Excerpt
Content
1 Introduction
2 Discussion of problems of the law before 1995 Reasons leading to the reform of the Sale of Goods Act 1995
3 Statement of the law in introduced by the reform
4 Critical analysis of the scope of the s.20A
5 Problematic situations of short delivery
6 Overselling – problematic relationship between the s. 20A and rules on passing of title
7 Unclear application of default rules on passing of risk on s. 20A
8 Conclusions
9 Bibliography
1 Introduction
Until September 1995 where a buyer bought a specified quantity forming part of an identified bulk, i.e. 250 tons of wheat from a named ship carrying a cargo of 500 tons, he could not acquire property in the goods until the goods were ascertained. This was result of a mandatory rule in s. 16[1] which provided that “where there is a contract for the sale of unascertained goods no property in the goods is transferred to the buyer unless and until the goods are ascertained”. The most serious consequence of the mandatory rule in s. 16 was that the buyer did not acquire property in the goods even though he had paid for it and received a document purporting to be a document of title. If the seller became insolvent before the goods were ascertained, both the paid price and the goods in the bulk passed to the office-holder in insolvency for the benefit of secured creditors and the buyer happens to be merely an unsecured creditor with no proprietary claim to his goods[2]. As follows the seller´s secured creditors might receive an undeserved windfall, because both the goods and the paid price might fall into the assets of the insolvent seller in liquidation[3].
The Sale of Goods (Amendment) Act 1995 attempted to solve this undesirable situation by introducing an exception to s.16. In s. 20A (1) it was introduced that unless otherwise agreed the prepaying buyer purchasing specified quantity of an identified bulk acquires an undivided share in the bulk ad becomes a tenant in common of the bulk. In this essay I will analyse the appropriateness of the reform by measuring it against its objectives, examining how far it solves the problems of the old law and considering the inconsistencies which introduces into the Sales law. Firstly, I will discuss the problems of the law before the reform and the reasons for the reform. Secondly, I will describe the law introduced by the reform; and thirdly, I will critically analyse the solution offered by the reform and its interaction with the rules on passing of property and passing of risk. I will argue that while the reform seemingly successfully responds to all problems of the old law, after scrutiny it is clear that the reform suffers from inconsistency and immanent injustice and fails to provide the intended protection to the buyer.
2 Discussion of problems of the law before 1995
The effects of the unreformed law might seem unjustifiable considering that on the basis of the same rule in s. 16 it was possible to arrive to different legal result in economically similar situation: Firstly, if the buyer agreed to buy an undivided share in the indentified bulk, i.e. one half of the cargo of a named ship carrying 500 tons of wheat, a tenancy in common would be created. Thus, the buyer would acquire an immediate proprietary interest in share of the goods which would give him the right to claim the goods in case of seller´s insolvency occurring after entering into the contract and ascertaining the goods for the buyer[4]. Even though there is a formal difference between the situations where the buyer buys 250 tons or one half out of 500, for the buyer as he acquires the same amount of wheat there is no economical difference, which would justify the contradictory approaches at law.
Secondly, where the buyer bought specified quantity of goods from particular bulk and the goods has been sufficiently ascertained by virtue of the fact that the bulk was reduced up to the amount of goods bought by the buyer, the property was not prevented to pass to the buyer[5]. The same result was reached where the one buyer bought the whole bulk under several contracts with different buyers[6]. However, in the situation where the whole bulk was purchased by several buyer under separate contracts, none of them acquired any proprietary interest until the goods was ascertained and unconditionally appropriated to the contract[7]. As a result, if the seller turned to be insolvent before the ascertainment of the goods, buyers have no proprietary interest in the goods and could claim only the price as unsecured creditors.
Thirdly, if the seller managed to ascertain and unconditionally appropriate the goods and then returned the goods back to the bulk, the property has already passed and tenancy in common would be created which gives proprietary rights to the buyer[8]. As mostly the appropriation and separation of the goods is up to the seller, the buyer’s ability to claim proprietary right will depend on the seller’s fortuitous willingness to do so before his insolvency[9].
Reasons leading to the reform of the Sale of Goods Act 1995
The institute of passing of property of a specified quantity of goods forming part of a bulk is of special interest for commodity traders. There was no need for reform of the inconsistent law until the 1980´s, when the trend in the shipping business started to change to bigger ships with bigger cargos. As a result buyers of commodities carried by sea bought proportionally smaller quantities of the carried bulks of goods. Additionally, speculative buying and selling increased in the 1980 and it become common practice that there were often many re-sales and sub-sales of the quantities purchased while they still form part of the bulk[10]. The price is in these transactions often paid in exchange for documents of title (e.g. bill of landing) to the quantities purchased. Traders ignored the impact of s. 16 and they expected to gain some proprietary interest in the goods in case the seller failed into insolvency, but those expectations did not match the legal reality[11]. This issue received publicity among traders in Britain as in a series of cases starting with the Gosforth case[12] and continuing with Re London Wine (Shippers) Ltd[13], Re Goldcorp[14] and the Aliakmon case[15] buyers suffered loss as a result of the strict rules on passing of property[16].
As other legal systems such as USA, Canada and Germany made corresponding law reform enabling buyer to have proprietary interest in the bulk earlier, there were concerns that traders who contracted on English law terms would adopts other law to avoid the effects of s. 16[17]. This posed a threat on insurance, shipping and legal business in Britain. On the other hand, some traders preferred to carry on using the English law for their contracts if it can be reformed[18]. On request of the Grain and Feed Association the Law Commission approached the problem and investigated reform possibilities[19]. As a result of those investigations the Law Commission issued in 1993 a Report[20] recommending changes to the law on passing of property in undivided bulk. The Sale of Goods (Amendment) Act 1995 came into force on 19 September 1995.
3 Statement of the law in introduced by the reform
The objectives of the Law Commission were to protect the pre-paying buyer of unascertained goods from a designated bulk whilst, at the same time not restricting trade in bulk goods. Moreover, they were concerned not to impose administrative burdens on insolvency practitioners responsible for administering property in the event of insolvency[21].
Besides the central rule in s. 20A (1) and (2)[22], s.20A (3) provides solution for the situation where the amount of the goods in the bulk fluctuates and S.20 (4) offers solution for the situation in case the bulk is oversold or it happened to be smaller than expected[23]. The whole s. 20B modifies the common law rules applicable to tenancy in common in so extensive way that it may be argued that it creates an institute sui generis[24], which should facilitate the disposal of the share in the bulk. It follows that the co-ownership should be an interim measure, pending the appropriation of the actual goods purchased to the contract[25]. These provision and problems they cause will be discussed in more detail below in detailed analysis of hypothetical cases. For completeness it should be mentioned that the ascertainment by exhaustion as ruled in Wait & James v Midland Bank[26] and The Elafi[27] was codified in the s. 18 rule 5 (3), (4) .
4 Critical analysis of the scope of the s.20A
According to English law property cannot pass in wholly unascertained goods, therefore the s. 20A applies only to sale of unascertained goods from an indentified bulk, as it must be possible to identify the goods in which the buyer has the share[28]. A bulk means a mass of goods of the same kind which is contained in a definite area and consists of fungibles[29]. The definition is intended to exclude traders´ general stock[30]. It follows that the reform would not change the ruling in Stapylton[31], Goldcorp[32] or London Wine[33] cases, because the only identifiable bulk in this kind of cases would be the whole seller’s existing stock. The existing stock might constitute a bulk only if the seller has stipulated to make delivery of the contract goods therefrom, but it is likely that the seller has not made such promise and is free to sell his stock and satisfy its customer from any other source[34]. It is obvious that the reform is response to concerns of commodity traders and associated interests and has no wide impact outside this area.
S. 20A applies only where the buyer has paid some or part of the price, which is based on the Law Commissions argument that only the pre-paying buyer suffers loss in case of seller´s insolvency[35]. This limitation introduces inconsistency into the law, because nowhere else in the Sale of Goods Act is the payment of price a determining factor in the passing of property[36]. Regulations in legal systems which served as model for this reform, .i.e. USA and Canada, do not limit the rules on passing of property in such way[37]. The rationale behind the uniform approach is the fact that buyers regardless the payment have the same economical interests: they want to be able to claim the property in the goods and secondly they need to be able to resell the goods and transfer good title to sub-buyers. Often the buyer needs to receive the payment from the sub-buyer first to pay the goods to the seller.
Further problem which causes the fact that the not pre-paying buyer is not protected concerns third parties rights. In a situation where the buyer purchases specified quantity of goods from an identified bulk and resells to third party (say X) before the payment or separation of the goods, the buyer has no property interest and therefore according the Nemo dat rule the third party X acquires no property. As the buyer had never possession of the goods X is unable to acquire good title by the virtue of s. 25. If X has paid the price and the seller or/and the buyer becomes insolvent, X has no proprietary claim for the goods and stays as unsecured creditor with claim for non-delivery against the buyer.[38] It seems unjust that the X´s ability to acquire goods title depends on circumstances out of his power.
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[1] Where references are made to sections, these are references to sections of the Sale of Goods Act 1979, unless explicitly stated otherwise.
[2] Re Wait [1927] 1 Ch 606.
[3] J Ulph, ´The Sale of Goods (Amendment) Act 1995: Co-Ownership and the Rogue Seller´ [1996] LMCLQ 93,
97.
[4] Ulph (n 3) 99.
[5] Wait & James v Midland Bank (1926) 31 Com Cas 172.
[6] Karlshamns Oljefabriker v Eastport Navigation Corporation, The Elafi [1982] 1 All ER 208.
[7] Re London Wine Co (Shippers) ltd [1986] PCC 121.
[8] Re Stapylton Fletcher Ltd [1994] 1 WLR 1181.
[9] Ulph (n 3) 97.
[10] Law Commission, Report Sale of Goods Forming Part of a Bulk (Law Com No 215, Scot Law Com No 154, 1993) para 3.2.
[11] Ibid para 3.3.
[12] The Gosforth (1985) A en S 91.
[13] Re London Wine (n 7).
[14] Re Goldcorp Exchange Ltd. [1995] 1 AC 74.
[15] Leigh & Silllivan Ltd v Aliakmon Shipping Co Ltd (The Aliakmon) [1986] AC 785.
[16] T Burns, ´Better Late than Never: The Reform of the Law on the Sale of Goods Forming Part of a Bulk´ (1996) 59 MLR 260, 267.
[17] Report (n 10) para 3.8.
[18] Ibid.
[19] Burns (n 16) 267 citing the Law Commission, Working Paper Rights to Goods in Bulk (Working Paper No 112, 1989).
[20] Report (n 10).
[21] R Bradgate, Commercial Law (3rd edn, Butterworths 2000) 384.
[22] As stated in the Introduction and discussed below in the Scope of s20A.
[23] Both provisions stated and critically analysed below in the Problematic situations of short delivery.
[24] For discussion of the tenancy in common sui generis see below the Problematic situations of short delivery.
[25] Report (n 10) para 4.1.
[26] Wait & James v Midland Bank (n 5).
[27] The Elafi (n 6).
[28] R Bradgate and F White, ´Sale of Goods Forming Part of a Bulk: Proposals for Reform´ [1994] LMCLQ 315, 317.
[29] S. 61 (1); examples from the Report (n 10) at para 4.3: a cargo of wheat in a named ship, a mass of barley in an identified silo, the oil in an identified tank, cases of wine of the same kind in an identified cellar, ingots of gold of the same kind in n identified vault, bags of fertiliser of the same kind in an identified storehouse, a heap of coal in the open at a specified location.
[30] Report (n 10) par 4.3.
[31] Re Stapylton (n 8).
[32] Re Goldcorp (n 14).
[33] Re London Wine (n 7).
[34] NR Campbell, ´Passing of property in contracts for the sale of unascertained goods´ (1996) JBL 199, 201.
[35] Report (n 10) para 4.7.
[36] See s. 17-18.
[37] Bradgate and White (n 28) 318.
[38] Ibid.