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Commercial law sixth edition
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Commercial law sixth edition
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Sixth edition published 2008 by Routledge-Cavendish 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge-Cavendish 270 Madison Ave, New York, NY 10016 This edition published in the Taylor & Francis e-Library, 2009. To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk. Routledge-Cavendish is an imprint of the Taylor & Francis Group, an informa business 2006, 2008 Routledge-Cavendish Previous editions published by Cavendish Publishing Limited First edition 1997 Second edition 1999 Third edition 2002 Fourth edition 2004 All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Commercial law. – 6th ed. p. cm. ISBN10: 0–415–45670–3 (pbk) ISBN13: 978–0–415–45670–8 (pbk) 1. Sales – Great Britain. 2. Consumer credit – Law and legislation – Great Britain. 3. Commercial law – Great Britain. KD1650.C66 2008 346.4107 – dc22 2007048647 ISBN 0-203-86824-2 Master e-book ISBN
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Contents
Table of Cases
v
Table of Statutes
ix
Table of Statutory Instruments
xv
Table of European Legislation
xvii
How to use this book
xix
1
Definition of contract of sale of goods
1
2
Passing of property and risk
5
3
Void and frustrated sale of goods contracts
17
4
Seller is not the owner
23
5
Contract terms as to title
35
6
Misrepresentation
41
7
Express and implied terms
49
8
Exemption and limitation clauses
71
9
Delivery and payment in sale of goods
85
10
Seller’s remedies
91
11
Buyer’s remedies
99
12
Agency
107
13
International sales
119
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CONTENTS
14
Consumer credit – categories of agreement
127
15
Consumer credit – triangular transactions
137
16
Consumer credit – trading control
143
17
Consumer credit – documentation and cancellation
149
18
Agency and connected lender liability
159
19
Consumer credit – rights of the parties
167
20
Putting it into practice . . .
179
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Table of Cases
14, 15
Aluminium Industrie Vaasen v Romalpa Aluminium Ltd [1976] 1 WLR 676 Andrews v Hopkinson [1956] 3 All ER 422 Armour v Thyssen [1990] 3 All ER 481 Armstrong v Jackson [1917] 2 KB 822 Ashington Piggeries v Hill [1971] 1 All ER 847
138 13 115 53
Barber v NWS Bank [1996] 1 All ER 906 Barrow Lane and Ballard v Phillips [1929] 1 KB 574 Bartlett v Sidney Marcus [1965] 2 All ER 753 Bence Graphics International Ltd v Fasson UK [1998] QB 87 Bentinck v Cromwell Engineering [1971] 1 QB 324 Bowmakers v Barnett Instruments [1945] KB 65 Branwhite v Worcester Works Finance [1969] 1 AC 552 Bunge Corporation v Tradax [1981] 2 All ER 513 Butterworth v Kingsway Motors [1954] 1 WLR 1286
37 18, 19 56 103, 184 172, 173 171, 172 140 120 37
Car and Universal Finance v Caldwell [1965] 1 QB 31 Central Newbury Car Auctions v Unity Finance [1957] 1 QB 371 Charge Card Services Ltd, Re [1988] 3 All ER 702 Clegg v Ole Andersson [2003] 1 All ER 721 Clough Mill v Martin [1985] 1 WLR 111 Colley v Overseas Exporters [1921] 3 KB 302 Couturier v Hastie [1856] 5 HL Cas 673 Cundy v Lindsay [1878] 3 App Cas 459
27 25 92 66 16 121 18 27
Demby Hamilton Ltd v Barden [1949] 1 All ER 435
11 v
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TABLE OF CASES
Dimond v Lovell [2000] 2 All ER 897 Director General of Fair Trading v First National Bank [2001] 1 All ER 97 Donoghue v Stephenson [1932] AC 562
153 83, 185
Federspiel v Twigg [1957] 1 Lloyd’s Rep 240 Felderoll Foundry Plc v Hermes Leasing [2004] EWCA Civ 747 Forthright Finance Ltd v Ingate [1997] 4 All ER 99 Freeman and Lockyer v Buckhurst Park Properties [1964] 2 QB 480 Frost v Aylesbury Dairy [1905] 1 KB 608
8 80
68
140 109, 110 58
GE Capital Bank Ltd v Rushton [2006] 3 All ER 865 George Mitchell v Finney Lock Seeds [1983] 2 AC 803 Gill and Dufus v Berger [1984] AC 382 Goldcorp Exchange, Re [1995] AC 74 Griffiths v Peter Conway [1939] 1 All ER 685
31 81 122 10 58
Hall and Pims Arbitration, Re [1928] 30 Ll L Rep 159 Harlingdon Enterprises v Christopher Hill Fine Art [1991] 1 QB 564 Healy v Howlett [1917] 1 KB 337 Hedley Byrne v Heller [1964] AC 465 Helby v Matthews [1895] AC 471 Hely-Hutchinson v Brayhead [1968] 1 QB 549 Hendy Lennox v Grahame Puttick [1984] 1 WLR 485 Highway Foods International, Re [1995] BCLC 209 Hong Kong Fir v Kawasaki Kisen Kaisha [1962] 2 QB 26 Howell v Coupland [1876] 1 QBD 258
102 53
J & H Ritchie v Lloyd Ltd [2007] 1 WLR 670 Jones v Gallagher [2004] EWCA 10
67 67
Keighley, Maxsted and Co v Durant [1901] AC 240 Kum v Wat Tat Bank Ltd [1971] 1 Lloyd’s Rep 439 Kursell v Timber Operators [1927] 1 KB 298
113 181 6, 7
9 45 30 109 14 30 51 19
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TABLE OF CASES
Kwei Tek Chao v British Traders and Shippers Ltd [1954] 2 QB 459
122, 123
Lambert v Lewis [1981] 2 Lloyd’s Rep 17 Lazenby Garages Ltd v Wright [1976] 1 WLR 459 Leaf v International Picture Galleries [1950] 2 KB 86 Lewis v Averay [1971] 3 All ER 907 Lombard North Car Central v Butterworth [1987] QB 527 Lonsdale v Howard & Hallam Ltd [2007] 4 All ER 1
59 95 43 26, 27 88, 169 117
Mash and Murrell v Joseph Emmanual [1961] 1 WLR 862 May and Butcher v R [1934] 2 KB 17 Microbeads v Vinhurst Road Markings [1975] 1 WLR 218 Mihalis Angelos, The [1971] 1 QB 164 Moorcock, The [1889] 14 PD 64
60 88 38 185 60
National Mutual General Insurance Association v Jones [1990] 1 AC 24 Newtons of Wembley v Williams [1965] 1 QB 560 Niblett v Confectioners’ Materials [1921] 3 KB 387
30 30 38
Office of Fair Trading v Lloyds TSB Bank Plc [2007] UKHL 48 162 73 Olley v Marlborough Court [1949] 1 KB 532 Panchaud Freres v Etablissement General Grain [1970] 1 Lloyd’s Rep 53 Panorama Developments v Fidelis Furnishing Fabrics [1971] 2 QB 711 Peachdart, Re [1983] 3 All ER 204 Pearson v Rose and Young [1951] 1 KB 275 Pfeiffer Gmbh v Arbuthnot Factors [1988] 1 WLR 150 Phillips v Brooks [1919] 2 KB 243 Photo Productions v Securicor Transport [1980] AC 827 Priest v Last [1903] 2 KB 148
122
R and B Customs Brokers v United Dominions Trust [1988] 1 WLR 321
79, 80
110 14 26 14 26 73 57
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TABLE OF CASES
Rickards v Oppenheim [1950] 1 KB 616 Rogers v Parish [1987] QB 933 Rowland v Divall [1923] 2 KB 500 Royscot Trust v Rogerson [1991] 3 All ER 294
86 56 36 44
Said v Butt [1920] 3 KB 497 Sainsbury Ltd v Street [1972] 1 WLR 834 Slater v Finning [1996] 3 All ER 398 Shine v General Guarantee [1988] 1 All ER 911 Smith New Court Securities v Scrimgeour Vickers (Asset Management) [1996] 4 All ER 769 Stadium Finance v Robbins [1962] 2 QB 664 Stevenson v Rogers [1999] QB 1028
114, 115 19, 20 58, 59 56 44, 45
Teheran-Europe v St Belton [1968] 2 QB 545 Thomas Witter Ltd v TPB Industries Ltd [1996] 2 All ER 573 Thompson v Robinson [1955] Ch 177 Thornton v Shoe Lane Parking [1971] 2 QB 163
58 44 95 73
United Dominions Trust v Taylor [1980] SLT 28
164
Vallejo v Wheeler [1774] 1 Cowp 143
181
Wadham Stringer v Meaney [1981] 1 WLR 39 Wait, Re [1927] 1 Ch 606 Watteau v Fenwick [1893] 1 QB 346 Wertheim v Chicoutimi [1911] AC 301 White and Carter v Macgregor [1962] AC 413 Wiehe v Dennis Bros [1913] 29 TLR 250 Wilson v First County Trust Ltd [2004] 1 AC 816 Workman Clerk v Lloyd Brazileno [1908] 1 KB 968
175, 176 8 111 103 185 12 153 93, 94
26 54, 79, 80
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Table of Statutes
Companies Act 1985— s 395 Companies Act 2006— s 860 Consumer Credit Act 1956— s 56 Consumer Credit Act 1974
14 14 112 2, 31, 84, 112, 127, 128, 130, 132, 144, 145, 147, 150, 151, 153, 154, 156, 161, 168 129, 153 129 129 134 134 131 134 173 135 30 173 173 145 145 145 147
s8 s 8(1) s 9(1) s 11 s 12 s 15 s 17 ss 19–22 s 19 s 25(2) s 33 s 34 s 39 s 39A s 40 s 46
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TABLE OF STATUTES
145 147 145 147 147 140, 141, 156, 159–161 154 151 151 154 152 152 152 155 156 156 156 151 159, 162–165 173 173 168 168, 169 171 171, 172 168 168 175 154 152, 154 168, 171 176 176 130 168, 173 167, 174
s 48 s 49 s 49(1) s 50 s 51 s 56 s 58 s 60 s 61 s 61(2) s 62 s 63 s 65 s 67 s 68 ss 69–73 s 69(7) s 74 s 75 s 83 s 84 s 86 s 87 s 90 s 91 s 93 s 94 s 99 s 113 s 127 s 129 s 133 s 135 ss 137–140 ss 140A–140D s 140A x
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TABLE OF STATUTES
s2 s 16 s 23 ss 26–54 ss 62, 64 Consumer Protection Act 1987 Pt 1 Contracts (Rights of Third Parties) Act 1999
174 175 175 145 145 154 128, 150, 173, 182, 185 130, 132 171 144 144 144 84 68 74
Enterprise Act 2002 Pt 8
175 84, 175
Factors Act 1889— s 1(1) s2 s 2(1) s9
25 26 24 29
Hire Purchase Act 1964 Pt III Hire Purchase Act 1965
33, 37 24, 31, 37 176
Late Payment of Commercial Debts (Interest) Act 1998
94
Misrepresentation Act 1967— s 2(1) s 2(2) s3
42–45, 47 42–44, 47 45, 77
s 140B s 140B(3) s 140D s 148 s 149 s 189 Consumer Credit Act 2006
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TABLE OF STATUTES
56, 60, 61, 66 1, 2, 17, 30, 50, 60, 61, 79, 139 104 1, 2 17–21 17–21 88 60, 69, 76, 77, 80 35–38, 75, 76, 78 38 61, 62, 75, 76, 78, 104 49, 51–53, 60 54, 56, 57, 69, 79, 80 49, 54–56, 58, 66, 67 56 56 49, 57–59 49, 59 52, 61 5, 8, 9 8 5, 7, 8, 10 5 12 11 12 5, 9, 10 12 11 24, 26, 27, 43 24, 28 14, 24, 27, 29 25
Sale and Supply of Goods Act 1994 Sale of Goods Act 1979 Pt 5A s2 s6 s7 s8 ss 12–15 s 12 s 12(3) ss 13–15 s 13 s 14 s 14(2) s 14(2D) s 14(2E) s 14(3) s 15 s 15A s 16 s 17 s 18 s 20 s 20(1) s 20(2) s 20(3) ss 20A–20B s 20A(3) s 20B s 23 s 24 s 25 s 26 xii
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TABLE OF STATUTES
s 28 s 29 s 30 s 35 s 38 ss 39–43 s 44 s 48 s 48F s 49 s 50 s 52 s 53 s 53(3) Sale of Goods Act 1995 Supply of Goods and Services Act 1982 ss 2–5A ss 6–11 ss 12–16 Supply of Goods (Implied Terms) Act 1973 69, 105 ss 8–11A
87 88 87 61, 66 92 95 96 96 104 91, 92 91, 94 99, 100 103 104 184 105 2 2 2
Trade Descriptions Act 1968
84
Unfair Contract Terms Act 1977
38, 45, 54, 61, 71, 72, 74–82, 87, 104, 182 75, 77 77 76, 77 76 77 81 80 81
2
s 2(1) s 2(2) s3 s6 s8 s 11 s 12 Sch 2
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Table of Statutory Instruments
Commercial Agents (Council Directive) Regulations 1993, SI 1993/3053 Consumer Credit (Advertisements) Regulations 2004, SI 2004/1484 Consumer Credit (Agreements) Regulations 1983, SI 1983/1553 Consumer Credit (Quotations) Regulations 1989, SI 1989/1126 Consumer Protection (Cancellation of Contracts Concluded away from Business Premises) Regulations 1987, SI 1987/2117
116
Unfair Terms in Consumer Contracts Regulations 1994 SI 1994/3159 Unfair Terms in Consumer Contracts Regulations 1999, SI 1999/2083
83
147 151 147 156
72, 74, 82, 83, 185
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Table of European Legislation
Conventions European Convention on the Protection of Human Rights and Fundamental Freedoms
153
Directives 82 84
Consumer Contracts Directive 93/13 Unfair Commercial Practices Directive 2005/29
xvii
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How to use this book
Welcome to this new edition of Routledge-Cavendish English Legal System Lawcards. In response to student feedback, we’ve added some new features to these new editions to give you all the support and preparation you need in order to face your law exams with confidence. Inside this book you will find: I NEW tables of cases and statutes for ease of reference
xix
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HOW TO USE THIS BOOK
I Revision Checklists We’ve summarised the key topics you will need to know for your law exams and broken them down into a handy revision checklist. Check them out at the beginning of each chapter, then after you have the chapter down, revisit the checklist and tick each topic off as you gain knowledge and confidence.
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HOW TO USE THIS BOOK
I Key Cases We’ve identified the key cases that are most likely to come up in exams. To help you to ensure that you can cite cases with ease, we’ve included a brief account of the case and judgment for a quick aide-memoire.
I Companion Website At the end of each chapter you will be prompted to visit the RoutledgeCavendish Lawcards companion website where you can test your understanding online with specially prepared multiple-choice questions, as well as revise the key terms with our online glossary.
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HOW TO USE THIS BOOK
I Exam Practice Once you’ve acquired the basic knowledge, you’ll want to put it to the test. The Routledge-Cavendish Questions and Answers provides examples of the kinds of questions that you will face in your exams, together with suggested answer plans and a fully-worked model answer. We’ve included one example free at the end of this book to help you put your technique and understanding into practice.
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1 Definition of contract of sale of goods I
What is ‘a contract of sale of goods’ (s 2)? Contracts for the sale of goods regulated by the Sale of Goods Act 1979 The other types of contract governed by other statutes
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I I
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DEFINITION OF CONTRACT OF SALE OF GOODS
English law provides different legislative regimes for different forms of commercial contracts. Only contracts of sale of goods are governed by the Sale of Goods Act 1979. According to s 2: A contract of sale of goods is a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price . . . The basic notion is that a contract of sale of goods is a means of transferring property (meaning ownership) from one person to another. There are other means of doing this. Clearly, making someone a gift or leaving someone a bequest by will are alternatives. There are also other types of contract which may involve transferring ownership and/or possession of goods. The reason that these other types of contract are not contracts of sale of goods is that one or more ingredients of the above definition is missing. These contracts are, therefore, not governed by the Sale of Goods Act 1979.
CONTRACTS WHICH ARE NOT GOVERNED BY THE SALE OF GOODS ACT 1979 Type
Why not sale?
Other relevant legislation
Barter or exchange
No money consideration
Sections 2–5A of the Supply of Goods and Services Act 1982
Services and work and materials contracts
Substance of contract, not the passing of property in goods
Sections 2–5A and 12–16 of the Supply of Goods and Services Act 1982
Hire purchase
No commitment by hirer to accept transfer of property in goods
Sections 8–11A of the Supply of Goods (Implied Terms) Act 1973; Consumer Credit Act 1974
Hire
No provision for transfer of property in goods
Sections 6–11 of the Supply of Goods and Services Act 1982
Sale of land
Land is not within the definition of goods
See Modern Land Law, 6th edn, 2008, by Martin Dixon
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DEFINITION OF CONTRACT OF SALE OF GOODS
You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Definition of contract of sale of goods why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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2 Passing of property and risk
The distinction between specific and unascertained goods How does property pass for specific goods (s 18 r 1–4)? Property cannot pass in unascertained goods (s 16) How may generic goods become ascertained (s 18 r 5)? Problems and solutions when buyer has paid for bulk generic goods (ss 20A–B) How risk passes (s 20) The effect of a retention of title clause
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I I I I I I I
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PASSING OF PROPERTY AND RISK
CLASSIFICATION OF THE CONTRACT Any contract for the sale of goods will concern one of three types of goods
SPECIFIC GOODS These are goods identified and agreed upon at the time the contract is made (s 61). Thus, the goods are specific goods only if it is possible, at the time the contract is made, to identify the particular goods which are being sold (Kursell v Timber Operators [1927]). Property in specific goods passes when the parties intended it to. Failing a clear indication (either by words or conduct) by the parties as to when they intend property to pass, the following rules (from s 18) will be applied by the court to decide who owns the property.
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Section 18, rule number
Applicable circumstances
Time when property passes
1
Unconditional contract for sale of goods in deliverable state
On the making of the contract
2
Seller is bound to do something to the goods to put them into deliverable state
When the thing is done and the buyer has notice that it has been done
3
Sale of goods in a deliverable state and the seller is bound to weigh, measure, test or do something else in order to ascertain the price
When the thing is done and the buyer has notice that it has been done
4
Goods are delivered on approval or sale or return or other similar terms
When buyer signifies approval or acceptance or otherwise adopts the transaction or retains the goods beyond the fixed time for their return or, if there was no fixed time, beyond a reasonable time
◗ KURSELL v TIMBER OPERATORS [1927] Basic facts The contract sold mature timber to be cut from a Latvian forest over fifteen years. Shortly afterwards the Latvian Government nationalised the forest, making performance of the contract impossible. Seller argued that property passed to Buyer when the contract was signed. The court did not agree: the timber was not ‘specific goods’ thus no property could pass to the buyer, the contract was frustrated and the price could not be claimed. Relevance The timber was not specific or ascertained until it was a) selected and b) cut: property could not pass when the contract was signed.
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PASSING OF PROPERTY AND RISK
PURELY GENERIC UNASCERTAINED GOODS These are goods which are not within the definition of specific goods and which are not sold as an identified quantity out of a specific bulk. No property can pass in them until they have become ascertained, i.e. identified. Thus the buyer may have paid the price for the unascertained goods but have no property in those goods. If the seller becomes insolvent before the goods are ascertained, the buyer will be an unsecured creditor, have no claim on the goods, and be likely to recover little or none of his payment (Re Wait [1927]). Once the goods have become ascertained, property passes when the parties intend it to pass (s 17). Failing either a clear expression by the parties as to when they intend property to pass, or other evidence of such an intention, the following ‘default’ rules (from s 18) will be applied by the court. These sections form a hierarchy. Section 16 must be considered first, then s 17, then (assuming there to be no evidence of the intention of the parties) s 18.
Section 18, rule number
Requirements for property to pass
5(1)
1 Goods of the contract description and in a deliverable state are unconditionally appropriated to the contract by one party; and 2 the other party assents, expressly or impliedly, to that appropriation either before or after it is made
5(2)
1 In pursuance of the contract, the seller, without reserving the right of disposal, delivers the goods to the buyer or to a carrier for the purpose of transmission to the buyer; and 2 the buyer assents, expressly or impliedly, to that appropriation either before or after it is made
Unconditional appropriation of the goods is said to occur when one party, usually the seller, does more than merely set aside the goods intended for use to fulfil the contract, but attaches the goods irrevocably to the contract (Federspiel v Twigg [1957]). Handing them over (without reserving a right of disposal) to an independent carrier to transport them to the buyer is thus usually a very clear unconditional appropriation (s 18, r 5(2)). It will not be an unconditional appropriation, however, if the goods destined for the buyer remain unascertained, for example, if some of the goods handed over to the 8
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CLASSIFICATION OF THE CONTRACT
carrier are to be delivered to one buyer and some to another, leaving it to the carrier to decide which are to be delivered to which buyer (Healey v Howlett [1917]).
◗ HEALEY v HOWLETT [1917] Basic facts Seller loaded 190 boxes of fish onto a railway carriage. Buyer was to have 20 of theses boxes. There was no separation of the 20 boxes from the 190 boxes. The fish went off. Had the property and risk passed from the seller to the buyer? The court held that as the 20 boxes were not separated or otherwise distinguished from the other 170 boxes no property or risk had passed from the seller to the buyer. Relevance Despite being handed to a carrier, the failure to separate the goods caused them to remain unascertained
SPECIFIED QUANTITY OUT OF IDENTIFIED BULK A buyer cannot become the owner of any particular goods to be taken from a bulk until the particular goods have become ascertained: until ascertained the goods are purely generic and s 16 will not allow property in such goods to pass (see above). As this legal position was out of step with commercial expectations, particularly in relation to sales of commodities such as oil, Parliament inserted two new sections into the Sale of Goods Act 1979, s 20A and s 20B. These sections do not change the requirement that property must be ascertained before it can pass, but do offer a purchaser who has paid for a specific unit quantity of otherwise unascertained goods some protection against the consequences of the seller becoming insolvent before the property is ascertained. Under s 20A it is possible for the buyer to obtain a share in the ownership of the bulk. He or she becomes, along with the owner and any other qualifying buyers, a tenant in common of an undivided share of the bulk. This occurs only if the purchase is from a bulk source, is expressed in units of quantity (thus a fraction of the bulk such as ‘one half’ will not do), and only when the buyer pays the price, or part of it. The buyer’s share is ‘such share as 9
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PASSING OF PROPERTY AND RISK
the quantity of goods paid for and due to the buyer out of the bulk bears to the quantity of goods in the bulk at that time’. Of course, if the bulk becomes reduced to (or to less than) the quantity of goods the buyer contracted to buy, then, unless some other buyer also has an interest in the bulk, the whole of the bulk will belong to the buyer. It will be ascertained and appropriated by exhaustion independently of s 20A and s 20B. In that case, the buyer will cease to have merely an undivided share in the bulk but will now be complete owner of the now identified remainder of the bulk (s 18, r 5(3)). It should not be assumed that s 20A and s 20B have solved the problem of the insolvency of the paid seller before the property has passed to the buyer. There are still many cases to which the rules in s 20A and B cannot be applied (Re Goldcorp Exchange Ltd [1995]).
◗ RE GOLDCORP EXCHANGE LTD [1995] Basic facts The Company offered a chance to invest in gold bullion which it would hold. In return it would issue a certificate stating how much gold was ‘owned’ by the customer: it would supply this gold, if specifically required, within 7 days. The Company became insolvent. Investors tried to claim gold they had paid for. The court held that only those who had required the company to supply gold could successfully claim ownership. Others had only a right to sue the insolvent company for breach of contract. Relevance Property in unascertained goods cannot pass.
WORKED EXAMPLES OF s 20A AND B Suppose that buyer A has agreed to buy 600 of the 1,000 widgets stored in a particular warehouse at an agreed price of £2 per widget. The following table of examples indicates the extent of buyer A’s proprietary interest in the goods.
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Example Amount Quantity of number paid by widgets buyer A paid for by buyer A
Quantity of widgets sold by the seller (of the 1,000 bulk) and delivered to other buyers
Extent of buyer A’s interest in the bulk
1
£600
300
0
30%
2
£1,200
600
0
60%
3
£1,200
600
200
75%
4
£1,200
600
400
100%
5
£1,200
600
600
100%
Note that, in example 3, the bulk has been reduced by 200 widgets so that buyer A has an interest amounting to 600 out of 800, that is, 75%. Similarly, in example 4, the bulk has been reduced to 600 so that buyer A has an interest amounting to 600 out of 600, that is, 100%. Assuming that there is no other buyer to whom goods are due out of the bulk, then, as soon as the bulk was reduced to 600, buyer A became the outright owner of the whole of the bulk. Example 5 deals with a situation where, before delivery of any of the goods to buyer A, the seller has sold and delivered 600 widgets (that is, 200 more than there should have been) to another buyer or buyers. This has reduced the bulk to 400 widgets. Clearly, buyer A is now the complete owner of 100% of that reduced bulk. None of the goods which have been sold and delivered to the other buyers can be claimed, since, provided each was bona fide and unaware of buyer A’s interest in the bulk, they will have obtained good title because buyer A is deemed to consent to a delivery of goods to another co-owner (s 20B). Buyer A does, however, have a claim against the seller for breach of contract, because the seller cannot now comply with the contract by which he undertook to supply buyer A with 600 widgets out of that specified stock. For the buyer’s rights when the wrong quantity is delivered, see p 83, below.
PASSING OF RISK (a) Where delivery of the goods is delayed through the fault of either party, then any loss of the goods or damage to them, which might not have occurred but for such fault, falls on the party at fault (s 20(2)) (Demby Hamilton Ltd v Barden [1949]). 11
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(b) Where either of the parties is negligent as a bailee of the goods, then any loss occasioned by that negligence falls upon that party (s 20(3)) (Wiehe v Dennis Bros [1913]). (c) The parties may agree upon when the risk passes from the seller to the buyer (s 20(1)). (d) Unless otherwise agreed, risk passes to the buyer when property in the goods passes to the buyer (s 20(1)), except that different rules apply in the situation where the buyer has an undivided share in an identified bulk. But where the buyer deals as a consumer, the goods remain at the seller’s risk until they are delivered to the consumer. PASSING OF RISK – UNDIVIDED SHARE OF BULK Unless one of rules (a)–(c) above applies, the position is as follows. First, if the buyer has not paid any of the price, the buyer has no property rights in the bulk and risk remains with the seller. If the buyer has paid some or all of the price, the buyer will have an undivided share in the bulk. In that situation, any accidental loss or damage is regarded as falling first on the share of the bulk which had been retained by the seller (s 20A(3)). Suppose the bulk consists of 1,000 widgets and suppose that the seller has agreed to sell, out of that bulk, 200 to X and 300 to Y. Suppose also that X and Y have each paid the agreed price in full and neither has taken delivery. The following table illustrates the outcome of different scenarios. Example number
Number of widgets destroyed/damaged/lost
Incident
Outcome
1
500
Some of bulk are stolen
Seller bears all the loss
2
600
Some of bulk are stolen
Seller bears loss of 500, X bears loss of 40 and Y bears loss of 60
3
1,000
Accidental fire. No widgets burnt. All equally damaged by smoke
Seller bears half the loss. X bears one-fifth and Y bears threetenths of the loss
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RETENTION OF TITLE CLAUSES A retention of title clause is used to protect the seller in the situation where the goods have been delivered to the buyer and the buyer becomes insolvent without having paid in full. Otherwise the seller will, as an unsecured creditor, have no claim against the goods supplied and will have to rely upon a claim in debt against an insolvent buyer. It is designed to enable the seller to assert a right to the goods in priority to other creditors of the insolvent buyer. Otherwise the goods supplied will be applied to try to discharge the buyer’s insolvency. At its simplest, the clause will provide that the property in the goods will not pass to the seller until the seller has paid the price. The risk from the seller’s point of view is that the buyer might, before becoming insolvent, have done one, or more, of the following: I paid the seller the price of the goods but not paid the seller other debts owed by the buyer to the seller under other contracts; I used the goods in a manufacturing process; I sold the goods. Thus, the retention of title clause may seek to cover these eventualities. ALL LIABILITIES CLAUSES The first eventuality just mentioned can effectively be covered by an all liabilities (sometimes called ‘all monies clauses’) retention of title clause, which provides that the property in the goods supplied under the contract will not pass to the buyer until the buyer has paid in full the price payable under this contract and all other debts owing by the buyer to the seller (Armour v Thyssen [1990]). MANUFACTURED GOODS Attempts have been made to enable a clause to cover the second eventuality by providing that, when the goods are incorporated via a manufacturing process into another new product, the seller becomes owner of the new product. Such attempts do not work, because the seller is no longer retaining title to the goods sold by the seller but is claiming title over some new goods produced by the buyer. Such a clause creates a charge, in favour of the seller, over the new product which is property of the buyer. That being so, the charge is void unless 13
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registered as a charge (s 395 of the Companies Act 1985) or s 860 of the Companies Act 2006. Also, the seller usually cannot claim title to the goods originally supplied because they will have lost their identity, as in Re Peachdart [1983], where leather had been sold which the buyer had then manufactured into handbags. If, however, the goods originally supplied have not lost their identity, and can be easily detached from other goods, then the seller can claim them under a retention of title clause (Hendy Lennox v Grahame Puttick [1984]).
◗ HENDY LENNOX v GRAHAME PUTTICK [1984] Basic facts Diesel engines were supplied, subject to a Romalpa clause, then fitted to generators. Each engine had a serial number. When the buyer became insolvent the seller sought to recover one engine. The Receiver argued that the process of fitting the engine to the generator passed property to the buyer. The court disagreed and allowed the seller to recover the still identifiable engine despite the fact that some hours of work would be required to disconnect it. Relevance If the property remains identifiable and is not irredeemably changed by the manufacturing process a Romalpa clause may be viable.
PROCEEDS OF SALE Usually, a retention of title clause will contemplate and authorise the buyer to resell the goods and pass on good title to the new buyer. Thus, the original seller will at that point lose the title to them (s 25). The retention of title clause may provide that, in that case, the original seller will have a proprietary interest in the proceeds of sale received by the buyer. Such a clause has been held to work in only one case: Aluminium Industrie Vaasen v Romalpa Aluminium Ltd [1976]. However, unless the clause gives the seller complete rights over the proceeds and does not limit them to the amount of the debt owing by the buyer to the seller, it is likely to be regarded as a charge over the buyer’s property and will thus be void unless registered (Pfeiffer GmbH v Arbuthnot Factors [1988]). 14
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◗ ALUMINIUM INDUSTRIE VASSEN v ROMALPA ALUMINIUM LTD [1976] Basic facts AIV (a Dutch company) supplied foil to Romalpa subject to a retention of title clause which covered foil supplied and goods later made from this foil. Romalpa became insolvent shortly after selling some foil to a third party. The proceeds of this sub-sale were received by the Receiver. AIV claimed return of remaining supplied foil and the proceeds of the sub-sale. The court agreed with AIV on both claims. Relevance Romalpa greatly encouraged the use of retention of title clauses by sellers. Subsequently there has been much litigation concerning the effectiveness or otherwise of such clauses (which often fail).
SIMPLE RETENTION OF TITLE CLAUSE – EXAMPLES The following examples illustrate the operation of a valid simple retention of title clause in relation to goods which have been supplied by the seller and not Example Amount of number price paid by buyer £
Value of goods as realised on resale by seller £
Amount (if any) of refund due to buyer £
Amount (if any) of price still to be paid by buyer £
1
10,000
0
0
0
2
0
10,000
0
0
3
0
8,000
0
2,000
4
1,000
8,000
0
1,000
5
0
12,000
0
0
6
2,000
12,000
2,000
0
7
1,000
12,000
1,000
0
8
3,000
12,000
3,000
0
9
2,000
9,000
1,000
0
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sold or used up by the buyer in a manufacturing process or in any other way. The examples all assume that the clause is not an ‘all liabilities’ clause and that the buyer has agreed to pay £10,000 for the goods. They assume that, on the buyer’s insolvency and liquidation or bankruptcy, the seller is entitled to the goods unless the price has already been paid in full. They are based on the approach set out in Clough Mill v Martin [1985]. In example 1, the seller would not be entitled to retake the goods, since property will have passed to the buyer on the buyer paying the price in full. The other examples illustrate the following principles: (a) Out of the proceeds of resale by the seller, the seller must reimburse the buyer the amount of any part payment already made. (b) Before making that reimbursement, the seller is entitled to deduct any loss he has made on the resale. (c) Subject to (a) above, the seller is entitled to keep any profit made on the resale, because he resells as owner. (d) If any part payment and the proceeds of resale are together less than the original purchase price agreed by the buyer, the buyer is liable to the seller for the shortfall (in example 4, £1,000) – though the seller will be an unsecured creditor as to this shortfall.
You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Passing of property and risk why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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3 Void and frustrated sale of goods contracts The distinction between Mistake and Frustration The meaning of ‘perish’ under the Act Mistake concerning specific goods (s 6) Frustration concerning specific goods (s 7) The residual role of the common law
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The ordinary contract rules relating to mistake and frustration apply to sale of goods contracts. There are, however, specific provisions in ss 6 and 7 of the Sale of Goods Act 1979 about the perishing of specific goods (Couturier v Hastie [1856]).
◗ COUTURIER v HASTIE [1856] Basic facts In February, Couturier shipped grain by sea to London. The grain began to overheat and was sold by the ship’s captain in Tunis in April. This was unknown to Couturier’s London agent, Hastie, who, in May ‘sold’ the cargo to Callender. When the truth emerged Callender refused to pay. Couturier sued Hastie arguing that under their Agency agreement he was responsible for the debt. The court disagreed. Relevance If, unknown to the parties, there is actually no subject matter because it has perished prior to the contract, there can be no contract. This case inspired s 6.
EVENTS BEFORE THE CONTRACT IS MADE: s 6 MISTAKE In the case of a contract for the sale of specific goods, if the goods have, unknown to the seller, perished before the contract is made, the contract is void (s 6). This is no more than what the rule would be at common law. Because the contract is concerned with the sale of something which, unknown to the parties, does not exist, it is a contract about nothing. The rule applies equally (unless the contract is severable) even if only some of the goods have perished – see Barrow Lane and Ballard v Phillips [1929] – where some of the goods had apparently already been stolen before the contract was made. The rule does not apply, however, if the contract was for the sale, not of specific goods (for example, ‘the seller’s current stock of 100 tons of hazelnuts’), but only of purely generic unascertained goods (for example, ‘100 tons of hazelnuts’). If the contract was for the sale of unascertained goods out of an 18
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identified bulk, then s 6 would not apply, but the contract would nevertheless be void at common law if the identified bulk had, unknown to the seller, ceased to exist at the time the contract was made.
◗ BARROW LANE AND BALLARD v PHILLIPS [1929] Basic facts Phillips sold a Parcel – being 700 bags – of nuts to Ballard. Unknown to either party before the contract was made 109 bags from the Parcel had been stolen from the depot. 150 bags were delivered to Ballard by Phillips before the remaining bags were also stolen. Phillips claimed the entire price from Ballard. The court held the contract void under s 6 as the goods had ‘perished’ and the contract was for a specific Parcel of goods. Relevance ‘Perish’, a term undefined by the Act, is interpreted broadly. If even part of specific goods ‘perish’, s 6 may apply.
EVENTS AFTER THE CONTRACT IS MADE: s 7 FRUSTRATION In the case of a contract for the sale of specific goods, where, without the fault of the buyer or the seller, the goods perish after the contract is made and before the risk has passed to the buyer, the contract is avoided (s 7). This mirrors the common law rule that the contract becomes frustrated when, after it is made and through the fault of neither party, it becomes impossible or illegal to perform. Thus, a contract for the sale of unascertained goods from an identified source (for example, ‘10 tons of wheat to be grown on Blackacre’) will be frustrated at common law if, contrary to expectations and through the fault of neither party, Blackacre suffers an unforeseeable blight and produces no crop (Howell v Coupland [1876]). If it produces a smaller crop but still enough to enable the seller to supply the contract quantity, the contract will not be frustrated. If it produces a smaller crop so that the seller can supply some but not all of the contract quantity, the seller should offer the buyer the option of either taking the lesser quantity at the contract rate or of not taking any (Sainsbury v Street [1972]).
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◗ SAINSBURY v STREET [1972] Basic facts The seller agreed to sell 275 tons of barley to be grown on his farm. Only 140 tons were harvested: these were sold to another person. The original buyer sued the seller for non-delivery of the 140 tons. The seller argued that s 7 applied and discharged his original obligations. The court disagreed: s 7 could not apply, the goods were not ‘specific’. The seller was held to have breached the contract by not delivering the goods that were produced. Relevance When ss 6–7 cannot apply, either the common law or the presumed intention of the parties will be decisive. The doctrine of frustration can apply where the contract is for the sale of a specified quantity from an identified bulk, for example, if the identified bulk perishes after the contract is made. If, however, the buyer has paid the price and thus obtained an undivided share in the bulk, then the risk may already have passed to him according to the principles already outlined (see above). In that case, those principles apply and the contract is not frustrated. Even if the buyer has not paid the price, in the case of unascertained goods from an identified bulk, the contract will in any event not be frustrated if the quantity of goods which perish is such that the seller is still able to fulfil the contract from the bulk. The Law Reform (Frustrated Contracts) Act 1943 applies to contracts frustrated at common law but not to contracts avoided by s 7 of the Sale of Goods Act 1979. In the latter case, the buyer is entitled to recover any of the price already paid, provided that they have suffered a total failure of consideration, but they do not have to make any payment for expenses incurred by the seller in performing the contract. In the former case, the buyer is entitled to his money back, irrespective of whether there has been a total failure of consideration, but may be required to compensate the seller for any use the buyer has had of the goods, or for expenses incurred by the seller in performing the contract.
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Effect of goods perishing
Goods perish before contract is made
Goods perish after contract is made
1 Contract for sale of specific goods
Contract may be void by s6
Contract may be avoided by s 7
2 Contract for sale of unascertained goods from identified source
Contract may be void at common law
Contract may be frustrated at common law
3 Contract for sale of purely generic unascertained goods
Contract is neither void nor frustrated
Contract is neither void nor frustrated
You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Void and frustrated sale of goods contracts why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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4 Seller is not the owner
The nemo dat rule and its exceptions When will an estoppel arise? When may a Mercantile Agent confer good title? When may a seller with a voidable title confer good title? When may a seller in possession confer good title? When may a buyer in possession confer good title? What if an HP purchaser sells a motor vehicle?
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GENERAL RULE Someone who does not have title to the goods, or is not authorised by the owner to sell them, cannot pass on good title to them. Nemo dat quod non habet – no one can give something he has not got.
EXCEPTIONS TO NEMO DAT When one of the following exceptions applies, someone without title or without authority to do so can confer good title.
Estoppel The true/original owner may be estopped (that is, stopped) from asserting that good title has not been passed on if the following requirements are all satisfied: I The true owner represented that the seller was the owner or had the owner’s authority to sell. (Note that merely letting someone have possession of your goods does not amount to such a representation. That is still 24
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the case, even if it is a motor vehicle and you leave him in possession of its registration book as well – Central Newbury Car Auctions v Unity Finance [1957].) I The true owner’s representation was made negligently or intentionally. I The innocent purchaser relied on the representation and bought (not merely agreed to buy) the goods.
◗ CENTRAL NEWBURY CAR AUCTIONS v UNITY FINANCE [1957] Basic facts A rogue tricked a dealer into parting with a car and registration document on HP. The rogue then pretended to be the person named as the owner of the car on the registration document and sold it to another dealer, who sold it to Unity Finance. When the original dealer sought its return the question arose, ‘Was the original dealer estopped from denying the rogue’s right to sell because it let him have both car and registration document’? The court said ‘No’. Relevance Simple possession of property and title documents is not a representation leading to an Estoppel.
Mercantile agent A mercantile agent is an ‘agent having in the customary course of his business as such agent authority either to sell goods or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods’ (s 1(1) of the Factors Act 1889; see now s 26 of the Sale of Goods Act 1979). In addition, in order to be a mercantile agent, the person must be: I independent from the person for whom he or she is agent; I acting as agent by way of business; and I authorised to deal with goods in his or her own name without disclosing the agency. 25
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Before a mercantile agent can pass on good title to someone else’s goods (under s 2 of the Factors Act 1889), the following requirements must all be satisfied: I the mercantile agent must be in possession of the goods (or documents of title); I he must have that possession in his capacity as mercantile agent; I he must have that possession with the consent of the owner; I in selling the goods, he must have been acting in the normal course of business of a mercantile agent; and I the purchaser must buy them in good faith, without knowledge of the agent’s lack of authority. A car dealer who has possession of a car for the purpose of repair or servicing would not be in possession in his capacity as mercantile agent. He would be, however, if he had possession for the purpose of seeing what offers he could secure from potential buyers of the car. Note that, in the case of a motor vehicle, the agent must be in possession not only of the vehicle but also of the registration document; the possession of these items must be with the consent of the owner (Pearson v Rose and Young [1951]). Apparently, the same requirement extends also to the possession of the ignition key (Stadium Finance v Robbins [1962]]. The requirement is that the mercantile agent is in possession ‘with the consent of the owner’. This requirement is not satisfied where the mercantile agent obtains possession by means of a trick without the owner’s consent. It would, however, be satisfied where the consent of the owner was secured by a deception or fraud. Seller with voidable title – s 23 of the Sale of Goods Act 1979 A number of cases learnt in the law of contract illustrate situations where a buyer (usually a rogue) has bought goods under a voidable contract, for example, Phillips v Brooks [1919] and Lewis v Averay [1971]. The contract is voidable, usually, because of the fraud of the buyer. The buyer can nevertheless pass on good title provided: I the contract has not been avoided at the time the goods are resold; and 26
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I they are sold to someone who takes in good faith and without notice of his defect in title.
◗ LEWIS v AVERAY [1971] Basic facts A rogue pretended to be a well known actor and thereby induced Lewis to allow him to take possession of his car in exchange for a worthless cheque. The rogue sold to Averay, who bought in good faith. Lewis claimed the contract with the rogue was void for mistake. The court disagreed, finding the contract voidable for misrepresentation. As Lewis had not acted to avoid the contract, Averay got a good title. Relevance As in Phillips v Brooks [1919] the ‘mistake’ made by the owner was not as to the identity of the rogue but merely as to his creditworthiness. This does not apply to the situation where the rogue has acquired the goods under a contract which is void for mistake (Cundy v Lindsay [1878]). Even where the contract is voidable, the rule does not apply once the contract has been ‘avoided’. It will be avoided once the original seller (that is, the person who sold the goods to the rogue) has shown a definite intention to avoid the contract; he will normally be regarded as doing that when he informs the police (Car and Universal Finance v Caldwell [1965]). Where, after the original seller has done that, the rogue subsequently sells the item to an innocent purchaser, the latter will not get good title by virtue of s 23. The innocent purchaser, may however, get a good title under s 25, which deals with the situation where goods are sold by a ‘buyer in possession’ (see below).
◗ CUNDY v LINDSAY [1878] Basic facts A rogue set up premises in the same street as an established reputable trader. He ordered goods on credit by post and under a name designedly similar to that of the reputable trader. The rogue 27
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purported to sell the goods to an innocent party. The owner of the goods sought recovery from the innocent party arguing that the contract with the rogue was void for mistake at common law. The court agreed, the contract was void for mistake. Relevance The evidence showed that the supplier was genuinely confused and believed itself to be contracting with the reputable trader.
Seller in possession – s 24 of the Sale of Goods Act 1979 A buyer, especially a buyer who has paid for the goods, takes a risk if the goods are left with the seller. The risk is that the seller will sell the goods to another buyer. The first buyer may well find that ‘his’ title is lost to the second buyer.
In this example, B1 has bought from S and obtained good title. Nevertheless, S may well have later passed good title to B2, thereby depriving B1 of his title. A seller will pass on good title under s 24 if the following requirements are satisfied: I the seller, having sold to the first buyer, continues or is in possession of the goods (or documents of title); I the seller makes an agreement to sell, pledge or otherwise dispose of the goods or actually sells, etc, the goods; I the seller delivers the goods to B2 under this latter transaction; and I the person taking the goods (B2) under this transaction receives the goods in good faith and without notice of the previous sale. 28
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If these requirements are satisfied, B2 gets a title as good as that of the seller. The original buyer loses the title which had passed to him. The original buyer can sue the seller for breach of contract. Buyer in possession – s 25 of the Sale of Goods Act 1979 A seller who agrees to sell goods and parts with them to the buyer without first getting paid takes a risk. The risk is that the buyer will dispose of them without having paid the seller. Even if property (that is, title) has not passed from the seller to the buyer, the buyer is able to pass on good title by virtue of s 25 (also s 9 of the Factors Act 1889). The seller will be able to sue the buyer for the price, but will be unable to recover the goods (see Retention of Title clauses above).
In this example, M is a buyer in possession and, if the requirements of the section are met, will pass on good title to N, thereby depriving L of the title. The buyer will pass on good title provided the following requirements are satisfied: I the buyer is a ‘buyer in possession’ of the goods (or documents of title). A buyer is someone who has bought or agreed to buy. Someone who has 29
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obtained the goods under a hire purchase agreement is not a ‘buyer’ (Helby v Matthews [1895]), nor is someone who has obtained the goods under a conditional sale agreement which is a regulated agreement within the meaning of the Consumer Credit Act 1974 (s 25(2) of the Sale of Goods Act 1979); I the buyer obtained possession of the goods (or documents of title) with the consent of the seller; I the buyer makes a transaction actually selling, pledging or otherwise disposing of the goods. In Re Highway Foods International Ltd [1995] it was held that no title will be passed if the buyer in possession merely agrees to sell the goods to the second buyer; I the buyer delivers the goods (or documents of title) under that transaction; I the person taking them receives them in good faith without notice of the rights of the original seller; and I (possibly) the buyer in possession, in disposing of the goods, acted in the way he would have acted if he was a mercantile agent selling in the ordinary course of business (Newtons of Wembley v Williams [1965]). The title conferred by this provision is a title only as good as that of the seller who entrusted possession of the goods to the ‘buyer in possession’ (National Mutual General Insurance Association v Jones [1990]). In the example below, K steals the item from J and sells it to L. L agrees to sell it
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to M subject to a term that property is not to pass to M until M has paid L the price. Before paying the price, M sells and delivers the car to N, an innocent purchaser. By pointing to the fact that he bought from a buyer in possession, N cannot defeat the rights of J. MOTOR VEHICLE SOLD BY HIRE PURCHASER Someone who has goods under a hire purchase agreement or a conditional sale agreement will not normally have good title until his payments have been completed under the agreement. He thus has no title to pass on. However, Pt III of the Hire Purchase Act 1964 has made an exception to nemo dat. Thus, in the case of a motor vehicle, the hire purchase (or conditional sale) customer can pass on good title to a private purchaser, even though it is not his to pass on. The following requirements must be satisfied for this to happen: I the person selling must be someone who has the vehicle under a hire purchase or conditional sale agreement (it makes no difference whether or not the agreement is one which is regulated by the Consumer Credit Act 1974); I the goods must be a motor vehicle; I the purchaser must be a ‘private’ purchaser, not a trader (or finance house) currently carrying on business in the motor trade, or intending to do so in the future (though presently a ‘private’ purchaser) GE Capital Bank Ltd v Rushton [2006]; I the private purchaser must be bona fide and unaware of any relevant hire purchase or conditional sale agreement; and I the transaction by which the private purchaser acquires the vehicle must be a contract of sale or of hire purchase. If the hire purchaser sells the car to a trade (not a private) purchaser, then the first private purchaser thereafter can obtain good title. In the example overleaf, O has sold the car to P, a finance company which has supplied the car on hire purchase terms to Q. Q, before completing his hire purchase payments, has sold the car to R who has in turn sold it to S. Until R sold the car to S, it belonged to P. However, S gets P’s title because S is the first private purchaser and buys in good faith. 31
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The private purchaser will, however, secure only as good a title as that possessed by whomsoever supplied the vehicle to the hire purchase customer under the hire purchase agreement. The example below is the same as the last except that, before O, we now know
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that O bought the car from N who had stolen it from M. That being so, O and, therefore, P never had good title to the car. Under the Hire Purchase Act 1964, S can get a title only as good as P’s. Thus, M retains the title to the car.
You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Seller is not the owner why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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5 Contract terms as to title
What does s 12 mean to buyer and seller? What implied conditions and warranties does s 12 imply? Can a defective title later be cured? Can you exclude s 12 by an express contract term?
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IMPLIED CONDITION AS TO TITLE – s 12 OF THE SALE OF GOODS ACT 1979 It is an implied condition of a contract of sale of goods that the seller has the right to sell the goods. If he does not, the buyer has the right to reject the goods, recover the purchase price, and damages for losses arising from the breach of the implied term. He is entitled to do this even if he has had possession and substantially enjoyed the use of the goods before discovering that the seller had no title to sell (Rowland v Divall [1923]).
◗ ROWLAND v DIVALL [1923] Basic facts Claimant motor dealer bought a car from the defendant motor dealer. Unknown to either the car was stolen. Claimant sold to a third party. After 2 months of use the Police recovered the car from the third party who was refunded by Claimant. Claimant then sued Defendant for the price he paid arguing total failure of consideration arising from the breach of s 12 of Act. The court agreed that all of the purchase price should be returned and made no allowance for the months of use. Relevance s 12 strictly requires the seller to have the right to sell.
FEEDING THE TITLE It may happen that the seller does not have title at the time the goods are sold and delivered, but that title is acquired at some later stage.
In the above example, P, who has not completed the hire purchase payments to O, sells the goods to Q who then sells them to R. P is liable to Q for breach of the implied condition as to title. Equally, Q is liable to R for the same reason. If, at some later stage, P completes the hire purchase payments to O, P will acquire good title which will immediately be ‘fed’ down the line of purchasers to R 36
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(Butterworth v Kingsway Motors [1954]). Until that happens, R is entitled to reject the goods and reclaim the purchase price from Q. If the goods have not already been rejected, then, after the title has been fed, R loses the right to reject the goods but may claim damages. The damages will be the difference between the value of the goods when he should have got good title (when he bought them) and when he actually got title (when it was fed). Of course, if R rejected the car (before the last HP payment was made and the title was thus fed (as happened in Butterworth) then Q could, if he acted quickly enough to beat the final HP payment, have also rejected the car and reclaimed the purchase price from P. It may be that the goods were a motor vehicle and that Q was an innocent private purchaser. In that case, Q will have obtained good title when the car was purchased from P (that is, by virtue of Pt III of the Hire Purchase Act 1964). In that case, Q would not be liable to R for breach of the implied condition as to title. Nevertheless, Q could still have a claim against P for breach of other terms as to title (Barber v NWS Bank [1996]). Alternatively, it could happen that Q was a trade purchaser and that R was an innocent private purchaser. In that case, R would have obtained good title when the car was bought (by virtue of the Hire Purchase Act 1964). Again, however, that would not affect his right to reject the car and recover the price or to claim damages from Q.
◗ BARBER v NWS BANK [1996] Basic facts Claimant took car on a conditional sale agreement from Defendant bank. Unknown to either, the car was subject to an earlier HP agreement: Claimant discovered this after 18 months and wished to reject and reclaim payments. No breach of s 12 here as the property was stated to remain with the seller until payment of the last instalment. However this term was treated as an express condition that the seller had the property. Because of the HP agreement this was untrue: the Claimant was allowed to reject and recover all payments Relevance Claimant chose to reject, rather than keep the car.
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IMPLIED WARRANTIES – s 12 OF THE SALE OF GOODS ACT 1979 There are also two implied warranties in s 12 that: I the goods are free from encumbrances not disclosed or known to the buyer before the contract is made; and I the buyer will enjoy quiet possession of the goods, apart from disturbance by virtue of any charge or encumbrance disclosed or known to the buyer when the contract was made. If one of these terms is broken, the buyer may not reject the goods but may sue for damages. They could be broken if, for example, the labelling of the goods infringed a trade mark (Niblett v Confectioners’ Materials [1921]) or if the use of the goods would infringe someone’s patent. This is the case even if the patent was taken out after the goods were sold (Microbeads v Vinhurst Road Markings [1975]).
EXCLUSION OF TERMS IN s 12 OF THE SALE OF GOODS ACT 1979 It is, in principle, not possible to exclude the provisions of s 12. Any exclusion is rendered ineffective by the Unfair Contract Terms Act 1977. However, s 12 itself permits a situation where the parties intend that the seller should transfer only such title as he has (see s 12(3)). This allows a seller, who has reason to doubt whether his title is good, to sell the goods. He will not be in breach of any of the terms of s 12 provided he discloses all charges and encumbrances known to him and, presumably, discloses his reasons for doubting that he has good title. This could arise, for example, if the claim to the goods is only by virtue of having found them.
OTHER TYPES OF CONTRACT The implied terms explained above, in contracts of sale of goods, have their counterparts in other types of contract, such as contracts of hire purchase, barter, hire, etc. For the relevant legislation, see the table on p 2.
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You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Contract terms as to title why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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6 Misrepresentation
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What is a misrepresentation? What types of misrepresentation exist and what remedies are available? What forms may Rescission take and when is it available? When are Damages available and on what basis are they calculated? Why is it rare in commercial law to use the tort of Negligent Misstatement? Can you exclude liability for Misrepresentation?
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An actionable misrepresentation is an untrue statement of fact made by one party (usually the seller) to the other party (usually the buyer) before the contract is made, which is one of the reasons the other party enters the contract. (It will be assumed in the text from now on that it is the seller who has made the misrepresentation to the buyer.)
TYPES OF MISREPRESENTATION
REMEDIES FOR MISREPRESENTATION
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Rescission The right to rescission of the contract exists independently of any statute. There are particular reasons to refuse rescission which are known as ‘bars to rescission’. If any bar is present it will prevent rescission from being an available remedy for misrepresentation. The three most significant bars are: (a) where restitution is impossible, for example, because the buyer has consumed the goods; (b) because the buyer has delayed for more than a reasonable length of time before attempting to rescind the contract; and (c) because a third party acting in good faith has already bought the goods (see s 23 of the Sale of Goods Act 1979, on p 24). In the case of a fraudulent misrepresentation (a common law remedy), the reasonable length of time does not start until the buyer has become aware of the misrepresentation. In the case, however, of other forms of misrepresentation rescission is an equitable remedy whether innocent or negligent under s 2(1)), thus time begins to run when the contract is made (Leaf v International Picture Galleries [1950]). By virtue of s 2(2) of the Misrepresentation Act 1967, the court has the discretion to refuse to grant rescission and to award damages instead. Section 2(2) does not apply where the misrepresentation was made fraudulently. Neither may s 2(2) be used if there are any existing equitable bars to the grant of rescission.
◗ LEAF v INTERNATIONAL PICTURE GALLERIES [1950] Basic facts Leaf bought a picture from the Gallery on the basis that it was by John Constable. Five years later it was exposed as a forgery. Leaf swiftly sought Rescission in Equity arguing that he had been the victim of an innocent misrepresentation. The court decided that time ran from the date of purchase – not discovery – and that accordingly he had delayed for too long: Rescission in Equity was barred. 43
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Relevance Had Leaf been able to prove fraudulent misrepresentation time would run from the discovery of the fraud: Rescission at common law would not be barred on these facts.
Damages In the case of a fraudulent misrepresentation, damages are recoverable for all damage directly flowing from the misrepresentation, irrespective of whether the damage was foreseeable (Smith New Court Securities v Scrimgeour Vickers (Asset Management) [1996]). In the case of a s 2(1) negligent misrepresentation, under the Misrepresentation Act 1967, damages are awarded on the same basis as are damages for a fraudulent misrepresentation (Royscot Trust v Rogerson [1991]). As mentioned above, the court may award damages under s 2(2) of the Misrepresentation Act 1967 (instead of ordering equitable rescission) when faced with s 2(1) negligent or purely innocent forms of misrepresentation. Apart from this possibility, there is no right to damages for a misrepresentation. However, the power of the court to award damages under s 2(1) survives even if the right to rescission has been lost, for example, by lapse of more than a reasonable length of time (Thomas Witter Ltd v TBP Industries Ltd [1996]). In practice many claims of misrepresentation will be framed under s 2(1) of the Misrepresentation Act 1967, under this Act the burden of proof is placed upon the defendant. Thus the defendant must show that the misrepresentation was not made negligently as he had ‘reasonable grounds to believe and did believe up to the time the contract was made the facts represented were true’ (s 2(1)). If the defendant cannot discharge this burden s 2(1) negligent misrepresentation is made out. If the defendant can discharge the burden of proof then the misrepresentation was purely innocent. In both cases the claimant has little to lose and much to gain by exploiting the statutory reversal of the burden of proof offered by s 2(1) of the Misrepresentation Act 1967. Even a claimant with an arguable case of fraudulent misrepresentation may prefer to proceed under s 2(1) so as to avoid the difficulty of having to prove the defendant to have been frudulent and to instead place the burden of proving the lack of negligence upon the defendant. As the damages available for fraudulent misrepresentation are 44
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the same as those available for s 2(1) negligent misrepresentation it is mainly the different rules concerning rescission at common law and in equity which will determine the issue.
◗ SMITH NEW COURT SECURITIES v SCRIMGEOUR VICKERS (Asset Management) [1996] Basic facts A fraudulent misrepresentation induced the claimant to buy shares. The value of the shares later fell sharply when unconnected fraud concerning the company was discovered. Could the claimant recover damages from the misrepresentor to compensate for losses to the value of the shares caused by the second fraud? Despite the unconnected nature of the second fraud the claimant was entitled to damages to compensate for this later loss. Relevance Damages for fraudulent misrepresentation need not be foreseeable as long as they are not too remote: later losses may be claimed if the misrepresentation locked the claimant into the transaction.
LIABILITY IN TORT FOR MISREPRESENTATION Where the buyer has a claim, as set out above, for a contractual misrepresentation, the buyer will have no reason to rely upon a claim in tort unless he wishes to proceed against someone other than the seller. This is because, in a claim for negligent misstatement in tort (under the principle in Hedley Byrne v Heller [1964]), the burden of proving negligence rests upon the claimant. EXCLUSION OF LIABILITY FOR MISREPRESENTATION Any clause excluding or limiting liability for misrepresentation is of no effect except to the extent it passes the requirement of reasonableness in the Unfair Contract Terms Act 1977 (s 3 of the Misrepresentation Act 1967). MISREPRESENTATION – RESCISSION AND REJECTION OF GOODS You are the buyer under a contract of sale of goods and you wish to know if you can rescind the contract and reject the goods because of a misrepresentation. Refer to the diagram on pp 46–47. 45
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Misrepresentation – rescission and rejection of goods
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You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Misrepresentation why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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7 Express and implied terms
What are the differences between conditions, warranties and innominate terms? What term is implied by s 13, when will it apply? What term is implied by s 14(2), when will it apply? What term is implied by s 14(3), when will it apply? What term is implied by s 15, when will it apply? When may goods be rejected by a consumer? When may goods be rejected by a commercial buyer? What tortious claims may be brought concerning a defective product? What terms are implied into consumer and commercial transactions by other statutes?
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CLASSIFICATION OF TERMS Each term of a contract must be either: I an express term of the contract (that is, expressly agreed by the parties); or I an implied term (one which is implied by statute or by law). A contractual term will be a condition, a warranty or an innominate term. This division is important because the rights of the other party depend on whether the term is classified as a condition, a warranty or an innominate term. An innominate term is one which cannot be classified as a condition or a warranty, but the Sale of Goods Act 1979 implies only conditions or warranties: innominate terms must be express, or implied by some other means.
Whichever type of term is broken, the innocent party is entitled to damages, additionally: I If the term broken is a condition, the innocent party is entitled to regard the contract as repudiated by the guilty party. I If the term broken is a condition and the innocent party is the buyer, the buyer is entitled to reject the goods and recover any of the price already paid. 50
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I If the term broken is a warranty, the innocent party is not entitled to regard the contract as repudiated and may only claim damages. I If the term broken is an innominate term, the innocent party is not entitled to regard the contract as repudiated, unless the breach is so serious as to deprive the innocent party of substantially the whole of the benefit of the contract (Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha [1962]).
◗ HONG KONG FIR SHIPPING CO v KAWASAKI KISEN KAISHA [1962] Basic facts Defendants hired a ship with crew for two years from the Claimants. The ship was often out of service requiring maintenance. The Defendants claimed that the ship was unseaworthy and repudiated the contract. The Claimants sued the Defendants for wrongful repudiation arguing that as the seaworthiness clause was not clearly a condition, its breach did not automatically allow repudiation unless the breach was extremely serious. The court described the unclassified seaworthiness clause as ‘innominate’ and agreed with the Claimant. Relevance A breach of an innominate term does not automatically allow repudiation of the contract.
IMPLIED CONDITION AS TO DESCRIPTION – s 13 OF THE SALE OF GOODS ACT 1979 Where there is a contract for the sale of goods by description, there is an implied condition that the goods will correspond with the description. There is no need for the contract to have been concluded ‘in the course of a business’. See diagram on p 52.
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Implied condition as to description
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Box 2 The fact that there are words in the contract describing the goods to be supplied does not necessarily mean that those words are part of the description for the purposes of s 13. They will be part of that description if they help to ‘identify’ the goods (Ashington Piggeries v Hill [1971]). However, a term which is not part of the description for the purpose of s 13 is, nevertheless, an express term of the contract and is likely to be regarded as an innominate term. (So the buyer will only be able to treat the contract as repudiated if he has been deprived of substantially the whole benefit of the contract.) Box 3 If the buyer has placed no reliance upon the seller’s description, then that description cannot provide the basis for a claim under s 13 (Harlingdon Enterprises v Christopher Hull Fine Art [1991]). This is likely to be the case where both parties are aware that the buyer is, and the seller is not, an expert in that description of goods. Boxes 7–10 For the law on ‘slight’ breaches of condition and on ‘acceptance’, see p 61.
◗ HARLINGDON ENTERPRISES v CHRISTOPHER HULL FINE ART [1991] Basic facts The seller art dealer sold a painting to the buyer art dealer which was said to be by Gabriele Munter. The seller was not a specialist in such works and made this clear to the buyer (who was a specialist) explaining that the attribution originated from an earlier sale catalogue prepared by another dealer. The buyer paid £6,000 but later discovered the painting was a fake, worth less than £100. Was there a breach of s 13? The court said ‘No’. Relevance The goods were not sold by reference to the description: the buyer relied on his own expertise.
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SECTION 14 OF THE SALE OF GOODS ACT 1979 The implied conditions in s 14, relating to satisfactory quality and fitness for purpose, are implied only if the seller sells ‘in the course of a business’. This, however, catches all sales made by businesses, whether or not the sale of such goods is the regular trade of that business (Stevenson v Rogers [1999]). (For the facts of this case, see p 79.)
◗ STEVENSON v ROGERS [1999] Basic facts Rogers, a fisherman, sold his boat to Stevenson. Stevenson claimed under s 14. Rogers argued that the sale had not been ‘in the course of a business’ thus s 14 did not apply. Even though the business of Rogers was fishing, rather than selling fishing boats, he was held to sell in the course of a business under s 14. Relevance The phrase ‘course of business’ has a wide meaning when determining whether or not s 14 of the Sale of Goods Act is applicable. Do not confuse this with the narrower meaning which is applied to UCTA (below).
SATISFACTORY QUALITY – s 14(2) OF THE SALE OF GOODS ACT 1979 Section 14(2) implies a condition that the goods will be of satisfactory quality (formerly ‘merchantable quality’) when sold by someone selling in the course of a business. See diagram on p 55. In determining whether the goods are of satisfactory quality, the following (among others) are aspects of the quality of the goods in appropriate cases: (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. 54
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Satisfactory quality
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Where the buyer deals as a consumer, the relevant circumstances include any public statements on the specific characteristics of the goods (such as advertising or labelling) made by the seller or the manufacturer (s 14(2D)). This is not the case if the consumer could not have been aware of the statement, or could not have been influenced to buy the goods by the statement, or if the statement was publicly withdrawn or corrected before the consumer bought the goods (s 14(2E)). I Section 14 was amended by the Sale and Supply of Goods Act 1994. This Act substituted the term ‘satisfactory quality’ for the previous expression of ‘merchantable quality’ and it gave the new definition quoted in Box 2 of the flow chart, as well as spelling out the aspects of satisfactory quality just listed. I In applying the definition to a sale of a motor vehicle, one must recognise that the purposes for which a motor vehicle is commonly bought are not just the purpose of driving it from place to place but of doing so with the appropriate degree of comfort, ease of handling and pride in the vehicle’s outward and interior appearance, and a vehicle sold as new should have the performance and finish of an average new vehicle of that model (Rogers v Parish [1987]). I The condition applies equally to goods sold second hand, though in that case minor faults and the normal wear and tear to be expected of goods of the age of those in question will not render the goods of unsatisfactory quality (Bartlett v Sydney Marcus [1965]). I A second-hand car which, unknown to the buyer, had been declared an insurance ‘write off’ might be found for that reason to be of unsatisfactory quality, even if its condition and performance were fine (Shine v General Guarantee [1988]).
◗ ROGERS v PARISH [1987] Basic facts A new Range Rover was delivered with minor scratches and faults including excessive engine noise, oil leaks and misfiring. Over a period of 6 months and 5,000 miles the dealer tried to cure the defects with varying levels of success. The buyer then rejected the car as unmerchantable under s 14(2). On appeal he was held to be entitled to do so. 56
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Relevance The interior and exterior appearance of the car, its comfort and the pride that the owner should be able to feel in relation to his purchase were all noted as factors relevant to merchantability.
FITNESS FOR PURPOSE – s 14(3) OF THE SALE OF GOODS ACT 1979 Where the seller sells in the course of a business and the buyer makes known to the seller the particular purpose for which the goods are required, there is an implied condition that the goods will be reasonably fit for that purpose.
I Where the buyer purchases goods that have only one normal use, for example, a hot-water bottle, then the mere fact of the purchase makes it known to the seller, by implication, that the buyer requires the goods for that particular purpose (Priest v Last [1903]). 57
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I Where the goods are required for some use out of the ordinary, then unless the buyer makes that purpose known, there will be no claim under s 14(3). I Equally, if the goods are of a type having more than one normal use and they prove not to be fit for one of those uses, the buyer will not be able to rely upon s 14(3), unless it has been made known to the seller that the goods are wanted for the particular use. (It is possible, however, that the buyer would be able, in such a situation, to rely upon s 14(2), where the definition of ‘satisfactory quality’ refers to one of the aspects of quality being, in appropriate cases, ‘fitness for all the purposes for which goods of the kind in question are commonly supplied’: see above.) I The requirement that the goods be reasonably fit for a particular purpose which the buyer has made known to the seller does not require them to be able to cope with some idiosyncrasy of the buyer, or with the circumstances in which the goods are to be used, unless that idiosyncrasy has been made known to the seller (Slater v Finning [1996]). Thus, a coat bought by someone for her own use does not have to be suitable for wear by someone with an extra sensitive skin, unless the buyer has intimated that she has extra sensitive skin (Griffiths v Peter Conway [1939]). In this matter, it is irrelevant whether she knew that her skin was extra sensitive. I Liability under s 14(3) – as also under s 14(2) – is strict. It is no defence to the seller that he was not negligent or that he took the utmost care (Frost v Aylesbury Dairy [1905]). I The point (in Boxes 3 and 4 on p 57) about reliance on the seller’s skill and judgment is not always straightforward. The buyer may have reasonably relied upon the seller’s skill and judgment in one respect but not have done so in another. Thus, a buyer of a tractor for resale in Iran who, to the seller’s knowledge, is knowledgeable about what Iranian legal requirements are, is not relying on the skill and judgment of the seller (who is unfamiliar with Iran) to ensure that the tractor fulfils those Iranian legal requirements (Teheran-Europe v ST Belton [1968]). He would, however, be relying on the seller’s skill and judgment in providing, if that is what the buyer has said is required, a tractor capable of operating in, say, a hard clay terrain. Thus, assuming that the buyer has made known to the seller a particular required purpose, the seller will not be liable if the unsuitability of the goods is 58
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outside the sphere of reliance reasonably placed by the buyer on the seller’s skill and judgment. I The requirement that goods reasonably fit the particular indicated purpose is a requirement that they remain reasonably fit for that purpose for a reasonable time after delivery, as long as they remain in the same apparent state and condition as when delivered (Lambert v Lewis [1981]).
◗ SLATER v FINNING [1996] Basic facts A ship’s camshaft was ordered from the Defendants: it failed in use and the Claimants suffered losses. The Claimants sued arguing that s 14(3) was breached. Expert evidence established that the failure was caused by the unusual nature of the Claimant’s ship: this had not been communicated to the Defendants, nor could they be assumed to know of it. The claim failed. Relevance s 14(3) only requires the goods to be reasonably fit for purposes which have been communicated to the seller. If the buyer does not communicate such purposes there can be no breach of s 14(3).
SAMPLE – s 15 OF THE SALE OF GOODS ACT 1979 In the case of a contract for sale by sample, there is an implied condition: I that the bulk will correspond with the sample in quality;
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I that the goods will be free from any defect, making their quality unsatisfactory, which would not be apparent on reasonable examination of the sample. Where there is a sale by description as well as by sample, the goods must correspond with the description (s 13) as well as with the sample.
OTHER IMPLIED TERMS The statutory terms as to title implied by ss 12–15 of the Sale of Goods Act 1979 are the implied terms which it is commonest for a buyer to rely upon. However, it is always open to either party to argue that there was some other term which was implied in the particular contract. This would be done applying the ordinary contract rules for determining whether the term was an implied term of the contract (see The Moorcock [1889]): I Would such a term have been so obvious that the parties felt no need to include it expressly in the contract? I Was the term necessary to give the transaction such business efficacy as the parties intended? It is now established that where, as part of the contract, the seller undertakes to despatch the goods to the buyer, there will normally be an implied term that the goods will be in such a state at the time of despatch that they are fit to withstand the rigours of an ordinary journey (Mash and Murrell v Joseph Emmanual [1961]). REJECTION OF THE GOODS FOR BREACH OF CONDITION In principle, the buyer has the right to reject the goods and to reclaim any of the price paid if there is a breach of condition by the seller. Before 1995, there was a general rule, however, that required the buyer to reject all or none of the goods; if the buyer accepted any of the goods, the right of rejection was lost. Apart from that, any breach of condition, however trivial the breach might be, gave the buyer the right of rejection. In these two respects, and also in one or two other respects, the law was changed by amendments to the Sale of Goods Act 1979 by the Sale and Supply of Goods Act 1994.
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Note In the flow chart on pp. 62–65, goods are described as conforming to the contract when they are not affected by the breach which gives rise to a right of rejection – and vice versa. The chart assumes that the contract in question was not a severable one and that the breach of condition was not an anticipatory breach. Trivial breach of condition The amendments to the Sale of Goods Act 1979, effected by the Sale and Supply of Goods Act 1994, included the insertion of s 15A. Section 15A removes the right for commercial buyers to reject goods for breach of condition if the breach is so slight that rejection of the goods would be unreasonable. This restriction on the right to reject applies, however, only to breaches of the conditions implied by ss 13–15 of the Sale of Goods Act 1979 and to breach of the obligation to deliver the correct contract quantity. Most importantly s 15A does NOT apply if the buyer is ‘dealing as a consumer’ (that is, within the meaning of the Unfair Contract Terms Act 1977). See Boxes 1–3 in the flow chart on pp 62–5. Rejection of part of the goods The Sale and Supply of Goods Act 1994 amended s 35 of the Sale of Goods Act 1979 so as to alter the previous rule that, if the buyer accepted any of the contract goods, the buyer thereby lost the right to reject any. Section 35 now allows the buyer to accept part of the goods and remain entitled to reject goods the buyer has not accepted. Thus, the flow chart deals in Boxes 5–9 with the situation where the buyer accepts all the goods and in Boxes 11–17 with the situation where the buyer accepts some of the goods. There are two qualifications to the buyer’s freedom to accept part and reject part of the goods. First, if any goods are accepted, the buyer is not allowed to reject any other of the goods that conform to the contract. Secondly, if any of the goods are a ‘commercial unit’, acceptance of any part of the goods within that commercial unit is automatically deemed to be an acceptance of all the goods within that commercial unit. A commercial unit means a ‘unit division of which would materially impair the value of the goods or the character of the unit’ (s 35(7)).
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Rejection of goods – a flow chart You are the buyer under a contract of sale of goods. The seller is in breach of condition and you wish to know if you can reject the goods.
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Acceptance – s 35 of the Sale of Goods Act 1979 Acceptance occurs when any one of the three following things occurs: I the buyer intimates to the seller that the buyer has accepted them; I the buyer, after delivery of the goods, does any act in relation to the goods which is inconsistent with the ownership of the seller; I the buyer retains the goods for more than a reasonable length of time without intimating to the seller that the buyer has rejected the goods.
◗ CLEGG v OLLE ANDERSSON [2003] Basic facts A yacht was delivered with an overweight keel. The buyer wished to understand the implications of this problem and corresponded with the seller for five months. Within three weeks of discovering the true nature of the problem, the buyer rejected for breach of s 14(2). The seller argued that the right to reject was lost and the yacht was ‘accepted’ because of the time which had elapsed. The court disagreed, allowing rejection. Relevance If a defect is complicated, it is not reasonable to find acceptance until a reasonable time after the buyer has been properly informed.
One of the amendments brought about by the Sale and Supply of Goods Act 1994 was that in the first two of the three types of ‘acceptance’, the buyer will not be deemed to have accepted the goods until the buyer has had a reasonable opportunity of examining them ‘for the purpose of ascertaining whether they are in conformity with the contract’ (and, if there was a sample, of comparing the bulk with the sample). Similarly, in the case of the third type of acceptance, whether the buyer has had an opportunity of ascertaining if the goods conform to the contract is a factor in determining whether a reasonable length of time has elapsed. While the buyer is waiting for the seller to provide information as to how complex goods might be repaired, the buyer will not lose the right to reject merely by retaining the goods until the information is communicated. (Clegg v Olle Andersson [2003].) If the nature of the defect is not obvious, the buyer who agrees to a repair of the goods is entitled to request an explanation 66
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of the nature of the defect from the seller so as to allow the buyer to decide whether to accept or reject the repaired goods. If the seller refuses to supply this information the buyer is entitled to then decide to reject the goods for breach of a statutory implied term (J & H Ritchie Ltd v Lloyd Ltd [2007]. But if the way in which the goods could be repaired was obvious, a buyer who delays in rejecting could lose the right to reject by keeping the goods for longer than a reasonable time. (Jones v Gallagher [2004].)
◗ J & H RITCHIE LTD v LLOYD LTD [2007] Basic facts A farmer bought a seed drill. When first used, a vibration fault emerged. The farmer agreed to a repair. When fixed, the seller refused to explain the nature of the fault. The farmer rejected the machine as unsatisfactory under s 14(2): he was concerned that it would be a year before he could test the machine and about other possible faults. The court allowed the rejection, despite an effective repair, as the seller withheld the information necessary to let the buyer decide to accept or reject. Relevance Agreeing to repair does not signify ‘accepting’ the goods: repairers must explain. ◗ JONES v GALLAGHER [2004] Basic facts A newly fitted kitchen developed various straightforward defects after four months. The Claimants corresponded with the Defendants over some months and asked for repair. Approximately a year after these repairs, the Claimant sought to reject the entire fitted kitchen and to recover the price they had paid. The court agreed with the Defendants’ argument that the kitchen and repairs had been accepted by lapse of time. Relevance If the fault is straightforward and a repair is agreed to, and effected, it is very likely that thereafter the right to reject will soon be lost.
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Also, a buyer will not be deemed to have accepted goods merely because: I the buyer asks for, or agrees to, their repair; I the goods are delivered to another under a sub-sale or other disposition.
PRODUCT LIABILITY – A CLAIM IN TORT? Where the buyer has a defective product, the lawyer may well think beyond claims being made for misrepresentation or breach of contract. There are three types of claim in tort that might be considered: I a claim in negligence under the principle in Donoghue v Stephenson [1932]; I a claim for breach of safety regulations, if the product in question was subject to any safety regulations; I a claim for product liability under Pt I of the Consumer Protection Act 1987. Each of these claims suffers from the same drawback, which is that these causes of action are available only when the claimant is claiming for loss or damage caused by the defective product. This may well be very valuable when a product has, perhaps, injured the claimant or burnt down his house. These claims in tort are, however, of no use when all that the buyer has to complain about is that the product wears out, does not work properly, is of poor quality, etc. In these cases, the buyer only has his claims for misrepresentation or breach of contract upon which to rely. Where the product has caused damage to persons or other property, then one of the tort claims mentioned above may well be very useful for the following reasons: I the claim can usually be made against the manufacturer or producer (who may well have more resources than the retailer); I the claim can be made by the party who has suffered the loss (who may not be the buyer); I the claim, unless it is in negligence, is one based on strict liability. 68
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The third of these advantages applies equally, of course, when the buyer is suing the seller, relying on one of the conditions implied by s 14 as to satisfactory quality and fitness for purpose.
IMPLIED TERMS IN CONTRACTS OTHER THAN SALE OF GOODS The terms in ss 12–15 of the Sale of Goods Act 1979 are implied only in contracts of sale of goods. However, in analogous contracts, virtually identical terms are implied by other statutory provisions. Thus, for example, there are identical terms implied in hire purchase contracts by the Supply of Goods (Implied Terms) Act 1973. See the table on p 2 for the legislation relevant to other types of contract, such as contracts for services, for barter or exchange and for the hire of goods.
You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Express and implied terms why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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8 Exemption and limitation clauses
When is an exemption clause incorporated into a contract? What is meant by ‘interpreting’ an exemption clause? May parties other than the buyer and seller be affected by an exemption clause? To what clauses does UCTA apply? How does UCTA define a consumer, with what effect? How does UCTA apply to commercial transactions? How does the Reasonableness test apply? What are the UTCCR 1999, how do they apply, and by whom are they enforced?
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To be effective, an exemption clause must clear certain hurdles:
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INCORPORATION In a written contract, any exclusion clause will normally be found within the written words of the contract. Where the contract is not in writing, the clause may be incorporated by: I express oral agreement; I a notice; I a previous course of dealings between the parties. For a clause to be incorporated, sufficient reasonable steps must have been taken to draw it to the attention of the party whose claims the clause seeks to limit (Thornton v Shoe Lane Parking [1971]). The more draconian the clause, the greater the efforts that must be made to bring it to that party’s attention. These steps must be taken before the contract is made; a clause cannot be incorporated after the contract has been made (Olley v Marlborough Court [1949]).
INTERPRETATION At one time, there was a rule (asserted in various decisions of the Court of Appeal) that an exclusion clause could not, however it was worded, exclude liability for a ‘fundamental’ breach of contract. That rule was itself abolished by the decision of the House of Lords in Photo Production v Securicor Transport [1980]. The approach of the courts in interpreting exclusion clauses now is as follows: I The clause will not be given a strained meaning in order to limit its effect. I The clause will be given its ordinary meaning and taken to exclude those liabilities which that meaning suggests. I Where the clause is genuinely ambiguous, it will be given the meaning which excludes less rather than more liability, that is, it is construed in the way which least favours the party relying upon it. This is called construing the clause contra proferentem. I The contra proferentem approach may not be applied so rigorously where the clause merely purports to limit, rather than exclude, a given liability. 73
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I A clause will not normally be construed as excluding liability for negligence where it does not expressly say so, unless of course exclusion of that liability was clearly intended – as might well be the case where negligence is the only likely head of liability. The above approach, which is based on the courts giving to a clause the meaning which its wording suggests, does not mean that widely worded clauses will necessarily be effective, because any exclusion clause may be rendered ineffective by the Unfair Contract Terms Act (UCTA) 1977 or by the Unfair Terms in Consumer Contracts Regulations 1999.
THIRD PARTY RIGHTS Only a party to a contract can be bound by the exclusion terms of that contract, although if a third party wishes to rely on a contract term which he is permitted to enforce under the contract or which is for his benefit, then he is also subject to any exclusion clause which applies to that term (Contracts (Rights of Third Parties) Act 1999). An exclusion clause which purports to confer immunity on a third party can be relied on by him in the event that he is sued by a party bound by the contract (1999 Act). In every case, a third party can derive benefits from a contract term only if he is identified by name, class or description.
UNFAIR CONTRACT TERMS ACT 1977 A seller who has sold goods in the course of business wants to know the effect of the UCTA 1977 on an exemption clause. See table on pp 76–7. I The effect of the UCTA 1977 depends upon the particular basis of the buyer’s claim against the seller. I Generally, however, the UCTA 1977 has no effect at all where the seller is not someone selling ‘in the course of a business’, that is, where the liability is not ‘business liability’. Even to this rule, however, there are exceptions. These are that, regardless of whether or not the seller is selling in the course of a business: 74
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G liability for death or personal injury caused by negligence cannot be excluded (s 2(1) UCTA); G liability under s 12 of the Sale of Goods Act 1979 cannot be excluded; and G any clause excluding liability for misrepresentation or for breach of the terms implied by ss 13–15 of the Sale of Goods Act 1979 will have no effect unless it satisfies the Act’s requirement of reasonableness. I The rules of the UCTA 1977 apply to both exemption clauses and clauses which merely seek to limit liability (for example, to a maximum figure). I In the following treatment of the different bases of liability, it will be assumed: (a) that the liability referred to is ‘business liability’; and (b) that by ‘exemption clause’ is meant ‘exemption or limitation of liability clause’ and ‘exclude’ means ‘exclude or limit’. LIABILITY FOR NEGLIGENCE I Liability for death or personal injury caused by negligence cannot be excluded. I Liability for other loss or damage caused by negligence can be excluded but only to the extent that the clause satisfies the requirement of reasonableness. LIABILITY FOR MISREPRESENTATION This liability can be excluded but only to the extent that the clause satisfies the requirement of reasonableness.
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What is basis of buyer’s claim?
Breach of implied term as to title in s 12
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LIABILITY FOR BREACH OF TERMS AS TO TITLE IN s 12 I Liability under s 12 of the Sale of Goods Act 1979 cannot be excluded. I Note, however, that s 12 itself allows for a lesser liability where the seller is contracting only to pass on such title as the seller actually has (see p 38).
LIABILITY FOR BREACH OF TERMS IMPLIED BY ss 13–15 I Where the buyer is dealing as a consumer, within the UCTA definition of this concept this liability cannot be excluded. I Where the buyer is not dealing as a consumer, this liability can be excluded but only to the extent that the exclusion/limitation clause satisfies the requirement of reasonableness. Was the buyer dealing as a consumer?
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Boxes 2 and 3
◗ R AND B CUSTOMS BROKERS v UNITED DOMINIONS TRUST [1988] Basic facts The Claimant wished to defeat exemption clauses in a contract concerning a defective car by arguing that though themselves a business they had not purchased ‘in the course of a business’ within the meaning of UCTA 1977 and should therefore be ‘consumers’ protected by the statute. The court decided that as such a purchase was neither: a) integral to the business, nor, b) frequent (three in five years) the business had bought as a consumer. Relevance ‘In the course of business’ under UCTA is narrower than this phrase when used under s 14 of the Sale of Goods Act.
There are two different strands of case law decided by the Court of Appeal which concern the meaning of the phrase ‘in the course of a business’. The first strand is concerned with the meaning of this phrase under UCTA. In R and B Customs Brokers v United Dominions Trust [1988], a shipping brokerage company, which bought a car for its executives to drive round in, was held not to have bought the car in the course of its business (and therefore to have been ‘dealing as a consumer’) because this was not a type of transaction made regularly by the company. The second strand is concerned with the meaning of this phrase within the implied terms of the Sale of Goods Act 1979 and its associated provisions. In Stevenson v Rogers [1999], a fisherman sold his fishing boat to another five years after he had bought it. He wished to buy another to replace it. The boat sold was defective and the buyer wished to use s 14 of the Sale of Goods Act 1979 to reject it. The fisherman argued that s 14 did not apply because he had not sold ‘in the course of business’ as his business was fishing and not selling fishing boats. It was held that ‘in the course of a business’ as used in the Sale of Goods Act 1979 was intended to have a wide meaning and to include all sales of goods made by businesses, whether or not the sale of such goods was the regular trade of that business. The fisherman’s sale of the boat therefore was in the course of his business as a fisherman and 79
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thus there was in the contract of sale an implied term that the boat must be of merchantable quality (now satisfactory quality). So ‘in the course of a business’ means one thing when considering the direct application of s 14 of the Sale of Goods Act 1979 and a different thing when considering whether a limitation or exclusion clause can affect the general applicability of such statutory implied terms under s 12 of UCTA 1977. For some time it was doubted whether the phrase could have these two different meanings. However, in Feldaroll Foundry plc v Hermes Leasing Ltd [2004] the Court of Appeal refused to unify the strands of case law and confirmed that both R & B Customs Brokers and Stevenson v Rogers were correctly decided.
◗ FELDAROLL FOUNDRY PLC v HERMES LEASING LTD [2004] Basic facts The Claimants leased a Lamborghini for their Managing Director. It had defective brakes, poor steering, and other faults. Had the Claimants leased as ‘consumers’ or ‘in the course of a business’ under UCTA? The Claimants were found to have leased as ‘consumers’: thus certain exemption clauses were ineffective. Relevance The Court of Appeal was invited to reinterpret R and B Customs Brokers (see above) in the light of Stevenson v Rogers (see above). It declined to do so and re-stated that the two strands of case law are different before applying R and B to determine the application of UCTA.
LIABILITY FOR BREACHES OF CONTRACT OTHER THAN ss 12–15 OF THE SALE OF GOODS ACT 1979 I If the exemption clause was part of the written standard terms of the seller, then liability can be excluded but only to the extent that the clause satisfies the requirement of reasonableness. I If the buyer was dealing as a consumer, then, irrespective of whether the clause was part of the seller’s standard terms, the liability can be excluded, but only to the extent that the clause satisfies the requirement of reasonableness. 80
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THE REQUIREMENT OF REASONABLENESS The requirement is (s 11 of the UCTA 1977) that the clause ‘shall have been a fair and reasonable one to be included, having regard to the circumstances that were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made’. A clause will be held to be unreasonable unless the seller shows that it satisfies this test. Matters to be taken into account include (Sched 2 to the UCTA 1977): I the relative strength of the bargaining position of the parties; I alternative ways of meeting the buyer’s requirements; I whether the buyer had an inducement to agree to the clause; I whether the buyer had an opportunity to enter a similar contract without the clause in question; I whether the buyer knew, or ought reasonably to have known, of the term; I whether any condition imposed for the buyer to avoid the effect of the clause was unreasonable; I whether the goods were processed or manufactured to the special order of the customer. The judge at first instance will have to balance the various relevant factors to come to a decision as to whether the clause satisfies the requirement of reasonableness. The Court of Appeal or House of Lords will overturn the judge’s decision on that matter only if the judge is shown to have proceeded on some wrong principle or to have been plainly and palpably wrong (George Mitchell v Finney Lock Seeds [1983]). A very significant factor, not perhaps spelt out above, is the ‘insurance’ factor, whereby the court considers which party it is reasonable to expect to carry the insurance against the risk that has materialised. Thus, when the seller supplied the wrong cabbage seeds which resulted in the crop of the buyer (a farmer) being a total write-off, it was held that it was reasonable to expect the sellers to insure against their liability for that loss. That, coupled with the fact that the sellers had control over which seeds were supplied and the buyer had no way of knowing whether the correct seeds had been supplied, meant that the limitation clause in the seller’s contract failed to satisfy the requirement of reasonableness and could not be relied upon by the seller. A clause which requires the buyer to notify the seller within an 81
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unreasonably short period of time (for example, three days in the case of seed potatoes which were infected with a virus which was only apparent once the crop had grown) or else be bound by the seller’s limitation of liability is likely to fail the reasonableness requirement. UCTA 1977 AND CONTRACTS OTHER THAN SALE OF GOODS The provisions of the UCTA 1977 apply to other contracts, such as contracts of hire purchase and for services, in the same way as they apply to sale of goods contracts. Thus, the exclusion of liability for terms as to title, description, quality and sample (which are implied by different statutes into the different types of contract just listed) is dealt with in broadly the same way by the UCTA 1977.
THE UNFAIR TERMS IN CONSUMER CONTRACTS REGULATIONS 1999 SCOPE OF REGULATIONS The regulations replaced earlier regulations made in 1994. They implement European Directive 93/13. They apply only to consumer contracts, that is, contracts where, in making the contract: I the seller/supplier of goods or services makes the contract for the purposes of the business; and I the buyer/customer is an individual who makes the contract for purposes other than business purposes. ‘Business’ includes trade or profession. EFFECT OF THE REGULATIONS I They require all written terms to be in plain intelligible language. Where there is doubt as to the meaning, the interpretation most favourable to the consumer is to prevail. I Apart from the latter requirement, the regulations do not apply to the ‘core’ terms of the contract, that is, terms which: G define the main subject matter of the contract; or 82
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G concern the adequacy of the price or remuneration for the goods or services being supplied. I Any term which is unfair is of no effect. The rest of the contract, however, is not affected, provided it is capable of subsisting without the term in question. WHAT IS AN UNFAIR TERM? An unfair term is any term which, contrary to the requirement of good faith, causes a significant imbalance in the parties’ rights under the contract to the detriment of the consumer. ‘Good faith’ is not defined and, unlike the earlier (1994) regulations, the 1999 regulations do not spell out any relevant factors. In Director General of Fair Trading v First National Bank plc [2002] the House of Lords said that good faith here required fair and open dealing. Terms should be clear and legible with no concealed pitfalls or traps. The regulations contain a long indicative list of clauses likely to be unfair. These include not only exemption clauses but also clauses which give the seller/supplier rights without compensating rights for the consumer, for example: I enabling the seller/supplier to raise the price, without giving the buyer a chance to back out if the price rise is too high; I enabling the seller/supplier to cancel the agreement without penalty without also allowing the customer a similar right; I automatically extending the duration of the contract, unless the customer indicates otherwise within an unreasonably brief period of time. ENFORCEMENT The Office of Fair Trading (OFT) has a duty to consider any complaint made to it that any contract term drawn up for general use is unfair. It is empowered to bring proceedings for an injunction against any business using an unfair term. For the first time, a similar power to apply for such an injunction is given to certain other ‘qualifying bodies’, including the Data Protection Registrar, the regulators of the privatised public utilities and the Consumers’ Association. The 83
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OFT often will not need to seek an injunction but will, instead, accept an appropriate assurance from the business in question.
THE UNFAIR COMMERCIAL PRACTICES DIRECTIVE 2005/29 This European provision is designed to protect the European consumer by discouraging unfair practices which are directed (whether before, during or after the transaction) by businesses towards consumers in general. It is seemingly not intended to allow individual actions by the consumer (the sanctions imposed often being of a criminal nature) but rather to allow a state agency to bring the action on behalf of consumers in general. As such provisions overlap and interact with existing domestic and EU law there will be significant amendments and repeals in the areas of law which the Directive will supercede. These repeals and amendments will include, inter alia, aspects of the Trade Descriptions Act 1968, aspects of the Consumer Credit Act 1974 and aspects of the Consumer Protection Act 1987. The Directive does not apply to either private or business to business transactions. For liability to arise it is necessary that either the practice in question is specifically listed upon a ‘blacklist’ of prohibited conduct or that the typical consumer would have made a ‘transactional decision’ (i.e. decided to buy or not to buy) as a result of the unfair commercial practice. The enforcement of the legislation will be by the OFT. Part 8 of the Enterprise Act 2002 will also be applied to further such enforcement. The UK implementation of this provision begins in April 2008.
You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Exemption and limitation clauses why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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9 Delivery and payment in sale of goods I
What is ‘delivery’? What consequences flow from a delivery which is: late, to the wrong place, or of the wrong quantity? How may the amount of the payment be calculated? Is the buyer normally entitled to be supplied on credit?
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WHAT IS DELIVERY? Delivery normally means the physical handing over of the goods (or documents of title), though it may be effected by handing over the means of their control, as when the goods are in the hands of a third party who ‘attorns’, that is, acknowledges that he now holds them for the buyer.
TIME OF DELIVERY In a commercial contract, a stipulated time for delivery will normally be ‘of the essence’, that is, a condition of the contract. If the goods are late being delivered, the buyer will therefore have the right to reject the goods. Waiver The buyer may, however, waive his right to reject the goods by, for example, indicating that they will be acceptable if delivered before some new later deadline stipulated. If this is done and the goods are not delivered by the new deadline, the buyer’s right to reject the goods will revive (Rickards v Oppenheim [1950]). Waiver by the buyer of the right to reject will not deprive the buyer of the right to claim damages for late delivery, normally assessed as the drop (if any) in the market value of the goods between the time when they should have been delivered and their value when in fact they were delivered.
◗ RICKARDS v OPPENHEIM [1950] Basic facts The seller was to make and deliver a chassis for the buyer’s Rolls Royce by a given date. Time was of the essence. The delivery did not take place on time. Initially the buyer tried to negotiate a later delivery, however, after months of failure he said that he would not accept it unless it arrived within the next four weeks. It arrived over two months late. Relevance Though the buyer had waived the first breach, he had later reapplied the term that time be of the essence and was then entitled to refuse to accept overdue deliveries.
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Where no time for delivery is agreed by the parties, the rule in s 28 of the Sale of Goods Act 1979 applies. This is that, unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions. In that case, the seller must expect to be ready to hand over the goods upon demand and against payment any time after the contract is made. DELIVERY OF WRONG QUANTITY – s 30 OF THE SALE OF GOODS ACT 1979 Seller tenders the wrong quantity. Can buyer reject the goods? Unless otherwise agreed, delivery of the wrong quantity is normally a breach of condition entitling the buyer to reject all the goods. However, he does not have to do so.
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In the case of a severable contract, the above rules are applied separately to each instalment. The usual signs that a contract is severable are that the goods are to be delivered in instalments and each instalment is to be paid for separately. PLACE OF DELIVERY Unless otherwise agreed, the place for delivery is ‘the seller’s place of business, if he has one and, if not, his residence’ (s 29 of the Sale of Goods Act 1979).
PAYMENT I The amount of the price may be fixed by the contract, or may be left to be fixed in a manner agreed by the contract, or may be determined by the course of dealing between the parties. Where the payment is not determined by one of these methods, the buyer must pay a reasonable price (s 8 of the Sale of Goods Act 1979). I Normally, however, the price is such a fundamental part of the contract that if it is not agreed and not to be determined by one of the listed methods, the contract will be void (May and Butcher v R [1934]). I Unless otherwise stipulated, a contract stipulation as to the date or time of payment will not be a condition of the contract. Thus, lateness in paying does not entitle the seller to regard the contract as repudiated. I The parties may, however, state that prompt payment is ‘of the essence’ of the contract, in which case, lateness in payment may be treated by the seller as a repudiation (Lombard North Central v Butterworth [1987]). I Unless otherwise agreed, payment and delivery are concurrent requirements of the contract. This means that: G the buyer is not entitled to credit unless it has been agreed; and G the buyer is not entitled to demand delivery of the goods unless the buyer is willing to pay at that time.
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You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Delivery and payment in sale of goods why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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10 Seller’s remedies
When is a seller ‘unpaid’? What remedies may a seller have against the buyer? What is the difference between s 49 and s 50? What remedies may a seller have against the goods? When may a seller act ‘against the goods’?
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AN UNPAID SELLER I The seller is ‘unpaid’ unless the whole of the price has been paid or tendered. I Payment by a cheque or other negotiable instrument is normally a conditional payment only. Thus, if the cheque is dishonoured, the seller is then ‘unpaid’ (s 38 of the Sale of Goods Act 1979). I Payment by credit or charge card, however, is an absolute and not a conditional payment. So, if the card issuing bank fails to pay the seller, the seller will have no claim against the buyer who paid by the card (Re Charge Card Services Ltd [1988]).
ACTION FOR THE PRICE – s 49 OF THE SALE OF GOODS ACT 1979 So you wish to know if the seller is entitled to sue for the price:
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I It may be that the parties have agreed that the payment will be paid not on a particular date, but upon the occurrence of some event (for example, the seller completes, or reaches a certain stage in, making the goods). If so, that event will be treated as a ‘day certain’ (Workman Clerk v Lloyd Brazileno [1908]). I It may be that the parties have agreed that payment will be made in instalments on particular dates (or upon particular events occurring). If so, 93
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when the date is reached (or the event occurs) for any one instalment, the seller is entitled to that instalment of the price. The instalment is to be paid on a ‘day certain’. I A seller who sues for the price is suing in debt. The Late Payment of Commercial Debts (Interest) Act 1998 now allows any business to claim interest, calculated at a statutory rate, if a debt is not paid within 30 days of its becoming due. I Unless otherwise agreed, payment and delivery are concurrent conditions. Therefore, in the absence of contrary agreement, the seller is not entitled to maintain an action for the price unless the seller is ready and willing to deliver. I If the payment was not due to be made on a ‘day certain’ and property has not passed, the unpaid seller will not be able to maintain an action for the price.
◗ WORKMAN CLERK v LLOYD BRAZILENO [1908] Basic facts A contract to construct a steamship for £89,000 required payments in five stages at different points of completion. Once the first stage occurred the builders asked for payment. As none was forthcoming, the builders sued, arguing that the completion of the first stage was equivalent to the occurrence of a ‘Day Certain’. The builders were allowed to bring their claim in debt for the price. Relevance The completion of the first task allowed the claim in debt for the sum due. Often contracts are drafted to allow the entire price to be recoverable when even one payment is missed.
DAMAGES FOR NON-ACCEPTANCE – s 50 OF THE SALE OF GOODS ACT 1979 The seller, even if unable to maintain an action for the price, may be able to maintain an action for damages if the buyer wrongfully refuses to accept and pay for the goods. In this situation, the seller is left with the goods to dispose of. 94
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I In assessing damages, the law assumes that the seller will dispose of the goods on the date of the buyer’s wrongful refusal to take delivery. Thus, the prima facie measure of damages is X − Y where: X = the contract price; and Y = the market price on the date when the buyer should have taken delivery. I Thus, if the market price on that date exceeds the contract price, the prima facie measure of damages is zero and the seller is entitled only to nominal damages. I If the seller chooses not to sell the goods in the market immediately, then that is normally irrelevant and the seller takes the risk of the price subsequently falling and takes the benefit if the price subsequently rises. I The prima facie measure of damages does not apply where there is no available market (Thompson v Robinson [1955]). In this case, the retail price of a new car was fixed and when the buyer backed out and refused to take delivery, the seller sold the car to another buyer for exactly the same price. However, the result of the buyer backing out was that the seller sold one fewer car than he would have done. Thus, the damages awarded were not the prima facie measure (which would have been zero) but the seller’s loss of profit (mark up) on one sale. The same reasoning does not apply to the sale of second-hand cars; in that case, the prima facie measure applies (Lazenby Garages v Wright [1976]).
LIEN – ss 39–43 OF THE SALE OF GOODS ACT 1979 The unpaid seller, if still in possession of the goods, is entitled to retain that possession until paid. In the situation where property has already passed to the buyer, this right is termed a lien. Otherwise, it is simply termed a right of retention. The right exists in each of the following situations: I where there has been no agreement to allow the buyer credit; I where the goods were sold on credit but the term of credit has expired; and I where the buyer has become insolvent. 95
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Exercise of this right can be effective as a means of enforcing payment. However, the right cannot be exercised if the seller has already made delivery, since one cannot retain possession if one no longer has it! STOPPAGE IN TRANSIT – s 44 OF THE SALE OF GOODS ACT 1979 This is a right of the unpaid seller to resume possession of the goods if they are still in transit (that is, with an independent carrier). The right can be exercised only if the buyer has become insolvent. This right is in fact seldom used and is exercised by the seller contacting the carrier and requiring the carrier not to deliver the goods to the buyer but to restore them to the seller. The seller must pay the cost of this. RESALE – s 48 OF THE SALE OF GOODS ACT 1979 An unpaid seller who still has the goods (or recovers them by stoppage in transit) may be able to resell the goods to a third party. The unpaid seller can do this in the following circumstances: I the goods are perishable and the seller gives notice to the buyer of his intention to resell them and the buyer does not, within a reasonable time, pay or tender the price; I the seller has expressly reserved the right of resale on the buyer making default. Where the seller exercises this right, he sells as owner and, thus, if he resells the goods for more than the buyer had agreed to pay, the seller makes an additional profit which he is entitled to keep. He must, of course, refund to the buyer any part of the price paid by the buyer except to the extent that doing so would leave the seller making a loss. If the seller makes a loss on the resale, he is entitled to claim that loss as damages from the buyer. Of course, in addition to the rights of resale under s 48, the seller is entitled to resell the goods if the buyer has repudiated the contract and the seller has accepted that repudiation.
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You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Seller’s remedies why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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11 Buyer’s remedies
What is specific performance under s 52? What forms of damages are recoverable? How are the different forms of damages calculated? How do the additional rights of the consumer relate to the existing remedies?
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SPECIFIC PERFORMANCE – s 52 OF THE SALE OF GOODS ACT 1979 This is an order of the court directed to the seller to carry out the contract, that is, to deliver the goods, and is available only in restricted circumstances: I the seller’s breach must be breach of a duty to deliver specific or ascertained goods; and I the situation must be one where an award of damages would not be an adequate remedy. This is likely to be the case only where the goods are unique or virtually unique.
REJECTION OF THE GOODS The buyer has the right to reject goods for breach of condition. This right and the restrictions upon it were explained on p 61. 100
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When the buyer is entitled to and does reject the goods, he is entitled to recover any of the price already paid. In addition to rejecting the goods, and irrespective of whether repayment of the price is claimed, the buyer may bring a claim for damages for: I storage expenses if any; and I non-delivery.
DAMAGES
DAMAGES FOR NON-DELIVERY It is assumed that the buyer goes on to the market and buys replacement goods immediately on the day the seller should have delivered and failed to do so. I Thus, the prima facie measure of damages is X − Y, where: X = the market price on the date when the seller should have delivered the goods; and Y = the contract price. 101
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I Thus, if the contract price exceeds the market price on that date, the prima facie measure of damages is zero and the buyer is entitled only to nominal damages. I If the buyer chooses not to buy replacement goods immediately, then that is normally irrelevant and the buyer takes the risk of the price subsequently rising and takes the benefit if the price subsequently falls. I Normally, it is also equally irrelevant that the buyer may have made greater or lesser losses because of the existence of sub-sales made. It is assumed that the buyer will have bought replacement goods in the market in order to fulfil any subcontracts he may happen to have. I However, the buyer’s losses in connection with sub-sale will be taken into account where the buyer’s contract with the seller contemplated sub-sales of the very same goods and where the sub-sale contract was for the sale of the very same goods that the seller was supposed to supply to the buyer. In this situation, the buyer is therefore likely to recover more than the prima facie measure (Re Hall and Pims Arbitration [1928]).
◗ RE HALL AND PIMS ARBITRATION [1928] Basic facts The buyer bought a cargo of wheat. Whilst yet at sea the cargo was sold at a profit of five shillings per unit. The seller delivered late by which time the market price had fallen: the profit was now only two shillings. Buyer successfully claimed the lost profit from the seller. Relevance This departure from the usual rule that the market price determines the loss was justified because the buyer contracted to sell the specific cargo (not just any wheat), that he did so before delivery, and that as the contract allowed this possibility the losses were not too remote.
DAMAGES FOR LATE DELIVERY Late delivery is usually a breach of condition. Where the buyer rejects the goods, the measure of damages is as for non-delivery. Where the buyer 102
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accepts the goods after late delivery, the buyer will usually be awarded X − Y, where: X = the market price on the date on which the goods should have been delivered; and Y = the market price on the date on which the goods are actually delivered. Thus, if the market value on the later date is higher, the buyer’s loss is zero. If the amount of the buyer’s loss is affected because of possible sub-sales, this will be taken into account to adjust the loss up or down. For example, the market value of the goods may have dropped, but the buyer may have suffered no loss because he was able to use the goods, despite their delayed delivery to himself, to fulfil a contract he was obliged to fulfil anyway (Wertheim v Chicoutimi Pulp [1911]). DAMAGES FOR BREACH OF WARRANTY – s 53 OF THE SALE OF GOODS ACT 1979 The typical breach is a breach of an express term of the contract or a breach of the implied conditions as to satisfactory quality. Where the buyer has accepted the goods, damages for breach of condition are assessed in the same way as for breach of warranty. The prima facie measure of damages is X − Y, where: X = the value the goods would have had if they had complied with the contract; and Y = the value the goods actually had on delivery. Again, however, if the buyer has, despite the breach of contract and, without any loss to himself, been able to use the goods to fulfil sub-contracts made, then the buyer is not entitled to the prima facie measure of damages. This is because, in that situation, the buyer has suffered no loss (Bence Graphics International Ltd v Fasson UK [1998]). Where the buyer has suffered consequential loss, then that loss can be claimed. For example, the goods supplied may have injured the buyer or damaged his other property.
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◗ BENCE GRAPHICS INTERNATIONAL LTD v FASSON UK [1998] Basic facts Much of a product supplied to the buyer was defective because it was not as durable as specified. The product had been processed and sold to the buyer’s customers with only one complaint, but the buyer sought to recover the entire difference in value between the product supplied and the correctly specified product. The Court of Appeal refused to apply s 53(3) and instead limited the damages to the liability the buyer had to its customers. Relevance To have allowed the claim under s 53(3) would have given the buyer a windfall for losses which it had not suffered.
LACK OF CONFORMITY WITH THE CONTRACT Part 5A of the Sale of Goods Act 1979 sets out additional rights of buyers in consumer cases. These rights do not replace the rights set out in ss 13–15 of the Act. The new rights apply if (a) the buyer is a consumer, and (b) the goods do not conform to the contract at the time of delivery. The definition of a consumer is the one set out in the Unfair Contract Terms Act 1977 (see pp 86–8.) Goods do not conform to the contract if there is a breach of an express term of the contract or a breach of one of the terms implied by ss 13–15 of the Act (s 48F of the Sale of Goods Act 1979). If the goods do not conform to the contract at any time within six months of the date of delivery, there is a (rebuttable) presumption that they did not conform at the date of delivery. This presumption does not apply if it is incompatible with the nature of the goods or the nature of the lack of conformity. HIERARCHY OF RIGHTS If the goods bought do not conform to the contract the consumer is given a hierarchy of rights: first, to require the seller to repair or replace the goods; second, to require the seller to reduce the price by an appropriate amount or to rescind the contract. 104
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Repair or replacement must be achieved within a reasonable time and the cost or repairing or replacing must be borne by the seller. Although repair or replacement are the primary remedies, the buyer cannot require the seller to repair or replace the goods where it would be impossible for the seller to do so, or where the remedy sought would be disproportionate in relation to another remedy. Where the buyer does require the seller to repair or replace the goods, he must not reject the goods and terminate the contract until the seller has been given a reasonable time to repair or replace the goods. If repair or replacement is disproportionate, or is not achieved by the seller within a reasonable time of being requested, or cannot be achieved without significant inconvenience to the buyer, the buyer is entitled to a reduction of the price (by an appropriate amount) or rescission of the contract. However, if the buyer does rescind, any reimbursement to the buyer may be reduced to take account of any use of the goods which he has had. OTHER STATUTES The Supply of Goods (Implied Terms) Act 1973 and the Supply of Goods and Services Act 1982 have been amended so that virtually identical rights are included where goods supplied to a consumer do not conform to the contract.
You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Buyer’s remedies why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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12 Agency
What is meant by a contract concluded by ‘Agency’? What forms of authority may an agent possess? When may the unauthorised acts of the agent be ratified? What duties exist between the Agent and the Principal? How and with what consequences may agency be terminated?
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NATURE OF AGENCY An agent has authority to make contracts with third parties on behalf of another person, the principal. Having made the contracts the agent usually drops out of the picture and the contracts take effect between the principal and the third parties. Only an agent with some type of authority to act for the principal has the right to make a contract which binds the principal. (However, in Chapter 4 we saw that a person who is not an agent sometimes has the power, but not the right, to pass a good title to another person’s goods.)
CREATION OF AGENCY
ACTUAL AUTHORITY An agent may be given actual authority either expressly or impliedly. Actual authority arises where the principal and agent agree, expressly or impliedly, that the agent should have authority. Express actual authority An agency may be created by the principal giving express instructions, for example, where a seller puts goods into an auction sale asking for them to be sold.
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Implied actual authority This arises where the principal agrees with the agent that the agent should have the authority but does so other than by express words. For example, it would apply if the principal appoints someone to a certain position, for example, store manager, or company managing director. In that case, and in the absence of any express statement to the contrary, the principal will be taken to have agreed with the appointee that he should enter, on the principal’s behalf, all the types of transaction which someone in the appointee’s position would usually have authority to enter. Thus, someone who is, say, a managing director will automatically have all the usual authority given to someone in that position, unless the principal has expressly placed a restriction on it (Hely-Hutchinson v Brayhead [1968]).
◗ HELY-HUTCHINSON v BRAYHEAD [1968] Basic facts The Chairman of Brayhead acted, with the knowledge of the Board of Directors, as if he was also its Managing Director. He encouraged the Claimant into an investment with a third company (in which Brayhead held shares) by claiming that Brayhead would indemnify any losses which the Claimant made as a consequence of the investment. When the third company became insolvent the Claimant called on Brayhead to pay its losses. The court agreed that the Chairman had the authority to bind Brayhead. Relevance The Court of Appeal found the Chairman to have implied actual authority.
OSTENSIBLE (APPARENT) AUTHORITY The doctrine of ostensible authority is based on the estoppel of the principal (Freeman and Lockyer v Buckhurst Park Properties [1964]). The idea is that if the principal has held out the agent as having authority, it would not normally be right to allow the principal subsequently to deny that the agent did have that authority. The requirements for the doctrine to apply are: 109
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I the principal made a representation that the agent had authority to enter the transaction; I the representation was intended to be acted and relied upon by the other party to the contract (the third party); I the representation was relied upon by the third party. Where these three requirements are fulfilled, the principal is estopped as against the third party from denying that the agent had authority. Apparent authority becomes important where the agent is appointed to a recognised position, but is expressly told not to make certain types of contract which someone in that position would normally have the authority to make. The principal, by appointing the agent to the position in question, has thereby represented to the world at large that the agent has all the usual authority that goes with that position. A third party, who does not know of the express restriction on that usual authority, may well enter the contract assuming that the agent has the full usual authority of someone in that particular position. In Panorama Developments v Fidelis Furnishing Fabrics [1971], a company secretary made a number of contracts over a period of time ordering minicabs to collect and take people to and from the airport. He was in fact making these contracts to convey relatives or friends of his, but was ordering the cars in the name of his company. It was held that the company was liable to pay for the cabs because the making of such contracts was within the usual authority of a company secretary. It is important to remember that apparent authority gives a third party a right to enforce the contract made by the agent against the principal but does not give the principal the right to enforce the contract. Also, a third party who knows or ought to know that the agent had no actual authority cannot claim that the agent had apparent authority.
◗ FREEMAN AND LOCKYER v BUCKHURST PARK PROPERTIES [1964] Basic facts One Director of the Defendant company acted as if he was its Managing Director: the Board of Directors knew and acquiesced to this. Without actual authority to do so, this Director instructed a 110
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firm of architects to draw up various plans. When the architects asked for payment the company claimed not to be bound by the contract. The architects sued the company, arguing that the actions of the Director bound it by reason of apparent (ostensible) authority. The court agreed that the company was bound. Relevance The Court of Appeal found the Director to have apparent authority to bind the company.
Watteau v Fenwick In Watteau v Fenwick [1893], the manager of a pub was forbidden by the owner to buy tobacco on credit. In contravention of these instructions, the manager (the agent) did buy tobacco on credit. The salesman thought that the agent owned the pub. It was held that the agent had authority and that the principal was bound. The agent did not have actual authority because he had been forbidden to make the purchase. He also could not have apparent authority because the salesman could not claim that a principal of whom he was unaware had made a representation to him. It was held that the agent had ‘usual authority’. However, the precise way in which the agent’s authority arose is unclear and some have doubted whether the case would now be followed. Also, it is important to realise that the term ‘usual authority’ can have other meanings. Usual authority can be a species of actual authority (because the principal and agent have agreed that an agent appointed to a position has the authority which usually goes with such a position) or a species of apparent authority (because by appointing an agent to a position, the principal represents to third parties that the agent has the authority which usually goes with such a position).
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OPERATION OF LAW Agency is usually something that is agreed between the principal and agent (actual authority) or arises by virtue of the principal having represented the agent as having authority (ostensible authority). However, sometimes, the law imposes an agency relationship. Agency of necessity This arises where three conditions are all satisfied: I there is an actual commercial necessity for the agency; I it is impossible for the ‘agent’ to get the principal’s instructions; I the ‘agent’ acts bona fide in the interests of all parties. The occurrence of these requirements was more common years ago than now, because communications are now so much better. Years ago, a carrier of a cargo which suddenly started to ferment whilst in the Middle East could not easily contact the cargo’s owner back in England before deciding that he really had to sell the cargo there and then before it became useless. Nowadays, the facilities of telephones and fax machines make the ‘necessity’ for the carrier to sell the cargo without first getting the owner’s authority much less likely to arise. Statutory agency Sometimes statute imposes an agency. Thus, for example, in the case of credit agreements which are regulated by the Consumer Credit Act 1974 and where there is a business connection between the creditor (finance house) and the dealer (retailer), the latter is made agent of the former in carrying out ‘antecedent negotiations’ (s 56 of the Consumer Credit Act 1974 – see p 160). RATIFICATION Where someone purports to act as agent, but does not have actual or apparent authority for his acts, the ‘principal’ will not be bound by the acts in question unless the principal subsequently ratifies them. If he does ratify them, the ratification is retrospective and relates back to when the acts were carried out. Ratification therefore retrospectively creates actual authority. A contract can be ratified, however, only if the following conditions are all satisfied: 112
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I the ‘agent’ must have purported to act as agent. Ratification will therefore not be possible where the agent has acted as if for himself, that is, without disclosing that he was acting for someone else (Keighley, Maxsted and Co v Durant [1901]); I the principal must have been in existence at the time the contract was made; I the principal must, at the time it was made, have had contractual capacity to make the contract; I the principal must have been named, or ascertainable, when the contract was made; I at the time of ratification, the principal either must have full knowledge of the material facts, or else must have the intention to ratify whatever may be the facts; I the principal must ratify within the stated time limit, if any, or else within a reasonable time.
RELATIONSHIPS CREATED BY THE AGENCY DISCLOSED AGENCY
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I unless otherwise agreed, the agent gives to the third party a warranty of authority. This enables the third party to maintain an action for damages against the agent if it turns out that the ‘agent’ had no authority to make the contract; I apart from the warranty of authority, the agent drops out of the picture and is not liable on the contract. These rules apply when the fact of the agency is disclosed to the third party, irrespective of whether the particular principal is identified.
UNDISCLOSED AGENCY
Where the agent fails to disclose at the time the contract is made that he is acting as agent, the third party can hold the agent liable as if he were the principal. In fact, the third party has an option whereby the third party can hold either the principal liable or the agent liable as if he were the principal. Should the principal seek to hold the third party liable, this is generally permitted. In that case, however, any set-off or defence available to the third party against the agent before the third party discovered the existence of the principal can be relied upon by the third party against the principal. The principal is not allowed, however, to hold the third party liable in the following circumstances: I if it is contrary to the terms of the contract; I if the identity of the principal is a significant factor (Said v Butt [1920]). 114
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◗ SAID v BUTT [1920] Basic facts The principal (a theatre critic) used an ‘agent’ to acquire a ticket to the first night of a new production. He did so because he knew no such ticket would willingly be sold directly to him. When the critic attended the theatre, he was refused admittance. Later he tried, as ‘principal’, to sue the theatre for breach of contract. The court refused to let him enforce the contract because of ‘. . . the personal element’. Relevance This case is probably best understood as one where there was no agency at all because of the deceitful scheme to obtain admission to the theatre.
AGENT’S DUTIES TO PRINCIPAL These are: I to exercise due care and diligence in the performance of his duties; I to render an account when so required; I not to allow duty and interest to conflict. This includes: G not, without disclosing it to the principal, to become a principal as against his principal (Armstrong v Jackson [1917]); G not to make secret profit from his position; I not, without permission, to delegate his authority; I not, without permission, to disclose or make use of confidential information obtained in his role as agent.
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PRINCIPAL’S DUTIES TO AGENT These are: I to pay remuneration and/or commission as and when due according to the terms of their agreement; I to indemnify the agent for acts lawfully done and liabilities properly incurred in the course of carrying out the agency.
TERMINATION OF AGENCY TERMINATION BY PRINCIPAL As a general rule, the principal can withdraw the agent’s authority at any time. This is subject, however, to the doctrine of ostensible authority, whereby a third party who is unaware of the principal’s withdrawal of authority may nevertheless be able to hold the principal liable. TERMINATION BY OPERATION OF LAW An agency is normally terminated by the occurrence of any of the following events: I death of the principal; I bankruptcy of the principal; I principal becoming mentally incapable; I principal becoming an enemy of the country.
SPECIALIST AGENTS There are particular rules applicable to particular types of agent such as auctioneers, estate agents, del credere agents and mercantile agents.
COMMERCIAL AGENTS The Commercial Agents (Council Directive) Regulations 1993 apply to independent commercial agents who have continuing authority to negotiate the sale or purchase of goods. They do not apply to agents who are employees, 116
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company directors or partners. In relation to those agents to whom they apply, these regulations supplement or vary the position at common law. Their effect includes the following: I The agent and the principal are each under a duty to the other to act dutifully and in good faith and have various other specific duties, such as the agent’s duty to provide the principal with all necessary information available to the agent. I The agent has a general right to reasonable remuneration for work done. I There is a minimum period of notice for termination of the agency and there are provisions for the agent to receive compensation when the agreement is terminated. The notion is that where the regulations apply, broadly where the agent has authority to buy and sell on the principal’s behalf, the agent will have an interest in the business which his activities will have helped to build up. Upon termination, he is therefore entitled to compensation. In Lonsdale v Howard & Hallam Ltd [2007] the House of Lords was faced with a dispute concerning the calculation of such compensation. The Agent argued that the method adopted in France, which set the compensation at twice the average gross commission received by the agent in the previous three years, should also be followed in the UK. The House of Lords did not agree and found the less generous approach applied by the English court, based on commission from one previous year assessed in net terms, to be in accordance with English business conditions and also the freedom allowed to each member state under European Law to implement the rules.
You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Agency why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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13 International sales
What are the features of an FOB contract? What are the features of a CIF contract? How are such international sales contracts ‘paid-for’? What is an international letter of credit and what forms may it assume?
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FOB CONTRACTS Different contracts may contain different provisions. However, the Free On Board (FOB) contract is one which has come traditionally to have certain features and, if these are not expressly spelt out and are not contradicted in the written contract, they will normally be assumed to be present in a contract which is termed FOB. The classic features are as follows: I The buyer arranges carriage of the goods in whatever ship the buyer chooses. Thus, the buyer incurs the cost of freight on the ship and insurance of the goods from the moment they are loaded. I The buyer will nominate the ship. If there is a contract stipulation for this to be done by a certain date, then failure to nominate the ship by that date will be a breach of condition by the buyer (Bunge Corporation v Tradax [1981]). I The seller’s duty is to convey the goods to the ship and have them loaded. I Property in the goods will pass when the parties intend it to, and their intention will normally be that property is to pass when the goods are loaded onto the ship. If the buyer fails to nominate a ship, the seller cannot load. Thus, property cannot pass. In that case, unless the price was payable on a day certain, the seller will not be able to sue for the price, but will be 120
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confined to a claim for damages for non-acceptance (Colley v Overseas Exporters [1921]). I Similarly, risk will normally pass, according to the parties’ intention, as the goods pass over the ship’s rail. The seller is under a duty to give the buyer notice of shipment, to enable the buyer to insure the goods. Failure to give notice will leave the goods at the seller’s risk. Individual contracts may vary one or more of the classic terms, for example, to provide that the seller undertakes to arrange carriage by sea and/or insurance.
◗ COLLEY v OVERSEAS EXPORTERS [1921] Basic facts The Claimant contracted to sell leather to the Defendants on an FOB basis. In breach of contract, the Defendants refused to nominate a ship, thereby preventing the Claimant from proceeding. Could the Claimant argue that property had passed by default and bring an action for the price he was owed? The court held that property could not pass even because of the deliberate default of the Defendants. Relevance No action in debt on the price may be maintained before property has passed: until this time only damages for breach of contract are available.
CIF CONTRACTS In a Cost, Insurance, Freight (CIF) contract, the cost includes insurance and freight. Thus, it is for the seller to arrange the carriage of the goods by sea to the destination port specified in the contract. It is also for the seller to arrange the insurance of the goods during the voyage. The key feature of a CIF contract is that it focuses on the delivery of documents and payment against delivery of those documents. The usual documents to be provided by the seller are: I A bill of lading, which represents the contract for the carriage of the goods by sea. I An insurance policy, which represents the contract of marine insurance. 121
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I An invoice, which asks for payment of the price. If payment is to be made by the buyer accepting a bill of exchange, then the bill of exchange will accompany the documents so that the buyer, upon receipt of the documents, can ‘accept’ the bill of exchange and return it to the seller. In a CIF contract, the buyer has two rights of rejection: I Reject the documents if they do not conform to the contract (for example, if the bill of lading shows that the goods were loaded onto the vessel after the date specified in the contract). If the buyer fails to reject the documents when he knows they are not in order, he will be estopped from rejecting them later (Panchaud Frères v Etablissement General Grain [1970]). Assuming that the documents are in order, the buyer has no right to reject the documents even if he can prove that the goods are non-conforming. In that situation, he must pay against the documents and may later reject the goods upon their arrival and then claim back the price (Gill and Dufus v Berger [1984]). I Reject the goods, upon their arrival, if they do not conform to the contract (Kwei Tek Chao v British Traders and Shippers Ltd [1954]). Assuming the goods have become ascertained, property passes to the buyer at the time the documents are taken up. If the buyer subsequently exercises his right to reject the goods, property will revert to the seller. If the goods are not ascertained but are a specified quantity from an identified bulk, then the buyer will acquire a property right consisting of an undivided share in the bulk (see p 8). Risk, however, will normally be intended to pass to the buyer upon shipment even if the goods were already afloat when the contract was made. The buyer does, however, have the benefit of the insurance policy transferred to him retrospectively from the date of shipment.
◗ GILL AND DUFUS v BERGER [1984] Basic facts The contract concerned 500 tonnes of beans CIF Le Havre. Sellers delivered the documents and 445 tonnes to Le Havre and sent 55 tonnes first to Rotterdam to be shipped onwards to Le Havre. Before the second consignment arrived, the buyers twice rejected
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the documents arguing the goods did not conform with the contract. The court held rejection of the documents to be a breach of condition, which entitled the sellers to terminate the contract and sue the buyers for non-acceptance. Relevance A refusal to accept conforming documents under a CIF contract is a serious breach of contract.
◗ KWEI TEK CHAO v BRITISH TRADERS AND SHIPPERS LTD [1954] Basic facts Hong Kong buyers contracted with London sellers to purchase a consignment of chemicals. The price was paid, and property passed, on the exchange of the shipping documents in November. Later, when the consignment arrived, it became clear that the goods had been shipped late and that the documents had been forged to conceal this. The buyers rejected, despite the passage of property, because of the forgery. The sellers argued that the goods were accepted and could not be rejected. The court found for the buyer. Relevance Goods which do not conform with the CIF contract may be rejected.
OTHER TYPES OF SALE CONTRACT EX WORKS The buyer is to collect the goods from the seller’s premises. FOR or FOT Free On Rail, or Free On Train, is a term used to describe a contract where the seller will deliver the goods to the rail and arrange their loading onto the wagons. 123
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FAS A Free Along Side contract is similar to an FOB except that the seller undertakes to leave the goods alongside a ship (usually a ship to be nominated by the buyer) rather than undertaking to have them loaded onto the ship.
C&F A Cost and Freight contract is similar to a CIF contract except that the seller does not undertake to arrange insurance.
EX SHIP This is similar to a CIF contract except that the seller’s duty goes further. The seller undertakes to get the goods to the port of destination and make them available to be delivered to the buyer from the ship at that port. The seller retains the risk until arrival at that port.
PAYMENT ARRANGEMENTS TRADITIONAL METHOD The buyer is sent the shipping documents (bill of lading and insurance policy) together with a bill of exchange. The buyer ‘accepts’ the bill (assuming that the bill provides for payment at a later date) and returns it to the seller. The seller then has a bill of exchange which is a negotiable instrument which can be indorsed (for example, to a bank) in return for immediate payment. The indorsee (the bank) can retain the bill until the due date for payment when the indorsee is entitled to payment from the ‘acceptor’, that is, the buyer. In practice, the documents will be sent by the seller via the international banking system to a bank in the buyer’s country, that bank having authority, if the shipping documents are in order, to accept or pay the bill on the buyer’s behalf.
INTERNATIONAL LETTER OF CREDIT The contract may require the buyer to open a letter of credit. This is a device to give the seller some added assurance that he will be paid. The buyer instructs a bank in his country (the issuing bank) to open a credit with a bank in the seller’s country (the advising bank). This authorises the advising bank to pay the price (or accept the bill of exchange) on presentation of the shipping documents to 124
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the advising bank. The type of credit to be opened depends upon the terms of the contract.
Revocable and unconfirmed Neither the issuing nor advising bank enters into a commitment to the seller. If payment is not made, the seller can look only to the buyer for a remedy. Irrevocable and unconfirmed The issuing bank enters into a legally binding commitment to the seller that it will pay according to the terms of the credit, that is, if conforming documents are presented before expiry of the credit. Irrevocable and confirmed Both the issuing bank and the advising bank enter legally binding commitments to the seller. In the case of an irrevocable letter of credit, the issuing bank cannot refuse to pay just because the goods themselves are proven to be non-conforming. The bank’s duty is to pay against conforming documents. (The same is true of the advising bank if it has confirmed the credit.) The buyer is then under a duty to indemnify the bank for its payment. A buyer who wishes to protect himself 125
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against the risk of thus having paid for goods which then prove to be nonconforming may, as part of the contract, require the seller to provide a performance guarantee via the international banking system.
You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of International sales why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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14 Consumer credit – categories of agreement What types of credit agreements are regulated by the Act? How is an ‘individual’ defined? Is there still a limit on the amount of credit supplied? Which agreements are exempt? Distinguish debtor–creditor–supplier agreements from debtor–creditor agreements When will a transaction be ‘linked’?
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The Consumer Credit Act 1974 is in the process of being significantly amended by the Consumer Credit Act 2006. The amending legislation has partially been brought into force by a succession of statutory instruments. There are currently two outstanding Common Commencement Dates (CCD): 6 April 2008 and 1 October 2008. The Consumer Credit Act 2006 is scheduled to be entirely in force by October 2008. This text refers to those provisions of the Consumer Credit Act 1974 which remain in force and those which have already been amended by the 2006 Act. In the event that a 1974 provision is currently operative but is due to be amended by the 2006 Act, this will be indicated by means of a single asterisk (where the CCD is April 2008) or by two asterisks (where the CCD is 1 October 2008). The Consumer Credit Act 1974 regulates regulated agreements, unless they are ‘exempt’ agreements. In addition, the Act contains definitions of various sub-categories of agreement, including: I debtor–creditor–supplier agreements; I debtor–creditor agreements; I restricted-use credit agreements; I unrestricted-use credit agreements; I small agreements; I non-commercial agreements.
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REGULATED CONSUMER CREDIT AGREEMENT (s 8 OF THE CONSUMER CREDIT ACT 1974)
Box 1 ‘Credit’ includes a cash loan and any other form of financial accommodation (s 9(1) of the Consumer Credit Act 1974). Hire purchase is a form of credit. Simple hire is not a form of credit. However, a hire agreement can be a regulated agreement if it is a consumer hire agreement (see flow chart on p 131).
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Box 2 The status of ‘individual’ now only applies to natural persons, unincorporated associations and small partnerships. If a partnership consists of more than three partners, or, if all the partners are corporate bodies, the 1974 Act has no application. The credit raised by companies, partnerships with more than three partners, purely corporate partnerships or other corporate bodies is not regulated by the Consumer Credit Act 1974. Thus, an agreement for a loan or other form of credit to a company cannot be a regulated agreement. Box 3 There is currently a financial limit in the 1974 Act which means that a credit agreement for more than £25,000 cannot be classed as a ‘regulated agreement’. This financial limit is due to be removed by s 2 CCA 2006 (by 06/04/08) so that all consumer credit agreements will be regulated by the 1974 Act unless exempted from its application. However, personal credit agreements which are not otherwise regulated are nevertheless subject to one set of provisions in the Consumer Credit Act 1974; they are the ‘Unfair Relationships’ rules (which have replaced the old ‘extortionate credit bargains’ provisions of ss 137–40). The new rules allow a court which finds the credit agreement between the creditor and the debtor to be unfair to the debtor to make orders to remedy the situation. Box 4 Until the abolition of the financial limit by s 2 CCA 2006 – due by 06/04/08 – it remains necessary to consider the amount of the credit supplied in order to determine if the agreement is ‘regulated’ or not. In the case of a ‘runningaccount’ credit agreement, the significant figure is the credit limit. If that is £25,000 or less, this question is to be answered ‘Yes’. In the case of ‘fixed-sum’ credit, the significant figure is the amount agreed to be advanced and this amount does not include the cost of the credit – that is, it does not include the interest or any other amount which falls within the ‘total charge for credit’ (see p 136). Boxes 5 and 6 A consumer credit agreement is ‘regulated’ only if it is not otherwise an exempt agreement. For existing ‘exempt agreements’, see p 133. Note that as of 06/04/08 individuals of ‘high worth’ may voluntarily ‘opt-out’ of the CCA 1974 if they follow the correct procedures. 130
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REGULATED CONSUMER HIRE AGREEMENT (s 15 OF THE CONSUMER CREDIT ACT 1974)
Box 2 ‘Individuals’ now only includes natural persons, unincorporated associations and small partnerships. If the partnership consists of more than three partners, 131
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or, all the partners are corporate bodies the 1974 Act does not apply. A company or other corporate body is not an ‘individual’, thus, an agreement whereby a company hires a photocopier cannot be a regulated agreement. Box 3 A hire purchase agreement cannot be a consumer hire agreement. However, it can amount to a consumer credit agreement (see flow chart on p 129). Box 4 Short term hirings of three months or less are not caught by the Act. If, however, a three month hire agreement contains a clause enabling the parties to renew the agreement, it will be capable of subsisting for more than three months. Box 5 Until the abolition of the financial limit by s 2 CCA 2006 – due by 06/04/08 – it remains necessary to consider the amount paid by the hirer under the agreement in order to determine if the agreement is ‘regulated’ or not. What is looked at here is not the amount of each instalment of rental, but the total amount which is required to be paid by the hirer under the agreement. If the agreement contains a clause entitling the hirer to terminate the agreement after, say, five months, then the total amount which the agreement requires the hirer to pay will include only those amounts which the hirer will have to pay if the hirer terminates the agreement at the first opportunity, that is, after five months. Box 7 The only type of consumer hire agreement which can fall within the exempt category is where the agreement is for the hire of a gas, water, or electricity meter. See diagram on facing page. Note The low cost credit exemption applies only where debtor–creditor credit is offered on a limited basis to a particular class or classes of individuals and where the APR does not exceed a benchmark rate. That benchmark rate is: (i) in the case of credit provided by a credit union, 12.7%; and (ii) in other cases, 1% higher than the highest of the base rates of the major UK banks. Where the APR under the agreement cannot be increased, the benchmark rate is that 132
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*As of 06/04/08 both ‘high net worth’ individuals and lending over £25,000 which the creditor is to use for business purposes will be exempt.
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applicable 28 days before the agreement was made. Where the APR can be varied, the agreement is low cost if the APR cannot at any time exceed the benchmark rate applicable 28 days earlier. DEBTOR–CREDITOR–SUPPLIER AND DEBTOR–CREDITOR AGREEMENTS (s 12 OF THE CONSUMER CREDIT ACT 1974) This definition aims to identify credit agreements where either : I the credit is to enable the debtor to buy goods or services from the creditor (that is, the creditor is the same person as the supplier of the goods or services); or I the credit is to enable the debtor to buy goods or services supplied by one person and the credit is provided by a creditor under ‘arrangements’ between the creditor and the supplier. Thus, in a debtor–creditor–supplier agreement, either the creditor and the supplier will be one and the same person, or there will be arrangements, a business connection, between them. The arrangements will be arrangements whereby the creditor is prepared to provide credit to customers of the supplier. A credit agreement which is not a debtor–creditor–supplier agreement is a debtor–creditor agreement.
RESTRICTED-USE CREDIT AND UNRESTRICTED-USE CREDIT (s 11 OF THE CONSUMER CREDIT ACT 1974) Credit provided in such a way that the debtor is free to use it as he chooses is unrestricted-use credit. If it is not provided in that way, then it may be restricted-use. Typical examples of restricted-use credit are hire purchase, conditional sale and credit sale agreements.
SMALL AGREEMENTS (s 17 OF THE CONSUMER CREDIT ACT 1974) I A fixed-sum credit agreement is a small agreement if the amount of credit (ignoring charge for the credit) is £50 or less. I A running-account credit agreement is a small agreement if the credit limit does not exceed £50. 134
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LINKED TRANSACTIONS (s 19 OF THE CONSUMER CREDIT ACT 1974) Flow chart to determine if a transaction is a linked transaction
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THE TOTAL CHARGE FOR CREDIT Add up the interest and other charges payable under the following transactions I The credit agreement + I Transactions entered into in compliance with the credit agreement + I Transactions required to be made or maintained as a condition of the making of the credit agreement + I Transactions for the provision of security + I Any credit-brokerage contract relating to the credit agreement. Subtract from the above sum the following charges I Default charges. I Charges that would be equally payable by a customer paying cash. I Variable bank charges on current accounts, charges for care maintenance or protection of goods or land (provided the debtor has a free choice as to from where he gets these services or, alternatively, if the charges are payable only in the event of something going wrong). I Club membership charges which entitle the member to other benefits apart from credit facilities. I Motor insurance premiums. I Other insurance premiums (that is, if the insurance was optional for the debtor, or if he had a free choice as to which insurer to use, or if the policy monies are to be used to repay the credit).
You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Consumer credit – categories of agreement why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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15 Consumer credit – triangular transactions What credit transactions may be classed as ‘triangular’? Against whom should the consumer proceed if the goods are defective? When may a dealer act as agent of the creditor? What are the consequences of the dealer acting as the agent of the creditor?
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We are here dealing with the situation where a dealer has an arrangement with a bank or finance company (‘the finance house’), whereby the latter is in principle prepared to finance the dealer’s customers so that they can acquire the dealer’s goods. It may be that the finance house makes a loan agreement with the customer, thereby lending money to the customer, enabling the customer to buy the goods. Equally, it could be that the finance house buys the goods from the dealer and then contracts with the customer to supply those same goods to the customer on credit or hire terms. The following table indicates the possible combinations, where FH = finance house. I The table applies irrespective of whether the agreement is a regulated agreement. I In those cases where the finance house is supplier of the goods to the customer, if the customer has a complaint on the ground of a breach of contract, for example, that the goods are not of satisfactory quality or fit for their purpose, it is the finance house against whom the customer must bring proceedings. The customer will be able to proceed against the dealer only if he can establish a collateral contract or, possibly, negligence (Andrews v Hopkinson [1956]).
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Type of agreement between FH and customer
Does FH buy FH owner of the the goods goods? from the dealer?
Is FH supplier of the goods to the customer?
When will the customer become owner of the goods?
Hire purchase
Yes
Yes (until customer completes HP payments to FH) and exercises option to purchase
Yes
When he completes HP payments to FH and exercises option to purchase
Conditional sale
Yes
Yes (until customer completes payments to FH under conditional sale agreement)
Yes
When he completes payments to FH under conditional sale agreement
Credit sale
Yes
FH acquires ownership by purchase from dealer, but passes ownership to buyer
Yes
Before or at the time of delivery of goods to customer: see Sale of Goods Act rules on passing of property
Simple hire
Yes
Yes
Yes
Never
Loan
No
No
No
Before or at the time of delivery of goods to customer: see Sale of Goods Act rules on passing of property
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AGENCY OF THE DEALER I At common law, the dealer is not the agent of the finance house in any of the above situations (Branwhite v Worcester Works Finance [1969]). I Where, however, the agreements are regulated agreements, the dealer can be the agent of the finance house during antecedent negotiations (s 56 of the Consumer Credit Act 1974). This statutory agency does not, however, apply where the agreement is a consumer hire agreement. The statutory agency most commonly applies where goods are bought with a credit card, or with a loan arranged by the dealer, or under a triangular hire purchase transaction. I The statutory agency means that the finance house is liable for statements and promises made by the dealer to the customer during antecedent negotiations, provided those statements or promises relate to the transaction being financed. Suppose that the transaction is the acquisition of a car by the customer and that it involves the customer trading in a car in partexchange. It may be that the dealer agrees a part-exchange allowance and undertakes that, out of that part-exchange allowance, he will pay off the customer’s existing hire purchase debt on the car the customer is trading in. If so, that promise is one for which the finance house can be held liable (Forthright Finance Ltd v Ingate [1997]). Alternatively, if the dealer described a car as suitable for towing a caravan and it turned out not to be suitable, the finance house would be liable for the dealer’s statement.
◗ FORTHRIGHT FINANCE LTD v INGATE [1997] Basic facts Defendant bought a car from a dealer on credit provided by the Claimant. Later the Defendant negotiated another car purchase on credit from a different dealer and financier but part-exchanged the first car with the second dealer as this second dealer promised to pay off the first credit agreement to the Claimant. The second dealer became insolvent: the Claimant sought repayment from the Defendant directly. Did s 56 cause the second financier to be bound by the second dealer’s promise to repay? The Court said that it did. 140
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Relevance s 56 is interpreted widely and may include statements made in negotiation.
You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Consumer credit – triangular transactions why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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16 Consumer credit – trading control I I I I
Which businesses must be licensed? What are the sanctions for unlicensed trading? What is ‘canvassing’ and how is it controlled? What other credit activities are prohibited
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LICENSING The licensing system is run by the Office of Fair Trading (OFT). Anyone carrying on a business in one or more of the following categories needs a licence covering that category. As of 06/04/08 ss 23, 26–54, 62 and 64 of the CCA 2006 will amend the existing licensing requirements of the CCA 1974.
Categories C, D, E and F are collectively termed ancillary credit businesses. As of 01/10/08 both Credit Information Services and Debt Administration (not being actual debt collection) must also be licensed. Carrying on a business in any of the categories without a licence covering that category is unlicensed trading. Even if the category is covered by a licence, canvassing off trade premises amounts to unlicensed trading unless canvassing off trade premises is expressly authorised by the licence. 144
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Sanctions for unlicensed trading are twofold: I Unlicensed trading is a criminal offence (s 39 of the Consumer Credit Act 1974). As of 06/04/08 s 39A of the CCA 1974 will add liability in the form of civil penalties of up to £50,000. I An agreement is unenforceable if made by an unlicensed trader: G a regulated agreement is unenforceable by the creditor or owner if he was not appropriately licensed when the agreement was made (s 40 of the Consumer Credit Act 1974); G an ancillary credit agreement is unenforceable by the trader (creditbroker, debt counsellor, debt collector, etc) if the trader was not appropriately licensed when the agreement was made (s 148 of the Consumer Credit Act 1974); G a regulated agreement is unenforceable if it was made following an introduction by a credit-broker who was not appropriately licensed at the time the introduction was made (s 149 of the Consumer Credit Act 1974); G despite the unenforceability, the trader can ask the OFT for a validating order to make the agreement enforceable under the above rules.
CANVASSING The flow chart on p 146 covers the definition of canvassing off trade premises (in s 48 of the Consumer Credit Act 1974) and sets out the legal controls on this activity. Canvassing is used to persuade individuals to enter into regulated agreements. DOOR TO DOOR SELLING This method of selling of loans is controlled by the Act. It protects people of limited means from being persuaded by creditors to take loans at extortionate rates of interest. To canvass debtor–creditor credit ‘off trade premises’ is an offence under s 49(1) of the Consumer Credit Act 1974. See flow chart on p. 146.
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Flow chart to determine if a salesperson was canvassing a regulated agreement off trade premises
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CANVASSING – SUMMARY Canvassing off trade premises is controlled in two ways: I it is an offence to canvass debtor–creditor agreements off trade premises (s 49 of the Consumer Credit Act 1974); I the canvassing of other regulated agreements (debtor–creditor–supplier agreements and consumer hire agreements) is permitted provided the canvasser is operating under a licence which expressly authorises such canvassing.
OTHER CRIMINAL OFFENCES I Sending out circulars to minors inviting them to obtain credit or goods on hire (s 50 of the Consumer Credit Act 1974). I Sending out an unsolicited credit token, other than a renewal one (s 51 of the Consumer Credit Act 1974). I Putting out a credit or hire advertisement which in a material respect is misleading (s 46 of the Consumer Credit Act 1974). I Putting out a credit or hire advertisement which infringes the Consumer Credit (Advertisements) Regulations 2004. These regulations set out detailed requirements as to the contents of advertisements controlled by the Consumer Credit Act 1974. They also brought in the idea of a ‘typical APR’ below which the creditor expects to do 66% of the business to which the advertisement relates. Note that the Consumer Credit (Quotations) Regulations 1989, which laid down the required form of quotations, were repealed in 1997.
You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Consumer credit – trading control why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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17 Consumer credit – documentation and cancellation What agreements are subject to the documentation requirements? What are the documentation requirements, why are they important? When is an agreement cancellable? What is the effect of cancellation?
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AGREEMENTS SUBJECT TO THE DOCUMENTATION REQUIREMENTS From 01/10/08 the documentation rules of the CCA 1974 will be amended by the CCA 2006. Flow chart to determine whether the documentation provisions of the Consumer Credit Act 1974 apply to the agreement
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AGREEMENTS SUBJECT TO THE DOCUMENTATION REQUIREMENTS
The agreements in Boxes 2–6 are exempted by s 74 of the Consumer Credit Act 1974 from having to comply with the documentation requirements. THE DOCUMENTATION REQUIREMENTS Content of the written agreement The Consumer Credit (Agreements) Regulations 1983 made under s 60 of the Consumer Credit Act 1974 require the agreement to include (inter alia): I the amount of credit or the credit limit; I the amounts and timings of payments; I the total charge for credit; I the APR (annual percentage rate of the total charge for credit); I details of any security provided by the debtor or hirer; and I information on legal protections for the consumer as to rights of cancellation, termination, repossession of goods, etc. Form of the agreement I The agreement must be legible and it must embody all its terms (other than implied terms) at the time when the debtor or hirer signs it (s 61 of the Consumer Credit Act 1974). I The agreement must have the appropriate heading, as stated by the Consumer Credit (Agreements) Regulations, for example, ‘Hire Purchase Agreement Regulated by the Consumer Credit Act 1974’. I The statements about various protections for the debtor or hirer must be in the form required by the regulations. I The agreement must contain a signature box. Signatures The agreement must be signed by the debtor or hirer and by, or on behalf of, the creditor or owner (s 61 of the Consumer Credit Act 1974).
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Copies (ss 62 and 63 of the Consumer Credit Act 1974) I If the agreement is made on the occasion when the debtor or hirer signs it, he must be given a copy of the executed agreement there and then. The agreement is executed when it is signed by both parties. I If the agreement is not made on the occasion when the debtor or hirer signs, there arises a requirement for him to be given two copies: G on the occasion when he signs, he must be given a copy of the unexecuted agreement; and G within seven days of the making of the agreement, he must receive a copy of the executed agreement. If the agreement is a cancellable one, this second copy must be sent by post. Improperly executed agreements I If any of the documentation requirements are not complied with, the agreement is improperly executed and cannot be enforced by the creditor or owner without an order of the court (s 65 of the Consumer Credit Act 1974). Seizing possession of the goods amounts to enforcement. I Generally, the court has a discretion to allow the creditor or owner to enforce the agreement, taking into account: G the culpability of the creditor or owner for the failure to comply; G the extent of prejudice, if any, to the debtor or hirer; and G the powers of the court to reduce any sum payable by the debtor so as to undo any prejudice to him (s 127 of the Consumer Credit Act 1974). I In three situations, however, the court may not grant an enforcement order: G where the agreement is a cancellable one and any copy given to the debtor omitted the notice of cancellation rights; G where the agreement is a cancellable one and a copy of the fully executed agreement has not been served on the debtor at some time before proceedings were commenced; and G where the debtor’s or hirer’s signature was not obtained on a document giving at least specified minimum information. 152
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In Dimond v Lovell [2000], the House of Lords held that where the Act regarded an agreement as unenforceable, the agreement would be unenforceable even if this meant that the debtor was unjustly enriched. In Wilson v First County Trust Ltd [2004], the House of Lords confirmed this view, rejecting an argument that to render the agreement unenforceable breached the creditor’s rights under the European Convention on Human Rights.
◗ DIMOND v LOVELL [2000] Basic facts Dimond hired a replacement car whilst her car was undergoing repairs after an accident involving Lovell. The hire agreement postponed payment until the case against Lovell was decided. This postponement unwittingly created a regulated credit agreement which, unsurprisingly, was unenforceable for failure to comply with formalities. Dimond thus could not claim ‘hire costs’ as damages from Lovell as she did not have to pay for the hire. Relevance That the sanction of unenforceability may create an unjust enrichment for the ‘debtor’ is not a reason to relax the rules or the policy of the Act.
◗ WILSON v FIRST COUNTY TRUST LTD [2004] Basic facts The Claimant borrowed money from a pawnbroker for six months. The loan was regulated under s 8. When the Defendant sought repayment the Claimant argued the transaction was unenforceable because it misstated the amount due. The argument was raised that the sanction of unenforceability, and the unjust enrichment it would create, could breach the human rights of the Defendant. The House of Lords did not agree and upheld the unenforceability.
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Relevance The unjust enrichment of an opportunistic debtor at the expense of an honest creditor did not justify breach of the human rights of the creditor or justify departing from the Act.
Documentation of security I The Consumer Credit Act 1974 applies only to security as defined by the Act – namely, security ‘provided by the debtor or hirer or at his request (express or implied), to secure the carrying out of the agreement’ (s 189). I If given by the debtor or hirer, it should be included within the regulated agreement. I If given by someone else (for example, a guarantee given by a third party), that security should be signed by the person giving it (the surety) and by or on behalf of the creditor or owner. There are requirements as to the form it should be in. In addition, the surety should be given a copy of the regulated agreement. I If these documentation requirements are not complied with, the security is improperly executed and is not enforceable against the surety without the creditor or owner obtaining a court order (s 105 of the Consumer Credit Act 1974). The court has a discretion as to whether to grant such an order (s 127 of the Consumer Credit Act 1974). I The security cannot be enforced against the surety to any greater extent than the regulated agreement can be enforced against the debtor or hirer (s 113 of the Consumer Credit Act 1974).
CANCELLABLE AGREEMENTS See flow chart on facing page. Box 2 These agreements are not cancellable, but are subject to a special procedure whereby the creditor must give the debtor an advance copy of the prospective agreement and then allow the debtor a pre-signature consideration (cooling off) period of at least seven days (ss 58 and 61(2) of the Consumer Credit Act 1974). 154
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Flow chart to determine if agreement is cancellable within s 67 of the Consumer Credit Act 1974
Box 3 Where a dealer sells goods to a finance house which then contracts with the customer to supply the goods on consumer hire terms, the dealer will not be the agent of the finance company and any negotiations conducted by the dealer will not be ‘antecedent negotiations’. Where the agreement made between the finance house and the customer is a hire purchase, conditional 155
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sale or credit sale, the negotiations conducted by the dealer will be ‘antecedent negotiations’ (s 56 of the Consumer Credit Act 1974). Box 5 An agreement may of course be cancellable under other legislation, including the Consumer Protection (Cancellation of Contracts Concluded away from Business Premises) Regulations 1987, which provide a cancellation period of seven days to a consumer who enters a contract as a result of doorstep canvassing. The 1987 regulations do not apply to any agreement which is cancellable under the Consumer Credit Act 1974. CANCELLATION PERIOD The debtor has the right to cancel a cancellable agreement at any time up to the end of the fifth day after he receives (by post) his copy of the executed agreement (or his notice of cancellation rights) (s 68 of the Consumer Credit Act 1974). If he posts it in time, that is sufficient (s 69(7) of the Consumer Credit Act 1974). The notice of cancellation served by the debtor need not be in any particular form so long as it is in writing. EFFECT OF CANCELLATION (ss 69–73 OF THE CONSUMER CREDIT ACT 1974) Service of the notice of cancellation operates to cancel the cancellable agreement and also any linked transaction. The detailed effect of this cancellation depends upon the type of agreement. Debtor–creditor–supplier and consumer hire agreements (a) The debtor or hirer must return the goods (if any) which he has received under the agreement. However, he may refuse to do so until he is repaid such money as he is entitled to. (b) The debtor or hirer ceases to be liable to make payments and is entitled to the return of all money paid by him under the agreement. (c) The debtor or hirer is entitled to the return of any fees (in excess of £5) paid to a credit broker. (d) The debtor or hirer may have returned to him any goods he gave in partexchange. If he does not get them back in substantially the same condition 156
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within ten days of cancellation, he is entitled to be repaid their partexchange allowance. (e) By way of exception to (a) above, the debtor does not have to return any goods that were supplied to meet an emergency, or have been consumed before cancellation, or are perishable or have been incorporated into other property which is not the subject of the cancelled transaction(s). (f) By way of exception to (b) above, the debtor must, despite the cancellation, pay for: (i) any work done or goods supplied to meet an emergency; and (ii) any goods which the debtor has incorporated into some other property which is not subject to the cancelled transaction(s). Other regulated consumer credit agreements Despite cancellation, the agreement continues in force as regards the repayment of credit and interest. However, no interest is payable in respect of any of the credit which the debtor repays within one month of cancellation (or, if later, the date for payment of the first instalment under the agreement).
You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Consumer credit – documentation and cancellation why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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18 Agency and connected lender liability What is the effect of s 56 of the Consumer Credit Act 1974? When will the consumer who pays with a card be able to regard the dealer as the agent of the creditor? What are the effects of s 75 of the Consumer Credit Act 1974? Can s 75 apply when the transaction involves a purchase abroad?
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AGENCY At common law, in the triangular transaction, the dealer is not the agent of the finance house (see p 138). That is true whether the agreement that the finance house makes with the customer is a hire purchase, a simple hire agreement or even a loan agreement. In the case of a regulated agreement, the position is reversed by s 56 of the Consumer Credit Act 1974 in respect of debtor–creditor–supplier agreements, but not where the agreement made between the customer and the finance house is a consumer hire agreement. Thus, during antecedent negotiations which lead to a regulated debtor–creditor–supplier agreement, the dealer is agent of the finance house. The fact that the dealer (retailer) is agent of the finance company means that the debtor can hold the finance company liable for misrepresentations made by the dealer. Also, money paid to the dealer will be regarded as paid to the finance company and notice given to the dealer will be notice to the finance company. This statutory agency arises, inter alia, in the case of regulated agreements of the following types: I hire purchase; I conditional sale; I credit sale; I loan; and I credit card. The first three of these types of agreement are always debtor–creditor–supplier agreements. The last two, however, may or may not be.
LOANS As far as loans are concerned, a debtor–creditor–supplier agreement might occur where, for example, a double glazing company offers the householder credit facilities to enable the customer to buy the double glazing. It may turn out that the credit facilities amount in fact to an opportunity to take a loan from a finance house with which the double glazing company has arrangements. In that case, during the antecedent negotiations, the double glazing company’s salesman is an agent not just for the double glazing company, but 160
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also for the finance house. That is the effect of s 56. Where, however, a consumer goes off on his own initiative and obtains a loan from a finance house (for example, his own bank) to enable him to buy goods or services, that loan agreement will not be a debtor–creditor–supplier agreement because it is not made under arrangements between the bank and the supplier of the goods or services. In that situation, the retailer is not agent of the bank. CREDIT CARDS The following table indicates when a card is such that the retailer is agent of the creditor (that is, the credit card issuer).
Card
Retailer agent of card issuer?
Why/why not?
Debit card (for example, No Delta or Switch) used to pay from a current account in credit
Not a ‘credit’ agreement
Debit card (for example, No Delta or Switch) used to pay from a current account in overdraft
Not a debtor–creditor–supplier agreement
Charge card (for example, Diners Club) where each periodical account is to be paid in a single payment
No
An exempt agreement and therefore not regulated by the Consumer Credit Act 1974
Credit card (for example, Barclaycard) used to draw cash (for example, from ATM) on credit and the cash is then used to pay the retailer
No
The credit card agreement is a multiple agreement. When used this way, it is a debtor–creditor agreement
Credit card used as means of paying retailer
Yes
Assuming the card allows the balance to be paid off in more than one payment, it is a debtor– creditor–supplier agreement when used in this way
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SECTION 75 OF THE CONSUMER CREDIT ACT 1974 This section created what is known as connected lender liability. When s 75 applies, it makes the creditor jointly and severally liable with the supplier for misrepresentations and breaches of contract by the supplier. This gives the debtor the option of bringing the claim against the creditor instead of the supplier. This can be of great advantage to the debtor where the supplier is: (a) insolvent; (b) difficult to trace; or (c) simply unwilling to accept the claim. In Office of Fair Trading v Lloyds TSB Bank plc [2007] the House of Lords held that s 75 does apply to foreign transactions. Thus, a consumer who makes a credit card purchase (inside or outside the UK) of between £100 and £30,000 for foreign goods or services (which prove to have been purchased subject to a misrepresentation or are otherwise ‘faulty’) may claim from either (or both) the foreign supplier or the UK credit card company. This decision will be of significant utility to those who use credit cards to purchase foreign goods or services via the internet.
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Flow chart to determine if s 75 applies
Boxes 1–3 In the table relating to credit cards on p 161, in the first four examples, the answer to whether the retailer was agent of the card issuer was ‘No’. In those examples, the answer to the question of whether s 75 applies would also be ‘No’ – and for exactly the same reasons. In the fifth and final example in that 163
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table, the answer would be ‘Yes’, but only if the cash price of the item exceeded £100 and did not exceed £30,000. Box 4 There is no point in making – and s 75 does not make – the creditor and supplier jointly and severally liable where they are in fact the same person. That means that s 75 never applies to hire purchase, conditional sale or credit sale agreements. This is because, even in the triangular transaction, the finance house buys the goods and then contracts to supply them to the debtor (on hire purchase, etc, terms). Thus, the finance house is the supplier. If the goods prove not to be of satisfactory quality, the debtor’s claim is against the finance company anyway. Box 8 If the debtor has a claim against the supplier for misrepresentation or breach of contract (which includes breach of statutory implied terms) s 75 enables the debtor to bring a ‘like claim’ against the creditor. Apparently, that means that if he has a claim to rescind the supply agreement, he has a right to rescind the credit agreement (United Dominions Trust v Taylor [1980]). There is some doubt whether s 75 applies where a second authorised card holder has used the card.
◗ UNITED DOMINIONS TRUST v TAYLOR [1980] Basic facts Taylor bought a car from a supplier on credit from the pursuer. The car was defective and Taylor both rejected it and stopped his payments. When faced with a claim for payment by the pursuer, Taylor argued s 75 allowed him to treat the contract as rescinded as far as both the supplier and the pursuer creditors were concerned. The court agreed with this use of s 75. Relevance When s 75 applies it includes the creditor in all ‘like claims’ and causes of action which arise between the debtor and the supplier.
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You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Agency and connected lender liability why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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19 Consumer credit – rights of the parties What are the rights of the debtor? What are the rights of the creditor? What is a time order and when may it be granted? When will a credit bargain be ‘unfair’ within the meaning of s 140A of the Consumer Credit Act 1974?
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The following table summarises some of the respective rights of the debtor (‘borrower’) and creditor (‘lender’) which exist, or may exist, depending on the terms of the agreement. The debtor’s rights are largely spelt out in the Consumer Credit Act 1974. The creditor’s rights will usually be spelt out in the agreement.
Debtor’s rights
Creditor’s rights
To make early repayment and earn rebate of credit charges (s 94)
To be paid (repaid) according to the terms of the agreement
To receive default notice before creditor able to take precipitate knock-out action (s 87)
To terminate the agreement
Not to be obliged to pay default interest at a rate higher than the APR payable under the agreement as a whole (s 93)
To repossess the goods
To re-open an ‘Unfair credit bargain’ (ss 140A–140D), (previously an ‘extortionate credit bargain’)
To enforce security
To have debtor’s heirs able to take over the agreement (s 86)
To be compensated for misuse of credit facilities up to a limit
To apply for a time order (s 129)
DEFAULT IN PAYMENT The debtor defaulting in making the payments due under the agreement is easily the most common event to cause the rights of the parties to be actively considered. There could be several rights of the creditor which will arise in such an eventuality: I Claim the arrears. The creditor is immediately entitled to bring proceedings to enforce payment of instalments which have fallen due. The agreement may provide that interest is payable on the arrears until they are paid. If so, the rate of the interest charged must not exceed the rate of the APR payable under the agreement as a whole. I The creditor will have the right to terminate the agreement if: G the breach amounts to a repudiation of the agreement; 168
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G the agreement states that prompt payment of sums due is ‘of the essence’ of the agreement (Lombard North Central v Butterworth [1988]); or G the agreement expressly gives that right. I The creditor may well have the right to repossess the goods (for example, upon termination of a hire purchase agreement). I The creditor will have the right to activate an accelerated payments clause, if the agreement gives him that right. I Similarly, the creditor will have the right to enforce security. All of these rights of the creditor, apart from (a), are dramatic and likely to be final so far as the debtor is concerned. Thus, in those cases, but not in the case of (a), the creditor is not entitled to exercise any of these rights without first serving on the debtor a default notice (s 87 of the Consumer Credit Act 1974) giving the debtor at least fourteen days’ notice. If the debtor makes good his default (pays off all his arrears) before expiry of the default notice, the debtor is deemed not to have defaulted at all. Even if he does not make good his default, the debtor may apply for a time order.
◗ LOMBARD NORTH CENTRAL v BUTTERWORTH [1988] Basic facts The Defendant finance company leased a computer system to the Claimant for five years. Payment was expressed to be required ‘promptly’ subject to an acceleration clause. In fact payments were usually quite late. After six instalments were late the Defendant terminated the agreement and demanded all sums due under the agreement (both those owed and those to be owed in the future). The court allowed the Defendant to claim overdue payments as debts and future payments as damages. Relevance The prompt payments clause can act as a condition and effectively accelerate payments.
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TERMINATION AND ACCELERATED PAYMENTS CLAUSES These are often to be found in credit agreements. I The termination clause is likely to be found in hire purchase and conditional sale agreements, where the result of termination is that in principle the creditor is entitled to the return of the goods. I The accelerated payments clause is likely to be found in these or in any other credit agreement which provides for repayment by regular instalments. Once it has been effectively activated, an accelerated payments clause means that the whole outstanding balance becomes due immediately, that is, that the payments that had been expected to fall due over the coming months and years are all payable immediately. The creditor is required to deduct a rebate of charges to reflect the fact that payment is required earlier. Nevertheless, for a debtor who has already got into arrears, insisting that he pays all the outstanding instalments immediately is likely to be an impossible demand and may push him into bankruptcy. Thus, the debtor faced with such a demand may ask the court to grant a time order. Table comparing effect of termination clause and accelerated payments clause in a hire purchase agreement Termination clause
Accelerated payments clause
Debtor has to surrender the goods and never becomes owner
Debtor becomes owner immediately and retains the goods
Debtor cannot recover payments already made and has to pay arrears already fallen due. He may have to pay a further sum to the creditor depending on the value of the goods when returned to the creditor
Debtor cannot recover payments already made, remains liable to pay arrears and must pay immediately the whole of the outstanding balance of future instalments
Debtor will be liable to pay default interest on arrears at a rate not exceeding the APR payable under the agreement
Debtor will be liable to pay default interest on arrears at a rate not exceeding the APR payable under the agreement, but will be entitled to a rebate of charges in respect of future instalments paid early as a result of the clause
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TIME ORDER (s 129 OF THE CONSUMER CREDIT ACT 1974) As of 01/10/08 s 16 CCA 2006 will amend the grant of time orders under s 129 CCA 1974. At any time after a default notice has been served, or in any proceedings to enforce a regulated agreement against him, the debtor can apply to the court for a time order. Often, this occurs after a default notice has expired (thus after fourteen days) and the creditor claims one of the remedies listed above. The choice before the court is: either to allow the creditor the remedy sought (for example, activation of an acceleration payments clause or immediate termination of the agreement, coupled in the latter case perhaps with repossession of the goods); or to grant the debtor a time order under s 129. The time order in effect allows the debtor a second chance, an extended time in which to make payments that are overdue. In the case of a hire purchase or conditional sale agreement, it can alter (that is, extend) the future repayment pattern as well as allow extra time for payment of sums that have already fallen due. The court will not grant a time order without hearing evidence of the debtor’s means and will then not grant a time order unless it thinks that the debtor has some reasonable chance of being able to make the payment according to the terms of the time order.
PROTECTED GOODS (ss 90–91 OF THE CONSUMER CREDIT ACT 1974) These provisions apply only to regulated hire purchase and conditional sale agreements. They apply to these agreements because there is a chance that after the debtor’s default the creditor will serve a default notice and that the default notice will expire without the debtor having paid off his arrears. That being so, the creditor may then lawfully terminate the agreement and he can do this simply by giving written notice of it. Upon termination of a hire purchase or conditional sale agreement, the creditor is in principle entitled to the return of the goods (which, of course, are his) (Bowmakers v Barnett Instruments [1945]). 171
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◗ BOWMAKERS v BARNETT INSTRUMENTS [1945] Basic facts The Defendants, via an illegal HP agreement, acquired tools belonging to the Claimants. No payments were made and the Defendants started to sell the tools. The Claimants brought a claim based on default of bailment by the Defendants and conversion arising from such default. The Claimants successfully recovered the value of their tools despite the illegality of the HP agreement (to which they were careful not to refer). Relevance If the agreement at the base of the HP or a Conditional Sale is terminated, the creditor may thereafter recover either his property or its value. The protected goods provisions are designed to prevent the creditor simply helping himself to the goods before the debtor has had a chance to appear in court and, perhaps, apply for a time order. Thus, where the goods are protected goods, the creditor is not entitled to take possession of the goods from the debtor without his consent unless he has received a court order. He is equally prevented from seizing the goods, without the debtor’s consent, from anyone to whom the debtor has passed possession temporarily, as could happen, for example, if it is a car and he has let his wife drive it or has left it at the garage for servicing (Bentinck v Cromwell Engineering [1971]). If the creditor does take possession of protected goods, then unless the debtor gave his consent to the repossession at the time of the repossession, the debtor is released from any obligation to make further payments under the agreement and is entitled to be repaid all payments he has already made under it (s 91). Goods are protected goods if: I the debtor is in breach of the agreement; I the debtor has paid or tendered at least one-third of the total price payable under the agreement; and I the property in the goods remains in the creditor. 172
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◗ BENTINCK v CROMWELL ENGINEERING [1971] Basic facts Bentinck financed a car on HP to Faulkner. Faulkner’s employer guaranteed the agreement. Faulkner fell into arrears but paid enough for the goods to be ‘protected’ under s 33. After a bad accident Faulkner abandoned the car at a garage. Months later Bentinck traced the wrecked car and recovered it from the willing garage owner: it sold for £50. Bentinck claimed from Faulkner’s employer. The employer argued that as the car was protected goods, its recovery was in breach of s 34. The court disagreed: the car had been abandoned. Relevance If abandoned, goods are no longer protected.
UNAUTHORISED USE OF CREDIT FACILITIES I Generally, the debtor is not liable to the creditor for unauthorised use of credit facilities by other people (s 83 of the Consumer Credit Act 1974). I Section 84 of the Consumer Credit Act 1974 provides an exception for unauthorised use of credit tokens (for example, credit cards) and allows the debtor to be made liable for up to £50 in respect of each time the card falls into unauthorised hands. UNFAIR CREDIT BARGAINS (ss 140A–140D OF THE CONSUMER CREDIT ACT 1974) FORMERLY ‘EXTORTIONATE CREDIT BARGAINS’ The CCA 2006 via ss 19–22 has repealed and replaced the jurisdiction of the court over extortionate credit bargains. The new legislation applies to all new non-exempt consumer credit agreements (and related agreements) which were entered into on or after 06/04/07. Existing consumer credit agreements (and related agreements) will also be subjected to the new law from 06/04/08 (assuming that they are then still in operation). Previously the jurisdiction of the court depended upon the credit bargain being of an ‘extortionate’ nature, thus only exceptionally harsh or disproportionate 173
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terms could justify the intervention of the court to reopen the credit bargain. Under the new law the court is now concerned with the issue of ‘unfairness’. The operative question is thus, ‘Is the agreement unfair to the debtor (or his surety)’? It is worthy of note that only the debtor or his surely may use these provisions: there is no equivalent for the creditor. s 140A of the CCA 1974 now explains that such unfairness may arise as a consequence of: (a) one or more of the terms in the agreement (or related agreement); (b) the way in which the creditor has exercised or enforced his rights deriving from the agreement (or related agreement); or (c) any act or omission made by or on behalf of the creditor before or after the agreement (or related agreement). The court is empowered to take all relevant factors into account in its consideration of the alleged unfairness to the debtor. In the event that the court is satisfied that the credit bargain is unfair in relation to the debtor, s 140B of the CCA 1974 sets out various orders which the court may then make and combine as it sees fit: (a) either the creditor or any current or former associate of the creditor may be ordered to repay any sums already paid by the debtor under the credit agreement (or related agreement) regardless of whether the creditor or any current or former associate was actually in receipt of the said sums (b) to require the creditor or any current or former associate of his to do (or not do) any act in relation to the agreement (or connected agreement) (c) to reduce or discharge any amounts due from the debtor (or surety) under the credit agreement (or connected agreements) (d) to order that any property provided by a surety as security under the credit agreement be returned to that surety (e) to set aside (wholly or partially) any duty imposed upon the debtor (or surety) under the credit agreement (f) to alter any term or terms of the agreement (g) to direct that an account be taken and made between the parties 174
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In addition to clarify the potential impact of these wide powers, it is explicitly stated in s 140B(3) that such orders may be made notwithstanding that the effect of so doing, ‘. . . is to place on the creditor, or any associate or former associate of his, a burden in respect of an advantage enjoyed by another person’. Under s 140D of the CCA 1974 the Office of Fair Trading is obliged to provide advice and information concerning unfair credit bargains and the potential of the same to interact with the Enterprise Act 2002. Part eight of the Enterprise Act allows the Office of Fair Trading to proceed against any person who harms the collective interests of consumers by reason of a breach of a statutory obligation, i.e. by providing individuals with consumer credit on ‘unfair’ terms.
PROVISIONS SPECIFIC TO REGULATED HIRE PURCHASE AND CONDITIONAL SALE AGREEMENTS I The protected goods provisions (above) are specific to these kinds of agreements. I Also, when making a time order, the court can make an order granting extra time for payment of instalments that have not yet fallen due. Again, this particular provision is confined to these kinds of agreement. I The debtor is given a statutory right to terminate the agreement by giving written notice at any time before the whole of the total price falls due (s 99 of the Consumer Credit Act 1974). Thus, if an accelerated payments clause has been activated (that is, the appropriate default notice has been served and expired without the debtor making good his default), the whole of the outstanding balance will have fallen due and thus the debtor will by then have lost his s 99 right of termination (Wadham Stringer v Meaney [1981]). If the debtor exercises this right of termination: G he becomes liable to return the goods; G he will sacrifice all payments already made under the agreement; G he will remain liable to pay all arrears that had fallen due before he exercised his right of termination; and 175
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G he may be required by the court to pay a further amount to bring up the sums at (b) and (c) to half of the total price payable under the agreement. I The court has power to make a return order requiring the debtor to return the goods to the creditor (s 133 of the Consumer Credit Act 1974). This power will usually be used where the debtor has got into arrears, and a default notice has been served and expired without the debtor paying off the arrears. The choice facing the court may be either to grant the return order requiring the debtor to return the goods or to grant the debtor a time order. The court has power to suspend the operation of any order it makes or to make it conditional upon some event (s 135 of the Consumer Credit Act 1974). Thus, the court could, at the same time, make: (a) a time order; and (b) an order for the debtor to return the goods but suspend the operation of the return order until such time as the debtor defaults on the payments as required by the time order. I As an alternative to a return order or a time order, the court can, where the goods are divisible, make a transfer order, transferring ownership of some of the goods to the debtor and requiring him to return the rest of them to the creditor (s 133 of the Consumer Credit Act 1974). This is possible only where the debtor has paid both: (a) that proportion of the total price attributable to the goods being transferred to his ownership; and (b) a certain amount more, equivalent to one quarter of the rest of the total price.
◗ WADHAM STRINGER v MEANEY [1981] Basic facts A buyer bought a car under the Hire-Purchase Act 1965. The agreement contained a payment acceleration clause which the buyer activated when she defaulted. The lender sought to enforce the agreement and the buyer argued that the clause was contrary to the Act as it meant her right to end the agreement was effectively rendered nugatory. The court did not agree. The clause was upheld. 176
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Relevance An acceleration clause is not contrary to the Act as it does not cause the loss of the right to terminate: this right is lost by reason of the claimant’s act of default.
You should now be confident that you would be able to tick all of the boxes on the checklist at the beginning of this chapter. To check your knowledge of Consumer credit – rights of the parties why not visit the companion website and take the Multiple Choice Question test. Check your understanding of the terms and vocabulary used in this chapter with the flashcard glossary.
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20 Putting it into practice . . .
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PUTTING IT INTO PRACTICE . . .
Now that you’ve mastered the basics, you will want to put it all into practice. The Routledge-Cavendish Questions and Answers series provides an ideal opportunity for you to apply your understanding and knowledge of the law and to hone your essay-writing technique. We’ve included one exam-style essay question, reproduced from the Routledge-Cavendish Questions and Answers series to give you some essential exam practice. The Q & A includes an answer plan and a fully worked model answer to help you recognise what examiners might look for in your answer.
QUESTION ONE ‘The fundamental purpose of commercial law is the facilitation of commercial transactions.’ Discuss. How does commercial law attempt to meet the needs of the commercial community? Answer plan This question is not an opportunity to discuss commercial law in a general way. A good answer requires you to identify what the needs of the commercial community are and then identify how the courts and legislature have responded to those needs. You need to illustrate these points by drawing from a range of areas of commercial law. ANSWER Commercial law is essential to the operation of the business world. To facilitate commercial activity, the business community needs a legal system which is certain and predictable; will give effect to their transactions; will give legal recognition to trade customs and market practices; is flexible in order to accommodate new practices and development in business; and offers an efficient dispute resolution to deal with their problems. Some of these needs overlap: for example, recognition of the customs and practices of the commercial community could be seen as an aspect for party autonomy. On the other hand, other needs appear to conflict: for example, flexibility in the law (which is necessary to respond to changes in market 180
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practice) tends to be achieved only at expense of certainty. In other words, if rules are strict and clear, then this produces certainty but it may produce unfair results in individual cases, whereas flexibility and discretionary principles may produce justice in individual cases but tend to be less predictable. Certainty and predictability Many transactions (some of high value) are undertaken on the basis that courts will continue to follow the rules laid down in preceding cases. The commercial community values legal certainty because it allows for planning and anticipation of liability. Businesses need to know that courts will reliably and consistently interpret commercial transactions. The English courts have consistently promoted considerations of certainty of outcome over those of fairness and justice and offer the commercial community a reasonable degree of predictability. In 1774 Lord Mansfield, then Lord Chief Justice, said in Vallejo v Wheeler [1774] 1 Cowp 143 at p 153: ‘In all mercantile transacs the great object should be certainty; and therefore, it is of more consequence that a rule should be certain, than whether the rule is established one way or the other. Because speculators in trade then know what ground to go upon.’ In order for there to be certainty, the law should be clear and be capable of being applied in a predictable way. For example, if a rule gives the court discretion to find a contract unreasonable, this may be a clear rule because it can be described simply, but its application in a particular case may be unpredictable. Another aspect of legal certainty is that settled legal rules should not be changed. Once a rule is established, parties will contract on that basis, so if the rule is then changed, settled contracts may be disturbed and commercial parties’ expectations are not fulfilled. Party autonomy Central to commercial law are the doctrines of freedom and sanctity of contract. Business people are free to make their contract and to insist on its strict performance. The goal is to enforce the true intention of the parties. Lord Devlin in Kum v Wat Tat Bank Ltd [1971] 1 Lloyd’s Rep 439: 181
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‘The function of the commercial law is to allow, so far as it can, commercial men to do business in the way they want to do it and not to require them to stick to forms that they may think to be outmoded. The common law is not bureaucratic.’ This non-interventionist approach is justified on the basis that it promotes certainty. Courts should only intervene if the contract terms are so restrictive or oppressive that it offends against the public interest. Of course, freedom of contract cannot be absolute. The courts have tended to adopt a non-interventionist approach on the assumption that there is equality of bargaining power between the contracting parties. It is questionable whether this assumption is as valid today, particularly in the light of the increased use of standard terms of business and the rise of monopolies or markets where dominance is shared by a few players. Nevertheless, to the extent that the law is not concerned with the fairness of outcome, commercial law reflects the principles of freedom of contract and the sanctity of contract. Factors suggest that assumptions may be less than reliable today, at least as far as consumer B is concerned. However, ‘pure’ commercial contracts are often excluded from such legislation, for example: the Consumer Credit Act 2006 has no application to contracts with companies, or where business lending to an individual exceeds £25,000; and the Unfair Contract Terms Act 1977 does not apply to, for example, international supply of goods nor insurance contracts. Recognition of commercial practices Courts have always recognised and given legal effect to the customs and practices of the commercial community,1 sometimes at the expense of stretching legal concepts. Courts do this by implying a term into contract. For example, if the contracting parties are in a particular trade where there is settled custom or usage, a term giving effect to that custom or usage may be implied into their contract. In order for the custom or usage to be judicially recognised, it needs to be certain, that is, be well established, so the assumption is that parties contracted on the basis of it; and reasonable, so that reasonable, honest people would accept it. Courts will not, however, imply such a term if it contradicts an express term of the contract, so that party autonomy takes precedence. 182
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Flexibility Business people want flexibility as well as predictability in order to accommodate new practices and development in business. The need for flexibility to accommodate new commercial practices has been met historically by judges recognising mercantile custom and incorporating it within the common law. As commercial people find new ways of doing business, the law needs to adapt to, and accommodate, these changing commercial practices.2 The law therefore needs to be flexible, although flexibility is often at the expense of certainty. Legislature also seeks to respond to, and accommodate, the needs of the commercial community. For example, whenever a reform is proposed, extensive consultation with the commercial community will take place before production of the Law Commission report.3 Resolution It is recognised that commercial people need speedy, inexpensive and efficient dispute resolution to deal with their problems. This need has been met in several ways: first, the Commercial Court is a separate court of the Queen’s Bench Division staffed by judges who are experienced arbiters of commercial disputes; the rules of the Commercial Court are flexible and operate with relatively little formality; and the judges of the Commercial Courts have been willing to develop new remedies, for example, the freezing order4 to prevent defendants from disposing of assets, and search and seize order5 allowing seizure of evidence which might otherwise be destroyed. Litigation can, however, prove costly and it is generally thought that arbitration provides a cheaper alternative. There are other reasons why parties to a commercial dispute may opt for arbitration as opposed to litigation, for example, speed, privacy and a limited right of appeal against arbitration awards. However, arbitration proceedings can be very protracted and sometimes more expensive than litigation, so there is now a growing drift towards Alternative Dispute Resolution (ADR), for example, mediation and mini-trial. It is a great deal quicker and cheaper. ADR is designed to be non-confrontational and it often offers the possibility of continuing a relationship rather than acceptance of a break down. ADR can also facilitate non-legal forms of relief, for example, an offer of a substitute contract to an aggrieved party or revival of agreement which has technically ended. 183
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Fairness and good faith Some also argue that the law should also promote values of fairness and good faith (especially if commercial law is interpreted widely to include consumer transactions). One of the principal objections to general standards of good faith and fair dealing is that they threaten the values of certainty, predictability and consistency to which English contract law is classically committed. Currently, for example, a party can exercise his right to terminate a contract for breach even though it causes him no loss and even if his sole motive is to escape the consequences of a bad bargain;6 or a party being able to perform against the other party’s wishes can claim the full value of the invoice.7 There are valid arguments for keeping good faith out of commercial transactions (for example, the uncertain scope of the concept would make it difficult to predict outcome of legal disputes – something valued by the commercial community), but it seems that standards of fair dealing are increasingly being introduced into English law, partly because of the harmonisation of commercial law in the European Union.8 Commercial law is obliged to factor-in the special needs of the commercial community and the English common law system has evolved to meet these needs, primarily through the interaction of the courts, lawyers and business. The key challenge for commercial law is to strike the right balance between competing principles and this depends on circumstances. For example, if the contracting parties involved are multinational corporations in, say, the shipping trade, then perhaps legal certainty should take precedence. On the other hand, if there is significant imbalance between the parties (especially if one is a consumer), then some certainty may be sacrificed in favour of fairness or flexibility. Notes 1 By judicial recognition, mercantile usage can become part of the common law, e.g. the bill of lading is recognised as a document of title to goods at common law. 2 With new technology being used in business, the special problems of e-commerce is one factor influencing the development of commercial law. 3 E.g., the Sale of Goods Act 1995 amendments. 4 Previously known as the Mareva injunction. 5 Previously known as the Anton Pillar order. 184
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6 The Mihalis Angelos [1971] 1 QB 164. 7 White and Carter v Macgregor [1962] AC 413. 8 E.g., the Unfair Terms in Consumer Contracts Regulations 1999 and HL in Director General of Fair Trading v First National Bank [2001], also the recent Consumer Credit Act 2006 where extortionate credit bargains is replaced entirely by an ‘unfair relationship’ test (see Question 22). Each Routledge-Cavendish Q & A contains fifty essay and problem-based questions on topics commonly found on exam papers, complete with answer plans and fully worked model answers. For further examination practice, visit the Routledge-Cavendish website or your local bookstore today!
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