred without
giving notice to the parties who are liable on it. It also means that a party to whom the
bill is transferred, subject to certain conditions, can enforce it notwithstanding any
defects in title. The transfer of a bill is sometimes referred to as its ‘negotiation’. Under
s.31(1) a ‘bill is negotiated when it is transferred from one person to another in such a
manner as to constitute the transferee the holder of the bill’.

The way in which a transfer is done depends on whether the bill is made out to the
bearer – a bearer bill – or payable to a particular person or their order.

Bearer bills
What constitutes a bearer bill is set out in s.8(3). Under s.31(2) a bearer bill is
transferred by delivery. This means that possession (actual or constructive) of the bill
must pass from one party to another.

A bill may be treated as a bearer bill where the only or last indorsement is an
indorsement in blank or when the named payee does not in fact exist or is fictitious
(s.7(3)). In Bank of England v Vagliano Brothers [1891] AC 107 an employee of Vagliano
Brothers forged signatures on bills of exchange using the name of an endorsee who
Vagliano had had past dealings with (but was not a genuine indorsee here) and then
sought payment under the bills at the Bank of England who made payment. The House
of Lords had to decide whether under s.7(3) a fictitious indorsee was one who did exist
but was named in the bill merely as a pretence, or a party that was entirely made up.
The House of Lords held that either would amount to a fictitious person and so the bill
would be a bearer bill, although in the circumstances of the case the ‘bills’ were not
enforceable as they had not been signed by the drawer. However, see Vinden v Hughes
[1905] 1 KB 795, which shows that the intention of the drawer is crucial.

Order bills
Under s.31(3), a bill made payable to a named payee cannot just be transferred. It must
be indorsed which must then be delivered. Indorsements can be either special or
general. A special indorsement is used when the bill is to be transferred to a named
transferee. To specially endorse the bill, the transferee writes on the name of the
transferee and signs it (s.34(1)). The transferee can then transfer the bill in the same
page 114 University of London 

way. A general indorsement turns an order bill into a bearer bill (s.34(2)) and is done
by the payee simply signing the back of the bill and transferring it. Any holder can then
present it for payment.

6.1.5 Holders of the bill

Essential reading
¢¢ Sealy and Hooley, Chapter 19 ‘Bills of exchange’.

The holder is the person who has the right to enforce the promise of payment under
the bill of exchange.

A holder is defined in s.2 as ‘the payee or indorsee of a bill or note who is in possession
of it, or the bearer thereof.’

There are three classes of holder: a mere holder, a holder for value and a holder in due
course.

Mere holder
A mere holder is neither a holder otherwise than for value, that is to say someone who
has given no consideration for it, or a holder in due course. The mere holder can still
present the bill for payment but otherwise has only the right to date the bill (s.12) or
transfer the bill by indorsement or delivery (depending on the type of bill). In addition,
the mere holder benefits from the rebuttable presumption in s.30 that they are a
holder in due course. The difficulty for the mere holder is that an attempt to sue on
the bill will be met by the defence of the absence of consideration.

Holder for value


A bill is a form of contract (s.21(1)) and so all the usual requirements of a contract apply,
including consideration. A holder for value is a person who has given consideration
for it. For example, a seller of goods will have given consideration for the promise
contained in the bill of exchange drawn by the buyer by agreeing to transfer property
in the goods under the contract of sale. In an even simpler scenario, a party who has
paid money for the bill will be a holder for value. There is a rebuttable presumption
that every party named on the bill has become a party to it for value (s.30(1)).

Consideration is understood more widely under the BEA than in the general law.
Section 27(1) sets out that:

Valuable consideration for a bill may be constituted by —

(a) Any consideration sufficient to support a simple contract;

(b) An antecedent debt or liability. Such a debt or liability is deemed valuable


consideration whether the bill is payable on demand or at a future time.

The examples given above would fall squarely within s.27(1)(a) and would be neither
problematic nor unfamiliar to the general law. Section 27(1)(b), however, is far wider as
it includes ‘antecedent debt’ which would normally be regarded as past (and therefore
not good) consideration. As explained in Oliver v Davis [1949] 2 KB 727 the reason for
this is that ‘the giving of a cheque for an amount which you are already indebted
imports no consideration’ and the promise in the bill may not be enforceable. The
BEA therefore finds consideration where otherwise there would be none. However, as
Oliver v Davis also makes clear, the antecedent debt or liability cannot be that of a third
party.

In Oliver v Davis, the defendant had borrowed £350 from the claimant. The defendant
had agreed to pay back £400. He told his fiancée’s sister, Miss Woodcock, that he
would not be able to repay the debt and she agreed to settle it for him, writing the
claimant a cheque for £400. The defendant was a conman and was already married.
When Miss Woodcock discovered this she stopped the cheque. Oliver then sued her on
it, contending he had provided consideration for Miss Woodcock’s cheque by lending
the money to Davis. The Court of Appeal found that there was no consideration
Commercial law  Chapter 6  Money and banks page 115

in this case. There must be ‘some relationship between the receipt of the bill and
the antecedent debt or liability’. Two of the judges in that case go on to state that
effectively the bill would have been enforceable had ‘consideration sufficient to
support a simple contract been given’. A promise from the claimant that he would not
sue Davis would have been sufficient.

The decision in Oliver can be contrasted with the decision in Diamond v Graham [1968]
1 WLR 1061. Diamond agreed to lend money to Herman. Diamond would do this by
writing Herman a cheque, but he put a stop on the cheque. Herman gave Diamond a
post-dated cheque to repay the loan. However, Diamond would only make the loan
if a third party, Graham, gave him a cheque to cover the loan amount. Diamond lifted
the stop on the cheque he had written to Herman. The cheque written by Graham
to Diamond was dishonoured. Graham argued Diamond had given no value for the
cheque. The Court of Appeal found the act of releasing the stop on the cheque written
to Herman was value given by Diamond for the cheque written to Herman.

The situation is very different for any party who acquires the bill at a later point.
Section 27(2) provides that if valuable consideration has been given at any point in the
past, all subsequent holders are deemed holders for value.

Holder in due course


A holder in due course is defined by s.29(1). A payee cannot be a holder in due course.
A holder in due course is afforded a unique position by s.38(2). The holder in due
course ‘holds the bill free from any defect of title of prior parties, as well as from mere
personal defences available to prior parties among themselves, and may enforce
payment against all parties liable on the bill’. Every holder is presumed to be a holder
in due course (s.30(2)) and it will be for a party refusing to make payment on the bill to
prove that they are not.

Section 29(1) sets out that a holder in due course is:

a holder who has taken a bill, complete and regular on the face of it, under the following
conditions; namely,

(a) That he became the holder of it before it was overdue, and without notice that it
had been previously dishonoured, if such was the fact;

(b) That he took the bill in good faith and for value, and that at the time the bill was
negotiated to him he had no notice of any defect in the title of the person who
negotiated it.

A defect in title for the purposes of s.29(1) is set out in s.29(2) and as can be seen, can
include fraudulent and illegal acts such that a holder in due course may be a holder
of a bill drawn under duress, etc., but this will not affect their ability to have payment
made under it.

We will now examine the requirements under s.29(1) individually.

Must be a holder of the bill


This excludes the original payee (RE Jones Ltd v Waring & Gillow Ltd [1926] AC 670) except
in the case where a bill is negotiated to other parties before ultimately being indorsed
back to the payee, where s.29(3) operates to make them a holder in due course (Jade
International Steel Stahl and Eisen GmbH & Co KG v Robert Nicholas Steels Ltd [1978]
QB 917).

The bill must be complete and regular


Even minor discrepancies will make a bill irregular. For example, in Arab Bank Ltd v Ross
[1952] 2 QB 216 there was a discrepancy between how the payee was named on the
bill and the name they used when indorsing the bill. This was sufficient to prevent the
holder being a holder in due course. If the bill is incomplete, s.20 may allow the holder
to complete it, for example if it is not dated, but this will preclude the holder from
becoming a holder in due course. The nature of a holder in due course, however, is
that if the bill is transferred again, the next holder may be a holder in due course.
page 116 University of London 

The bill must not have been overdue


A bill is overdue if it has not been presented for payment by the date specified for
payment. If the bill is payable at sight (i.e. immediately upon drawing) it is overdue
when it has been in circulation for an unreasonable length of time, which is a question
of fact (s.36(3)).

Holder must have taken the bill without notice and in good faith
Under s.29(1) the holder must have taken the bill in good faith without notice that the
bill had been previously dishonoured due to non-payment or non-acceptance and
without notice at the time the bill was transferred with a defect in the transferor’s title.

Notice here means actual notice or suspicion as opposed to constructive notice.


Notice in s.29(1) is very closely linked to good faith. Negligence will not amount to bad
faith (s.90). As set out in Jones v Gordon (1877) App Cas 616 to show that a person did
not take a bill in good faith ‘it is necessary to show that a person was affected with
notice that there was something wrong about it when he took it’. In Jones v Gordon the
bills were sold at a substantial undervalue, which was evidence of bad faith.

Holder must have taken the bill for value


The wording of this section leaves some ambiguity as to whether a holder for value
under s.27(2) can also establish that they took the bill for value under s.29(1)(b). The
decisions in this area (MK International Development v The Housing Bank [1991] 1 Bank LR
74 (Mustill LJ obiter) and Clifford Chance v Silver [1992] Bank LR 11) point to it being the
case that a holder for value can establish that they took the bill for value, even if, as in
Clifford Chance v Silver, they are a donee of a bill. Sealy and Hooley note this is at odds
with the weight of academic commentary on this question.

6.1.6 Liability on the bill of exchange in general


The bill of exchange creates contractual liabilities. However, the drawer, acceptor and
indorser can only be liable on the bill where they have capacity to contract, where the
bill is complete and irrevocable and where they have signed the bill.

Capacity to contract
Capacity under the BEA has the same meaning that it does in law at large. If one
party does not have capacity, that party is not bound by their promise on the bill;
however, the other parties will continue to be bound. Where the drawee lacks
capacity, under s.5(2), the holder can elect whether to treat the bill as a promissory
note or bill of exchange.

Complete and irrevocable contract


The contract on the bill is neither irrevocable nor complete until the bill is delivered
(s.21(1), delivery defined in s.2). Except in the case of a holder in due course, there is
a rebuttable presumption that there was a valid and unconditional delivery by the
drawer, acceptor or indorser (s.21(3)).

Signature
Without a signature on a bill no party will be liable on it. As such, signatures are hugely
important. Signatures made by agents and forged or unauthorised signatures are
especially problematic.

Forgery is defined by ss.1 and 9 of the Forgery and Counterfeiting Act 1981. The effect
of a forged signature will vary depending on which signature has been forged. Section
24 provides that a forged or unauthorised signature is wholly ineffective. Under s.3, if
the drawer’s signature is forged the whole bill is ineffective. The only exception to the
general rule in s.24 is where the victim of the forgery represents that the signature is
in fact genuine, or fails to disclose when required to do so that the signature is in fact
a forgery. The requirements for an estoppel to be raised are set out in Greenwood v
Martins Bank Ltd [1933] AC 51.
Commercial law  Chapter 6  Money and banks page 117

The general effect of an agent signing on behalf of a principal is to hold the principal
liable on the bill in line with usual agency principles. If an agent signs a bill without
authorisation, that is to say without actual authority to do so, it may be within the
agent’s apparent authority to sign. However, to successfully argue that the agent had
apparent authority, the third party must not be aware of any defects in the agent’s
authority. The BEA provides (s.25) that a ‘procuration signature’ (i.e. where one party
signs on behalf of another using words such as ‘per pro’ or simply ‘pp’) this will put a
third party on notice that there may be a limitation on the agent’s authority so that a
third party may not be able to rely on it.

The principal will be able to ratify the agent’s action and become liable (and be able to
enforce) the bill.

Where an agent signs a bill it must be clear that they are not signing in their own
personal capacity. Doing this may mean that they incur liability personally on the bill.
Section 26(1) provides that adding words such as ‘for and on behalf of’ a principal will
suffice to make it clear that the agent is signing on behalf of the principal; however,
words which suggest that the agent is simply a representative or an agent will not.
However, in Bondina Ltd v Rollaway Shower Blinds Ltd [1986] 1 All ER 564 it was held that
the words written on the cheque must be seen in the context of the whole of the
pre-printed form on which the cheque was written, which included the details of the
now insolvent company (the principal) and their company bank details, making the
company liable on the cheque.

6.1.7 Liability of individual parties on the bill

Essential reading
¢¢ Sealy and Hooley, Chapter 19 ‘Bills of exchange’.

Acceptor
The liabilities of the acceptor are set out in s.54. The acceptor is the party primarily
liable on the bill and so will be liable to either the payee or a subsequent holder. Once
the bill has been accepted, the acceptor undertakes to pay the bill in accordance with
the terms of the acceptance (s.54).

Drawer
The liabilities of the drawer are set out in s.55(1). The drawer is not liable to pay the bill
and so their liability is limited to compensating a party who claims the bill and has it
dishonoured. However, the measure of damages (per s.57) will be the value of the bill
plus interest plus the cost of protesting the dishonour of the bill.

The indorser
The liabilities of the indorser are set out in s.55(2). Upon signing a bill as indorser, the
indorser is making the same undertaking as the drawer is making and so will be liable
on it in the same way that the drawer would be liable. The indorser also has additional
liability to subsequent holders of the bill by virtue of s.55(2)(c) which precludes
(estops) the indorser from denying the genuineness and regularity of the drawer’s
signature and of prior indorsements. The result is that if a thief steals and indorses
the bill with a forged signature before negotiating it to another party, while that party
will not be able to gain payment under the bill from the acceptor or sue the drawer or
payee, they will, in principle, be able to recover from the thief.

No signature is needed to indorse a bearer bill (s.58(1)), only delivery to the indorsee
(s.58(2)). If a bearer bill is signed when transferred, the party becomes liable as if they
were an indorser. The transferor may not become party to the bill but under s.58(3) the
transferor warrants to the immediate transferee that the bill ‘is what it purports to be,
that he has a right to transfer it, and that at the time of transfer he is not aware of any
fact which renders it valueless’.
page 118 University of London 

6.2 The bank/customer relationship


Banking is a term used to describe a very wide range of activities. This section deals
with just one, the core of those activities: the legal nature of a bank, its customers
and the relationship between the two, a relationship which is often very different in
nature from what might be expected from those who have had a relationship with a
bank as a ‘consumer’.

Banks and the very wide range of commercial activities they undertake are subject
to very wide-ranging regulation at both national and international levels. Aside from
being part of the broad description of the legislative picture in the UK that will not be
a focus of this part of the guide, indeed banking is a discipline in its own right.

6.2.1 Regulation of the banking sector


Following the near collapse of Northern Rock and the virtual nationalisation of other
major banks in 2009, the regulatory regime for banking and financial services was
reformed by the Financial Services Act 2012, which amended the regulatory structures
set out in the Financial Services and Markets Act 2000 (the FSMA).

The FSMA had provided for the establishment of the Financial Services Authority
(FSA) (FSMA ss.1 and 2). The FSA had oversight of the entire financial sector and had
as its objectives responsibility to maintain market confidence, financial stability and
consumer protection and reduce financial crime. The regulatory model adopted
focused not on the idea of banks per se but of entities which carried on ‘regulated
activities’. Any entity that carried on a regulated activity was required to be licensed
to do so and had to operate within the rules of the FSA in order to continue to comply
with that registration. The list of regulated activities was extensive (FSMA ss.1 and 2)
but included activities which, as will be seen, are core to the business of banking, such
as the taking of deposits.

The Financial Services Act 2012 amended the FSMA, abolished the FSA and replaced it
with the Financial Conduct Authority (FCA) and the Prudential Regulation Authority
(PRA)and handed additional responsibility to the Bank of England to ‘protect and
enhance the stability of the financial system’ (Bank of England Act 1998, s.2A). The PRA
is now primarily responsible for the regulation of banks to ensure their ‘soundness’
while the FCA is broader and is concerned, much as the FSA was, with licensing and
regulation of a broad range of financial and banking services and ensuring effective
competition and the protection of consumers in a well-functioning market.

6.2.2 What is a bank?


The approach, as set out above, to regulating the financial sector, of which banking
is one (substantial) part, is not concerned with defining ‘banks’ as such; indeed there
is no statutory definition of a bank, banker or banking business. The emphasis is on a
wide range of regulated activities, many of which will be undertaken by banks to some
degree or other. This is a deliberate omission which reflects the variety and complexity
of banking businesses. Certainly, for any sort of regulatory purpose, a general
definition would not be helpful or easily arrived at. By comparison, the common law
has sought to arrive at what can be regarded at least as a working definition of what
amounts to a bank. The common law definition is important because a contract with a
bank or banker carries with it at common law certain implied terms and concepts such
as the banker’s lien and the banker’s right of set-off which necessitate a definition of
what amounts to a bank and a banker.

The leading authority on how a bank is defined at common law is the decision of
the Court of Appeal in United Dominions Trust v Kirkwood [1966] 2 QB 431. This case
concerned whether or not the claimant, which was an established finance house, was
‘bona fide carrying on the business of banking’ under the Moneylenders Act 1900.

The Court of Appeal considered extensive expert evidence on the question of what
amounted to a bank or the business of banking and despite being divided on the
Commercial law  Chapter 6  Money and banks page 119

question of whether UDT was a bank were unanimous in agreeing what the identifying
characteristics of a bank or an entity carrying on a banking business were. The
essential characteristics of a bank, it was held, were the accepting of deposits (into
current accounts), the handling of cheques (both cheques written to customers to be
collected and which the customer could use to withdraw money) and, although not all
of the judgments attach equal weight to this, having a reputation among commercial
people as a bank. Denning MR and Harman LJ regarded this as good evidence of a
bank’s status as a bank, but Diplock LJ took the view that deposit taking was the
primary determinant of an institution’s status.

In his judgment, Denning MR notes how in the 50 years prior to the judgment, the
definition of a bank has necessarily shifted and the definition that Kirkwood arrives
at looks very different to a bank today, taking no account of electronic payments,
payment cards and placing emphasis on cheques, whose use has declined by over 80
per cent in under 30 years. This places a serious question over the authority of this
judgment, which identifies with ephemeral features of the banking system.

Re Roe’s Legal Charge [1982] 2 Lloyd’s Rep 370 also considered the nature of a bank and
particularly whether the scale of a business carrying out banking functions was relevant
in deciding if it was a bank. The business in question did accept deposits on current
accounts, collected cheques and paid cheques drawn on it by its customers but on a
very small scale. The Court of Appeal, while refusing to lay down a general definition,
accepted that it was the activities carried on and, providing they were not a small
adjunct to the business, not the scale that determined whether or not this was a bank.

6.2.3 Who is a customer?


A bank owes its customers a number of duties, for example to follow its customer’s
instructions, to work with reasonable skill and care, etc. It is important therefore to
understand who is a customer, as it does not owe the same duties to someone who
is not a customer or is merely a casual user of its services, for example, someone who
uses one of its cash machines for convenience, or historically, someone who might
have used it to cash a cheque.

Anyone who has an account with a bank is a customer of that bank and will become a
customer from the moment an account is opened (Ladbroke & Co v Todd (1914) 30 TLR
433). It is not material that there may only have been one transaction on the account
(Taxation Commissioners v English, Scottish & Australian Bank [1920] AC 683) or that the
overall level of activity is low. It has been held (Woods v Martins Bank Ltd [1959] 1 QB
55) that, where a bank had accepted an instruction to receive money from a building
society, the banker–customer relationship existed from the point in time when the
instruction was accepted, even though that was prior to the opening of an account as
nonetheless the bank had accepted the claimant as a customer. The relationship does
not exist where an account is opened in someone’s name but without their authority
(Stoney Stanton Supplies (Coventry) Ltd v Midland Bank Ltd [1966] 2 Lloyd’s Rep 373).

Today, the position may be slightly clouded by the range of services offered by banks,
for example mortgages, financial advice and credit cards, which, while customers have
their own ‘accounts’, may not make the customers a ‘customer’ in the common law
sense, although the selling of all such products is heavily regulated.

6.2.4 The bank–customer relationship


The relationship between a bank and its customer is a contractual one under which
the customer is a creditor of the bank. When money is paid into the bank, it becomes
the money of the bank; it is not that of the customer, and a customer cannot therefore
say accurately that they have money in the bank. The bank is indebted to the customer
and the customer has a personal (not a real) right to demand repayment of the debt in
whole or part.

In Joachimson v Swiss Bank Corporation [1921] 3 KB 110 the Court of Appeal summarised
the relationship as one where:
page 120 University of London 

the Bank undertakes to receive money and to collect bills for its customers’ accounts, the
proceeds so received are not to be held in trust for the customer but the bank borrows
the proceeds and undertakes to repay them. The promise is to repay at the branch of the
bank where the account is kept, and during banking hours. It includes a promise to repay
any part of the amount due against the written order of the customer addressed to the
bank at the branch…The customer on his part undertakes to exercise reasonable care on
executing his written orders so as not to mislead the bank or facilitate forgery.

That the relationship was one of debtor and creditor was established many years
before in Foley v Hill (1848) 2 HL App Cas 28 and has been reaffirmed repeatedly since
(e.g. Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB 728).

6.2.5 Bank’s duty to honour the customer’s mandate


The judgment in Joachimson sets out that it is the duty of the bank ‘to repay any part
of the amount due against the written order of the customer addressed to the bank
at the branch’. This requirement that the bank may effectively repay its debt to the
customer or to a third party as ordered by the customer is what is known as the
customer’s mandate.

As Cresswell J put it in Sierra Leone Telecommunications Co Ltd v Barclays Bank plc [1998]
CLC 501:

It is a basic obligation owed by a bank to its customer that the bank will honour on
presentation a cheque drawn by the customer on the bank provided that there are sufficient
funds in the customer’s account to meet the cheque or the bank has agreed to provide the
customer with overdraft facilities sufficient to meet the cheque. Where the bank honours
such a cheque or other instructions it acts within its mandate, with the result that the bank is
entitled to debit the customer’s account with the amount of the cheque or other instruction.

The bank is under a duty to comply with the customer’s mandate providing that the
demand from the customer is clear and there are sufficient funds in the customer’s
account or available under an agreed overdraft. If the available funds are not sufficient,
the bank may ignore the instruction completely and treat it as an offer by the
customer to extend credit to them (Emerald Meats v AIB Group (UK) Ltd [2002] EWCA
Civ 460). Such borrowing may incur substantial charges and these charges have been
the source of litigation which sought (unsuccessfully) to argue that the terms such
overdrafts were made on were unfair under the Unfair Terms in Consumer Contracts
Regulations 1999 (now Consumer Rights Act 2015) (see Office of Fair Trading v Abbey
National plc [2009] UKSC 6).

When making a payment, for example by debit card, the bank will pay a merchant out
of its own funds before debiting them from the customer’s current account. If the bank
pays on a mandate that is not clear, the bank may not be able to debit the customer’s
account for the same sum (Morrell v Workers Savings & Loan Bank [2007] UKPC 3).

Just as the bank must obey the customer’s instruction in making payments, it must
also obey its instruction when a payment is countermanded by the customer. In
respect of cheques, the obligation is set out in s.75 of the Bills of Exchange Act 1882.
In respect of other payments, there must be clear and unambiguous notice of the
countermand. Notice can only be actual notice, as held in Curtice v London City &
Midland Bank [1908] KB 293 but, unless required by the contract between the parties,
it does not need to take a specific form. The amount of time available to a customer to
countermand a payment will vary. The contract may specify how long a customer has,
although this may only really be of use in relation to cheques. With a card payment or
other electronic payment, the time between the bank being ordered to pay and funds
being released may be so short that it is just not possible to countermand a payment.

6.2.6 Bank’s duty of care


At common law (and under s.13 of the Supply of Goods and Services Act 1982) the bank
is under a duty to exercise reasonable skill and care in carrying out its contractual
obligations. The bank may also be liable in tort for a failure to reach this standard (see
Henderson v Merrett Syndicates [1995] 2 AC 145). This is especially relevant when the bank
Commercial law  Chapter 6  Money and banks page 121

is making payment and, historically, especially when making payments on cheques (or
other bills of exchange). Today, this issue is more likely to be in relation to the making
of payment by card or electronically, although these cases present real difficulties, as
payments are invariably made immediately without human intervention and, unless
fraud or suspicious activity has been previously notified or detected, it may be that the
bank can very easily meet the required standard.

The standard that a bank must reach is that of the ordinary prudent banker; this is to
be judged objectively but what this means in relation to a particular transaction is
often a difficult question of fact and will continue to be so as payment mechanisms
and platforms change and evolve and payment becomes primarily automated. The
case law, however, continues to illustrate the standard effectively, albeit it seems that
the standard has declined over time, taking account of the difficulty of making any
meaningful judgment on literally billions of payments (see e.g. Karak Rubber Estates Ltd
v Cradock (No 3) [1968] 2 All ER 1073).

In Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340 a solicitor was writing cheques on the
partnership account and using them to fund his own gambling habit. The bank was
aware of his gambling and noted that the way the cheques were drawn was unusual but
still made payment on the cheques. The Court of Appeal held that the bank had reached
the required standard, that it would not be reasonable for a bank to suspect a solicitor of
wrongdoing and that the bank would only have fallen below the required standard if no
reasonable cashier, having been presented with the cheque, would have paid without
consulting a superior and no superior would pay without querying the cheque.

6.2.7 Bank’s fiduciary duty


As we have seen, the banker–customer relationship is not a fiduciary one. In terms of
the taking of deposits and making of payments it cannot be as this is incompatible
with the business model on which a bank operates. However, the functions of a bank
range well beyond this and a bank may act in a fiduciary capacity when it acts as
financial adviser (Woods v Martins Bank [1959] 1 QB 55), as trustee or as agent (as these
are relationships of a fiduciary nature). Exceptionally, there may also be a fiduciary
relationship as a result of a long-standing and special relationship between bank and
customer (Lloyds Bank Ltd v Bundy [1975] QB 326 (not accepted on appeal)) although
such instances are likely to be exceptionally rare.

Core comprehension
1. How and where is a bill of exchange defined?

2. How does a bill of exchange differ from a promissory note?

3. How is a bank defined at common law? Does this accord with the definition of a
bank in the context of financial regulation?

4. What are the key features of the bank–customer relationship?

Applied comprehension
5. Where the same person is named as both drawer and drawee, can this be
regarded as a bill of exchange? If so, why?

6. B draws a bill on A, naming C as the payee. C indorses the bill in favour of D but
then places it in a desk drawer. Will D be able to enforce it?

7. If B draws a bill on A naming C as the payee, delivers to C, who then indorses it


in favour of D, who then has it stolen by E, who negotiates it to F, can F enforce it
and against whom?

8. What importance does the Bills of Exchange Act attach to signatures?

9. What value can really be attached to the Court of Appeal decision in UDT v
Kirkwood?

10. What is the standard of care that a bank must reach when complying with the
instructions of its customer to make payment?
page 122 University of London 

Core comprehension answers


1. A bill of exchange is defined in s.3(1). The Act defines a bill as: ‘…an unconditional
order in writing, addressed by one person to another, signed by the person giving
it, requiring the person to whom it is addressed to pay on demand or at a fixed
or determinable future time a sum certain in money or to the order of a specified
person or to bearer.’

Unconditional offer – means nothing in how it is written must prevent it being


presented for payment immediately or when it is due (e.g. it cannot require that
the holder or payee wait until told to present it by the drawer).

In writing – allows for print or handwriting on any material; there is no standard


form. The definition excludes electronic bills.

Addressed by one person to another – the drawer and drawee must be different
people.

Signed by the person giving it – the bill will not be effective unless signed by the
drawer or their authorised agent.

Payable on demand or at a fixed or determined future time – the holder or


payee must be able to present it for payment immediately or on a date that can be
determined from the bill.

The bill must order payment to, or to the order of, a specified person or to a
bearer – further defined by s.7, means that the bill of exchange can be payable to
a named person, to a person nominated by that person, or to anyone (a bearer) to
whom the bill has been transferred.

The order must be to pay a ‘sum certain in money’ – further defined by s.9, the
amount to be paid must be certain.

2. As set out in s.3(1), a bill of exchange contains an order to a bank or similar to


pay the payee or subsequent holder, whereas a promissory note is merely an
unconditional promise by one person to pay another. It is defined in s.83(1).

3. There is no fixed definition of a bank at common law or in statute. The notion of a


bank or banker is found, for example, in the banker’s lien and in various legislation
but has never been defined. Cases such as Re Roe’s Legal Charge and UDT v Kirkwood
stress that the emphasis of the banking business is the taking of deposits and
handling of payments for customers. Regulation centres on ‘regulated activities’
which include a far wider range of activities than those contemplated at common
law but include deposit taking and the making of payments and are not related
to scale. Equally, the statutory framework gives no consideration to the extent to
which a bank is recognised as a bank and so differs in this respect.

4. The bank–customer relationship, as set out in Joachimson v Swiss Bank Corporation


[1921] 3 KB 110 is a relationship, the essence of which is that the customer is a
creditor of the bank and has no ‘money in the bank’ as such, merely a personal
(contractual) right to demand its return or demand, under the mandate, payment
to a third party. The relationship therefore is not a fiduciary one unless the bank
acts as agent or trustee and the bank owes only a limited duty of care, at least in
processing payments.

Applied comprehension answers


5. No. Section 3(1) makes clear that the two parties must be different. If they are the
same, the drawer is effectively making the promise to pay. A promise by the drawer
to pay would be a mere promissory note (s.5(2)).

6. As the bill is made out to C and then indorsed to D, this is not and cannot be
treated as a bearer bill (D is named). An order bill, that is to say a bill that is not
made out to a named payee, not just to a bearer, will be complete without delivery
under s.31(3). Whereas, a bearer bill is negotiated by delivery alone (s.31(2)).
Commercial law  Chapter 6  Money and banks page 123

7. This question illustrates the effect of s.55(2). This section operates such that where
a bill is taken by someone who does not have good title to it, they are unable to
enforce it against the drawee, drawer or payee. However, the indorser is precluded
from denying that the bill is genuine and regular in all respects, and so F can
enforce against E but no other party.

8. Without a signature, as per s.23, there can be no liability on a bill. They are
therefore of huge importance. It is not only a question of whether there is a
signature but whether the signature is genuine or a forgery and whether, if the
signature is made by an agent, the agent is intending to sign on their own account
or for the principal and whether they in fact have authority to sign. If they do not
have authority, usual agency principles will apply: either it must be shown the
agent had apparent authority or, if the principal seeks to enforce, must ratify.

9. Arguably, this decision is very much of its time, which Denning MR to some extent
acknowledges when he compares banking practice at the time of the judgment
with prevailing practice some 50 years earlier. Neither he nor the other judges take
the opportunity to consider how enduring and relevant their definition, or defining
characteristics, might be in the future. However, they echo a number of compelling
precedents which also identify the essence of banking as being the taking of
deposits and the making of payments in accordance with the instructions of the
customer, with recognition of a bank as a bank by the mercantile community being
another important factor. The nature of banking has clearly changed substantially
since that judgment was handed down but looking, for example, at the structure
of successive regimes for the regulation of banking in the UK, it is those same
activities which remain at the core of banking activity.

10. A bank must reach the standard of an ordinary prudent banker. However, this
standard is generally regarded as being a low one – that a bank, considering the
volume of payments that it processes, cannot reasonably be expected to make
enquiry in all but the most egregious cases. As set out in Lipkin Gorman, there can
be no expectation that a bank can or will play detective and delve into why an
individual payment is being made.
page 124 University of London 

Reflect and review


Look 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 to revise
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 Need to Need to
move on revise study
first again

I can explain the nature of a bill of exchange and the


elements of its definition. ¢ ¢ ¢

I can explain how bills of exchange are transferred


and the classes of holders of a bill of exchange. ¢ ¢ ¢

I understand the liabilities of parties to a bill of


exchange and how they come to be liable on a bill. ¢ ¢ ¢

I understand the common law definition of a bank. ¢ ¢ ¢

I understand and can explain the nature and features


of the relationship between bank and customer. ¢ ¢ ¢

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

6.1 Bills of exchange ¢ ¢

6.2 The bank/customer relationship ¢ ¢


7 Credit and security, financing the sale of goods

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

7.1 Nature and forms of credit . . . . . . . . . . . . . . . . . . . . . . . 127

7.2 Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

7.3 Personal security . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

7.4 Assignments of choses in action . . . . . . . . . . . . . . . . . . . . . 137

7.5 Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

7.6 Common law controls over credit . . . . . . . . . . . . . . . . . . . 144

7.7 The regulation of consumer credit . . . . . . . . . . . . . . . . . . . 145

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . 154


page 126 University of London

Introduction
As has been seen in the previous chapters, in a sale of goods (as opposed to a contract
for exchange or barter) the seller has two duties; one is to accept the goods, the other
is to pay for them. Not infrequently, goods will be paid for at the time of delivery or
at the time the contract for them is made. However, for many businesses, paying at
the time the contract is made may be neither possible nor desirable. The buyer may
need to resell the goods in order to raise the funds to pay for them and, in any case,
their cash flow will be improved by keeping hold of the funds for as long as possible.
The result is that buyers routinely buy goods on credit with payment being made
at the end of an agreed period. For sellers, offering credit may be desirable and may
encourage buyers to buy from them but it has the opposite effect on their cash flow
and exposes them to the risk that the buyer will ultimately not pay, or when the time
comes not be able to pay. The latter position is particularly unenviable because it may
mean that the seller is left with just a personal claim against a buyer which the buyer
has not got the funds to meet. A seller may protect themselves by retaining title in the
goods (see Chapter 5) but this offers only limited, and at times uncertain, protection
against non-payment. Such terms are also of little assistance for the seller who needs
payment sooner rather than later but who still must sell goods on credit.

The opposing needs of the buyer and seller may seem to be irreconcilable but are in
fact reconciled by the devices that will be considered in this chapter: the different
forms of that credit used to finance a sale, the security interests which a seller or
lender may be able to take to ensure payment for the goods, or repayment of money
advanced to facilitate a purchase of goods, provide the necessary confidence to deal
with each other on mutually agreeable terms. This chapter will also consider how
intangibles are assigned and outline the regime that regulates contracts for credit and
security.

Learning outcomes
By the end of this chapter and the relevant readings you should be able to:
uu explain the commercial function and nature of credit and security
uu describe the main forms of possessory security
uu describe the main forms of non-possessory security
uu explain the operation of personal securities, especially guarantees
uu explain the requirements for a valid assignment of a chose in action
uu outline how credit and security agreements are regulated by common law.
Commercial law  Chapter 7  Credit and security, financing the sale of goods page 127

7.1 Nature and forms of credit

Essential reading
¢¢ Sealy and Hooley, Chapter 24 ‘Introduction’.

Further reading
¢¢ Bradgate, Chapter 20 ‘Financing the transaction’ and Chapter 21 ‘Credit and
security’ Sections 21.0 ‘Introduction’ and 21.1 ‘Types of credit’.

Before considering the forms of credit, it is necessary to define what exactly is meant
by the term ‘credit’.

7.1.1 Meaning of credit


‘Credit’ has a specific legal meaning. Goode (p.578) defines it as the ‘the provision of a
benefit (cash, land, goods, services, or facilities) for which payment is to be made by
the recipient in money at a later date’. It is therefore, as Sealy and Hooley suggest, a
‘financial accommodation’, which is reflected in the wording of the Consumer Credit
Act 1974 s.9(1), which defines credit as including ‘a cash loan, and any other form of
financial accommodation’.

7.1.2 Forms of credit


Credit generally takes one of two forms: loans or sale credit.

A loan is a transaction where a lender advances money to a borrower which the


borrower will then repay with interest and potentially other fees at or by the end of an
agreed period.

Unlike a sale credit, a loan is usually an independent transaction from the agreement
to sell or transfer the goods; money is advanced under one contract in order to pay for
goods under another. A bank loan to buy a car would be an example of loan credit (a
car could also be used as security for a loan to buy another item). The party advancing
the money will not usually be the supplier. A lender may make a loan for a fixed sum,
which will usually be paid in a single payment, or provide a ‘revolving’ facility. An
example of this would be an overdraft (a line of credit which the borrower can draw
on up to an agreed maximum).

A sale credit, by comparison, is a situation where the seller or supplier of goods simply
allows the other party to make payment for them at a later time. The credit and the
sale or supply of goods are within the same transaction. A sale credit can take the form
of a credit sale, a hire-purchase agreement or a conditional sale. A credit sale is where
the seller sells (i.e. property passes in the goods) and the buyer makes payment at a
later time. In a conditional sale, the seller contracts to pass property but only when
payment has been made. It is therefore conditional on payment. Hire-purchase may
also be regarded as a form of sale credit, although legally it is an agreement of hire. Its
structure and content will often be very similar to a contract for conditional sale.

In addition to loan and sale credit, there are also credit cards, which are neither a loan
nor a sale credit. A credit card provides a line of credit to the card holder. When the card
is used, the issuer enters into an agreement to pay the merchant for the goods, the buyer
of the goods is essentially paying for them with the promise of a third party to pay. The
card holder will then repay the outstanding amount in whole or by instalments (for
analysis of the credit card transaction see Re Charge Card Services [1989] Ch 497).

7.2 Security

Essential reading
¢¢ Sealy and Hooley, Chapters 25 ‘Possessory security’ and 26 ‘Non-possessory
security’.
page 128 University of London
Whether money is lent as a loan or as a credit, unless the creditor has some continuing
interest in the goods, they have advanced money only on the promise that it will be
repaid. Such a promise may be of little value. A creditor will therefore go to some lengths
to assure themselves of the creditworthiness of a borrower, taking up references, making
credit checks, taking into account their own prior dealings, etc. This may still not reveal the
financial situation of the debtor, who may be borrowing/taking goods on credit because
their situation is difficult or deteriorating, and it still only indicates the past or current
position of the debtor, not their ability to repay in the future. If the debtor does become
insolvent, the lender, with only a personal right to have the money repaid, will often be in
a very weak position with most available assets gone to secured creditors or those who
are protected by statute. A supplier of goods on credit, therefore, will seek to limit the
consequences of a default on the loan by availing themselves of some form of security.

Security can take one of two forms, real and personal. In the context of sale of goods,
real security gives the creditor rights in respect of the goods that have been supplied.
Real security can also include intangibles such as money owed to a company (although
that and company charges will not be considered here). Personal security gives the
seller contractual rights to enforce the debt, usually a separate contract entered into
to guarantee the debt. These will be considered in turn.

7.2.1 Real security – general requirements

Essential reading
¢¢ Sealy and Hooley, Chapter 24 ‘Introduction’.

There are four forms of real security:

uu lien

uu pledge

uu charge and

uu mortgage.

Real securities can also be categorised as:

uu possessory (pledge and lien) and

uu non-possessory (charge and mortgage).

Possessory securities are suitable in some circumstances but their reliance on taking
delivery or continuing in possession of goods, and the fact that neither allows a right
to freely dispose of the goods, limits their utility and makes them less robust than
non-possessory securities, which are in reality much more commonly used, at least in
transactions of any scale.

All real security interests require there to be a present debt. There must then be:

uu attachment

uu perfection and

uu priorities

in order to be valid.

Attachment is the ‘fastening’ of the security interest to the asset that it is to be used as
security for, for example goods which a seller is going to sell to a buyer, or goods which
are going to be used as security for a loan that is to be granted for another purpose.
Attachment is achieved by a creating a valid contract to create a security interest.
The contract must make clear that it is intending to create a security (Palmer v Carey
[1926] AC 703) and it must make clear what property the security will attach to (Tailby
v Official Receiver (1888) 13 App Cas 523). An asset that is being claimed must then fall
within the scope of that definition. The debtor must also have an interest in the asset
to grant security over it. The money must have been advanced by the creditor (Rogers
v Challis (1859) 27 Beav 175). In the case of a lien or pledge, the creditor must also be
given possession.
Commercial law  Chapter 7  Credit and security, financing the sale of goods page 129
A valid security interest can only be created where the asset falls within the scope of
assets identified in the agreement creating the security.

Perfection refers to the completion of any additional steps required by law to make
the security effective, for example registration of a company charge under the
Companies Act 2006.

Priorities refers to the ranking of the security interest. The ranking of the security
is especially important in the event of insolvency, when the remaining assets of a
debtor will be liquidated and divided between the various creditors. However, the
fundamental difficulty (and often the reason for the insolvency) is that the debtor
does not have sufficient funds to satisfy all debts. While all creditors are in principle on
an equal footing (the pari passu principle) the extent to which the debt owed to them
will be repaid depends on the ranking (i.e. the order in which the remaining available
assets are distributed).

Notwithstanding statutory protections that safeguard otherwise unsecured creditors


such as unpaid employees and the practitioner conducting the insolvency, secured
creditors have preference over unsecured creditors. Unsecured creditors will usually
receive a very small proportion of the debt owed to them and only after the claims of
the secured creditors have been satisfied.

However, within the group of secured creditors, the holders of certain security
interests rank above others. The general rules are as follows.

uu A fixed security interest will have priority over a floating charge even if that fixed
security interest is created after the floating charge (Wheatley v Silkstone and Haigh
Moor Coal Company (1885) 29 Ch D 715).

uu Fixed charges and mortgages rank in priority according to the date of their creation
(James v Boythorpe Colliery Co [1890] 2 Meg 55).

uu Floating charges rank in priority according to the date of their creation (Smith v
English and Scottish Mercantile Investment Trust Ltd [1896] 40 Sol Jo 717).

These rules are subject to several exceptions, which are noted here (but the detail of
them is somewhat outside of the scope of a general commercial law module – they are
primarily a matter of company/corporate insolvency law) and which add substantially
to the complexity of establishing the precise ranking of creditors.

The most important exceptions are as follows.

uu Prior equitable security interests over an asset take priority over subsequent legal
interests in that asset, unless the legal interest in the asset is transferred to a bona
fide purchaser for value without notice of the prior equitable interest (Pilcher v
Rawlins [1872] 7 Ch App 259).

uu The priority of the security interests in assets that require additional registration
(aircraft and ships, land and intellectual property) will normally be determined by
the order of registration in the specialist register.

uu The Financial Collateral Arrangements (No 2) Regulations 2003 (SI 2003/3226)


disapply the registration requirements of the Companies Act 2006 (and disapplied
those of the Companies Act 1985) in respect of certain security interests over
financial collateral (e.g. cash and financial instruments). Where the Financial
Collateral Arrangements Regulations apply and the security agreement so provides,
the collateral taker (that is, the security holder) can appropriate the collateral as a
remedy on default, effectively making the security over that collateral first-ranking.

uu Floating charge holders will often try to circumvent the rule that a later fixed
security interest takes priority over an earlier floating charge by way of a negative
pledge. A negative pledge is a covenant made by a borrower that it will not create
any other security, subject to agreed exceptions. A new lender with actual notice of
a negative pledge who obtains security over any of the assets subject to an existing
floating charge will rank behind that floating charge.
page 130 University of London
As of April 2013, by virtue of s.859D of the Companies Act 2006, the existence of a
negative pledge must be noted among the particulars of the charge. Prior to this
date, the existence of a negative pledge would often have been noted but it is a
matter of debate as to whether a new lender would have constructive knowledge
of any negative pledge included in the particulars of the charge.

uu In respect of assignments of choses in action and equitable interests, as established


in Dearle v Hall (1828) 3 Russ 1, priority is governed by whoever is first to give notice
to the third party whose obligations are being assigned. The rule will not apply if
the second assignee took its assignment with notice of the first assignment, even
though the first assignee had not given notice to the third party whose obligations
have been assigned.

7.2.2 Pledge

Essential reading
¢¢ Sealy and Hooley, Chapter 25 ‘Possessory security’.

A pledge is a form of security where an asset is delivered to a person as security for a


loan from them. This is essentially the business carried on by a pawnbroker (pawn being
another word used to describe a pledge), although pledge is also used commercially.

The classical definition of a pledge can be found in Coggs v Bernard (1703) 2 Ld Raym
909. Coggs sets out the essential requirements of a pledge and the interest that results
from it.

To create a pledge, the pledgor, the owner of the asset, enters into a contract with the
pledgee, the party who is making a loan. As with any contract for security, the contract
must make clear that is creating a security and what property is to be pledged. The
pledgor must then deliver the asset to be pledged to the pledgee. The result is that
the pledgee is a bailee of the asset and owes the pledgor a duty of care in respect of
them (this is often modified by the contract). Moreover, the pledge is given a ‘special
property’ in the asset. The special interest subsists until the loan is paid either by being
repaid by the pledgor or by the sale of the asset by the pledgee.

Delivery can either be actual, physical delivery of an asset (Official Assignee of Madras v
Mercantile Bank of India [1935] AC 53 or constructive delivery, whereby the pledgor gives
to the pledgee access to the goods (e.g. keys to a room in which they are kept with no
other goods (Wrightson v McArthur & Hutchison (1919) Ltd [1921] 2 KB 806, see also Hilton
v Tucker (1888) 39 Ch D 669)) or a document of title to them. At common law, the only
recognised document of title is a bill of lading.

The ‘special property’ that a pledgee acquires allows the pledgee, in the event that the
original loan is not repaid, to resell the goods (Re Hardwick, ex parte Hubbard (1886) 17
QBD 690) and on the authority of Coggs would seem to allow the pledgee, for as long
as they have possession of them, to use them, although they may be liable to the true
owner if they are lost. The special property is just that, the pledgor will never become
owner of the goods as there is no right of foreclosure under a pledge (Carter v Wake
(1877) 4 Ch D 605).

The pledgee’s special property is not lost if the asset is re-delivered to the pledgor
(Reeves v Capper (1838) Bing 5 NC 136) or re-pledged by the pledgee (Donald v Suckling
(1866) LR 1 QB 585). The pledge is only released when the loan is repaid.

As Lord Mersey sets out in The Odessa [1916] 1 AC 145, the right of resale arises out of an
‘implied authority from the pledgor and for the benefit of both parties’. As such, if the
sale of the asset realises a greater amount than the debt, the pledgee holds it on trust
for the pledgor (Matthew v TM Sutton Ltd [1994] 4 All ER 793) and, conversely, where the
sale of the assets falls short of the amount owed, the pledgee can bring an action to
recover the shortfall against the pledgor (Jones v Marshall (1889) 24 QBD 269).
Commercial law  Chapter 7  Credit and security, financing the sale of goods page 131

7.2.3 Lien

Essential reading
¢¢ Sealy and Hooley, Chapter 25 ‘Possessory security’.

A lien can take one of four forms: common law, statutory, equitable and maritime. The
focus here is on the lien at common law.

The classical definition of a lien is found in Hammonds v Barclay (1802) 2 East 227
where Grose J defines it as a ‘right in one man to retain that which is in his possession
belonging to another till certain demands of him the person in possession are
satisfied’. The modern expression is given by Diplock LJ in Tappenden v Artus [1964] 2 QB
185 where he sets out that ‘the remedy is the exercise of a right to continue in existing
actual possession of the goods, it…involves a right of possession adverse to the right
of the person who, but for the lien, would be entitled to immediate possession of the
goods’.

The key distinction between a pledge and lien is that whereas a pledge requires
delivery of an asset in order to take effect, a lien depends on pre-existing possession of
the goods which are then retained by the lienee.

This gives rise to a question of what ‘degree’ of possession is required, or more


accurately, whether that possession must be continuing and how possession can arise
in the first place.

Possession must be complete and continuing. This is illustrated in Forth v Simpson (1849)
13 QB 680 where stables that kept and trained racehorses claimed a lien over them. The
court agreed that in this situation a lien certainly could arise but in this case, when the
horses were stabled, they were in the possession of the stables but during this time the
owner also sent them off to race at meetings chosen by him, suggesting control over
the horses and therefore a right to assert his possession. The stables therefore was not in
possession and there was no effective lien.

The lienee must have come into possession of the goods by the voluntary act of the
owner of the asset (Re Coslett (Contractors) Ltd [1998] Ch 495). An asset that has been
obtained by force (Bernal v Pirn (1835) 1 Gale 17), fraud or misrepresentation (Madden v
Kempster (1807) 1 Camp 12) cannot be subject to a lien.

A common law lien can arise as a result of a contract term (Gladstone v Birley (1817)
2 Mer 401) but more commonly arises by operation of law (noted in Re Bond Worth
[1980] Ch 228 at 250 per Slade J). Contractual liens simply operate according to
their own terms but have the effect of superseding or excluding liens that arise by
operation of law (Fisher v Smith (1878) 4 App Cas 1).

Liens that arise by operation of law are recognised as existing in certain trades where
they are customary (and so evidence that they are customary will be required).
Although, as in Forth v Simpson, the contract between the parties may prevent a lien
being claimed.

Liens that arise by operation of law may be either particular or general. Particular liens
give the lienee a right to retain an asset until sums due in respect of it have been paid.
By contrast, a general lien allows a lienee to retain any and all goods until all sums
have been paid in respect of them.

Particular liens include an improver’s lien (usually referred to an ‘artificier’,


distinguished from someone who merely looks after something or maintains it, see
Hatton v Car Maintenance Co Ltd [1915] 1 Ch 621 and Re Southern Livestock Producers
[1964] 1 WLR 24, also considered and illustrated in Forth v Simpson); an innkeeper’s lien;
a professional (such as an accountant) who is retained to produce documents (such
as a set of accounts) has a lien over the documents produced (Woodworth v Conroy
[1976] QB 884). These liens are somewhat archaic and have little relation to each other,
aside from the fact, historically, practitioners of trades where these liens would arise
were required at common law to render their services to anyone who requested them,
thereby exposing them to a risk of non-payment, which the lien would partially offset.
page 132 University of London
General liens are usually strongly discouraged by the courts (Rushforth v Hadfield
(1806) 7 East 224) but are available and recognised in certain professions such as
solicitors, factors and stockbrokers.

The effect of a lien is to make the lienee bailee of the lienor’s property and it follows
that the lienee owes the lienor a duty of care in respect of them. This duty can be
limited or modified by the terms of the contract between them. The lienee can remain
in possession of the lienor’s property until the sums to the lienor are paid. The lienee
does not have the right to sell the property, except where the seller has a statutory
power of sale, such as that in s.48 of the SGA.

A lien is terminated when the lienor pays the debt which the lien secures. However,
given that the lien relies on possession, the lien may also be terminated if the
possession itself comes to an end. In Hatton v Car Maintenance Co [1915] 1 Ch 621 the
lienor had access to the car which had been left with the would-be lienee and was
able to take it without their consent. If the possession comes to an end the lien will
also come to an end and is not restored if the lienor comes into possession again. The
only exception is where, as in Albemarle Supply Co Ltd v Hind [1928] 1 KB 307 (Sealy and
Hooley, pp.1055–57), the goods are taken and it is stated that while they are in the
possession of the lienor they remain ‘on pawn’.

7.2.4 Mortgage

Essential reading
¢¢ Sealy and Hooley, Chapter 26 ‘Non-possessory security’.

A mortgage is a non-possessory, real security. It is a form of security whereby the


ownership of an asset, which may be tangible or intangible but must exist in the
present (as opposed to the future; an attempt to create a mortgage of an asset which
is acquired in the future will take effect as an equitable mortgage when it is acquired),
is transferred by a debtor (the mortgagor) to a creditor (the mortgagee) with an
agreement that when the debt is paid, ownership will be restored to the debtor. This is
known as equity of redemption. By contrast, if the mortgagor defaults, the mortgagee
has the right of foreclosure, extinguishing the mortgagor’s equity of redemption
before selling the asset.

The classical definition of a mortgage can be found in the judgment of Lindley MR in


Santley v Wilde [1899] 2 Ch 474 and a modern re-statement of those critical features is
given by Lord Templeman in Downsview Nominees Ltd v First City Corporation Ltd [1993]
AC 295 where he states that:

A mortgage, whether legal or equitable, is security for repayment of a debt. The security
may be constituted by a conveyance, assignment or demise or by a charge on any interest
in real or personal property. An equitable mortgage is a contract which creates a charge
on property but does not pass a legal estate to the creditor. Its operation is that of an
executory assurance, which, as between the parties, and so far as equitable rights and
remedies are concerned, is equivalent to an actual assurance, and is enforceable under
the equitable jurisdiction of the court. All this is well settled... (at p.311)

Mortgages of land have developed into a very particular form of mortgage and are
governed by the Law of Property Act 1925. Mortgages of land require very particular
formalities that are not needed for mortgages of other property.

The essence of a mortgage is the transfer of property from the mortgagor to the
mortgagee. Other than in respect of land, this usually requires little formality and so
a mortgage can be created with equally little formality; all that is required is that the
formalities for the transfer of that particular form of property are complied with. For
example, an assignment of a chose in action is required to be in writing and so a chose
in action could only be subject to a mortgage where it has been transferred in writing.
That said, there are exceptions and a mortgage will generally be evidenced in writing
in any case.
Commercial law  Chapter 7  Credit and security, financing the sale of goods page 133
A mortgage may be legal or equitable. A mortgage of an equitable interest will always
be equitable but there may also be an equitable mortgage of a legal interest in
property. As Buckley LJ explains in Swiss Bank Corporation v Lloyds Bank Ltd [1980] 3 WLR
457 (Sealy and Hooley, p.1124):

An equitable mortgage is created when the legal owner of the property constituting
the security enters into some instrument or does some act which, though insufficient
to confer a legal estate or title in the subject matter upon the mortgagee, nevertheless
demonstrates a binding intention to create a security in favour of the mortgagee, or in
other words evidences a contract to do so.

The most attractive feature of a mortgage for a lender is the power that it brings
with it to foreclose. That is to say, in the event that the mortgagee does not pay the
debt, to extinguish the equity of redemption so that the property vests absolutely
in the mortgagee. Foreclosure can only be achieved by court order and as Sealy and
Hooley note (pp.1064–65), such proceedings are invariably lengthy to attempt to give
the mortgagor the opportunity to salvage their financial position if possible (see,
for example, Palk v Mortgage Services Funding plc [1993] Ch 330). Once foreclosed, the
mortgagee can then sell the property to discharge the debt. The agreement between
the parties will usually contain a power to sell the asset; where this is absent, the
mortgagee will need to obtain a court order (s.91 Law of Property Act 1925) or could
seek to argue that there is an implied power of sale at common law, although this is
generally doubted.

7.2.5 Charge

Essential reading
¢¢ Sealy and Hooley, Chapter 26 ‘Non-possessory security’.

A charge is a non-possessory, real security. A charge by its nature can only arise in equity
and consequently is known as an equitable charge. Here it will simply be referred
to as a charge. Like other forms of security, it must be created by an agreement (see
Section 7.2.1 above) supported by valuable consideration. The agreement is to create an
equitable interest but not to transfer it, since a charge falls outside of the requirement
of writing set out in the Law of Property Act 1925 (s.53(1)(c)). A charge may be either
fixed or floating. Fixed charges have priority over floating charges in the event of
insolvency.

A number of cases seek to define the nature of a charge. Buckley LJ in Swiss Bank
Corporation v Lloyds Bank Ltd [1980] 3 WLR 457 expressed that:

An equitable charge…is said to be created when property is expressly or constructively


made liable, or specially appropriated, to the discharge of a debt or some other obligation,
and confers on the chargee a right of realisation by judicial process, that is to say, by the
appointment of a receiver or an order for sale…

In Re Cosslett (Contractors) Ltd [1998] Ch 495 Millett LJ expressed that the essence of a
charge was that:

a particular asset or class of assets is appropriated to the satisfaction of a debt or other


obligation of the charger or a third party, so that the charge is entitled to look to the asset
and its proceeds for the discharge of the liability.

A charge, then, is essentially a security interest in goods, which arises when the owner
of the goods, who will usually also be the party liable on a debt, risks those goods
being seized and sold in order to satisfy that debt.

On its face, this may seem very similar to a mortgage. However, as Slade J explains,

[t]he technical difference between a ‘mortgage’ or ‘charge,’ though in practice the phrases
are often used interchangeably, is that a mortgage involves a conveyance of property
subject to a right of redemption, whereas a charge conveys nothing and merely gives the
chargee certain rights over the property as security for the loan.
page 134 University of London
The remedy created by a charge for the chargee is the right at common law to obtain
an order for sale to sell the assets and apply the funds to settle the debt, in the event
the charger defaults on the debt secured on the assets. In practice, the document
creating the charge will contain provisions which give the chargee power to appoint a
receiver and power of sale, avoiding the need to seek a court order.

As noted above, charges may be either fixed or floating. The distinction is important. A
holder of a fixed charge is in a stronger position in the event of insolvency as the fixed
charge ranks substantially higher than the floating charge.

A fixed charge may therefore appear to be very much preferable but a fixed charge can
only attach to a fixed asset – a specific thing, such as an item of machinery, although
as Holroyd v Marshall (1862) 10 HL Cas 191 shows, it can be an asset acquired after
the charge is created. A fixed charge will prevent the chargor from disposing of the
asset without first settling the debt owed to the chargee. This makes a fixed charge
incompatible with many assets a business might typically have to use as security –
such as raw materials, manufactured goods, cash in the bank, all of which are shifting
and changing continuously as they pass through and out of the business.

A floating charge, by its nature, hovers over a changing pool of assets, which may grow
and shrink and will inevitably include assets acquired by the chargor after the creation
of the charge.

The distinction is set out by Lord MacNaghten in Illingworth v Houldsworth [1904] AC 355:

A specific [fixed] charge, I think, is one that without more fastens on ascertained and
definite property or property capable of being ascertained and defined; a floating charge,
on the other hand, is ambulatory and shifting in its nature, hovering over and so to speak
floating with the property which it is intended to affect until some event occurs or some
act is done which causes it to settle and fasten on the subject of the charge within its
reach and grasp.

The key feature distinguishing a fixed from a floating charge is the freedom of the
chargor to use the assets that are ‘under’ the floating charge. This makes a floating
charge compatible with assets such as book debts and stocks of raw materials, which
change continuously. This feature and the other distinguishing features are identified
by Romer LJ in Re Yorkshire Woolcombers Association Ltd:

I certainly do not intend to attempt to give an exact definition of the term ‘floating
charge,’ nor am I prepared to say that there will not be a floating charge within the
meaning of the Act, which does not contain all the three characteristics that I am about to
mention, but I certainly think that if a charge has the three characteristics that I am about
to mention it is a floating charge. (1.) If it is a charge on a class of assets of a company
present and future; (2.) if that class is one which, in the ordinary course of the business
of the company, would be changing from time to time; and (3.) if you find that by the
charge it is contemplated that, until some future step is taken by or on behalf of those
interested in the charge, the company may carry on its business in the ordinary way as far
as concerns the particular class of assets I am dealing with.

The speech of Romer LJ and these defining characteristics were approved by the Privy
Council (Agnew v Commissioner of Inland Revenue [2001] UKPC 28 and House of Lords
(National Westminster Bank plc v Spectrum Plus Ltd [2005] UKHL 41 respectively.

Ultimately, a floating charge, like other security interests, must attach to a fixed pool
of assets. Unless it does, the chargee cannot identify what assets it wishes to, or can,
sell in order to recover the unpaid debt. A floating charge at some point must then
become a fixed charge, it must solidify and attach to a fixed pool of assets. This occurs
when the charge crystallises. Crystallisation converts a floating charge into a fixed
charge. Once crystallised, the charge may then use the assets to which the charge has
attached in satisfaction of the debt.

As Sealy and Hooley set out, a number of events will cause a floating charge to
crystallise:

uu the appointment of a receiver


Commercial law  Chapter 7  Credit and security, financing the sale of goods page 135
uu entering into liquidation

uu ceasing to trade

uu notice of conversion from the floating charge holder that the floating charge is
converted to a fixed charge (Re Woodroffe’s (Musical Instruments) Ltd [1986] Ch 366)

uu automatic crystallisation as provided for on the terms of the agreement


(debenture) creating the charge.

Charges present a difficulty for a third party dealing with a company in that a charge in
itself is effectively invisible – there is no way of knowing whether a company seeking
to charge assets has previously charged them – which would render a further charge
worthless. Certain assets, such as ships and aircraft which present particular problems
due to their portability and crossing into other jurisdictions, have their own registers
showing ownership and giving details of parties who may have security interests in
them. For other assets, the problem is addressed to a large extent by the requirements
for registration of certain securities in the Bills of Sale Act 1878 (see Sealy and
Hooley, pp.1078–80) and Part 25 of the Companies Act 2006. The latter is particularly
important.

In brief, Part 25 requires that all charges be registered unless they are excepted from
registration (s.859A). Failure to register a charge in the manner prescribed in Part 25
results in the charge being void and therefore unenforceable (s.859H).

7.3 Personal security


Personal securities (i.e. those that are enforceable against an individual rather than
against goods) take the form of contracts of suretyship. A surety will usually guarantee
the payment of a debt but a contract of suretyship can in fact guarantee any obligation
under a contract. A suretyship is used, for example, where a parent company guarantees
the debts of its subsidiaries or a parent guarantees the debt of a child – situations where
the creditworthiness of one party alone may not be sufficient to assure a creditor of
repayment. In its simplest form a surety arrangement involves two separate agreements,
one between the creditor and the debtor under the principal contract and a second
between the creditor and the surety. The creditor benefits from two promises to repay
the money. If the principal cannot pay, the creditor will turn instead to the surety.

7.3.1 Guarantee and indemnity


Contracts of surety take two different forms: contracts of guarantee and contracts of
indemnity. These are distinct but the two terms are often used interchangeably. The
distinction in essence rests upon who is primarily responsible for the debt (or other
performance). In a contract of indemnity, irrespective of default, it is the surety and
not the creditor who is primarily liable for the debt. In a contract of guarantee, it is the
creditor who is primarily liable and the surety – the guarantor – has secondary liability.

The distinction between the two can be a fine one and is often a matter of
construction. As Holroyd-Pearce LJ set out in Yeoman Credit Ltd v Latter [1961] 1 WLR
828, ‘we must have regard to its essential nature in order to decide whether or not
it is really no more than a guarantee’. An approach approved and demonstrated in
Actionstrength Ltd v International Glass Engineering IN.GL.EN SpA [2001] EWCA Civ 1477. The
distinction between a guarantee and an indemnity is also important because certain
formalities are required under the Statute of Frauds 1677 for a contract of guarantee
that are not required of an indemnity. A contract of guarantee is also regarded as co-
extensive to the principal contract such that if it is set aside the contract of guarantee is
also set aside, whereas, under an indemnity, the indemnifier remains liable.

A further distinction may also need to be drawn between ordinary contracts of


suretyship and what are termed performance bond or demand bonds, which create
an entirely independent obligation to make a payment when demanded following
some sort of trigger event (see Marubeni Hong Kong and South China Ltd v Mongolian
Government [2005] EWCA Civ 395).
page 136 University of London

7.3.2 Formation of the contract


The focus in this section will be on contracts of guarantee.

As Lord Diplock set out in Moschi v Lep Air Services [1973] AC 331, the usual rules of
contract and contract formation apply to contracts of guarantee and, while they are
supplemented by statute, the usual common law requirements still apply, including
consideration. Advancing of money under the principal agreement will normally
provide consideration for the guarantor’s promise under the contract of guarantee
but the consideration must not be past (i.e. the guarantor cannot make a guarantee
after the money has been advanced (although a promise of a further advance or to
extend the term for payment will suffice: Johnston Nicholls (1845) 1 CB 251)).

The Statute of Frauds 1677 (s.4) requires that the contract of guarantee be in writing
signed by the person giving the guarantee. This requirement would appear to be
immovable, as the House of Lords held in Actionstrength Ltd v International Glass
Engineering IN.GL.EN SpA. In this case, a guarantee was made orally and despite the
unpalatable consequences that resulted, the House of Lords held that it was therefore
non-binding, rejecting the argument that the guarantor was estopped from denying
that there was an agreement.

Just as the requirement of writing seeks to protect the guarantor and provides an
assurance of their true intention in entering into a contract, which on its face may
be of little benefit, once formed, the contract is construed strictly in favour of the
guarantor (Blest v Brown (1862) 4 de GF & J 367) but there is some doubt about whether
this established approach to interpretation is affected by the shift away from a strict
or literal approach in contract law in general, toward a more contextualised reading of
the document (Investors Compensation Scheme v West Bromwich Building Society [1998]
1 WLR 896), from which contracts of guarantee are not excluded. It can certainly be
said that this does potentially upset the certainty of the guarantee as the contrasting
approaches taken by the courts in Static Control Components (Europe) Ltd v Egan [2004]
EWCA Civ 392 and Dumford Trading AG v OAO Atlantrybflot [2005] EWCA Civ 25 illustrate,
although Rix LJ saw nothing inconsistent between a contextual reading of the contract
and a strict reading in favour of the guarantor, as this is an established principle of law
(Liberty Mutual Insurance Co (UK) Ltd v HSBC Bank plc [2002] EWCA Civ 691).

7.3.3 Relationship between surety and creditor


Once a valid agreement is in place, as a minimum, it will create a relationship between
surety and creditor. The role of the guarantor is to ensure that the debtor performs
their duty under the principal contract, not simply to make payment on their behalf.
This is the importance of the distinction between a guarantee and indemnity or bond.
The relationship between the creditor is analysed at length in the judgment of the
House of Lords in Moschi v Lep Air Services [1973] AC 331. As Lord Diplock explains at p.348:

It follows from the legal nature of the obligation of the guarantor to which a contract
of guarantee gives rise that it is not an obligation himself to pay a sum of money to the
creditor, but an obligation to see to it that another person, the debtor, does something;
and that the creditor’s remedy for the guarantor’s failure to perform it lies in damages for
breach of contract only. That this was so, even where the debtor’s own obligation that was
the subject of the guarantee was to pay a sum of money…

The contract of guarantee therefore is co-extensive. There is no scope for the


guarantor to argue that they are not liable because the principal agreement has been
repudiated (as Lord Diplock points out in Moschi, it is in fact the opposite (at p.348)).
The failure by the principal debtor to perform their obligations under the principal
contract, therefore, will be the trigger that obliges the guarantor to perform their
obligations under the contract of guarantee.

7.3.4 Discharge of the surety


As an ordinary contract, the contract of surety is discharged by performance of
the contract or in the case of guarantees by the performance of the principal
contract, so that repayment of the debt by the principal debtor will discharge
the contract of guarantee.
Commercial law  Chapter 7  Credit and security, financing the sale of goods page 137
Material changes to the guarantee made by the debtor (Pigot’s Case (1614) 11 Co Rep
26b) will discharge the contract of surety as will any material alteration of the principal
contract by the principal debtor (Holme v Brunskill (1878) 3 QBD 495).

7.3.5 Protection of the surety


If a guarantee is given in a consumer credit context, the position can quickly become
complicated and, under the Consumer Credit Act 1974, the regime may apply.
Following the FCA’s assumption of responsibility for consumer credit regulation, this
regime is now found and extended in the FCA’s Consumer Credit Sourcebook (CONC).

Where the guarantee was entered into before 1 October 2015, the guarantor may be
able to rely on the protection of the Unfair Terms in Consumer Contracts Regulations
1999 (UTCCR) or the Unfair Contract Terms Act 1977 (UCTA), or both. There is a debate
about the extent to which the UTCCR apply in the guarantee context but the emerging
consensus in first-instance decisions is that they may apply where both the guarantor
and the borrower are ‘consumers’ (Royal Bank of Scotland Plc v Chandra [2010] EWHC
105 (Ch) at paras 101–02).

As regards guarantees entered into on or after 1 October 2015, the law on unfair
contract terms in consumer contracts as set out in UCTA and UTCCR was replaced
by the Consumer Rights Act 2015. However, UCTA continues to apply to business-to-
business contracts.

7.4 Assignments of choses in action

Essential reading
¢¢ Sealy and Hooley, Chapter 22 ‘Assignment of choses in action’.

This section will consider the requirements for a valid assignment of a thing in action.

7.4.1 The essence of assignment


The benefit of a contract may be transferred to a third party by a process called assignment.
This is a transaction between the person entitled to the benefit of the contract (called the
creditor or assignor) and the third (the assignee) party as a result of which the assignee
becomes entitled to sue the person liable under the contract (called the debtor). The
debtor is not a party to the transaction and his consent is not necessary for its validity.
(Peel, E. Treitel on the law of contract. (London: Sweet & Maxwell, 2015) 14th edition [ISBN
9780414037397].)

Assignment, therefore, is concerned with transactions in intangible property, or


choses in action, which are considered in more detail in Chapter 2.

7.4.2 Choses in action


The accepted definition is that of Channell J in Torkington v Magee [1902] 2 KB 427 at 430
who sets out that choses in action comprise:

...all personal rights of property which can only be claimed or enforced by action and not
by taking physical possession.

The following are examples of choses in action:

uu Rights to debts of all kinds – these usually arise under a contract.

uu Right to act on a contract and the right to claim damages for its breach.

uu Rights arising by the commission of a tort.

uu Rights to recover ownership/possession of real or personal property.

uu Rights arising out of documents such as bonds, bills of exchange, cheques, bills of
lading, policies of insurance, patents, copyrights.

uu Equitable rights such as the benefit of a trust.


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There is no limit on what can constitute a chose in action and there are avenues that
remain to be explored and some aspects that remain to be clarified, as exemplified
by Goel v Pick [2006] EWHC 833 considering whether a cherished car registration plate
was a chose in action (it is not). Similarly, in Investors’ Compensation Scheme v West
Bromwich Building Society [1998] 1 WLR 896 the distinction was made between rights
and remedies under a contract, only the former being assignable even though they
may be conceptually related to each other.

7.4.3 What is assignment?


Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 set out that:

Assignment means the immediate transfer of an existing proprietary right, vested or


contingent, from the assignor to the assignee. Anything that, in the eye of the law can
be regarded as an existing subject of ownership, whether it be a chose in possession or
a chose in action, can to-day be assigned, unless it is excepted from the general rule on
some ground of public policy or by statute.

This question is also considered in Mulkerrins v Pricewaterhouse Coopers [2003] UKHL 41,
per Lord Millett, on the nature of assignment:

The general rule is that the benefit of a contract may be assigned to a third party without
the consent of the other contracting party...unless he takes the precaution of including in
the contract a prohibition of assignment, he has no right to object to it.

Assignment, therefore, creates a tripartite relationship between a debtor (usually), A,


an assignor, B, and an assignee, C.

A will usually owe a duty to B. B has a right to the performance of the duty owed by A.
B is entitled to assign that right to C so that A will now render performance to C rather
than B. The product of the assignment is a transaction between B and C.

7.4.4 Types of assignment


Torkington v Magee [1902] 2 KB 427 confirmed that legal and equitable things in action
may be assigned and there are both legal and equitable assignments. Consequently,
there can be legal assignments or legal things in action, equitable assignments of
legal things in action, legal assignments of equitable things in action and equitable
assignments of equitable things in action. It was confirmed in Brandt v Dunlop Rubber
Co [1905] AC 454 that the two species could continue to co-exist.

Legal (statutory) assignments are those which comply with the formalities of s.136
Law of Property Act 1925 (LPA) – can be the legal assignment of an equitable chose in
action or the legal assignment of a legal chose in action.

Equitable assignments are those which fail to comply with the formalities above and
take effect only in equity, although it is possible to assign either a legal or equitable
chose in action in equity.

The key question here is whether the differences between the two are any more than
procedural, which is often how they manifest (see The Mount I [2001] EWCA Civ 68 and
for commentary, Tolhurst, G.J. ‘Equitable assignment of legal rights: a resolution to a
conundrum’ (2002) 118 LQR 98 and Wolff, L.C. ‘Assignment agreements under English
law: lost between contract and property law?’ (2005) JBL 473).

7.4.5 Assignment at law


The requirements are set out by the LPA 1925 s.136. There must be:

uu an absolute assignment

uu of a debt or other legal thing in action

uu complying with formalities

uu subject to equities.
Commercial law  Chapter 7  Credit and security, financing the sale of goods page 139
All of these requirements must be met, without exception, for an assignment to take
effect at law.

An absolute assignment
An assignor must pass all rights and interests without reservation. Therefore,
assignments by way of charge are unlikely to be successful as a result of the fact a
charge does not seek or purport to create an absolute transfer of property.

In Durham Bros v Robertson [1898] 1 QB 765, a property developer had assigned to him
the right to receive an amount of money. The assignment made clear on the face
of it that it was being assigned as a security. As a security, it is something inherently
intended to be ‘released’ when it is no longer needed. As a result, the court found that
it was not an absolute assignment but a conditional one.

In Hughes v Pump House Hotel Co Ltd [1902] 2 KB 190, Hughes assigned to his bank all
money that he was owed as security for an overdraft. Hughes then sought to enforce
a debt under the contract. If the assignment had been absolute, he would have been
unable to sue as he would have divested himself of his rights of suit. Taking into
account the documents that purported to assign and the actions of the assignor, it
seems likely that the assignor only intended to create some form of surety for the bank
rather than any kind of absolute assignment.

A similar problem arises in relation to the part payment of a debt: The Mount I [2001]
EWCA Civ 68 – clarifying the LPA position that assignment of debt must be total, not
partial – but see Walter & Sullivan Ltd v Murphy & Sons Ltd [1955] 2 QB 584 – assignment
of a partial debt will be valid in equity.

Of a debt or thing in action


See above and Chapter 2 for discussion of things in action.

Complying with formalities


To take effect at law, an assignment must be ‘in writing, under the hand of the
assignor’. No particular form is required providing that the above is satisfied and the
document clearly shows on its face an intention to assign. See Brandt [1905] AC 454.

Notification of the assignment must be made to the assignee by the assignor or someone
acting for them (Burn v Carvelho (1839) My & C 690). For any assignment to be effective
whether in law or equity, the debtor must know that the rights under the contract have
been transferred and that they now owe a duty to another party. Though the law is not
prescriptive in terms of form, it makes effective communication an absolute priority.
It must be clear precisely what the transaction has done, that it requires the obligor to
render performance to another party. Simply demanding payment be made to another
party is not notice. Similarly, if the assignment has not been communicated, later trying
to sue them for non-performance will be not be effective.

The notice again need not take on any particular form but it must be accurate. In WF
Harrison & Co Ltd v Burke [1956] 1 All ER 169, the notice given misstated the date on
which the assignment had taken place and the amount of the debt that was owing.
Harrison was decided on the basis that the notice was not effective because the date
of the assignment was after the date of the notice so the assignment did not exist
when the notice was given and so could not be effective. Otherwise, it is considered
generally that minor defects will not make a notice invalid (reiterated in Curran v
Newpark Cinema [1951] 1 All ER 295).

Written notification must be given to the debtor


No particular words are necessary as long as the meaning is clear and the notice is free
from errors – a mere demand for payment is insufficient (Talcott v John Lewis & Co Ltd
[1940] 3 All ER 592) or a notice of the commencement of legal proceedings to recover
debt is not considered valid notice for legal or equitable assignments (Herkule Piling Ltd
v Tilbury Construction Ltd (1992) Build LR 107).
page 140 University of London

The effect
If all of the above are satisfied the debtor, or obligor, now owes their duty to the
designated assignee and is not liable to the assignor. The duty is owed to the assignee
without the need for the assignee to provide any consideration for it (Westerton Public
Trustee v Gray [1919] 2 Ch 104).

If there have been multiple successive assignments of the debt, debtor/obligor, payment/
performance is due to the first assignee to give a valid notice to the assignee (Dearle v
Hall (1823) 3 Russ 1 and more recently Pfeiffer v Arbuthnot Factors [1988] 1 WLR 150).

Subject to equities
This requirement pre-dates the LPA and derives from the common law principle, as
expressed in Mangles v Dixon (1852) 3 HLC 702, that the assignee and debtor should not
be unduly enriched or prejudiced by the transaction.

Assignment does not correct defects in title


The assignor can assign no better title than they have (see Tooth v Hallett (1869) LR 4 Ch
App 242) and the assignee will take subject to any ‘encumbrances’ on the transferred
instruments. Glencore Intl AG v Metro Trading Intl [1999] 2 All ER (Comm) 899 is a neat
illustration of this. The bank (assignee) of a crude oil trader (the defendant) sought to
commence legal action in Paris; however, it was held that it was prohibited from so doing
by the exclusive jurisdiction clause in the contract, which specified that the contract was
governed by English law and only amenable to adjudication in English courts.

Debtor has the same claims against the assignee as they had against the assignor
– for example, set-off. See Graham v Johnson (1869) LR 8 Eq 36 and more recently
Banco Santander SA v Bayfern Ltd [2001] 1 All ER (Comm) 776 in respect of a claim for
misrepresentation.

Assignee may take subject to claims arising out of other transactions – for example,
claims against a party to the contract as per Business Computer Ltd v Anglo-African
Leasing Ltd [1977] 1 WLR 578 or claims against immediate assignees as per The Raven
[1980] 2 Lloyd’s Rep 266.

Assignee cannot recover more than the assignor – Dawson v Great Northern & City
Railway [1905] 1 KB 620, an oft-cited principle in the case law.

7.4.6 Equitable assignment


As Lord MacNaghten observed in William Brandt’s Sons & Co v Dunlop Rubber Company
[1905] AC 454:

...the statute does not forbid or destroy equitable assignments or impair their efficacy in
the slightest degree.

Thus, equitable assignments will be deemed to exist in situations where only some but
not necessarily none of the requirements for legal assignment have been met.

Requirements of an equitable assignment


uu A clear intention to assign.

uu Need not comply with legal requirement for writing.

uu Notice is desirable.

Clear intention to assign


The foundation of the equitable assignment must be that there is an intention to
assign and that intention is clearly manifested. The reason for this is founded in the
maxim of equity – that equity considers to be done that which ought to have been
done. In essence, this means equity will essentially, where the evidence dictates as
such, treat a transaction that the law would regard as imperfect as a result of its failure
to comply with the requisite formalities as if it did comply with those formalities and
Commercial law  Chapter 7  Credit and security, financing the sale of goods page 141
give effect to it between the parties who have agreed upon it, providing the obligation
is not revocable.

In writing?
Subject to s.53(1)(c) of the LPA 1925, which requires that an equitable assignment
of an equitable chose in action must be in writing, writing is preferable but is not a
requirement and the writing need not follow any particular form, providing that it shows
intention to assign. Whiteman QC elaborated in Phelps v Spon-Smith [2001] BPIR 326:

...it is not necessary for an equitable assignment to follow any particular form. What is
necessary, however, is that there should be an intention to assign, that the subject-matter
of the assignment should be so described as to be capable of being identified at the time
of the alleged assignment and that there should be some act by the assignor showing that
he is transferring the chose in action to the (alleged) assignee.

Notice
There must be a notice given to the assignee, otherwise the assignment is considered
revocable.

There need not be notice to the debtor; however, this is desirable as without notice
to the debtor they need not consider that they owe a duty to anyone but the assignor.
Established in Stock v Dobson (1853) 4 De GM & G 11 and agreed by the House of Lords in
Deposit Protection Board v Dalia [1994] 2 AC 367.

7.4.7 Consideration for an assignment


An assignment is by definition the transfer of an existing right so it is not possible to
assign a right which does not exist or which does not yet belong to the assignor, that is
to say, future property.

This difficulty can be circumvented where consideration exists. Therefore, an agreement


to assign future property, supported by consideration, will be valid per Tailby v The Official
Receiver (1883) 13 App Cas 523 and Wu Koon Tai v Wy Yau Loi [1997] AC 179.

The difficulties have been further ameliorated by the definition applied to the courts
to ‘future property’. Hughes v Pump House Hotel Co Ltd [1902] 2 KB 190 sets out the
differences between the two situations. Assignment of a future income (i.e. to a right
that is not yet enforceable) remains unenforceable (Williams v Commissioners of the
Inland Revenue (1965)) but following the important decision in The Mount I [2001]
EWCA Civ 68 an assignment of a future income, providing there is a present right to
that income, will be valid. In the latter case, the existence of a contract, which would
eventually, ‘bear fruit,’ was sufficient.

7.4.8 Limits on assignment


There are instances where debtors/obligors may not wish to owe their performance
to anyone but the party with whom they contracted and may wish to preserve rights
of counterclaim against them. This may be a general policy of that party. This may
be achieved by providing for such a provision under the original obligee/obligor
contract. This may take the form of an absolute prohibition or a qualified prohibition,
the former prohibiting any attempt to assign, the latter restricting assignment,
for example, where the obligor specifically consents. A qualified prohibition was
considered as effective in Hendry v Chartsearch [1988] CLC 1382.

The difficulty, however, arises with the conflict between the desire to make obligations
readily assignable and the appreciation that this would undermine any need for consent
on the part of the debtor. Early cases on this matter had expressed the opinion that the
validity of the absolute non-assignment clauses was questionable. However, the matter
was eventually considered by the House of Lords who gave effect to such provisions in
Linden Garden Trust v Lenesta Sludge Disposals [1994] 1 AC 85, holding that they were not
contrary to public policy where the parties to the agreements had a genuine commercial
interest in preserving the contractual relationships they had formed.
page 142 University of London
That has not deterred numerous attempts to circumvent such prohibitions on
assignment. In Don King Productions v Warren [2001] Ch 291, resurrecting the authority
of Re Turcan (1888) 40 Ch D 5, a chose in action was declared to be subject to a trust
to avoid contractual prohibition. Although it was argued the assignment, even by
this method, would not be successful if the performance of the contract required a
personal element (see obiter in Offer-Hoar v Larkstore [2006] EWCA Civ 1079).

A further limitation of this approach is illustrated in Barbados Trust Co Ltd v Bank of


Zambia [2006] EWHC 222 (and on appeal at [2007] EWCA Civ 148). This case raised two
issues. It concerned the assignment of a lender’s right to be repaid a loan. The loan
agreement provided that the lender would not assign the right without first seeking
the consent of the borrower, with consent deemed given if there was no response
within 15 days, and then assignment would only be made to another financial
institution. The assignment took place after just 13 days and then to assignees that
were not financial institutions. While the High Court found the assignment to be valid,
the Court of Appeal disagreed.

Moreover, the case considered whether, in the event that a debt is made the subject
of a trust, a beneficiary of that trust can bring a claim to enforce the debt. Both courts
agreed that it would be inequitable to allow the prohibition on assignment to be
circumvented in this way, illustrating that there are significant limitations on the
means of avoiding contractual prohibitions on assignment.

7.5 Set-off

7.5.1 The nature of set-off


Where two parties have financial claims against each other, a right of set-off allows
them to deduct one liability from the other, so that only the balance is due. As a result,
the liability of one party to another may be reduced or eliminated. While enforcing a
right of set-off is akin to enforcing a security, a right of set-off is a personal right that
may arise under a contract term, or under various legal rules.

Whether a course of action amounts to ‘actual set-off’ will depend on the specific
characteristics of that course of action and, as Pearson v Lehman Brothers Finance SA
[2011] EWCA Civ 1544 illustrates, the individual facts of a case must be considered.
Here, the issue was whether what was termed ‘offsetting’ certain payments or
obligations against each other in the Lehman Brothers intra-group custody and
settlement system was actual set-off and whether, therefore, this offsetting was
sufficient to amount to payment.

7.5.2 The types of set-off


There are five forms of set-off:

uu legal

uu equitable

uu banker’s

uu insolvency

uu administrator’s.

Legal set-off
Legal set-off provides a defence to a court action allowing a counter-claim by a
defendant, against a claim brought by a claimant, available where the two claims
are liquidated or ascertainable with certainty and are both due and payable at the
commencement of the action. The two claims do not have to arise from the same
transaction or closely connected transactions but must be between the same people.
Commercial law  Chapter 7  Credit and security, financing the sale of goods page 143

Equitable set-off
Equitable set-off arises where a claim and cross-claim are so closely related to each
other that it would be unjust to enforce one without taking the other into account
(the test for equitable set-off was revisited and affirmed by the Court of Appeal in
Geldof Metaalconstructie NV v Simon Carves Ltd [2010] EWCA Civ 667).

Providing the cross-claim arises out of the same or a closely related transaction, the
right to equitable set-off arises without the need for there to be pending litigation.
However, the sums in question must be due and payable or, in the case of unliquidated
damages, must be a reasonable assessment of the loss made in good faith.

Banker’s set-off
Banker’s set off (also known as a right of combination) is the right to combine
accounts and arises in favour of a bank where a customer has more than one account,
including one in debit and one in credit. As with equitable set-off, this is a self-help
remedy and, therefore, can be exercised without litigation.

A bank can only invoke banker’s set-off if the accounts are current or running accounts,
that is, where the balance on the account, whether positive or negative, is payable on
demand or on reasonably short notice (Re Willis, Percival & Co (1879) LR 12 Ch D 491).

Insolvency set-off
Insolvency set-off arises out of statute. It is compulsory and contracting out is not
permitted (National Westminster Bank Ltd v Halesowen Pressworks and Assemblies Ltd
[1972] 1 All ER 641).

The rules on insolvency set-off are contained within the Insolvency (England and Wales)
Rules 2016 (SI 2016/1024). They provide two very similar regimes for set-off in liquidation
and administration. The liquidation rules are outlined here to exemplify the approach.

Insolvency set-off is automatic and applies as at the date on which the liquidation
commences. Assets are notionally treated as being realised and distributed
simultaneously on that date, although the actual process by which the liquidators
collect any amount due or pay a dividend to the relevant creditor will take much
longer (Re Dynamics Corporation of America [1976] 1 WLR 757).

The rules for the operation of insolvency set-off are set out in Rule 14.25 of the
Insolvency (England and Wales) Rules 2016. Rule 14.25 requires that an account be
taken of sums due in respect of mutual dealings and for these sums to be set-off so
that only the balance may be claimed by the liquidator/proved for by the creditor.

Under Rule 14.25, a sum is regarded as due regardless of whether it is payable at present
or in the future; the obligation under which it is payable is certain or contingent, the
amount is fixed or liquidated, or is capable of being ascertained by fixed rules.

Where a debt being taken into account for insolvency set-off is payable at a future
date, its value is discounted (Rule 14.44) but any surplus amount owed by the creditor
to the company after such exercise is effected is payable in full, without the benefit
(to the creditor) of discount under Rule 14.44 (Rule 14.25(5)). The Insolvency Rules also
contain further provisions to enable a liquidator to estimate the value of a debt for the
purposes of calculating the effect of set-off, and to cater for debts in a foreign currency,
payments of a periodical nature and interest.

Mutuality requires that one person’s claim should not be used to pay another’s debt,
as this would amount to expropriation. For reciprocal claims to be mutual so that set-
off applies, the parties must be acting in the same capacity, although the claims need
not arise from the same transaction.

Administrator’s set-off
In administration, where an administrator gives notice that they propose to make
a distribution to creditors, Rule 14.24 applies. Unlike in the case of a liquidation,
page 144 University of London
where insolvency set-off applies automatically from the date of the liquidation,
insolvency set-off in an administration does not come into effect unless and until the
administrator gives notice of an intended distribution to creditors.

Excluding or restricting the right of set-off


Contractual terms which exclude or restrict the right of set-off are enforceable and
not contrary to public policy (Coca-Cola Financial Corporation v Finsat International Ltd
[1996] 3 WLR 849) but particularly clear wording is required (BOC Group plc v Centeon
LLC [1999] 1 All ER (Comm) 53). The decision in Lehman Brothers Commodity Services Inc
v Credit Agricole Corporate and Investment Bank [2011] EWHC 1390 (Comm) underlined
this in the context of a standby letter of credit. Lehman made it clear that, when issuing
a standby letter of credit, an express prohibition on set-off should be included in the
letter of credit itself if that is what the parties intend. In Lehman, the fact that the
underlying agreement to which the standby letter of credit related may have been
drafted on the basis that the letter of credit would be paid without set-off did not
mean that the standby letter of credit should be construed as prohibiting set-off.

7.6 Common law controls over credit


The nature of credit means that creditor–debtor relationships can be exploitative. This
has long been recognised; consider the Statute of Frauds 1677, for example. As ordinary
contracts, governed by the ordinary principles of contract law, contracts for credit and
security are also controlled by the doctrines of duress, undue influence and mistake
and, until the passing of the Consumer Credit Act 1974 (CCA), these were the primary
controls on such contracts. Section 189(1) of the CCA now extends the protection of the
CCA to include unincorporated bodies and partnerships of two or three people but most
commercial credit agreements are protected only by these common law controls.

7.6.1 Misrepresentation
Where a contract is proven to have been induced by a representation, which is a false
statement of material fact (i.e. not a statement of opinion or law) which has been
reasonably relied upon by the representee, the contract will be voidable. This applies
equally to any form of credit agreement or contract of surety.

7.6.2 Mistake
A contract will be void for mistake when it is made on the basis of a fundamental
misapprehension. The courts do not readily accept that the parties mistakenly entered
into a contract and so mistake can only usually be successfully pleaded, for example,
when the subject matter of a contract is held subsequently not to exist (Macrae v
Commonwealth Disposal Commission (1950) 84 CLR 377) and not where one party has
simply erred and entered into a contract on the basis of their own misunderstanding
or even a misunderstanding that has been induced by the other party (this is a matter
of misrepresentation).

A credit agreement, security or guarantee will be void for mistake in the same way
that any other agreement would void for the same reason. Associated Japanese Bank
(International Ltd) v Credit du Nord SA [1988] 3 All ER 902 provides an illustration of when
a guarantee was held void for mistake. In this case, the primary contract related to a
sale and lease back of machinery. The machinery did not exist, contrary to the mutual
understanding of the parties. The contract is therefore robbed of all substance and
cannot be performed and is held void.

7.6.3 Duress
Where an agreement has been entered into under duress it will be voidable. This
applies equally to an agreement to provide credit, and a party that was induced to give
credit or accept it can avoid the contract if either can be proved.
Commercial law  Chapter 7  Credit and security, financing the sale of goods page 145
Duress may take the form of either duress to the person, duress to goods (although
this does not allow the contract to be set aside) or a more recently recognised
category of economic duress (The Atlantic Baron [1979] QB 705). The standard for
duress is a high one. As Lord Scarman expressed in Universe Tankships of Monrovia v
International Transport Workers Federation [1983] 1 AC 366:

The classic case of duress is, however, not the lack of will to submit but the victim’s
intentional submission arising from the realisation that there is no other practical choice
open to him.

In respect of credit agreements or securities of any kind, the standard is the same.
Decisions such as that in CTN Cash & Carry v Gallagher [1994] 4 All ER 714 illustrate
that a threat to withdraw credit can amount to illegitimate (indeed unlawful in the
circumstances) threat, which would permit the victim to treat the contract as voidable.

The decision in Bank of India v Riat [2014] EWHC 1775 (Ch) also provides an example of
how the courts apply the standard to claims by a guarantor that their surety has been
extracted under duress from the principal creditor.

7.6.4 Undue influence


Where a threat or action falls short of duress it may still be coercive and where this is
the case, in particular circumstances, it may be that the contract can be set aside as a
result of undue influence.

To found a claim of undue influence, the party claiming to have entered into a contract
as a result of it must prove that there was actual undue influence as a matter of fact (as
illustrated in Royal Bank of Scotland v Etridge (No 2) [2001] UKHL 44), or presumed undue
influence because of the legal nature of the relationship (e.g. solicitor and client, trustee
and beneficiary) and the fact that the transaction cannot be readily explained or because
the relationship is one of trust and confidence. Where undue influence is presumed, that
presumption may then be rebutted. This is usually achieved by demonstrating that the
party entered into an agreement entirely of their own free will – for example, by being
shown to have taken independent advice on how it might adversely affect them.

A great deal of the case law in relation to undue influence has grown up around
mortgages of land and contracts of guarantee, although the principles are applicable
to all contracts and the outcome of proving undue influence will be the same.

7.7 The regulation of consumer credit


The common law controls on credit agreements are insufficient for consumer
credit agreements. This was recognised some time ago. The legislative response
was the Consumer Credit Act 1974 (the CCA), which has been the subject of frequent
amendments. The CCA creates an extensive regime and overlaps with the regulation
of the firms that offer or are brokers for consumer credit. This section will set out the
basic legislative scheme and how it seeks to regulate consumer credit agreements.

On 1 April 2014, the responsibility for consumer credit transferred from the Office of
Fair Trading (OFT) to the Financial Conduct Authority (FCA). Firms carrying on consumer
credit activities are now regulated by the FCA rather than the OFT.

7.7.1 Background to consumer credit regulation


Consumer credit businesses include banks, hire-purchase companies, credit card
issuers, payday loan companies, mail order companies, companies offering store
cards, financial advisers, pawnbrokers, debt management firms and debt collectors.

Until the FCA took over the regulation of consumer credit, the regime was statute-
based, established by the CCA (as amended by the Consumer Credit Act 2006), with
the OFT responsible for the regulation of consumer credit.
page 146 University of London
Consumer credit regulation was subsequently brought within the legal framework
contained in the Financial Services and Markets Act 2000 (FSMA) and the FCA became
responsible for consumer credit activities.

Although referred to as the FCA consumer credit regime, the rules and guidance are
also relevant to firms that carry on consumer credit-regulated activities authorised by
the Prudential Regulation Authority. Work is currently ongoing to consider whether, in
the future, a single regulator may be preferable.

7.7.2 Regulatory framework for consumer credit activities


The UK regulatory framework for consumer credit comprises:

uu FSMA and its secondary legislation, in particular the Financial Services and Markets
Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO)

uu retained provisions in the CCA and its retained secondary legislation

uu rules and guidance in the FCA Handbook.

The UK consumer credit regime implements the following key EU legislation:

uu the Consumer Credit Directive (87/102/EEC)

uu Directive 90/88/EEC, amending Directive 87/102/EEC

uu Directive 98/7/EC, amending Directive 87/102/EEC

uu the ‘new’ Consumer Credit Directive (2008/48/EC).

Although parts of the CCA were repealed from 1 April 2014, large parts of it (and its
secondary legislation) have been retained.

7.7.3 Licensing regime


Under the FSMA regime, regulated activities replace the OFT’s licence categories. The
RAO was amended to bring the following credit-related activities within the FSMA
framework:

uu credit broking

uu debt-related consumer credit activities, that is, debt adjusting, debt


administration, debt counselling and debt collecting

uu entering into a regulated consumer hire agreement as owner

uu entering into a regulated credit agreement as lender

uu operating an electronic system in relation to lending

uu providing credit information services and credit references.

7.7.4 Definition of a regulated credit agreement


Under Article 60B(3) of the RAO, a regulated credit agreement (in relation to an
agreement other than a Green Deal plan), that is entered into on or after 1 April 2014,
must have all of the following elements:

uu be a credit agreement between an individual or relevant recipient of credit, and


any other person

uu under which B provides A with credit of any amount

uu that is not an exempt agreement.

In the case of an agreement entered into before 1 April 2014, a regulated credit
agreement means a credit agreement that either:

uu was a regulated agreement within s.189(1) of the CCA when the agreement was
entered into, or
Commercial law  Chapter 7  Credit and security, financing the sale of goods page 147
uu became such a regulated agreement after being varied or supplemented by
another agreement before 1 April 2014, and would not be an exempt agreement
under Article 60C(2) of the RAO on 21 March 2016 if the agreement was entered into
on that date.

An exempt agreement is a credit agreement that is an exempt agreement under


Articles 60C to 60HA of the RAO. Definitions in the FCA Handbook are carried across
from the CCA. In some cases, the definition in the CCA is still referred to (for example,
the definition of a small agreement).

7.7.5 Definition of credit


The definition of credit is set out in Article 60L of the RAO, which states:

Credit includes a cash loan and any other form of financial accommodation.

It is worth noting that the term ‘credit’ has, over the years, been the subject of
litigation. It is generally held that the constituent elements of credit include:

uu the supply of a benefit

uu attracting a contractual duty of payment

uu in money

uu the duty to pay being contractually deferred

uu for a significant period of time after payment has been earned

uu such deferment being granted by way of ‘financial accommodation’.

7.7.6 Regulated activities involving a regulated credit agreement


Section 19 of the FSMA states that a person must not carry on a regulated activity in the
UK, or purport to do so, unless they are an authorised or exempt person.

A regulated activity is a specified activity that relates to a specified investment or


property of any kind and is carried on by way of business in the UK. A specified activity
or investment is one that has been specified as such in the RAO.

Establishing whether there is a regulated credit agreement is the first step to establishing
whether a person is carrying on the following credit-related regulated activities:

uu entering (or agreeing to enter) into a regulated agreement as lender

uu carrying on (or agreeing to carry on) a credit broking activity

uu carrying on (or agreeing to carry on) a debt-related regulated activity.

A creditor that only enters into exempt agreements is not carrying on a regulated activity
for the purposes of FSMA and therefore does not require FCA authorisation to enter into
such agreements. However, the unfair relationship provisions in the CCA still apply.

7.7.7 Exclusions and being exempt from carrying on regulated credit-


related activities
A person carrying on credit-related activities involving a regulated credit agreement
will not require FCA authorisation if they are excluded, or exempt, from the need for
authorisation.

A consumer credit agreement is not a regulated agreement if it is an exempt


agreement. Before 1 April 2014, certain types of agreement were designated as
exempt agreements under order of the Secretary of State. Consequently, as the FCA is
responsible for consumer credit regulation, the following orders have been repealed:

uu Consumer Credit (Exempt Agreements) Order 1989 (SI 1989/869); and

uu Consumer Credit (Exempt Agreements) Order 2007 (SI 2007/1168).

Provisions relating to exempt agreements are set out in the RAO alongside the relevant
regulated activity.
page 148 University of London

7.7.8 Consumer credit advertisements


Consumer credit advertisements are now covered by the FCA’s financial promotions
regime. Specifically, principle 7 of the FCA’s Principles for businesses (PRIN) which
states that a firm must pay due regard to the information needs of its clients and
communicate information to them in a way that is clear, fair and not misleading and
Chapter 3 of the FCA’s Consumer Credit Sourcebook (CONC), which sets out more
detailed rules and guidance relating to financial promotions and communications
with clients.

7.7.9 Pre-contract credit information


The CCA s.55 deals with the disclosure of information to the debtor or hirer before
a regulated agreement is made. The following regulations require that certain
information (for example, the type of credit, the identity and address of the creditor,
the total amount of credit to be provided and the rate of interest charged) is set out in
the prescribed manner:

uu Consumer Credit (Disclosure of Information) Regulations 2004 (SI 2004/1481)

uu Consumer Credit (Disclosure of Information) Regulations 2010 (SI 2010/1013).

7.7.10 Form and content of regulated credit agreements


As stated above, a credit agreement is not a regulated credit agreement if it is
an exempt agreement. The content of, and format for, regulated agreements is
prescribed in detail by the following regulations:

uu Consumer Credit (Agreements) Regulations 1983 (SI 1983/1553)

uu Consumer Credit (Agreements) Regulations 2010 (SI 2010/1014).

The CCA regulates agreements by classifying them into different types. The main types
of agreement classification are:

uu borrower-lender-supplier (previously debtor-creditor-supplier) agreements (CCA


s.12)

uu borrower-lender (previously debtor-creditor) agreements (CCA s.13)

uu hire agreements (CCA s.15).

These classifications are themselves made up of a complex categorisation of


agreements. It is important to properly classify agreements as this determines the
requirements that apply to them.

7.7.11 Copies of documents


The consumer credit regime requires specific copies of the agreements to be sent to
the borrower within prescribed timeframes. The requirements relating to this are set
out in Part V of the CCA.

7.7.12 Right to cancel and withdraw


The CCA makes some agreements cancellable depending on how they were originated
(this can be in addition to any consumer’s right of cancellation that arises from distance
marketing requirements). Borrowers also have rights of withdrawal from certain
agreements. The requirements relating to these provisions are set out in Part V of the CCA.

7.7.13 Statements and notices


Borrowers have the right to receive regular information from lenders. The
requirements relating to this are set out in Part VI of the CCA. The information depends
on the particular type of credit agreement and can relate to matters including:

uu Details of the total sum paid under the agreement by the debtor and the amount
that remains outstanding.
Commercial law  Chapter 7  Credit and security, financing the sale of goods page 149
uu Statements of account, including a table showing the details of each instalment
owing.

uu Changes in the rate of interest.

7.7.14 Termination and early settlement


The CCA provides the borrower with rights of early settlement and caps what may
be payable where an agreement is settled early. There are rules relating to the
repossession of some goods financed by a credit agreement, and in relation to the
notices that must be sent to borrowers where a creditor wishes to terminate an
agreement or enforce certain rights under it. These are dealt with in Part VII of the
CCA and the associated Consumer Credit (Early Settlement) Regulations 2004 (SI
2004/1483).

7.7.15 Unfair relationships


Under ss.140A–D of the CCA, the courts have a broad power to reopen credit
agreements (and change their terms, including the amounts payable) if a credit
agreement creates an unfair relationship between the lender and borrower. An unfair
relationship can arise where the agreement is unfair to the borrower because of:

uu any of the terms of the agreement

uu the way the lender has exercised or enforced their rights

uu anything done or not done before, during or after the making of the agreement.

7.7.16 Enforcement
The FCA can enforce the provisions of the CCA that have been carried forward. Article
3 of the Financial Services Act 2012 (Consumer Credit) Order 2013 (SI 2013/1882)
(Consumer Credit Order) applies the FSMA toolkit to the CCA and its secondary
legislation. This means that breach of, for example, the Consumer Credit (Agreements)
Regulations 2010 (SI 2010/1014), which set out the form and content of credit
agreements, could lead to action under FSMA.

Core comprehension
1. Thinking in general about real securities, what is attachment and why is it
important?

2. How is a valid lien created? What is the effect of it?

3. How is a lien distinguished from a pledge?

4. How is a mortgage defined?

5. What distinguishes a mortgage from a charge?

6. What is a floating charge?

7. What will cause a floating charge to crystallise?

8. How is a chose in action assigned in law? What do each of the requirements mean?

9. How is a chose in action assigned in equity?

Applied comprehension
10. What is the significance of the decision in Moschi v Lep Air Services?

11. Should the courts bring about certainty and simply uphold blanket contractual
prohibitions on assignment?

12. Is a lien a useful form of security?

13. Was the House of Lords right in Actionstrength to uphold the requirement of the
Statute of Frauds 1677 that guarantees be made in writing?
page 150 University of London

Core comprehension answers


1. A security interest must clearly relate to specific property. Attachment is the
‘fastening’ of the security interest to the asset that is to be used as security.
Attachment is achieved by creating a valid contract to create a security interest.
The contract must make clear that it is intending to create a security (Palmer v
Carey [1926] AC 703) and it must make clear what property the security will attach
to (Tailby v Official Receiver (1888) 13 App Cas 523). An asset that is being claimed
must then fall within the scope of that definition. The debtor must also have an
interest in the asset to grant security over it.

If a security interest does not attach to specific property then it will fail and will not
be enforceable.

2. A lien is created when the lienee is in possession of the goods of the lienor with the
consent of the lienor and the parties either agree to a contractual lien or the lienee
is in possession of the goods for the purposes of improving them and carries on a
trade or calling recognised by common law as automatically implying the creation
of a lien. No registration or further formality is required.

The effect of a lien is to make the lienee bailee of the lienor’s property and it
follows that the lienee owes the lienor a duty of care in respect of the property.
This duty can be limited or modified by the terms of the contract between them.
The lienee can remain in possession of the lienor’s property until the sums to the
lienor are paid. The lienee does not have the right to sell the property, except
where the seller has a statutory power of sale, such as that in s.48 of the SGA.

3. A lien requires the lienee to have pre-existing possession of the asset, whereas a
pledge is defined by the fact that the pledgor must deliver up the goods (can be
actual or constructive) to the pledgee. Moreover, the pledgee, who gains a ‘special
property’ in the goods, unlike the lienor has a right to dispose of the goods in the
event that the pledgor does not discharge their debt to the pledgee. However, the
pledgee does not have a right of foreclosure and merely sells the goods as if doing
so on behalf of the owner.

4. Lord Templeman in Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295
(p.1059, Sealy and Hooley) states that:

A mortgage, whether legal or equitable, is security for repayment of a debt. The security
may be constituted by a conveyance, assignment or demise or by a charge on any
interest in real or personal property. An equitable mortgage is a contract which creates
a charge on property but does not pass a legal estate to the creditor. Its operation is that
of an executory assurance, which, as between the parties, and so far as equitable rights
and remedies are concerned, is equivalent to an actual assurance, and is enforceable
under the equitable jurisdiction of the court. All this is well settled... (at p.311)

5. A mortgage requires the transfer to the mortgagee of the asset that is subject
to the mortgage, with the mortgagor having an equity of redemption – the right
to regain ownership once the loan secured on the asset has been paid off. The
transfer of property to the mortgagee gives the mortgagee the power to foreclose
(that is to say, dispose of the asset as if it were their own) free of the mortgagor’s
equity of redemption.

A charge does not require the chargor to transfer the asset to the chargee; they
remain in ownership of it. Although the charge (particularly a fixed charge) will
limit their ability to deal with the goods to some extent, it still allows security to be
raised over a shifting class of assets, such as stocks of raw materials, in a way that a
mortgage would not.

6. A floating charge is a non-possessory security, which requires registration


(Companies Act 2006, s.859A) in order to be effective. It is defined by Romer LJ in Re
Yorkshire Woolcombers Association Ltd:
Commercial law  Chapter 7  Credit and security, financing the sale of goods page 151

(1.) If it is a charge on a class of assets of a company present and future; (2.) if that
class is one which, in the ordinary course of the business of the company, would be
changing from time to time; and (3.) if you find that by the charge it is contemplated
that, until some future step is taken by or on behalf of those interested in the charge,
the company may carry on its business in the ordinary way as far as concerns the
particular class of assets I am dealing with.

7. In practice, a floating charge will most commonly crystallise when an agreed event
in the debenture that creates it occurs. In this case, the power of sale will arise
automatically and this is therefore preferable for the chargee. Where this is not the
case the following will cause the charge to crystallise into a fixed charge:

uu the appointment of a receiver

uu entering into liquidation

uu ceasing to trade

uu notice of conversion from the floating charge holder that the floating
charge is converted to a fixed charge (Re Woodroffe’s (Musical Instruments)
Ltd [1986] Ch 366).

8. An assignment of a chose in action at law must comply with the formalities set out
in the Law of Property Act 1925, s.136. There must be:

uu an absolute assignment

uu of a debt or other legal thing in action

uu complying with formalities

uu subject to equities.

This means that the assignor must transfer their entire interest in the thing
in action without reservation (e.g. charging a thing in action will not be an
assignment).

The assignment must be of a recognised thing in action as defined in Torkington v


Magee, although this is not a closed class of assets. It includes things such as shares,
rights to be paid a debt and the right to sue for breach of contract. Only the benefit
of a contract may be assigned.

The formalities for a legal assignment are that it must be ‘in writing, under the
hand of the assignor’. No particular form is required, providing that the above is
satisfied and the document clearly shows on its face an intention to assign. See
Brandt [1905] AC 454.

Notification of the assignment must be made to the assignee by the assignor


or someone acting for them (Burn v Carvelho (1839) My & C 690). The notice again
need not take on any particular form but it must be accurate.

Written notification must be given to the debtor but no particular form is


necessary.

All assignments at law are ‘subject to equities’.

9. All that is required is an intention to assign, per Phelps v Spon-Smith [2001] BPIR 326:

...it is not necessary for an equitable assignment to follow any particular form. What is
necessary, however, is that there should be an intention to assign, that the subject-
matter of the assignment should be so described as to be capable of being identified
at the time of the alleged assignment and that there should be some act by the
assignor showing that he is transferring the chose in action to the (alleged) assignee.

All that is required is notice to the assignee so that it can be determined that the
assignment is not revocable. An equitable assignment of an equitable chose in
action must always be in writing (LPA, s.53(1)(c)).
page 152 University of London

Applied comprehension answers


10. Moschi is one of the leading modern authorities on the contracts of surety. Moschi
reiterates that a contract of surety is a contract in the usual sense and so is subject
to the usual requirements in terms of formation. More importantly, it provides
clarification on the nature of the obligations of a guarantor under a guarantee and
distinguishes a guarantee from an indemnity, highlighting (see the speech of Lord
Diplock) that the function of a guarantee is to ‘see to it’ that that principal debtor
under the principal contract performs (not to step in to perform for them), with
the creditor having a right against the guarantor if they fail. It is also emphasised
that as a result, the default of the debtor under the principal agreement will not
excuse the guarantor but will in fact trigger the guarantor’s liability.

11. The current position is somewhat confused. Applying Lenesta, Hendry v Chartsearch
would seem to suggest that a limited or qualified prohibition will be upheld
but it is not clear exactly the justification and whether there must be a personal
element to the performance or whether that decision is justified purely because
it is regarded as being more proportionate than a blank prohibition. As Don King
Productions shows, a prohibition can easily be circumvented by simply making the
chose the subject of a trust of which the intended assignee is beneficiary. Except in
a case where the performance element is strikingly personal, such a circumvention
would seem to be effective.

The result, however, is that a party seeking to rely on a prohibition on assignment


may be successful but only if their prohibition can be shown to result from a sound
commercial justification. Arguably, this is entirely reasonable; choses in action are
a class of assets and assets should be freely alienable. Moreover, in principle, the
assignment benefit of a contract should not prejudice any party who is rendering
performance under it. Conversely, to refuse to give effect to a prohibition on
assignment is clearly destructive of the parties’ freedom to contract on the terms
they choose. This points up the balancing act that the courts must do when
dealing with certain types of contract terms in general but particularly those which
deal with prohibitions on dealings in property. On balance, it would seem more
desirable to ensure that choses in action are freely alienable and this is seemingly
the position that the law has taken.

12. A lien is a very weak form of security. It is useful because it requires very little
formality – at most a contract term, or in the case of those recognised at common
law no formality at all – just arising by virtue of the nature of the transaction. Even
where it is based in contract, it is a self-help remedy and requires no registration.

That said, there are a number of aspects of liens that make them very weak. First,
the requirement that the lienor has possession of the goods prior to the creation
of the lien makes them inherently incompatible with many transactions. This
is compounded by the archaic list of lienees recognised at common law and
belonging to a different era.

The lien also provides no means of re-selling the goods and so will be of little
help in realising an unpaid debt. It is merely a means of coercing the debtor who
can pay, to pay, and is no protection against the debtor that cannot. In any case,
the lien will be destroyed and cannot be restated if the owner of the goods takes
possession of them. Overall, it has little more than a mildly coercive effect and
therefore is perhaps more useful because of its symbolism than its function.

13. Actionstrength is a difficult case. It would appear and seems to be accepted that
the guarantee, when given, is not merely intended to induce performance but
to be honoured in the event of default (parallels might be seen with Williams v
Roffey). However, as the House of Lords comes back to repeatedly, despite its age,
the Statute of Frauds 1677, s.4, makes absolutely clear that a guarantee (and there
Commercial law  Chapter 7  Credit and security, financing the sale of goods page 153
is no room for arguing that the Act does not cover a guarantee despite the archaic
language it uses) must be made in writing. Caught by this undeniable clarity in the
statute, Actionstrength seeks to argue that there is instead an estoppel but because
of the clear language used, this must fail. On the facts, this is a defeat for a clear
agreement between the parties but the context of guarantees must be considered.
A contract of guarantee in financial terms is one exclusively of burden. It is crucial
therefore that the Statute prevails for the protection of those who act as a surety.
page 154 University of London

Reflect and review


Look 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 to revise
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 Need to Need to
move on revise study
first again

I can explain the commercial function and nature of


credit and security. ¢ ¢ ¢

I can describe the main forms of possessory security. ¢ ¢ ¢

I can describe the main forms of non-possessory


security. ¢ ¢ ¢

I can explain the operation of personal securities,


especially guarantees. ¢ ¢ ¢

I can explain the requirements for a valid assignment


of a chose in action. ¢ ¢ ¢

I can outline how credit and security agreements are


regulated by common law. ¢ ¢ ¢

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

7.1 Nature and forms of credit ¢ ¢

7.2 Security ¢ ¢

7.3 Personal security ¢ ¢

7.4 Assignments of choses in action ¢ ¢

7.5 Set-off ¢ ¢

7.6 Common law controls over credit ¢ ¢

7.7 The regulation of consumer credit ¢ ¢


8 Agency 1

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

8.1 What is an agency? . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

8.2 Types of agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

8.3 Creation of agency . . . . . . . . . . . . . . . . . . . . . . . . . . . 162

8.4 The actual authority of the agent . . . . . . . . . . . . . . . . . . . . 164

8.5 Apparent authority . . . . . . . . . . . . . . . . . . . . . . . . . . . 166

8.6 Usual authority: Watteau v Fenwick . . . . . . . . . . . . . . . . . . . 169

8.7 Ratification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170

8.8 Agency of necessity . . . . . . . . . . . . . . . . . . . . . . . . . . . 173

8.9 Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . 178


page 156 University of London

Introduction
The law of contract seems to present an obstruction to the operation of companies
in the shape of the doctrine of privity: the rule that a contract cannot confer rights or
burdens on someone who is not a party. The difficulty for companies is that they can
only act through people – it is not actually the company that negotiates and agrees to
buy and sell goods, it is someone purporting to act on its behalf (i.e. its agent). The law
of agency thus enables a company to enter into contracts. The agents, who actually
negotiated these contracts, stand in for the companies they represent and, since they
act in that capacity, the agents acquire no personal liability (unless they separately
choose to do so).

Since the negotiations carried out by the agent on behalf of the company will affect
the company’s legal rights and obligations, the company must be able to place
complete confidence in the agent. This has led the law of agency to make the agent
– in most cases – a fiduciary. There are also issues relating to the protection of the
third party with whom the agent has dealt, the protection of the agent against
any liability incurred on behalf of the principal, and the rights an agent may have
against the principal.

Since this course is focused on the sale of goods, this part of the module guide looks
at those aspects of the law of agency that enable such transactions to occur. The focus
will be on principal–third party and third party–agent relations. There will only be a
very brief consideration of the rights and duties owed between the agent and the
principal. Chapter 8 deals with the creation of an agency and the scope of the agent’s
authority; Chapter 9 discusses the rights of the various parties.

The main reading is Sealy and Hooley, but you might also consult Bradgate, Chapter
3 ‘Agency’, Chapter 4 ‘The authority of the agent’ and Chapter 5 ‘Relations with third
parties’.

Learning outcomes
By the end of this chapter and the relevant readings you should be able to:
uu define the term ‘agent’
uu explain how an agency is created
uu discuss the scope of the agent’s authority.
Commercial law  Chapter 8  Agency 1 page 157

8.1 What is an agency?

Essential reading
¢¢ Sealy and Hooley, Chapter 4 ‘Introduction’.

8.1.1 Introduction
Lord Alverstone CJ once defined an agent as ‘any person who happens to act on behalf
of another’ (The Queen v Kane [1901] 1 QB 472). While this gives a sense of what an agent
does, as a statement of the meaning given to the term ‘agent’ by the law of agency it is
far too broad and imprecise: ‘Any concise definition of the concept of agency must be
treated with care. Striving for brevity, the definition is likely to be flawed by errors and
omissions which may make it misleading.’

If P (the principal) instructs A (the agent) to act in the purchase or sale of goods from
or to T (the third party seller), the contract of sale that arises is enforceable between P
and T. In general, A has no liability to either P or T on that contract:

where a person contracts as agent for a principal the contract is the contract of the
principal, and not that of the agent; and, prima facie, at common law the only person
who may sue is the principal, and the only person who can be sued is the principal.
(Montgomerie v United Kingdom Mutual Steamship Association [1891] 1 QB 370, Wright J.)

There are three parties, P, A and T, and three relationships:

uu the relationship between P and A

uu the relationship between A and T

uu the relationship between P and T

The picture may, however, be more complex. It may be difficult to determine for
whom A is acting – A’s function in bringing together the buyer and the seller can
make it hard to decide which party appointed A. A may assume personal liability to
T, although this is unusual (e.g. confirming houses, discussed in Section 8.2.3 below).
A may be a company and so itself act through an agent in its dealing with T, and both
P and T may act with A through agents (e.g. P’s employee appoints A to conclude
the deal with T, who also deals with A through its own agent). One party may be
simultaneously agent and principal. In Aluminium Industrie Vaassen BV v Romalpa
Aluminium Ltd [1976] 1 WLR 676, by a contract of sale on credit, S (seller) reserved title
in the goods (in essence, S retained ownership of the goods) and required B (buyer) to
account to S for the proceeds of any resale of those goods. This meant that on resale
B was an agent for S and under an obligation to account for the resale proceeds, but B
was also a principal in relation to the contract of sale to the new buyer (on reservation
of title see Chapter 5). It is important to recognise that the appointment of an agent
does not preclude the principal from acting (although as a company it cannot act
other than through an agent) or from appointing another agent (a shop may appoint
many sales assistants), unless the agency agreement stipulates to the contrary.

An agent who acts outside the authority granted by the principal will be in breach
of the contract (if there was one) by which the agent was appointed (see Section
8.5 below). However, in spite of this, the principal may be bound to the third party
because the authority with which the agent has been clothed by the principal
determines the relationship between the principal and the third party. That is, the
principal may be liable to the third party if the principal represented that the agent
was acting within their authority (apparent authority). This is based on estoppel:
having represented to the third party that the agent has the necessary authority,
the principal cannot deny this representation. So the question of whether or not the
principal is bound to a third party does not depend on the actual authority granted
by the principal to the agent; it depends on the apparent authority of the agent (also
known as the ostensible authority of the agent). If the third party knows the limits of
the agent’s actual authority, there is no difficulty and the apparent authority will be
page 158 University of London

the same as the actual authority of the agent. However, usually the third party will not
know the terms of appointment of the agent and must rely on the apparent authority.

Where, however, someone represents to the third party that they have the authority
to act as an agent for another person, there is neither actual authority (the ‘agent’
has not been appointed by the ‘principal’) nor apparent authority (the ‘principal’ has
not represented to the third party that the ‘agent’ has authority). In this situation
the ‘principal’ is not bound and the third party is left only with an action against the
‘agent’ for breach of warranty (that is, breach of the promise by the ‘agent’ of authority
to act for the ‘principal’). However, in this situation, the principal may decide to adopt
the transaction – in other words, to ratify the action of the ‘agent’ – and by doing so
establish a contractual relationship between the principal and the third party.

We will revisit all of these issues in this chapter.

8.1.2 Theories
There are three main theories that seek to define and explain agency: power-liability
theory, consent theory and qualified consent theory.

Power-liability theory
The power-liability theory says that an agency exists when a person (the agent)
acquires the power to alter the principal’s legal relations with a third party so that only
the principal (and not the agent) can sue or be sued by that third party.

The problem with this definition is that it focuses on the external relationship with
the third party – that is, the relationship between the principal and the third party,
which has been enabled by the agent. This does focus on the issues that are of central
concern in this module guide: the authority of the agent. Yet it ignores the internal
relationship between the principal and the agent: the issue of the appointment of the
agent, the terms of that appointment, its breach and the consequences of breach. In
addition, by focusing on the power of the agent to affect the principal’s legal relations
with the third party it excludes many who are commonly called agents and who are
the subject of case law commonly accepted as falling within the law of agency. For
example, estate agents act as intermediaries in the sale or lease of land; their role is to
introduce buyers and tenants to sellers and landlords. However, usually, they do not
have the power to bind either party – typically, they merely communicate to the seller
the offer made by the buyer and communicate to the buyer the seller’s acceptance
or rejection of that offer. Nevertheless, principles of agency law apply to them: so, for
example, they owe a fiduciary duty to their principal (see Section 9.3). Moreover, some
of the key cases in agency law have concerned estate agents. It therefore seems odd to
exclude them from a definition.

Consent theory
A different approach to the definition of agency is taken by US Restatement (Third) of
Agency (Tentative Draft No 2) (2003), § 1.01:

Agency is the fiduciary relationship that arises when one person (a ‘principal’) manifests
assent to another person (an ‘agent’) that the agent shall act on the principal’s behalf and
subject to the principal’s control, and the agent manifests assent or otherwise consents
to act.

This deals with the criticism of the power-liability theory by focusing on the fiduciary †
Ministerial = where the
duty owed by an agent to a principal. Since someone will not become a fiduciary
agent merely follows the
unless they have the ability to affect the legal rights and obligations of another person, instructions of the principal
this definition stresses the need for the ‘agent’ to have functions that are more than precisely and has no
merely ministerial.† In other words, the agent must have been invested with a degree discretion, that is, no choice
of discretion that shows the principal has placed trust and confidence in the agent. over what course of action to
It is this which gives rise to a fiduciary duty. Yet this definition has problems too. take on the principal’s behalf.

uu By placing attention on the internal relationship between principal and agent, the
external relationship with the third party is ignored.
Commercial law  Chapter 8  Agency 1 page 159

uu Not all agency relationships arise as the result of prior consent given by the
principal – in ratification, A has not been appointed as P’s agent at the time when A
represents to T that A is an agent; it is only subsequently that P ratifies the action of
A and so adopts the contract with T (see Section 8.7 below).

uu Not all agency relationships require the assent of the parties: an agency of
necessity is created without the consent of the principal (see Section 8.8 below).

uu Consent or assent is only required in a special sense. P and A will have consented if
they agreed to what amounts in law to an agency, even if they did not realise that
this would be the effect of their words or conduct (Garnac Grain Co Inc v HMF Faure
& Fairclough Ltd and Bunge Corpn [1968] AC 1130 at 1137, Lord Pearson). The test is,
would the reasonable person define their relationship as amounting to an agency?
As has been seen, if P represents to T that A has authority to act as P’s agent, P may
be bound by the actions of A even though P did not intend to establish an agency
relationship (see Section 8.5 below).

Qualified consent theory


This approach is discussed by McMeel (see Sealy and Hooley, pp.111–12). It combines
the consent theory with the protection of ‘misplaced reliance’ to account for actual
and apparent authority (see Sections 8.4 and 8.5 below).

Study pack reading


¢¢ McMeel, G. ‘Philosophical foundations of the law of agency’.

Activity 8.1
Distinguish between ‘power’ and ‘authority’ in the context of agency.

8.1.3 Trustees, sellers, buyers, distributors and franchisees


It is worth distinguishing between an agent and a trustee, a seller and buyer, a
distributor and a franchisee.

Sale
The distinction between an agent and a seller is sometimes difficult to establish. If A
sells to T on behalf of P, A is an agent. But if A buys from P and resells to T, there are two
different sale contracts: (i) P sells to A (ii) A sells to T. The key question is what was the
intention of A and P, determined objectively? Did they intend that A act as agent of P
or as buyer from P? This must often be determined by the circumstances: for example,
was the relationship such that A was under an obligation to account to P for any
money received? Was A paid a fee or commission or did A retain the profit from the
sale to T? But none of these may be decisive. The use of the word ‘agent’ by the parties
will not mean that the person is an agent: ‘the test is ultimately one of substance
rather than form’ (Rix LJ in Sealy and Hooley, p.115).

Distributorship and franchise


It is commonplace to see a business advertising itself as ‘agent’ for a supplier, but often
this does not bring the relationship within the law of agency – as Rix LJ said, the courts
look at the substance of the relationship and not its form (e.g. the words the parties
use to describe it). Where there is a distributorship or a franchise, there may be an
agreement not to sell goods from another supplier, but this does not in itself create an
agency. Normally, the distributor or franchisee is a principal who sells a particular brand
of product (e.g. Volkswagen cars) or runs a business developed by the franchiser. The
consumer who buys goods from either type of business enters into a contract with the
immediate seller and not with the original supplier or franchiser, so that if the goods
are defective, the retailer will be liable (the retailer may have a right of action under
its contract with the supplier). Whether someone is an agent or a principal – that is,
whether the relationship is an agency or a distributorship/franchise – depends on the
intention of the parties: was it their intention that goods supplied would be resold by
the recipient acting as principal, or that they would be sold on behalf of the principal?
page 160 University of London

Bailment
A contract of bailment arises where one party (the bailor) delivers or transfers goods
to another (the bailee) on terms that require the bailee to deal with the goods as
agreed with the bailor (e.g. to return them to the bailor or deliver them to someone at
the bailor’s direction). A simple example of bailment is where X leaves a suitcase at the
cloakroom of a railway station under terms that X can recover the suitcase. The bailee
does not act on behalf of the bailor or enter contracts on behalf of the bailor, but
merely exercises certain powers over the property, as agreed by the bailor. The bailee
may, however, have the right in law to take certain actions with regard to the property,
which have the consequence that the bailor is liable to a third party.

Trustee
The legal title to the property is held by the trustee for the benefit of the beneficiaries,
and so, while required to act, broadly, in their best interests, the trustee does not bring
the beneficiaries into legal relations with third parties: it is the trustee who enters into
the transactions. The roles of agent and trustee may, however, be mixed: an agent may
hold the property of the principal or the third party on trust, and a trustee may also be
an agent. But this does not affect the way in which the law views each aspect of their
functions.

Activity 8.2
a. In what ways might an estate agent not fit the legal definition of ‘agent’?

b. Jane, a shopkeeper, describes herself as ‘sole agent for Bloggs’ Televisions’. Does
this mean Bloggs is the principal in any sale by Jane? See WT Lamb & Sons v Goring
Brick Co [1932] 1 KB 710.

Summary
The key characteristics of an agency are:

uu the agent acts on behalf of another (the principal) so that the principal is bound
and can sue or be sued by the third party on the contract made by the agent

uu the agent is not liable on the contract between the principal and the third party.

8.2 Types of agent

Essential reading
¢¢ Sealy and Hooley, Chapter 4 ‘Introduction’.

8.2.1 General agent and special agent


A general agent acts for a principal in the ordinary course of that agent’s business;
a special agent is appointed to act only for a particular transaction that is not part
of that person’s ordinary course of business. A solicitor would be a general agent if
authorised to undertake a range of legal work for a client, but a special agent if only
authorised by the client to sell a house.

8.2.2 Factor and mercantile agent


A factor is an agent who is entrusted with the possession of goods or documents of title
to goods and who is allowed to sell them in the factor’s own name as a principal (Baring
v Corrie [1818] 2 B & Ald 137) or in the principal’s name (Stevens v Biller [1883] 25 Ch D 31).

A mercantile agent is an agent who, in the customary course of business, has authority
to sell or to consign goods for sale, or to buy goods, or to raise money on the security
of goods (Factors Act 1889, s.1(1)). The general rule is that handing over goods or
documents of title to another does not give that person authority to sell (it may
give rise to a bailment), so that anyone buying the goods will not acquire good title:
handing over a car to a mechanic for repair does not constitute an authority to sell the
car. A disposition by a mercantile agent is an important exception to this general rule.
Commercial law  Chapter 8  Agency 1 page 161

Where a mercantile agent is in possession of goods or documents of title with


the consent of the owner (even if that consent is later revoked but the goods or
documents are not returned), and the agent, acting in the ordinary course of business
as a mercantile agent, sells or raises money on the security of those goods, that
disposition will be valid ‘as if he were expressly authorised by the owner of the goods
to make the same’, as long as the third party acts in good faith and without notice of
a lack of authorisation (Factors Act 1889, ss.1(1), 2(1), (2); Weiner v Harris [1910] 1 KB 285;
Official Assignee of Madras v Mercantile Bank of India Ltd [1935] AC 53; Jerome v Bentley
& Co [1952] 2 All ER 114). Of course, while the Factors Act 1889 provides the third party
with rights in the goods so disposed, it does not exempt the mercantile agent from
liability to the owner of goods for any breach of authority.

The status of mercantile agent does not arise from the pursuit of a particular
profession or occupation. A mercantile agent must conduct a business of dealing in
goods: this means that a shop assistant, who sells goods in the course of the business
of another (the shop owner), is not a mercantile agent (Lowther v Harris [1927] 1 KB
393). The Factors Act 1889 does not exclude the possibility of someone acting as a
mercantile agent in a one-off sale, although it does refer to a mercantile agent as
someone ‘having in the customary course of his business as such agent’ authority to
dispose of goods, which might suggest past – or the prospect of future – such business.

In practice, the labels ‘factor’ and ‘mercantile agent’ are rarely used – indeed, the term
‘factor’ is more commonly used to describe a company whose business is the purchase
(and realisation) of trade debts (debts owed to the company) at discount.

8.2.3 Other agents


Broker
A broker negotiates contracts between a buyer and a seller without having possession
of the goods or the documents of title (Baring v Corrie (1818) 2 B & Ald 137). It may not
always be obvious for which party the broker acts, but the point is, of course, crucial. For
example, an insurance broker is paid commission by the insurance company to which
they are bringing the business of the insured, but, normally, the broker is the agent of
the insured and this means that misstatements or omissions in the application form by
the broker may have consequences for the enforceability of the insurance policy. Some
brokers act for both buyers and sellers by virtue of the custom of particular markets.

Commission agent
In spite of the title, a commission agent (or commission merchant) buys or sells goods
on behalf of the owner without establishing a contractual relationship between the
owner and the third party. The commission agent acts as principal in the contract
with the third party. Nevertheless, this agent owes to the owner all the duties owed
by an ordinary agent to a principal. In a sale, the agent is liable to the third party (the
buyer) for breach of the implied terms as to quality. In a purchase of goods, the agent
is liable to the third party (the seller) for the price, but is not liable to the principal
for the quality of the goods. Such agents are familiar in civil law jurisdictions. While
English law is, of course, comfortable with the idea of someone acting as principal in
the purchase and then in the sale of goods, the idea that someone can simultaneously
act as principal and agent in respect of the goods does not fit easily into English agency
law because it does not conform to the idea of an agent as one who is able to alter
the legal relations between the principal and a third party. Although there was some
limited acceptance of the idea in 19th-century cases (Ireland v Livingston (1872) LR 5
HL 395; Robinson v Mollett (1875) LR 7 HL 802), it cannot be regarded as part of English
law (but see Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676).
English law has, instead, opted for the much less conceptually satisfactory idea of the
undisclosed principal (see Section 9.2 below). Note that this does not prevent the
quite different situation in which one party acts as both principal and as agent. For
example, in syndicated loans (where a number of banks lend to a single borrower) it
is common for one of the syndicate to also act as agent bank which has the power to
collect and make payments for the syndicate and take certain decisions with regard to
the loan.
page 162 University of London

Confirming houses
Confirming houses act for overseas buyers wishing to buy goods in English markets.
The confirming house can operate in a number of different ways: it may simply buy
goods as principal and sell them to the overseas buyer without any suggestion of
agency, or it may act as an agent for the buyer, or it may act as agent for the buyer and
separately undertake to the seller that the buyer will perform (known as confirmation)
(see Sobell Industries Ltd v Cory Brothers & Co [1955] 2 Lloyd’s Rep 82).

Del credere agent


While a confirming house may guarantee the third party’s performance to the seller,
a del credere agent indemnifies the principal against loss incurred by the third party’s
failure to pay (Gabriel & Sons v Churchill & Sim [1914] 3 KB 1272). An exporter, who is
uncertain about the financial status of a foreign buyer, might find such a guarantee
attractive, although the common practice is to obtain a confirmation from a
confirming house or to rely either on a documentary credit, under which a bank pays
the seller on the presentation of certain documents (see Chapter 8), or on a credit
guarantee, where the guarantor pays in the event of a default by the buyer.

Forwarding agent
A forwarding agent undertakes the transmission of goods for the principal and is
personally liable for the freight charges, which are then recoverable from the principal.
Such an agent is obliged to exercise reasonable care in relation to the goods.

Commercial agent
The meaning of this term is discussed at Section 9.3.

Activity 8.3
Read Budberg v Jerwood and Ward [1934] 51 TLR 99. Why was Dr Thadee de
Wittchinsky not a mercantile agent and why was this finding significant in that
case?

8.3 Creation of agency

Essential reading
¢¢ Sealy and Hooley, pp.125–27.

There is a distinction between the creation of the agency and the authority that an
agent has to act on behalf of the principal, although the two issues are necessarily
tangled together since the creation of an agency will involve conferment of authority.

An agency may be created:

a. by express or implied agreement between the principal and agent

b. where there is a representation by the principal to the third party that the agent
has authority (agency by estoppel)

c. where the principal ratifies an act by someone who, without authorisation,


purported to undertake that act as an agent of the principal

d. by necessity (agency of necessity)

e. where the agency arises under statute, such as when an unpaid seller exercises
the right to resell under the Sale of Goods Act 1979, s.48(3) (RV Ward Ltd v Bignall
[1967] 1 QB 534; Chapter 5).

Typically, an agency is established by consent of both the principal and the agent (but
not always: see Section 8.1.2) but no formalities are normally required. Although the
agreement will usually be by contract, this is not necessary: someone who acts out of
friendship without payment may be an agent (Chaudhry v Prabhakar [1989] 1 WLR 29).
Commercial law  Chapter 8  Agency 1 page 163

The appointment may be made orally or inferred from the conduct of the principal and
agent showing consent to the establishment of the agency. The agent’s acceptance can
be express or may be inferred, as where actions on behalf of the principal can only be
explained by the existence of an agency. If, however, the parties do put their agreement
into a contractual document, it is likely to be decisive in forming a court’s view of the
parties’ intention (AMB Imballaggi Plastici SRL v Pacflex Ltd [1999] 2 All ER (Comm) 249;
Mercantile International Group plc v Chuan Soon Huat Industrial Group Ltd [2002] EWCA
Civ 288). Note that where a commercial agent (within the meaning of the Commercial
Agents (Council Directive) Regulations 1993: see Section 9.3) has been appointed, the
agent is entitled to a signed statement of the terms; but there is no requirement that the
contract of appointment is written (reg 13(1)).

For an agency in the full sense of the word to exist the agent must have some degree
of autonomy, otherwise the agent performs merely ministerial functions, that is, the
agent acts almost mechanically and without any exercise of discretion. Although
someone who acts on behalf of another in a purely ministerial way is, in a general
sense, an agent, the nature of their obligations and the relationship with the principal
is quite different from the sort of agent with which we are concerned – one with some
autonomy and discretion.

The degree of control exercised by one party (the alleged principal) over the other
(the alleged agent) may suggest the existence of an agency. However, with some
agents the principal’s control is limited because the way in which the agents
undertake their activities is dictated by the rules and custom of their business. For
example, much of the work of stockbrokers is determined by the rules of the exchange
within which they operate. So an alleged principal’s lack of total control does not
necessarily indicate that there is no agency relationship.

That the parties did not intend to create an agency may be suggested by the fact
that the person carrying out the functions is paid through profit earned in trading
rather than through commission, or is entitled to fix the price of the goods being
sold or retains money received from sales. Yet such matters are not conclusive since a
principal can consent to an agent making a profit or entering into personal contracts
with buyers. Even if the principal is not aware that the agent is making a profit and
so cannot have consented, this alone cannot be determinative of the existence of
the agency since that would enable the agent to define the existence of the agency
unilaterally. It would be the same as saying that no agency exists if the alleged agent
breaches what would otherwise constitute their fiduciary duty (the obligation not to
make a secret profit or to undertake other business that conflicts with the interests of
the principal).

Activity 8.4
Jake tells Anne that he owns a painting by Picasso, which he wishes to sell. Anne
knows that Pugwash, who is a wealthy collector, has always admired this painting.
Pugwash is away on business and cannot be contacted, but some time ago he
expressed to Anne the wish to own the painting and willingness to pay up to £1
million. Anne tells Jake that she is acting for Pugwash and can offer £1 million. Jake
accepts. Anne writes to Pugwash telling him of the deal. Pugwash receives the
letter, but does not reply. In fact, Pugwash no longer wants the picture. Is Pugwash
liable to pay for the painting?

Summary
Normally, an agency will be established by consent of both parties. The parties can
create the agency by a written agreement (for example, power of attorney), but it
is also possible to imply the existence of the agency from the spoken words or the
conduct of the parties.
page 164 University of London

8.4 The actual authority of the agent

Essential reading
¢¢ Sealy and Hooley, Chapter 5 ‘Creation of agency, and the authority of the agent’.

8.4.1 Actual authority of the agent


In Section 8.1.1 we discussed ‘authority’ when trying to understand and define the
nature of agency. Here the word ‘authority’ is used in the sense of the agent’s ability to
bind the principal. It is important to note the two different meanings of ‘authority’.

We have seen already that the authority that an agent has to bind the principal is
entangled with the creation of the agency. If the principal and agent agree to the
creation of the agency, that agreement will embody the authority of the agent. In
agency by estoppel, the representation of the principal establishes the authority of
the agent to bind the principal and defines the scope of that authority (apparent or
ostensible authority: see Section 8.5).

The principal is bound only by those acts of the agent that are within the scope of that
agent’s authority. In Jacobs v Morris [1902] 1 Ch 816, an agent had authority to make,
draw, sign, accept or indorse bills of exchange and sign cheques. He represented to a
third party, who took him at his word, that he also had authority to borrow. It was held
that the principal was not liable: there was no actual authority. (Note that there was
also no apparent authority since no representation had been made by the principal to
the third party that the agent had authority to borrow.)

8.4.2 Definition of actual authority


The scope of an agent’s actual authority is important since, generally, it is only if
an agent acts within actual authority that the principal is bound (unless bound by
apparent authority) and the agent can claim an indemnity from the principal for
any expenses incurred or remuneration. In addition, an agent who acts outside their
actual authority may be liable to the third party for breach of the implied warranty of
authority (see Section 9.1.6).

The actual authority of an agent is determined by the agreement between the principal
and the agent and is, therefore, a matter of contract construction. It consists of:

uu express actual authority, which is the authority expressly given to the agent by the
principal

uu implied actual authority, which is the authority that can be implied into the
agreement between the principal and the agent.

(See Diplock LJ in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2
QB 480.)

8.4.3 Express actual authority


Express actual authority is the authority which the principal expressly gives to the
agent: for example, where the agent is instructed to sell a particular property for
the principal. This authority may be contained in documents and/or conversations
between the parties (e.g Aviva Life & Pensions UK Ltd v Strand Street Properties Ltd [2010]
EWCA Civ 444 at 54). In determining the express authority of an agent, the normal
rules for construing contracts apply. (For a discussion of express authority, see SMC
Electronics Ltd v Akhter Computers Ltd [2001] 1 BCLC 433.)

What if the instructions from the principal to the agent are ambiguous? In Ireland v
Livingston (1872) LR 5 HL 395 and Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147, it
was held that an agent who adopts a reasonable interpretation will not be in breach of
its mandate. But in European Asian Bank AG v Punjab & Sind Bank (No 2) [1983] 1 WLR 642,
Robert Goff LJ observed that this principle could only be used sparingly. Similarly, in
Patel v Standard Chartered Bank [2001] All ER (D) 66 at [35]–[36] (see also Cooper v
Commercial law  Chapter 8  Agency 1 page 165

National Westminster Bank plc [2009] EWHC 3035 (QB)), having referred to these
authorities, Toulson J observed:

Obviously it cannot be open to every contracting party to act upon a bona fide, but mistaken,
interpretation of a contractual document prepared by the other, and to hold the other to
that interpretation…If the instructions are given to an agent, it is understandable that he
should expect to act on those instructions without more; but if, for example, the ambiguity
is patent on the face of the document, it may well be right (especially with the facilities of
modern communications available to him) to have his instructions clarified by his principal,
if time permits, before acting upon them. In other words the critical question is not limited
to whether the agent’s interpretation was reasonable; it is whether he behaved reasonably
in acting upon that interpretation.

Activity 8.5
Where the scope of the agent’s actual authority is unclear, what should the
agent do?

8.4.4 Implied (or incidental) actual authority


In addition to express actual authority, the agent may have implied actual authority.
It is important to recognise that implied authority cannot contradict express actual
authority. Implied actual authority is a way of filling in the gaps in order to make sense
of the agency agreement. It is not a means of altering that agreement or of making
it in some sense fairer. The analogy is, of course, with implied terms in contract law.
Some agents (e.g. those operating in the financial markets, such as stockbrokers and
insurance brokers) are, however, subject to terms imposed by statute or to the rules of
a particular market and those rules may override the express terms of the agreement
or prevent the implication of terms.

The agent will have implied actual authority to do those things that are necessarily
incidental to the execution of the express actual authority. The question is, do the
powers expressly given by the principal to the agent enable the agent to carry out
the specified task, or can that task only be undertaken by implying the authority to
do things in addition to those that are expressly authorised? Authorising an agent
to enter into a contract to buy land carries implied actual authority to sign the
documents required under statute because the requirement for writing in such
transactions means that without such authority the agent would not be able to
perform the task agreed (Rosenbaum v Belson [1900] 2 Ch 267). Conversely, in Bryant,
Powis and Bryant Ltd v Law Banque du Peuple [1891–94] All ER 1253, an agent, who had
express actual authority by power of attorney to buy or sell goods, charter vessels and
employ agents and servants, did not have implied actual authority to borrow money
because this was not necessary to carry through the tasks that had been expressly
authorised.

The agent may have authority to undertake that which is implied from the particular
circumstances of the relationship between this principal and this agent, such as where
there has been a consistent previous course of dealings between the parties in which
the particular term has always been present.

The agent may have the authority of someone in this agent’s position, trade,
business or profession (this is sometimes referred to as usual authority, but should
not be confused with Watteau v Fenwick, see Section 8.6). Here the question is, what
authority would the reasonable person in the position of the third party believe that
someone in the agent’s situation possessed? The answer will, of course, depend on
the knowledge of the third party: if they know of limits on the agent’s authority, there
can be no implication that would contradict such knowledge. In Hely-Hutchinson v
Brayhead Ltd [1968] 1 QB 549, it was implied from the appointment of the agent as
managing director of a company that they had the normal authority that managing
directors possess to undertake the business of the company. However, an estate agent
will not have authority to sell property since this is not what such agents usually
have authority to do; but they will have authority to make representations about the
property.
page 166 University of London

Similarly, the agent will have such authority as is customarily enjoyed by someone
dealing in the particular market. To imply a custom, it must be uniform, certain,
notorious (that is, generally known), recognised as binding and reasonable (Robinson
v Mollett [1875] LR 7 HL 802). A broker employed to transact business in a market is
authorised to deal according to the usage of that market (Nickalls v Merry [1875] LR 7
HL 530). However, customary authority will not be recognised where it contradicts the
express agreement between the agent and the principal or the normal duties owed by
the agent to the principal or mandatory statutory provisions. For instance, such custom
cannot be admitted to undermine the fundamental nature of the agent–principal
relationship. In Robinson v Mollett [1875] LR 7 HL 802, even though it was shown that a
custom existed in the London tallow market by which a broker, who was employed to
buy goods, could sell their own goods to a principal, the court held that this was not part
of the agent’s customary authority because evidence ‘cannot be admitted to convert a
broker employed to buy for his employer, into a principal to sell to him’ (Mellor J).

Summary
The actual authority of an agent is determined by the express agreement (subject
to contrary statutory or regulatory provisions) between the parties (express actual
authority) and any appropriate implications from the surrounding circumstances
(implied actual authority) that do not contradict the express actual authority.

8.5 Apparent authority

Essential reading
¢¢ Sealy and Hooley, Chapter 5 ‘Creation of agency, and the authority of the agent’.

8.5.1 Definitions
Typically, a third party dealing with an agent will not have knowledge of the terms of
the contract between the agent and principal and so will not know the scope of the
agent’s actual authority: ‘In ordinary business dealings the contractor at the time of
entering into the contract can in the nature of things hardly ever rely on the “actual”
authority of the agent’ (Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd
[1964] 2 QB 480, Diplock LJ; Nayyar v Sapte [2009] at [134]). The third party, therefore,
relies on a perception of the authority of the agent as represented by the principal.
The representation creates an agency by estoppel – in other words, the principal is
prevented or estopped from denying the existence of the agency. The representation
will also establish the scope of the agent’s apparent (or ostensible) authority. As Lord
Denning expressed it, apparent authority is ‘the authority of an agent as it appears to
others’ (Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549).

An agency by estoppel arises where:

uu the principal (or someone acting with the actual authority of the principal)
represents to the third party that the agent is authorised to undertake the
transaction which the agent and the third party subsequently conclude

uu the agent does not purport to make the agreement as principal

uu the third party is induced to enter into the transaction in reliance upon the
principal’s representation

uu the third party alters their position to their detriment.

It is unclear whether this last is an additional requirement (Rama Corpn Ltd v Proved
Tin and General Investment Ltd [1951] 2 QB 147), or, as seems likely, it merely reiterates
the requirement that the third party enter the transaction in reliance upon the
representation (The Tatra [1990] 2 Lloyd’s Rep 51 at 59. But see Spiro v Lintern [1973] 1
WLR 1002, discussed below). See Nayyar at [134], for a summary of the law on this issue.
Commercial law  Chapter 8  Agency 1 page 167

As a result the principal may be bound to a third party even though:

uu the agent does not have actual authority, or

uu the agency agreement has ceased, or

uu the agent acts beyond the actual authority granted by the principal.

This is because the agency is based on estoppel and not the consent of the principal,
who may not have intended to create an agency (Freeman & Lockyer).

Where someone is represented by the principal as having authority to act as agent,


that person will possess the usual authority of such agents in spite of any restrictions
imposed by the principal on the agent (Hely-Hutchinson, Lord Denning MR). In Freeman
& Lockyer, K and H formed a company to buy and then sell some land. K, H and a
nominee of each were appointed directors. The articles of association contained a
power to appoint a managing director but none was appointed. K instructed F, a firm
of architects, to do work in connection with the land, which they did. On an action
by F for their fees, it was held that since K was not the managing director he had no
actual authority to employ F, but he did have apparent authority because, with the
knowledge of the board of directors, he had acted throughout the transaction as if he
were managing director and his action in engaging F was within the usual authority
of a managing director. As the case law shows, the distinction between instances of
implied actual authority and apparent authority is often a fine one. Conceptually, the
two can never co-exist. An agent can never have both implied actual and apparent
authority for the same act. However, as Lady Justice Arden sets out in her judgment in
Smith v Butler [2012] EWCA Civ 314 at [29] the test of the content of the implied actual
authority will typically coincide with the test of the content of apparent or ostensible
authority (this is nicely illustrated in Sino Channel Asia Ltd v Dana Shipping & Training Pte
Singapore [2017] EWCA Civ 1703).

8.5.2 Representation by the principal


In order to be bound by the apparent authority of the agent, the principal must
have represented to the third party that the agent had the necessary authority to
conclude the transaction on behalf of the principal and the third party must have a
reasonable belief that the agent had such authority. In general, if the representation as
to authority comes from the person purporting to be an agent (Nayyar v Sapte [2009]
above at [134]), the principal will not be bound to the third party, although the bogus
agent may be liable to the third party for breach of an implied warranty of authority
(see Section 9.1.6).

The decision in ING Re (UK) Limited v R&V Versicherung AG [2006] EWHC 1544 (Comm)
involves a fairly complex area of insurance practice, but one of the issues at the heart of
the case is the question of the representation of an agent’s authority. For T to claim that
P is estopped from denying A’s authority to act as agent, it must be shown that P made
a representation about A’s authority to T. T cannot claim that such a representation
has been made in circumstances where T believes the relevant statement about A was
not intended either for T or for the world at large. Here the alleged representation
was contained in a document issued by P that T was not intended to see, and Toulson
J held that this did not amount to a representation to T by P any more than it would if
T had overheard a conversation (or seen an email intended for another recipient). It
was suggested by T in this case that A had authority to pass the relevant document to
T, but Toulson J held that it will only be in very unusual circumstances that P will have
represented to T that A had such authority (see Section 8.5.3).

The representation may be by words or by actions. Usually, silence or inaction will


not amount to a representation unless there is a duty to say something, which will
be rare. However, it arose in Spiro v Lintern: L said nothing when his wife (who had no
authority to do so) entered into a contract for the sale of L’s house, and, as a result,
the buyers incurred various expenses in contemplation of completion of the sale; L’s
silence amounted to a representation that his wife had authority to sell the house.
page 168 University of London

Some cases in this area indicate how the principal might make a representation (to
refer to it as a ‘holding out’ might be preferable) and how it might arise as a result of a
number of actions – or acquiescence – rather than a single clear statement or act. For
example, in CRJ Services Ltd v Lanstar [2011] EWHC 972 (TCC) the defendant’s agent was
allowed to use the title ‘Landfill Materials and Recycling Facilities Manager’ and was
able to enter into a number of short-term contracts for hire of plant and machinery,
which were honoured by the principal, before entering into contracts of hire for 2–3
years’ duration. It was these contracts which the defendant sought to argue had been
made without authority. However, the court found that that there was ‘no reasonable
prospect of it being established that Mr Vaughan did not have appropriate authority’.
See also Newcastle International Airport Ltd v Eversheds LLP [2012] EWHC 648.

8.5.3 Representation by the agent


There is a difficulty, which was touched on in the discussion of the ING case in the
previous section. A company acts through its agents, so representations must come
from one of the company’s agents. Normally, the agent will not be able to represent
their own authority: this representation must come from another agent acting for
the principal. But the principal can endow the agent with this authority (actual or
apparent) to make representations about the agent’s own authority to act in the
transaction for the principal (Freeman & Lockyer v Buckhurst Park Properties (Mangal)
Ltd; Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd and PS Refson
& Co Ltd [1985] 2 Lloyd’s Rep 36).

This issue arose in First Energy Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s
Rep 194; Reynolds (1991) 110 LQR 21. FE wished to arrange credit facilities through the
bank and dealt with J, who was senior manager of the bank’s Manchester branch. FE
knew that J was not authorised to grant the credit facilities and that these could only
be agreed to by head office. Incorrectly and without authority, J wrote to FE saying
that head office had approved the credit facility. The Court of Appeal decided that as a
manager J had apparent authority to write to FE informing them of the decision made
by head office, and, therefore, the bank was bound by J’s letter indicating that head
office had agreed to give the facilities.

Yet that case distinguished Armagas Ltd v Mundogas [1986] AC 717, where the House
of Lords dismissed the argument that P had represented to T that A was authorised
to make a representation on behalf of P to the effect that A had actual authority to
undertake the transaction with T. (See also Sea Emerald SA v Prominvestbank [2008]
EWHC 1979 (Comm).) The Lords did not overrule First Energy, but it seems best to treat
it as involving an unusual set of facts, which place it at the extreme end of apparent
authority. Armagas is the more normal approach.

Certainly, the agent will not have apparent authority to make such a representation
where the third party knows, or ought to know, that the agent does not possess
authority. In other words, the third party’s knowledge of the agent’s actual authority
cannot be overridden by claims as to apparent authority. The reason is that in such
a situation the third party has not relied on the representation by the principal.
In Overbrooke Estates Ltd v Glencombe Properties Ltd [1974] 1 WLR 1335, a term in an
auction sale catalogue said the auctioneer did not have the seller’s authority to
make representations about the property being sold. Shortly before the sale the
auctioneer told a prospective buyer that the local authority had no plans with respect
to the property. The buyer bought the property, and then discovered it was in an
area that might be included in a slum clearance programme. It was held that, even if
an auctioneer had apparent authority to make such representations (and the judge
thought that an auctioneer might only have apparent authority to accept bids),
the buyer knew (or ought to have known) the actual extent of authority and was,
therefore, bound by it. The Misrepresentation Act 1967, s.3, which limits the ability of
parties to exclude or restrict liability for misrepresentation, does not seem to restrict
the ability of the principal to exclude or limit the apparent authority of the agent to
make representations as to the subject-matter of the contract.
Commercial law  Chapter 8  Agency 1 page 169

Activity 8.6
How can the decisions in First Energy Ltd v Hungarian International Bank Ltd and
Armagas Ltd v Mundogas be distinguished?

Further reading
¢¢ On apparent authority and the decision in Watteau v Fenwick, see Brown, I. ‘The
significance of general and special authority in the development of the agent’s
external authority’ (2004) Journal of Business Law 391–422.

Summary
Where the principal (or an agent with actual or apparent authority) represents to the
third party that the agent is authorised to undertake the transaction and the third
party is induced to enter into the transaction in reliance upon that representation, the
principal will be bound. The principal will not be bound where the representation on
which the third party relied came from the agent undertaking the transaction, unless
this agent had authority to make representations on behalf of the principal.

8.6 Usual authority: Watteau v Fenwick

Essential reading
¢¢ Sealy and Hooley, Chapter 5 ‘Creation of agency, and the authority of the agent’.

Study pack reading


¢¢ Tettenborn, A. ‘Agents, business owners and estoppel’.

The decision in Watteau v Fenwick [1893] 1 QB 346 (see Tettenborn) has proved
troublesome. Although it has almost no impact on the courts’ approach to matters
of agency law, it is worth discussing because it provides an opportunity to consider
certain distinctions in agency law. Various questions surround this case, of which the
most important is: was there an agency and, if not, why was the ‘principal’ liable?
Reading the case for the first time, one might be surprised at the fuss: the reader
would be forgiven for thinking this is clearly a case on agency, not least because that is
what the court believed.

In outline, F, who owned a hotel, appointed H as manager. H was expressly forbidden


from buying any goods other than mineral water and bottles of beer. H had previously
owned the hotel and his name remained above the door as the licensee. H ordered
cigars from W, who believed he was the owner of the hotel. F was held liable for the
price of the cigars.

It might be argued that W did not think H was an agent; he believed H to be the
principal, so if W had not been allowed to enforce the contract against F, W would
have lost nothing because he was unaware of F’s existence. Against this it might be
said that F’s action in allowing his agent, H, to represent himself as the principal placed
W in a weakened position. W had every reason to suppose that H was the principal and
this misconception was facilitated by F.

Wills J based his conclusion on usual authority, that is, on the implied authority of an
agent who is appointed to a particular role by the principal or represented by the
principal as occupying that role. But this leaps over the main question as to whether
an agency exists – consideration of the scope of implied authority is relevant only if it
is established that an agency exists. Leaving that aside, W did not know that H was an
agent and so could not make assumptions about his authority. W believed that H was
the principal, not an agent, and so made assumptions as to the implied authority of H.

Might it be a decision on apparent authority? Again, the answer must be no because F


made no representation to W that H was acting as F’s agent (nor did H): W believed H
was acting as principal in the transaction.
page 170 University of London

Similarly, the principal cannot ratify the transaction (this is where P adopts an
unauthorised transaction: see Section 8.7) because it is essential to the doctrine of
ratification that the third party is told that the ‘agent’ is acting as such. H did not tell
W that he was an agent and, in any event, it seems hard to argue that F adopted the
transaction. The other possibility is the doctrine of undisclosed agency/principal
(where the existence of the agency is not disclosed to the third party at the time of
the transaction), but that requires the agent to have entered the transaction with the
actual authority of the principal (see Section 9.2).

At the core of the objections to treating this as a case on agency is, therefore, the
simple fact that H was not an agent in regard to the purchase of the cigars. H had no
actual authority, F did not make any representation to W that H acted as agent in the
purchase and, even if H had apparent authority to represent his own authority (like the
manager in First Energy), he did not do so – throughout W believed H was the principal.

It has been suggested that this case is an example of estoppel by conduct, not agency.
F had put H into a position that made it appear not that H was an agent but that the
owners of the hotel and H were not distinct parties. H might be seen as a principal
with respect to W and an agent with respect to F, and F was estopped from defending
an action by W for the price of the cigars because of F’s conduct. The other possibility
is that H was a principal with respect to both parties, but that he had a duty to account
to F.

The stumbling block to all of these explanations is, of course, that Wills J clearly
believed he was merely applying the doctrine of usual authority; this might prompt us
to conclude that since this was incorrect, he got the decision wrong (hard though this
is when he was supported by Lord Coleridge CJ). Other jurisdictions have rejected the
case: for instance, it has been expressly overruled by one Canadian court (Sign-O-Lite
Plastics Ltd v Metropolitan Life Insurance Co [1990] 73 DLR (4th) 541). In the English courts,
Bingham J (later Lord Bingham) called the decision ‘puzzling’ (Rhodian River Shipping
Co SA v Halla Maritime Corp [1984] 1 Lloyd’s Rep 373), but it has not been overruled. It
is certainly difficult to find cases in which it has been applied: the citation in Mellor
v Lydiate [1914] 3 KB 1141 was on a separate point (the decision was cited, without
discussion, in the Scottish case, Graham v Stirling [1922] SC 90). In similar circumstances
the courts have tended to hold the contract to be between the ‘agent’ personally and
the third party – that is, A and T are found to be the principals (Kinahan & Co v Parry
[1911] 1 KB 459. See also Jerome v Bentley & Co [1952] 2 All ER 114).

Activity 8.7
Is the decision in Watteau v Fenwick wrong?

Summary
The decision in Watteau v Fenwick is difficult to explain or defend. It does not fit into
any of the well-defined categories of agency and the general disinclination of the
English courts to apply the decision or even to refer to it might suggest that it is to be
treated either as an anomaly or as wrong.

8.7 Ratification

Essential reading
¢¢ Sealy and Hooley, Chapter 5 ‘Creation of agency, and the authority of the agent’.

8.7.1 Requirements for ratification


The principal will be bound where it validly ratifies a transaction entered into by
someone purporting either to act as its agent when that person has not previously
been appointed as such, or by someone purporting to possess authority beyond that
granted by the principal. This is not apparent authority because the agent represents
their own authority, and it does not seem to fall within Watteau v Fenwick because
there the agency was not made apparent.
Commercial law  Chapter 8  Agency 1 page 171

If the third party goes ahead with the transaction on the basis of the agent’s
representation, there is a risk that the agent is lying about the existence of actual
authority and that the principal will not later ratify the transaction. There are various
reasons why a principal might ratify: the principal may be happy with the deal, or
may be unhappy with the transaction but decide to ratify it to maintain commercial
reputation or to preserve the reputation of the agent. However, in determining if there
has been ratification, the motive of the principal is irrelevant.

There are a number of requirements for valid ratification.

At the time of the relevant act, the agent must have intended to act on behalf of the
principal. This intention is gathered from the terms of any contract and surrounding
circumstances (National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582).

The purported agency must be revealed to the third party before the transaction
is concluded. There can be no ratification where A makes the contract as principal
(Keighley, Maxsted & Co v Durant [1901] AC 240). In this case, the justification is, according
to Lord Macnaghten, that ‘civil obligations are not to be created by, or founded upon,
undisclosed intentions’ (but see Section 9.2). The identity of the principal need not be
disclosed, ‘but there must be such a description of him as shall amount to a reasonable
designation of the person intended to be bound by the contract’ (Watson v Swann
[1862] 11 CBNS 756, Willes J). It will be sufficient if the agent states that they are acting
for a class of persons to which the principal belongs (National Oilwell). Contrast that
decision with Southern Water Authority v Carey [1985] 2 All ER 1077).

The third party must believe that the person with whom they are dealing has
authority to act for another. If, for example, the agent tells the third party that the
agreement is subject to ratification, any action by the principal will not bring it within
the doctrine of ratification because, in effect, the agent is saying there will be no
contract until the principal has approved it. In such circumstances the principal’s
‘approval/ratification’ may, however, amount to an acceptance of the third party’s
offer so that the contract comes into existence at that point and does not date back to
the time of the original agreement, as is the case where there is effective ratification
(see Section 8.7.2).

The principal must be competent to enter the contract at the time of the original act
by the agent. Did the principal have capacity to contract given that the ratification
dates back to the time of that original act? (See Section 8.7.2.) For instance, did
the company have authority under its constitution to do this act? (On capacity,
see Section 8.9.)

The principal must also be competent at the time of ratification. For example, an
enemy alien cannot ratify, even if at the time of the contract P was not an enemy alien
(contracts with an enemy alien – someone who is resident in a country with which
this country is at war – are void for illegality). Since ratification relates back to the
moment of the original act (see Section 8.7.2), there is an argument for looking solely
at whether the principal was competent at that time, but, of course, a principal who
lacks competence (such as a company that has been wound up or a person who has
lost mental capacity or an enemy alien) would not be able to signify ratification.

Ratification must occur within a reasonable time after the action of the purported
agent (The Managers of the Metropolitan Asylums Board v Kingham [1890] 6 TLR 217). What
constitutes a reasonable time will depend on the circumstances, but ratification may still
occur even after the contract has commenced: for example, an insurance policy may be
ratified after loss (Williams v North China Insurance Co [1876] 1 CPD 757). Ratification may be
implied from the failure to act within a reasonable period of time, although it is likely to
be difficult to show that inaction indicated a clear intention to ratify.

There are no formalities for a valid ratification, but it is essential that the principal must
have intended to ratify and does so with a positive act (Sino Channel Asia Ltd v Dana
Shipping & Trading Pte Singapore [2017] EWCA Civ 1703). The principal will only be held to
have ratified if they did so with full knowledge of the facts or if it is clear that the principal
is willing to adopt the act whatever the facts (Marsh v Joseph [1897] 1 Ch 213). Ratification
can be express or implied from conduct as long as the intention to ratify is clear and
page 172 University of London

unequivocal: for example, where the principal sues the third party on the contract
(Aviva Life & Pensions UK Ltd v Strand Street Properties Ltd [2010] EWCA Civ 444 at [73]). An
authorised agent can ratify (Suncorp Insurance and Finance v Milano Assicurazioni SpA [1993]
2 Lloyd’s Rep 225) and there seems no reason why a purported ratification by an agent,
who had no authority to ratify, cannot itself be ratified – indeed, of course, a company
can only ratify through its agents.

An attempt to ratify only part of a contract and repudiate the rest will, generally,
operate as ratification of the whole (Suncorp Insurance and Finance. But see Marsh v
Joseph [1897] 1 Ch 213).

Activity 8.8
Why was the attempt to ratify ineffective in Boston Deep Sea Fishing and Ice Co Ltd v
Farnham (Inspector of Taxes) [1957] 1 WLR 1051?

8.7.2 Effect of ratification


Ratification puts the parties into the position they would have been in had the act
been authorised from the outset: ‘Ratification when it exists is equivalent to a previous
authority’ (Lord Lindley in Keighley, Maxsted & Co v Durant [1901] AC 240). This means
the principal can sue or be sued by the third party. The agent will not be liable to
the principal for excess of authority, nor to the third party for breach of the implied
warranty of authority. The agent may be entitled to be indemnified by the principal for
any liability incurred. In Suncorp Insurance, Waller J suggested that, while ratification
normally relieves the agent from personal liability to the principal, the principal might
be able to ratify without waiver of any breach of duty by the agent (where the agent
exceeds their authority).

Since ratification puts the parties into the same position as if the act had been
authorised from the outset, then logically it relates back to the moment of the original
contract. The unusual consequence of this was illustrated by Bolton Partners v Lambert
(1889) 41 Ch D 295. S accepted an offer from L on behalf of B but without B’s authority.
L later withdrew the offer and only then did B ratify. It was held that the contract
was binding on L. No real reasoning was provided for this other than that ratification
meant ‘the agent is put in the same position as if he had had authority to do the act at
the time the act was done by him’ (Cotton LJ). This rule may seem unfair since it allows
the principal – but not the third party – to choose whether or not to ratify. Yet, it can
be argued that the third party who believed themselves to be bound by the contract
and so to hold the principal, who declines to ratify, liable would be even more unfair. If
the principal fails to ratify, the third party may be able to bring an action for breach of
warranty of authority against the agent.

There are limits to the rule in Bolton Partners v Lambert. In addition to the
requirements already discussed (Section 8.7.1), ratification is not likely to be effective
in the following situations:

uu If the interests of someone other than a party to the original contract are unfairly
affected, or if the unauthorised act was void as a nullity. In Brown v Bird [1850]
19 LJ Ex 154, without authority the seller’s agent sought to stop goods in transit
(a remedy available to the seller where the buyer fails to pay for goods). Before
the seller ratified this action the goods had reached the trustee in bankruptcy of
the buyer. The ratification was held to be ineffective. However, in Presentaciones
Musicales SA v Secunda [1994] Ch 271, solicitors issued a writ without authority; this
action was later ratified, but that ratification came outside the statutory time limits
for issuing the writ. It was held that the ratification was effective. The majority in
the Court of Appeal regarded the solicitors’ action as valid and contrasted this with
the situation in Brown; Roch LJ, however, agreed that the cases showed ratification
could not occur where a third party would be deprived of their property rights (see
also Brook v Hook [1871] LR 6 Exch 89; Owners of the ship ‘Borvigilant’ v Owners of the
ship ‘Romina G’ [2003] EWCA Civ 935 (Sealy and Hooley, p.167)).

uu If the agent and the third party rescind the agreement before ratification (Walter v
James [1871] LR 6 Exch 124).
Commercial law  Chapter 8  Agency 1 page 173

Study pack reading


¢¢ Tan, C-H. ‘The principle in Bird v Brown revisited’.

Activity 8.9
Read Brook v Hook (1871) LR 6 Exch 89.
J forges H’s signature on a promissory note. The forgery is discovered. H wants to
protect J from prosecution; can H ratify the promissory note? (A promissory note is
an unconditional promise to pay made by one person to another and signed by the
maker.)

Summary
Where an agent exceeds their authority or purports to act as agent but has not been
appointed as such, the person on whose behalf they purport to act is not bound,
unless that person ratifies. In general, ratification puts the principal, agent and third
party in the same position as if the act had been undertaken with authority.

8.8 Agency of necessity

Essential reading
¢¢ Sealy and Hooley, Chapter 5 ‘Creation of agency, and the authority of the agent’.

In a restricted range of emergencies, an agency may arise as a matter of law. This may
result in one of the following consequences: A may be empowered to enter into a
contract with T that binds P; A may be empowered to sell P’s goods to T without giving
rise to a contract between T and P; and A may be entitled to reimbursement from P for
actions taken on P’s behalf, which may also not involve a contract. Although these three
situations are often spoken of as aspects of the agency of necessity, in truth only the first
amounts to an agency. Moreover, if A does make a contract that binds P and T is unaware
that A is acting for P, this would seem to be an undisclosed agency which should mean
that T can bring an action on the contract against either A or P (see Section 9.2).

The courts are reluctant to hold P liable on the ground of necessity. Certainly, they
rarely seem to countenance a claim brought by someone with whom P has no existing
agency relationship. In other words, the argument is more likely to succeed (although
this should not be overstated) if A has acted beyond their authority than if A had no
prior authority (China-Pacific SA v Food Corporation of India, ‘The Winson’ [1982] AC 939.
But see also The Choko Star [1990] 1 Lloyd’s Rep 516; Reynolds ‘Necessity in the law of
agency’ (1992) JBL 505; Surrey Breakdown Ltd v Knight [1999] RTR 84, [1998] EWCA Civ
729).

The agency of necessity may arise where certain conditions are fulfilled:

uu P’s property is in A’s possession as the result of an existing legal relationship, such
as a contract of bailment. This excludes claims by strangers, such as someone who
finds the goods

uu A is unable to obtain instructions from the owner

uu an emergency threatens the property; it is not sufficient for A to show that P’s
property is causing A hardship or inconvenience (Sachs v Miklos [1948] 2 KB 23)

uu A takes action in good faith and that action is commercially reasonable,


proportionate and in the interests of P (Prager v Blatspiel, Stamp and Heacock Ltd
[1924] 1 KB 566).

Since it is a characteristic of an agent that they can affect the legal relations of the
principal, it might be argued that those ‘agents’ who only have the right to claim
expenses or to defend an action are not true agents of necessity and that the only true
agency of necessity is the master of a ship who acts to save the ship or its cargo in an
emergency. It has been said that this agency of necessity derives from the peculiar
position of the master of a ship and ‘affords no analogy to the case of an ordinary
agent’ (Hawtayne v Bourne [1841] 7 M & W 595 at 599, Parke B).
page 174 University of London

Certainly, the area is confused because many situations which are treated as agency
of necessity seem to be examples of the implied actual authority of the agent, or of an
implied term of a contract, or of the application of the law of restitution. For example,
the requirement that P’s property is in A’s possession as the result of an existing legal
relationship may mean that the obligation to reimburse expenses arises from an
implied term in that contract rather than from the agency of necessity. In The Great
Northern Railway Company v Swaffield (1874) LR 9 Exch 132, a carrier conveyed a horse
to its destination and, when the owner failed to collect it, incurred expenses for feed,
stabling, etc. The carrier successfully defended an action for conversion and recovered
the expenses incurred. Some of the judges did talk of this as a case of expenses being
necessarily incurred, but the test they applied was the same as would be used to imply
a term. The obligation to pay the expenses is better explained as a term of the contract
of carriage or of the contract of bailment, both of which contracts require the carrier
to take reasonable care of the horse.

Further reading
¢¢ Brown, I. ‘Authority and necessity in the law of agency’ (1992) 55 MLR 414.

Activity 8.10
M owned a house and rented out rooms. In 1940 she agreed to store in her house
furniture belonging to her friend, S. M did not charge S and agreed to keep the
furniture until such time as S wished to collect it. M and S stayed in contact for
another year, but after that M heard nothing from S, who appeared to have moved.
In 1943 the house suffered damage, and, as a result, the room in which the furniture
was stored was required for letting. M tried to trace S, but without success. In 1944,
M sold the furniture. Two years later S sued M in the tort of conversion. Could M
argue that the circumstances gave rise to an agency of necessity?

8.9 Capacity

8.9.1 Capacity of the principal


The general rule is that whatever a principal is competent to do personally may be
delegated to an agent. Conversely, a principal cannot authorise an agent to do an act
that the principal is not competent to undertake: for example, an enemy alien cannot
authorise an agent to undertake any act within the jurisdiction (Boston Deep Sea Fishing
and Ice Co Ltd v Farnham (Inspector of Taxes) [1957] 1 WLR 1051).

Where the principal’s ability to enter into a contract is qualified by age, the agent’s
capacity is also qualified. The principal, on acquiring the necessary capacity, can avoid
a contract made by the agent. The agent’s capacity is terminated by the death of the
principal or, where the principal is a company, liquidation or winding-up.

8.9.2 Capacity of the agent


Since the agent is acting for the principal, the capacity of the agent to enter the particular
transaction on the agent’s own behalf is, generally, irrelevant. For example, a minor
(someone below the age of legal capacity) who is a partner of a firm can bind the
partnership even if, had the minor entered into the contract on their own behalf, they
would not have been bound. Similarly, the fact that the agent would have the capacity to
undertake a transaction on their own behalf will not supply the deficiency of the principal:
an enemy alien wishing to sell goods in England does not remedy their own contractual
incapacity by employing an English agent. Finally, it is important to note that some
agents, such as solicitors and insurance brokers, are required by statute to have particular
qualifications before they can act for a principal in respect of certain transactions.

Summary
Anyone can appoint an agent, but the agent’s competence to engage in transactions
is restricted by the competence of the principal. The reverse is, generally, not true: an
agent can undertake transactions on behalf of the principal that would be outside the
agent’s personal capacity.
Commercial law  Chapter 8  Agency 1 page 175

Core comprehension
Read Sealy and Hooley, Chapters 4 and 5 and answer the following questions:
1. What is meant by the ‘authority’ of an agent?

2. How is actual authority defined and how does it arise?

3. What are the two forms of actual authority?

4. How does apparent authority come about and what are its requirements?

5. Could it be said that Watteau v Fenwick represents a separate head of authority?

Applied comprehension
6. What is the precedent value of Watteau v Fenwick? Considering the criticism
made in subsequent decisions, is it best regarded as simply a wrongly decided
case?

7. Can an agent ever represent their own authority?

8. What is the basis of the decision in First Energy v Hungarian International Bank?

9. Summarise the duties owed by an agent to their principal.

10. Summarise the duties owed by a principal to their agent.

Core comprehension answers


1. Authority is the basis of agency. Authority is said to be a matter of fact; it exists
when one person gives instruction or grants permission to another to act on their
behalf. Authority should not be confused with power. As a result of authority,
an agent has the power to change the principal’s legal position. The scope of an
agent’s authority defines the extent to which an agent is authorised to change
their principal’s position. An agent who does not have the ability to change the
principal’s legal position, such as an estate agent who only has authority to receive
offers on behalf of a vendor, is not a true agent.

2. Actual authority is authority that exists as a matter of actuality. That is to say, it is


authority which has been purposefully bestowed on the agent by the act of the
principal as a result of their consensual agreement. See Diplock LJ in Freeman &
Lockyer v Buckhurst Park Properties [1964] 2 QB 480 at 502.

3. Actual authority can take the form of express or implied actual authority. As Lord
Denning MR sets out in Hely-Hutchinson v Brayhead [1968] 1 QB 549, actual authority
is ‘express when it is given by express words, such as when a board of directors
pass a resolution which authorises two of their number to sign cheques. It is
implied when it is inferred from the conduct of the parties and the circumstances
of the case’.

4. Apparent authority occurs where a principal holds out an agent as having authority
despite the fact that the agent in fact has no such authority. A prerequisite for
apparent authority therefore is the absence of actual authority. Slade J set out
the requirement for apparent authority in his judgment in Rama Corp v Proved Tin
[1952] 2 QB 147: ‘[o]stensible or apparent authority which negatives the existence of
actual authority is merely a form of estoppel, indeed, it has been termed agency by
estoppel, and you cannot call in aid an estoppel unless you have three ingredients:
(i) a representation, (ii) a reliance on the representation, and (iii) an alteration of
your position resulting from such reliance.’

5. Watteau v Fenwick is said to represent a separate category of ‘usual authority’, that


is to say an agent is deemed simply to have the authority which would be usual for
a person performing that role, irrespective of the authority they have been given
by their principal. However, the case has been very heavily criticised and so it is
likely that it is confined only to its particular facts.
page 176 University of London

Applied comprehension answers


6. Watteau v Fenwick has only been followed on one occasion and is heavily criticised
in the academic literature and in the case law, especially by Bingham LJ in Rhodian
River Shipping Co SA v Halla and by Woods JA in the Canadian case of Sign-O-Lite
Plastics Ltd v Metropolitan Life Insurance Co who said: ‘It is astonishing that after
all these years, an authority of such doubtful origin, and of such unanimously
unfavoured reputation, should still be exhibiting signs of life and disturbing the
peace of mind of trial judges. It is surely time to end any uncertainty, which may
linger as to its proper place in the law of agency.’ It is widely regarded as being
wrongly decided.

7. The courts have repeatedly made clear that the representation must come from
the principal. In Bank of Kuwait v Hammoud, Lord Donaldson MR stated that an
agent ‘cannot pull himself up by his own shoe laces’. This is straightforward.
However, the representation need not come from the principal directly; an agent
with authority to make a representation or communicate a representation may do
it on behalf of the principal. By extension, it is also thought that an individual could
be held out as being able to make representations about their own authority. This
is problematic and is addressed in Armagas v Mundogas.

8. The decision in First Energy can be explained by reference to Steyn J’s opening
paragraphs where he explains that commercial law and, by extension, the law
of agency is concerned with upholding reasonable expectations – in this case,
the reasonable expectations of a potential borrower meeting with a very senior
member of a bank’s staff and whether that member of staff had authority to make
or communicate an offer of a loan that was later revoked (without explanation).
Underlying this is a more complex issue of whether the agent had represented
himself as having authority to make an offer of a loan or whether he had been
presented by his employer as having authority to merely communicate their offer,
mainly by virtue of the way he had been presented by the bank. The court found
that the principal had held out the agent as having authority to communicate a
decision made by the principal and concluded it would go against the borrower’s
reasonable expectations to arrive at a different result. The judgment here avoided
the difficulties presented by a ‘self-authorising’ agent by finding there was a
holding by the principal. The court also distinguished the House of Lords’ decision
in Armagas v Mundogas.

9. The agent is in a fiduciary relationship with the principal and this defines their
relationship. Specifically, the agent is prohibited from taking any form of bribe or
inducement or making any form of profit beyond the remuneration agreed with
the principal. The agent must avoid conflicts of interest and follow the instructions
of the principle and has a general duty of ‘transparency’ – to account to the
principle for their actions, whereabouts, etc.

10. By contrast, the principal owes the agent very little. The principal must allow the
agent a reasonable opportunity to earn a commission, although no commission or
payment is required to be made, except to cover agent’s expenses incurred by the
agent in performing their duties. At common law, notice must usually be given to
terminate the agency relationship but the period of notice is generally short unless
the circumstances are unusual.
Commercial law  Chapter 8  Agency 1 page 177

Sample examination question


‘Actual authority and apparent authority are quite independent of one another.
Generally they co-exist and coincide, but either may exist without the other and
their respective scopes may be different.’
Discuss.

Advice on answering the question


This quote is taken from the judgment of Diplock LJ in Freeman & Lockyer v Buckhurst
Park Properties (Mangal) Ltd [1964] 2 QB 480. A good answer would outline what is
meant by actual authority and apparent authority, and then highlight the distinction
between them.

Actual authority is based on the consensual agreement between the principal and
the agent, while apparent authority is concerned with the appearance of authority as
represented to the third party, even though the agent lacks actual authority. While it is
common for the apparent authority of an agent to coincide with their actual authority,
the third party’s knowledge of the agent’s authority will almost always depend upon
a representation by the principal. The relationship between the agent and principal
will be governed by actual authority. This means that the agent may be in breach of its
agreement with the principal, but the principal may be bound to the third party.
page 178 University of London

Reflect and review


Look 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 to revise
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 Need to Need to
move on revise first study again

I can define the term ‘agent’.   

I can explain how an agency is created.   

I can discuss the scope of the agent’s authority.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

8.1 What is an agency?  

8.2 Types of agent  

8.3 Creation of agency  

8.4 The actual authority of the agent  

8.5 Apparent authority  

8.6 Usual authority: Watteau v Fenwick  

8.7 Ratification  

8.8 Agency of necessity  

8.9 Capacity  
9 Agency 2

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

9.1 Relationship with third party: disclosed agency . . . . . . . . . . . . . 181

9.2 Relationship with third party: undisclosed principal . . . . . . . . . . 185

9.3 Relationship between principal and agent . . . . . . . . . . . . . . . 189

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . 194


page 180 University of London

Introduction
This chapter analyses the rights and obligations that arise in two situations. These are:

uu where the principal is disclosed or known to the third party

uu where the third party is not aware of the principal’s identity, either because it is not
disclosed or because the third party is unaware that there is a principal behind the
agent.

The discussion of agency concludes with the relationship between the principal and
agent.

Learning outcomes
By the end of this chapter and the relevant readings you should be able to:
uu explain the rights and obligations owed by the principal and by the agent to the
third party
uu explain the rights and obligations owed by the third party to the principal and to
the agent
uu outline the rights and obligations arising between the principal and the agent.
Commercial law  Chapter 9  Agency 2 page 181

9.1 Relationship with third party: disclosed agency

Essential reading
¢¢ Sealy and Hooley, Chapter 6 ‘Relations with third parties’.

9.1.1 Principal–third party


If an agent (A) enters into a contract with a third party (T) and prior to that contract A
names the principal (P) or, at least, the principal can be identified, this is a disclosed
agency (also known as disclosed principal). The third party’s contract is with the
principal and not with the agent.

Where a person contracts as agent for a principal the contract is the contract of the
principal and not that of the agent; prima facie at common law the only person who may
sue is the principal, and the only person who can be sued is the principal.
(Montgomerie v United Kingdom Mutual Steamship Association [1891] 1 QB 370, Wright J.)

Where A exceeds their authority, the question of whether P is liable to T depends on


the existence or not of apparent authority that covers the transaction. If it does, P is
fully liable to T (although A may be liable to P for breach of their agency agreement).
If it does not, P is not liable to T, but A may be liable to T for breach of the implied
warranty of authority as, by representing their authority to T, A promises that they
have such authority. It is possible for A to agree with T to be liable on the transaction,
but this is separate from P’s liability.

Lord Scarman preferred a rather different approach from that of Wright J – one more in
line with the general presumption underlying contract law. His view was that everyone
is liable for their contracts, even where they act for another, unless they can show that
this liability is removed by the law of agency (Yeung Kai Yung v Hong Kong and Shanghai
Banking Corpn [1981] AC 787 at 795).

The principal may sue or be sued on the contract with the third party, if the agent
discloses the agency and:

uu acts within actual authority

uu acts without actual authority and the principal ratifies.

The principal may also be sued if the agent acts within apparent authority, but the
principal cannot sue the third party unless there has been ratification. This is because
apparent authority arises out of an estoppel which prevents the principal from raising
a defence to an action by the third party, but does not give the principal a right of
action; that right only arises if the principal ratifies the unauthorised action.

In response to a claim by the disclosed principal, the third party can use:

uu any defence or claim arising from the contract

uu any defence or claim available against the principal.

A defence or claim available against the agent and unconnected with the contract
cannot be used against the principal.

9.1.2 Principal–third party: payment


In general, payment by the third party to the agent does not constitute payment to
the principal. A third party can only discharge a debt owed to the principal by paying
the agent in a limited number of circumstances (Irvine & Co v Watson & Sons [1880] 5
QBD 414). These circumstances are:

uu if an express or implied term of the contract specifies this method of payment

uu if the agent has actual authority from the principal to receive payment

uu if the principal is estopped from denying the right of the third party to pay the agent
because the payment was induced by a representation by the principal (in effect the
principal represented that payment to the agent would discharge the debt)
page 182 University of London

uu if this method of payment was ratified by the principal: for example, the third
party will be discharged if payment is made to the agent, who had no authority to
receive it, and the agent passes that payment to the principal, who accepts it.

The same principles apply where the payment is due from the principal to the third
party. In Heald v Kenworthy [1855] 10 Exch 739, Parke B said:

…if a person orders an agent to make a purchase for him, he is bound to see that the
agent pays the debt; and giving the agent money for that purpose does not amount to
payment, unless the agent pays it accordingly…I think that there is no authority for saying
that a payment made to the agent precludes the seller from recovering from the principal,
unless it appears that he [the seller] has induced the principal to believe that a settlement
has been made with the agent.

In Wyatt v Marquis of Hertford [1802] 3 East 147, the third party gave the agent a receipt
for payment and on this basis the principal reimbursed the agent. In fact, the agent
had made no payment, but it was held that the debt owed by the principal had been
discharged.

9.1.3 Principal–third party: misrepresentation by the agent


A misrepresentation is a false statement of fact upon which the person to whom it
is made relies and which leads them to enter into a contract with the person who
made the misrepresentation. The normal remedy is rescission of the contract and/
or damages. Where the agent makes the alleged misrepresentation, the principal is
liable if the agent was acting within their actual or apparent authority or the principal
ratified. There is no requirement that the principal should be aware of the agent’s
action, and it does not matter that the agent acted for their own benefit and not for
that of the principal (Lloyd v Grace, Smith & Co [1912] AC 716).

There is no fraudulent misrepresentation (which constitutes the tort of deceit) if the


agent honestly believes the truth of the statement that turns out to be false and the
principal, while knowing the truth, does not know that the agent is going to make the
statement (Armstrong v Strain [1952] 1 KB 232).

An agent does not come within the terms of the Misrepresentation Act 1967,
which was designed to deal with the liability of the contracting parties for pre-
contractual representations. An agent is, therefore, not liable to the third party for
the misrepresentation (Resolute Maritime Inc v Nippon Kaiji Kyokai (The ‘Skopas’) [1983]
1 WLR 857), unless it amounts to the tort of deceit or negligence (under Hedley Byrne
& Co Ltd v Heller & Partners Ltd [1964] AC 465, which you will have studied in the Tort
law course). The principal may also be liable for such tortious actions by an agent who
acted within actual or apparent authority.

Activity 9.1
A is commissioned to find a buyer for a house owned by P. T expresses interest in
buying. A falsely tells T that another person is also interested in the property and
that if T pays in excess of the asking price he would secure it. A also falsely tells T
that a tenant is willing to rent part of the property. Relying on these statements, T
enters into a contract to buy. Advise T, who has now discovered the truth.

9.1.4 Agent–third party: liability to the third party on the contract


The general rule is that where the agency is disclosed, the principal alone is liable
on the contract. However, as Lord Scarman pointed out, ‘It is not the case that, if a
principal is liable, his agent cannot be’. The agent may make themselves personally
liable in addition to the principal. The onus of proof is on the party alleging that the
agent is personally liable (Vlassopulos (N & T) Ltd v Ney Shipping Ltd: The Santa Carina
[1977] 1 Lloyd’s Rep 478).

Where A contracts with B on behalf of a disclosed principal C, the question whether both
A and C are liable on the contract or only C depends on the intention of the parties. That
intention is to be gathered from (1) the nature of the contract, (2) its terms and (3) the
surrounding circumstances...The intention for which the Court looks is not the subjective
intention of A or of B. Their subjective intentions may differ. The intention for which the
Commercial law  Chapter 9  Agency 2 page 183

Court looks is an objective intention of both parties, based on what two reasonable
businessmen making a contract of that nature, in those terms and in those surrounding
circumstances, must be taken to have intended.
(Bridges & Salmon Ltd v The ‘Swan’ (Owner) [1968] 1 Lloyd’s Rep 5, Brandon J.)

Where someone signs a contract in their own name and without any qualification,
the general rule is that they assume personal liability, unless it is clear from the
proper construction of the document that the signatory signed in the capacity of
agent for another.

Affixing a label, such as ‘agent’ or ‘director’, is not sufficient by itself to displace the
presumption that the signatory was signing on their own behalf. It must be made clear
that the signatory is acting in a representative capacity. In Universal Steam Navigation
Co Ltd v James McKelvie & Co [1923] AC 492, the contract was signed ‘as agents’. This
showed that they did not sign as principal and, therefore, did not incur personal
liability. Signing ‘for’ another has the same effect. However, in The ‘Swan’, Brandon J
thought that merely adding the word ‘agent’ or ‘director’ would not, normally, relieve
the signer of liability (but see Viscount Cave LC and Lord Sumner in Universal Steam
Navigation). Care must be taken in applying these decisions because words used in one
contract may have a different meaning in another contract.

A term rendering the agent personally liable may be implied by the custom of the
agent’s trade. In Fleet v Murton [1871] LR 7 QB 126, it was held that there was a custom in
the London fruit trade that the agent was personally liable if the name of the principal
was not disclosed.

Before company incorporation


A company cannot be bound by contracts entered on its behalf before incorporation
for the simple reason that at that stage the company does not exist and it cannot,
therefore, make contracts. For the same reasons the unincorporated company cannot
appoint an agent to act on its behalf. In Kelner v Baxter [1866] LR 2 CP 174 the promoters
of a hotel company contracted for the purchase of wine before the company was
incorporated. Upon incorporation the company ratified this action and the wine was
drunk. Before payment the company went into liquidation. The promoters were held
personally liable. The company did not exist and so could not contract.

Under s.51(1), Companies Act 2006 someone who purports to make a contract
on behalf of a company that has not been formed will be personally liable. The
knowledge of the third party and the intention of the agent are irrelevant. The section
is ‘subject to any agreement to the contrary’, which requires the agent’s personal
liability to have been expressly excluded (Phonogram Ltd v Lane [1982] QB 938).

Making those who act on behalf of an unincorporated company personally liable


may cause difficulties for promoters who legitimately wish to enter into contracts
– for example, to lease premises – so that trading can begin immediately upon
incorporation. The most obvious solution is novation where, with the consent of
the third party, the contract with the promoter is substituted by a contract with the
company (Howard v Patent Ivory Manufacturing Co [1888] 38 LR Ch Div 156).

Activity 9.2
a. Why could the company not ratify the contract after incorporation in Kelner v
Baxter?

b. Will Jake be liable in either of the following situations?

i. He signs contract as follows:

ii. He signs another contract as follows:


page 184 University of London

9.1.5 Agent–third party: merger and election


If the agent is personally liable, the third party must choose to sue either the principal
or the agent and, having chosen, cannot change their mind. If T sues A, but A cannot
pay, T cannot turn to P. The operation of this rule seems harsh and probably does not
reflect the expectations of the parties. The reason the parties wished to hold both
principal and agent liable must have been to give the third party alternative actions.

This process of choosing by the third party is called merger or election. Although
Scrutton LJ saw no distinction between them (Debenhams Ltd v Perkins [1925] 133 LT
252), there are differences and merger may occur in circumstances where there can be
no election.

uu Election involves a choice: the third party is aware of the agency and chooses to
sue one party rather than another. Election can only be made by a third party with
full knowledge of the relevant facts. The election must be clear and unequivocal
(e.g. obtaining judgment).

uu Merger involves the idea that the principal and the agent are liable in the alternative
so that if judgment is obtained against one, the other is discharged from liability
even if the judgment is not satisfied (because, for example, the debtor is insolvent).

Thus, if the third party sues the agent before the agency is disclosed there cannot
be election, but the doctrine of merger may apply so the third party cannot later
sue the principal.

Professor Reynolds (‘Election distributed’ (1970) 86 LQR 318) has suggested that many
of the cases treated as merger and election could be seen as situations in which the
agent contracted as principal. Whatever the merits of this view, it does serve as a
reminder that it is necessary to determine the contracting parties and whether agency
is involved at all.

Study pack reading


¢¢ Reynolds, F.M.B. ‘Election distributed’.

9.1.6 Agent–third party: liability for breach of warranty of authority


If the ‘agent’ acts without actual or apparent authority (and does not act as principal)
and the ‘principal’ has not ratified, neither will be liable on the ‘contract’ with the
third party (although see Watteau v Fenwick, in Section 8.6 above). But the ‘agent’ has
impliedly contracted that authority exists and, therefore, is liable if there is no such
authority and the third party was induced by the representation of authority to act
in a way that they would otherwise not have done. The representation must be as to
the ‘agent’s’ authority to act for the ‘principal’. So, where A is appointed by B to act
for B in a transaction that is (unknown to A) fraudulent, A is not liable for breach of
warranty of authority because A was acting as agent for B and within the authority
granted by B (Frank Houlgate Investment Co Ltd v Biggart Baillie LLP [2009] CSOH 165 at
[21]). This warranty of authority does not extend to a promise that the main contract
will be performed.

Liability is strict. It is no defence to show that the misrepresentation was the result
of an honest, but mistaken, belief about the existence or extent of the authority, or
that the agent had no means of knowing that actual authority had ended. In Yonge v
Toynbee [1910] 1 KB 215, a firm of solicitors was held liable when they acted for a client
without knowing that, subsequent to their appointment as agent, the client had
become insane, which illness automatically terminated their authority to act (but see
Drew v Nunn [1879] 4 QBD 661).

The ‘agent’ will not be liable where the third party ought to have known that no
warranty of authority was being given so that the ‘agent’ was not professing to act
as agent, or where the ‘agent’ was appointed under a power of attorney and was
unaware that it had been revoked (Powers of Attorney Act 1971, s.5(1)).
Commercial law  Chapter 9  Agency 2 page 185

Activity 9.3
What knowledge of the termination of authority must the agent have to be liable
for breach of warranty of authority?

9.1.7 Agent’s liability in tort


An agent may be liable in the tort of negligence if they have assumed responsibility to
the third party so as to give rise to a duty of care to a third party and act in a way that
breaches the duty of care and causes loss of a type that was reasonably foreseeable.
An agent who makes a fraudulent misrepresentation may be personally liable in the
tort of deceit, and here there is no requirement to show that the agent assumed
responsibility to the third party.

9.1.8 Agent–third party: agent’s right to sue third party


The agent cannot sue on the contract between the principal and the third party, but
there are exceptions to this general rule: for example, where the parties intend that
the agent shall be able to sue and where an agent, who is liable on a contract because
of the Companies Act 2006, may also enforce that contract (Braymist Ltd v Wise Finance
Co Ltd [2002] EWCA Civ 127).

Activity 9.4
a. What was the decision in Rayner v Grote [1846] 15 M & W 359?

b. Might the result in that case have been different if there had been no
performance and the agent/principal had sought to enforce the contract, or if
the buyer had not discovered the identity of the principal until after delivery?

Summary
Where an agent acts within the scope of their authority, any contract is the contract
of the principal and the agent cannot sue or be sued on it, unless there is a contrary
intention. Neither the principal nor the agent will be liable on a ‘contract’ made with
the third party where the agent acted without actual or apparent authority and the
principal has not ratified. However, the third party may be able to bring an action for
breach of warranty of authority by the agent.

9.2 Relationship with third party: undisclosed principal

Essential reading
¢¢ Sealy and Hooley, Chapter 6 ‘Relations with third parties’.

9.2.1 Undisclosed principal


There is no legal requirement that the agency be disclosed. T may not be aware that
they are dealing with an agent. This is known as undisclosed principal or undisclosed
agency. Up to this point, the law of agency in respect of third parties seems relatively
consistent in that it involves representations made by the principal to the third party,
but on entering the realm of undisclosed principals this consistency vanishes. Her